Journal of International Banking Law and Regulation

2004
Material adverse change and syndicated bank financing: Part 2
Franck Julien
Jean-Marc Lamontagne-Defriez
Subject: Banking and finance. Other related subjects: Contracts
Keywords: Contract terms; Cororate finance; !"clusion clauses; Financial markets;
#$ndicated loans
*J.I.B.L.R. 193 %n &art ' of t(is article) *e considered t(e +arious e"ectations in(erent in
a M,C clause and (o* t(is clause fitted *it(in t(e arra$ of contractual rotections afforded to
a lender.
%n t(is second art *e *ill -e concerned *it( looking at t(e M,C clause to differentiate
among t(e e+ents t(e occurrence of *(ic( (as -een ad+anced -$ t(e agent) t(ose *(ic(
aear to -e moti+ated -$ a desire to get out of a contract t(at (as ro+ed less rofita-le
t(an anticiated) from t(ose--more limited in num-er and fre.uenc$--*(ic( genuinel$ allo*
an earl$ and less costl$ e"it out of a contractual undertaking.
Invoking a MA lause
/(e imortance of t(e decision to e"ercise a M,C clause is reflected in t(e role gi+en to t(e
mem-ers of a -anking s$ndicate. /(is decision s(ould not -e reac(ed -$ t(e -anks0 agent
alone) and it must) rior to an$ formal stes on t(is matter) organise a consultation among
mem-ers of t(e ool of -anks *it( a +ie* to ascertaining t(eir +ie*s on t(e e"ercise of t(e
M,C clause in t(e lig(t of t(e occurrence of a single or se+eral e+ents.
/(is e"ercise *ill -e moti+ated as muc( -$ olitical calculations as -$ legal or commercial
1udgments. #ome instances (a+e s(o*n t(at t(e agent alone *ould not in+oke a M,C clause)
and -anks *ere di+ided as to t(e range and t(e interla$ of t(e clause.
2(ere t(ere (as -een a lack of recision) t(e !nglis( courts endea+our to trace t(e
circumstances *(ic( re+ailed -efore a transaction *as concluded) to get to t(e intent of t(e
rotagonists. %n t(e a-sence of a definiti+e contractual definition encomassing all ossi-le
trigger e+ents en+isaged -$ a M,C clause) 1udges in t(e 3nited #tates refer to *(at a
reasona-le de-tor faced *it( similar conditions *ould deem a deciding e+ent.
'
Frenc( la*
also ad+ocates (a+ing recourse to t(is met(od.
2

Because t(e Frenc( courts0 decisions do not) as far as *e are a*are) furnis( a recedent) *e
need to look to t(e aids to interretation *(ic( ,nglo-#a"on decisions (a+e e+ol+ed) *(ere
t(e rincial cases attemt to distinguis( 4'5 t(e determining factors and 425 t(ose *(ic( are
not deemed sufficientl$ ro-ati+e.
!he deter"ining factors
%t *ould -e inconcei+a-le to look at in+oking a M,C clause in t(e a-sence of e+ents *(ic( 4a5
e"(i-it a singular seriousness) 4-5 t(e -rutalit$ and sudden nature of *(ic( escaes and
defies all +igilance and anticiation) and 4c5 *(ic( are likel$ to ro+e to (a+e -een of an
e"cetional and insurmounta-le seriousness.
#ow detri"ental are the events$
%n National Westminster Bank Ltd v Halesowen Presswork Assemblies,
6
!nglis( 1udges
decided t(at t(e fact t(at t(e client of a -ank re.uested t(e oening of a +oluntar$ li.uidation
rocedure in resect of (is assets s(ortl$ after ad+ances to (is current account) constituted a
decisi+e c(ange in circumstances *(ic( t(e -ank could counter *it( a M,C clause.
%n Levison v Farin,
4
an !nglis( 1udge decided) in t(e conte"t of t(e ac.uisition of a coman$)
t(at a 20 er cent fall in t(e +alue of t(e assets of t(e target coman$ in a eriod of 1ust four
mont(s) -et*een t(e date of t(e last accounts of t(e coman$ and t(e date of comletion of
t(e transaction) *as material. %t is uncertain *(et(er t(is decision s(eds an$ furt(er lig(t on
t(e circumstances in *(ic( a M,C clause can -e +alidl$ in+oked7 8i-son J. re1ected t(e
arguments of t(e +endors t(at t(e illness of t(e in-(ouse designer) and its conse.uent
detrimental effect on t(e results of t(e target) *ere communicated to t(e -u$ers in good
time. ,ccording to t(e court) t(is *as re+ealed in +er$ general terms and *it(out an$
numerical anal$sis of t(e +alue of t(e assets or of t(e real rate at *(ic( losses *ere -eing
incurred. /(is moti+ation seemingl$ did not allo* t(e in+ocation of a M,C clause) -ut *ould
rat(er encourage a claim on t(e grounds of *rongful consent and
fraudulentmisreresentation in articular.
