UK – Was a Material Adverse Effect clause triggered by Covid-19?
This case is a rare example of litigation in the English courts regarding whether a purchaser could invoke a material adverse effect clause to avoid completing an acquisition.
In January 2020, WEX Inc agreed to purchase the shares in eNett International (Jersey) Limited and Optal Limited. The target companies facilitated business to business payments (B2B), principally in the travel industry.
The SPA contained a condition precedent that there had been no Material Adverse Effect and no event, change or development had occurred that would reasonably be expected to have a Material Adverse Effect.
Material Adverse Effect was defined, broadly, as any event, change or development that, individually or in aggregate, has had and continues to have a material adverse effect on the business, condition or results of the target companies. There were several carve outs providing that there was no Material Adverse Effect, including for changes in regulatory or political conditions or law (carve out (d)) and for pandemics (carve out (e)).
There was then an exception which provided that certain carve outs, including carve out (e), did not apply, if the carve out had a disproportionate effect on the eNett group or the Optal group, "as compared to other participants in the industries in which [eNett, Optal or their respective subsidiaries] operate". "Industries" was not defined. The Carve Out Exception did not apply to carve out (d).
In April 2020, WEX sought to walk away from the transaction on the basis that the Carve Out Exception to carve out (e) applied and there was a Material Adverse Effect. The sellers disagreed, arguing that the reference to "industries" in the Carve Out Exception should be read as the travel payments industry and not the wider payments industry. Also, to the extent lockdown and other Covid-19 restrictions fell within carve out (d), they did not fall within the Carve Out Exception and that there was no Material Adverse Effect.
In May 2020 the sellers issued claims for a declaration that there had been no Material Adverse Effect and for specific performance under the SPA. Following a hearing in June, the judge agreed to try certain preliminary issues on an expedited basis. These included questions as to:
- which party bore the burden of proving the definition was satisfied;
- the meaning of "industries" in the Carve Out Exception; and
- whether the Carve Out Exception to carve out (e) for pandemics applied irrespective of whether events also fell within carve out (d) for changes in regulatory or political conditions or law.
Cockerill J interpreted the clause according to the usual principles of construction and answered the preliminary issues as follows:
- The sellers had the burden of proof to establish whether and to what extent any event fell within the carve outs. WEX had the burden of proving whether and to what extent an effect fell within the Carve Out Exception.
- The Optal and the e-Nett groups operated in the payments industry and the B2B payments industry. For the purpose of the Material Adverse Effect definition, the relevant industry was the broader B2B payments industry. There was no travel payments industry as opposed to a travel payments market/vertical space.
- The Carve Out Exception did not apply irrespective of whether the events, changes, developments or effects also fell within carve out (d) for changes in regulatory or political conditions or law.
The case is a reminder to be careful when negotiating MAE or MAC clauses and to ensure that key terms are defined. In particular, ensure that any relevant comparator, against which the effect or change is to be compared, is clearly agreed.
The judge noted that (even though the parties hadn't stated what they meant by "industries"), as the SPA was a major and heavily negotiated contract, she assumed that "all wording has been carefully scrutinised by lawyers and is used wittingly and advisedly".