13/06/2024

Material adverse change: the threshold remains (very) high in an M&A context

In a recent case, Mingguo v Sadeghnia (Rev1) [2024] ADGMCFI 0005 (22 May 2024), the Abu Dhabi Global Market Court of First Instance provided a detailed analysis of the material adverse change (MAC) clause in a share purchase agreement of a financial services company, World Credit Savings. Manuel Casas appeared for the seller, Mr Bai.

The buyer had alleged that he had not received proper control over the company and was thus refusing to pay an outstanding instalment of the purchase price. Stone J considered that the requirements for a MAC had not been satisfied and, in consequence, that the buyer was obliged to pay the outstanding instalment of the purchase price.

The court’s approach to MAC clauses may be of general interest.

First, Stone J provided a short and straightforward definition of MAC, something that so far had been relatively elusive in the authorities. The judge held that:

“In an acquisition context, MAC generally is understood as a contractual mechanism that provides a route for the buyer to terminate the agreement and to withdraw from the transaction in question if events occur that have a significant detrimental effect on the business, assets or profits of the entity to be acquired.” [32]

Second, relying on the Delaware Court of Chancery’s observation in Akorn Inc and Ors v Fresenius Kabi AG, CA No 2018-0300-JTL and English authorities, the court observed that establishing a MAC was subject to a “high threshold” and that the adverse change had to last “over a longer-term period” [36].

Third, although the court held that the seller had not engaged in the breaches he had been accused of, the court distinguished between potential adverse effects caused by a party’s contractual breach, and the adverse effects that would be necessary to trigger the application of a MAC. The latter, the judge held, “must be something that affects the company’s future prospects” [40].

The court also reiterated the proposition that a company is generally “controlled” by its majority shareholder. The court categorically rejected the buyer’s claim that, despite owning a majority of the company’s shares, he did not effectively control the company’s management. Stone J observed that “it is trite law that he who owns the majority shareholding (assuming the shares in question attract equal rights) controls the company” [58].

Finally, the court awarded the seller more than 93% of its costs on an indemnity basis. The court observed that “what should have been a straightforward claim … has been characterised throughout by wholly unreasonable delay and obfuscation”. In particular, the court took issue with the personal attacks made on the seller, observing that the buyer had made “unsubstantiated allegations against Mr Bai … and regrettably … unfounded personal attacks on Mr Bai’s good faith and integrity.” The court concluded that: “this has been an object lesson in how not to conduct commercial litigation” [90].

The court’s decision to award indemnity costs – alongside its stern words – suggests that ADGM Courts will be robust in sanctioning what they consider to be unduly aggressive tactics in the conduct of litigation.

Manuel Casas was instructed by Fouad Obeid of Obeid & Medawar.