A buyer seeking to rely on an MAE clause in a share purchase agreement to justify termination should proceed with caution, whether in the US or under English law.~~In the recent case of BM Brazil & Ors v Sibanye BM Brazil & Anor [2024] EWHC 2566 (Comm) (“Sibanye”), the English Commercial Court considered whether the buyer under two sale and purchase agreements relating to nickel mines in Brazil (the “SPAs”) was entitled to terminate the SPAs on the basis that a material adverse effect (“MAE”) had occurred at one of the mines prior to completion. The Court’s decision was rendered by The Hon. Mr Justice Butcher.~~Background~~A buyer may seek to include MAE provisions in a share purchase agreement to allow it to terminate the agreement if the target suffers an MAE between the signing and completion of the transaction.~~An MAE provision will typically cover events or changes which materially and adversely affect a target’s business, operations, assets, liabilities, condition (whether financial, trading or otherwise) or operating results, but will often be subject to carve-outs relating to changes in interest rates, commodity prices, wars, natural disasters, etc. MAEs are a customary provision in share purchase agreements governed by Delaware law (and other US state law), but less common where English law is the governing law.~~In Sibanye, a “geotechnical event” occurred at one of the mines between signing and completion. The buyer claimed this constituted an MAE so as to discharge it from its obligation to complete the transactions and allow it to terminate the SPAs. The seller asserted that the geotechnical event was not an MAE and that the purported termination was therefore wrongful and repudiatory, allowing the seller to terminate the SPAs and bring a claim against the buyer.~~Decision~~The Court ruled that the geotechnical event was not, and was not reasonably expected to be, an MAE under the SPA. In reaching that decision the Court had to decide on the central issue of whether the geotechnical event was an MAE.~~There being no standard meaning of “material adverse effect” or “material adverse change” under English law, the Court confirmed that the proper approach to determining this issue was to apply the ordinary principles of construction of contracts governed by English law. The three main issues of construction or interpretation of the MAE provisions considered by the court in reaching this decision were:~~Relevance of the United States perspective~~In contrast to practice in the US, MAE clauses are not customarily included in share purchase agreements governed by English law (i.e. buyers are required to complete a transaction even in the event an MAE occurs), although this will be dependent on the circumstances, including the location and respective bargaining power of the parties.~~As a result, there is a relative dearth of relevant English authority on MAE clauses with a better developed body of case law in the US, notably in Delaware[2]. Interestingly, the Court noted in Sibanye that the “comparative dearth is beginning to be made good” by reference to four English law authorities[3].~~While agreeing that US cases are neither binding nor formally persuasive, the Court considered various US authorities which many lawyers in the US consider seminal (including Re IBP, Frontier Oil, Hexion and Akorn)[4] in reaching its decision. Although it did not view those decisions as binding precedent, the Court weaved into its own textual and contextual analysis some of the key thinking from those US cases. Particularly on how to analyse the qualitative, quantitative and durational impact of an event on the equity value of a company.~~Notably, the Delaware court has in certain cases[5] granted the seller the remedy of specific performance and ordered the buyer to close the transaction, flowing from the Court’s findings that there has been no MAE excusing the buyer from closing.~~Whilst there are multiple grounds for the English Court to refuse an order for the equitable remedy of specific performance, there are instances where the Court has granted orders requiring parties to close on contracts for the sale of shares[6]. However, these cases have not involved the invocation by the buyer of MAE provisions under such contracts.[7] Those cases determined that specific performance could be granted on the basis that damages would not be an adequate remedy. In Gaetano, damages were not considered to be adequate because there was no ready market for the shares and the shareholding was difficult to sell as a result of the target’s poor financial performance.