Covid-19 and material adverse change: MAC is back

2020-04-09

Following our update of 16 March 2020 on the use of material adverse change (MAC) clauses in Sweden, the outbreak of Covid-19 accelerated significantly. The global economy has since been in near freefall, with many countries facing historic recessions and stock markets down on average by almost 25% compared to January 2020. Consumption and passenger numbers are down, but surprising winners have emerged, including the commodity orange juice as the new liquid gold.

Given the adverse effects of Covid-19 on the economy, it is no surprise that companies that entered into transactions on the basis of a particular set of assumptions about the future economic circumstances in relation to their investment that clearly will have been blown out of the water will be looking to terminate these deals wherever possible. In our previous article, we discussed the possibility of using a MAC clause to do just that.

What is a MAC clause?

As we explained in our previous article, a MAC clause is commonly used in M&A transactions to provide the buyer with the right to walk away from the acquisition before closing if there is a change in circumstances that leads to a significant reduction in the value of the target. MAC clauses have become common in Sweden through the influence of English legal documents used by the Swedish legal and financial services sectors.

Swedish buyers are already triggering MAC clauses

In our previous article we emphasised that a buyer’s ability to terminate a transaction will largely depend on the wording of the MAC clause and the clause is more difficult to trigger if the event giving rise to a claim under a MAC clause was known at the time the parties signed their agreement.

In a recent development, a subsidiary of Swedish private equity firm EQT has issued a notice that it intends to withdraw from a NZD 1.5 billion agreement to buy dual-listed retirement village owner Metlifecare. In that case, EQT is relying on a MAC clause which could be triggered if the relevant change in circumstances caused a reduction in (i) the net tangible assets of the target by NZD 100 million, or (ii) the underlying net profit by 10% or more compared to what it would have been but for the change.

Meanwhile, the Australian private equity firm BGH Capital and its Canadian co-investor OTTP terminated an agreement to buy the New Zealand-listed dental care provider Abano Healthcare, due to a material adverse change caused by the Covid-19 outbreak.

Final Comments

As we mentioned in our previous article, MAC clauses usually entail a longer-term perspective. That private equity firms are acting now demonstrates the depth of the turn in the market, but also that the MAC-clause really is back. We expect more buyers to trigger MAC clauses in the coming weeks in order to terminate or renegotiate their deals and for future transactions to include explicit exclusions to MAC clauses for public health emergencies such as pandemics.

We at Magnusson are available to provide legal advice on how your business should manage any Covid-19 related issues in all legal areas, including corporate restructuring, labour law and insurance law, reviewing commercial contracts, analysing the consequences of cancelled events and advising how to best handle procurement in emergency situations, to help ensure that your business is well placed to survive these difficult times and to thrive once Covid-19 has been contained.