This note summarises certain legal considerations with respect to enforcing Material Adverse Change (“MAC”) conditions in private and public M&A transactions and our tips for parties seeking to negotiate MAC protections whilst uncertainties arising from the COVID-19 pandemic
continue to prevail.
- Businesses around the world have been substantially impacted by the COVID-19 pandemic and are likely to be managing the effects and remaining uncertainties for some time. In this context, we expect to see a shift in risk allocation in the European private M&A market to deal protection mechanisms more synonymous with a buyer’s market and specific provision for COVID-19, such as tailored warranties and covenants.
- Among other measures, we are likely to see renewed emphasis on whether a buyer should be entitled to withdraw from a transaction if a material adverse change (“MAC”) arises in the period between signing and closing. Already we have seen COVID-19 cited as a basis for a MAC-related exit right from a number of high-profile M&A deals, including L-Brand’s aborted sale of Victoria’s Secret, Silver Lake’s divestment of Global Blue and Carlyle and GIC’s investment in Amex’s Global Business Travel unit.
- It is to be hoped that the impact of COVID-19, whilst substantial, will be temporary and further outbreaks will not mean that businesses prove to be fundamentally affected in the longer term. However, buyers may not be prepared to accept that they should be on the hook to complete if another severe outbreak occurs and/or the business they agreed to purchase suffers lasting damage in the period to closing.
- Buyers should be aware there is a high bar to being able to successfully invoke traditional, generic formulations of a MAC condition and such formats are unlikely to suffice to address further consequences or outbreaks of the pandemic.
- When negotiating a MAC condition in the context of the prevailing COVID-19 uncertainties, buyers should consider including specific, measurable triggers that are capable of appropriately testing the real business concerns. More specific language should bring certainty for both buyers and sellers and help to minimise the prospect of dispute and delay. Some suggested drafting tips can be found on page 3 of the full PDF article below.
- Although generic MAC conditions are included as standard in UK public M&A offer documents, the ability to invoke a MAC condition so to cause an offer to lapse is significantly restricted by the UK takeover rules. We do not expect to see a departure from the standardised MAC formulation used in UK public M&A deals nor a change in how the UK regulator, the Panel on Takeovers and Mergers (the “Panel”) views these conditions. Indeed, we have already seen the Panel block the first (and possibly the last) attempt by a bidder for a UK public company to invoke a condition to lapse its offer due to the effects of COVID-191 and potential offerors considering a UK public bid should assume there is limited prospect of withdrawing, even if further adverse events arise from COVID-19 or a second wave of the pandemic breaks out.
1 See Panel Statement 2020/5 dated 21 May 2020 in respect of Brigadier Acquisition Company Limited’s offer for Moss Bros plc.
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