Shrodinger’s Arrangement

There’s been a lot written about MAC clauses in M&A in the recent days. Essentially, one of the parties to a merger agreement aims to walk away citing the Covid-19 pandemic and its impacts triggering the MAC (material adverse change/ effect) clause. Whether the party is successful in walking away will depend both on how the MAC is drafted and on the interpretation by courts in each country.

Until a determination is made by the court do the two parties have an agreement or not?

In a recent case, Metlifecare Limited v Asia Pacific Village Group Limited [2020] NZHC 1184, the High Court of New Zealand  wrote [24]:

It follows that, as matters currently stand, one party contends the arrangement remains in existence and the other party denies that it is. The arrangement for which orders are sought may therefore still be in existence or it may not.

So, it appears that we have a Shrodinger’s arrangement. (My words, not Justice Lang’s!)

This case arose in the shadow of Asia Pacific attempting to terminate a Scheme Implementation Act (SIA) it had entered into with Metlifecare on the basis of the emergence of Covid-19 constituting a MAC. (It also alleged that some acts of Metlifecare triggered another clause, the Prescribed Occurrences clause under the SIA.) On the other hand, Metlifecare initiated court proceedings seeking a declaration that the SIA remains in force (the termination litigation). While the termination litigation still pending, Metlifecare has now filed the instant application seeking directions under s 236(2) of the Companies Act, 1993 which deals with the court’s ability to make orders relating to approval of arrangements, amalgamations and compromises. Asia Pacific opposed this application.

As Justice Lang explains [20], “these provisions contemplate an applicant seeking approval for a scheme under Part 15 of the Act in two stages”. First, applications are made for initial orders under s 236(2) where “the applicant sets out the procedure it proposes to follow in calling a meeting of shareholders to consider and, if appropriate, approve the arrangement”. If the of shareholders approve the arrangement as required, “ the applicant applies for final orders under s 236(1) so the scheme can be implemented”.

The current application for orders under s 236(2) is unusual because Metlifecare is seeking orders with respect to a Shrodinger’s arrangement.

Justice Lang notes that although the court’s powers under the provision are discretionary, the parties usually are “willing participants” to the arrangement. Justice Lang found that the uncertainty of the arrangement in this situation was fatal to the application. Further, since the termination litigation was not likely to be decided before January 2021, there seemed to be no reason for Metlifecare to obtain approval from its shareholders about the possible arrangement with Asia Pacific. Instead, Metlifecare is probably aiming to get shareholder approval for the termination litigation. That issue, Justice Lang holds [at 33], is not within the scope of s 236(2). Instead, Metlifecare could simply obtain shareholder approval at a general meeting. Thus, Metlifecare’s application was dismissed.

Although the court did not dwell on it, it is interesting to note that one of Asia Pacific’s concerns [16] about this application was that the market would interpret the making of initial orders as the Court giving its endorsement to both the scheme and the litigation.

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