The court held that the MAE clause in question did not entitle the buyer to terminate the SPA and so be released from its obligation to purchase two mines under two interconnected SPAs. The MAE that the buyer was relying on was a “geotechnical event” in relation to one of the mines – a partial displacement of rock with an immediate though temporary impact on what could be mined. A further hearing is to be held to determine what damages (if any) the seller may be entitled to, flowing from the buyer’s breach of the SPA in seeking to terminate it.
The judgment considers:
- The approach that should be followed when interpreting MAE clauses
- How US and UK courts have approached their analysis of these clauses
- When and how “materiality” is to be tested
- Whether “revelatory events” – in this case, further conditions or events affecting the mine revealed by the geotechnical event – could be included in the assessment of whether a MAE had occurred
- What “or would reasonably be expected to be material and adverse” in the MAE clause required
- What the “materiality” threshold in the clause required.
The MAE clause
The SPA contained a fairly standard MAE clause which, as these clauses do, allowed the buyer to terminate the SPA and not proceed with the purchase if “any change, event or effect that … is or would reasonably be expected to be material and adverse to the … [target]” occurred after signing and prior to closing. MAE clauses are a much more common feature of US law-governed M&A than they are of English law-governed M&A and, as a result, there is considerably more US case law on these clauses than English. The English courts have therefore had regard to what the US courts have said, as well as to some of the US academic writing, about these clauses. The English courts are not, of course, bound to follow these US decisions but they are clearly seen as being potentially helpful to the English courts’ analysis owing to the much greater experience of the US courts hearing disputes over the application of MAE clauses.
Approach to interpretation of MAE clauses
The court held that the ordinary principles of interpretation of contracts under English law apply to MAE clauses. Likewise in the 2020 Travelport case, the court had accepted that although the US authorities were helpful, “there was … [no] special principle applicable to MAE clauses whereby … [they] were narrowly construed, or that a party invoking …[them] bore a ‘high burden’”.
US v English case law authorities
US cases
The court found the US authorities helpful when considering how “materiality” was to be assessed and tested under the MAE clause it was dealing with. In Travelport, the court had noted the “dearth of relevant English authority” on MAE clauses and that there was a “better developed body of case law in the US, notably in Delaware”. Of course, the relevance of any case law authority is always going to depend on the extent to which the wording of the MAE clause being looked at is aligned with the wording of the MAE clause considered in the earlier case.
The court referred specifically to five US cases – all concerned with M&A transactions – and an important academic article (Prof. Robert T. Miller’s ‘A new Theory of Material Adverse Effects) which contained “a number of thoughtful observations, even if one does not subscribe to …. [the] ‘new theory’ itself”).
Notable points to be drawn from what has been said in those US cases included: (i) “the MAE should be material when viewed from the longer-term perspective of a reasonable acquiror”, (ii) the test whether the relevant event “would reasonably be expected to have” a MAE is an objective one, (iii) a MAE can have both “qualitative” and “quantitative” aspects – in the present case, the buyer argued that even if the judge found that in purely “quantum” terms the size of the geotechnical event problem did not amount to a MAE, when viewed “qualitatively” the nature of the geotechnical event could trigger a MAE, (iv) “many commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement. This is not a coincidence”, and (v) the mere risk of a MAE occurring is not enough – a drop in the value of the target of more than 20% is likely to be material though there is no “bright-line test” based on any particular percentage.
English cases
The court discussed four English cases which had looked at MAE clauses, though in only two of them had the MAE clause been included in a M&A agreement and it was only in the Travelport case that the MAE clause operated as a condition to closing, hence the interest in the present decision.
These cases have noted the significance of MAE clauses as a means of allowing a party to resile from an agreed deal and that therefore “substantial” is an appropriate epithet when considering “materiality” for the purposes of triggering these clauses. In one case involving both a specific warranty in which a 20% loss impact was referenced and a warranty that there had been no material adverse change, the judge said that a “material adverse change” for the purposes of the clause he was considering must, quantitatively, exceed 10%.
When and how must the materiality of the MAE be assessed?
The parties had, the judge noted, correctly accepted that materiality must be assessed at the point in time when notice of termination, relying on the MAE clause, was served and that the test for whether the geotechnical event “would reasonably be expected to be material” was an objective one.
