The University for business

The City Law School and the professions

Department of Law

LLB & Graduate Entry LLB Degree

LU3136
INTERNATIONAL BANKING LAW

8th January 2020

[take away one day exam timings tbc]

Please answer BOTH questions.

Answers to be supplied in electronic typed form complying with the word limits provided.

Translation dictionaries are permitted.

Permitted materials: Take away moodle exam so all materials allowed

This exam paper is a take away examination.

Internal Examiners: Nigel Clayton

External Examiner: Dr A Karim Aldohni
Read the extract (part of the article is below)
“Are courts undermining the flexibility of the MAC clause in finance documents” Rian Matthews (2015) 8
JIBFL 485
Journal of International Banking & Financial Law/2015 Volume 30/Issue 8/Articles/Are courts
undermining the flexibility of the MAC clause in finance documents? – (2015) 8 JIBFL 485
Note: this article is available from the Lexis website.

Journal of International Banking and Financial Law

(2015) 8 JIBFL 485

1 September 2015

Are courts undermining the flexibility of the MAC clause in finance

documents?

Features

Rian Matthews

is a Local Principal based in Singapore in the Commercial Litigation and International Arbitration
Team of Baker & McKenzie. Wong & Leow. Email: rian.matthews@bakermckenzie.com
© Reed Elsevier (UK) Ltd 2015

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In recent years there have been a number of cases on Material Adverse Change (MAC)
clauses. These cases provide greater clarity about how the Courts will interpret these clauses,
but it is unclear whether this is the right approach to MAC clauses used in finance documents.1

KEY POINTS

 1 ●     In principle, the inclusion of a MAC clause in loan agreements and other finance
documents should enable lenders to better manage risk over the life of a facility, eg
by helping to protect against substantial deteriorations in a borrower's ability to repay
its loan.

 2 ●     The English courts, however, have generally interpreted MAC clauses in a
uniform way. This ignores the fact that the use of MAC clauses in a lending context
is very different to their use in other situations (eg M&A transactions or takeovers).

 3 ●     While lenders should not be able to invoke MAC clauses lightly, the Courts
should be careful not to undermine the flexibility of these clauses by taking an overly
technical approach to their interpretation.

A common theme in discussions about Material Adverse Change (MAC) and Material Adverse
Effect (MAE) clauses2 is that there is a dearth of cases explaining how these clauses work. 3 But
while appellate authority remains thin,4 in recent years a growing body of first instance decisions
in England and Australia has emerged which provides greater guidance on the scope and
operation of MAC clauses. This article briefly looks at the leading English Court decision, Grupo
Hotelero Urvasco SA v Carey Value Added SL and Another,5 and several subsequent decisions
of the English and Australian courts, and considers their application to MAC clauses in loan
agreements, guarantees and other finance documents.

WHAT ARE MAC CLAUSES?

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In a finance/lending context, MAC clauses are usually used as a contractual trigger to certain
rights which a lender may have under a facility agreement: if there is a change in the borrower's
circumstances or position which is both “material” and “adverse”, then a lender may be entitled
to seek additional security, refuse draw-down (a “draw stop” clause) or call an event of
default/accelerate the relevant loan.

The prevalence of MAC clauses in finance documents has changed over time depending on the
relative negotiating strength of lenders and borrowers. When used, however, MAC clauses
provide lenders with a useful tool: first, MAC clauses operate similarly to financial maintenance
covenants, guarding against substantial deterioration in a borrower's ability to repay its loan; 6
second, while a lender can usually end a facility if a borrower becomes insolvent or breaches its
financial covenants, a MAC clause allows a lender to cease further drawdowns/accelerate a
loan before reaching such a terminal point; third, MAC clauses limit the scope for technical
arguments about whether particular events of default have been triggered, by providing a more
flexible and general triggering event.

GRUPO

Grupo is the leading English Court decision on MAC clauses. Briefly, a lender, relying on
alleged events of default, refused to permit further drawdowns by a borrower (a Spanish
property developer). The defaults included alleged breaches of certain representations,
repeated at various intervals, that there had been no “material adverse change” in the
borrower's or the guarantor's “financial condition (consolidated if applicable)”. Mr Justice Blair
found that there had been events of default, but not on the basis of any MAC: there had not
been any MAC in the borrower's financial condition and, while the guarantor's financial condition
had changed, this did not constitute a misrepresentation (or an event of default) because the
change only arose after the guarantor had last represented that no MAC had occurred.

