Four significant decisions for the Private Equity industry in 2020

The case of Travelport v WEX has received a lot of coverage since proceedings were issued in May 2020. It is a welcome judgment on Material Adverse Effect (MAE) clauses in the context of M&A transactions, of which there is relatively little legal precedent in this jurisdiction.  In commercial terms, this matter is a prime example of a transaction being successfully renegotiated by the purchasers in light of the dramatic effects of COVID-19.

WEX Inc., a financial technology service provider, agreed to purchase the shares of eNett International (Jersey) Limited and Optal Limited, who together provided online payment solutions and for which the vast majority of their revenue was generated through the travel industry. WEX agreed to the pay the shareholders of eNett and Optal approximately USD $1.7 Billion pursuant to a Sale and Purchase Agreement (SPA) agreed in January 2020 and the transaction was due to complete at a later date. The SPA contained detailed MAE provisions, the effect of which (for the purpose of this case) was that a pandemic would not be treated as a MAE unless it had a disproportionate effect on the target companies as compared to other participants in the industries in which they operated.

COVID-19 was declared a pandemic by the WHO in March 2020 and the ensuing restrictions and global lockdowns had a drastic effect on the travel industry, and therefore on the revenue on the target companies of the WEX deal. On 30 April 2020 WEX notified the sellers that it considered a MAE to have occurred under the terms of the SPA and therefore that it was not obliged to complete the transaction in accordance with the SPA. The sellers sought specific performance of the SPA and a declaration as to whether there had in fact been an MAE, the latter issue of which proceeded to an expedited trial.

Mrs Justice Cockerill DBE found largely for WEX in a judgment handed down on 12 October 2020. The primary issue before the Court was to determine the relevant industries which were deemed to be comparable for the purpose of the pandemic carve-out in the MAE clause in the SPA. The sellers argued that the comparable industries were a narrow class of travel payment service providers (who were all similarly affected by the pandemic) but WEX argued that the comparable industries was a wider class of "B2B" payment service providers (amongst whom travel payment providers such as the target companies did suffer disproportionately as a result of the pandemic). The Court found that there was no "Travel Payment Industry" and that, on the construction of the MAE clause in the SPA and the facts of the case, the targets companies were in the wider B2B payments industry.

Press reports following this judgment suggest that WEX renegotiated the purchase price of the target companies down to USD $577.5 Million (a reduction of over USD $1 Billion, or nearly 60%). This is hugely significant and demonstrates the importance of defining properly the scope of any exclusion clauses in deal documents. The key consideration in relation to MAE clauses in SPAs, therefore, is for parties to define which party is to bear which particular risks, and by reference to clearly identifiable metrics and comparators.

The particularly interesting facet of this case for the PE industry is the English Court's treatment of competing jurisdiction clauses in the SPA (which was governed by Spanish Law and subject to the jurisdiction of the Spanish Courts) and an Equity Commitment Letter (ECL) which was governed by English law and the English Courts' jurisdiction. The English Court refused to stay English proceedings, which related to the same failed transaction as those already commenced in Spain, because the parties had clearly intended for the obligations in different documents to be subject to different jurisdictions.

The Claimant, Lopesan Touristik, was the seller of a hotel in Spain and, pursuant to the terms of an SPA, it was to be purchased by an SPV (Oldavia ITG SLU). In addition to the SPA, various entities within the Apollo Private Equity group committed to provide equity to Oldavia pursuant to the terms of the ECL in order to complete the purchase in certain circumstances. The commitment under the ECL was enforceable by Lopesan. These two agreements were governed by and subject to Spanish law and Courts and English law and Courts respectively. The ECL contained a provision by which Apollo's obligation to provide equity to Oldavia would cease on 1 January 2021.

It was common ground that the condition precedent for completion of the transaction took place, but that completion did not take place (for reasons that include a dispute as the effect of the Spanish government's response to the COVID-19). Lopesan issued proceedings in Spain, seeking specific performance of the SPA purchase obligations. However Apollo indicated that Oldavia's liability to purchase the hotel was contested, that it was accordingly not obliged to commit funds under the ECL and, in any event, that its obligations would lapse on 1 January 2021 (which was before the Spanish proceedings would be determined).