Can “revelatory events” constitute MAEs?
The sellers argued that even if the geotechnical event had revealed wider problems with the structure of the mine – something they denied that it had – those additional “revelatory events” could not themselves qualify as a MAE. The judge agreed with this. The MAE clause was “concerned with a ‘change, event or effect’ which has occurred since signing …. not with what such a ‘change, event or effect’ may indicate about the possibility that there may be other problems which existed at the time of the signing of the SPA”. In assessing whether there has been a MAE, “the consequences that will be taken into account are those which quantify or illuminate the significance which the ‘change, event or effect’ itself has or would be reasonably expected to have, while consequences which quantify or illuminate the significance of some other, distinct, problem to which attention has been drawn are not to be taken into account”.
“Or would reasonably be expected to be material and adverse”
The sellers and buyers disagreed about how this standard second limb of MAE clauses should be construed. The buyers argued that the “materiality expectation” test in the limb could be satisfied if it fell within “a range of views held by reasonable people in the position of the parties”. The sellers said the test required a single, yes or no answer rather than an assessment of a range of “reasonable views”. The court agreed with the sellers – there was no authority in the cases for having to conduct an enquiry as to a range of views and to introduce that requirement into these clauses would add an extra degree of uncertainty which is unlikely to have been intended by the parties when agreeing on the wording of the MAE clause.
The court also considered what degree of likelihood is implied by “would reasonably be expected” – “a mere risk that a matter may turn out to be material cannot be enough. Instead …. the assessment is whether a reasonable person would have considered it more likely than not that the matter would turn out to be material”. While, when making that assessment, the court might have regard to what subsequently transpired, this should not subvert the primary assessment of the position at the date when the MAE was triggered and “looking forward from that date”.
The materiality threshold for triggering MAE clauses
As noted above, a number of US authorities have accepted that “materiality” for these purposes can have both a qualitative and a quantitative dimension. Butcher J was, however, sceptical about the relevance of a “qualitative” assessment – “it is very difficult to think, at least in relation to … SPAs, that a ‘change, event or of effect’ which was not quantitatively material and adverse …. could nevertheless be a MAE because of ‘qualitative’ factors”.
This was, of course, the critical question which the court had to answer – was the geotechnical event (or would it reasonably be expected to be) sufficiently material and adverse to the target company to trigger the buyer’s rights to terminate the SPA. On the facts, the judge decided that it clearly was not.
The judge made some general remarks about the tests to be applied in assessing materiality. He agreed with comments in the US authorities that “materiality” has to be assessed over “a commercially reasonable period, which one would think would be measured in years rather than months”. It also requires an impact that is “significant or substantial” and something that is more than simply “de minimis”. There is, however, no “bright-line” test applicable to all MAE clauses. In the present case, he had to consider “the size of the transaction, the nature of the assets concerned, including that they are susceptible to such matters as [geotechnical events] …, the length of the process of the sale of the mines and the complexity of the SPAs”. All of that militated against setting the bar of materiality too low.
Looking at the impact of the geotechnical event on the target company, the judge thought that “a reduction in equity value of 20% or more would indeed be material, but that a somewhat lesser reduction might also be material … a reduction of more than 15% might well be material …. [but] a 10% reduction in the value of the company in the present case … is rather too low to count as material for the purposes of the MAE provisions here”. He then proceeded to consider the significance of the geotechnical event against a 10%, 15% and 20% reduction in the value of the target. Applying what he considered might be accepted as the most favourable valuation methodology to the buyer’s case, he concluded that the impact of the geotechnical event “still falls significantly below the level of 10%, which, as I have said, I would in any event tend to think was too low a level to amount to a material effect”.
What next?
The buyer has noted that the next stage in these proceedings will be a trial in November 2025 on the amount of the seller’s loss resulting from the termination of the SPAs. Without having to wait for the result of that trial, M&A lawyers and their clients can be grateful for the opportunity this case has provided in clarifying and offering very useful guidance on how MAE clauses are to be approached and construed in English law-governed transactions.
Judgment: BM Brazil v Sibanye Stillwater
