Material Adverse Change Clauses - Draft Carefully

• Published date: 27 January 2021
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Contracts and Commercial Law
• Law Firm: Giambrone & Partners
• Author: Giambrone & Partners LLP

The unprecedented situation that the coronavirus pandemic has delivered to global commerce has impacted on a variety of contractual issues related to non-contentious day-to-day transactions. The exchange of contracts marks the formalisation of an agreement between parties and launches what is hoped to be a prosperous venture. However, in uncertain times circumstances change between the moment of signature and the moment of delivery and subsequently many are left to ponder whether their business can execute their end of the contract.

Whether you are a business struggling to chart a path in murky waters and unwilling to overcommit yourself, or whether you are an enterprise unsure whether a venture is sensible, contractual clauses can form pivot points in your dealings. Material Adverse Change clauses (MAC) clauses can be crucial and will usually be the subject of detailed negotiation between the parties. They are often wide in scope and often may be drafted in vague terms but in the current situation, such clauses could have far greater significance than seen previously.

A new regime left by a landmark case between WEX Inc -v- Travelport Limited and others, centred around the withdrawal of a company acquisition due to its much lower value as a result of financial difficulties faced due to the impact of the coronavirus pandemic. What resulted was a deal struck at a significantly reduced purchase price of the company as a result of the use of a MAC clause.

The new precedent established by the purchasing company emphasised that the circumstances surrounding the share purchase agreement were no longer the same as at the moment the parties entered into their initial negotiations. As such, the shift in the encapsulating environment around the companies as well as...