Blair J held that, under the relevant finance documents, a MAC only arose where an unforeseen
change occurred which “significantly [affected] … the borrower's ability to perform its
obligations, and in particular its ability to repay the loan”. Blair J also emphasised that, to trigger
a MAC, the relevant change must be “significant”, as otherwise “a lender may be in a position to
suspend lending and/or call a default at a time when the borrower's financial condition does not
fully justify it, thereby propelling it towards insolvency”. A MAC would not arise, however, merely

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because of changes in the “prospects of the company” or “external economic or market
changes”.

Blair J's analysis, in large part, drew on a number of Delaware Chancery Court authorities
(particularly IBP v Tyson Foods Inc7). These cases, however, all concerned M&A and/or
takeover transactions. In M&A or takeover transactions, there is often a period of time between
when the buyer and seller agree the sale of a target/asset and when completion takes place. If
a MAC clause is triggered during that period then it will usually permit the buyer to pull out of the
transaction. However, because a buyer is usually thought to accept the risk of a decline in the
asset's/target's value between agreeing the sale and completion (and, conversely, is also the
beneficiary of any increase in value during that period), the US Courts have generally been
unwilling to allow buyers to invoke MAC clauses in M&A/takeover transactions save in
exceptional circumstances. It is in that context that US Courts have set a high bar for invoking
MAC clauses.

A lender, however, cannot be similarly assumed to have accepted the risk of a decline in the
borrower's financial position during the course of a loan, particularly as a lender will not
financially benefit from any improvement in the borrower's position. The risk a lender accepts is
a credit or enforcement risk — ie the risk that a borrower may ultimately prove unable to repay a
loan or that any security is insufficient — not necessarily a risk that it must keep lending if a
borrower's financial position deteriorates. As a consequence, the authorities relied on by Blair J
were not apposite to the situation in Grupo.

In this author's view, MAC clauses in finance documents should be read in accordance with the
normal rules of contractual interpretation; but, beyond this, there is no need to read such
clauses in an overly restrictive manner. In this regard, it is difficult to see why in Grupo the
relevant MAC clauses should have been limited to events which adversely affect a borrower's
ability to repay its loan. A lender's decision to provide finance, and the terms it lends on, are
informed by the lender's assessment of the financial risk and the commercial rationale of the
facility. It therefore seems reasonable that a lender should be able to call a MAC if the risk
profile or commercial rationale of a loan changes. Similarly, if a borrower's prospects worsen or
there is a decline in the market, then a lender should be entitled to invoke a MAC, at least to the
extent that these in turn impact on the borrower's financial position. Further, while a MAC clause
should not be invoked unless a relatively significant “change” has occurred, how “significant” a
change should be is a matter of degree. Part of the rationale of a MAC clause in a lending
context is to provide a lender with a degree of flexibility. If the bar for invoking a MAC clause is
set too high, it will undermine the flexibility, and value to the lender, of such a clause.

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MINUMBRA

Grupo was considered in the Minumbra decision,8 a judgment of Mr Justice Robb in the
Supreme Court of New South Wales. Minumbra Lancewood Pty Ltd and AM Lancewood
Investments Nominees Pty Ltd were 50/50 partners in a joint venture operating an
accommodation village for miners. AM Lancewood Investments, as lender, advanced funds to
Minumbra Lancewood, under a facility agreement. The lender accelerated the loan, claiming
that a failure to achieve certain forecast occupancy rates constituted a MAC. The MAC was
defined as arising where:

“… any situation occurs which in the opinion of the Lender gives it grounds to
believe that a material and adverse change in the business or financial
condition of the Borrower has occurred or that the ability of the Borrower to
perform its obligations under this Agreement has been or will be materially or
adversely affected …”

Given the wording of the MAC clause, the lender was only required to show that they had
subjectively formed the opinion that a MAC had occurred, and that this opinion was held
honestly and not capriciously..9 Robb J found the lender had the relevant opinion. But His
Honour also found that, in any event, the lender's opinion was correct as objectively a MAC had
occurred. In contrast to Grupo, Robb J considered that the relevant MAC clause could be
triggered not only by an event which adversely affected the borrower's ability to repay its loan,
but also by any change which “may have the effect that the Lender would not have made the
loan on the terms of the Loan Agreement at all if the changes had been anticipated at the
outset, or would only have done so on substantially more onerous terms”. Robb J also
considered that changes in the borrower's market and its failure to meet budget expectations
could constitute MACs (although the latter was a matter of degree).

