Material Adverse clauses: Do they work during a pandemic?

Written on 28 Jan 2021

A Material Adverse Effect (MAE) or Material Adverse Change (MAC) clause allows a party to pull out of the agreement, without cost, where there has been a material change before signing. These clauses are commonly included in corporate and finance agreements. Generally, the clause will be drafted in such a way that it is not triggered where there have been external changes to a market or industry, and instead require a change which impacts on the particular company in question. That is because the company might out-perform its industry.

As we have previously discussed, a general deterioration in economic conditions as a result of the pandemic is unlikely on its own to trigger a MAC. However, if the specific business has been affected– for example, because it has been ordered to close – there may be more of an argument to be made.

A recent case, though, supports the view that, if the wording of the clause allows, it can be triggered even where it is not just the company that is affected.
In Travelport Ltd v Wex Inc, the contract in question was a share purchase agreement and the MAE clause excluded pandemics but then had an exception if the pandemic had a disproportionate effect on the seller "as compared to other participants in the industries" in which it operated.

Much of the case turned on what was meant by "industries" and how narrowly that should be defined (namely whether it was confined to the "travel payments industry" or the wider "business-to-business payments industry"). The judge noted that "industries" is wider than "markets" or "sectors" or "competitors" and then went on to find that there is no "travel payments industry". That was significant here, since the pandemic had affected the whole travel sector, so it would be hard to argue that the exception in the clause applied if that had been the comparator. Instead, the relevant industry was the business-to-business payments industry.

More generally, she rejected an argument that MAE clauses are designed to leave the seller bearing only "company-specific risks". She made the important observation that: "It seems clear to me from the commentators that whatever the Sellers may say, there is no clear authority or rationale in favour of the company/market comparison as opposed to the company(market)/industry one".

On the facts, the judge's preliminary ruling was that there had been a MAE and the purchaser was entitled to pull out of the deal.

This decision highlights the importance of considering the specific wording of the MAE/MAC clause. If the operation of the clause is to be determined by reference to a certain market, sector or industry, be clear what that comparator is.