Also known as material adverse effect clauses, MAC clauses are designed to provide a way to address events that were unanticipated in a deal’s documentation.

In an agreement to buy a business, a MAC clause typically allows a buyer to withdraw from an agreed transaction if events occur that are detrimental to a target company and/or its assets. In so doing, a MAC clause offers the buyer a level of protection against significant adverse business or economic changes that impact the value of the target company.

The enforceability of a MAC clause hinges on the precise language used throughout the agreement and, in particular, the definition of what constitutes a material adverse change or event. A higher burden of proof typically applies to a person seeking to establish that a MAC has occurred within the meaning of the clause in question. Linguistic precision when drafting these provisions is therefore of the utmost importance.

The recent English High Court case of Travelport Ltd v Wex Inc considered the construction and interpretation of MAC clauses under English law. This judgment would be persuasive before a court in Bermuda and is of particular interest as the English court had to consider the enforceability of a MAC clause arising as a result of the Covid-19 pandemic.

Interestingly, the court not only considered English precedent, of which there was relatively little, but also decisions in the United States where there is a more substantial body of case law.

The proceedings concerned a share purchase agreement that was conditional upon certain matters including that, between signing and completion, there had not been anything that had a MAE and nothing had occurred which might reasonably be expected to have a MAE.

While the case did not determine whether or not there had been a MAE, it did provide guidance about how MAE provisions should be interpreted.

The provision itself was fairly complex in that it set out what events would constitute a MAE before providing certain exclusions – and exclusions to the exclusions. The court heard counter-arguments from both parties regarding how these provisions should be applied.

As the agreement had been carefully drafted and heavily negotiated, the court proceeded on the basis that the choice of language in the agreement was deliberately chosen.

The court’s approach demonstrates that parties should exercise caution when using “boiler plate” language in a contract that may not, without careful review and amendment, sufficiently encapsulate the parties’ intended meaning. The greater the specificity of the drafting about what event and/or consequence constitutes a MAC for the purpose of a given agreement will give the buyer an increased chance of being able to enforce it should the need arise.

However, the challenge for buyers in the current climate is that we have now been in the throes of the pandemic for more than a year, and there is a better understanding of the economic challenges we are faced with as a result. Due to this, an attempted reliance on a MAC clause being invoked as a result of the pandemic could be interpreted more harshly as both parties should be aware of the potential business and economic implications when entering into the agreement.

Consequently, sellers may focus on the MAC clause to ensure that it cannot be triggered by changes that should have been in the mind of the buyer when making their decision whether to enter into the transaction.

The scope of MAC clauses will continue to be a pressing concern for buyers and sellers engaged in business acquisitions while the costs of the pandemic are still being counted globally.

Careful consideration should be given to any potential effects of the Covid-19 pandemic on the target company, and the extent to which the parties consider it reasonable to rely upon a MAC clause as a result of their impact.

Authored by trainee Arielle DeSilva, a member of the Corporate department at Appleby. 

Share
Twitter LinkedIn Email Save as PDF
More Publications
30 Nov 2023

Uncertainty Over Control Test in Sanctions Relating to Russia

Bermuda-based companies undertaking business with Russian entities must comply with the island’s s...

9 Nov 2023

Navigating AI Service Contracts

Organisations are increasingly using and relying on the many commercial advantages of artificial int...

26 Oct 2023

Lay Offs: A practical analysis of the legislation for employers

The choice to make lay offs is never an easy one. It is also an area of business where the commercia...

26 Oct 2023

Bermuda: Economic Substance – Trends in Compliance and Enforcement

This article provides a brief summary of the legislative framework concerning the regulation of the ...

25 Oct 2023

The Insolvency Review: Bermuda

The Insolvency Review offers an in-depth review of the most consequential features of the insolvency...

23 Oct 2023

Bermuda: Investors still wary of sidecars despite upbeat outlook for 2023 returns

Sidecar vehicles are expected to return on average 20%-30% in 2023, assuming no major loss event in ...

12 Oct 2023

Bermuda: Privacy and the Private Sector

Bermuda’s Personal Information Protection Act 2016, which comes into full force on January 1, 2025...

5 Oct 2023

Board Governance: Caring for your Bermuda Captive

If there is one topic that always comes up in major captive conferences, it’s the best way to mana...

2 Oct 2023

Expect a Busy Year-End for Cat Bonds and Sidecars

History has shown that in both soft and hard markets, the final quarter of the year is always busy, ...

29 Sep 2023

Directors’ knowledge and the duty to creditors

In the intricate realm of corporate governance and insolvency law, directors hold a position of imme...