Summary

In this article, we consider the recent preliminary judgment of Mrs Justice Cockerill in Travelport Limited and others v WEX Inc.1, which concerned the construction and application of a material adverse change or effect provision (a “MAC Clause”) specifically in the context of COVID-19 in relation to an M&A transaction. If the courts decide that the MAC Clause has/had been triggered (to be determined at a full trial in 2021), the buyer, WEX Inc. (“WEX”), will be able to back out from its agreement to buy the target companies for $1.7 billion.

What is a MAC Clause?

In the context of an M&A transaction, a MAC Clause is a buyer-friendly provision that seeks to allow a buyer to walk-away from an agreed acquisition of assets or shares in the event that the target’s business, assets or profits suffer a material adverse change between exchange and completion of the transaction. It shifts risk onto the seller and can leave the seller exposed to events outside of its control.

A MAC Clause may be constructed either as a condition to completion of an M&A transaction or as a termination right.

Although MAC Clauses have perhaps been less common in private UK M&A transactions during the last decade, given the current COVID-19 climate and the associated economic impacts and uncertainty, buyers are focusing more on their inclusion (for deals being negotiated) and their exercise (for signed but not completed deals) – particularly for international buyers, where, MAC Clauses are more commonly used and litigated in US M&A transactions. After all, sudden lockdowns (whether local or national) and travel and other business and social restrictions can interrupt businesses, operations and supply chains and other relevant stakeholders.

In UK public M&A transactions, it is standard practice for a takeover offer document to contain a MAC Clause as a condition to the offer. The UK Takeover Code, which regulates offers for public companies in the UK, does not permit a condition (including a MAC Clause) to be invoked unless the circumstances that give rise to the right to invoke the condition are of “material significance” to the offeror in the context of the offer. The UK Takeover Panel applies a high level of materiality and has shown itself to be unwilling to allow offerors to rely on MAC Clauses, save in exceptional circumstances (e.g. the Panel’s 2001 ruling in relation to WPP Group plc, following the 9/11 terrorist attacks, when, in WPP’s view, the terrorist attacks had resulted in a significant deterioration in Tempus’ long-term prospects). The test used by the Panel in deciding whether a MAC clause can be invoked is:

“…whether the relevant circumstances on which the offeror is seeking to rely are of material significance to it in the context of the offer, which must be judged by reference to the facts of each case at the time that the relevant circumstances arise. Whilst the standard required to invoke such a condition is therefore a high one, the test does not require the offeror to demonstrate frustration in the legal sense.” (Practice Statement 5 dated 28 April 2004, last amended on 19 September 2011).

Background

On 24 January 2020, WEX entered into a share purchase agreement (“SPA”) with Travelport Limited (“Travelport”) to purchase shares in eNett International (Jersey) Limited (“eNett”) and Optal Limited (“Optal”) for a total consideration of $1.7 billion, consisting of approximately $1.275 billion in cash and approximately 2 million WEX shares. In the weeks that followed the signing of the SPA, COVID-19 began to spread across the globe and, on 11 March 2020, the World Health Organisation declared the outbreak a pandemic. Global travel all but halted, which adversely impacted the businesses of Optal and eNett, who service clients in the travel industry. Relying on the MAC Clause in the SPA, WEX sought to withdraw from the transaction on the basis that there had been a material adverse effect on the finances of eNett and Optal.

The relevant MAC Clause

The acquisition of eNett and Optal was subject to certain conditions, including a requirement that, between exchange and completion of the SPA, “…there shall not have been any Material Adverse Effect and no event, change, development, state of facts or effect shall have occurred that would reasonably be expected to have a Material Adverse Effect”.

On 4 May 2020, WEX notified Travelport, eNett and Optal that, owing to “conditions resulting from the SARS-CoV-2 pandemic”, the MAC Clause had been triggered and that, therefore, they would not be proceeding with the transaction. WEX were issued with legal/court proceedings seeking a declaration from the court that no material adverse effect had occurred and an order for specific performance of the acquisitions, pursuant to the terms of the SPA.

The expedited hearing determined certain preliminary issues and, in particular, focused on the construction of the MAC Clause specifically in the context of the COVID-19 pandemic.

Construction of the MAC Clause

Central to the proceedings was the construction of the MAC Clause. The relevant definition is relatively complicated and constructed in three parts:

1. The definition of material adverse effect

A material adverse effect would include any “event, change, development, state of facts or effect” that would have or has had a material adverse effect on the business of eNett and/or Optal.

2. The carve-outs

The MAC Clause contained certain carve-outs that would not constitute a material adverse effect (including one specifically relating to “conditions resulting from…pandemics”).

3. Exception to the carve-out

The relevant definition included an exception to the carve-out, which provided that a material adverse effect may still exist where such adversity has had a “disproportionate effect” on the business of eNett and/or Optal “as compared to other participants in the industries” in which they “or their respective Subsidiaries” operate.

Industries

As the SPA provided no explanation as to the interpretation of “industries” in the context of the MAC Clause, the key issue for Mrs Justice Cockerill was to determine the relevant “industries” in which eNett and Optal operate for the purposes of determining whether the impact of the COVID-19 pandemic had a “disproportionate effect” on either eNett or Optal “or their respective Subsidiaries”.

