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We’re still waiting on U.S. courts to address the issues surrounding MAE clauses & the pandemic, but at least one English court has weighed-in on them.  This Goodwin memo discusses the UK Commercial Court’s decision in Travelport Ltd & Ors. v. Wex, (EWHC 10/20), in which the Court was called upon to interpret a contractual MAE clause that came into play when U.S.- based Wex attempted to terminate its $1.7 billion agreement to acquire eNett & Optal, two majority-owned subs of Travelport.

Section 1.1 of the Share Purchase Agreement defines the term “Material Adverse Effect.”  Generally, the term is defined to include “any event, change, development, state of facts or effect that, individually or in the aggregate” that has had and continues to have an MAE on the business of eNett or Optal. The agreement included a specific carve-out for conditions resulting from pandemics, and  for “changes (or proposed changes) in Tax, regulatory or political conditions (including as a result of the negotiations or outcome with respect to Brexit) or Law.” However, the pandemic carve didn’t apply to conditions that had a “disproportionate effect” on eNett or Optal as compared to other companies in their industries. There was no similar language applicable to the change in law carve-out.

After first addressing which “industry” should serve as a reference point for the exception to the pandemic carve-out, the Court addressed the application of the MAE clause. This excerpt from the memo summarizes the Court’s analysis:

The court also considered how the MAE clause was to be interpreted in circumstances where one or more of the carve outs to the definition were triggered. The sellers argued that to the extent that the wide-ranging travel and quarantine restrictions introduced by governments and authorities fall within the meaning of the legal and political change carve out, they do not qualify for the “disproportionate effect” carve out exception and may not be taken into account when determining an MAE.

WEX argued that if the disproportionate effect exception applied, such that the effects of a pandemic could be taken into account for the purpose of determining whether there had been an MAE, then it did not matter if another carve out from the definition was also triggered. In short, as the court put it, WEX sought to “cherry-pick among various overlapping matters in connection with which an event may be said to have arisen”.

Mrs Justice Cockerill held that: “The fact that changes in Law may be an obvious consequence of a pandemic, is not to the point […] the parties chose not to include changes in regulatory or political conditions or Law within the Carve-Out Exception, even though it was obvious that such changes might result from [a pandemic]”. The sellers’ argument that it does not matter whether the same effects are caused by other carve outs (i.e., the pandemic carve out) made “better commercial sense” and “there is no basis in the wording of the clause to conclude that the parties objectively intended that if two Carve-Outs were engaged they would have to work out which should prevail to the exclusion of the others.”

The memo points out that one of the interesting things about the Court’s opinion is the extent to which it relied on Delaware precedent. Apparently, there’s not much English authority on MAE clauses outside of banking transactions, so the Court looked to Delaware, which it considered a “leading forum for the consideration of these clauses, a forum which is both sophisticated and a common law jurisdiction.”

– John Jenkins