Can a Buyer Pull Out of a Deal Due to Coronavirus (COVID-19)?

Background

The completion of a sale of a business is sometimes made subject to certain conditions which will be set out in the share purchase agreement (SPA) governing the terms of the deal.  These conditions may include a material adverse effect (MAE) clause which allows the buyer to withdraw from the deal in certain circumstances.

What Happened in this Case?

The buyer entered into an SPA under which it was to acquire the entire share capital of two business to business (B2B) payments companies, eNett International (Jersey) Limited ("eNett") and Optal Limited ("Optal"), for a total consideration of approximately $1.7 billion.

The SPA included conditions to the buyer's obligations to complete the transaction, including that:  

"there shall not have been any Material Adverse Effect and no event, change, development, state of facts or effect shall have occurred that would reasonably be expected to have a Material Adverse Effect."

A few months after exchange, the buyer sent a letter to the seller to give notice that a MAE within the meaning of the SPA had occurred due to "conditions resulting from the SARS-CoV-2 pandemic" and that it was not obliged to complete the transaction. The seller disputed the existence of an MAE and subsequently issued claims seeking a declaration that there had been no MAE and for a court order to require the buyer to complete the SPA. 

What Were the Key Issues?

The main preliminary issue was the proper construction and application of the definition of a MAE in the SPA. The MAE was defined in a complicated structure consisting of:

• The MAE definition - which included "...any event, change development, state of facts or effect that, individually or in the aggregate:...has had or continues to have a material adverse effect on business, condition (financial or otherwise) or results or operations of [the eNett Group].. or [the Optal Group]…";

• The "Carve-Outs" - exceptions to the general definition of a MAE which included "conditions resulting from pandemics"; and

• The "Carve Out Exception" - providing that the "Carve-Outs" would not apply and a MAE would exist if the adversity has had "a disproportionate effect" on the eNett or Opal groups "taken as a whole, as compared to other participants in the industries in which [they] operate".

The key question for the court to examine was therefore: what was the relevant industry under the Carve-Out Exception? The seller argued that it was the (narrow) travel payments industry, whereas the buyer argued that there was no travel payments industry and the appropriate comparator was the (far wider) B2B payments industry. The impact of the pandemic on eNett and Optal would be far less or greater depending on which industry their performance was being measured against.

What Did the Court Decide?

The court held that the buyer's construction was correct and the appropriate comparator was the wider B2B payments industry. The reasons for the court's findings included:

• The buyer's construction was preferred on an analysis of the wording only and, as the SPA was a heavily negotiated contract, it could be assumed that all the wording had been carefully scrutinised by the lawyers whilst being used wittingly and advisedly.

• The parties had chosen "industries" as the comparator in the MAE clause rather than "markets", "sectors" or "competitors", which was a broader word capturing a group of participants in a broad sphere of economic activity.

• Evidence failed to establish that there was a "travel payments" industry against which the performance of eNett and Optal could be assessed and the definition adopted by the seller seems to have materialised for the purposes of the litigation.

• The seller sought to argue that the commercial purpose of the MAE was to isolate firm-specific risks (ie the risks facing eNett and Optal). The court however agreed with the buyer that the commercial purpose extended beyond the firm-specific risks to those facing the wider industry or sector in which the seller operated.

What Does This Mean for You?

This judgment provides important guidance on how the court will approach the interpretation of MAE clauses in the context of the COVID-19 pandemic. The court conducted a multi-layered analysis of its precise wording and of the commercial purpose in order to identify the comparator to be used. To avoid the court from having to decide on the construction and application of a MAE clause in the future, parties should expressly identify any comparator used within the MAE clause.

How We Can Help

We have an expert team of corporate solicitors who are able to assist with the drafting and interpretation of complex material adverse effect clauses.

To discuss any queries on material adverse effect clauses, or any other aspect of a business sale or purchase, please contact Emma Cameron on 01923 919 305 in our Corporate Law team, or complete the form below.