As a result of the credit crisis, lenders are placing greater
reliance on market material adverse change (market MAC) provisions
in commitment letters. These clauses remain untested in Canadian
courts, and it is highly likely that a duty of good faith applies.
Nevertheless, by carefully negotiating and exercising a market MAC,
lenders may significantly improve its enforceability.
A market MAC (also known as "market out") relieves a
lender of its obligations under a commitment letter in the event of
a "material adverse change" in financing, banking or
capital markets. The objective is to protect lenders against the
risk that a loan cannot be syndicated (at least on its original
terms) due to unanticipated changes in the markets generally.
Usually, a market MAC clause expressly provides that it is
within the lender's discretion to determine that a
"material adverse change" has occurred. Various terms may
be used to describe the lender's discretion; these include
"opinion" or "sole judgment."
No matter how strongly stated, language describing a
lender's discretion will be interpreted as requiring an
exercise of good faith. The Ontario Court of Appeal has
consistently held that contractual discretion must be exercised
honestly and in good faith. Depending on the contractual term and
facts, the exercise of good faith may be measured on a mixed
subjective and objective standard.
In addition to general jurisprudence on contractual discretion,
a court deciding a case regarding a market MAC might also have
regard to emerging US case law. Leading US cases in this area
involve provisions directed at changes in the target of a merger or
acquisition, so they arise in a different context. Nevertheless, an
Ontario court may be influenced by US decisions holding that
parties seeking to invoke a "material adverse change"
provision bear a "heavy burden."
When negotiating a market MAC, a lender should consider:
Whether "material adverse change" can be defined in
objective terms so that its occurrence is difficult for the
borrower to deny, and difficulties associated with the duty of good
faith are avoided.
If "material adverse change" cannot be defined
objectively, use strong language to describe the lender's
discretion, such as "sole discretion."
If there are existing adversities in the market, as is the case
today, make sure they are incorporated into the definition of
"material adverse change" so that even a slight
deterioration will be sufficient.
Avoiding pre-contractual statements to the effect that the
"market MAC" is only boilerplate, and including an entire
agreement clause, in order reduce the risk that the borrower could
rely on such statements in litigation.
McCarthy Tétrault Notes:
When deciding whether to exercise a market MAC, remember that a
duty of good faith will almost surely apply, so a rigorous,
well-documented analysis should be undertaken. The record should be
one the lender could confidently defend in court, if necessary.
Fortunately, invoking a market MAC often results in a renegotiation
of terms, rather than litigation, but it is better to hope for the
best and plan for the worst.
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.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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