COVID-19 continues to have a major impact on all aspects of our lives. Mergers and acquisitions are no exception. Business and market changes due to the pandemic are likely to impact our interpretations of common terms in merger agreements – such as material adverse change (“MAC”), material adverse event (” MAE ‘), force majeure and the normal course of business – for the foreseeable future.
Significant adverse change
In a typical merger agreement, the buyer’s closing obligation will be subject to a MAC clause and certain representations and warranties of the seller will be qualified by an MAE provision. Many practitioners rephrase the provisions of the MAC and Market EAW to expressly include “pandemics” and the broader economic or market changes resulting from a pandemic. This is particularly important because it seems likely that the pandemic has become a general systemic market risk.
In a historical case, Akorn, Inc. v. Fresenius Kabi AG, et al., Memorandum Opinion, No. 2018-0300-JTL (Del. Ch. 1 Oct. 2018), the court found that a MAC had occurred between signing and closing due to non- FDA compliance and inadequate data integrity controls. The court predicted long-term damage to the seller’s potential success due to these issues.
One could imagine a court similarly predicting long-term damage triggering a MAC if a seller’s failure to have and follow a pandemic response plan resulted in adverse consequences. Courts in Delaware and New York, however, have stressed that a buyer must meet the high bar – in particular, a significant economic impact – to win in the MAC or MAE field. For example, in Newmont Mining Corp. vs. AngloGold Ashanti Ltd., No. 1: 17-cv-08065 (SDNY Mar 18, 2020), the buyer of a mineral processing plant alleged that the seller failed to disclose faults in the plant which made it unable to ” achieve certain performance targets stated in the materials manufactured. available to bidders during due diligence and that these deficiencies, in turn, constituted an EAW under the purchase contract. The Southern District Court of New York rejected this request on a number of grounds, including the fact that the claimed EAWs were excluded from the definition of EAWs by virtue of the plain language of the purchase contract and that the claimed EAWs were related. under circumstances which were foreseeable at the time of purchase.
The purpose of a force majeure, or “force majeure”, the clause in a merger agreement is to excuse performance when compromised by forces beyond the control of a party. This clause typically lists specific events (such as natural disasters) that would trigger the disposition, as well as some catch-all language.
Recently, Guess?, the Miami retail store, has been ordered to pay rent despite changes the retailer has experienced due to COVID-19. Guess? argued that the pandemic left the company unable to pay rent when the store closed in 2020 due to the pandemic. The lease stipulated that the term force majeure encompassed “fortuitous events, labor disputes (legitimate or not), shortages of material or labor, restrictions imposed by a government authority, civil riots, floods. or any other cause beyond the control of the party claiming the existence of a case of force majeure.
However, it also specifies: “Notwithstanding any provision to the contrary in this lease, the tenant will not be exempt from payment of the basic rent, operating costs or any other sum due under this lease due to force majeure. . The Miami-Dade Circuit Court ruled that because the lease contained an unambiguous force majeure clause, Guess? must pay no matter what, even during a pandemic.
Ordinary business course
A merger agreement typically contains restrictive covenants that require a seller to have carried on business âin the ordinary courseâ and to continue to do so between signing and closing. In considering these restrictive covenants, the courts take into account how the business has operated historically and how comparable businesses operate today (or have operated in the past).
In AB Stable VIII LLC v Maps Hotels & Resorts One LLC, CA # 2020-0310-JTL. (Del. Ch. November 30, 2020), the Delaware Chancery Court found that a seller was not operating in the ordinary course of business because it had made substantial changes to its operations by completely closing two hotels and severely limiting the operations of the other 13. in light of COVID19. As a result, the court ruled that the buyer was not obligated to close.
Pandemics were clearly not on the minds of the original drafters of most of the merger agreements. However, due to COVID-19, we realize that pandemics may be a way of life in the future. And it’s unclear how the courts will apply the general language of MAC / MAE clauses, force majeure or the ordinary course of business to the adverse consequences of a pandemic. Therefore, it is incumbent on M&A practitioners not to rely on general formal language, but rather to adapt these clauses to reflect this new reality in a clear and unambiguous manner.
Â© 1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.Revue nationale de droit, volume XI, number 174