Is the COVID-19 event a material adverse change for purposes of merger agreements?

In my Mergers and Acquisitions class, we discuss a material adverse effect clause that reads as follows:

"Company Material Adverse Effect" means any event, occurrence, fact, condition or change that is, or would reasonably be expected to become, individually or in the aggregate, materially adverse to (i) the business, results of operations, prospects, condition (financial or otherwise), or assets of the Company and its Subsidiaries, taken as a whole, or (ii) the ability of the Company to consummate the transactions contemplated hereby on a timely basis; provided, however, that, for the purposes of clause (i), a Company Material Adverse Effect shall not be deemed to include events, occurrences, facts, conditions or changes arising out of, relating to or resulting from: (a) changes generally affecting the economy, financial or securities markets; (b) the announcement of the transactions contemplated by this Agreement; (c) any outbreak or escalation of war or any act of terrorism; or (d) general conditions in the industry in which the Company and its Subsidiaries operate; provided further, however, that any event, change and effect referred to in clauses (a), (c) or (d) immediately above shall be taken into account in determining whether a Company Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such event, change or effect has a disproportionate effect on the Company and its Subsidiaries, taken as a whole, compared to other participants in the industries in which the Company and its Subsidiaries conduct their businesses.

The absence of such an event is a closing condition, so that if such an event occurs one or both parties could invoke it to justify terminating the deal.

It occurs to me that the COVID-19 crisis raises a great hypothetical as to the application of the MAE clause,

It seems obvious that the economic devastation being wrought by the coronavirus pandemic is "an event ... that is ... materially adverse to the business, results of operations, prospects, condition (financial or otherwise), [and] assets of the Company." 

As I explain in my book Mergers and Acquisitions, however, courts put the burden on the party seeking to invoke the clause to show that the allegedly material adverse effect will be significant and lasting. Accordingly, such a clause is treated as “a backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.” IBP, Inc. v. Tyson Foods, Inc. (In re IBP, Inc. S'holders Litig.)., 789 A.2d 14, 68 (Del. Ch. 2001). See also  Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715, 738 (Del. Ch. 2008) (“The important consideration therefore is whether there has been an adverse change in the target's business that is consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months.”).

At this point, most commentators seem to be assuming that the impact of the pandemic will be felt over months or even years rather than just a short period.

So the question is whether any of the provisos are pertinent. Provisos (b) and (c) are inapplicable on their face. But what about (a)? Recall that it provides that "a Company Material Adverse Effect shall not be deemed to include events, occurrences, facts, conditions or changes arising out of, relating to or resulting from ... changes generally affecting the economy, financial or securities markets." A global pandemic like just such an event. But, as Gibson Dunn notes:

A pre-crisis MAE/MAC definition that makes no reference to COVID-19 (or even to pandemics or epidemics generally) may or may not be found to include the effects of COVID-19 in determining whether an MAE/MAC has occurred. In such cases, disputes may focus on whether definitional language that typically excludes general economic or market conditions and other broad based factors impacting the business climate or the target’s industry generally is sufficient to exclude the impact of COVID-19. Parties also may debate whether the potential impact of the virus was reasonably foreseeable at the time the agreement was signed or whether the impact is sufficiently long-lasting to be considered an MAE/MAC under applicable state law.

So if one of our parties wishes to invoke the MAE clause, they are going to have to prove that the event has had "a disproportionate effect on the Company and its Subsidiaries, taken as a whole, compared to other participants in the industries in which the Company and its Subsidiaries conduct their businesses." I'm having trouble thinking of a company that would be disproportionately affected by the pandemic compared to other companies in the same industry. Suggestions?

One wonders whether transaction planners will start adding pandemics to the war/terrorism clause of the standard MAE clause. Paul Weiss predicts that "it is likely that sellers will negotiate for more specific references to pandemics and epidemics in the exceptions to the definition of an MAE, just as terrorism exceptions became more commonplace following the events of September 11, 2001." Gibson Dunn agrees:

... both buyers and sellers would be well-advised to negotiate explicit language to address COVID-19 risk-allocation in the context of an MAE/MAC provision. We have seen this practice followed in response to past crises. We have already seen a fair number of more recent agreements that specifically exclude the impact of COVID-19 (most often building on an exclusion for any “pandemic” or “epidemic,” and sometimes only if it does not disproportionately affect a party) from the scope of an MAE/MAC definition. Whether excluding it completely or specifying a quantitative or qualitative level of financial or operational impact from COVID-19 that, if reached, would give rise to an MAE/MAC, specificity will guard against unexpected results.