Material Adverse Effect clause not triggered by geotechnical event at mine between signing and completion

The Commercial Court has held that a geotechnical event at a Brazilian mine between the signing of contracts and completion of a US$1 billion deal did not trigger a "Material Adverse Effect" (MAE) clause. It followed that the buyer was not entitled to terminate the acquisition contracts and the sellers were entitled to damages for wrongful repudiation: BM Brazil v Sibanye Stillwater [2024] EWHC 2566 (Comm).

The judgment provides helpful guidance on how MAE clauses are to be construed and in particular what "material" means. In the judge's view, a material effect must be significant or substantial, and would not include everything that was more than de minimis. While acknowledging there is no "bright line" test, Mr Justice Butcher considered that, in this case, a 20% reduction in the equity value of the target would be material, a 15% reduction might well be material, and a 10% reduction would be too low to be material. However, each case will inevitably turn on its own facts and the drafting of the particular MAE clause in question. For example in another recent case, Finsbury Food Group PLC v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm) (considered here), a 10% reduction in total group sales was sufficient to qualify as a material adverse change. 

In Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm), in which this firm acted, Mrs Justice Cockerill observed that there was a "dearth of relevant English authority" on MAE clauses. As Butcher J commented in the present case, that dearth is beginning to be made good with WEX itself and Finsbury Food Group PLC referred to above. This latest decision is a welcome addition, particularly for its discussion of materiality in the context of a US$1 billion commercial transaction.

Background

In October 2021, the defendant (Sibanye) signed Share and Purchase Agreements (SPAs) to buy two mines in Brazil from the claimants (the Sellers) for a total consideration exceeding US$1 billion.

The deal was expected to complete by 14 January 2022, the long-stop date in the SPAs.

In the period between signing and completion, a geotechnical event occurred at one of the mines, which involved the displacement of a portion of rock in one of the mine walls.

Sibanye relied on this geotechnical event to withdraw from the deal. It said the event triggered a MAE clause in the SPAs. The clause was as follows:

“Material Adverse Effect” means any change, event or effect that individually or in the aggregate is or would reasonably be expected to be material and adverse to the business, financial condition, results of operations, the properties, assets, liabilities or operations of the Group Companies, taken as a whole…

The Sellers started proceedings claiming that Sibanye had wrongfully terminated because the geotechnical event was not a MAE. They also alleged that, in purporting to terminate in reliance on the geotechnical event, Sibanye had engaged in "wilful misconduct" (which, under the terms of the SPAs, would mean that a sole remedies clause would not apply to damages arising from the breach).

Decision

Butcher J in the Commercial Court found that the geotechnical event was insufficiently material to constitute a MAE. Sibanye's purported termination was therefore a repudiatory breach of the SPAs, and the Sellers were entitled to damages.

However, Butcher J held that the termination did not amount to "wilful misconduct": Sibanye had believed that there had been a MAE, and while this belief had turned out to be wrong, it was based on (flawed) technical analysis undertaken at the time Sibanye made its decision. 

Construction of the MAE clause

The judge's decision turned in part on the specific language of the MAE clause, construed in the context of the SPA as a whole.

However, Butcher J identified three important issues of construction of the SPAs, as outlined below.

1. So-called "revelatory" events

The first issue of construction was whether the MAE provisions applied to so-called "revelatory" events.

There was no dispute that the geotechnical event occurred, and could therefore be relied on by Sibanye as a potential MAE event. However, the geotechnical event or the ensuing investigations might have revealed other issues which already existed before exchange – for example, with the geological structure of the rock in the mine wall. Could those matters that were revealed also be relied on as MAE events?

The judge said no. The MAE clause was aimed at events which occurred between exchange and completion. The geology of the underlying rock had existed for millions of years – that was not a "change, event or effect" which occurred in the relevant time period, even if it was only revealed by the event which occurred.

2. "Reasonably be expected to be"

The second issue of construction arose from the fact that a MAE was defined in the clause as an event which was "or would reasonably be expected to be" material and adverse. What did "reasonably be expected" mean in this context?

Sibanye argued that the "reasonable to expect" language would be satisfied if the expectation that the event would be material fell within the range of views that reasonable people in the position of the parties might hold.

The judge rejected this. Instead, he said the clause required an assessment of whether or not it would reasonably be expected that the matter was material and adverse – and this would give a single answer, yes or no. This assessment is objective, and is to be made from the perspective of a reasonable person at the time of termination. The degree of likelihood required is whether a reasonable person would have considered it more likely than not that the matter would turn out to be material.

The judge noted that the parties agreed that, in making this assessment, the court could consider what subsequently, in fact, transpired as that might shed some light on what might reasonably have been expected to happen when the incident occurred. However, he cautioned that the assessment of "reasonable to expect" was intended to be forward-looking from the date of termination, not backward-looking from the date of trial.

3. Meaning of material

The final issue of construction was what was meant by "material".

The judge rejected Sibanye's submission that an event which was not de minimis was necessarily material. He agreed with comments from previous cases that "material" was intended to mean "significant or substantial" and that, where a target company is purchased as part of a long-term strategy, the important question is the impact on the purchaser's earnings power over a "commercially reasonable period", which is likely to be measured in years rather than months.

While the judge said there was no "bright line" test which would be applicable to all MAE clauses, he provided helpful guidance for deciding the "materiality" of an event, particularly in the context of a large acquisition such as this one. In the present case, relevant factors included: (a) the size of the deal (close to US$ 1 billion); (b) the nature of the assets concerned, ie mines, which are by their nature susceptible to geotechnical events; (c) the length of the sale process; and (d) the complexity of the SPAs, and all of these militated against setting the bar for materiality too low.

The judge looked at the reduction in equity value of the target. His "intuitive response" in this case was that a reduction of 20% or more in equity value would indeed be material; and more than 15% might well be material; but that a 10% reduction in value would be rather too low to be material.

Here, the judge determined that the geotechnical event had only a relatively minor impact on equity value – on any basis significantly below the level of 10% which the judge considered too low in any event – and thus was not "material". Further, as at the date of termination, it could not reasonably be expected to be "material". Sibanye therefore could not rely on the MAE clause.

Wilful misconduct

Lastly, on wilful misconduct, the Sellers alleged that Sibanye had engaged in "wilful misconduct" in three different ways, each of which was rejected by the judge:

• The Sellers alleged that Sibanye terminated with no reasonable basis for believing the geotechnical event was a MAE. The judge said this was not capable of amounting to wilful misconduct, but was more akin to an allegation of negligence.
• The Sellers pleaded that Sibanye had no genuine belief the geotechnical event was a MAE. This case was not advanced at trial, and in any event was not made out. The relevant individuals at Sibanye did not have reasonable grounds for considering the geotechnical event was a MAE, because the Sibanye analysis underpinning its assessment of materiality was flawed – but they each genuinely believed it was a MAE.
• Lastly, the Sellers alleged that Sibanye had been reckless as to whether the GE was a MAE. This was also not made out. While the relevant individuals at Sibanye understood there was a risk involved in terminating and the decision was taken in an overly hurried manner, it was a decision based on analysis conducted by technical and financial advisors which went through various rounds of iterations. The decision-makers thought that analysis, flawed as it was, justified termination.