Travelport, eNett and Optal asserted that the comparable industry was the (narrower) “travel payments industry”.  WEX, on the other hand, contended that the definition was intended to be wider and that the appropriate comparison should be the “payments industry”, as the “travel payments industry” was not in and of itself a recognised industry.

Preliminary judgment

Mrs Justice Cockerill held that WEX’s construction of “industries”, as used in the MAC Clause, was correct and that the appropriate comparator was the wider “B2B payments industry”, and not the “travel payments industry”. There was insufficient evidence to show that a specific “travel payments industry” existed and, therefore, no such industry could have been implied into the definition of “industries”.

The argument on the wording

In reaching her decision, Mrs Justice Cockerill commented on the use of the word “industries” as the comparator, and not “markets” or “sectors”, or indeed “competitors” or an identified pool”. Mrs Justice Cockerill found in favour of the expert, Dr Cragg and held that “industries” had a “different, broader meaning than market or sector”. Although Mrs Justice Cockerill noted that the use of the term “industries” was likely taken from a pro forma, as the SPA was itself a “heavily negotiated contract” she assumed that the all wording had “been carefully scrutinised by lawyers” and, therefore, “industries” was used wittingly and advisedly.

Consequently, for WEX to invoke the MAC Clause, COVID-19 had to have disproportionately affected eNett and Optal in comparison to the wider “B2B payments industry”, and not against a specific, but non-determinable, “travel payments industry”.

The purpose of the transaction

Mrs Justice Cockerill also placed weight on the fact that “the objective purpose of the transaction was that this was not a deal with a single purpose … the present, predominant and known value was in travel; but the acquisition carried with it future value in other markets”.

Case law

In reaching her decision, Mrs Justice Cockerill considered the two main reported UK cases, BNP Paribas v Yukos Oil Company2 and Grupo Hotelero Urvasco v Carey Value Added3, although it was specifically noted that the MAC Clauses in these cases concerned banking transactions, and not M&A transactions.

As such, and due to the “dearth of relevant English authority”, Mrs Justice Cockerill was directed towards and, at least to some extent, found persuasive US authorities. In particular, Mrs Justice Cockerill frequently cited the Delaware Court’s decision in Akorn Inc. v Fresenius Kabi AG4, in which a material adverse change clause was successfully relied upon by the buyer in the acquisition of a US pharmaceutical company.

Whilst the supporting materials cited by Mrs Justice Cockerill favoured the view that MAC Clauses are typically interpreted as allocating “general market or industry risk to the buyer, and company-specific risks to the seller”, they did not provide obvious guidance as to the allocation of risk for companies operating within a particular market or a sector in a wider industry.

Comment

Whilst this was only a preliminary judgment (a full trial is anticipated in 2021), this case nevertheless serves as a timely reminder about the importance of considered and careful drafting for important deal mechanisms in M&A. A buyer will likely have considerably more certainty from a MAC Clause that is expressed to be triggered on specific events with specific consequences (e.g., falling financial performance measured by reference to net asset value or EBITDA, or a failure to maintain a certain regulatory status or rating). In the absence of any specificity, it will likely be hard for a buyer to prove that a given event, such as COVID-19 (even with all of the challenges and consequences associated with the pandemic), rises to the level of a material adverse effect. Based on the limited UK case law, courts set a high threshold so that a material adverse effect must be significant and have a long-term or significant short-term impact on the target.

In the light of this uncertainty, there are some drafting points to consider in any M&A transaction:

  • depending on the target’s business, a buyer may wish to consider specific triggers for a MAC Clause, such as a failure to maintain a certain regulatory status or rating, or, subject to a quantifiable materiality threshold, a loss of orders or of meeting orders underpinning the target’s business, production interruption or business interruption;
  • a buyer could also try to shift the burden of proof away from itself by requiring a confirmatory “bring-down” certificate from the seller as to no MAC having occurred (although this is not very common for UK M&A transactions);
  • by contrast, a seller should try to expressly exclude such MAC events and, more broadly, general economic and market conditions (including epidemics, pandemics or outbreak of disease) and their effects. A seller should also try to resist any prospective element to a MAC Clause (i.e., limiting a MAC Clause to actual impact, and not potential future impacts); and
  • a seller should also try to limit the scope of the MAC Clause so that only a single event can trigger the MAC Clause, which would mean there cannot be an aggregation of a number of consequential effects of, say, COVID-19.

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Should you have any questions or wish to discuss, please contact your usual contact at Rosenblatt or the authors named below.

Authors5

Christopher Allen, Senior Associate (Christopher.Allen@rosenblatt-law.co.uk)

Elliott Dagul, Solicitor (Elliott.Dagul@rosenblatt-law.co.uk)

[1] [2020] EWHC 2670 (Comm)

[2] [2005] EWHC 1321 (Ch)

[3] [2013] EWHC 1039 (Comm)

[4] No. 2018-0300-JTL, 2018 WL 4719347 (Del. Ch. October 1, 2018)

[5] The authors would also like to note and thank the contribution of George Kestel, Trainee Solicitor

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