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Got no choice: Australian firms use legal clause to back out of M&A amid virus

SYDNEY/HONG KONG (Reuters) - Several Australian companies are reviewing or even terminating takeover deals by using a legal escape route because of the devastating impact of the coronavirus, a template that some lawyers expect to be replicated in other countries.

A worker cleans the mostly deserted waterfront area of the Sydney Opera House, in the wake of New South Wales implementing measures shutting down non-essential businesses and moving toward harsh penalties to enforce self-isolation as the spread of coronavirus disease (COVID-19) reached what the state's premier calls a "critical stage" in Australia, March 26, 2020. REUTERS/Loren Elliott

Three listed companies this week have triggered so-called material adverse change (MAC) clauses that can be invoked to end or renegotiate deals, as the COVID-19 pandemic has paralyzed businesses and sent markets crashing.

“Companies invoking the Material Adverse Change clauses to call off deals is a question of when not if,” said Nandakumar Ponniya, Asia Pacific head of Baker McKenzie’s international arbitration practice.

On Thursday fund manager Centuria Capital Group said it had withdrawn its A$174.8 million ($103.15 million) offer to buy New Zealand property fund Augusta Capital, terminating a takeover agreed in January and for which it had raised A$80 million. The deal was due to close on March 31.

The deal’s documentation included an MAC clause with specific provisions that protected the bidder if financial markets deteriorated, Chief Executive John McBain told Reuters.

“Since entering into the bid implementation agreement on January 29 there has been an unquestionable deterioration of almost unrivalled magnitude in markets and this and only this caused the clause to be invoked,” McBain said.

Dentist chain owner Abano Healthcare, which has operations in Australia and New Zealand, told the stock exchange on Wednesday that a government order to close its network in New Zealand for four weeks could trigger the restructuring or even ending of an NZ$300 million ($174.39 million) takeover deal with private equity firm BGH.

Abano’s shares, at NZ$5.4 when the deal was announced, were trading at NZ4.4 before it made the announcement.

“As a result of the four-week lockdown, Abano has now given formal notice ... that there are circumstances that may give rise to a Material Adverse Change (MAC),” the company said.

Earlier this week, Australian credit score provider Pioneer Credit, which is being acquired for A$120 million by Carlyle Group Inc, said the U.S. private equity firm had asked for information about its “business operations and performance”.

Although the takeover has been signed, the deal - which values the company’s shares at A$1.82, almost five times their current price - is yet to be approved by shareholders and court-stamped.


Bankers and lawyers say they have seen a jump in inquiries about MACs in the region in recent weeks.

“I’m sure there will be deals where the sellers or the buyers feel like they have an ability to not do it at that price and they’ll have to cut,” said a Hong Kong-based M&A banker who declined to be named for the story.

In Asia-Pacific alone, there are some 88 deals worth $1 billion or more - totalling $252.8 billion combined - that have been agreed to since 2019 but not yet completed, according to Refinitiv data as of March 17.

“If the MAC clause is drafted broadly enough, an epidemic like the current COVID-19 situation could constitute an MAC and therefore entitle the buyer to refuse to complete the transaction,” Ponniya of Baker McKenzie added.

($1 = 1.6946 Australian dollars)

($1 = 1.7203 New Zealand dollars)

Reporting by Paulina Duran in Sydney and Kane Wu in Hong Kong; Editing by Jennifer Hughes and Muralikumar Anantharaman