COVID-19, Force Majeure, and Material Adverse Change Clauses

Forensic & Litigation Consulting

April 21, 2020

Ben Franklin

As of April 2, 2020, more than half of the world’s population was under some form of restriction, including more than 90 percent of the United States. While the pandemic will eventually subside and quarantines will be lifted, the economic repercussions of COVID-19 are likely to last well into the future.

Most firms, particularly in the legal and professional services sector and the insurance sector, are now considering whether COVID-19 constitutes a Force Majeure (“FM”) event that will trigger various contractual clauses, and whether economic disruptions due to COVID-19 will trigger Material Adverse Change or Material Adverse Effect clauses (collectively, “MAC”) in Merger & Acquisition (“M&A”) contexts.

In this paper, we highlight potential considerations in damage analyses. In addition, we review MAC clauses in recent M&A Securities & Exchange Commission (“SEC”) filings over the last six months and catalogue references to FM, acts of God, epidemic, pandemic, and other similar terms, as well as terms related to hostilities and natural disasters. Our intention is to give an overview of how common these clauses are, the typical language used, the precision or vagueness within various contracts, the commonality of these types of clauses, how frequently they appear, their structure, whether pandemics are specifically mentioned and in what detail, and so forth. We perform this analysis as a thought exercise, as opposed to an attempt to make any definitive statements regarding their use and intended meaning of relevant terms.

In short, fewer than 20 percent of the M&A agreements we reviewed make reference to COVID-19 or more broadly “pandemics,” “epidemics,” “virus,” or “disease”. If one wishes to enlarge this category to include the more generic terms “FM” or “act(s) of God,” we find that still less than half include these terms.

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