Has the COVID-19 pandemic had a "material adverse effect"?

The answer in one recent case was yes but, as is often the case, the real answer is it depends….

The case in question (Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm)) considered the meaning of a "material adverse effect" condition in a share purchase agreement and, specifically, whether the COVID-19 pandemic had, in fact, had such a material adverse effect on the target business.

MAC (and MAE) clauses

A MAC clause is one which entitles a buyer to withdraw from a purchase where there is a "material adverse change" affecting the target between the date of signing and the date of completion. In the current case, the actual clause referred to a "material adverse effect" - a MAE - on the target.

A key element of a MAC or MAE clause is to set out the specific event or circumstance that will amount to a material adverse change entitling the buyer to terminate the agreement. Each clause will turn on its own drafting but, as the parties in this case found, any ambiguity in that drafting will leave the matter open to interpretation by the court.

The billion-dollar acquisition

In this case, the buyer had agreed to acquire two companies for a combined consideration of over US$1 billion. The target's main business was providing "business-to-business" or "B2B" payment services to customers operating in the travel industry.

The share purchase agreement was signed towards the end of January 2020 but it contained various conditions which had to be met before completion could happen. If the conditions weren't met, the buyer could withdraw from the transaction.

The MAE condition said that between exchange and completion " … 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". The MAE condition was subject to a number of carve outs - things which would not amount to an MAE. This included conditions resulting from pandemics. But that pandemics carve-out was itself subject to an exception relating to events which had a "…a disproportionate effect on [the target]…as compared to other participants in the industries in which [the target] operate[s]". 

So if the COVID-19 pandemic had disproportionately affected the target when compared to other operators in its industry, that would trigger the MAE condition entitling the buyer to withdraw.

After the agreement was signed, the worsening COVID-19 outbreak was declared a pandemic by the World Health Organisation. Travel restrictions were introduced resulting in fewer payments to and from businesses in the travel sector. That in turn led to a significant decrease in the target's revenues. 

So the buyer served notice on the seller terminating the agreement on the basis that there had been a MAE.

Had the target been disproportionately affected by the pandemic?

The High Court's decision on the pandemic carve-out turned on the question of the industry within which the target operated. If the target had been disproportionately affected by the pandemic compared to others in that industry, the buyer could withdraw. But if the target had been no more badly affected than others in its industry, the buyer could not withdraw.

The seller argued that the target's industry should be narrowly interpreted as the travel payments industry. Because the target had not been disproportionately affected by the pandemic when compared to other operators in this narrow sector, the seller said that the MAE condition had not been triggered and the buyer was not entitled to withdraw from the agreement. 

But the buyer argued that the relevant industry should be interpreted more widely as the B2B payments industry. The buyer said that on this interpretation, the target had indeed been disproportionately affected compared to other operators within that more general industry.

The decision

The court agreed with the buyer. In particular, it noted that the parties had used the word "industries" for the relevant comparator rather than, for example, markets or sectors. Those latter words might have suggested a narrower interpretation where the MAE condition was only satisfied by firm-specific issues. But using the broader word "industries" caught a much wider group of participators in a general sphere of economic activity. And the target, operating mainly in the travel payments sector, had indeed been disproportionately affected by the pandemic when compared to all operators within the broader B2B payments industry.

Careful what you draft for

Although common in the US, MAC clauses are still relatively rare in UK transactions and there is very little case law on them. So this judgment will be welcomed as providing some guidance on the court's approach to interpreting these provisions. 

As is often the case, the decision points to the need for precise drafting to achieve the parties' intentions.