A founder I was helping through a sale process called on a Thursday afternoon last month about the MAE change-in-law carve-out — or, more precisely, about the fact that it had just disappeared. The buyer’s second markup of the merger agreement had come back overnight. Most of the revisions were the usual back-and-forth on indemnification baskets and disclosure-schedule mechanics. Buried in the definition of “Material Adverse Effect” was a four-word strike through. The phrase “changes in applicable Law” had been deleted from the list of items that did not count as an MAE. His own counsel had not flagged it. The buyer’s cover email called it a clean-up.
It is not a clean-up. It is, in 2026, one of the highest-leverage edits a buyer can slip into a definitive agreement, and it is happening with increasing frequency in deals signed against the current regulatory and tariff backdrop. The change-in-law carve-out to the MAE definition has been a market-standard piece of furniture in U.S. M&A for two decades. Buyers who quietly remove it — or who quietly limit it — are shifting a category of risk onto sellers that founders, in particular, are unprepared to bear and rarely repriced for.
The conversation I had with that founder is the conversation I want to flatten into this post. If you are about to sign, or have just signed, a letter of intent that contemplates a sign-to-close gap of any length in 2026, the change-in-law carve-out belongs on your short list of terms to watch.
What the carve-out actually does
Every MAE definition in a modern U.S. merger agreement does the same two things in sequence. First, it defines a Material Adverse Effect in expansive terms — any event, change, occurrence, or circumstance that has or would reasonably be expected to have a material adverse effect on the business, results, or financial condition of the target. Second, it lists a series of carve-outs: categories of event that, even if materially adverse, will not count as an MAE for purposes of the buyer’s walk right or any rep bring-down.
The standard carve-out list runs to ten or twelve items. General economic conditions. Industry-wide changes. Acts of war, terrorism, or pandemic. Changes in GAAP. Changes in stock-market conditions. The announcement of the transaction itself. And — the one this post is about — changes in applicable Law, regulation, or governmental policy.
The change-in-law carve-out exists because of a doctrine the Delaware courts have spent more than twenty years building around the MAE clause. The framework was set by then-Vice Chancellor Strine in In re IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del. Ch. 2001), which read the MAE definition narrowly and required durationally significant deterioration in earnings power. It was tested again in Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018) (TABLE) — to date the only Delaware decision to have actually found an MAE permitting a buyer to terminate. The Akorn analysis read the MAE clause as allocating systemic risk to the buyer and company-specific risk to the seller: the buyer should bear macroeconomic shocks, industry-wide disruptions, and regulatory turbulence; the seller should bear deterioration specific to its own operations. The carve-out list is the operational expression of that allocation. Change-in-law lives on the buyer’s side of the ledger because no founder selling a business in the United States can underwrite congressional or agency action between signing and closing.
Why 2026 buyers are pushing on the line
The reason this term is moving in 2026 is not a doctrinal shift — it is an environmental one. The Trump administration’s second-term economic agenda has produced a wave of regulatory change that the M&A bar has not seen in the previous decade. The April 2, 2025 reciprocal-tariff executive order (EO 14257) and the successive modifications and pauses that followed it through 2025 and into 2026 have reshaped supply-chain economics for entire industries between signing and closing on already-pending deals. The EU AI Act’s obligations for providers of general-purpose AI models began to apply on August 2, 2025, with the European Commission’s enforcement powers scheduled to come online August 2, 2026. CFIUS jurisdiction has expanded. State data-privacy regulators have moved aggressively in ways that materially affect the unit economics of software companies whose due diligence closed three months earlier.
From the buyer’s seat, that environment is a planning problem. A buyer signing in February with a six-month closing window is signing into a regulatory environment that may meaningfully change before money moves. The institutional response — visible across both strategic and sponsor-backed deals I have papered this year — has been to push the change-in-law line. Sometimes the push is a full strike of the carve-out. Sometimes it is a narrowing: the carve-out survives, but only for changes that affect the industry generally, with a tag-along clause kicking the seller’s loss back onto the seller if the change has a “disproportionate effect” on the target. Sometimes it is a quiet rewrite that limits the carve-out to changes “enacted” after signing — carving out from the carve-out any agency rule or guidance issued before the deal is signed but that takes effect after.
Ethan Klingsberg’s M&A Predictions and Guidance for 2026, posted to the Harvard Law forum in January from Freshfields, called out heightened negotiation of regulatory-risk allocation, larger regulatory reverse termination fees, and extended outside dates as defining features of 2026 deal design. The MAE drafting fight is the conceptual cousin of that pressure: same risk, allocated at a different point in the agreement. Buyers want optionality. The change-in-law carve-out is one of the cleanest places to take it.
What founders actually give up when they accept the markup
The founder who signs without flagging the strike is taking on three categories of risk that nobody priced into the deal.
First, walk risk. The MAE definition feeds the buyer’s walk right under the no-MAE condition to closing. If a regulatory event hits the business between signing and closing — a new tariff schedule that triples the cost of a key input, a state privacy regulation that requires a material capex to comply, a CFIUS notice that delays the closing six months — a buyer with no change-in-law carve-out has a colorable argument that the event constitutes an MAE. The argument is not always strong. But the cost to a seller of being on the wrong end of a litigated MAE walk — the cost in time, in legal fees, in the death-spiral signaling problem of a public buyer hesitating on closing — is high enough that the seller will negotiate. The buyer’s leverage in that negotiation is the strike that the seller’s counsel did not catch six weeks earlier.
