Material Adverse Effect clause in the context of the Covid-19 pandemic: Court finds the Buyer does not have to complete the deal

6th November 2020

Preliminary issues trial in Travelport Limited and others v Wex Inc.

Introduction

The Claimant Sellers of companies sought specific performance and declarations that would compel the Defendant Purchasers to complete the transaction for approximately $US 1.7bn pursuant to a pre-Covid-19 Sale and Purchase Agreement (“SPA”). The Purchasers sought to argue that the intervening Covid-19 pandemic engaged the Material Adverse Effect (“MAE”) clause in the SPA and released the Purchasers from the contract, on the grounds that the pandemic constituted ‘regulatory or political conditions or law’ with a disproportionate effect on the Targets compared to competitors within their industry, such to allow the Purchasers to step away from the deal.

Crucially, “industry” was not defined in the SPA. The Judge disagreed with the Sellers’ arguments that the Targets were involved in the “travel payments” industry and found that no such recognisable distinct industry existed. The Judge considered the word “industry” to have broad meaning in contrast to, for example, “market” or “sector”. Applying the principles of contractual construction, the Judge found that the Targets were as a matter of fact involved in the “Business to Business payments” industry.

The effect of this was that the Targets had suffered a disproportionate effect from the pandemic compared to others in the Business to Business payments industry – due largely to the fact that the Targets’ core sector was handling travel payments – with the consequence that the MAE clause was engaged and the Purchasers were not obliged to complete.

Analysis

• The rationale for MAE (or Material Adverse Change (“MAC”)) clauses in SPAs (and other transaction documents) is to allocate risk to the Seller of a material adverse change occurring during the period of time between exchange of contracts and completion of the transaction which has a fundamental impact on the subject matter of the agreement.
• The UK Takeover Code (which regulates offers for public companies in the UK) states that in order for a MAC clause to be invoked, the ‘change’ must be of “material significance” and it is accepted by the courts that a high degree of materiality is required.
• English courts have rarely been asked to consider MAE/MAC clauses in SPAs, and accordingly this case gives a useful insight into the approach that the courts are likely to take. In reaching her conclusion, and in the absence of English authority, the Judge looked at US caselaw. The Judge also considered that the transaction (while primarily focussed on securing value in the travel payments sector) “carried with it future value in other markets”.

Practical Lessons from Travelport Limited and others v Wex Inc.

• In this case, the Sellers argued that their intention for the benchmark in the MAE clause was to be the “travel payments” industry, as opposed to the “Business to Business payments” industry. If a specific allocation of risk is contemplated between the parties, this should be clearly recorded in the terms of the contract, so that it can be ascertained by the usual process of contractual interpretation, i.e. what are the ordinary and objective meaning of the words.
• Depending on the nature of the Target, Buyers should consider including specific measurable triggers in a MAC clause, such as maintaining a certain regulatory status or maintaining turnover at a certain level (subject to meeting the materiality threshold).
• Conversely, Sellers should seek to make MAC clauses as narrow as possible by excluding certain events, or events of a particular nature (e.g. epidemics and pandemics), from constituting a MAC.

Walker Morris experience

We have extensive experience at Walker Morris of advising clients on complex issues of contractual interpretation, including on the operation of MAC clauses in the context of the Covid-19 pandemic and we are available to support businesses looking at these issues in the context of transactions and loan documents.