More recentl$) t(e 39 /akeo+er &anel0s ruling in WCC v Tempus
:
in ;o+em-er 200'
considered t(at to a+ail oneself of or rel$ on a M,C clause s(ould re.uire a considera-le
c(ange *(ic( *ent to t(e core of t(e transaction itself 4<an ad+erse c(ange of +er$
considera-le significance striking at t(e (eart of t(e urose of t(e transaction in .uestion)
analogous to somet(ing t(at *ould 1ustif$ frustration of a legal *J.I.B.L.R. 194 contract=5.
/(is *ould not generall$ -e t(e outcomeof a straig(tfor*ard s(ort-term do*nturn in
erformance of a target coman$) *(ic( could demonstra-l$ s(o* t(at it is not likel$ to
affect t(e coman$0s erformance in t(e long run) e+en *it(out a nuance in t(e drafting of
t(e M,C clause to *(ic( t(is turn of e+ents is contrasted. %n t(e matter of Tyson-BP,
>
t(e
1udges mentioned t(e seasonal c(aracter of %B&0s results *(ic( t(e ac.uiror kne* a-out. ,s a
result) o+er a eriod of t*o semesters) t(e alleged deterioration in %B&0s erformance)
eseciall$ *it( reference to t(e re+ious $ears0 financial statements) *as merel$ t(e logical
4and t(us redicta-le5 outcome of t(e ac.uisition. /(eir decision could (a+e differed faced
*it( a seculator desirous of a +alue added in t(e s(ort term and *(ose -usiness lan0s
ro1ections (ad -een contradicted) -ut t(is +ie* cannot -e reac(ed *it( a -u$er *(ose
strateg$ is focused on t(e long term.
%n ot(er cases *(ere recourse to a M,C clause *as de-ated) t(e grounds *ere t(e
discreanc$ -et*een t(e reresentations and *arranties made in a facilit$ agreement on t(e
trut( and fairness of its accounts and financial statements 4*(ic( formed t(e -asis for t(e
financial ro1ections of t(e lenders) articularl$ on dereciation5 and t(e su-se.uent
statements of t(e -orro*er) *arning t(e markets a-out a slo*do*n in sales and a do*ngrade
of e"ected rofits. , *arning from t(e -orro*er0s arent coman$) stating t(at t(e grou
*ill not -e a-le to meet its financial undertakings negotiated in its s$ndicated facilit$) can
e"acer-ate t(e situation. %n suc( circumstances) ro+ided e"erts are unanimous in t(inking
t(at t(e effects of suc( statements are sufficientl$ far-reac(ing to 1ustif$ (a+ing recourse to a
M,C clause) an$ suc( decision -$ t(e -anks must -e receded -$ an o-1ecti+e re+ie* of all
facts and circumstances. /(is re+ie* s(ould -e undertaken *it( reference to t(e latest
audited accounts of t(e -orro*er) *(ic( can -e furt(er clarified -$ t(e -orro*ers0 usual
reorting accountants.
