DealLawyers.com Blog

Glenn West’s latest article for Business Law Today discusses BM Brazil I Fundo de Investimento em Participações Multistrategia v. Sibanye BM Brazil (Pty.) Ltd — the latest judicial pronouncement by a common-law court on the meaning and effect of an MAE clause. The decision is from the English High Court of Justice, but apparently English common law is lacking when it comes to decisions addressing MAEs, so the Justice turned to Delaware’s “substantial body” of MAE-related case law and “took a trip” through “Delaware authorities that have addressed MAE conditions since IBP,” including Akorn, Inc. v. Fresenius Kabi, AG, the one Delaware case where it was determined that an MAE had occurred.

Looking to Akorn’s reference to a 20% decline in equity value and commentary that the decision was not suggesting that a “reduction in the equity value of the target of anything less than 20% would necessarily not have been material,” Mr. Justice Butcher was “inclined to view 15 percent as the right number for this case.” He even considered expert testimony about the significance of the geotechnical event — the case involved a landslide at a mine owned by the target company between the signing and closing — that even a 10% hit might be sufficient. But, even at this lower level, he still concluded that no MAE had occurred. Glenn notes that credible expert testimony and establishing that the MAE clause was not invoked as a means to get out of a bad deal can be critical in these MAE cases.

But Glenn’s discussion of the decision’s analysis of what constitutes a “Change, Event or Effect” may be the most interesting aspect of the article.

One of the contentions made by the sellers was that the buyers were including in the material adverse effects of the geotechnical event not just the direct effects of the geotechnical event but also the alleged problems with the “underlying geology” that had been revealed by the geotechnical event. According to the sellers, any problems and costs associated with the underlying geology that had been revealed by the geotechnical event could not be included in any determination of whether an MAE had occurred—only the direct effects of the geotechnical event itself could be included. … Mr. Justice Butcher agreed with the sellers on this point. … In this case, the underlying geological condition “had existed for millennia.” And “[n]o ‘change, event or effect’ had occurred in [that underlying geological condition] by the happening of the [geotechnical event—i.e., the landslide].”

Glenn generalizes and summarizes by saying, “an MAE condition cannot save you from the failure to obtain a representation and warranty about any existing issue—MAEs focus on future occurrences, not existing facts.”

– Meredith Ervine