Transactions in times of corona: the return of the MAC?

The unfolding coronavirus (Covid-19) crisis may very well turn the tide in a very seller-friendly M&A market. Besides a slow-down in some transactions, buyers especially may lobby for the return of the MAC clause, i.e. the right to rescind an agreed transaction in the event of a material adverse change (MAC) in the target’s business operations or financial conditions. Buyers invoked MAC clauses in Germany after the burst of the dotcom bubble in the early 2000s as well as during the financial crisis in 2007 and 2008, for example. While MAC clauses have remained more common in the US market, in the past few years buyers in Germany were often less successful in implementing MAC clauses in transaction purchase agreements. This holds true in particular because competitive auction processes do not allow for any contractual uncertainty in final bid documentation. If at all, MAC clauses could be agreed in restructuring or distressed M&A deals where the seller was depending on a sale to a certain buyer at short notice.

However, with the current rise of the coronavirus crisis, the MAC clause may make a strong comeback. Against the background of the first negative economic implications brought about by the rapidly spreading virus (e.g., many German companies are faced with interruptions in their supply chains, especially those producing in or supplied from Asia, and businesses in the travel and leisure industries are reporting substantial reductions in revenue in the light of cancelled events, travel restrictions or just general reduced travel and entertainment), buyers may be increasingly prompted to negotiate a MAC clause into transaction purchase agreements in order to have an (additional) option to walk away from a deal or at least reduce their purchase price. Often the parties would negotiate to specify the MAC event by stipulating quantitative hurdles, e.g. sales underperformance of 20% or more compared to the business plan in a certain period. Especially in locked-box deals (i.e. transactions with an economic cut-off date prior to signing), the absence of a MAC could be part of the ordinary course of business guarantee from the locked-box date onwards and, in addition, the non-occurrence of a breach of such guarantee would be a condition for closing.

Nevertheless, whether a MAC clause may be triggered even under the potentially dramatic circumstances caused by the corona crisis obviously depends on the specific wording of the MAC clause in question. For example, a MAC clause may often exempt a change in the general economic conditions or the general conditions of the industry in which the target company operates from the definition of a MAC. In such a case, a buyer would need to prove that the outbreak (and/or the increased spread) of Covid-19 only resulted in a material adverse change for the target company’s business, as opposed to a material adverse change in the economy in general or at least the target company’s industry. It may also be difficult to prove that, with adverse business conditions due to Covid-19 already present at signing, the target’s business has deteriorated even further to such a point that a material adverse change in the business can be assumed at the time of closing.

Even if a MAC clause does not provide for a specific definition of a MAC, the party looking to invoke the clause will need to prove the existence of an unforeseen adverse change that is material. The US courts have held that an adverse condition will only be considered a MAC if it is “material when viewed from the longer-term perspective of a reasonable acquirer, which is measured in years” (Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (del. Ch. Oct. 1, 2018). It is currently unclear whether German law would also require such a long term view when determining whether an event is considered a material adverse change under an unspecified MAC clause.

Nonetheless, given the risk of not closing the transaction due to the buyer invoking the MAC clause based on the spread of Covid-19, possibly entailing lengthy court proceed-ings/arbitration (during which the enterprise value of the target company may decrease) and the risk of having to enter into negotiations on lowering the purchase price, sellers should try to deny buyers the possibility to include MAC clauses. If it needs to be included, a MAC clause should be tailored to the specific company and should exclude adverse changes in general market and industry conditions.

In agreements governed by German law without a specific MAC clause buyers could also try to raise the objection of interference in the basis of the transaction (section 313 German Civil Code) in order to attempt to be relieved of their contractual obligations due to the outbreak of Covid-19. While the chances of success of this objection depend on the specific case in question, it should be noted that courts apply very high hurdles to allowing deal terms to be modified and even higher hurdles for a right to rescind.