%n $et anot(er case) t(e reliance on a M,C clause *as discussed in t(e lig(t of t(e follo*ing
scenario7 4a5 uon t(e occurrence of a material ad+erse c(ange in t(e financial osition of t(e
grou since Marc( 6') '??@) and 4-5 *(ere t(e c(ange (as or *ill (a+e a material ad+erse
effect on t(e -orro*er0s caacit$ to satisf$ its financial commitments to*ards lenders. /(e
-orro*er0s -oard of directors (ad aro+ed t(e accounts for t(e eriod Marc( 6' to t(e end
of Ma$) and (ad considered t(at good*ill (ad -een roerl$ +alued. , fe* *eeks later) t(is
telecoms e.uiment manufacturer announced a reduction in good*ill -$ se+eral -illions of
ounds) reflecting s(arl$ re+ised gro*t( ro1ections. /(e deterioration of t(e -orro*er0s
osition *as suc( t(at its accounts (ad not gi+en an$ indication of t(e se+erit$ of t(e
difficulties *(ic( t(e coman$ t(en (ad to face) *(ic( *ere communicated to t(e lenders
onl$ at t(e -eginning of t(e summer) *(en an anticiated uturn in acti+ities did not
materialise. /(e e"erts *(o *ere called in on t(is matter considered t(at) on t(e -asis of
t(e financial statements aro+ed -$ t(e ,8M) taken at face +alue) it *as reasona-le to
conclude t(at t(e turn in t(e -orro*er0s condition *as entirel$ attri-uta-le to t(e eriod
su-se.uent to Marc( 6'. /(ese e"erts s(o*ed t(at a re+ie* of e+ents since Marc( 6'
clearl$ suggested a -reac( of t(e M,C clause7 in articular t(e oerating losses of t(e first
trimester amounted to se+eral (undred million ounds) *it( an o-+ious imact on financial
o-ligations; t(e reduction in t(e +alue of good*ill in t(e region of se+eral (undred million
ounds *ould (a+e una+oida-le reercussions on a glo-al +aluation of t(e -orro*er0s
turno+er) and roduce a increasing likeli(ood t(at t(e -orro*er *ould -e una-le to reim-urse
current facilities. Lastl$) t(e do*ngrade in its ratings to 1unk status -$ t*o international rating
agencies *as likel$ to *orsen its refinancing ro-lems. /(erefore it *as reasona-le for
lenders to allege t(at 4a5 t(e financial statements dra*n u to Marc( 6') '??@ did not gi+e a
true and fair and e"act +ie* of t(e financial situation of t(e -orro*er at t(e date t(e$ *ere
dra*n u) and 4-5 t(at since Marc( 6') '??@) t(ere (ad -een a significant negati+e c(ange in
t(e financial situation of t(e grou) *it( a material ad+erse effect on t(e -orro*er0s a-ilit$ to
meet its financial o-ligations to lenders. Calling a M,C clause in t(is case
-roug(tman$difficulties. For t(e M,C clause to -e +alidl$ in+oked) t(e e+ents in .uestion (ad
to -e lasting 4t(e clause stiulating <Aro+idedB t(e e+ent is continuing=5. /(e coman$ (ad
also managed to imlement a disosals rogramme for certain of its o+erseas su-sidiaries)
and t(e funds recei+ed from t(is sale *ould go to*ards sta-ilising t(e financial osition of t(e
coman$. /(is distur-ed t(e e"ercise of t(e M,C clause in t(at t(e -anks0 anal$sis (ad to
take into account t(ese future sales roceeds. Moreo+er) t(e -orro*er could a+ail itself of t*o
facilities 4as *ell as t*o -ond issues57 t(e first) *(ic( *as almost full$ utilised) and a second
facilit$) *(ic( *as (ardl$ dra*n on during t(is eriod. /(e comle"it$ in t(e anal$sis of t(e
M,C clause *as t(erefore comounded (ere) -ecause its in+ocation in t(e first facilit$ could
(a+e led to a rea$ment demand of all outstandings) *(ic( in turn *ould (a+e reciitated a
cross default clause as regards t(e coman$0s reim-ursement o-ligations to -ond(olders.
Co*e+er) t(e anal$sis of t(e M,C clause as alied to t(e undra*n ortion of t(e loan facilit$)
in con1unction *it( t(e second 4undra*n5 facilit$) (ad far less onerous conse.uences for t(e
-orro*er.
#ow %redictable were the events$
Can a M,C clause -e alied to circumstances *(ic( could (a+e -een redicted) or *(ic( t(e
lenders s(ould (a+e susectedD En t(is oint again) onl$ t(e !nglis( la* recedents gi+e us
sufficient illustrations to dra* from. /(e decisions made do not ena-le us to redict an
outcome *it( an$ recision. /(e Levison-Farin case referred to a-o+e seems to (old u suc(
a ossi-ilit$) -ut it is in some *a$s contradicted -$ 3# la* cases. %t is t(erefore most
*J.I.B.L.R. 195 useful to refer to t(e t(eor$ of !rustration under !nglis( la*) *(ic( osits
t(e occurrence of an unforeseen or une"ected e+ent) to 1ustif$ a+oiding a contract) t(e
arties (a+ing to face t(e conse.uences of t(e e+ents *(ic( t(e$ (ad -een a*are of at t(e
time t(e$ entered into t(e contract. /(is de-ate aears to -e di+isi+e among secialists)
*it( some *is(ing a (ig( test of foreseea-ilit$)
F
and ot(ers claiming t(at t(is is a matter of
interreting t(e terms of a contract in order to determine*(et(er t(e contracting arties (ad
intended to remain -ound -$ t(e terms of t(e contract or con+ersel$) in t(e a-sence of an$
stiulation on t(is oint) *(et(er t(e t(eor$ of frustration (as an$ alica-ilit$.
