MAC Clauses in the Brazilian Legal System
Guilherme Leporace and Ana Carolina Pimentel*
A material adverse change clause, or simply MAC clause,1 is a legal provision often found in M&A agreements. The purpose of such provision is to allocate between the parties of a transaction the risk of adverse changes that might occur within a particular time frame, usually signing and closing. Upon an event that materially affects the transaction, the MAC clause entitles the party that did not take the risk of such event to refuse to close or, in industry parlance, "walk away from the deal".
In this context, it is highly advisable that the parties to an M&A deal, including venture capital and private equity firms, be aware of certain features of the Brazilian legal system when negotiating MAC clauses in M&A agreements to be governed by Brazilian law.
The (new) Brazilian Civil Code enacted in 2002 contains two articles dealing with changes affecting the economic balance of executory contracts. Article 317 sets forth that if an unforeseeable event brings about clear disproportion between the value of performance on the signing date of a contract and at the moment of its execution, a court may change the contract to assure the real value of the performance at the request of the debtor. Article 478, on its turn, provides that if the execution of a executory contract shall bring about excessive hardship to one party and extreme windfall to the other due to extraordinary and unforeseeable events, a court may terminate the contract at the request of the party burdened by the hardship.
Despite the significant number of M&A transactions involving Brazilian companies, Brazil does not have yet a well-developed body of case law on either MAC clauses or articles 317 and 478.
Although the Brazilian highest court for non-constitutional matters – the Superior Tribunal de Justiça – has ruled that those legal provisions do not apply to certain commercial contracts,2 it has never addressed the specific case of M&A agreements. It is questionable whether such case law would also control disputes involving M&A agreements. In the absence of a MAC clause, chances are that courts would apply articles 317 and 478 to M&A agreements. For that reason, it may be advisable for parties that do not want to be bound by articles 317 and 478 to expressly provide so in their agreements.
However, it is also not clear whether or to which extent parties are allowed to contract around articles 317 and 478 to limit the cases in which they shall apply. Most scholars argue that in the Brazilian legal system parties are usually free to agree on the contractual terms they see suitable and that it is not sensible to restrain such freedom when parties are sophisticated players, as it is often the case in M&A agreements. On the other hand, some other scholars point out it is in the spirit of the Brazilian Civil Code that contracts be fair and balanced. Accordingly, one could argue that articles 317 and 478 express public policy and, as such, cannot be totally or partially contracted around.
Another difficulty is that in the absence of a very detailed MAC clause it is quite hard to foretell whether Brazilian courts would acknowledge a fact with direct influence on the economics of a transaction as a material adverse change or not, since there are no significant cases discussing the concepts of adverse change, materiality and carve-out.
Likewise, it is not clear how courts would apply certain terms in the wording of articles 317 and 478 (such as "unforeseeable event", "clear dis-proportion", "real value of performance", and "extreme windfall") to M&A transactions. Even though there is case law addressing the meaning of these terms, it hardly ever has involved highly sophisticated transactions.
In the midst of the relative uncertainty rounding the world economy, MAC clauses have become even more important. In view of certain particularities of the Brazilian legal system, it is somewhat complex to negotiate MAC clauses in M&A agreements governed by Brazilian law. A comprehensive understanding of the nuances involving this matter is crucial for investors to be able to take informed decisions on the contractual conditions that better suit their risk policy and their assessment of the deal.
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1 Also known as material adverse effect clause.
2 Such as future contracts. STJ, Recurso Especial 936.741/ GO.
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* Guilherme Leporace and Ana Carolina Pimentel are partner at Lobo & Ibeas Advogados.
