Private M&A: equity value thresholds for triggering a MAC clause

A recent case provides helpful guidance on material adverse change (MAC) / material adverse effect (MAE) clauses in the context of Private M&A transactions governed by English law. The case considered whether a geotechnical event which occurred at a nickel mine in Brazil constituted a material adverse effect in the context of a US$1 billion transaction. 

The court held that it did not. This meant that:

• the buyer was not entitled to terminate the SPA; and
• the sellers were entitled to damages for wrongful repudiation.

Guidance on materiality

The case provided the following guidance on materiality in the context of MAC and MAE clauses in SPAs:

• “material” is intended to mean significant or substantial;
• a matter or event should not be treated as being material simply because it is not trivial / de minimis;
• there is no “bright line” test for what constitutes materiality which will be applicable to all MAC clauses;
• a reduction in the equity value of the target of 20% or more is material;
• a reduction of more than 15% might be material; and
• a reduction of 10% would be too low to count as material. This differed from the approach taken in Finsbury Food Group PLC v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm) where a reduction of 10% of total group sales since the accounts date was regarded as sufficient to qualify as a material adverse change.  The outcome will always be driven by the terms of the MAC clause and the underlying facts.

The judge also noted that a number of considerations will be relevant as to what is to be regarded as material in a particular case.  He took the following factors into account:

• the size of the transaction;
• the nature of the assets concerned, including in this case that mines are susceptible to geotechnical events;
• the length of the process of the sale of the mines; and 
• the complexity of the SPA.

All of those factors indicated that the bar of materiality should not be set too low. 

In addition to this commentary on materiality, the judge also noted that “MAE Objects” could be considerably shortened without any significant change in meaning of a MAC clause. MAE objects are those aspects of a company's business which may be affected by the material adverse effect and it is customary for a MAC/MAE clause to list them out. The alternative formulation, which probably achieves the same outcome, would be to refer to the effect on the company. 

General guidance on MAC / MAE clauses

Other points to note from the judgment include:

• Approach to construction: when construing a MAC clause, the court will apply the ordinary principles of construction of contracts governed by English law;
• US Authorities: the court will continue to consider US decisions on MAC clauses;
• No special rules for MAC clauses: there is in English law no “special rule” as to the construction or application of MAC clauses or as to the burden on a party who invokes such a clause;
• Take the SPA as a whole: A MAC clause has to be read in the context of an SPA, including the other risk allocation provisions, including warranties and indemnities, as a whole;
• Events which occur following signing: MAC clauses are concerned with a “change, event or effect” which has occurred since signing and whether that event is itself material and adverse. 
• “Revelatory” events excluded: The court will not allow this timing requirement to be circumvented by bringing “revelatory events” within the scope of a MAC clause. A “revelatory event” is a change, event or effect which occurs between signing and closing and which is not itself material but which reveals something else which was in existence when the SPA was signed. In this case, the terms of the MAE definition dictated “that a matter is only a MAE if that “change, event or effect” is material and adverse, not with what such a ”change, event or effect" may indicate about the possibility that there may be other problems which existed at the time of the signing of the SPA."
• More likely than not: a mere risk that a matter may turn out to be material is not enough. Instead the assessment is whether a reasonable person would have considered it more likely than not that the matter would turn out to be material.

The judgment is available here: BM Brazil I Fundo De Investimento Em Participacoes Multistrategia & Ors v Sibanye BM Brazil (Pty) Ltd & Anor [2024] EWHC 2566 (Comm) (10 October 2024)

How was material adverse effect defined in the SPA?

The SPA contained the following definition 

"Material Adverse Effect" means any change, event or effect that individually or in the aggregate is or would reasonably be expected to be material and adverse to the business, financial condition, results of operations, the properties, assets, liabilities or operations of the Group Companies, taken as a whole, excluding any such change, event or effect arising out of, in connection with or resulting from (a) general global, national or regional economic, business, political, market, regulatory or social conditions (or changes therein), including in respect of interest or currency rates, inflation or deflation or the financial, credit or capital markets, (b) any change or proposed change in Law (the enforcement, implementation or interpretation thereof), except where such change or proposed change is in respect of the Corporation or the Subsidiary specifically, (c) any change affecting the mining industry generally or metal or other commodity prices, (d) any change or proposed change in any applicable accounting practices or rules (or the enforcement, implementation or interpretation thereof), (e) any natural or man-made disaster, (f) any epidemic, pandemic, disease, outbreak of illness (including COVID-19), including the worsening thereof, other health crisis or public health event, (g) the commencement or continuation of any war, armed hostilities, civil unrest, including the escalation or worsening thereof, or acts of terrorism, (h) any action by the Purchaser or any of its Affiliates, (i) any action, omission, change, effect, circumstance or condition attributable to or contemplated by the execution, delivery or performance of this Agreement or the announcement of the transactions contemplated in this Agreement (including any adverse effect proximately caused by threatened or actual loss of, or disruption in, any customer, supplier, vendor, lender, contractor, employee, landlord, community or government relationships or loss of any personnel, or by reason of the identity of the Purchaser or any communication by the Purchaser regarding its plans or intentions with respect to the Group Companies or the Project [viz the Santa Rita Mine]), (j) compliance with the terms of this Agreement or Applicable Law (including COVID-19 Measures), (k) any action taken, or failure to take any action, or such other change or event, in each case, to which the Purchaser has consented or requested, or (l) the failure of the Project to meet internal projections, estimates, forecasts or revenue or earning predictions for any period.

The relevant clause dealing with conditions to Closing referred to Material Adverse Effect in the following terms: “No Material Adverse Effect shall have occurred since the date hereof”.

Although the case involved two mines and two SPAs we have for the purposes of this update simply referred to one SPA as they were to be inter-conditional and had to be completed simultaneously.

Further information

If you would like to discuss this update then please speak to your usual contact at Burges Salmon or Nick Graves (Head of the Corporate and M&A team).

Mr Justice Butcher: In this regard, I agree with what was said by Strine VC in IBP and which has been reiterated, using various different forms of words, in subsequent US authorities, that for an acquiror who seeks to purchase the target company as part of a long-term strategy 'the important thing is whether the company has suffered a Material Adverse Effect in its business or results of operations that is consequential to the company's earnings power over a commercially reasonable period, which one would think would be measured in years rather than months'. (Paragraph 249: BM Brazil I Fundo De Investimento Em Participações Multistrategia & Ors v Sibanye BM Brazil (Pty) Ltd & Anor [2024] EWHC 2566 (Comm))