@
But t(e
o+erall stance of ,nglo-#a"on 1udges aears to condition t(e la$ of a M,C clause to t(e
occurrence of e+ents it *as imossi-le to redict or anticiate. %n t(e mergers and
ac.uisitions sector) t(e 39 /akeo+er &anel em(asised in WPP-Tempus in ;o+em-er 200'
t(at an offeror could not in+oke a general or sector-secific economic do*nturn *(ic( it
s(ould (a+e anticiated at t(e date of its offer) *(ic( makes t(e offeror0s duties to discern
more onerous.
&hat is the sco%e of the events$
%n mergers and ac.uisitions),merican cases s(o* t(e courts onl$ seem *illing to entertain a
+alid M,C clause in t(e resence of a serious c(ange) *(ic( de+elos <durationall$
significant= effects on t(e nature) t(e long-term ersecti+es and t(e maintenance of a target
coman$0s acti+it$. /(e dominant trait aears to -e to refuse to disla$ an$ -ene+olence
to*ards an$ regrets of -u$ers *(o e"erience re+ersals in t(eir ro1ections. , some*(at
*ide and +oluntaril$ imrecise drafting of a M,C clause *ill engender uncertaint$ on t(is
front. #ome draftsmen (a+e t(us ri+ileged a tig(ter (rasing to include a secific and
mutuall$ agreed definition of t(e ro-ati+e +alue of t(e circumstances 4materiality 5--and
t(eir conse.uences--in relation to t(e negotiated transaction) taking into account t(e secifics
of t(e transaction) its conte"t at its incetion and t(e rofile of t(e -orro*er. ,s a result t(e
M,C clause *ill -e constructed -$ reference to a redetermined ercentage of rofits or -$
reference to a articular economic inde" 4for e"amle) ratings do*ngrade5. #uc( a clause is
not entirel$ de+oid of itfalls (o*e+er) and can ro+e to -e some*(at s(ort of some
determining factors.
?
Fromt(is arises a otential risk of not anticiating a articular c(ange
t(at *ill -e su-se.uentl$ re+ealed -$ t(e turn of e+ents. #(ort of a recise contractual
definition of t(e decisi+e c(aracter of one or se+eral e+ents encomassed *it(in a M,C
clause) ,nglo-#a"on 1urisdictions refer to *(at a reasona-le creditor) ut in similar
circumstances) could consider decisi+e. Frenc( la* also recommends resorting to t(is
ractice.
'0

'on(catalyst events
2(ere some e+ents do not act as a catal$st to a M,C clause turns on 4a5 t(e e"cessi+el$
restricti+e drafting of t(e clause) or 4-5 on t(e nature of t(e alleged e+ent.
Restrictive character of the drafting
%n some instances t(e de-ate turned on *(et(er a ratings do*ngrade of t(e client or its
grou -$ one or more reuta-le ratings agencies could act as a trigger to a M,C clause and
t(us lead to re+ised financing terms. /(e reference to t(is sole criterion) indeendentl$ of an$
ot(er cororate ills) causes some erle"it$ gi+en t(e dire conse.uences t(at could attac( to
suc( an interrution. /(is feeling is reinforced uon re+isiting a t$ical agreed M,C clause7
<as at t(e date of t(is agreement) t(ere (as -een) in t(e oinion of t(e agent acting in good
fait() no ad+erse c(ange in t(e financial condition of t(e -orro*er t(at is material in t(e
conte"t of t(e financing) nor a c(ange *(ic( (as a material ad+erse effect on t(e financial
condition of t(e -orro*er and its su-sidiaries taken as a *(ole.= /(e reference to t(e financial
condition of t(e -orro*er and to t(e agent0s o-ligation to reac( a good fait( determination
constitute as man$ o-stacles to in+oke t(e M,C clause. %t *ould -e some*(at resumtuous
to dra* animmediate conse.uence from a rating do*ngrade and t(e instantaneousl$ and
irredeema-l$ comromised nature of t(e -orro*er0s financial *ort(. /(e difficult$ for lenders
*ill -e *(et(er to look for a ossi-ilit$ t(at t(e -orro*er0s fortunes mig(t imro+e. /(e agent
*ill -e *ell recommended to can+ass t(e oinion of reorting accountants on t(e meaning of
t(ose e+ents) t(ose e"erts can -e t(ose of t(e client and t(ose (a-ituall$ retained -$ t(e
-anks for t(eir o*n -esoke researc(. %t *ould also -e rudent for t(e -anks to seek to
identif$ certain trou-le areas t(at mig(t lead to a ratings do*ngrade7 noncomliance *it(
ratios) -reac( of reresentations and *arranties) etc.
