An empirical analysis of 128 M&A transactions provides food for thought about whether the economic disruption of COVID-19 can trigger a material adverse change (“MAC”) in an agreement.
espite the ebb and flow of the spread of COVID-19 and the easing of government-mandated lockdowns in various parts of the world, the economic shock waves caused by the pandemic are likely to ripple through markets for years to come.
This has led many firms, primarily in the legal and professional services sector and the insurance sector, to consider the effects of the pandemic on contractual obligations. In one example, firms are examining whether economic disruptions due to COVID-19 will trigger contract clauses under the heading of material adverse change or material adverse effect (collectively “MAC”) in merger & acquisition (M&A) contexts.
MAC clauses are typically found in M&A and financing agreements. They are intended to excuse a party’s obligations when some extraordinary event prevents the party from fulfilling those obligations. The interpretation of a MAC clause is predominantly a legal question that is highly case-specific, but also depends on detailed economic analysis. MAC provisions are typically interpreted narrowly and U.S. courts have set a high standard for claims that an event constitutes a MAC.
Most MAC clauses explicitly exclude pandemics, and there is some indication that the language governing MAC clauses is already evolving to exclude COVID-19.
To better understand the context of a MAC with regard to COVID-19, FTI Consulting conducted an empirical analysis of 128 M&A transactions containing a MAC clause over a six-month period that were filed with the Securities & Exchange Commission (SEC).
Of the 128 analyzed, 92 encompassed just four industries, representing approximately 70% of all transactions. The sample included both acquirer and target companies.
These four industries represented approximately 70% of all 128 M&A transactions examined by FTI Consulting over a six-month period that contained a MAC clause. The numbers listed above each reflect the percentage of transaction agreements within each industry where terms related to pandemic, epidemic, virus, or disease are specified as exclusions to the MAC clause.
FTI catalogued how frequently terms such as epidemic, pandemic, virus, and disease appeared, as well as the precision or vagueness of language within the various contracts. We also searched for specific mentions of “pandemic.” (Other criteria were applied, but are omitted here for the sake of space. The full report can be accessed below.)
In short, fewer than 20% of the M&A agreements reviewed contain MAC clauses with exclusions that specifically refer to COVID-19 or more broadly, pandemic, epidemic, virus or disease.
Based on the presence of the terms — which are listed as exclusions that would not trigger a material adverse change — industries like business services and chemicals and allied products give greater consideration to biological events such as COVID-19 when drafting a MAC change in an M&A agreement compared to depository institutions and oil and gas extraction. It is important to keep in mind, however, that the report looked at a small sample size; we intend our analysis to highlight overall the relative paucity of the term “pandemic” in many existing MAC clauses. Certainly, we would anticipate seeing the term “pandemic” or similar terms used more widely as excluded events in future M&A agreements.
To learn more about the analysis and the elements to consider for potential damage calculations, read our report “COVID-19, Force Majeure, and Material Adverse Change Clauses.”
FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.