MATERIAL ADVERSE CHANGE CLAUSES UNDER SCRUTINY – RETURN OF THE MAC?
A common feature of share purchase agreements is a clause that permits the buyer to terminate the transaction where the target’s fortunes have taken a turn for the worse between signing and closing.
Commonly referred to as material adverse effect (MAE) clauses or material adverse change (MAC) clauses, these often-overlooked provisions can have terminal consequences for a deal which the parties have spent months negotiating.
While more commonly invoked the other side of the Atlantic, MAC clauses in share purchase agreements have seldom been the subject of scrutiny before the English courts. Given that MAC clauses provide parties with the ability to terminate a contract (on the occurrence of certain events), one might find that surprising.
In October 2024, Justice Butcher handed down his decision BM Brazil I Fundo De Investimento Em Participacoes Multistrategia v Sibanye BM Brazil (Pty) Ltd (2024), which includes the most in-depth consideration to date of the construction of MAC clauses under English law. The decision underscores the need to exercise caution when seeking to rely on a MAC clause to terminate a transaction.
Background
The claimants had agreed to sell two open-pit mines to the defendants pursuant to two interdependent share purchase agreements (SPAs). The SPAs provided that the buyer would not be required to close if a MAC had occurred on or after the date of the SPAs. A MAC was defined as “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.
Shortly after signing, a crack appeared on the wall of one of the mines (a geotechnical event or GE). The defendants did not express any concern at the time. However, months later the defendants purported to terminate the SPAs on the basis that the GE constituted a MAC. The principal issue at trial was whether this was correct.
Apr-Jun 2025 issue
Kirkland & Ellis International LLP