Inconsistency of the event
%n an ,merican case)
''
t(e 3# 1udges refused to ground a M,C clause in a c(ange in t(e
roduction caacities of a ne*l$ ac.uired coman$. ,ccording to t(e court) t(e resence of
reresentations and *arranties on t(e anticiated results of t(e target in t(e contract could
not +alidl$ admit of a c(ange in t(e financial situation of t(e target. #imilarl$) a -u$er sa* its
aeal on t(e in+ocation of a M,C clause turned do*n) as it *as una-le to demonstrate t(at
t(e fall in t(e e"ected rates of gro*t( in t(e re+enues of target o+er a eriod of t*o mont(s
amounted to a real c(ange *J.I.B.L.R. 196 in its erformances) *(en contrasted to a
do*nturn in t(e e"ected results.
'2
%t (as also -een decided t(at t(e introduction -$ a t(ird
art$ of an action against t(e target0s +endor for -reac( of licensing rig(ts) is not of a kind
*(ic( *ould 1ustif$ in+oking a M,C clause. /(is *as -ecause) according to t(e 1udges) t(e
aeal not (a+ing $et led to a definiti+e decision) t(e introduction of t(is e+ent could (a+e an
effect e+entuall$) -ut not in realit$.
'6

reating a MA lause
/(e difficulties in(erent in a M,C clause arise out of t(e comle"it$ of encasulating t(e
*(ole anol$ of e+ents and situations) or t(eir effects) *(ic( could cast dou-t on t(e
concetion of a financier of its contractual undertaking *it( t(e -orro*er 4-e$ond t(e
-orro*er0s a-ilit$ to meet its o-ligations5) and on t(e outlook -e$ond t(is contractual
relations(i *it( an$ degree of certaint$. 2e s(ould take note of one oint7 a clause*(ic(
*ould onl$ refer to t(e -orro*er0s financial o-ligations could -e construed to imose on t(e
-anks a dut$ to ro+e t(at t(e contracting art$ *as una-le to make an$ a$ments at all.
%t *ould -e too restricti+e to -ase t(e discussions around t(e M,C clause on t(ese
considerations onl$. Draftsmen are sometimes fond of t(e unkno*a-le c(aracter of t(e M,C
clause as a de+ice to -ring some ressure to -ear on t(e -orro*er and (ence ri+ilege a form
of *ide or oen drafting. Moreo+er) t(e (a-itual financial -ackers of t(e -ig industrial or
commercial grous are a*are t(at) e+en if t(e$ (ad t(e t(eoretical ossi-ilit$ to in+oke a
M,C clause) t(e$ *ould -e (eld to account for a-rutl$ -ringing to an end a -usiness
relations(i. For all t(ese reasons) onl$ strategic (ig(-+alue transactions s(ould constitute
fertile grounds for M,C clauses *it( t(res(olds for automatic trigger.
%n t(e searc( for t(ese o-1ecti+es) rat(er t(an attemt to catc( all t(e e+ents t(emsel+es) it
*ould -e refera-le *(en drafting a M,C clause to t(ink a-out and t(en .uantif$ t(e effects
of t(ese e+ents on t(e financial rofile of t(e -orro*er. %t *ould t(en -e concei+a-le to
roceed -$ cross-reference) -$ linking t(e content of t(e M,C clause to ot(er clauses in t(e
arra$ of contractual clauses *(ic( ser+e as *arning signs of a otential degradation in 4or t(e
t(reat of suc( a decline5 t(e financial situation of t(e -orro*er or of its grou. &ractical
illustrations could consist of7
G all or art of t(e financial undertakings *(ic( t(e -orro*er needs to meet on a regular and
consolidated -asis) suc( as7 consolidated net inde-tedness) consolidated tangi-le net *ort()
consolidated !B%/D,) consolidated !B%/) consolidated net financial c(arges) free cas(flo*;
G all or art of financial ratios re.uired to -e met eriodicall$) on a consolidated -asis) suc(
as7 net inde-tedness to consolidated !B%/D,) consolidated !B%/ to consolidated net financial
c(arges) free cas(flo* -efore de-t rea$ments to annual de-t a$ments.
