22 October, 2020

English Court Rules On COVID-19 Material Adverse Effect In M&A Transaction

On 12 October 2020, the Commercial Court handed down judgment in the first case in which the English courts have had to consider whether COVID-19 resulted in a material adverse effect (“MAE”) (Travelport Ltd & Ors v WEX Inc [2020] EWHC 2670). In expedited proceedings brought by the sellers, Mrs Justice Cockerill addressed a number of preliminary issues relating to the MAE provisions in the sale documentation. This is likely to be such an important question in the current climate and the court’s decision and commentary is worthy of close consideration as a result.

The $1.7bn agreement for the purchase by WEX Inc of shares in eNett International (Jersey) Limited and Optal Limited, was entered into on 24 January 2020. As is widely known, the COVID-19 pandemic had by this point already begun to spread around the world. The parties do not dispute that following the outbreak of the pandemic there has been a decrease in global travel and a decrease on the value of eNett and Optal, which are businesses that service clients in the travel industry.

The sale of the companies was subject to a number of conditions, including a requirement that between the date of the SPA and closing there must not have been any “Material Adverse Effects”. In early May 2020, WEX notified the sellers that an MAE had occurred due to “conditions resulting from the SARS-CoV-2 pandemic”, and that WEX was therefore not obliged to proceed with the purchase. The sellers issued proceedings in early May, seeking a declaration that there had been no MAE and for an order for specific performance of the SPA.

Reliance on US authorities

At the outset, it is interesting to note the reliance placed by the court on US authorities in the absence of applicable English authority on MAE clauses in transaction documentation. Whereas most English decisions in relation to MAE clauses emanate from banking transactions, there is a significant body of authority resulting from transaction documentation produced by the Delaware courts. Mrs Justice Cockerill stated that: “to ignore the thinking of the leading forum for the consideration of these clauses, a forum which is both sophisticated and a common law jurisdiction, would plainly be imprudent”. 

Material Adverse Effect provisions in the SPA

The MAE clause in the SPA comprised three parts:

  1. The definition of MAE included any event, change, development, state of facts, or effect that has had and continues to have an MAE on the business of eNett or Optal. If an event satisfied this definition, then the result would be that the conditions for the closing of the transaction had not been satisfied.
  2. Carved out from that definition were certain events that would not constitute an MAE, including:

    a. “conditions resulting from […] pandemics”; and
    b. “changes (or proposed changes) in Tax, regulatory or political conditions (including as a result of the negotiations or outcome with respect to Brexit) or Law.” 

  3. There were certain limited exceptions to the pandemic carve out, i.e., events that (notwithstanding the above) would be considered for the purpose of the MAE clause. This included conditions resulting from a pandemic which have a “disproportionate effect” on eNett or Optal “as compared to participants in the industries in which [eNett], [Optal] or their respective Subsidiaries operate”. There was not any applicable exception in relation the legal and political change carve out.

Which industry?

The SPA did not define the term “industry” or “industries” and provided no additional explanation regarding the interpretation of that term in the context of the MAE provisions. As such, it fell to the court to determine, as a matter of contractual construction, the comparable industry that should be used for the purpose of determining whether COVID-19 had had a “disproportionate effect” on eNett and/or Optal.

The sellers argued that the comparable industry was the “travel payments industry” and that the purpose of the provision was to identify meaningful comparators to the businesses being sold. This was disputed by WEX, which asserted that that was not a recognised industry and that the appropriate comparison was instead to either the B2B payments industry or, more broadly, the payments industry.

Mrs Justice Cockerill favoured the arguments put forward by WEX and held that the relevant industry was the B2B payments industry, rather than the travel payments industry. Further, it was found that there was no travel payments industry, as defined by the sellers, and that as such that could not have been the meaning intended by the parties. It was noted that it was open to the parties to have particularised the details of the specific industry that was to be used as a comparator, but that they had chosen not to do so and had used a term which “helps no-one”. 

It was not necessary for the comparison to be made only to very similar companies and it was accepted by both parties that the companies operated in the B2B payments industry. Whilst one of the objectives of the transaction was related to the travel business of the companies, the purpose of the transaction was multi-faceted and was an opportunity for WEX to develop other markets as well.

This trial did not address whether there had in fact been a disproportionate effect on eNett or Optal as compared to the B2B payments industry. However, the effect of this ruling will benefit WEX as it will likely be easier for it to demonstrate that the companies have been disproportionately affected by the COVID-19 pandemic when compared with the wider B2B payments industry rather than with companies that operate solely within the seller’s narrower concept of the travel payments industry.

Which carve out applies?

The court also considered how the MAE clause was to be interpreted in circumstances where one or more of the carve outs to the definition were triggered. The sellers argued that to the extent that the wide-ranging travel and quarantine restrictions introduced by governments and authorities fall within the meaning of the legal and political change carve out, they do not qualify for the “disproportionate effect” carve out exception and may not be taken into account when determining an MAE.

WEX argued that if the disproportionate effect exception applied, such that the effects of a pandemic could be taken into account for the purpose of determining whether there had been an MAE, then it did not matter if another carve out from the definition was also triggered. In short, as the court put it, WEX sought to “cherry-pick among various overlapping matters in connection with which an event may be said to have arisen”.

Mrs Justice Cockerill held that: “The fact that changes in Law may be an obvious consequence of a pandemic, is not to the point […] the parties chose not to include changes in regulatory or political conditions or Law within the Carve-Out Exception, even though it was obvious that such changes might result from [a pandemic]”. The sellers’ argument that it does not matter whether the same effects are caused by other carve outs (i.e., the pandemic carve out) made “better commercial sense and there is no basis in the wording of the clause to conclude that the parties objectively intended that if two Carve-Outs were engaged they would have to work out which should prevail to the exclusion of the others.

Other issues

The court also considered a number of other issues of contractual interpretation, including the burden of proof in relation to the scope of the carve outs (which it determined fell on the sellers as they asserted that it fell within the legal and political change carve out) and whether the carve out exception applies to MAEs that are reasonably expected to occur (which it determined was not provided for in the wording of the clause).


The outcome of the overall case will be determined by a subsequent trial on the merits. This preliminary judgment is, however, a stark reminder to parties regarding the importance of careful drafting and the use of precise language in SPAs. This is particularly important in relation to provisions which are likely to be the subject of a dispute when a party seeks to invoke them, such as MAE clauses. Parties would be well advised to heed Mrs Justice Cockerill’s observation that it “may well be that one result of this case is that future drafters will do differently” and ensure that the wording of these provisions is not open to interpretation.


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