The pandemic had various impacts on M&A practitioners, one being that attorneys quickly updated their transactional documents to consider the new "normal" – a more volatile business environment. The typical general areas of concern are the definitions of the material adverse change (MAC) or material adverse event (MAE) clause (which would provide the buyer with the right to walk away from the deal should events occur that are detrimental to the value of the target company) and the carve-out from the obligation to operate the business "in the ordinary course" in case unexpected severe events occur. These trends also saw the emergence of Covid-19-related M&A case law in the Delaware Court of Chancery in the US.
In a first decision AB Stable VIII LLC v MAPS Hotels and Resorts One LLC, the court held that the Covid-19 pandemic did not result in a MAC/MAE, because it fell within a contractual exclusion for "natural disasters or calamities". However, it still allowed the buyer to walk away from the deal because the seller's response to the pandemic breached the ordinary course of business covenant. The target closed two of its 15 luxury hotels and limited severely the operations of the other 13, it laid off or furloughed 5,200 full-time-equivalent employees and decreased marketing expenditure year-over-year by 33.1%, 76.4%, and 69% in March, April, and May of 2020 respectively. All of these measures were implemented without seeking the buyer's prior approval. The seller argued that if it had sought approval from the buyer, then the buyer could not reasonably have withheld its consent; this argument was rejected by the court. Also, the seller was unable to convince the court that the responses were taken only to comply with its contractual obligations or in response to legal requirements due to government measures or laws that came into effect only after signing.
In a second decision in Snow Phipps, LLC v KCAKE Acquisition, Inc., the court also found no MAC/MAE, considering its pre-Covid-19 decision in Akorn, Inc. v Fresenius Kabi AG (the only case in which the Delaware Court of Chancery so far found a material adverse effect). According to the court, a drop in sales of 42%-64% over five weeks, followed by a strong rebound in sales and supported projections of continued recovery (the downside case projected the target's adjusted EBITDA to be 5% higher in 2021 than in 2019), does not qualify as a material adverse effect. The court also found no violation of the ordinary course of business covenant in the Covid-19-related cost-cutting measures of the target, which had acted similarly in previous situations of sales declines. The target had also informed the buyer, who did not object to the measures.
Against this backdrop, one may draw some interim conclusions for M&A transactions under Swiss law, bearing in mind that despite recent positive developments, Covid-19 is not eradicated yet and the global economic and political situation is far from being stable.
The MAC clause under Swiss law
While the Swiss Supreme Court has not yet decided on MAC-clauses in
particular, inferences can be drawn from other cases. Similar to
the approach taken by the Delaware Court of Chancery in the AB
Stable transaction, it is very likely that a Swiss court would
consider the Covid-19 pandemic as a natural disaster or calamity
given the Swiss Supreme Court's definition of an act of God as
an 'unforeseeable, extraordinary event that is not related to
the "operation" of the company, but strike with
unavoidable force from the outside' (SSC 102 IB 257). Also under Swiss law, a
temporary drop in sales as in the Snow Phibbs case would not
constitute a MAC due to the general legal principle that agreements
must be kept (pacta sunt servanda). However, the question arises
whether a Swiss court's perception of the foreseeability of
certain "natural disasters or calamities" may have
changed not only with respect to pandemics but also concerning
other matters of public attention, such as climate change-related
events. If a matter like the pandemic is carved out from a
contractual MAC/MAE definition, such carve-out would be respected
under Swiss law. Hence, parties should consider explicitly
including or excluding specific issues by means of a MAC/MAE clause
(e.g. exclude the "pandemic" or, more broadly,
"effects or events induced by an epidemic"; similarly,
"climate-change induced effects or events"). If events
without a long-term impact on the target business shall be
considered a MAC/MAE, parties must make that explicit. Notably, any
MAC/MAE clause in a Swiss law agreement (with or without certain
explicit inclusions or exclusions) will likely bar a party to
invoke the established Swiss law principle of "clausula rebus
sic stantibus" (a doctrine allowing for relief because of a
fundamental change of circumstances), as this doctrine is
superseded by the contractual MAC/MAE arrangement (see SSC 127 III 300).
The ordinary course undertaking and responses to severe
events under Swiss law
In contrast to the Delaware Courts, a Swiss court may take a more
flexible approach when interpreting ordinary course undertakings. A
Swiss court will put more emphasis on the parties' intention
when contracting and whether the seller acted in good faith in its
response to unexpected severe events. This is not a carte blanche
for sellers who seek to implement drastic measures without
soliciting the buyer's opinion under Swiss law. If
contractually obliged to do so, the right approach is always to
inform the counterparty and request approval; if circumstances
require immediate action, a party may, as an exception, be
protected even if disregarding contractual approval requirements or
response deadlines. In any case, due consideration should be given
to antitrust regulations, especially if soliciting consent would
lead to the exchange of crucial information about measures to
combat an industry-wide crisis. Based on this, a cautious seller
negotiating a Swiss law transaction will want to (a) ensure that
the contract allows for reasonable emergency measures to be taken
by the seller/target even if not compliant with the ordinary course
of business and past practice; and (b) accept the buyer's
consent requirements in an ordinary course covenant only subject to
short deadlines in case of immediate need for action.
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.