MAC/MAE clauses: English Commercial Court delivers guidance in the context of $1.2 billion mining dispute

Summary

The English High Court has held that a geotechnical event ("GE") at a mine in Brazil did not engage the material adverse effect ("MAE") clause in an SPA, pursuant to which two mines in Brazil were being sold for $1.2 billion.  As a result, the purchaser had wrongfully relied on the MAE clause when terminating the SPA and refusing to complete the purchase.

Given the current "dearth of relevant English authority" on MAE (and material adverse change or "MAC") clauses,¹ the judgment provides helpful guidance regarding how the English courts construe MAC/MAE clauses, specifically by reference to the following issues:

• whether and how MAE/MAC provisions apply to 'revelatory occurrences';
• whether the assessment of what would reasonably be expected involves consideration of a range of possible views; and
• the meaning of 'material'.

The Court's detailed analysis of the existing MAE/MAC related case law in the judgment means that this will likely become a key authority on the construction of MAE/MAC clauses going forward.

The High Court's decision

Earlier this month, the English High Court delivered its liability judgment in the case of BM Brazil v Sibanye Stillwater.²  The dispute concerned whether a GE had given rise to an MAE, such that the purchaser (Sibanye Stillwater ("Sibanye")) was entitled not to proceed with its $1.2 billion transaction with the seller (BM Brazil) for the acquisition of two mines in Brazil.

The GE that occurred caused a portion of the mine to be displaced and resulted in cracks on the main ramp of the mine.  Despite a remediation plan being implemented by BM Brazil, Sibanye asserted that the GE was material and would reduce the value of the mine by at least 20% - prompting Sibanye to terminate the sale.

The judge, Mr Justice Butcher, ultimately held that the GE had not engaged the MAE clause because it was not material nor was it an event that would reasonably be expected to be material.  The Court therefore held that Sibanye had wrongfully terminated the SPA.

In his judgment Butcher J. explained that the interpretation of an MAE clause depends on the terms of the clause according to ordinary principles of construction. In particular, the judge relied upon the High Court's 2013 decision in Grupo Hotelero Urvasco v Carey Added Value SL³ (a leading case on MAC, in which Mayer Brown International LLP acted for the Defendant). Applying the ordinary principles of contractual construction under English law, the Court concluded that an MAE had not occurred based on the following reasons:

1. Revelatory Events: Sibanye submitted that the GE was significant as it revealed wider pre-existing problems with the wall of the mine. BM Brazil argued that the MAE clause should not cover pre-existing conditions or problems revealed by the GE. The judge agreed with the BM Brazil – finding that the MAE definition focuses specifically on changes, events, or effects occurring after the SPA was signed. The judge therefore concluded that the GE itself must be material and adverse, rather than it having the effect of revealing pre-existing issues.
2. Reasonable expectation of material and adverse effect: the second issue of construction concerned an assessment of what "would reasonably be expected to be material and adverse".⁴ Sibanye argued that a range of views can be reasonably held as to what was expected to be material. In this regard, it was submitted that this limb of the MAE definition would be satisfied "provided that the expectation that the event will be material falls within the reasonable range". However, the Court preferred BM Brazil's submission that this assessment was an objective one, which would prompt a "yes" or "no" answer as to whether the relevant matter could reasonably be expected to be material and adverse.The judge held that this assessment should be made from the perspective of a reasonable person in the parties' position, as at the date notice of the MAE is given.
3. Materiality: the Court considered both quantitative and qualitative aspects of the GE in order to assess materiality. The Court held that in commercial agreements (including SPAs), if there is no significant financial or 'qualitative' impact on a company's business, then it is difficult to see that such 'qualitative' matters could on their own mean that the change/event/effect was material and adverse. The Court found that the actual financial impact of the GE was not material and that the GE was a type of adverse development common in open-pit mining and did not result in injuries, equipment loss, or regulatory consequences. Therefore, the Court held that the impact of the GE was not material.

Comment

Although MAE/MAC clauses are commonly found in English law governed SPAs and finance agreements, establishing a MAC or MAE is often an uncertain and complex task –courts are generally reluctant to discharge parties of their contractual obligations, without good cause.  This is one of the reasons why these clauses have historically been rarely litigated in the English courts.  This judgment adds to the small but growing number of MAC/MAE related decisions from the English courts, and brings a little more certainty to how such clauses will be approached, this growing body of caselaw may eventually lead to parties invoking such clauses with greater confidence in English law agreements and will likely serve as a critical reference point for the interpretation of MAC/MAE clauses going forward.