- MAC provisions are included in many SPAs but buyers rarely seek to invoke them as the hurdle for triggering a MAC is typically set very high.
- The COVID-19 pandemic presents an unprecedented challenge and will have a significant effect on many commercial and business matters, including M&A transactions.
- In this article, we discuss the impact of COVID-19 on M&A transactions in the UAE, including the effect on MAC provisions and potential issues to consider when transferring UAE shares/assets.
The COVID-19 pandemic presents an unprecedented challenge and will have a significant effect on many commercial and business matters, including M&A transactions. Parties which have already entered into share/asset purchase agreements (SPAs) will need to carefully consider whether any material adverse change (MAC) provisions have been triggered. For deals which have not yet been signed, the inclusion of a MAC clause and how it is formulated are likely to be key negotiating points.
MAC provisions in SPAs
MAC provisions in SPAs typically provide a buyer with a right to terminate if, between signing and completion, an event or circumstance occurs that has, or is reasonably likely to have, a material adverse effect on the target company/business. In the interests of certainty, a test is normally included for determining whether or not the event or circumstance is “material” (for example, it may only be “material” if it results in a specified reduction in the net assets or net income of the target company/business).
Sellers will often argue that a MAC provision should be narrowly defined such that it relates specifically to the target company/business and expressly excludes other matters such as epidemics, pandemics, acts of terrorism, natural disasters and the like. If a MAC provision is drafted in this way, then clearly it would not be triggered by the COVID-19 pandemic.
MAC provisions are included in some SPAs but not in others. It will typically depend on the specific nature and circumstances of the transaction. Relevant factors include the following:
- Bargaining power: If a seller is in a strong bargaining position (particularly on an auction sale) it may be able to resist the inclusion of a MAC provision.
- Likely time period between signing and completion: If it is likely that there will only be a short time period between signing and completion, a buyer may be comfortable with not including a MAC provision. In contrast, where there is likely to be a long gap (for example, due to regulatory approvals) a buyer will typically require the inclusion of MAC provisions in order to mitigate the risk of a deterioration in the performance/value of the target company/business during this period.
- Governing law: Generally speaking MAC provisions are more likely to be included in “US style” SPAs than in “UK style” SPAs. This is because UK market practice tends to regard economic risk as transferring from the seller to the buyer at the point of signing of the SPA rather than at completion, whereas US market practice tends to regard economic risk as transferring to the buyer at the point of completion. This is a relevant factor in the UAE as English law is frequently chosen as the governing law in SPAs relating to UAE share/asset sales.
Another variation of a MAC provision arises where the SPA contains a warranty from the seller that there has been no material adverse change with respect to the target company/business since the date of the most recent set of accounts. If the SPA also contains a right in favour of the buyer to terminate in case of a breach of warranty between signing and completion, then the buyer essentially has the benefit of a MAC provision even if it is not described as such. Sellers should be wary of “backdoor” MAC provisions such as this, in particular in a COVID-19 environment where opportunistic buyers may be looking for ways to extract themselves from transactions.
Triggering of MAC provisions
The COVID19 pandemic, and the resulting market conditions, may or may not trigger the MAC provisions in an SPA. Ultimately this will depend on the precise wording of the MAC provisions and any other relevant clauses in the SPA. Parties to SPAs should carefully review and consider the relevant provisions, and seek legal advice if they are in any doubt.
Approach of the UAE courts and English courts to MAC provisions
Under UAE law, parties are generally free to agree and contract on the parameters of their contractual relationships (subject to certain restrictions e.g. a contract that conflicts with public order or morals is void). Accordingly, a typical MAC provision in a SPA contested before the UAE courts is generally likely to be enforced (although the UAE courts may appoint an expert to assist with the interpretation of a MAC provision). The approach of the English courts will similarly be to generally apply the bargain that the parties have made with respect to a MAC provision – and accordingly arbitrators appointed in respect of a dispute on a SPA (where the venue of the arbitration is in the UAE but the governing law of the SPA is English, DIFC or ADGM law) should enforce appropriately drafted MAC provisions.
Readers should note that there is no system of binding precedent in the UAE with each case being decided on its facts and therefore the outcome of a dispute regarding a MAC provision before the UAE courts may be harder to predict as compared with a similar dispute before the English courts (or an international arbitration centre where the governing law of the SPA is English, DIFC or ADGM law) which will have regard to previous cases involving MAC provisions (albeit that there is relatively limited English, DIFC or ADGM case law regarding the interpretation of MAC provisions).
Share / asset transfer provisions
In the UAE, it is generally not possible to transfer shares without the involvement and approval of the relevant licensing authority. Additionally, for transfers of shares in onshore UAE companies it is necessary to sign certain documents before a UAE notary public. Similarly, UAE business transfers require approvals from local authorities (for example, there is no automatic transfer of employees on the sale of a business and the employment relationship with the seller (including residency visas and work permits) will need to be terminated and a new employment relationship with the buyer (including new residency visas and work permits) will need to be entered into). Further, where a purchasing or selling entity is incorporated in a foreign jurisdiction, the constitutional documents and / or an appropriate resolution (or power of attorney) of that entity will need to be notarised, legalised and attested up to the level of the UAE embassy in the relevant foreign jurisdiction prior to being submitted to the UAE notary public and/or the relevant licensing authority in the UAE.
As a result of the COVID-19 pandemic, the relevant authorities in the UAE may be closed and/or operating at reduced capacity (for example see our recent article here http://www.hadefpartners.com/News/440/Dubais-Notary-Public-goes-remote on the remote status of the Notary Public in Dubai). In addition, it may be difficult procuring notarised, legalised and attested documents of the foreign entity from the relevant foreign jurisdiction given that there are “lockdowns” in so many countries across the world. This is likely to result in delays to the share/asset transfer process, which may result in completion not occurring by an agreed “longstop” or “backstop” date, thereby triggering the termination of the SPA. Parties to existing SPAs should review the relevant provisions and, if necessary, engage with their counterparty with a view to agreeing extensions to such “longstop” or “backstop” dates. Parties which are negotiating SPAs should bear in mind the extra time it may take to effect share/asset transfers in light of the COVID-19 pandemic, and build in the appropriate level of flexibility to their SPA.
MAC provisions are included in many SPAs but buyers rarely seek to invoke them as the hurdle for triggering a MAC is typically set very high. However, the COVID-19 pandemic has resulted in unprecedented market conditions and many previously healthy companies/businesses have suffered significant downturns, thereby opening up the possibility for buyers to invoke MAC clauses (or to use them as bargaining tools to force the price down or otherwise seek improved terms).
For deals which have not yet signed, parties should carefully consider whether a MAC provision should be included and how it should be drafted in light of the current situation.
As referred to above, parties should also bear in mind the issues with transferring UAE shares/assets highlighted above, and include appropriate drafting in their SPAs.
Depending on the nature and circumstances of the transaction, there may be other issues to consider. For example, the impact on earn-out provisions in SPAs where the COVID-19 pandemic and the resulting downturn span the earn-out period, the opening up of the potential for warranty/indemnity claims etc. Each transaction should be examined on its own merits to determine what the relevant issues are in light of COVID-19.
If you have any queries about this article or M&A transactions in the UAE, please contact Patrick Tweedale (Partner) or Paul Wynne (Senior Associate).