Material adverse change clauses and their implications for acquisitions

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Posted in:Corporate and Commercial|July 29, 2015 | Join the mailing list

A material adverse change clause (“MAC”) aims to provide the buyer in an transaction involving a split exchange and completion with the right to withdraw from the transaction, if certain events occur between
exchange and completion. In such deals MACs cause some of the risk pre-completion to shift from the buyer to the seller.

The case of Ipsos SA v Dentsu Aegis Network Limited (previously Aegis Group plc) is a case recently heard in the High Court where Dentsu sold one of its business divisions (referred to as “S”) to Ipsos. The case also touched on the importance of a compliant
claim notice, as mentioned in our
previous article

After completion, Ipsos brought a claim against Dentsu and alleged that Dentsu had breached the terms of the share purchase agreement. Ipsos argued that Dentsu failed to notify Ipsos that: (i) S’ sales revenue and operating profit was significantly worse
than Dentsu had forecast; and (ii) between exchange and completion S’ management had made substantial downward revisions to its 2011 forecasts. These instances were argued to fall within the “no material adverse event condition” in the share purchase agreement,
which was essentially a MAC.

Dentsu applied to strike out Ipsos’ claim, which the Court did, in part. The Court held that Ipsos had an arguable case for asserting that the MAC was triggered by the event within argument (i), as stated above. However, the Court struck out argument (ii).

In its reasoning, the Court “had to consider whether there was an arguable case that the two matters relied on fell within the definition of [material adverse event]”, as set out in the share purchase agreement. The Court held that argument (ii) above did
not fall within the definition.

An important factor in the Court’s decision was that, within the share purchase agreement, Dentsu gave no warranty in relation to its forecasts.

Although in this instance the MAC was construed narrowly, courts can give consideration to other contractual terms when interpreting the terms of an commercial agreement.

Should you have any queries regarding the subject matter of this article, or need any assistance in connection with transactional work or commercial contracts, please contact
Stephen Foster, Partner and Head of the Corporate and Commercial Department
at or by
telephoning 0161 829 2599.

The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice.  No responsibility for its accuracy or correctness is assumed by berg or any of its partners or employees.  Professional legal
advice should be obtained before taking, or refraining from taking, any action as a result of this article.


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