The M&A Perspective

Unexpected Severe Events – Learnings from the Pandemic for Swiss Law M&A Transactions


The pandemic had various impacts on M&A practitioners, one being that attorneys quickly updated their transactional documents to consider the new "normal" – a more volatile business environment. The typical general areas of concern are the definitions of the material adverse change (MAC) or material adverse event (MAE) clause (which would provide the buyer with the right to walk away from the deal should events occur that are detrimental to the value of the target company) and the carve-out from the obligation to operate the business "in the ordinary course" in case unexpected severe events occur. These trends also saw the emergence of Covid-19-related M&A case law in the Delaware Court of Chancery in the US.

In a first decision AB Stable VIII LLC v MAPS Hotels and Resorts One LLC, the court held that the Covid-19 pandemic did not result in a MAC/MAE, because it fell within a contractual exclusion for "natural disasters or calamities". However, it still allowed the buyer to walk away from the deal because the seller's response to the pandemic breached the ordinary course of business covenant. The target closed two of its 15 luxury hotels and limited severely the operations of the other 13, it laid off or furloughed 5,200 full-time-equivalent employees and decreased marketing expenditure year-over-year by 33.1%, 76.4%, and 69% in March, April, and May of 2020 respectively. All of these measures were implemented without seeking the buyer's prior approval. The seller argued that if it had sought approval from the buyer, then the buyer could not reasonably have withheld its consent; this argument was rejected by the court. Also, the seller was unable to convince the court that the responses were taken only to comply with its contractual obligations or in response to legal requirements due to government measures or laws that came into effect only after signing.

In a second decision in Snow Phipps, LLC v KCAKE Acquisition, Inc., the court also found no MAC/MAE, considering its pre-Covid-19 decision in Akorn, Inc. v Fresenius Kabi AG (the only case in which the Delaware Court of Chancery so far found a material adverse effect). According to the court, a drop in sales of 42%-64% over five weeks, followed by a strong rebound in sales and supported projections of continued recovery (the downside case projected the target's adjusted EBITDA to be 5% higher in 2021 than in 2019), does not qualify as a material adverse effect. The court also found no violation of the ordinary course of business covenant in the Covid-19-related cost-cutting measures of the target, which had acted similarly in previous situations of sales declines. The target had also informed the buyer, who did not object to the measures.

Against this backdrop, one may draw some interim conclusions for M&A transactions under Swiss law, bearing in mind that despite recent positive developments, Covid-19 is not eradicated yet and the global economic and political situation is far from being stable.

The MAC clause under Swiss law
While the Swiss Supreme Court has not yet decided on MAC-clauses in particular, inferences can be drawn from other cases. Similar to the approach taken by the Delaware Court of Chancery in the AB Stable transaction, it is very likely that a Swiss court would consider the Covid-19 pandemic as a natural disaster or calamity given the Swiss Supreme Court's definition of an act of God as an 'unforeseeable, extraordinary event that is not related to the "operation" of the company, but strike with unavoidable force from the outside' (SSC 102 IB 257). Also under Swiss law, a temporary drop in sales as in the Snow Phibbs case would not constitute a MAC due to the general legal principle that agreements must be kept (pacta sunt servanda). However, the question arises whether a Swiss court's perception of the foreseeability of certain "natural disasters or calamities" may have changed not only with respect to pandemics but also concerning other matters of public attention, such as climate change-related events. If a matter like the pandemic is carved out from a contractual MAC/MAE definition, such carve-out would be respected under Swiss law. Hence, parties should consider explicitly including or excluding specific issues by means of a MAC/MAE clause (e.g. exclude the "pandemic" or, more broadly, "effects or events induced by an epidemic"; similarly, "climate-change induced effects or events"). If events without a long-term impact on the target business shall be considered a MAC/MAE, parties must make that explicit. Notably, any MAC/MAE clause in a Swiss law agreement (with or without certain explicit inclusions or exclusions) will likely bar a party to invoke the established Swiss law principle of "clausula rebus sic stantibus" (a doctrine allowing for relief because of a fundamental change of circumstances), as this doctrine is superseded by the contractual MAC/MAE arrangement (see SSC 127 III 300).

The ordinary course undertaking and responses to severe events under Swiss law
In contrast to the Delaware Courts, a Swiss court may take a more flexible approach when interpreting ordinary course undertakings. A Swiss court will put more emphasis on the parties' intention when contracting and whether the seller acted in good faith in its response to unexpected severe events. This is not a carte blanche for sellers who seek to implement drastic measures without soliciting the buyer's opinion under Swiss law. If contractually obliged to do so, the right approach is always to inform the counterparty and request approval; if circumstances require immediate action, a party may, as an exception, be protected even if disregarding contractual approval requirements or response deadlines. In any case, due consideration should be given to antitrust regulations, especially if soliciting consent would lead to the exchange of crucial information about measures to combat an industry-wide crisis. Based on this, a cautious seller negotiating a Swiss law transaction will want to (a) ensure that the contract allows for reasonable emergency measures to be taken by the seller/target even if not compliant with the ordinary course of business and past practice; and (b) accept the buyer's consent requirements in an ordinary course covenant only subject to short deadlines in case of immediate need for action.


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