Return Of The MAC: The English Courts' Approach To Material Adverse Change Clauses

• Published date: 27 November 2020
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Debt Capital Markets, Financial Services, Corporate and Company Law, Trials & Appeals & Compensation
• Law Firm: Quadrant Chambers
• Author: Robert-Jan Temmink

Synopsis

In light of the significant business downturn occasioned by the COVID-19 pandemic, we anticipate that the meaning and effect of 'Material Adverse Change' or 'MAC' clauses will be of critical potential importance to all businesses reliant on debt financing, and the professionals who advise them.

MAC clauses are commonplace in loan facility agreements and are provided for in substantially all loan facilities on the Loan Market Association standard forms (save for certain investment grade debt). MAC clauses are also found in business acquisition agreements (most typically, in the UK at least, in public acquisitions) and other more general contracts (such as long-term supply agreements in the commodities context). In the interests of brevity we only consider in this article the paradigmatic case of MAC clauses in loan facility agreements. However, the principles applicable to the consideration of MAC clauses in loan facility agreements will have general application to MAC clauses in other business contexts.

Where are MAC clauses typically found?

While their meaning and effect obviously turn on their precise terms, MAC clauses are often found in the following instances:

• as 'event of default' clauses that provide that in the event of a generally unforeseeable event that materially effects the borrower, the lender will have the option to accelerate the debt due or to place a stop on drawdowns;
• as part of a borrower's representations and warranties to the lender either between the signing of the loan facility and first drawdown, or before each drawdown e.g. there has been no material adverse change in the financial condition of the borrower since the most recent borrower's audited financial accounts provided to the lender; and
• as an important qualifier to certain covenants, representations or warranties provided by the borrower to the lender (e.g. the borrower is not in breach of any covenants where such breach would give rise to a Material Adverse change in the borrower's business).

Guidance from the Court

The leading English case on the interpretation of MAC clauses is Grupo Hotelero Urvasco SA v Carey Value Added SL [2013] EWHC 1039 (Comm).

The case concerned the financing of a hotel in London by a Spanish fund that invested in hotels (Carey). Grupo Hotelero Urvasco (GHU) was involved in developing the hotel and had entered into a loan agreement with Carey in 2007. The agreement contained a 'plain vanilla' MAC clause pursuant to which GHU represented that there had been 'no material adverse change in its financial condition'. The representation was made and repeated at specified times. Carey...