Material Adverse Change Provision Case

Material Adverse Change Provision Case

Introduction

Material adverse change (MAC) is used in contracts drawn at the time of merger of two companies or at the time of buying and selling. They take place in representations and can be used in two different ways. One of the party can make this representation related to non-occurrence of MAC right form the given date. This simple representation can be stated as “for the last two months, no MAC has taken place. On the other hand, MAC provision can be used to modify a representation regarding some aspects of party's operations in order to indicate the anything that is absent and can lead to MAC.

As viewed in the recent cases of Cukurova Finance International Limited v Alfa Telecom Turkey Ltd [2013] UKPC 2  and Grupo Hotelero Urvasco S.A. v Carey Value Added S.L. [2013] EWHC 1039 (Comm) that includes termination of merger worth of billion dollars, it is a serious matter in M& A transactions. The cases are the best example of facility agreement between a borrower and a lender. It is also a reminder that companies must pay attention to clauses of MAC at the time of drafting. These clauses are intended to allow the buyer to expire the agreement on any event that takes place with material impact on the seller after signing and before completing. The importance of MAC clauses is equal for both buyers and sellers. Buyers make the use of these clauses to escape from the chewed transactions. Hence, they prefer the best possible MAC clauses. Sellers also go for MAC clauses in order to offer greater surety of consummation. In this context, they prefer the tightest possible MAC clauses.

Case Update

MAC clauses have been invoked more recently as an attempt to terminate transactions. The case is a good example of appropriation. The facts of the case Cukurova and Alfa are complex, but they ended in a facility agreement protected by FCARS (Fair Channel Adaptive Rate Scheduling). In the case, the lender had the advantage of MAC event and the right of appropriation. The lender accused that the some of the events of MAC default were prompted through an arbitration award. In this situation, the lender, accelerated the loan and made a request to be listed as the owner of the shares that were charged with the help of right of appropriation. This has given rise to some of the issues before the Privy Council (PC) (Bailii, 2013).

Analysis

MAC offered that an event of default may exist where there is a chance of material adverse change in the monetary context in the opinion of the lender with reference to a certain event or situation. It was a common opinion that in order to satisfy the clause, an event needs not to have an adverse effect objectively. What required from the lender was to believe that an event would surely have a monetary effect and the belief must be based on rational and honest ...