MAC attack in the UK

A recent ruling from the UK Takeover Panel suggests that private equity firms will find it hard to abort a public-to-private on the basis of a ‘material adverse change.’

When private equity firm Terra Firma Capital Partners recently applied to the UK Takeover Panel to abort its £453 million (€668 million; $801 million) acquisition of utility East Surrey, it was only the second time that a buyer attempted to prevent the agreed purchase of a UK listed company by citing a “material adverse change” (MAC).

London-based Terra Firma, headed by mercurial financier Guy Hands, had reportedly based its bid on a gas pricing agreement thought to have been struck between East Surrey and the Northern Ireland energy regulator, which had implications for the future prospects of Phoenix, East Surrey’s Belfast, Northern Ireland-based gas distribution subsidiary.

However, following Terra Firma’s bid, the regulator announced that no such agreement was in fact in place and that a new agreement would not be struck until further discussions had occurred: until then, the existing pricing arrangements dating back to 1996 would remain in place.

Given the pricing uncertainty, Terra Firma applied to the UK Takeover Panel to withdraw, citing a material change in the conditions of the deal – as set out in the Scheme Document of May 11 2005 – as a result of the interference of the regulator.

After consulting with both parties to the deal, the energy regulator and Northern Ireland’s Department of Enterprise, Trade and Investment, the Takeover Panel concluded that the deal should proceed. It said there had been “a number of developments since the announcement of the offer…which were not anticipated at that time by either of the parties.”

But the Panel continued: “In light of the discussions held with all concerned…these developments are not of sufficient substance to permit Kellen [the Terra Firma bid vehicle] to invoke any of the conditions.”

The ruling came as no surprise to some lawyers, who had waited four years for their suspicion to be confirmed that a MAC clause could only be cited where there had been an extremely radical change of circumstances. This after all appeared to be the conclusion when the Takeover Panel ruled against communications group WPP when it cited a MAC in order to try and halt its £434 million takeover of media buying group Tempus in 2001, the only other example of a MAC clause having been used in the UK to date. 

In the Tempus case, in between WPP’s offer for the company and its receipt of sufficient acceptances for the deal to go unconditional, the 9/11 terrorist attacks had struck the US. Fearing the damage done to Tempus’ trading prospects – a fear that Tempus argued was unfounded – WPP asked the Panel to revoke the deal. Not only did the Panel refuse, it concluded – rather crushingly – that WPP had failed to prove a material adverse change “by a considerable margin.”

Following the verdict, the Takeover Panel issued a statement outlining circumstances where a MAC might apply. It ruled that “meeting this test requires an adverse change of very considerable significance striking at the heart of the purpose of the transaction in question, analogous…to something that would justify frustration of a legal contract.”

Said Julian Francis, a London-based partner at international law firm Freshfields Bruckhaus Deringer: “The ruling appeared to make clear that you wouldn’t normally be allowed to invoke this sort of clause unless something had run a horse and coaches through the deal. The ruling relating to Terra Firma’s deal seems to have confirmed this.”

The message is clear: the return of the MAC, after a long absence, may be a short-lived phenomenon.

A more detailed look at MAC clauses in the UK can be found in the January issue of sister publication Private Equity Manager (