Why Force Majeure Isn't A Golden Ticket Out Of M&A Deals

By Benjamin Horney
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Law360 (April 20, 2020, 7:34 PM EDT) -- Clients are probing every possible path as they consider pulling out from deals in the wake of the coronavirus pandemic, but attorneys caution that many mergers and acquisitions agreements don't even include force majeure clauses, and for the ones that do, it can be difficult to justify invoking the provision to cancel a transaction.

Force majeure clauses excuse a party in a contract from certain responsibilities and obligations that were unforeseen and make the performance of the contract basically impossible. If it sounds comparable to material adverse effect clauses, that's because there are similarities, including the fact that both provide a potential out from a contract that has been signed, whether that's an M&A agreement or a commercial contract of some kind. 

However, there are key differences, including that force majeure clauses are typically applicable to contracts contemplating ongoing performance, according to Mark Solomon, a partner at Katten Muchin Rosenman LLP

"It's a similar concept, but in the M&A construct it's probably less likely to be applied than in other commercial contracts," he said. 

Unlike material adverse effect clauses, force majeure provisions are relatively rare in M&A agreements.

"It would be extraordinarily unusual for an acquisition agreement to include a force majeure clause," said John Sorkin, a partner at Ropes & Gray LLP.

According to Sorkin, it's more common in M&A deals for risk allocation related to outside events, such as a hurricane or pandemic, to come by way of the MAE provision as opposed to a force majeure clause. He also noted that it's particularly hard to fit the force majeure concept into a typical private equity acquisition context, because it's generally not impossible for a buyer to perform its obligations, which are often limited to obtaining approvals or clearances from regulators and antitrust authorities and delivering consideration at closing.  

"For example, COVID-19 is unlikely to make cash systemically unavailable, and if the agreement does not include a financing condition, it would seem very difficult to assert that failure to obtain financing was not a risk assumed by the buyer," Sorkin said.

Michael Fieweger, a partner at Baker McKenzie and chairman of the firm's North American private equity practice group, said his firm has been working with clients "to determine which contracts contain force majeure clauses, whether the pandemic has triggered such clauses, what notice and other steps are required to take advantage of the excuse provided by a force majeure and the remedies of the parties in light of a force majeure."

Still, some M&A deals do include force majeure provisions, but even in those cases it shouldn't necessarily be where lawyers look first if a client expresses a desire to get out of a deal. For one thing, force majeure clauses are extremely specific and narrowly interpreted, so unless there's no question that the provision can be invoked, it's a risky gambit.

Joshua Sandler, a business litigation trial lawyer who works as a partner at Lynn Pinker Hurst & Schwegmann LLP in Dallas, said that while he hasn't seen force majeure clauses being heavily litigated during the coronavirus pandemic so far, that isn't likely to last.

"There's going to be a lot of litigation on a lot of different kinds of contracts," he said. "M&A will certainly be encompassed in that, but those deals are generally bigger, and I think people can be more afraid to litigate larger cases right now given these uncertain times. However, once the economy gets a little more stable, that won't be the case."

Thus far, Sandler said he is seeing a variety of cases where force majeure is being invoked, such as wedding contracts and performance contemplated in a supply chain.

"What you're seeing right now are some of the more obvious kinds of claims where the contracting parties are immediately harmed by a large shutdown, quarantine, or both," he said. "One thing we know for certain is that going forward, probably from late February or maybe early March, most people have updated their boilerplate language in contracts for the force majeure clause." 

That includes the addition of specific language on pandemics, epidemics, viruses and global outbreaks, as well as the additional things that have occurred as a result of the coronavirus, like quarantines, shelter-in-place orders, government and industrial stoppages, and supply chain shortages.

"COVID-19 is not the first pandemic, but there really hasn't been anything before that wreaked havoc on this scale," he said.

Meanwhile, lawyers who are looking into whether a force majeure clause might be relevant because of the coronavirus pandemic must be careful to check for the catch-all language that is often included at the end of such provisions. Force majeure clauses frequently end by noting something akin to "anything else that's unforeseeable" that makes performance impossible. Such language serves to modify every word before it, Sandler warned.

"In Texas, if you have a list of seven things but that final catch-all says 'anything else that's unforeseeable' or anything that makes performance impossible, then that's going to modify the other conditions that were specifically enumerated," he said.

For instance, if a force majeure clause includes a partial government shutdown, but the provision ends with the above-mentioned catch-all language, then it might be difficult to try and invoke force majeure for the partial government shutdown. That's because, with the catch-all language, not only does it matter that there's a partial government shutdown, but that shutdown needs to make performance impossible. And attorneys would need to prove that's the case.

"Now you're back to the position that it's not enough the government has partially shut down," Sandler said. "It has to be impossible to perform, if that is what the specific contract's force majeure provision says. Most force majeure clauses contain some sort of catch-all, which is why good lawyers need to review and make sure the catch-all language is not going to defeat your ability to invoke the clause in certain circumstances."

If a lawyer is still seeking to try and invoke the force majeure clause, it's wise to consider what other requirements in the agreement should be addressed. Many M&A agreements note that a party looking to terminate a deal must show that it has tried to mitigate the damages, as opposed to simply seeing the potential for there to be difficulties and calling off the transaction.

"The best advice is to give the other party reasonable notice if you're invoking force majeure, and to show that you have acted reasonably, including by trying to mitigate damages," Sandler said. "Courts like to see people acting reasonably, and you should document your mitigation efforts so you can show at every stage you did try and prevent the damages."

With the courts in mind, it's important to remember that if a client does want to invoke a force majeure clause to attempt to get out of a deal, the other side could always sue to try and keep the deal alive. And if a force majeure clause is what the lawsuit hinges on, however the provision was written will be how the court interprets it.

"People have to live with the deal, almost to an extreme," said Jeffrey Bushofsky, a partner at Ropes & Gray and co-leader of the firm's commercial litigation practice. "[The court's] not going to expansively interpret a force majeure clause, or apply defenses outside of the written contract that are going to let one party or another out of an agreement."

--Editing by Breda Lund.

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