As a result, Lopesan issued proceedings in the English Court against Apollo to enforce the payment obligations under the ECL by way of a speedy trial, and Apollo sought a stay of the English proceedings pursuant to Article 30(1) of Brussels Recast. Despite a finding that there was substantial overlap between the Spanish and English proceedings and a risk of conflicting judgments, the Judge refused to grant a stay of the English proceedings because the parties had chosen different jurisdictions for each agreement; indeed it would not be possible to enforce the ECL in Spain.

Whilst Brussels Recast no longer applies in England and Wales following Brexit, the importance of commercial parties' express choice of jurisdiction (or jurisdictions) will always be a strong determining factor in whether the English Court accepts jurisdiction. This is of critical importance to the structure of multi-jurisdictional, and multi-party, transactions.

The judgment of the Supreme Court in Marex v Sevilleja is one of the most important company law judgments for many years. It has changed the law in respect of the ability of creditors to recover loss in certain circumstances. Creditors are no longer subject to the reflective loss rule, which prevents shareholders from recovering damages for the same loss as that suffered by a company. For the PE industry, the Court's decision could be significant in the context of structuring investments and financing for target and portfolio companies.

The original claimant, Marex, sought damages against Mr Sevilleja for prejudicing its ability to enforce a judgment from 2013 against insolvent BVI forex trading companies controlled by him. Mr Sevilleja had taken assets from the bank accounts of these companies and made them insolvent in order to avoid paying a substantial judgment debt to Marex. Mr Sevilleja argued that the "reflective loss" rule prevented Marex, as a creditor of the original defendant companies, from seeking loss that was actually suffered by the defendant companies.  The reflective loss rule prevents shareholders seeking damages for the loss of value to their shareholdings in a company in circumstances where that loss has actually been suffered by a company (and therefore only that company can bring a claim). The reflective loss principle had previously been extended to non-shareholder creditors and Mr Sevilleja sought to argue that Marex had no arguable claim against him on that basis.

The Supreme Court found unanimously that the reflective loss prohibition should be limited to shareholders only and Mr Sevilleja's arguments failed. This overturned previous Court of Appeal authority extending the reflective loss prohibition to creditors and thereby reduced (and clarified) the scope of it. In fact, three of the seven-person panel argued that the reflective loss prohibition should be abandoned entirely (with measures against double recovery being addressed on a case by case basis) but the majority preserved a narrow restriction for shareholders only.

The differing approach taken by the Court to loss suffered by different categories of claimants is important. It means creditors of a company may now recover directly from wrong-doers (such as errant directors) when they have a cause of action, rather than the only recourse being through the insolvency process. Indeed it is important for investors to understand the (re)defined scope of the reflective loss prohibition, especially in the context of fundraisings or additional capital injections. Management teams should also be aware that the decision reaffirms the duties on companies, acting through their board members, to pursue losses for the benefit of the company as a whole (namely the shareholders).

This July 2020 decision provides a salutary lesson on strict compliance with claim notification provisions under an SPA, and the financial consequences of failing to do so.

The matter relates to the purchase of the shares in Outfit 7 Investments Limited by United Luck Group Holdings Limited for USD $1 Billion. Under the terms of the SPA, signed on 21 December 2016, USD $100 Million of the purchase price was retained in a Claims Escrow Account, and would be released to the sellers in two tranches unless certain claims had been notified. In that case, the release of a tranche would be halted pending resolution of the particular claim. A warranty or indemnity claim under the SPA would only be enforceable against the sellers if the buyers gave "written notice" and "stating in reasonable detail the matter which gives rise to such Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed."

Shortly before the release of the second tranche, the buyers purported to notify the sellers of a potential claim by the Slovenian tax authorities, and pending which the release should be halted. The sellers alleged that the notification of the claim was not valid or compliant with the terms of the SPA and therefore the second tranche of the escrow sum should be released in full. The sellers sought a declaration for this relief and then applied for summary judgment.

Deputy Judge Eggers QC granted the application for summary judgment. He emphasised that proper compliance with the notification provisions was a condition precedent for having an enforceable warranty or indemnity claim and, if this was not satisfied in accordance with the terms of the SPA, there was no basis for retaining any escrow sums. The Court found that the notification letter did not give "reasonable detail of the matter which gives rise to the claim", despite adequately stating the nature of the claim. Importantly, it was not relevant that the buyer may have known the background to the claim.

This decision reinforces the importance of strict compliance with contractual notification provisions, even when the facts of a claim may be well known to both parties. We anticipate that the economic downturn is likely to give rise to many breach of warranty claims in the coming years and it is essential that buyers are aware of (and adhere to) the relevant contractual notification requirements.