Material adverse change (MAC) clauses are frequently used in the context of mergers and acquisitions (M&A) in UK transactions, but their structure and content differ depending on whether the transaction is of private or public nature. In both contexts, the purpose of a MAC clause is to give the buyer or bidder the right to walk away from an acquisition following material and adverse business or economic developments in or affecting the target, in the time period between agreeing to a deal (whether by signing an acquisition agreement or by making an announcement for a bid) and the deal's completion.
Private Transactions
In private company M&A, a MAC clause may take the form of either a condition to completion or, more likely, a warranty that no MAC has occurred since a specific date (the buyer will try to negotiate that the warranty is repeated at completion in order to give itself a termination right capable of being exercised if the warranty, when repeated at completion, is not true). A typical MAC clause will contain similar exceptions as would apply in a U.S. transaction (e.g., change in economic conditions or financial or securities markets, natural disasters).
MAC clauses in an acquisition agreement will be interpreted in accordance with the principles of English contract law, but there is very little case law on the subject (although rulings by The Panel on Takeovers & Mergers offer some indication as to the approach the UK courts might take towards MAC clauses). Generally, UK courts determine the intention of the parties by looking at the contract as a whole, but they will only enforce a general clause if it is clear that it unequivocally expresses the intention of the parties and is free of ambiguity. To ensure, therefore, that a MAC clause can be more safely relied upon, it is advisable for a buyer in a UK transaction to express MAC in terms of an event resulting in a quantified reduction in value of target assets or an increase in liabilities, which can be objectively measured, or by reference to specific circumstances occurring that would have an effect on the target in particular.
Public Transactions
In public company M&A, it is standard practice for a UK offer document to contain a MAC clause (expressed as a condition to the offer), the wording of which is largely standardised, as follows: "[save as publicly disclosed] no adverse change or deterioration having occurred in the business, assets, financial or trading position or profits or prospects or operational performance of any member of the Group which in any case is material in the context of the wider Group taken as a whole." However, unlike in the private company context, there are no negotiated exceptions since the UK regulation prescribes the circumstances when a condition may or may not be invoked.
The City Code on Takeovers and Mergers (the City Code) are the rules by which UK takeover activity is regulated. Rule 13 of the City Code provides that for a bidder to invoke a MAC condition so as to cause a bid to lapse, the condition must not be subject to the subjective judgment of the directors of the bidder, nor should satisfaction of the condition be in the bidder's hands. Further, the circumstances that give rise to the right to invoke the condition must be of material significance to the bidder in the context of the offer.
The Takeover Panel ruled on the subject of a MAC condition during the course of WPP plc's offer for Tempus Group plc, which was announced in August 2001. WPP argued that following the events of September 11, 2001, a material adverse change had occurred. The Takeover Panel took the view that those events, although exceptional, unforeseeable and a contributor to the decline that had already affected the advertising industry, did not undermine the rationale for the terms and the price of WPP's offer, which were Tempus' long-term prospects. As a result, the Takeover Panel held WPP to its offer. The Takeover Panel stated in this instance that to meet the material significance test "requires an adverse change of very considerable significance striking at the heart of the purpose of the transaction in question, analogous to something that would justify frustration of a legal contract."
Another example in which the Takeover Panel considered a bidder trying to invoke a MAC condition involved the 2005 bid by the private equity firm Terra Firma Investments for East Surrey Holdings. In this transaction, Terra Firma wanted to acquire East Surrey Holdings for its productive Phoenix Gas distribution business in Northern Ireland. Terra Firma's offer was based on what it thought was a price agreement made in 2004 between East Surrey Holdings and the Northern Ireland energy regulator. However, after the bid's launch, the regulator said that the price agreement was not in place, and that the agreement was in any event subject to review. Terra Firma applied to the Takeover Panel to withdraw its offer by invoking the MAC condition, but the Panel ruled that the regulatory changes "were not of sufficient substance" to invoke the MAC condition. However, that ruling supports the suggestion that a MAC condition can be invoked successfully if it is of sufficient magnitude and strikes at the heart of the purpose of the deal. In the East Surrey Holdings example, the magnitude of the event was simply not great enough.
Since these two cases, the Takeover Panel has issued a statement clarifying that in order to invoke a MAC condition, there is no need for a bidder to positively demonstrate "frustration" in the legal sense. Instead, a stringent objective test must be satisfied. The bidder must demonstrate that the relevant circumstances are of very considerable significance, striking at the heart of the purpose of the transaction. Some commentators argue that as the decision stands, a MAC condition could only be invoked in the most extreme circumstances.
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