Material Adverse Effect Credit Agreement

River Terrace Assoc., LLC v. The Bank of N.Y., a 2005 New York case stemming from the terrorist attacks of September 11, 2001, contrasts with the recognition of importance. In this case, the borrower, who built an apartment building in Lower Manhattan, sued the lender, claiming that the lender`s proposal that a MAC “may have occurred because of the attacks” was a rejection of the 83 MM credit contract they had entered into shortly before the attacks. The borrower requested reimbursement of the fees he had paid as part of the agreement. The agreement defined an MAC as a “major adverse amendment . . . . businesses, prospectuses, principals, commitments or capitalization of the borrower.¬†However, several experts shortly after the attacks indicated that rents in Lower Manhattan had fallen by at least 20%, allowing the lender to conclude, in an internal memo, that the project could no longer support an $83 million loan. The court rejected the borrower`s request for a summary decision and wrote that “[t]he reviews suggested that the value of … [the borrower`s project] had decreased considerably in the wake of 9/11, if … [the lender`s behaviour] amounts to an all the more questionable rejection.¬†In other words, the court did not decide whether a MAC took place, but maintained the borrower`s assessments of position that it was not “doubtful” of MAC.

“materiality” and “permanent substance.” In Delaware as in New York, there is usually a high bar for detecting a MAC, with an emphasis on the language of the destination and the specific facts and circumstances. For both merger and financing agreements, courts have generally required the amendment to be “substantial” and “hard.” There is no test of the light line. A significant change is a change that is serious, not a “blip.” A significant change over a period of time is a change that is reflected “over an economically reasonable period, measured not in months, but in years.” As stated in Akorn, the focus is on whether there has been “a negative change in the activities of the objective that, from the perspective of a reasonable long-term investor, would have an impact on the long-term profitability of the business” – that is, a change (generally based on business-specific and non-sectoral factors) that would be essential from a reasonable investor`s point of view. In New York cases, the courts considered “whether the alleged adverse amendment was in the parties` consideration at the time the agreement was implemented, whether it was under the control of the parties, and what the impact was on the activities of the party concerned” (In re Lyondell (Bankr). S.D.N.Y. 2017) MAC clauses generally focus on the borrower`s financial situation and assets (and all adaptres) and on the borrower`s overall ability to meet its obligations to the lender. If the loan is secured, the MAC clause may also extend to the applicability of the guarantee granted to the lender. However, in all cases, the MAC clause is intended to protect the lender by monitoring the borrower`s overall financial health and ensuring that the lender has, so to speak, an “issue” when a significant change occurs with respect to the borrower`s ability to repay the loan. To this end, MAC clauses are generally included in credit contracts in two ways: (i) as a condition of financing in which the borrower assures the lender that there has been no MAC since the announcement of its last conclusion; and (ii) in the event of a delay allowing the lender to terminate its commitment and accelerate the loan in the event of the appearance of an MAC. As a representative, the borrower finds that there has been no MAC and presents this fact to the lender. In the event of a late payment, the lender must decide whether the corresponding change is “substantial” sufficient to seize the loan and terminate its contract with the borrower.