Most facility agreements contain a material adverse change (MAC) clause. Until recently there have been few reported English cases on the use of MAC clauses in facility agreements. 2013 has seen judgments published in two such cases: Cukurova v. Alfa Telecom and Grupo Hotelero Urvasco SA v. Carey Value Added SL and another. Candice Hart explains what lenders can learn from them.
Background: what is a MAC clause?
A MAC clause is a sweeper clause intended to provide a lender with protection against unforeseen events which have, or may have, a significant detrimental effect on the borrower. The clause may be a repeating representation from the borrower about the absence of any MAC. Or it may be an event of default. In either case, the ultimate purpose is to give the lender the right to accelerate the loan if the MAC occurs.
Lenders will usually want MAC clauses to be subjective rather than objective, and as wide as possible. But even if they achieve this, there will often be a degree of doubt about whether the clause covers a particular event. So, lenders are usually reluctant to rely on this clause alone to accelerate a facility.
Before 2013 one of the few reported cases where an English court has upheld a lender's use of a MAC clause was BNP Paribas v. Yukos Oil. However, the extreme facts of this case provide little comfort to other lenders seeking to use a MAC clause: it would be hard to argue that a US$3.3 billion tax bill, frozen assets and a press release referencing a threat of insolvency did not constitute a MAC.
The Cukurova case
The Privy Council (the Council) heard the Cukurova case on appeal from the Court of Appeal of the British Virgin Islands.
The Council considered the following MAC event of default: "[an] event or circumstance which in the opinion of [Alfa] has had or is reasonably likely to have a material adverse effect on the financial condition, assets or business of [Cukurova]".
The “event” Alfa was looking to rely on was an arbitration award that had been made against Cukurova for breaching an agreement with another party. The award had ordered specific performance of Cukurova's breached obligation. But the Council accepted that the award "clearly implied a potential, indeed a virtual certainty, of a very substantial order for damages against [Cukurova]…" on the basis that Cukurova would not be able to satisfy the requirement for specific performance. In the Council’s opinion, this substantial contingent liability was unquestionably “reasonably likely to have a material adverse effect on [Cukurova’s] financial condition”.
However, the MAC clause was a subjective one. So even though the Council was satisfied that, on an objective basis, the MAC event of default had occurred, it still considered that "the court has to be convinced by admissible evidence that [the lender] did in fact form the requisite opinion". One might have thought the lender's letter to the borrower declaring the event of default would be enough to satisfy this requirement. The Council said it was not. Ultimately the Council was satisfied the lender had formed the opinion on the basis of board minutes disclosed in the case.
The Grupo Hotelero case
In this case the High Court looked at the interpretation of a repeating MAC representation. The representation was "there has been no material adverse change in [the] financial condition [of the obligors] (consolidated if applicable) since the date of this Loan Agreement".
The dispute focused on the general deterioration in the obligors' financial position over the relevant period, rather than on any particular event or events. The court found there was no breach of the representation on the facts. However, in coming to that decision, it outlined some useful principles for interpreting MAC clauses:
- If a lender is trying to show there has been a MAC in a company’s "financial condition", this will be determined chiefly by reference to its financial information covering the relevant period. “Financial condition” would not usually cover a company’s prospects or more general economic or market changes.
- A change in financial condition is only materially adverse if it significantly affects the company's ability to perform its obligations under the relevant agreement, and in particular its ability to repay a loan.
- A lender cannot enforce a MAC clause based on circumstances of which it was aware when it entered the agreement.
- A change must not be merely temporary.
- The burden of proof is on the lender to show the event or circumstance described in the clause has occurred.
What can lenders learn from these cases?
- Check the drafting. These cases emphasise that a dispute about a MAC clause will generally hinge on the drafting of the clause, and how it applies to the facts. Lenders should not infer from these cases that certain types of event will always fall inside or outside the scope of a MAC clause.
- Keep a paper trail for subjective tests. Before enforcing a MAC clause based on the lender's "opinion", the lender should ensure there is a record of how it reached that opinion.
- Apply Grupo Hotelero principles. Before enforcing a MAC clause, a lender should check whether the general principles set out in Grupo Hotelero are relevant to the facts and the drafting.
- Are other remedies available? But perhaps the most important lesson for lenders is a simple reminder: if there are alternative contractual provisions they can rely on instead, they should use them. In both these cases, the lenders found themselves still arguing in court over MACs they were alleging had occurred several years earlier.