Travelport v WEX: what constitutes a material adverse effect?

Background

Pursuant to a Share Purchase Agreement dated 24 January 2020 (the "SPA"), WEX agreed to purchase the entire issued share capital of two companies, eNett International (Jersey) Limited (“eNett”) and Optal Limited (“Optal”) from the former shareholders (the “Sellers”). The two target companies were payment service providers in the travel industry.

A dispute arose between the parties when WEX, in a letter dated 4 May 2020, notified the Sellers that it was pulling out of the transaction worth US$1.7bn. WEX claimed that as a result of the pandemic there had been a global decrease in the travel industry which had adversely affected payments both to and from companies in the travel industry, including eNett and Optal. This, on WEX’s case, constituted a material adverse effect for the purposes of section 8.2(d) of the SPA (the “MAE Clause”), which in turn allowed WEX to avoid closing the transaction in accordance with its obligations under s.21(a) of the SPA.

The Sellers disagreed and issued a claim seeking: (i) a declaration that no MAE had occurred or was reasonably expected to occur and (ii) specific performance of WEX’s obligations to close the transaction.

The MAE Clause

There were three essential parts to the MAE Clause, which for ease, can be described as: (a) the Condition Precedent (b) the Carve-Out to the Condition Precedent and (c) the Carve-Out Exception.

(a) The Condition Precedent

Under section 8.2(d) of the SPA, it was a condition precedent to completion that since the date of the SPA “there shall not have been any Material Adverse Effect and no event, change, development, state of facts or effect shall have occurred that would reasonably be expected to have a Material Adverse Effect”.

(b) The Carve-Out

For the purposes of this article, the two relevant carve-outs to the definition for Material Adverse Effect related to “events, changes, developments, state of facts or effect resulting, arising from or in connection with” either:

1. sub clause (d), which concerned changes in, inter alia, regulatory law (the “Change of Law Carve-Out”), or
2. sub-clause (e), which concerned, inter alia, pandemics (the “Pandemic Carve-Out”).

 (c) The Carve-Out Exception

The distinction between the two Carve-Outs was important to the application of the Carve-Out Exception.

The Carve-Out Exception stated that the Pandemic Carve-Out could constitute an event of material adverse effect, provided that the pandemic had had “a disproportionate effect on [the eNett or Optal Groups], taken as a whole, as compared to other participants in the industries in which [they] operate” [emphasis added].

No such exception applied to the Change of Law Carve-Out.

The issues

Two main issues were before the Court:

1. For the purposes of the Carve-Out Exception, and as a matter of construction, what were the relevant “industries” against which the financial condition of the companies should be measured? The Sellers argued that the term should be construed in the narrow sense so that the relevant benchmark was, what they defined as, the “travel payments industry”. WEX, on the other hand, argued that the relevant industry was the broader payment industry (the “First Issue”).

    

2. In the event that both the Change of Law Carve-Out and the Pandemic Carve-Out were engaged, was it right that a buyer could not rely, as the Sellers contended, on the Carve-Out Exception to assert a material adverse effect i.e. where one event was expressly excluded from the ambit of the MAE Clause but the other was not? Or was WEX right to argue that the Carve-Out Exception applied irrespective of whether the events, changes, developments or effects fall in both Carve-Outs (the “Second Issue”)?

Decision

For the purposes of high-value commercial transactions, the Court confirmed that the precise wording in any MAE Clause will be central to the scope of its operation. Here, despite the inclusion of certain “boilerplate clauses”, the Court recognised that merger and acquisition transactions are heavily negotiated contracts between sophisticated parties, closely scrutinised by the parties’ respective lawyers. Therefore, the presence or absence of particular wording will be assumed to be the result of careful consideration of those involved, who have taken into account any perceived advantages of including or excluding terms.

The relevant industries

As to the First Issue, the parties had chosen to peg disproportionality in the Carve-Out Exception to a comparison with “industries”, without specifying which “industries” they meant. The Court concluded that “industries”, within the context of the SPA, meant the business to business payment industries in general and not, as argued by the Sellers, the “travel payment industries”. It was noteworthy to the Court that the parties had not defined the term, nor included a specific comparator, which was within their power to do. MAE clauses were not to be construed more narrowly than other clauses. Further, the Court was not prepared to imply additional meaning to an undefined term, particularly where there was “relative paucity” of evidence to suggest that the “travel payment industries” was a term that was in day-to-day or established use.

The application of the Carve-Out Exception where two Carve-Outs are engaged

Whilst the Sellers were unsuccessful in their arguments on the meaning of “industries”, their argumentsfound more favour with the Court in respect of the Second Issue. The Court was not persuaded by WEX’s argument that it should be able to cherry pick between two applicable Carve-Out Clauses where one took the benefit of the Carve-Out Exception, but the other did not. To do so would, in the Court’s view, undermine the parties’ bargain (set out in the express contractual wording) that events which fell under sub-clause (e) of the Carve-Out should be excluded from the MAE Clause.

Other points to note:

1. The Court preferred the view that the burden of establishing the extent to which any effect falls within or outside of a Carve-Out is with the Sellers.

    

2. In the context of a heavily negotiated contract, the Court acknowledged that any carve-out wording should be assumed to have meaningful effect.. It followed that if the effect of one party’s construction (in this case, the Sellers) was to render such an exception devoid of all meaning, then such construction was likely to be wrong.

    

3. Given the “dearth” of English authority on the MAE Clauses, the Court ruled that it was appropriate to consider Delaware authority and US academic learning cited in the Delaware Court. Whilst the Court considered that it would be “plainly imprudent – as well as discourteous to that court” to exclude other common law authorities, it was clear that such authorities would not be dispositive or override the construction of the clauses, particularly in heavily negotiated commercial contracts.

Commentary

It is understood that both the Claimants and Defendant are seeking to appeal the decision and that a full trial is anticipated next year. In the meantime, this case provides some useful guidance on the Court’s approach to interpreting MAE clauses. It is clear that those seeking to assert a material adverse effect will need to consider carefully the relevant wording in their agreements. To the extent that there is ambiguity in the construction of the clause, the court will be reluctant to imply additional terms, particularly where (as is typical) the clause has been heavily negotiated. Successful reliance on a MAE clause remains a high threshold to cross and the outcome of any appeal or final judgment will be eagerly awaited.