Many contracts, M&A agreements in particular, contain a clause allowing the buyer to terminate (or trigger more favourable terms) before the acquisition is finalised, if there has been a material adverse change either in the nature of the asset being purchased or its value.
These are known as MAC and MAE clauses. MAC and MAE clauses are in focus at the moment because few events over the past 100 years have had a more material adverse change or effect on businesses than the Covid-19 pandemic. The question parties are asking is whether buyers can pull out of a sale because of it?
This issue was considered by the Commercial Court in London last year who concluded, as is often the case, that “it depends”. In particular the court will look closely at the precise wording used in the clause. In the case at hand, Travelport Ltd & Ors v WEX Inc  EWHC 2670 (Comm), the relevant clause specifically anticipated pandemics. The clause said that "Since the date of this Agreement 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." There was then a carve-out relating to "conditions resulting from … pandemics". There was also then a carve-out exception to the carve-out which said that the purchaser, WEX, could rely on a pandemic if it had "a disproportionate effect” on the target companies “taken as a whole, as compared to other participants in the industries in which [they] operate".
The question for determination by the court was the relevant industries in which the target companies operated. Both companies operated in the payments industry, but exclusively for customers in the travel industry. When one of eNett’s customers, who were all in the travel industry, wanted to pay a supplier, it made a request through the eNett Payments Platform, which then provided the client with a virtual credit card account number (VAN) to make the payment. The VAN was issued by Optal Group under Mastercard's "Global Wholesale Travel Program", and eNett was virtually Optal Group’s only customer.
If “industries” meant the business to business (B2B) payments industry, or the payments industry, which is what WEX contended, the target companies, having customers exclusively in the travel industry, had been disproportionately adversely affected by the Covid-19 pandemic. If on the other hand “industries” meant the "travel payments industry", as the sellers contended for, then they had not been disproportionately adversely affected.
When construing the clause, the court looked at the ordinary meaning of the words used and considered the contract as a whole, bearing in mind the nature, formality and quality of drafting of the contract. The judge took the view that this was a long, highly detailed contract drawn up by experienced solicitors acting for sophisticated parties. In these circumstances the language used had particular relevance, and carried the most weight.
The judge held that WEX’s construction was correct. The parties chose to compare the target companies to participants in the same “industries” they operated, rather than use the tighter definitions of market, sector, or competitors. Unfortunately they failed to specify what industries they meant. On the evidence the judge found that there was no established travel payment industry, although there was an established B2B payments industry. The law did not require a particular comparison to be performed in MAE clauses and so, in the absence of a travel payments industry, there was no other relevant industry which could give rise to the tight and specific comparison which the sellers wanted.
This decision shows how important it is that parties take care to define which industries they mean when drafting MAE clauses. Careful thought should be given to specifying the control group against which the impact on the target company or group can be measured. Here, the parties could have defined the relevant payments industry more specifically. By choosing looser drafting and pegging disproportionality to a comparison with “industries” in general, the buyer had a bigger hurdle to overcome in arguing that the MAE clause could be invoked, and both parties were involved in the costs and uncertainty of a court determination.