M&A and Covid-19: material adverse events

What is an MAE clause in an M&A context?

A material adverse event ('MAE') clause in a share purchase agreement ('SPA') permits a buyer to withdraw from a transaction between exchange and completion in the event of a significant or material deterioration in the health or stability of the target company's business. The key element of an MAE clause is the definition of what constitutes such an event, as a buyer seeking to rely on the clause will have to establish that an MAE, as defined within the SPA, has occurred.

Travelport Ltd v Wex Inc

The High Court recently considered the construction of an MAE clause in an SPA in the case of Travelport. In January 2020, Wex entered into an SPA to acquire two companies, eNett International (Jersey) Limited ("eNett") and Optal Limited ("Optal"), both of which were payment service providers to the travel industry, from Travelport and other sellers ("Sellers"). The SPA provided for a gap between exchange of contracts and completion of the transaction and included an MAE clause giving Wex the right to withdraw in the event of an MAE.

Following exchange of the SPA, several countries entered lockdown, causing a decrease in global travel which in turn resulted in a decrease in revenue for eNett and Optal. Wex asserted that an MAE had occurred and therefore sought to withdraw from the transaction. The Sellers disputed this, asserting that no MAE had occurred, and argued that the transaction should complete as per the SPA. This reached the Commercial Court, who determined preliminary issues regarding the construction of an MAE clause in an SPA in the context of the global pandemic.

Decision

The key matter considered by the Court in relation to whether an MAE had occurred was the basis against which eNett and Optal's financial position should be measured, and whether eNett and Optal should be seen as operating in the "travel payments industry" or the wider B2B payments industry.

The decision of the judge ultimately hinged on the phrase "industries" in the MAE clause. The MAE clause provided that the relevant benchmark for assessing whether an MAE had occurred was the position / performance of eNett and Optal in "the industry of providers of products and services to facilitate [B2B] payments to participants in the travel industry." The judge held that there was no travel payments industry and so the relevant industry was the wider B2B payments industry, such that the performance of eNett and Optal needed to be benchmarked against the wider B2B payments industry. The judge noted that the use of "industries" suggested an intention broader than "markets" or similar when considering the operations of eNett and Optal. The result of this was that the effects of the pandemic on eNett and Optal were disproportionate compared to others in the B2B payments industry. In determining whether or not the Defendant is entitled to rely on the MAE clause, it will therefore be necessary to assess eNett and Optal in the broader industry. In due course the case will proceed to a full trial to determine whether the Defendant is able to withdraw from the transaction.

Analysis

The judgment highlights the importance of, and challenges faced in drafting and relying on, MAE clauses. It is crucial that the definition of an MAE is clearly drafted, and the comparators against which the financial performance of the target will be measured, defined carefully. The dispute highlights the difficulties which ambiguous clauses can present, with the parties having very different expectations and interpretations of negotiated terms.