MAC Clauses Post August 2007 - What Do They Mean In The Current Financial Markets?
The "credit crunch" has resulted in numerous
disputes being brought, both by and against lenders, in relation to
commercial transactions which are now less attractive or less
workable than they were prior to Summer 2007. Paul Friedman and
Nicola Clavarino examine the operation of MAC clauses in the
current market and what the recent financial markets turmoil could
mean for borrowers and lenders interpreting such clauses. Paul
Friedman is a partner; and Nicola Clavarino an associate in Clyde
& Co's banking litigation team.
Most corporate finance agreements contain material adverse
change or MAC clauses, as they are commonly known. Some finance
agreements currently governing relationships between commercial
parties were agreed prior to the market turmoil of August 2007.
What do these clauses now mean for borrowers and lenders in the
current market climate?
Introduction
Since August 2007, the prevailing commercial climate has
changed: there is greater uncertainty, many financial institutions
are in financial difficulty, the market is less borrower-friendly
and banks are wary of advancing funds as well as being keen to
reduce their existing commitments. Following the collapse of Bear
Sterns, the nationalisations of Northern Rock and Bradford &
Bingley, the insolvencies of Lehman Brothers and Washington Mutual,
the sale of Merrill Lynch to Bank of America and the take-over of
HBOS by Lloyds TSB, lenders are reviewing their positions and
rethinking their commitments to borrowers. In many cases in which
banks have advanced funds, the market has since moved and so
certain existing loan agreements are on terms at which lenders
would not now be prepared to lend and secured by assets worth
significantly less than when the loans were agreed.
MAC clauses – general importance
In the context of a loan agreement, MAC clauses typically
provide that any material adverse change in the underlying business
in respect of which a loan is made amounts to an event of default.
MAC clauses are inserted to protect lenders and empower them to
take action when there has been a material negative change in the
condition of the business against which they have advanced funds.
The MAC clause is a general sweep-up protection clause for the
lender. Depending on the provisions of the particular finance
documentation in question, the occurrence of a MAC could mean any
of the following:
the lender is relieved from the obligation to provide funding
in response to borrower draw-down requests;
the lender can demand cure of the default by means of an
injection of equity from the borrower; or, most seriously,
the lender is entitled to accelerate the loan.
Given the serious consequences of a MAC for most borrowers and
the potential relief they offer for lenders in a difficult market,
it is worth analysing the two central issues in this area in the
light of current market developments:
1) what amounts to a material adverse change in the current
market?
2) what effect does a decline in market conditions generally
have in respect of the operation of MAC clauses?
1) What amounts to a material adverse change?
What precisely will amount to a MAC in any given circumstance
will depend both on the wording of the specific MAC clause and the
particular facts of the case. For example, some MAC clauses may
have no qualification (i.e. "no material adverse change to the
company"), some may have an inclusive or exhaustive list of
changes which are deemed to amount to a MAC. Further a MAC clause
may require a change "to the overall net assets", or to
the "business" of an asset company, the "business
assets or financial condition" of the company, or to the
"trading or financial position" of the company, or to
"the financial condition, results of operations and
assets". Yet MAC clauses may require a change "to be
judged by reference to the company's financial
statements". The precise wording of the specific clause and
the meaning of any defined terms used are key. Nonetheless, some
general guidance as to how the courts interpret these clauses
generally can be gained from both English1 and US
authorities2.
Generally, the threshold for materiality is set quite low. It
excludes matters which are trivial or insignificant. It includes
matters which would be decisive or regarded as important by a
lender banker. It may also include matters which could be viewed as
influential considerations by some but not by others.
Butterworth's Encyclopaedia of Banking Law states that
"It is considered that normally an adverse change in
financial condition would be material if the change would have
caused the bank not to lend at all or to lend on significantly more
onerous terms, e.g. as to margin, maturity or security.
Consideration could be given also to the criteria used by
recognised rating agencies in implementing significant credit
downgrades. Any additional test, such as probable impact on ability
to pay, would be an additional hurdle."3
Elsewhere, the definition of MAC has been discussed in the context
of a sale and purchase agreement.
In Re TR Technology Investment Trust plc ((1988) 4 BCC
244), for example, a share purchase was financed by a loan. The
borrower's assets were frozen. The material adverse change
clause in the loan agreement required that "the adverse
change... be judged by reference to the company's financial
statements." The company was newly formed and had no financial
statements. The Court held that it was not possible to say whether
there had been an adverse change, which could only occur in this
case if there were financial statements. The Court construed the
clause according to its literal meaning. In National
Westminster Bank plc v Halesowen Pressworks Assembles Ltd
([1972] AC 785 HL), the Court held that a resolution to wind up the
company was a material change of circumstances.
There is also a statutory definition of "material" in
the Marine Insurance Act 1906, section 18(2). In insurance law,
this definition is relevant where there...
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