Singapore M&A Lawyer: Material Adverse Change Clause, What is it?

Introduction

When the buyer and the seller wants to sell some shares, they will sign a Share Purchase Agreement.
Usually, the agreement will provide for completion at a later date.
This is so that the seller has sufficient time to get the necessary approvals, consents, etc., so that the sale can go through on completion.
What if something happens to the target company
after the agreement has been signed
but before the completion of the sale?

Material Adverse Change ("MAC") Clause

To deal with just such a situation, an MAC clause is often inserted into the agreement.
Its purpose is to state
under what circumstances the buyer can choose not to proceed with the purchase and
under what circumstances the buyer must proceed with the purchase.
This will usually depend on whether a material adverse change had impacted the company (whose shares are being sold).

Exact Effect, Precise Wording, Particular Context

The exact effect of any MAC clause will depend on its precise wording and the particular context of the clause and the agreement.
This is because the court is likely to construe the MAC clause with all these factors in mind.

General Structure

Representations & Warranties

Typically, the representations and warranties made
(a) at the time the agreement is signed
are repeated
(b) at the time of completion.
Often, any of the representations or warranties being untrue at the time of completion is a material adverse change that would allow the buyer to get out of the transaction.

Specified Events

Buyer and seller can also negotiate and agree as between themselves:
what specified events will constitute material adverse change
what specified events will NOT constitute material adverse change
for example, the clause may provide that changes in general economic circumstances do NOT constitute material adverse change in which case, the buyer cannot use changes in general economic circumstances as a reason for aborting the transaction.

Relative Bargaining Power & Negotiating Position

Reason for Gap

The reason for the gap between (a) the signing of the agreement; and (b) completion of the sale for example,
where the buyer needs financing to push the transaction through and
where the buyer's bank insists on certain conditions being true on completion, etc. (in which case, it is vital that the agreement and the loan documentation match up
to avoid the scenario where the transaction goes through but the funding does not).

Responsibility for Gap

Where the buyer is responsible for the gap, the seller may wish to argue that there should be no MAC clause at all
Where the seller is responsible for the gap, the seller may argue for a shorter period before completion to reduce the risk of something happening in between.

Action

If you have any questions or have an MAC clause to be reviewed, please feel free to call Lam & Co. at 6535 1800.