10 July 2015 by Matthew Miller

Big MACs

Material Adverse Change clauses, or MAC clauses, are often found in share purchase and business purchase agreements – the aim is to give the buyer the ability to withdraw from the transaction if an event occurs which is detrimental to the target company or business. 

Few previously reported cases have considered MAC clauses in any detail, but their construction has been the subject of a decision, in a recent High Court case, which offers a rare insight into how the Courts might approach them. Under the terms of the relevant share purchase agreement: 

–        completion was conditional on no “Material Adverse Event” taking place after exchange of contracts; 

–        a “Material Adverse Event” was defined as “…an act or omission, or the occurrence of a fact, matter, event or circumstance, affecting the [Target Company] giving rise to, or which is likely to give rise to, a material adverse effect on the business, operations, assets, liabilities, financial condition or results of operations of the [Target Company] taken as a whole…“; 

–        the Buyer and Seller undertook to notify one another of any fact which was likely to give rise to a “Material Adverse Event” and, if one arose, the Buyer was entitled to withdraw from the transaction; 

–        the Seller gave no warranties as to the accuracy of any forecasts, estimates, projections or opinions given to the Buyer prior to exchange of contracts (and the Buyer expressly acknowledged that). 

The target company’s sales, revenue and operating profit were in fact significantly worse than the Seller had previously forecast, and as a result the directors made substantial downward revisions to the target company’s profit forecasts in the period between exchange of contracts and completion. On discovering this, after completion, the Buyer brought a claim against the Seller contending that, if it had been made aware, it would have invoked the MAC clause and would not have completed the transaction. The Seller, however, applied to strike out the Buyer’s claim on the basis there had been no “Material Adverse Event” according to the proper construction of the share purchase agreement. 

Although the Court agreed the MAC clause may have been triggered by the target company’s actual poor financial performance, the revisions to the profit forecasts did not trigger the MAC clause because: 

  • the downward revision of the profit forecasts did not, of itself, constitute a “Material Adverse Event”; 
  • it would not make commercial sense for revisions to the profit forecasts to trigger the MAC clause, as the Buyer expressly acknowledged that the Seller had given no warranty in respect of the forecasts; 
  • including revisions to profit (or any other) forecasts, within the scope of any MAC clause, would be to encourage inherent uncertainty and so would be highly undesirable in the M&A market as a whole. 

The outcome of this case acts as a reminder that MAC clauses will not usually be construed independently of the other terms in a share purchase or business purchase agreement, and also shows the Courts will look to construe such agreements in a way that is consistent with good commercial sense. 

If you are looking to buy or sell a company, or a business, please contact Matthew Miller for further assistance and legal advice: matthewmiller@boltburdon.co.uk or 0207 288 4739.

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