Material Adverse Change Clauses: Use of a MAC Clause during a Global Pandemic

Is it possible for a party to invoke a Material Adverse Change (MAC) clause because of the effects of the COVID-19 pandemic?

The key takeaway 

Precision is key when drafting specific MAC clauses – clearly detail how a MAC should be measured and any relevant exceptions which alter the risk allocation between the parties. 

The background 

WEX Inc is a financial technology service provider which offers corporate payment solutions (the Buyer). The Buyer had agreed to purchase the parent companies of two business-to-business (B2B) payments companies specialising in the travel sector, eNett International (Jersey) Limited (eNett) and Optal Limited (Optal) from Travelport (the Sellers), pursuant to a Share Purchase Agreement (SPA) for a total of approximately USD1.7 billion. 

Completion of the SPA was subject to a number of conditions, including that there had been no “Material Adverse Effect, event, change, development, state of facts or effect that would reasonably be expected to have a Material Adverse Effect” (the MAC Condition).

The unprecedented disruption to the travel industry as a result of the global COVID-19 pandemic resulted in a decrease in revenue for the eNett and Optal groups. As such, on 4 May 2020, the Buyer notified the Sellers that the MAC Condition had occurred and so the Buyer was not required to complete the transaction. The Sellers disagreed and issued proceedings to seek (i) a declaration that a MAC had not occurred within the meaning of the SPA, and (ii) specific performance of the Buyer’s obligations to complete the transaction.

The definition of “Material Adverse Effect” (MAE) was central to the dispute, focusing on two express carve outs:

1. An exemption for the effects from causes including specifically “conditions relating from… pandemics” (Pandemics Carve-Out), and 
2. an exception to the Pandemics Carve-Out providing that, even if an event otherwise falls within the Pandemics Carve-Out, an MAE may still exist if its impact had “… a disproportionate effect on [the eNett or Optal Groups], taken as a whole, as compared to other participants in the industries in which [eNett], [Optal] or their respective Subsidiaries operate.”(Carve-Out Exemption).

The key issue for the Court was the identity of the “industries” in which eNett and Optal operated in for the purpose of assessing the Carve-Out Exception. The Buyer argued that it was the general payments industry or the B2B payments industry, whereas the Sellers contended that it was the narrower travel payments industry. 

The decision 

The Court considered both a textual analysis of the MAE definition and interpretive considerations made in light of its commercial purpose. 

A pure textual analysis favoured the Buyer’s broader interpretation. The SPA referred to “industries” as opposed to “markets”, “sectors” or an identified group of competitors which, in its natural and ordinary meaning, captured participants in a broad sphere of economic activity. That interpretation was also adopted elsewhere in the SPA.

When considering the commercial purpose of the MAE definition, the Court assessed the factual matrix against the objective intentions of the wording to decide whether it extended beyond “firm-specific” risks to eNett and Optal themselves and instead captured risks relating to the broader sector in which they operated. It found that, whilst the transaction related to the acquisition of a travel business, it also extended to a wider payments business. This was based on the Buyer’s case that it saw future value in extending its reach into other sectors and markets. The commercial purpose did not therefore suggest that the Court needed to depart from an ordinary reading of the language used in the MAE definition.

The Court considered that the Sellers failed to establish the existence of a specific travel payments industry. eNett and Optal operated in the more general payments industry and B2B payments industry and so, in invoking the MAE Condition and, by extension the Carve-Out Exception, the Buyer had to demonstrate that Optal and eNett had been disproportionately affected by COVID-19 when compared to others in those wider industries. 

Why is this important? 

Whether the pandemic has resulted in a MAE in these circumstances is still to be determined. However, the case provides useful guidance on the approach that the Courts will take when interpreting MAC clauses – construing an agreement on its wording, with reference to its commercial purpose, in order to appropriately allocate risk. 

Any practical tips? 

It is expected that similar disputes will emerge in the coming months which will provide further clarity. In the meantime, the scope and consequences of MAC clauses should be drafted clearly, and ambiguity and competing meanings avoided. If a market or industry comparator is being used, expressly identify it.