As we face increasingly uncertain market conditions, parties involved in an M&A transaction process will need to consider the impact of coronavirus (COVID-19) on the transaction. The impact may be demonstrated in purchase price negotiations and/or additional protections or risk mitigation provisions in the sale agreement required to address COVID-19. In this article, we consider the operation of MAC clauses and suggest some issues to be considered in drafting for future deals.
Purchasers should carefully consider their options before seeking to rely on MAC clauses as a result of COVID-19 due to its continually evolving nature. If a purchaser wrongfully relies on a MAC clause, this could result in reputational damage or a potential damages claim.
What is a MAC clause?
A MAC clause permits a purchaser to claim for damages or pull out of the deal if, in the time between signing and completion, the target business deteriorates or there are adverse economic developments that will affect the value of the business.
MAC clauses typically take the form of:
- a warranty that no MAC has occurred since a particular date (typically since the date of the last set of accounts); or
- a condition precedent to completion that no MAC has occurred between signing and completion.
Is COVID-19 a MAC event?
The operation or invocation of a MAC clause is subject to a number of different triggers including:
- the extent or ‘materiality’ of the change required to trigger the MAC clause
- whether the term ‘materiality’ is defined to assess the effect on the target company alone or the proportionate effect on the target company relative to others in the market
- whether the definition of MAC excludes more broad events such as general economic or market conditions
- whether the change has a long-term impact on the target
As such, COVID-19 has the potential to trigger the MAC clause. However, globally significant events are rare, and examples of MAC provisions being called upon in such a circumstance are even rarer. Epidemic or pandemic events such as the SARS epidemic in 2003 or the swine flu pandemic in 2009 and major global political and economic events, including the 9/11 terrorist attacks, have not contributed significantly to the limited body of case law in this area. There is no one size fits all answer to whether COVID-19 will constitute a MAC. Ultimately, the specific phrasing of the MAC clause and the specific facts and circumstances impacting the target will determine the outcome.
In the last few days, there has been speculation that the sale of Funlab to Archer Capital will grind to a halt, Quadrant has ceased its discussions relating to the acquisition of Total Tools and the Abano Group has given formal notice under the proposed scheme of arrangement that there are circumstances which may give rise to a MAC.
MAC and COVID-19: Drafting considerations and implications
The economic impact of the COVID-19 outbreak is likely to be significant and unpredictable and any future MAC clauses will need to be carefully drafted to ensure they extend to cover this issue. Below are some key drafting considerations for MAC clauses in sale agreements:
- Carve outs and exclusions: Economy wide or industry wide events are often excluded from MAC clauses. COVID-19 may encourage target companies to push for MAC clauses that exclude consequences flowing from COVID-19. Whether excluding it completely or specifying a quantitative or qualitative level of financial or operation impact from COVID-19, the MAC clause will need to be drafted with precision and specificity so as to guard against unexpected results. Sellers may try to limit the scope of the MAC so there can be no aggregation of a number of consequential effects of COVID-19 where only a single event can trigger the MAC.
- Long lasting consequences: There is conflicting information surrounding the proliferation of COVID-19. Some experts predict months to years, while others predict a shorter period. Sellers may want to ensure that, in order for a MAC to be triggered, it must have an adverse impact on the maintainable earnings of the business and is not due to a one-off event.
- MAC metrics: Consider what the appropriate trigger should be in addition to a reduction in earnings or net assets, such as unavailability of key personnel (or a certain proportion of the workforce), suppliers or manufacturers or a standstill arrangement being entered into with financiers or landlords.
About Hamilton Locke
Hamilton Locke is a corporate law firm specialising in complex corporate finance transactions, including mergers and acquisitions, private equity, finance and restructuring, litigation, property and fund establishment.
The Finance and Restructuring team has considerable restructuring and turnaround experience across all relevant areas including finance, debt-trading, loan to own transactions, distressed M&A, safe harbour, enforcement and insolvency.
If you would like to discuss the contents of this article, please contact Cristín McCoy, Nick Edwards or Zina Edwards.