/(e difficult$ (ere is to e"loit t(e otential dou-le usage of t(e M,C clause and t(ese
clauses) *(ic( aear in t(eir o*n rig(t in a document -$ +irtue of ratios) reresentations
and *arranties. Follo*ing t(e stock e"c(ange cras( in '?@F) se+eral -u$ers of comanies
oerating in t(e ;ort( ,merican market introduced a <Do* Jones clause= in sale and
urc(ase agreements *(ic( ena-led t(em to *it(dra* from a transaction if t(e stock of t(e
target *ere to register significant falls.
'4
Lenders could take t(e lead from t(is rocess -$
introducing *it(in a M,C clause an o-1ecti+e test *it( reference to an$ Frenc() !uroean or
international stock market inde" rele+ant to t(e -orro*er 4!urone"t) DJ !uro #to""5. For
clients *it( a more modest rofile) a reference -ack to dul$ certified accounting documents
*it( reorting anal$sis mig(t -e more aroriate.
!he )ffects of a MA lause
!he antici%ated effects
Deending on its drafting) and its ositioning in t(e contractual matri") t(e M,C clause *ill
(a+e t(e intended effect eit(er of t(e immediate re+ocation of t(e s$ndicated financing
contract or t(e susension of ad+ances e"ected -$ t(e -orro*er. %n one of t(ese situations)
it *ill t(erefore -e a matter of reconsidering t(e +alidit$ of t(e contractual relations(i on
grounds t(at (a+e $et to -e finalised and in t(e ot(er) in a less a-rut and more consensual
manner) t(e reconsideration of t(e contract *ill -e soug(t.
Revoking the contract
/(e common ercetion of a M,C clause) *(ic( is a means of e"erting ressure rat(er t(an
an o+er(aul of t(e contract) is not easil$ comati-le *it( t(e notion of termination of t(e
contractual undertaking) fraug(t *it( fear of t(e sanctions t(at could ensue follo*ing its
e"ercise. Lenders seek more legitimac$ in order to 1ustif$) or at least to make admissi-le) its
e+entual oeration. 2e (a+e seen t(at t(is (as led to associating t(e in+ocation of t(e M,C
clause *it( ot(er defaults -$ t(e -orro*er) t(at can -e discerned under t(e (eading of
reresentations and *arranties or undertakings 4nota-l$ coml$ing *it( ratios5. But t(e
resentation of t(e legitimac$ of t(e recourse to t(e M,C clause can -e founded in some
instances on ot(er legal grounds) e"ternal to t(e contractual matri".
/(e mec(anism of a M,C clause can -e articulated around t(e tenor of t(e accounting and
financial *J.I.B.L.R. 197 documentation reared at regular inter+als -$ t(e -orro*er for
t(e agent of t(e facilit$. ,ccording to t(is) t(e -orro*er ackno*ledges t(at -anks (a+e
acceted to articiate in t(e loan facilit$ <in full reliance= on t(ose reresentations and
*arranties. &rominent among t(ese is a statement t(at t(ere (as -een no material ad+erse
c(ange in t(e -usiness) assets) financial condition) rosects or oerations of t(e coman$ or
its grou since t(e date to *(ic( t(e audited consolidated financial statements for t(e last
'2-mont( eriod *ere reared. 2(en t(e accounts do not resent a true and fair +ie* of
t(e financial situation of t(e -orro*er and its grou) a legitimate .uestion to ask is *(et(er
t(e -anks are entitled to see in t(is a material ad+erse c(ange) on t(e ground of a M,C or
M,! clause.
3nder !nglis( la*) t(e courts (a+e sometimes considered t(at all t(e conditions t(at (ad to
-e fulfilled for its in+ocation (ad -een met) (ig(lig(ting t(e discreanc$ -et*een t(e
reresentations and *arranties -$ t(e client and t(e accounting documents furnis(ed.
Frenc( la* also recognises sufficient grounds for re+oking a contract on t(e grounds of
mistake or of fraudulent misreresentation. Co*e+er) on -alance) +oiding a contract on t(e
ground of error does not seem aroriate7 t(is is -ecause under Frenc( la* an error on t(e
ground of sol+enc$ is not generall$ a cause of nullit$.