Overall, it appears that Robb J in Minumbra may have taken a less restrictive approach to the
interpretation of MAC clauses as compared to the approach taken by Blair J in Grupo. That
said, the difference in approaches may have instead been because of the different wording of
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the clauses they considered: in Grupo, the relevant MAC clauses only referred to the “financial
condition” of the borrower and guarantor, whereas the clause in Minumbra covered the
“business” and “financial condition” of the borrower. However, it is not clear that there is any
great practical difference between a change in a borrower's “financial condition” or its
“business”. Any adverse change in a borrower's business will almost certainly cause or reflect a
change in its overall financial condition and vice versa.

Please keep to the maximum word limit(s) and put the number of words that you have used for each part
and for each question. You may be penalized if you do not keep below the maximum word limit. There is
a word limit for each part which may vary.

Please note that no drafting is required for any parts of question one. Answer both question one and
question two.

Question 1:

(a)What is a Material Adverse Change? (50 words maximum)

ANSWER:

‘MAC’ is a material and adverse change in a borrower’s business, operations, or financial condition.
‘MAC’ is determined through the reasonable lender’s objective assessment, but subjectively examines
borrower’s ability to perform any/all of its obligations. ‘MAC’ doesn’t arise merely from changes in a
company’s prospects or external market changes (Grupo). (50 words)

AND

(b)Explain the type of wordings that you would put into a Material Adverse Change clause. You are the
lawyer acting for the lending bank. The law and jurisdiction will be English. (300 words maximum)
Please note that you are not required to draft a Material Adverse Change clause.

ANSWER:

In drafting a MAC clause lawyers should use ‘general’ language to establish a ‘wide net’. This disallows
the Court to reference any narrowing language as grounds to find that a certain change does not fall
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within, or is not applicable to, the clause. “May” or “could”, both reflected in Grupo and Minumbra, or
phrases like “which could possibly” exemplify a MAC’s possibility and help to extend the definition. As
well, it would be unwise for lawyers to recognize the MAC arising from one singular event; as in Grupo, it
is understood that a series of events can trigger the clause, and drafting should reflect this. It is also
important for the drafting to reflect the MAC’s variety of effects. Writing shouldn’t be limited to
demonstrate one effect of MAC (I.E. an event of default) but should extend to recognize material and
adverse changes to the borrower’s “business, operations, assets, liabilities, or financial condition”, for
example. Further, reference to the term ‘reasonable’ complies with the objective test noted in Minumbra
in determining a ‘MAC’ (Robb J).
MAC clause drafting can invite more creative techniques depending upon negotiations between parties.
Language might include a list of material changes (“including but not limited to […]”), or the “opinion of
the Lender” (as in Minumbra) can be drafted to allow for the honest, not capricious, and subjective
assessment (and triggering) of a MAC by the purchaser. Should the determination of what constitutes
‘materiality’ be a concern, it is possible to include a definition of this, as well. Lastly, as per Professor
Clayton, a MAC clause can be written with dual purpose: general (as explained above) and narrow, to
reflect the occurrence of a specific triggering event like “a decline in the English or European housing
markets” which is relevant to the borrower in Minumbra. (300 words)

AND

(c) Consider whether and in what way(s) you would amend your advice/opinion/view in part (b) above in
the light the decision in Grupo Hotelero Urvasco v Carey [2013] EWHC 1039- decision of Blair J. (200
words maximum)

ANSWER:

As the above recommendations were already made in light of, and in reference to, Blair J’s decision in
Grupo, I will extend upon the discussion in this section.

