Landmark COVID dispute: interpreting material adverse effect clauses

Freshfields has acted for WEX Inc. in successfully securing the acquisition of business-to-business (B2B) payments technology providers eNett International (Jersey) Limited (eNett) and Optal Limited (Optal) for $1.1bn less than the original purchase price. 

The acquisition follows landmark litigation proceedings commenced by the sellers of eNett and Optal, which raised questions concerning the proper interpretation of a material adverse effect (MAE) clause in the sale contract, as a result of the coronavirus pandemic.

This case has been watched closely by legal commentators as the pandemic has caused commercial parties globally to reconsider their contracts and pending deals, and in many instances carefully consider the potential application of MAE clauses.

Background

On 24 January 2020, WEX entered into a share purchase agreement (SPA) to acquire eNett and Optal for $1.7bn. Together, eNett and Optal provide payment technology solutions, including virtual card offerings, primarily to clients operating in the travel industry. 

In May 2020, once the effects of the pandemic on eNett and Optal became clear, WEX asserted that an MAE clause in the SPA had been triggered and, consequently, WEX was not required to complete the acquisition.

Under the SPA, WEX could only rely on the MAE clause insofar as (broadly) it could be shown that the conditions resulting from the Pandemic could reasonably be expected to cause a disproportionate effect on either eNett or Optal, as compared to other participants in the industries in which either eNett or Optal operates.

Litigation proceedings

The sellers of eNett and Optal ('the claimants') brought litigation proceedings seeking a declaration from the English Commercial Court that no MAE had occurred within the meaning of the SPA and an order for the enforcement of the SPA (essentially seeking an order that WEX complete the transaction).

The proceedings were brought on an expedited basis leading to a highly truncated timetable, as the claimants raised concerns regarding the viability of the transaction in the event of a delay (including in light of concerns raised by the sellers regarding the expiry of certain financing commitments).

The preliminary issues

There were certain discrete issues to be determined which could, depending on the outcome, resolve the litigation in full, without the need for a full trial on the remaining points of law and facts.

The key issue to be determined at the preliminary trial was which industry (or industries) eNett and Optal participate in, and who the other participants in that industry (or industries) are. The Claimants argued that eNett and Optal are participants in the 'travel payments industry', while it was WEX’s case that there is no 'travel payments industry' and that they operate in one or both of the 'B2B payments industry' and/or the broader 'payments industry'.

The parties conducted an almost entirely remote hearing over seven days in September 2020 concerning aspects of the interpretation of the MAE clause. While opening and closing submissions were made in court in London, the rest of the trial (including all witness and expert testimony and cross examination) was conducted via video link, with parties joining from around the globe.

Successful first instance judgment

Mrs Justice Cockerill ruled in favour of WEX on the main issue, concluding that the relevant comparator industry is the B2B payments industry and not a narrower 'travel payments industry' ([2020] EWHC 2670 (Comm)). 

This was a significant win for WEX because a finding that the relevant industry was the 'travel payments industry' may inevitably have led to WEX closing the transaction at the original purchase price. (WEX would have had to show a disproportionate impact of the pandemic on eNett and Optal, compared to others in that narrow 'industry', where it was likely that all participants would have been adversely affected by the decline in global travel.) 

The judge’s ruling on the preliminary issues is precedent-setting in relation to how MAE clauses should be read, understood and applied under English law. This is particularly significant as the structure of the MAE clause in dispute, with the requirement for industry benchmarking and the need to prove a disproportionate impact, is a common feature of many similar clauses.

The evolution of the issues during trial, and the judgment, provide much insight for M&A practitioners drafting MAE clauses, as well as corporates assessing their rights post-signing. By way of example, three takeaways are:

1. The court made clear that the case was decided on the basis of the precise wording of the agreement rather than any special rules of construction (such as a presumption of interpretation against the draftsman when interpreting an MAE clause). The judgment was focussed squarely on the ordinarily rules of contractual interpretation, relying heavily on the exact choice of language selected by the parties
2. In interpreting the term 'industries', the court ruled that the term 'in its natural and ordinary meaning' is one which would capture 'a group of participants in a broad sphere of economic activity'. Specifically, the term means something broader than simply 'sector', 'market' or 'competitor', each of which are narrower terms, and which indicate that disproportionality should be triggered by more company-specific events. The court noted that the parties had ultimately left the term 'industries' undefined and remarked that 'it may well be that one result of this case is that future drafters will do differently'.
3. The judge considered that 'there is a dearth of relevant English authority' when interpreting MAE clauses. As a result, the court took into consideration the leading authorities from Delaware (Akorn Inc v Fresenius) and US academic literature when considering the commercial purposes of the clause and the allocation of risk (albeit those US authorities were not binding or formally persuasive). In so doing, the court concluded that the commercial purpose of the MAE clause in the SPA was to identify (as described by US academics) what 'type of events would entitle the acquiring company to call the deal off if events occur between signing and closing that make the deal less advantageous than expected' (see paragraphs 245 to 261 of the judgment). This was broader than the position advanced by the claimants, who sought to persuade the judge that the MAE clause was intended to allocate to the sellers only 'company specific' risks.

Settlement and resolution 

Following its successful result at the preliminary issues trial, Freshfields assisted WEX during its renegotiation of the deal terms. On 15 December 2020, the parties announced that WEX had acquired eNett and Optal for a revised purchase price of $577.5m, representing a $1.1bn reduction from the original price agreed in January.

The Freshfields team was led by Matthew Bruce and Ali Kirby-Harris, with support from Sean Pitt, Eid-Daniel Jadon, Sunil Singh, Tahleel Lateef, Kristin Lampe, Alice Skupski and Daniel Gold in London, Linda Martin in New York, and Campbell Herbert in Hong Kong.