March 2, 2020

Coronavirus: Will It Be Used As A MAC Trigger?

There are lots of pending deals involving companies whose business prospects have been made substantially less certain due to the ongoing impact of the coronavirus. It’s probably not much of a stretch to suggest that there are already some very quiet conversations between buyers & their lawyers along the lines of “how can we get out of this deal?”  My guess is that as the implications of the epidemic continue to work through global supply chains, these conversations may become more frequent and more urgent.

This Morrison & Foerster memo addressing the implications of the outbreak on PE investors in Asia is the first one I’ve seen that examines the invocation of a MAC clause to try to bust a deal as a result of the coronavirus crisis.  Here’s an excerpt:

Whether a party can rely on the impact caused by the COVID-19 outbreak to trigger the MAC clause under a particular agreement will depend heavily on (1) how the clause is drafted, (2) how the clause will be construed under the agreement’s governing law, and (3) the actual impact on the business at issue.

If a MAC clause does not specifically define the circumstances that constitute a MAC, courts will require the party seeking to invoke the MAC clause to show an unforeseen adverse change that is material under prevailing precedent. That typically will require such party to show that the event has a significant long-term adverse effect on the business at issue. This is a very high bar and requires something more than a short-term downturn in business or business prospects.

For example, under Delaware law, courts apply a test (which has been referenced in UK decisions) requiring a fact-specific demonstration that the event “substantially threatens” the earnings potential of the entire business “in a durationally significant manner.” While a fact-specific determination, this has proven to be a very high hurdle in practice.

The memo notes that the full effect of the outbreak is currently unclear, and it may be too early to determine conclusively whether a MAC clause has been triggered. It cautions that PE investors should “continue to approach contract performance in good faith and maintain thoughtful and commercially reasonable communications with their counterparties.” Motive matters in cases involving efforts to use a MAC clause, and courts are unlikely to favor a buyer that just looks like it’s suffering “buyer’s remorse.”

Meanwhile, some companies are negotiating terms intended to ensure that the coronavirus won’t trigger a MAC in their deals.  Bloomberg Law reports that the Morgan Stanley/E*TRADE deal has an express carve-out of the coronavirus from the merger agreement’s MAE clause. Here’s the merger agreement – see the definition of “Company Material Adverse Event” on page 8.

John Jenkins