As argued by Rian Matthews, it is not helpful to the clause’s purpose if ‘MAC’ is drafted in an overly-
restrictive manner. For example, Matthews believes that the drafting in Grupo should not have been
limited only to events affecting a borrower’s ability to repay loans, but should also consider alternative
financial, economic, and operational events that may bring about a similar and detrimental effect upon
the Borrower. The ‘wider’ drafting approach depicted in the previous section is reflective of Matthews’
hopes that the clause be “read in accordance with the ordinary rules of contractual interpretation”.
Instead of drafting in a similar manner to that of the lawyers in Grupo, it is advised for the legal writing to
adopt the broader technique inherent in the language of cases such as Minumbra to avoid litigation and
to allow for effective contractual relations. MAC clauses can be useful in a lending agreement to regulate

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uncertainty, however, their effectiveness and (potentially) severe consequences are greatly dependent
on the skill and precision of lawyers’ writing. (198 words)

Question 2:

ABC Bank Plc (the lead/managing bank) is preparing an information memorandum to attract other banks
in the UK to lend in a syndicated loan. It wishes to protect itself from possible liability for
misrepresentation to these syndicate banks. The law and jurisdiction will be English. .

Draft the relevant clause(s) which seek to protect ABC Bank Plc from possible liability for
misrepresentation. (500 words maximum)

ANSWER:

DEFINITIONS
 “Investment”: the financial transaction to be entered to between the parties.
 “Recipient”: the syndicate bank in receipt of the IM.
 “TD Bank” [Toronto Dominion Bank – London-based bank]: Lead Bank to which I am drafting
the IM for.

BACKGROUND
The following contextual information should be taken into account when considering the below clauses:
 The “Relevant Provisions” clause is not an attempt to exclude or restrict liability, but simply an
agreement as to the basis on which information is being provided between the parties. This
clause is drafted in reference to the ‘Relevant Provisions’ at the heart of litigation in Raiffeisen
Zentralbank Osterreich AG v RBS [2011], which was held to be a basis clause and not an
exclusion of liability (Clarke J).
 The “Risk Disclosure Statement” clause will be held as representative of a neutral clause on
the assumption that the Recipient has been in receipt of the disclosure statement (the “Risk
Disclosure Statement”). The Risk Disclosure Statement’s purpose is to disclose the risk
associated with the Investment [a method used in Peekay – although Peekay is a derivative
transaction] and should not be treated as excluding the Issuer’s liability in regards to the
Recipient’s performance in the Investment.

1. RELEVANT PROVISIONS (RELATIONSHIP OF PARTIES)

1.1. The Recipient acknowledges and agrees that:
1.1.1. TD Bank and its Affiliates, agents, officers, and professional advisors do not make any
representation or warranty, express or implied as to, or assume any responsibility for, the
accuracy, adequacy, completeness, or reliability of any of the information in the IM or any
document incorporated by reference herein or any further information supplied.
1.1.2. TD Bank and its Affiliates, agents, officers, and professional advisors shall be under no
obligation to update or correct any inaccuracy in the IM or be otherwise liable in respect of
the information in the IM.
1.1.3. The IM is not intended to provide the sole basis of any credit evaluation and should not be
considered to be a recommendation that the Recipient participate in the Investment. Each
investor contemplating the Investment should make its own independent investigation of the
financial condition and affairs, and its own creditworthiness of the Issuer.

2. ISSUER’S RESPONSIBILITY

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 2.1. This IM has been prepared by, and issued with, the authority of the Issuer. The Issuer accepts
responsibility for the information contained in this IM and for each of the Debt Instruments issued
under the Investment.

3. RISK DISCLOSURE STATEMENT

3.1. It is understood between the parties that the Recipient is to be aware of the risks and practices
described in the Risk Disclosure Statement. The Investment may not be suitable for all investors,
and TD Bank assumes that prior to the Investment the Recipient will determine that such
transaction is suitable, and that the Recipient fully understands the nature of the Investment.

4. ACCEPTED REGULATORY STANDARD – THE FCA

4.1. The Investment which is the subject of this IM is to be constructed in accordance with regulatory
and industry standards set out by the Financial Conduct Authority (“the FCA”). (500 words)

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