DOES BREXIT CHANGE ANYTHING IN MATERIAL ADVERSE CHANGE LITIGATION?
On 23 June 2016, the United Kingdom stunned the world by voting to leave the European Union. While the initial shockwaves of the news were seismic, notably prompting the resignation of prime minister David Cameron and the downward spiral of the pound, great uncertainty remains about the long-term effects of this decision.
This uncertainty is unlikely to dissipate anytime soon, especially since new prime minister Theresa May has yet to invoke Article 50 of the EU Treaty, the provision governing withdrawal. Once invoked, it is anticipated that the negotiation process for the UK’s withdrawal will take at least another two years. Because the outlines of this negotiation process are hazy at best, the effect of Brexit on markets, immigration, employment and taxation is impossible to predict.
Despite uncertainty about Brexit’s effects, experts across the board agree that the Brexit vote will almost undoubtedly lead to an uptick in litigation. One such potentially contested area concerns transactions on the cusp of closing. Companies now eager to distance themselves from the UK may seek to nullify prior agreements, arguing that the Brexit vote constitutes a material adverse change (MAC). A MAC clause offers protection to the buyer should the target suffer a deterioration before closing. Virtually all American transaction agreements contain a MAC clause as a condition to closing, with the UK recently becoming more open to their adoption.
The ABA’s model Stock Purchase Agreement contains the following example of a basic MAC provision: “No Material Adverse Change. Since the date of the Balance Sheet, there has not been any material adverse change in the business, operations, properties, prospects, assets or condition of any Acquired Company, and no event has occurred or circumstances exist that may result in such material adverse effect.”
Oct-Dec 2016 issue