':
Certain decided cases -roadl$
fa+oured t(is interretation and u(eld claims of nullit$ on t(e grounds of mistake on +alue)
*(en t(e latter resulted from a mistake as to t(e .ualit$ of t(e erson (eld out to constitute
t(e main reason for contracting.
'>
Mistake (as -een recognised -$ t(e courts to 1ustif$
+oiding a contract *(en it concerned t(e caacit$ of t(e ot(er art$ to fulfil its o-ligations.
Fraudulent misreresentation under Frenc( la* arises as a result of t(e insertion of *rongful
indications in documents ta-led *it( a +ie* to entering into a contract.
'F
/(e Court of ,eal
of &oitiers found an instance of fraudulent misreresentation in t(e roduction of documents
s(o*ing inflated turno+er and rofit figures.
'@
Claiming on t(e grounds of fraudulent
misreresentation allo*s a *ronged art$ to claim damages and interest as comensation for
all t(e results of t(e act) as *ell as +oiding t(e contract) and more easil$ t(an if t(e *ronged
art$ (ad merel$ claimed mistake. Lastl$ ,rt.L 6'6-'2 of t(e Frenc( Monetar$ and Financial
code ro+ides t(at a credit institution is not -ound to coml$ *it( an$ notice eriod to
terminate a credit facilit$ *(ere t(ere (as -een serious and rere(ensi-le conduct on t(e
art of t(e -eneficiar$ of t(e facilit$ or *(ere t(e latter0s financial standing (as -een
una+oida-l$ comromised. Enl$ a -rutal interrution at t(e -e(est of t(e credit institution in
contra+ention of t(e sirit of a contract could -e considered *rongful. %nstances of dis(onest$
also include false accounting) forged c(e.ues) fictitious in+oices or sent de-ts) non-deli+er$
of documents or of a romised guarantee. Follo*ing a decree of t(e C(am-re Commerciale
de la Cour de Cassation dated June 2) '??2) an$ dis(onest or strongl$ dislo$al -e(a+iour of a
de-tor *(ic( deli-eratel$ (arms t(e interests of a -ank can constitute rere(ensi-le
-e(a+iour) *(ic( leads to a loss of trust and undermines t(e continuation of t(e facilities. ,ll
t(ese e"amles of dis(onest -e(a+iour s(ould lead to an e"oneration of t(e lender) -ut in
ractice t(e o-1ecti+e *ill -e to sa+e t(e contractual edifice.
Reconsidering the contract
,t as earl$ a stage as t(e mandate letter) t(e effects of a material ad+erse c(ange s(ould -e
anticiated. &ercei+ed in t(is *a$) t(e M,C clause0s closest relati+e *ill -e a !or"e ma#eure
clause) recognised -$ common la* as imosing on t(e arties to a contract a dut$ to
negotiate *it( a +ie* to accommodating t(eir contractual relation to ne* circumstances. %n
contrast to !or"e ma#eure a M,C clause does not contain an o-ligation on t(e art of t(e
-eneficiar$ of t(e clause to safeguard a contractual relations(i 4e"cet ossi-l$ a moral dut$
to do so5) -ut t(e interests at stake could lead a Frenc( 1udge to force t(e arties to take all
ossi-le stes to reser+e a contract.
'?
%n t(e !nglis( case of Para$on v %taunton,
20
t(e
Court of ,eal u(eld t(e lender0s rig(t to increase an interest rate) ro+ided it did so in an
(onest and fair *a$) and not in an ar-itrar$ or caricious manner. 2e *ould e"ect t(e
e"ercise of a M,C clause to -e go+erned -$ similar considerations.
