MAE the MAC return? COVID-19 and Material Adverse Effect

Elizabeth Wall

Last week a judgment on preliminary issues was handed down in Travelport v WEX, the first Covid-related Material Adverse Effect, or MAE, dispute to come before the English courts. The judge found in favour of the buyer, and interpreted “industry” widely (as the entire B2B payments industry, rather than “travel payments industry”) for the purpose of assessing whether the pandemic had a disproportionate effect on the targets as compared to other industry participants.

When there is a crisis, M&A disputes usually follow, and that has certainly been the case with Covid-19. Many involved buyers trying to extricate themselves from deals they signed before the pandemic (or its full impact) became known. Some have settled, others have resulted in deals being renegotiated, but a number are still playing out in the courts. One of these is the MAE dispute between U.S.-headquartered WEX Inc and the sellers of eNett and Optal, two UK-based businesses that WEX agreed to buy for more than USD 1bn under an English law-governed sale and purchase agreement signed back in January.

The MAE condition precedent was of the type that is common in deals that have a U.S. connection. It allowed WEX to pull out if any event had a “material adverse effect on the business, condition (financial or otherwise) or results of operations of [eNett] and its Subsidiaries, taken as a whole, or of [Optal] and its Subsidiaries, taken as a whole”. It contained standard carve-outs, including for “conditions resulting from … pandemics”, except where they had “a disproportionate effect on [eNett] and its Subsidiaries, taken as a whole, or on [Optal] and its Subsidiaries, taken as a whole, as compared to other participants in the industries in which [eNett], [Optal] or their respective Subsidiaries operate”.

Optal’s business involves issuing virtual credit card account numbers that function like a physical credit card and can be used by one business to pay another. Its principal client, accounting for 98% of its revenues, is eNett. eNett derives the vast majority of its profits from providing B2B payment services to customers who operate in the travel industry which has been hit hard by the pandemic.

One of the preliminary questions, decided last week, was what exactly are “the industries” in which eNett and Optal operate: the travel payments industry or the B2B payments industry more generally? WEX (as buyer) argued for the wider B2B payments industry, presumably because that would give it a better chance of a finding in the main trial that eNett and Optal have been disproportionately affected. The judge agreed, holding that there was insufficient evidence to establish that a separate “travel payments industry” even existed, that “industry” was a broader term than others that might have been used, like “market”, “sector” or “business”, and did not accept the sellers arguments as to the commercial purpose of the clause which that, on the facts the actual language used carries more weight than arguments about commercial purpose in the interpretation of a highly detailed contract drawn up by experienced solicitors acting for sophisticated parties.

So what is the takeaway from this decision? Well, as the judge herself noted: “the parties could have but did not specify what industries they meant. It may well be that one result of this case is that future drafters will do differently.” That is certainly worth thinking about, as is the question of exactly which divisions of which entities are in the relevant peer group, and what information might be publicly available in a short space of time to show how they have been affected by the event in question. But greater specificity might not be the answer: one of the key purposes of an MAE condition is to provide fuel for renegotiation if the unexpected happens between signing and completion, and a certain amount of ambiguity might help with that.

Back in May, the Takeover Panel Executive ruled that the offeror for Moss Bros was not permitted to invoke material adverse change and similar conditions to its offer on account of the impact on the target of the Covid-19 pandemic and related government measures. And the English courts have previously considered MAE/MAC clauses in banking transactions on occasion (most recently in 2013 in Grupo Hotelero Urvasco). But I can only recall one M&A-related MAE dispute having previously come before the English courts, and that was Ipsos v Dentsu Aegis in 2015. Indeed it was because of the dearth of English case law that the court here was prepared to look at authorities and commentary from Delaware including Akorn v Fresenius. It will be helpful to have a little more insight on how the English courts will approach a MAE as and when the full trial takes place.

Update: permission to appeal has been sought.