We have been tracking the impact of Material Adverse Change (MAC) and Material Adverse Effect (MAE) clauses on M&A transactions and how parties to certain M&A transactions are navigating the issues surrounding the termination of transactions in the context of changing business realities due to the global coronavirus pandemic.

Another recent case involves Juweel Investors Limited ("Juweel"), the owner of the company carrying on the business of American Express Global Business Travel ("GBT"), a corporate global business travel enterprise with over 10,000 clients in more than 140 countries. In its complaint filed in the Court of Chancery in Delaware on May 11, 2020, Juweel sought an expedited trial to obtain an order to compel several entities related to The Carlyle Group Inc. ("Carlyle") and GIC (Ventures) Pte. Ltd (through Pure Magenta Investment Pte Ltd.) (collectively, "GIC", and together with Carlyle, the "Purchasers") to complete a transaction in which the Purchasers had agreed to acquire an ownership interest in GBT.

The transactions contemplated by the Share Purchase Agreement, dated December 16, 2019 ("SPA"), were scheduled to close on May 7, 2020. As was seen in the Victoria's Secret case reported on in our earlier post, the Purchasers claim that there was an MAE1 and that GBT failed to comply with interim operating covenants between signing and closing by not operating in the ordinary course of business.

With respect to an MAE, the Purchasers' main contentions are that: (i) the pandemic has resulted in a "significant decimation of .[the] financial condition and results of operations" of GBT and based on industry projections that the level of air travel may not return to pre-Covid levels for up to three years, such decimation is "durationally significant" (which has been articulated as a key requirement under Delaware case law); (ii) GBT failed to negotiate a specific pandemic carve-out that would shift the risk of an MAE to the Purchasers2; and (iii) the pandemic had a disproportionate effect on GBT. GBT in turn argues that there is no MAE because the general carve-outs provided in the SPA shift the risk of the pandemic to the Purchasers since any change to its current financial condition or results of operation has arisen from "general business or economic conditions", "national or international political or social conditions", "financial, banking or securities markets" and "changes in Legal Requirements".

With respect to the Purchasers' contention that GBT was no longer operating in the "Ordinary Course of Business", because of cost-cutting steps taken by GBT, GBT is arguing that under the defined term in the SPA, it is to operate in the ordinary course of business consistent "with past custom and practice". GBT points out that in response to the 2008 financial crisis, which also had a significant effect on business travel, it took steps that were commensurate with the steps it has taken in the current crisis - the point being that its actions are consistent with its past practice. The Purchasers dispute this assertion.

In addition to these two arguments as a basis for terminating the transaction, the Purchasers have raised some other claims as a basis for termination. In particular, they assert that (i) GBT was to complete a preclosing leveraged recapitalization (i.e. by borrowing money and distributing cash to shareholders) and that GBT was going to redirect the proceeds of the borrowing to cover operating costs, hence breaching a covenant related to the refinancing; (ii) GBT had failed to comply with its obligation to provide the Purchasers with access to its books and records in order for the Purchasers to complete pre-closing diligence; and (iii) GBT will not satisfy the condition precedent that its representations and warranties under the SPA will be true and correct at closing (particularly as it related to the "No Violations" and "Suppliers and Customers" representations), which individually and in the aggregate constitute an MAE under the SPA.

The Delaware court refused to grant Juweel's request for an expedited trial, on the basis that Juweel had waited almost a month, from the time when the Purchasers originally claimed an MAE, to bring its case. The trial has been scheduled for July 20, 2020.

As parties to M&A transactions continue to test their rights to terminate M&A transactions, this case will be of particular interest for several reasons. First, it may provide some commentary on the necessity to have specific carve-outs to MAC and MAE clauses, rather than relying on general "business and economic condition" carve-outs. Second, it may provide some clarity on covenants to operate in the ordinary course consistent with past practice and consider questions dealing with (i) whether the past practice of the particular target is relevant or could the past practice of other industry players be relevant, and (ii) what happens when a target takes actions to react to a "black swan" event. Finally, the other bases of termination, including the inability to continue due diligence during the interim period and the inability to bring-down specific representations at closing, may be arguments that other purchasers also pursue, on a case-by-case basis. We continue to monitor these developments.


1. An MAE is defined in the SPA as "any event, change, effect, occurrence, circumstance, state of facts or development that, individually or in the aggregate, is or would reasonably be expected to be materially adverse to the assets, properties, financial condition or results of operations of [GBT], taken as a whole" subject to certain exceptions, including "any adverse change, event, development, effect, occurrence, circumstance or state of facts arising from (i) general business or economic conditions, (ii) national or international political or social conditions . . . , (iii) financial, banking or securities markets . . . , [and] (v) changes in Legal Requirements . . . , except to the extent, with respect to clauses (i) through (v) above, that any such event, change, effect, occurrence, circumstance, state of facts or development disproportionately and adversely affects [GBT] relative to other participants in the industries in which [GBT] participate[s]."

2. The Purchasers noted that in GBT's existing credit agreement, GBT had previously negotiated a "Travel MAC" which relieves GBT from certain financial covenants in the instance that an event "results in the issuance of any public declarations or emergency travel advisories by the ICAO or the WHO". The Purchasers' argument being that their failure to negotiate a similar provision in the SPA was a conscious decision that GBT would bear the risks of a pandemic.

Originally published June 2, 2020

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.