*o"e conse+uences for the lender of a MA clause
/(e client *ill face t(e dire conse.uences of an$ re+ocation of a facilit$) -$ a re+ocation of
ot(er facilities -$ ot(er lenders and t(e effects of cross-default. /(e resonsi-ilit$ of t(e
arties *ill need to -e ascertained at t(is stage. Broadl$ similar t(emes emerge out of Frenc(
and !nglis( recedents. ,rticle '':' of t(e Code Ci+il ens(rines t(e rincile t(at an$
remed$ s(ould -e roerl$ linked to t(e aroriate causes of an$ damage; in ractice a
-ank alone *ill not -e solel$ resonsi-le for t(e deterioration of a coman$0s o+erall financial
rofile. Certain elements *ill t(us (a+e to taken out of t(e -alance s(eet7 t(e amount of an$
deficit in e"istence rior to t(e date of e"ercise of a M,C clause) an$ loss in +alue of t(e
assets as a result of an$ -ankrutc$ roceedings) an$ amounts rig(tfull$ de+ol+ing to ta" and
ot(er go+ernment aut(orities. Eccasionall$ it *ill also -e alleged t(at t(e interrution of t(e
financing led to a loss of *J.I.B.L.R. 198 oortunit$; t(is *ill (a+e to considered carefull$
on a case--$-case -asis according to oortunities *(ic( t(e client0s rofile allo*ed it
realisticall$ to gras 4t(e general rule is t(at t(ese oortunities must (a+e -een -roug(t to
t(e kno*ledge of t(e financier -efore an$ damages can -e claimed5. !nglis( la* rinciles of
comensation for -reac( of contract aim to ut t(e de-tor in t(e osition it *ould (a+e -een
in if t(e facilit$ (ad -een maintained) -ut t(e aggrie+ed art$ must also take all reasona-le
stes to mitigate its loss. ;otions of causalit$ and remoteness of loss (a+e in addition to -e
taken into account7 t(ere needs to -e a <serious ossi-ilit$=) a <real danger= or a <+er$
su-stantial ro-a-ilit$= t(at t(e loss *ould occur.
2'
%n t(e case of a financing for a secified
urose) t(e -anks could -e (eld lia-le for suc( a loss) as t(e case of &an"'ester and
(ld'am Bank Ltd v WA Cook
22
illustrated. %n an$ e+ent) *(en dealing *it( ustream to
do*nstream financing flo*s) t(e o+erriding re.uirement for financiers aears to -e a
constant +igilance.
J.%.B.L.H. 2004) '?4>5) '?6-'?@
'.
BP n" v Tyson Foods, n", 200' Del. C(. Le"is @' 4June '@) 200'5.
2.
FranIois /errJ) &(ilie #imler) K+es Le.uette) <Droit ci+il--les o-ligations=) &rJcis Dalloz) Droit &ri+J) FLme Jdition)
no.426) .4''.
6.
A'?F2B ,.C. F@:.
4.
A'?F@B 2 ,ll !.H. ''4?) MBD.
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www)t'etakeoverpanel)or$)uk*%tatements*+,,--.)pd!)
>.
BP n" v Tyson Foods n", 200') Dcl.C(.Le"is@' 4June '@) 200'5.
F.
#ee /reitel) Law o! Contra"t 4'0t( ed.) #*eet and Ma"*ell) London) '???5) .@4'.
@.
#ee Beatson) Anson/s Law o! Contra"t 42@t( ed.) 20025) .:4@.
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T0 Te"'nolo$y nvestment Trust pl" 4'?@@5 4 B.C.C. 244.
'0.
#ee /errJ) #imler and Le.uette) n.2 a-o+e) no.426) .4''.
''.
1oodman &!$ Co v 0ayt'eon, '??? 2.L. >@'6@2 4#.D.;.K. ,ugust 6') '???5.
'2.
Pa"'e"o v Cambrid$e Te"'nolo$y Partners, @: F. #u. 2d >? 4D. Mass 20005.
'6.
%C 2o'nson 3 %on, n" v 4ow Brands, n", '>F F. #u. 2d >:F 4D. Del.5.
'4.
<%n+oking t(e Material ,d+erse C(ange 4M,C5 clause to -reak merger deals=) T'e 5"onomist, Decem-er >) 200'.
':.
FranIois /errJ) &(ilie #imler) K+es Le.uette) no.2'') -5) .20>-- Cass. Ci+.) : ,oNt '@F4) D& '@F:.
'>.
#ee) e)$) C, &aris) '0 fJ+r. '?>') D. '?>2 somm. &.22 and Cass.ci+ 're) 20 mars '?>6) D. '?>6.
'F.
/errJ) #imler and Le.uette) n.': a-o+e) .2'4.
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C, &oitiers) Marc( 60) '??4) JC& '??:) i+) 2:2:.
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C, &aris) #etem-er 2@) '?F>) JC& '?F@) %%) '@@'0) note J. Ho-ert.
20.
Para$on Finan"e pl" v %taunton A200'B !2C, Ci+ '4>>; A200'B 2 ,ll !.H. 4Comm5 '02:.
2'.
T'e Heron A'?>?B ' ,.C. 6:0.
22.
4'@@65 4? L./. >F4.