“Big” MAC clause in Vietnam – The Covid-19 Make-over in M&A Deals

Highlights

• Material adverse change (MAC) clause has often been deployed by buy-side as a “fail-safe” walk away mechanism.
• Despite not traditionally heavily discussed in the past, lawyers in Vietnam find themselves negotiating presently this clause for a wider variety of clients since the pandemic outbreak.
• The approach to the MAC clause really depends on which side of the fence you are sitting. If sellers often find themselves in a stressed position running a business post-Covid and, where there is an implied discount (due to current performance), buyers want flexibility and are investing capital in an uncertain period.
• Both sides have legitimate concerns.

In one of our transactions early this year, the buyer and seller had agreed to a generic MAC clause and signed the transaction documents. When Covid-19 reached Vietnam and lockdowns were implemented, the buyer utilized the generic MAC to re-negotiate the purchase price under threat of walking away. It was a bitter pill for the seller, who still wanted the deal very much, to accept the discounted purchase price. Having learned the lesson from the original generic MAC clause, when re-negotiating agreements, the seller made sure to demand the exclusion of Covid-19 lockdowns and specify in detail the permitted delays arising from government responses to Covid-19 so as to eliminate any second opportunity for the buyer to walk away.

MAC’s DNA

Material adverse change (MAC) clauses (also effectively operating under the term Material Adverse Effects) have often been deployed by buy-side as a “fail-safe” walk away mechanism, especially when included as a condition precedent (either directly or indirectly through a MAC representation). Whilst many legal terms may be seen as esoteric, and the precise content of a MAC clause may differ, the legal term “material adverse change” is easily understood – that, in essence, something has gone wrong for a contracting party. The term “MAC” lives up to its moniker with the concept widely and easily understood.

The rise of MAC in Vietnam

Despite the importance of something going wrong, this clause has not historically been heavily negotiated in Vietnam save for sophisticated buyers and sellers. In fact, the conventional approach has been to follow “boilerplate” styled broad provisions. This however changed when, put simply, something went very horribly wrong for everyone: Covid-19. Presently, lawyers in Vietnam find themselves negotiating this clause for a wider variety of clients. Whether this is simply reactionary for the time being remains to be seen as negotiation utilizes resources and money which may, over time, result in sellers and buyers being less willing to exert efforts on this negotiation. However, given that Covid-19 will remain in our living memory for some time to come, it would not be surprising if the MAC features in the minds of businesspersons into the foreseeable future.

Vietnam is, of course, not alone in the scrutiny now given to MAC clauses. For the importance of this clause, one need only look at the recent dispute (which appeared somewhat resolved at the time of writing) between European luxury behemoth LVMH and American jewelry icon Tiffany (an approximately $16 billion deal with the price of US$135/share cut down to US$131.5/share) to see the extent to which Covid and the MAC clause can impact deals – both on walk-away and price. We have seen similar fall out in Vietnam where, in certain instances, there have been walk-aways and, if not, threatened walk-aways by the buy-side followed by renegotiated economic terms in lieu of walk-aways.

Against this backdrop, one would wonder how negotiations on the MAC clauses have been evolving?

The inclusion of “epidemic/pandemic” exception 

A standard MAC clause has two components: the first one is a general rule that essentially says if something goes wrong, buyers can just walk away from the deal and the second component is a number of exceptions to that general rule to the effect that a MAC that results from any such exception will not be considered as a MAC that triggers the buyer’s walk-way right. And never has in so many past years the tiny word “pandemic” attracted so much attention as it does when it comes to MAC clause negotiations in the context of Covid-19. Sellers almost always insist on having a pandemic exception to the MAC while buyers sometimes remain reluctant to any such inclusion.

Yes to MAC but since when? 

MAC has previously been linked to both conditions precedent and representations and which remains the case, but more so post-Covid. The MAC clause is therefore amplified to the extent it is connected to closing requirements and broader representations – which buyers increasingly demand post-Covid. If a seller could not have the “pandemic” word included in the exception part of the MAC clause, attention should then be carefully paid to the reference period in which a no MAC representation is given. For example, a no MAC representation which is given for the period from the 2019 financial close date (e.g., 31 December 2019) would put a seller in a vulnerable position since things have obviously changed dramatically since then.

Disproportionate impacts  

The paradox is that not everyone is upset about Covid.  Certain pharma and tech companies and their stock investors may have had their best time ever thanks to the surge in consumption of their products during the pandemic and social distancing period.  On the contrary, aviation, leisure and hospitality industries obviously have been having a tough time, coping with the pandemic effects.  All of these potentially disproportionate impacts may eventually be reflected in a MAC clause where buyers insist on not including, as exceptions to MAC, events where a target business is disproportionately impacted as compared to other industry players.

Living with long Covid 

As with most things, the approach to the MAC clause really depends on which side of the fence you are sitting. Sellers often find themselves in a stressed position running a business post-Covid and, where there is an implied discount (due to current performance), it would seem harsh from the seller perspective for the buyer to insist on broad provisions in the MAC clause. Buyers want flexibility and are investing capital in an uncertain period when the entire country (let alone the world) could be completely locked down at a given moment. From a sell-side perspective, negotiating specific language (rather than the historically broad terms upon which MAC clauses have been phrased) reduces walk-away risk. Both sides have legitimate concerns.

Contributors:

Nguyen Van Hai, Counsel
Krissen Pillay, Senior Associate
Nguyen Duy Duong, Associate