First Published in The Royal Gazette, Legally Speaking, February 2021
Given the ongoing impact of the Covid-19 pandemic, it is timely for us to look closely at material adverse change clauses in the context of a business acquisition.
Also known as material adverse effect clauses, MAC clauses are designed to provide a way to address events that were unanticipated in a deal's documentation.
In an agreement to buy a business, a MAC clause typically allows a buyer to withdraw from an agreed transaction if events occur that are detrimental to a target company and/or its assets. In so doing, a MAC clause offers the buyer a level of protection against significant adverse business or economic changes that impact the value of the target company.
The enforceability of a MAC clause hinges on the precise language used throughout the agreement and, in particular, the definition of what constitutes a material adverse change or event. A higher burden of proof typically applies to a person seeking to establish that a MAC has occurred within the meaning of the clause in question. Linguistic precision when drafting these provisions is therefore of the utmost importance.
The recent English High Court case of Travelport Ltd v Wex Inc considered the construction and interpretation of MAC clauses under English law. This judgment would be persuasive before a court in Bermuda and is of particular interest as the English court had to consider the enforceability of a MAC clause arising as a result of the Covid-19 pandemic.
Interestingly, the court not only considered English precedent, of which there was relatively little, but also decisions in the United States where there is a more substantial body of case law.
The proceedings concerned a share purchase agreement that was conditional upon certain matters including that, between signing and completion, there had not been anything that had a MAE and nothing had occurred which might reasonably be expected to have a MAE.
While the case did not determine whether or not there had been a MAE, it did provide guidance about how MAE provisions should be interpreted.
The provision itself was fairly complex in that it set out what events would constitute a MAE before providing certain exclusions – and exclusions to the exclusions. The court heard counter-arguments from both parties regarding how these provisions should be applied.
As the agreement had been carefully drafted and heavily negotiated, the court proceeded on the basis that the choice of language in the agreement was deliberately chosen.
The court's approach demonstrates that parties should exercise caution when using "boiler plate" language in a contract that may not, without careful review and amendment, sufficiently encapsulate the parties' intended meaning. The greater the specificity of the drafting about what event and/or consequence constitutes a MAC for the purpose of a given agreement will give the buyer an increased chance of being able to enforce it should the need arise.
However, the challenge for buyers in the current climate is that we have now been in the throes of the pandemic for more than a year, and there is a better understanding of the economic challenges we are faced with as a result. Due to this, an attempted reliance on a MAC clause being invoked as a result of the pandemic could be interpreted more harshly as both parties should be aware of the potential business and economic implications when entering into the agreement.
Consequently, sellers may focus on the MAC clause to ensure that it cannot be triggered by changes that should have been in the mind of the buyer when making their decision whether to enter into the transaction.
The scope of MAC clauses will continue to be a pressing concern for buyers and sellers engaged in business acquisitions while the costs of the pandemic are still being counted globally.
Careful consideration should be given to any potential effects of the Covid-19 pandemic on the target company, and the extent to which the parties consider it reasonable to rely upon a MAC clause as a result of their impact.
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.