knowledge 12 November 2020 |

COVID-19: The MAC and an Update on Buyer Protection in a Pandemic

The facts

Under the SPA dated 24 January 2020, WEX Inc (the “Buyer”) agreed to acquire the entire issued share capital of both eNett International (Jersey) Limited ("eNett") and Optal Limited ("Optal") (the “Targets”) from the Seller for US$1.7 billion.  The precondition to closing which gave rise to the dispute was:

“Since the date of this Agreement, there shall not have been any Material Adverse Effect and no event, change, development, state of facts or effect shall have occurred that would reasonably be expected to have a material adverse effect”. 

The main issues in the dispute centred on a carve-out contained in the MAE definition in relation to “conditions resulting from…..pandemics” and a carve-out exception that, where an adverse event otherwise falls within the carve-out, the Buyer can invoke the carve-out exception if the event has had “a disproportionate effect on the [Targets], taken as a whole, as compared to other participants in the industries in which [they] operate”.

On 4 May 2020, the Buyer wrote to the Seller to give notice that there had been a MAE within the definition in the SPA due to "conditions resulting from the SARS-CoV-2 pandemic", that the condition to closing had not been met and that the Buyer was not obliged to proceed with the transaction.  The Seller denied that there had been a MAE and issued proceedings seeking declarations that no MAE had occurred under the SPA.

The dispute

The main issue in dispute was the identification of the relevant industries for the purpose of the MAE definition and measuring the Targets’ financial condition.  The SPA did not contain a definition of what “industries” meant for the purposes of the MAE.  The Seller claimed that the relevant industry for comparison was the (narrower) “travel payments industry” whereas the Buyer argued that the appropriate comparator was the (broader) “business to business “(B2B”)” or the (even broader) payments industry. 

Judgment

Appropriate comparator

The court decided that it was necessary to assess the Targets’ financial condition against the broader B2B payments market and not the narrower “travel payments industry”.  In reaching its conclusion, the court noted that the SPA was a heavily negotiated contract where all of the wording had been carefully scrutinised by lawyers and was used intentionally.  The judge added that parties could have, but did not, specify what industries they meant.  The use of the word “industries” (being a broad word connoting scale and a high level of generality), rather than alternative words such as “markets” or “sectors” or “competitors”, was a relevant consideration in the court reaching its decision.

Although the court did look the "purpose of the transaction" and whether the Buyer had contracted to purchase a travel business or a payments business, the court held that it was an "oversimplification" to characterise the deal as "just a purchase of a travel payments business" and found that the transaction did not have one specific purpose (as the Buyer argued that it saw financial value in extending the payments business to other sectors).  As noted above, the decision was on a preliminary issue and the court did not address whether there had in fact been a disproportionate effect on the Targets as compared to the B2B payments industry.

Interpretation

In reaching its decision, the court considered how the MAE clause should be interpreted and the cases where MAE and material adverse change clauses had been examined.  In noting that the leading English authority considered these clauses in the context of banking transactions (as opposed to share purchase agreements) the judge referred to the more advanced body of relevant US decisions (particularly from Delaware) acknowledging that although they were not binding it would be imprudent to ignore the thinking of the leading forum for consideration of these clauses. 

The US decisions and authorities cited by the judge emphasised the importance of establishing where risk is intended to sit in the context of an M&A transaction.  The authorities supported a view that MAE clauses tend to be interpreted as allocating general market or industry risks to the buyer and more company-specific risks to the seller.  The judge referred extensively to the Delaware Court's decision in Akorn Inc v Fresenius Kabi AG³, where the court addressed an MAE clause that had a carve-out and a carve-out exception similar to the one in the present case.  Although much of the focus in that judgment was around the concept of materiality, the issue also turned on the categorisation of the risks. 

Commentary

This preliminary judgment is a further reminder to parties regarding the importance of careful drafting and the use of precise language in SPAs.  This is particularly important in relation to (risk allocation) provisions, such as MAE clauses, which are likely to be the subject of a dispute when a party seeks to invoke them.  Ambiguity in MAE clauses may have a separate purpose that could drive the parties in such a dispute to renegotiate a transaction rather than simply pull out of it altogether or resort to litigation.  It is understood that the parties intend to appeal the decision, and if that occurs,   higher courts in the UK will offer more definitive views on this important topic, notwithstanding that in each case much will depend on the actual wording used by the parties.