COVID-19 Drives Change & Fraudulent Litigation | FTI Consulting

COVID-19 Could Drive Increase in Material Adverse Change & Fraudulent Transfer Litigation

Forensic & Litigation Consulting

April 6, 2020

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The COVID-19 pandemic has inflicted a dire humanitarian impact on our communities that, at the time of this publication, is yet to be fully comprehended. The economic impact has been no less catastrophic, with record-setting drops in the stock market and increases in unemployment claims. Even as government stimulus funds seek to stabilize the economy, a highly uncertain near-term future will likely continue to impact credit markets for mergers and acquisitions, putting financing from lenders or potential investors at greater risk.

In the past, many of these lenders or potential investors have relied on the rarely used Material Adverse Change (MAC) clause in financing agreements or, in the case of investors, in purchase and sale agreements. MAC clauses typically allow parties to void contracts if and when a material change has significantly altered an entity’s value or financial position. However, it is typically not possible to declare a MAC when the business change is industry wide. When a MAC claim fails, lenders or investors alternatively claim that the transaction is a fraudulent conveyance because it would leave the acquired business insolvent.

Industry Peer Comparisons & Receding Economic Tides

In the merger planned in 2007 between sportswear company Finish Line, Inc. and shoe retailer Genesco, UBS agreed to finance the $1.5 billion transaction. In the weeks following the agreement, Genesco’s performance began to weaken and UBS and Finish Line decided not to close, claiming that Genesco had a MAC and would become insolvent if the deal closed.

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Key Contacts

Basil A. Imburgia

Senior Managing Director, Leader of North America Forensic and Litigation Consulting

Brian Ong

Senior Managing Director, Co-Leader of Forensic Accounting & Advisory Services