For many years, US and UK M&A practices have differed in their use of material adverse change clauses (MACs) in sale and purchase documents. Common, even ubiquitous in the US, these clauses, which permit a buyer to refuse to close upon the occurrence of events detrimental to the target, remain a rarity in SPAs on this side of the Atlantic. However, oil and gas transactions, especially those involving upstream assets, prove an exception to this rule.
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The differences between US and UK practices are most apparent in private deals. MACs remain rare in UK practice but are more common in oil and gas deals, with around a third of private upstream deals having a MAC. Even within oil and gas practice, however, US sale and purchase arrangements are much more likely to contain MACs than UK documents. The drafting tends to be different too. US MACs are often general in nature, covering events with an adverse financial or operational impact. This broad introduction is typically subject to a number of carve-outs, such as general economic conditions and market conditions, and general economic, regulatory, or political conditions or changes.
UK oil and gas MACs tend to be more specific. General, economic or financial test-based MACs are rare. Instead, recent upstream practice has been to focus not on financial tests but rather on regulatory, physical, environmental and operational issues such as termination of licences, damage to facilities, oil spills and oil production shut-ins. Typically, a materiality threshold will be stipulated, either to the losses or the repair cost, usually expressed as a percentage of the overall consideration, often placed between 15 and 40%. Production shut-in may also be a key concern, especially if the acquisition is bank financed, and will likely be tied to a specific duration, say four to six months. These tailored provisions typically reflect the financing outs in the buyer’s commitment letters.
More than 80% of all US merger agreements governing the acquisition of oil and gas companies contain MAC clauses
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For private transactions, the current buyer’s market affords buyers the opportunity to consider inserting MACs into their arrangements. However, the oil price volatility that has softened the market has also pushed sellers (and their interested lenders and shareholders) to focus heavily on deal certainty, rendering them particularly resistant to financial or economic MACs. Expending commercial goodwill that might be expended elsewhere on a MAC remains a dilemma.
M&A MAC Guidelines:
- Courts will narrowly construe MACs to preserve contractual certainty. If language is insufficiently apt for the event in question, do not expect the courts to construe generously
- Circumstances known to exist at the time of the contract will not count as trigger events unless expressly provided for
- Absent specific thresholds to guide them, buyers should expect the court to set the materiality bar high, with the issue and its effect likely to be fundamental and not short-term