Material adverse change clauses in light of the Covid-19 pandemic

Is there any applicable jurisprudence relevant to your jurisdiction?

While there is little case law relevant to MAC clauses and their enforceability in the British Overseas Territories of Bermuda, the British Virgin Islands (BVI) and the Cayman Islands, the recent English High Court case Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm) considered the construction and interpretation of MAC clauses under English Law.  This judgment would be persuasive in our jurisdictions and is of particular interest as the Court had to consider the enforceability of a MAC clause arising as a result of the Covid-19 pandemic.

The proceedings concerned a share purchase agreement which 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.  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.

While the case did not determine whether a MAC had occurred it did provide guidance on the construction and interpretation of MAC clauses, cautioning against ambiguous language and broad definitions.  The interpretation of the word “industry” was a particularly contentious area between the parties and the courts remarks on this point suggest that words which are broadly defined will be interpreted as such, if contested.

The case also highlighted the value placed on acquisition agreements as heavily negotiated legal instruments, the implication being the language contained within is deliberately chosen and carefully drafted.

In the Privy Council decision in Cukurova Finance International Ltd & Anor v Alfa Telecom Turkey Ltd, Alfa Telecom Turkey Ltd (Alfa) sought to rely on a MAC clause to accelerate repayment of a loan to Cukurova.  In that case, Alfa maintained that a material adverse change arose on the making of an arbitral award for specific performance against Cukurova that could give rise to a significant damages award against it.  The decision of the Privy Council (on appeal from the BVI) in deciding that Alfa was entitled to accelerate repayment of the loan in reliance on the MAC clause, turned on the precise drafting of the MAC clause which referred to “the opinion of the lender” in determining whether the event was to have a material adverse effect on the borrower.

Are there any points of particular relevance in your jurisdiction for parties seeking to draft and subsequently rely on a MAC clause?

Given the Bermuda, BVI and Cayman courts will generally refer to the jurisprudence of England and Wales, in instances where there is no relevant local case law it is likely that the courts would have regard to English case law when looking into situations where parties are seeking to rely on a MAC clause.

With reference to the cases noted above, a key point of negotiation between parties should be the specific definitions and interpretations of the MAC clause and any exclusions or carve outs.  Sellers should attempt to narrow definitions and instances that could give rise to a MAC, while buyers should use their bargaining power to broaden these terms.  Words should be carefully chosen.  For example, a clause requiring a change in company’s ‘financial condition’ is likely to be narrower than one requiring a change in its ‘business condition’.  ‘Business’ arguably incorporates a number of external market factors as well as the company’s trading position and balance sheet/profit and loss status.

Given that the Covid-19 pandemic is now part of the reality of transacting business at the current time (with the effects likely to be felt well into the future) it may be difficult for buyers to negotiate terms that include any business or economic hardships resulting from the pandemic.  In addition, any reliance on a MAC clause during the pandemic would require the buyer to prove that a significant change in the financial and economic challenges has arisen since signing.  In all likelihood, this would be a difficult exercise given that the buyer negotiated and signed the contract in full knowledge of the pandemic and the adverse economic environment and future forecasts resulting from it.

The buyer in any acquisition transaction is therefore left particularly vulnerable and should give additional consideration to any potential trickledown effects the pandemic may have on the potential target.

Are there any sectors particularly prevalent in your jurisdiction with specific sensitivities or points of relevance that should be taken in to account?

Bermuda

Bermuda is a leading offshore insurance and reinsurance centre.  The recent determination in the FCA Covid business interruption test case underscores the requirement for precision in drafting business interruption clauses in order to successfully gain any relief from the economic challenges resulting from the pandemic.  There are obvious parallels to be drawn between business interruption clauses and MAC clauses.  We would interpret the FCA test case as a reminder to take great care in drafting in the insurance and reinsurance sector in particular.

British Virgin Islands

BVI is a leading offshore financial centre with more than half a million companies incorporated in the jurisdiction.  The sheer volume of business acquisition activity in BVI means that MAC considerations are universal and must be carefully considered in all contexts.

Cayman Islands

Cayman is the leading offshore jurisdiction for funds and near the top of the list for captive insurance.  Both sectors rely on contractual arrangements to function.  Careful consideration and drafting of MAC clauses should be undertaken in all cases, having regard to the very specific deals, transactions and structures being utilised in each sector.

Is there any applicable jurisprudence relevant to your jurisdiction?

MAC provisions are customary in public takeovers of Isle of Man companies and may also be negotiated in some form in private acquisitions.  There is no local case law on their interpretation.  The Isle of Man courts will have regard to English law principles of contractual interpretation, including the limited case law on MAC clauses.  We refer the reader to the discussion of recent English case law in the Bermuda, BVI and Cayman section linked above.

