BM Brazil & Ors v Sibanye BM Brazil & Anor [2024]: applying MAE analysis to finance documents

In-depth analysis

An interesting case recently came before the High Court - BM Brazil & Ors v Sibanye BM Brazil & Anor [2024] EWHC 2566 concerning the interpretation of a "material adverse effect" clause. Such clauses (commonly referred to as MAE or MAC clauses) are commonly seen in many commercial contracts, and typically provide an ability for a party to terminate an agreement, walk away from an unconsummated transaction or, in the case of a financing arrangement, for a lender to accelerate the underlying debt where there has been a material and adverse change to the business in question.

Facts of the Case

The case relates to two share purchase agreements (or SPAs) signed in October 2021 pursuant to which South African based multinational mining and metals processing group, Sibanye Stillwater (the Buyer) agreed to acquire the shares in two corporate entities which owned, respectively, the Santa Rita nickel mine and the Serrote copper and gold mine, both located in Brazil. The two SPAs (one for each mine) were inter-conditional and were to be completed simultaneously, subject to certain pre-completion conditions being met. These included that no "Material Adverse Effect" (as defined in the SPA) had occurred in between signing and completion.

The SPAs defined a Material Adverse Effect as:

"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"

A few weeks after signing, a geotechnical event (or GE) occurred at the Santa Rita Mine involving the dislocation of part of a slope. The Buyer was made aware of the GE and the steps being taken to monitor and mitigate the impact of the same, including at a site visit that took place as scheduled, coincidentally shortly after the GE event occurred.

At the same time, the various conditions to completion were confirmed as satisfied and the parties and their advisers began to prepare for completion, which was anticipated would take place in early January 2022 in accordance with the timelines specified by the SPAs. However the Buyer failed to complete on the defined closing date, and instead began to request more information about the GE which, in their evidence to the court, the Buyer claimed caused them to be "very concerned" about the GE and realise it was a "much bigger issue" than previously thought. Ultimately, the Buyer gave notice that it was terminating the SPA in respect of the Santa Rita mine on the basis the GE constituted a MAE. As completion under the SPA in respect of the Serrote mine was conditional on the contemporaneous closing of the SPA in respect of the Santa Rita mine, the Buyer also gave notice to terminate this SPA.

The Sellers subsequently commenced a new sales process for the mines, but, as at the date of the judgment in this case, no sale has yet been concluded.

The Sellers brought proceedings against the Buyer seeking declaratory relief and damages in respect of what they considered to be the wrongful repudiation of the two SPAs. The principal issue for the court to determine therefore was whether the GE constituted a MAE for the purposes of the SPAs, allowing the Defendants to lawfully terminate the SPAs.

Judgment

Much of the debate between the parties rested on their respective interpretation of the MAE definition, requiring the court to therefore weigh in on the same. The judgment therefore sets out the required approach to interpretation as a matter of English law, with the court required to consider the objective meaning of the language which the parties have chosen to express their agreement, considering the contract as a whole and elements of the wider context, which might include the factual background known to the parties at or before the date of the contract.

The court also noted the absence of substantial judicial authority on MAE or MAC clauses under English law, making this an occasion where a review of foreign authorities (principally the US) could be helpful, as well as academic commentary.

In applying the law to the circumstances at hand, the court broke the definition down into its constituent parts. First there needed to have been a "change, event or effect" between signing and closing. The parties were in agreement that the GE was such a change, event or effect, and that it clearly had occurred after signing but prior to closing.

The change, event or effect then had to have, or be reasonably expected to have, an impact on the business, financial condition, results of operations, the properties, assets, liabilities or operations of the relevant group. The parties were in agreement that this was to be assessed at the point on which the relevant notice was served terminating the SPA on account of the purported MAE, and that this was an objective test, requiring one to consider this "from the perspective of a reasonable person in the position of the parties at the time". The court held that a "mere risk" that something may turn out to be material was unlikely to be enough (given the use of "would" rather than "could… be expected"), ie it must be more likely than not.

