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Transplanting the Material Adverse Change Clause to Transaction Agreements Governed by Finnish Law

Antikainen, Alex

Opinnäytetyöt 14.1.2022, Gradut ja muut tutkielmat

Tiivistelmä

The context of corporate transactions necessitates mechanisms of risk allocation that allow acquirors and sellers to allocate the inherent uncertainty in transactions according to their own risk preferences. A key tool for managing the deal risk is the “Material Adverse Change” clause (MAC clause) that has been developed in the Anglo-American legal environment. Drafted as a conditions precedent, it grants the acquiror the option of walking away from the deal if a change that is sufficient to trigger the clause occurs. Because of its origin in the Anglo-American common law, this thesis analyses the clause as a legal transplant, which concerns the situation when the original function and meaning of a legal concept might change when it interacts with a new legal environment. Ignoring the differences between the legal systems when transplanting a contractual mechanism to a new environment might result in a misguided expectation that the clause operates as in the original legal system.

The research aims to demonstrate the Finnish court’s readiness to interpret the MAC clause as a formulation of the parties’ intentions, and whether the interpretation reflects the negotiated risk allocation, preserving the clause’s economic purpose. More specifically, the thesis asks whether Finnish parties can use the MAC clause to allocate the deal risk in their transaction to the same extent as Anglo-American practitioners, and whether the drafting practice of including the MAC clause fulfils the parties’ strategic objectives with similar efficiency.

From a legal perspective of transaction agreements, the MAC clause is directly related to the juxtaposition between the doctrines of changed circumstances and the sanctity of contract. Apparent differences exist in how Anglo-American and Nordic contract law respectively approach the justification of deviating from the sanctity of contract for the purpose of upholding a flexibility towards changes in contractual circumstances. Contracts in the Anglo-American legal culture are deemed more as technical tools for risk allocation rather than as fair and balanced systemizations of the parties rights and obligations. In agreements between commercial parties however, both legal systems are very reluctant to find exceptions to the sanctity of contract, which incentivizes parties to include flexibility to their contracts.

The thesis identifies four main functions of the MAC clause. First, it shifts the deal risk of changed circumstances from the buyer to the seller and allows for decreased information asymmetries. Secondly and thirdly, the MAC clause’s function is described with the symmetry and investment theories. Lastly, the clause has a function in renegotiations and creates renegotiation leverage. In Anglo-American case law, the MAC clause has been interpreted strictly. The courts have adopted a fact specific approach in interpretation that emphasizes extrinsic evidence, required that the adverse change is viewed from a long-term perspective, and restricted the MAC clause only to be applicable on unknown events.

It is argued that based on the general principles and theories of contract interpretation in the Finnish courts, termination of a transaction agreement pursuant to the MAC clause would be possible on less strict grounds than termination under the contract doctrines of changed circumstances. The MAC clause thus reaches its minimum threshold for when it can be considered impact the agreement. The thesis argues that including the MAC clause as conditions precedent to the transaction agreement is a clear indication that the parties prefer to deviate from the contract doctrines. The economic functions of the MAC clause are argued to have evident effects on the negotiation and transaction dynamics. The conclusion is reached that the MAC clause, when transplanted from the Anglo-American common law, preserves the economic purpose and reflects the parties’ negotiated risk allocation in transaction agreements governed by Finnish law.
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