"Material Adverse Change"?



Finsbury Food Group plc v Axis Corporate Capital Ltd & Ors provides some guidance in an area where disputes rarely proceed all the way to judgment – in fact it is the first case of its kind to be heard in the Commercial Court.

In this case, a claim was brought by the policyholder under a buyer-side warranty and indemnity insurance policy (W&I Policy). The Court ruled in favour of the defendant (i.e., the insurer).

In reaching its decision, the Court had considered (among other things) the true construction of a warranty that there had been "no material adverse change" in trading or financial position.

In the context of commercial contracts, a "material adverse change" (MAC) clause is a provision that allows a party to potentially terminate a contract or seek compensation if certain significant adverse events occur that could impact the value of the transaction.

Key takeaways

There is no fixed meaning of MAC so courts will examine the language, context and evidence surrounding the change. Generally, for a MAC to be triggered, the change must be at least both significant and unforeseeable at the time of entering into the contract.

To provide more certainty in relation to its interpretation and application, and if the context permits, it may be sensible to consider defining what is meant by a MAC. Whilst a legal construct, it is a commercial issue for the parties and goes to the heart of the basis on which they are happy to do the deal. Where possible it is worth considering including specific parameters for a MAC, for example by reference to a fixed figure or a percentage of some variable measure (such as turnover, profits or sales).

Special care needs to be taken with drafting contractual warranties. This case dealt with drafting nuances which could have been avoided.


Finsbury Food Group Plc (Finsbury) is a group of food manufacturing companies.

Ultrapharm Limited (Target) is a specialist manufacturer of gluten free baked goods.

Keen to expand its own offering of gluten-free baked goods, Finsbury entered into a share purchase agreement on 31 August 2018 to buy the Target on that day for £20,000,000 (SPA).

Separately, Finsbury entered into a buyer-side W&I Policy with a number of underwriting syndicates, providing insurance against the risk of a breach of various warranties in the SPA.

Finsbury brought a claim for indemnity under the W&I Policy asserting that certain insured warranties were breached, causing it to have overpaid for the Target.

The Court considered (among other things) the true construction of a warranty in the SPA (MAC Warranty) that, since the date of the Target and its group companies' (together the Target Group) last accounts (Accounts Date), there had been:

"… no material adverse change in the trading position of [the Target Group] or their financial position, prospects or turnover and no [Target Group company] has had its business, profitability or prospects adversely affected by the loss of any customer representing more than 20% of the total sales of the [Target Group] …".

The Court also considered the price reductions that were agreed between the Target Group and one of its major customers (Price Reductions) and the true construction of the following warranty in the SPA separate to the MAC Warranty (Price Reduction Warranty), that since the Accounts Date:

"no [Target Group] has offered or agreed to offer ongoing price reductions or discounts or allowances on sales of goods relating to its business or any such reductions, discounts or allowances that would result in an aggregate reduction in turnover of more than £100,000 or would otherwise be reasonably expected to materially effect the relevant [Target Group's] profitability;".

The Court's decision - MAC Warranty 

The MAC Warranty consisted of two parts, as follows: 

  1. no MAC in the Target Group's trading position or its turnover; and
  2. no loss of a customer representing more than 20% of the Target Group's total sales.

The Court found that the two parts making up the MAC Warranty were separate warranties and on that basis, the insurer's argument - that the MAC for the first part of the MAC Warranty required the loss of sums representing more than 20% of the Target Group's total sales - was not accepted. Although it was subsequently concluded that no MAC had occurred under the MAC Warranty, the Court determined that for there to be a breach of the first part of the MAC Warranty an adverse change representing more than 10% of the Target Group's total sales was required. The Court did not give any detailed reasoning or explanation for the figure it chose.

The Court's decision – Price Reduction Warranty 

The Court did not need to decide whether the Price Reductions amounted to a MAC, as by including a specific warranty addressing price reductions, the parties had intentionally decided to treat them separately and not through the no MAC warranty.

In determining whether the Price Reductions gave rise to a breach of the Price Reduction Warranty, it was noted that since the Accounts Date, the Target Group had not offered or agreed to offer "ongoing price reductions or discounts or allowances on sales"The Court interpreted that the Price Reduction Warranty applied to the date on which the price reduction was offered or agreed and not the date on which that price reduction was implemented. Therefore, the Court found that the Price Reductions did not give rise to a breach of a warranty as they had been agreed before (despite being implemented after) the Accounts Date.

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