Material adverse change (MAC) is a catch-all concept designed to capture unpredictable and unforeseen events or circumstances which have an adverse impact on the target business triggering particular contractually agreed consequences. MAC clauses are commonly found in the context of an M&A transaction or facility agreements.
In an M&A transaction, a MAC clause gives the buyer the right to walk away from a deal if the target is materially and adversely affected by events that occur between entering into the agreement and the intended completion date.
In facility agreements, a MAC is typically an event of default, the triggering of which allows a lender to call in the loan and enforce any security provided, and can act as a drawstop, preventing further funds from being drawn down.
In acquisition finance, it is crucial that the MAC clause in the acquisition documents match the MAC clause in the finance documents so that a buyer is not forced to complete an acquisition (because the MAC clause in the acquisition documents has not been triggered) in circumstances where it has insufficient funding available to it (because the MAC clause in the finance documents has been triggered).
In this Insight, we consider the general principles of MAC clauses under English law and whether Covid-19 is sufficient to trigger a MAC clause. (If you are looking for insights into whether Covid-19 is sufficient to amount to a force majeure or frustration event, please see our other insights here.)
What does the contract say?
A MAC clause is completely a creature of the contract. So the specific wording of the MAC clause and the definition of a MAC in the agreement is crucial. Definitions and use can vary considerably depending on the nature of the transaction and the practice in the jurisdiction of the parties so it's important to look at the particular facts and contracts in question.
How will a MAC be interpreted?
While much will depend on the particular drafting, there are some general principles which can be drawn out of the limited English law cases on MAC clauses:
- The party seeking to rely on the MAC clause has a heavy evidential burden in convincing the court that a MAC has occurred because public policy favours the enforcement of signed deals.
- What facts were known to the parties when they entered into the agreement? A party cannot rely on a MAC clause on the basis of circumstances of which it was aware on entering into the agreement – but there may be room for argument where conditions worsen and/or become materially different.
- There is no black-and-white test as to what is "material". However, the change must be of sufficient magnitude (“significant” or “substantial”), and the effect must be significant in duration – not just temporary or short-term.
- Usually a MAC clause will make some reference to a deterioration in the financial condition of the underlying business. "Financial condition" will be interpreted narrowly starting with an assessment of the company's financial statements at the date under the agreement until the date the MAC was invoked. However, an enquiry as to financial condition is not necessarily limited to the company's financial information if there is other compelling evidence to show that an adverse change sufficient to satisfy a MAC clause has occurred. A MAC about "financial condition" will not be established by reference to a company's prospects. The MAC clause will have to specifically cover the businesses prospects.
- There must be a causal link between the change and the adversity. Changes in general economic conditions or the market would not in and of itself constitute a MAC unless the MAC clause specifically includes these words (which would be extremely unlikely).
Does COVID-19 and lockdown amount to a MAC?
The short answer is: it depends. It depends on what the parties knew at the relevant time, the specific terms of the MAC and on the specific impact that Covid-19 and the lockdown has had on the target business.
The general deterioration in economic conditions which have arisen as a result of the lockdown are unlikely on their own to trigger a MAC. However, if the specific business has been affected by the lockdown – for example, because it has been ordered to close – there may be more of an argument to be made. Even then, the government has made a number of announcements to support businesses which could counteract the impact.
The timing of the agreement will also be relevant. Covid-19 has been a known factor for a few months but the full implications have only recently been realised and lockdown has only been in place for a relatively short amount of time. Covid-19 may or may not have been in the contemplation of the parties depending on when the agreement was negotiated and signed.
And finally, we are still in the eye of the storm when it comes to the impact of the pandemic. Will the impact be long-term or will the support package announced by the government mean that the fundamentals of business will remain sound and "bounceback" once lockdown restrictions are lifted?
These are not easy questions. But invoking a MAC could have serious consequences for your legal position and your business relationships and so this step requires careful consideration.
If you require assistance, please speak to your usual Osborne Clarke contact who will put you in touch with someone from our Finance, Corporate and Commercial Litigation team who have considerable experience in this area.