Judgments in other common law jurisdictions, such as the more developed body of law on MAC clauses in the US, may also be taken into account.

Are there any points of particular relevance in your jurisdiction for parties seeking to draft and subsequently rely on a MAC clause?

The likelihood of a buyer being able to rely on a MAC clause will of course be increased if it includes the specific type of event in question – for example, a defined change in the financial condition of the target, market conditions, interest rates, or the loss of a key customer.  Broadly drafted clauses offer less certainty as the buyer’s rights under a MAC clause can only usually be invoked if the clause unequivocally expresses the parties’ intention.

Generally the courts will only regard a change as material if it will have a long-term adverse impact on the target’s position.  Again, it may be possible to reduce uncertainty by including specific time frames.

To attempt to capture adverse changes which will not have a measurable effect until after completion, a buyer will often seek to include a forward looking statement and refer to adverse changes to the target’s “prospects”.

Reliance on a MAC clause will not be straightforward – the court will need to determine the correct interpretation and it will be for the buyer to evidence that the change has occurred as a factual matter.  A MAC clause would typically be one of a number of protections in an SPA.

Are there any sectors particularly prevalent in your jurisdiction with specific sensitivities or points of relevance that should be taken into account?

Isle of Man acquisitions are relatively diverse and the above points apply across most sectors.  Public acquisitions of Isle of Man incorporated companies are common and the target company will often be subject to the City Code on Takeovers and Mergers (this will be the case if (i) its securities are admitted to trading on a regulated market or a multilateral trading facility in the UK or on any stock exchange in the Channel Islands or the Isle of Man or (ii) for certain other Isle of Man incorporated companies, if it is considered by the Panel to have its place of central management and control in the UK, the Channel Islands or the Isle of Man).  The Code and relevant Practice Statement require that a MAC clause allowing a bidder to withdraw its takeover bid can be invoked only where the change is of material significance to it in the context of the offer, striking at the heart of the purpose of the transaction.  This will be judged on facts of each case but it is clear that where a takeover is subject to the Code MAC clauses can be invoked in only limited circumstances.  For a detailed discussion of how this played out in the recent Brigadier Acquisition Company Limited bid, we direct the reader to the Jersey section, linked below.

Is there any applicable jurisprudence relevant to your jurisdiction?

MAC clauses in Jersey and Guernsey law-governed contracts would be interpreted in accordance with the principles of contractual interpretation for the relevant bailiwick.

Historically, there has been very little case law on the interpretation of MAC clauses in the M&A context under Jersey or Guernsey law and the persuasive authority of English law.  We refer the reader to the discussion of recent English case law in the Bermuda, BVI and Cayman section linked above.

The recent offer by Brigadier Acquisition Company Limited (Bidder) for Moss Bros Group plc attracted attention after the Bidder sought a ruling from the Takeover Panel (Panel) to invoke a condition of its recommended cash offer and lapse its offer.  The offer was intended to be implemented by a members’ scheme of arrangement. In the scheme document, reference was made to Covid-19 and to four general conditions (including a MAC condition) which the Bidder might seek to invoke.  The scheme document also made it clear that the Panel’s permission would be required if the Bidder wanted to invoke any of these conditions and Rule 13.5 of the City Code on Takeovers and Mergers would apply.

Rule 13.5 states that:

“An offeror should not invoke any condition … so as to cause the offer not to proceed, to lapse or to be withdrawn unless the circumstances which give rise to the right to invoke the condition …are of material significance to the offeror in the context of the offer.”

To invoke a condition, the tests in Practice Statement No 5 must be satisfied. Practice Statement No 5 states that in applying Rule 13.5(a) the Panel Executive’s practice is as follows:

• as set out in Rule 13.5(a), the appropriate test for the invocation of a condition is whether the relevant circumstances upon 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 the relevant circumstances arise;
• in the case of a MAC, or similar condition, whether the above test is satisfied will depend on the offeror demonstrating that the relevant circumstances are of very considerable significance striking at the heart of the purpose of the transaction; and
• 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.

The Panel’s Executive ruled that the Bidder had not demonstrated that circumstances of a material significance existed that would permit the Bidder to invoke a condition under Rule 13.5(a).

Whilst this was not a local Channel Islands case, this ruling is significant for locally as the Panel’s jurisdiction extends to all offers for Jersey or Guernsey public companies (i) if any of their securities are admitted to trading on a regulated market or a multilateral trading facility in the UK or any stock exchange in the Channel Islands or the Isle of Man; and (ii) which are considered by the Panel to have their place of central management and control in the UK, the Channel Islands or the Isle of Man.

