Canada: A Brief Overview Of Material Adverse Change Clauses In Credit Documents

Last Updated: December 22 2016
Article by Travis Evens

Most Read Contributor in Canada, October 2018

Material Adverse Change ("MAC") clauses, sometimes referred to as Material Adverse Effect ("MAE") clauses, are found in many financing commitments and can often be heavily negotiated. In spite of this, MAC clauses are often the most ambiguously drafted clauses in a financing agreement and are thus often subject to multiple interpretations. However, this ambiguity is essential to the purpose of the MAC clause — which is, in the broadest sense, to protect the lender against gaps in due diligence, unforeseen changes to the borrower's financial situation, unexpected and drastic market fluctuations, and anything else that could be considered a "material" change to the borrower's ability to repay the loan. While borrowers may view MAC clauses as a sign of the lender's unwillingness to fully commit to the loan, the lender should view MAC clauses as a necessary added protection against unforeseen and indeed, unforeseeable, material changes.

MAC clauses generally focus on the financial condition and assets of the borrower (and any additional credit parties), and the general ability of the borrower to meet its obligations to the lender. If the loan is secured, the MAC clause may also extend to the enforceability of the security granted to the lender. In all cases, however, the MAC clause is intended to protect the lender by monitoring the overall financial health of the borrower and ensuring that the lender has a "way out", so to speak, if a material change occurs with respect to the borrower's ability to repay the loan. To that end, MAC clauses are generally included in credit agreements in two ways: (i) as a condition of funding in which the borrower represents to the lender that no MAC has occurred since the time of the delivery of its latest financial statements; and (ii) as an event of default allowing the lender to terminate its commitment and accelerate the loan on the occurrence of a MAC. As a representation, the borrower makes the determination that no MAC has occurred and represents that fact to the lender. As an event of default, the lender must decide if the relevant change is "material" enough to call the loan and terminate its agreement with the borrower.

As mentioned, in order to provide the lender with maximum protection, MAC clauses are necessarily ambiguous. For instance, MAC clauses often define a material adverse change as an adverse change that is, not surprisingly, material. With this in mind, how is a lender to know when a change is sufficiently "material" to engage the MAC clause in the financing agreement? Surprisingly, there have been very few Canadian cases to consider this issue in a lending context, but two cases from Canadian and international courts provide some insight as to how important proper drafting is to a court's interpretation of the scope and enforceability of a MAC clause.

In Doman Forest Products1, the British Columbia Supreme Court considered the definition of "materiality" in the context of a credit agreement which included an event of default upon the occurrence of a change that constituted a material adverse effect. The agreement defined "material adverse effect" very broadly to include a material adverse effect on (among other things) the condition (financial or otherwise), operations, assets, property, business or prospects of the borrower and any benefits or rights of the lender under the agreement, to be determined at the lender's sole discretion.2 Although the borrower's financial position was poor (as it was producing a low EBITDA), it argued that this was not relevant because the lender's advances were fully secured by accounts receivable. The Court disagreed and found that the MAE clause was not limited to the value of the collateral, but actually extended to the overall financial condition of the borrower as per the wording of the clause itself.3 The Court therefore held that materiality is to be determined according to the language of the clause and the definition of materiality in the agreement, and found that the lender in this case could rely on the MAE clause in accelerating the loan. The Court also went on to support the lender's right to exercise the MAE clause in its sole discretion, so long as the lender exercised its discretion reasonably based upon bona fide considerations and gave proper consideration to the facts supporting its decision to rely on the MAE clause.4 This decision is very favourable to lenders that use broadly worded MAC clauses in their financing agreements.

It is also worth noting the decision in Grupo Hotelero5, wherein the U.K. High Court of Justice took an approach that is less favourable - but not necessarily prejudicial - to lenders by adopting a more objective standard when determining when a change is sufficiently material. The credit agreement in this case required the borrower, as a condition to funding, to represent that "there has been no material adverse change in its financial condition" since the date of the loan agreement.6 The lender refused to advance the funds, claiming that a material adverse change had occurred with respect to the borrower's financial condition. A full analysis of the court's lengthy reasoning is beyond the scope of this article, but the Court made several comments of note. The Court acknowledged that the approach of English courts has long been to give effect to what the parties have stipulated in the contract,7 indicating that a lender is entitled to enforce the literal word of the agreement. However, the Court also put forth a number of considerations when interpreting MAC clauses. Among these, the Court stated that a lender should always review the financial information available to it regarding the borrower before relying on a MAC clause.8 Further, the material change must affect the borrower's ability to repay the loan,9 must not be temporary in nature,10 and would not include circumstances or events which were known to the lender at the time the agreement was made.11

Although the decision in Grupo Hotelero purports to narrow the circumstances in which a MAC clause can be invoked, it is important to note that the MAC clause in that case was already quite narrow, as it was limited to changes to the borrower's financial condition. The differing interpretations by the courts in Grupo Hotelero and Doman Forest Products can largely be explained by the difference in scope of the relevant MAC clauses.

As the above decisions indicate, the enforceability and usefulness of MAC clauses is largely dependent on the specific facts of each case, as well as the scope and quality of drafting of each MAC clause. If a MAC clause is broad enough to cover the types or categories of change that are of central importance to a lender, and the lender exercises its discretion reasonably and with due consideration of all relevant information in declaring a default based upon a MAC clause, a MAC clause can, in the right circumstances, act as an effective 'fail safe' against unforeseen material adverse changes to a borrower's ability to repay a loan. Nevertheless, due to the uncertainty associated with the interpretation of materiality in MAC clauses, many lenders are reluctant to act solely on a default based upon a MAC clause and prefer to have a second unrelated default under the applicable credit document before making demand and accelerating a loan.

Footnotes

1 Doman Forest Products Ltd. v. GMAC Commercial Credit Corp. – Canada, 2005 BCSC 774 [Doman Forest Products].

2 Doman at para 28.

3 Doman at para 127.

4 Doman at para 159.

5 Grupo Hotelero Urvasco SA v Carey Value Added SL, [2013] EWHC 1039 (Comm) [Grupo Hotelero].

6 Grupo Hotelero at para 326.

7 Grupo Hotelero at para 340.

8 Grupo Hotelero at paras 351-352.

9 Grupo Hotelero at para 357.

10 Grupo Hotelero at para 363.

11 Grupo Hotelero at paras 360-362.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions