Camila Vieira Guimarães
Lawyer at Marcos Martins Advogados
The new coronavirus pandemic scenario has reinforced the importance of contractually implementing mechanisms capable of covering the largest number of events that may affect the consummation of business and operations, especially those involving high investments and with significant legal repercussions between parties and third parties, such as mergers and acquisitions (M&A).
In line with this scenario and of North American origin, we have theMAC(Material Adverse Change) or MAE (Material Adverse Effect) clauses , typical inM&A transactions ,which allow for renegotiation of the agreed conditions or even withdrawal from negotiations, in the event of a material adverse change in the transaction, i.e. a substantial change in the company being acquired (Target) or in its business, which significantly impacts on the expected return on investment , both for the buyer and the seller.
In the event of considerable changes that modify Target‘s business, making the intended transaction less attractive than the valuation previously made, or that directly impact the amounts receivable from the seller linked to operating and financial results in earn-out payments, the parties will contractually have the possibility of reviewing the conditions agreed in order to rebalance the terms originally negotiated so that the bases of the negotiation are reviewed and adapted to the new scenario in order to obtain, as far as possible, the results originally estimated.
The material adverse event in a transaction is generally found after the signing of the purchase and sale agreement until theclosing of the transaction, at which time the parties ratify the substantial conditions of the business andTarget ‘s operations up to that point, as well as certifying that the necessary approvals have been obtained from government regulatory bodies, among other conditions for the consummation of the transaction.
Brazilian law does not regulate the criteria to be used or to be considered in the preparation and application of the MAC clause but, considering that its purpose is to contemplate substantial changes in Target‘s operations and business, for example: drop in financial performance based on revenues; loss of relevant customers; reduction in EBITDA; new regulatory policies in Target’s market of operation; war; pandemic, among others.
Considering that theMAC clause originates from the Common Law system, which is different from that applicable to the Brazilian legal system, which is based on Civil Law, the Brazilian institute that most closely resembles the possibility of contractual revision is the theory of unforeseeability, contemplated in article 478 of the Brazilian Civil Code, which allows contractual conditions to be rediscussed in the face of unforeseeable and extraordinary situations; in contracts of continued or deferred performance and which generate excessive onerosity for one of the parties.
The MAC clause coexists in full harmony with the theory of unforeseeability, but is broader in scope, allowing broad negotiation between the parties on its application and scope in the contract entered into, since it allows renegotiation based on adverse events contractually accepted between the parties and, among them, the unforeseeable and extraordinary.
Since it is possible for the parties to define the concept of a material adverse event, it is also of the utmost importance that the parties negotiate the delimitation and applicability of the MAC clause, as well as defining the carve outs, i.e. the exceptions to the application of the MAC clause, establishing the situations or occurrences which will not be considered a material adverse event, should they occur.
Thus, the MAC clause is an ally of the parties involved inM&A transactions , considering that there are more and more changes and adverse effects on operations intensified by the pandemic and experienced daily by businesspeople worldwide.
Marcos Martins Advogados reaffirms its commitment to excellence in the provision of legal services, with professionals and partners capable of ensuring greater security and identifying potential risks and benefits in its clients’ transactions.