Second, repricing risk. Even where the buyer cannot credibly walk, the buyer can use the threat of an MAE argument to extract a purchase-price reduction at closing. The pattern is familiar to anyone who has worked through a 2020 pandemic-era deal or an early-2023 banking-stress deal: buyer surfaces an alleged MAE, seller disputes, parties settle at a number that bears some relation to the buyer’s walk leverage. That leverage is dialed up materially if the change-in-law carve-out is gone.
Third, bring-down risk on the reps. The MAE definition also feeds the rep bring-down condition — the buyer’s right to refuse to close if any of the seller’s reps would be untrue at closing in a way that constitutes an MAE. A regulatory change that makes a previously-true rep less true at closing — say, a rep about the target’s compliance with applicable Law becoming less defensible after a new regulation hits — can be used as a closing condition wedge by a buyer who is looking for one. A clean change-in-law carve-out blunts that wedge. Its absence sharpens it.
The drafting fight worth having
The right posture for a founder is not to die on the hill of an unmodified, pre-2018 carve-out. The buyer’s concerns about 2026 regulatory volatility are real and the buyer is not unreasonable to want some recourse if the floor moves. The right posture is to negotiate a carve-out that gives both sides what they actually need.
First, keep the carve-out in. The full strike is the version to refuse. There is no defensible reason a seller should bear systemic regulatory risk for a closing event that no party can underwrite. The market has resolved that question for twenty years.
Second, accept a disproportionate-effect modifier. The buyer’s legitimate concern is the change-in-law that hits the target much harder than it hits the broader industry — a regulation aimed at a category of business in which the target is uniquely concentrated. A carve-out that survives the change-in-law but kicks back into MAE territory if the target is “disproportionately affected” compared to other industry participants is the standard compromise and is in line with the doctrinal allocation the Delaware courts have settled on. The buyer gets protection against target-specific regulatory exposure. The seller is protected against generalized regulatory turbulence.
Third, push back on the “enacted after signing” narrowing. The trick in some 2026 markups is to limit the carve-out to laws actually enacted or adopted after signing — which excludes a regulation that has been published in proposed form before signing but takes effect after. That is a narrow technical edit that hands the buyer the change-in-law carve-out only for surprises the buyer could not have priced. Sellers should resist that narrowing. The carve-out should cover changes that take legal effect after signing, regardless of when the change was first noticed in the Federal Register, because the seller cannot reprice for a regulation that is not yet binding law at signing.
Fourth, watch the tariff carve-out closely. Some buyers in 2026 are proposing a separate, explicit anti-carve-out for “changes in import tariffs, duties, or trade restrictions.” That is the buyer asking the seller to underwrite the next round of tariff actions. The seller’s answer should be the same disproportionate-effect framework: a tariff change that affects the industry generally is buyer risk; a tariff change that has a target-specific disproportionate effect is seller risk. The seller-friendly vs. buyer-friendly framing applies cleanly here and is worth working through with counsel before the markup lands. For deals where the MAE fight is layered on top of an R&W policy, our representations & warranties insurance practice page walks through how the carrier’s exclusions interact with the buyer’s walk right.
What this looks like at the term-sheet stage
Most founders see the MAE definition for the first time when the buyer’s draft of the purchase agreement comes back. That is too late to set up the negotiation cleanly. The term sheet rarely addresses MAE language — it is conventionally treated as definitive-agreement drafting — but a sophisticated seller can land a term-sheet provision that says “MAE definition shall include customary carve-outs, including for changes in applicable Law, with disproportionate-effect qualifiers consistent with current market practice.” That one sentence in a term sheet, signed before exclusivity runs, prevents the buyer’s counsel from quietly stripping the carve-out in the first agreement draft and forcing the seller to negotiate it back in from behind.
For founders who are past the term-sheet stage and looking at a markup, the move is straightforward. Read the MAE definition in full. Compare every carve-out to the buyer’s prior draft and to the comparable language in three or four recent precedent agreements pulled from EDGAR for deals in the same sector. The change-in-law carve-out should be there. If it is not, the markup is doing something the cover email is probably not advertising.
The honest summary
Founders selling in 2026 are signing into the most regulatorily volatile environment U.S. M&A has seen since the early Obama-era financial-reform period, and arguably since the post-9/11 round of national-security regulation. Buyers are responding the way buyers always respond to uncertainty — by pushing for optionality and by writing that optionality into the definitions section, where it tends not to attract scrutiny. The change-in-law carve-out is the highest-stakes single line on that front. It is, when present, the seller’s protection against having the deal repriced or walked because Congress, an agency, or the executive branch did something between signing and closing. The merger agreement is a system of allocated risk, and the change-in-law carve-out is the line that allocates regulatory risk to the party who can actually absorb it.
The buyer should not be allowed to quietly move that line. The market has decided where it belongs. Founders who walk into the negotiation knowing the line is being pushed in 2026 will keep it where the doctrine has put it.
If you are a founder negotiating a 2026 purchase agreement and want a second read on the MAE definition or the broader risk-allocation architecture, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
