03 December 2020
Corporate lawyer, Michael Cox, looks at “MAC” clauses and whether the COVID-19 pandemic has been used as a trigger.
Material Adverse Change (“MAC”) clauses can be used in conditional contracts to acquire a company and in loan transactions. In a company acquisition context, MAC clauses are used to allocate the Seller with the risk of an unexpected event occurring that prejudices the Target’s business between signing the acquisition agreement and completion. If a MAC event occurs in this period, the Buyer can be released from its obligation to acquire the Target.
A MAC clause is a backstop in the risk allocation process. At the outset of acquiring a company, due diligence identifies risk associated with the Target. In the acquisition agreement, the disclosure letter, warranties and indemnities apportion identified risks associated with the Target. The MAC clause protects the Buyer against external, unexpected risks occurring prior to completion. Even then, external risks that affect the industry are often borne by the Buyer, with the Seller classically bearing the risk of events that uniquely affect the Target’s business.
As a MAC clause protects against unique external risk, it is not commonly triggered. Consequently, there has been little litigation in this area. However, the Covid-19 pandemic is a perfect example of an external event that could adversely change a business. Whether the pandemic was a sufficient reason to trigger a MAC clause was considered in the recent English law case of Travelport Ltd & Ors v WEX.
Travelport Ltd & Ors v WEX
The case related to the $1.7billion acquisition of two target companies that specialise in business to business payments in the travel sector (“Targets”). In January 2020, a conditional share purchase agreement was entered into to acquire the Targets. Prior to satisfaction of the various conditions, the full impact of the Covid-19 pandemic became apparent. The Buyer notified the Seller that it was triggering the MAC clause on the grounds that the pandemic constituted ‘regulatory or political conditions’ with a disproportionate effect on the Targets compared to competitors within their industry. The Seller disagreed.
The matter came down to interpretation of wording of the MAC clause. The word “industry” was not defined and arguments related to conflicting interpretation. The Buyer asserted the Targets’ industry was the business to business payment industry. The Seller asserted that industry meant the travel payments industry (a narrower interpretation).
The Court found in favour of the Buyer, principally as the Court agreed with its wider interpretation of “industry”. The judgement noted that careful drafting of a MAC clause is essential. The Court required to assume that each word was carefully considered and deliberately used, due to the sophistication of the parties and their advisers. In addition, there was no presumption that a MAC clause should be narrowly construed, as had been asserted by the Seller based on similar case law from the USA.
Practical Take Aways
The Travelports case was governed by English law, but would likely be highly persuasive to the Scottish Courts. Clear drafting of the clause is key. From our experience, the subjectivity or objectivity of the clause’s trigger should be considered. Can a definitive test be used as a trigger? For example, a specified drop in value of the Target rather a subjective interpretation of a “material adverse change”. Also, consider the point at which the clause can be triggered. Does the MAC event require to have occurred and caused loss, or will anticipated loss be sufficient?
The unforeseen and substantial impact of Covid-19 demonstrates how useful the MAC clause can be. The Travelports case demonstrates the level of consideration required to ensure the clause is drafted effectively.
Michael Cox, Senior Associate: firstname.lastname@example.org / 0131 222 2939