~~Therefore, a well-advised buyer negotiating an English law share purchase agreement will seek to exclude, and a well-advised seller will seek to include, specific performance as a remedy – particularly in circumstances where it is likely that there would not be a ready market for the shares.~~The Sibanye decision adds to the growing body of English authority on MAE clauses and will reassure parties seeking deal certainty that England and Wales continues to be a strong jurisdictional choice for major M&A transactions on the basis that establishing the occurrence of an MAE is not an easy route to abandon a transaction.~~Invoking an MAE clause~~A buyer seeking to rely on an MAE clause in a share purchase agreement to justify termination should proceed with caution, whether in the US or under English law. The buyer will need to establish that the MAE has occurred within the meaning of the contract and, as proved to be the case in Sibanye, that can be a challenging task. The exercise is heavily fact-specific and it is hard to know what it might entail at the time of contracting. If the buyer wrongly asserts an MAE, it risks incurring liability to the seller for wrongful termination and/or repudiatory breach of contract.~~[1] Akorn Inc v Fresenius Kabi AG (Court of Chancery of Delaware, Memorandum Opinion 1 October 2018, Laster VC) and Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).~~[2] Cockerill J in Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm) (at [175]-[176]).~~[3] Grupo Hotelero Urvasco v Carey Added Value SL [2013] EWHC 1039; Decura IM Investments LLP v UBS AG [2015] EWHC 171 (Comm); Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm); and Finsbury Food Group PLC v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm).~~[4] Re IBP Inc. Shareholders Litigation Del. Ch., 789 A.2d 14 (2001), the Court of Chancery of Delaware (Strine VC); Frontier Oil Corp. v Holly Corporation (Court of Chancery of Delaware, Memorandum Opinion 29 April 2005, Noble VC); Hexion Spec. Chemicals v Huntsman Corp Del. Ch. 965 A. 2d. 715 (2008); Akorn Inc v Fresenius Kabi AG (Court of Chancery of Delaware, Memorandum Opinion 1 October 2018, Laster VC); and Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).~~[5] Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).~~[6] Gaetano Ltd v Obertor Ltd [2009] EWHC 2653 (Ch); and MSAS Global Logistics Ltd v Power Packaging Inc [2003] EWHC 1393 (Ch).~~[7] Specific performance was not part of the decision in Sibanye, where the claim was for declaratory relief and damages.~~The following Gibson Dunn lawyers prepared this update: Sarah Leiper-Jennings, Anne MacPherson, George Sampas, Piers Plumptre, and Will Summers.~~Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Mergers and Acquisitions, Private Equity, or Transnational Litigation practice groups:~~Mergers and Acquisitions: Robert B. Little – Dallas (+1 214.698.3260, rlittle@gibsondunn.com) Saee Muzumdar – New York (+1 212.351.3966, smuzumdar@gibsondunn.com) George Sampas – New York (+1 212.351.6300, gsampas@gibsondunn.com)~~Private Equity: Richard J. Birns – New York (+1 212.351.4032, rbirns@gibsondunn.com) Wim De Vlieger – London (+44 20 7071 4279, wdevlieger@gibsondunn.com) Federico Fruhbeck – London (+44 20 7071 4230, ffruhbeck@gibsondunn.com) Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com) Ari Lanin – Los Angeles (+1 310.552.8581, alanin@gibsondunn.com) Michael Piazza – Houston (+1 346.718.6670, mpiazza@gibsondunn.com) John M. Pollack – New York (+1 212.351.3903, jpollack@gibsondunn.com) Will Summers – London (+44 20 7071 4203, wsummers@gibsondunn.com)~~Transnational Litigation: Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com) Perlette Michèle Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com) Piers Plumptre – London (+44 20 7071 4271, pplumptre@gibsondunn.com) Markus Rieder – Munich (+49 89 189 33-260, mrieder@gibsondunn.com) Andrea E. Smith – New York (+1 212-351-3883, aesmith@gibsondunn.com) William E. Thomson – Los Angeles (+1 213-229-7891, wthomson@gibsondunn.com)~~© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.~~Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials.  The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel.  Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.~~Download PDF~~