One of the key points at issue was whether what the Claimants described as a "revelatory event" (in this case meaning that the GE had revealed, or lead to the revealing of, wider problems with the east wall of the Santa Rita mine pit) could be a MAE. The Claimants denied that the GE was a revelatory event but contended that even if it was it did not fall within the required scope of "change, event or effect" – the state of the mine pit was extant at the point of signing the SPA, and indeed had existed for millennia. They emphasised that the "change, event or effect" itself was what needed to be material and adverse, and one could not "abuse" the language by stating that a change, event or effect was material and adverse because it revealed an issue which predated the contract and could have been picked up by the due diligence process or had a risk allocated to it via the representations and warranties commonly agreed. The court agreed with the Claimants view on this point and noted that an MAE provision is one of many methods of risk allocation within a commercial contract.

Further consideration was also given to what is meant in this context by "material", with the court finding this should be taken to mean "significant or substantial" (and certainly more than simply "not de minimis"), and consequential to the company concerned for a "commercially reasonable period… measured in years rather than months", but that there was no "bright line test" for what constitutes materiality which can be applied to all MAE clauses. Factors to consider will include the size of the transaction, the nature of the asset and the complexity of the transaction.

Applying these factors to the situation at hand, it was noted that there had been 166 geotechnical events at the Santa Rita mine in 2021 alone, and while the GE in question was large in comparison to others within the period, it was comparable with many events at other mines. It involved a dislocation rather than detachment of the slope, there were no injuries or fatalities, no equipment was lost and operations resumed on the same day. Analysis of the financial impact both in terms of the costs of remediating the GE and the decline in the NPV of the Santa Rita mine also failed to persuade the court that the GE had been material, especially when considered against the agreed purchase price.

The court ultimately concluded therefore that the GE was not an MAE, and in the absence of any other grounds for termination the Buyer had been obliged to complete both SPAs in accordance with their terms.

Comment

While this case relates to a dispute over the terms of the SPA, it is of interest to those of us in the debt finance world given the prevalence of MAE provisions in debt documents. For all the time spent debating the inclusion and the exact language of such provisions, it is often suggested that a lender is highly unlikely to rely on a MAE clause if there are no other subsisting events of default. Whether or not this is borne out in practice, this case usefully highlights some of the reasons a lender may tread carefully before relying on a MAE.

The MAE provision typically sits within the section of a facility agreement listing Events of Default, which frequently consists of a long list of specific events (such as non-payment, breach of financial covenant, insolvency), the occurrence of many of which are clear-cut. A lender will also typically insist on a suite of representations and covenants (breach of which will be an Event of Default in its own right), and will have done a significant amount of diligence and financial modelling before deciding to enter into the transaction. As such, the MAE provision serves as a "sweeper" for anything not specifically addressed in the document but which might occur and fundamentally alter the credit profile of the borrower/deal in a manner that means the lender should no longer be obliged to continue funding. Against this backdrop, it is clear to see why a provision which enables a party to back out of a transaction that has been often been extensively negotiated and documented, at great cost, should not be one that may be utilised lightly.

While the clause is reasonably short and self-contained, and may seem simple on first reading, it is apparent from the judgment that when you start to break down each element of the clause there are a myriad of questions as to how it should apply even from a "textual" analysis, before one even begins looking at context. Those seeking to rely on such provisions, in the absence of any other provision which enables them to terminate and/or accelerate the arrangement in question should have conducted a very thorough and robust analysis of the clause and its application to the facts.

The judgment related only to the issue of liability – quantum issues will be tried in 2025 (subject to any appeal) - so it remains to be seen what damages the claimants may be awarded. In a comparable scenario where a lender were found to have wrongfully accelerated and/or enforced under a loan in reliance on a MAE, one could see that the repercussions for the borrower and therefore the damages they'd be able to seek could well have a rather material and adverse effect on the lender.