Skip to content

Material adverse effect clauses and Covid-19

A Material Adverse Effect clause in an share purchase agreement  excluded conditions resulting from a pandemic except where those conditions would have a disproportionate effect on the target companies as compared to companies in the “industries” in which those companies operated. The court agreed with the purchaser that the correct comparator for the target (which provided virtual credit and payment services to the travel payments market) was the broader B2B payments industry and not, as the seller contended, the narrower “travel payments industry”. The seller had failed to provide sufficient evidence that the “travel payments industry” was a distinct, externally-recognised industry: Travelport Ltd & ors v WEX Inc [2020] EWHC 2670 (Comm)

WEX (the purchaser), a corporate payment services provider, entered into an SPA with the sellers whereby it agreed to purchase 100% of the shares in two companies (the Target Companies), which provide virtual credit and payment services in the travel payments market. The sellers are the shareholders in the Target Companies.

A condition to closing was that no Material Adverse Effect (MAE) had occurred. The definition of MAE in the SPA excluded conditions resulting from pandemics, except if the event, change, development, state of facts or effect in question had a disproportionate effect on the Target Companies or their subsidiaries “as compared to other participants in the industries in which [the Target Companies] or their respective Subsidiaries operate”. This wording is central to the dispute since, if the comparison was with a small group of other equivalent participants, those participants would be more likely to have experienced similar changes, so that those of the Target Companies would not be disproportionate.

The Covid-19 pandemic and resulting global decrease in travel meant that the trade volumes of the Target Companies decreased. The purchaser notified the sellers by letter of the occurrence of an MAE within the meaning of the SPA due to “conditions resulting from the SARS-CoV-2 pandemic” and stated that it was not obliged to close the transaction.

The sellers sought: (i) a declaration that there had been no MAE; and (ii) specific performance under the SPA.

The relevant “industries”

To assess whether the pandemic had resulted in conditions disproportionately affecting the Target Companies a key preliminary issue was the meaning of “the industries” in which the Target Companies operate.

The sellers argued for a narrow interpretation that the relevant industry was the “travel payments industry”.

The purchaser countered that there was no “travel payments industry” and the appropriate comparator was either the “business to business” (B2B) payments industry or the payments industry. The judge agreed, finding that there was no “travel payments industry” as defined by the sellers, nor was there any other “travel payments industry” which might exist distinct from that defined by the sellers. The judge found that the relevant industry for the purpose of assessing any disproportionate impact on the Target Companies was the “B2B payments industry”.

Industry – broad pool of participants

The judge found as a matter of interpretation that the word “industry”, used in the MAE clause, connoted a broad pool of participants. The parties could have chosen “markets”, “sectors” or “competitors” (or an identified pool of participants), but instead “chose to peg disproportionality to a comparison with ‘industries’”. The contract was a heavily negotiated document and therefore it should be assumed that the words used had been deliberately chosen.

No “travel payments industry”

Whilst noting that the existence of a “travel payments industry” would not in any case be determinative, the judge found that the sellers had failed to demonstrate the existence of such an industry (either using the sellers’ definition or otherwise). In addition to witness evidence, the sellers had relied on the use of the term “travel payments industry” in statements by the parties (including in investor presentations) and in third-party materials such as news or company websites, references by analysts, statements by other market participants and industry publications and events.

Whilst the judge accepted witness evidence that the term “travel payments industry” was a well-understood phrase, it was noted that none of the witnesses gave evidence that “travel payments industry” was a standard term and the sellers’ witness accepted it was uncertain that the relevant regulator would understand the term. Moreover, the references to the term identified by the sellers were insufficient to support the conclusion that the “travel payments industry” was a distinct, externally-recognised industry. The judge noted the “relative paucity” of references to the “travel payments industry” (in contrast to the thousands of references to the terms “B2B payments industry” or “payments industry” adduced by the purchaser) and that on examination many of the references submitted by the sellers were of little assistance in any case. A common theme was that publications or events focussed on issues from either a payments or travel perspective rather than concerning a “travel payments industry”; for example, it was found that news relating to travel payments would most likely be found in a payments industry newsletter (whereas there were no travel payments industry newsletters) and similarly the awards ceremonies which might feature the Target Companies were travel industry awards. The judge concluded that “travel payments industry” was not a term in established use, but was rather used informally and with contextually varying meaning.

The judge also considered the purpose of the transaction, which the sellers argued supported their interpretation. However, the judge found that the purpose did not ultimately help the sellers. While it was accepted that the Target Companies operated in the travel payments market, the judge considered that it would be an “oversimplification” to describe the purpose of the transaction as merely a purchase of a travel payments business.

The law on MAE clauses

The judge noted the “dearth” of English case law on MAE clauses and referred to U.S. case-law and academic literature.

The U.S. authorities largely view MAE clauses (and any carve-outs and exceptions) as functioning to allocate firm-specific internal risks to the seller and industry-wide external risks to the purchaser. However, there was no clear authority to say that the comparison was inevitably one of company versus market as opposed to company versus industry.


The approach of the judge emphasises the significance of a textual analysis of the contractual language in ascertaining the meaning and effect of an MAE clause. In this instance, the wording favoured the purchaser. With the benefit of hindsight, the sellers would have benefited from defining the comparator group more precisely; but that will not always be the case and a certain amount of ambiguity or flexibility may work better in other instances.

Permission to appeal has been sought.

Further information

For more information please contact Amy Edwards,