The material adverse change (MAC) clause was recently introduced in Belgium by the Anglo-Saxon approach of negotiating corporate and financial transactions. A MAC clause seeks to allow the buyer in an acquisition or project financing transaction to withdraw from the transaction or renegotiate the transaction price if there is a MAC in the business, assets or profits of the target company between the date of agreeing to purchase the company and the closing of the transaction. A MAC clause offers significant protection to the buyer against events that are seriously detrimental to the target company. Accordingly, the scope and wording of MAC clauses are key negotiated parts of acquisition agreements. The use of a MAC clause in transaction agreements with respect to Belgian companies is now very common.
An important transaction providing for a MAC clause in the share purchase agreement was the acquisition of the Dutch bank ABN AMRO by the consortium constituted by Banco Santander, Royal Bank of Scotland and the Belgian bank FORTIS. Some members of the consortium intended to request the application of the MAC clause as a result of a fall in the target’s share price. However, pursuant to publicly available information, the parties in that case decided not to pursue the application of the MAC clause.
It is premature to generalize any Belgian trends related to MAC clauses, since such contractual provisions were qualified as MAC clauses only recently. Before the introduction of MAC clauses in Belgium, contracts provided for simple conditions precedent and subsequent describing the specific situation to be fulfilled. In order to better understand the factors to be taken into account when using and drafting MAC clauses governed by Belgian law, some general rules applicable to Belgium contracts must be explained.
No Theory of Hardship
The Belgian Supreme Court has systematically rejected the theory of hardship. Pursuant to the theory of hardship, a party obligated under a contract would be allowed to modify that contract (without any specific clause allowing it to do so) when contractual performance is rendered much more difficult as a result of certain circumstances, even if the circumstances do not constitute force majeure that renders the performance impossible. Pursuant to the Belgian Supreme Court’s rulings, good faith in contracts does not prevent the obligee from insisting on specific performance of the contractual obligation, even if new and unforeseeable events make the performance of the obligation more difficult for the obligated party. The major reason for rejecting the theory of hardship under Belgian law is the belief that acceptance would undermine legal and contractual certainty. As such, in order to prevent problems in the event of changed circumstances during the performance of the contract, parties must insert contractual language (such as a MAC clause) by which they agree to renegotiate the transaction or to withdraw from the transaction.
Freedom to Contract Under Conditions; the Object Requirement
In principle, parties are generally free to subject contracts to conditions. Such contractual conditions may be conditions precedent (i.e., upon the fulfillment of which the contract comes into force), or conditions subsequent (i.e., upon the occurrence of which the contract is otherwise terminated). However, pursuant to Article 1108 of the Belgian Civil Code, a contract is valid only if four elements are included in the contract: consent, capacity, an object and a cause. By looking at the complete agreement, one can consider whether the contractual elements are satisfied. The most relevant factor in drafting a MAC clause is satisfying the “object” requirement.
Under Belgian law, the object of the contract must be determined, or be determinable, possible and lawful. Extending the object requirement to MAC clauses, the more determined or determinable the specific language of a MAC clause is, the more clearly it satisfies the object requirement under the Belgian Civil Code.
Enforceability of MAC Clauses
MAC clauses are interpreted under Belgian contract law and supported generally by the freedom to contract. As discussed above, so long as the required contractual elements are present and the intention of the parties is determinable, a MAC clause will be enforceable. It is therefore recommended that the specific conditions triggering a MAC clause should be described in as much detail as possible. Making the conditions of a MAC clause specific should limit disputes and facilitate enforcement.
In order to exclude and/or limit disputes, it is therefore recommended not to use too general language, because a broad MAC clause may not always provide sufficient protection to the buyer and/or lender. If possible, a MAC clause must provide for objectively identifiable facts, such as a 5 percent fall in market share, or a decrease of 10 percent of the turnover related to a specific period. Further, it is more appropriate for a MAC clause to provide for a renegotiation of the contract, rather than an immediate termination, in case of a MAC. If one of the parties to the transaction wishes to protect itself from a specific event, that should be provided in a separate contractual clause, rather than relying on a general MAC clause.
Notwithstanding the protections provided by a MAC clause, it is worth noting that in principle under Belgian law, sellers provide additional statutory warranties to buyers for matters that the buyer was not aware of at the time the purchase agreement closed. Pursuant to the general provision of Article 1641 of the Belgian Civil Code, in principle a seller must warrant that the buyer is protected against so-called hidden defects making the goods unfit for their purpose or reducing their usefulness to such an extent that the buyer would not have bought them or would have paid a lower price had it known about them. With regard to a MAC in the business, assets or profits of the target company between the date of agreeing to purchase the company and the closing of the transaction, the buyer is still afforded some protection pursuant to the “culpa in contrahendo” principle. Under that principle, parties to an agreement have the duty to inform each other during the pre-contractual process. The duty to inform implies that a party that has information to which the other does not have access must take the initiative of sharing it so the other party can contract with sufficient knowledge of the facts. Sometimes the duty to inform is extended to a duty to advise or assist. So, under Belgium law, if the buyer is able to characterize a MAC as a hidden defect or a “culpa in contrahendo” satisfying its Belgian legal requirements, the buyer is still afforded some protection for a MAC, even without the contractual protection of an enforceable MAC clause.