Furthermore there are often occasions when Jersey public companies are subject to takeover offers (to be implemented by either a scheme of arrangement or by an offer, both under Companies (Jersey) Law 1991) that are not subject to the Panel’s jurisdiction. In such instances, it would be quite common for the implementation agreement (or equivalent document) and scheme document to contain a MAC clause that can be invoked by a bidder.

Given that the Jersey and Guernsey courts will refer to the jurisprudence of England and Wales, particularly in the area of company law, it is likely that the courts in either bailiwick would be asked to have regard to the developments in Moss Bros and specifically the test applied should it ever be asked to adjudicate upon the invocation of a MAC clause in a scenario where the Panel (or any equivalent regulatory body) does not have jurisdiction over the proposed offer.

Are there any points of particular relevance in Jersey or guernsey for parties seeking to draft and subsequently rely on a MAC clause?

Given the Jersey and Guernsey courts will refer to the jurisprudence of England and Wales, particularly in the area of company law, it is likely that the local courts would be asked to have regard to the developments in English case law, when looking into situations where parties are seeking to rely on a MAC clause.

Are there any sectors particularly prevalent in Jersey and Guernsey with specific sensitivities or points of relevance that should be taken in to account?

While Channel Islands acquisitions are quite diverse, involving any number of business sectors and industries, public acquisitions of locally incorporated companies warrant special consideration for the reasons described above.

Mauritius law neither embraces the MAC clause nor its equivalent as it is understood. Instead, the Mauritian Civil Code captures the concept of ‘force majeure’ which is an integral part of Mauritius law as it is referred to in the Mauritian Civil Code.

The Mauritian Civil Code has not defined “force majeure’ but has rather focused more on its effects on various types of contracts which the legislator contemplated. Hence, Article 1148 of the Mauritian Civil Code declares that a contracting party is not liable to damages where he could not perform his obligations as a result of ‘force majeure’ i.e. non-performance is attributable to an event which is beyond his control.

In the absence of a formal definition of ‘force majeure’, it is the Mauritian Supreme Court which endeavoured to define the phrase, its scope and effect on a contract. In its latest determination on “force majeure’, namely, General Construction Co. Ltd v Ibrahim Cassam & Co. Ltd 2011 SCJ 19, the Supreme Court re-affirmed its earlier decisions, based on French doctrine by which the term ‘force majeure’ designates an event which is impossible to predict.

In this regard the following are accepted as being the 3 constitutive elements of the legal test to be applied:

(a)        imprévisibilité i.e. that which is unpredictable;

(b)        irresistibilité i.e. that which is uncontrollable or inescapable; and

(c)        extériorité i.e. an event which is external.

The Supreme Court went further and confirmed that ‘force majeure’ exonerates fully a person who has an obligation to perform, from any responsibility or fault whatsoever for the non-performance of the obligation. This extends to both a contractual and tortious obligation. Therefore, if established, ‘force majeure’ does not give rise to a claim for damages whether under a contract or in tort.

The Supreme Court went further and analysed the meaning and scope of each of the constitutive elements.

Imprévisibilité

The condition of unpredictability is assessed by the yardstick of whether an event could have been foreseen and therefore avoided had it been supervised or monitored. The rationale is taken further into the principle of whether the consequences could have been averted or the damages mitigated regardless of the foreseeability or lack of it.

Extériorité or the extraneous element

On this criterion, the Supreme Court held that the assessment of what constitutes an extraneous circumstance is flexible and depends on the particular circumstances of each case. This criterion does not designate a single exterior event and captures inherent conditions within its reach.

Irresistibilité or that which is uncontrollable or inescapable

On this criterion, the Supreme Court expressed the view that it was minded to follow the French developments on this issue with the effect that it is assimilated with the first two criteria such that this criterion now represents the core of the concept of ‘force majeure’. This is unambiguously captured by its pronouncement below:

“If imprévisibilité remains a complimentary factor of force majeure, it should be noted that irrésistibilité stands as the irreductible factor.”

Clearly, given the nature of “force majeure” and the guidance provided by the Supreme Court, there is no standard ‘force majeure” clause as the existence (or not) of an event of ‘force majeure’ is a mixed question of fact and law. However, the 3 criteria which the Supreme Court has identified and the explanations as to the scope of each criterion, now serve as a yardstick for the drafting of a “force majeure” clause in contracts.

On the topical question of the impact of the COVID-19 pandemic, it is a fact that it has significantly impacted transactions, whether locally in the constructions industry in particular  or at a cross-border level with a long-term reach on the Mauritian economy. The invocation of the “force majeure” for exoneration of liability in the terms explained above was particularly high whether as part of injunctive reliefs lodged before the Supreme Court or in more private cross-border transactions to trigger amendments to transactional documents. The question which remains is whether pandemics as a phenomenon will still be captured as a ‘force majeure” event which can feature in contractual clauses or invoked as defences to tortious claims.