By James Arnold
The Covid-19 pandemic impact on SPAs: enforcement of Material and Adverse Change (MAC) clauses in M&A transactions
The Covid-19 pandemic has created unprecedented disruption to the global economy. With M&A activity rapidly tailing off, buyers at the pre-completion stage of existing deals are also becoming increasingly risk-averse, and those with cold feet are starting to look at MAC clauses within SPAs to extricate themselves. Private Equity group Sycamore has recently attempted to pull out of buying Victoria’s Secret from L-Brands, citing Victoria’s Secret’s closure of most of its 1,600 stores in response to the Covid-19 pandemic as a breach of its obligation to “continue business operations consistently with past practices”.
As always, whether an event has had material adverse effect will depend on the drafting of the MAC clause in a given SPA. Although MAC disputes can and have historically turned on the meaning of “material”, given the widespread impact of Covid-19 on all industries the real battleground here is likely to be over seller carve-out clauses. These will be bespoke and vary widely between SPAs, but they can exclude changes in general economic conditions, regulations or laws which do not have a materially disproportionate effect on that company compared to other companies in the same industry. In other words, if everyone is impacted by the relevant effect, there is no escape for the buyer.
There is no “one size fits all” answer as to whether Covid-19 will allow buyers to invoke a MAC clause to escape their contractual obligations. The unprecedented nature of Covid-19 (at least, unprecedented since the invention of MAC clauses) means that we are in uncharted territory. However, buyers should consider the following before trying to trigger a MAC clause: