BM Brazil I v Sibanye: when is a geotechnical event an MAE?

On 10 October 2024, the English High Court delivered its judgment in BM Brazil I Fundo de Investimento em Participações Multistrategia & ors v Sibanye BM Brazil (Pty) Ltd & anor [2024] EWHC 2566 (Comm) (click here for the judgment). The judgment provides important guidance on material adverse event (MAE) and material adverse change (MAC) clauses - particularly in the context of M&A deals in the mining/natural resources sectors.

The decision is important for practitioners as it: 

• provides a helpful summary of how MAE/MAC clauses should be construed; 
• considers whether MAE provisions apply to “revelatory events”; and 
• sets out useful guidance when determining whether a geotechnical event may be “material”.

Background

The Court's judgment arises out of an M&A-related dispute between the claimant entities (Brazilian mining companies managed by Appian Capital) and Sibanye.

On 26 October 2021, Sibanye agreed to buy two companies from the claimant entities, pursuant to two share purchase agreements, for a combined price of US$1 billion. One of the target companies, Atlantic Nickel, owns a nickel mine in Brazil known as the Santa Rita mine. 

Two weeks after signing, a geotechnical event (the GE) occurred at the Santa Rita mine. The GE caused a portion of the mine to be displaced by up to two metres. This resulted in cracks on the main ramp of the mine (photos of the GE appear at Annexes 2 and 3 of the judgment). 

A remediation plan was implemented by Atlantic Nickel to help address the effect of the GE. However, Sibanye formed the view that the GE was a material event which would affect 20% of the value of Santa Rita, given Sibanye's understanding of the impact of the GE on the stability of the affected portion of the mine. As a result, on 24 January 2022, Sibanye informed the sellers that it was terminating the sale, relying on an MAE condition in the SPA.

MAE was defined in the SPA as follows:

"Material Adverse Effect" means any change, event or effect that individually or in the aggregate is or would reasonably be expected to be material and adverse to the business, financial condition, results of operations, the properties, assets, liabilities or operations of the Group Companies, taken as a whole, excluding any such change, event or effect arising out of, in connection with or resulting from (a) general global, national or regional economic, business, political, market, regulatory or social conditions (or changes therein), including in respect of interest or currency rates, inflation or deflation or the financial, credit or capital markets, (b) any change or proposed change in Law (the enforcement, implementation or interpretation thereof), except where such change or proposed change is in respect of the Corporation or the Subsidiary specifically, (c) any change affecting the mining industry generally or metal or other commodity prices, (d) any change or proposed change in any applicable accounting practices or rules (or the enforcement, implementation or interpretation thereof), (e) any natural or man-made disaster, (f) any epidemic, pandemic, disease, outbreak of illness (including COVID-19), including the worsening thereof, other health crisis or public health event, (g) the commencement or continuation of any war, armed hostilities, civil unrest, including the escalation or worsening thereof, or acts of terrorism, (h) any action by the Purchaser or any of its Affiliates, (i) any action, omission, change, effect, circumstance or condition attributable to or contemplated by the execution, delivery or performance of this Agreement or the announcement of the transactions contemplated in this Agreement (including any adverse effect proximately caused by threatened or actual loss of, or disruption in, any customer, supplier, vendor, lender, contractor, employee, landlord, community or government relationships or loss of any personnel, or by reason of the identity of the Purchaser or any communication by the Purchaser regarding its plans or intentions with respect to the Group Companies or the Project [viz the Santa Rita mine]), (j) compliance with the terms of this Agreement or Applicable Law (including COVID-19 Measures), (k) any action taken, or failure to take any action, or such other change or event, in each case, to which the Purchaser has consented or requested, or (l) the failure of the Project to meet internal projections, estimates, forecasts or revenue or earning predictions for any period.

(Notably, the MAE definition included an “effect” as one of the things that could give rise to a material adverse effect, and also referred to a change, event or effect that “is or would reasonably be expected to be material and adverse”, thereby capturing both actual and reasonably expected MAEs.)

1. General guidance on construing MAE/MAC clauses

As the Court's judgment explains, the central question of liability in dispute was whether the GE was a material adverse effect - if it was not, then Sibanye was not entitled to terminate the SPA. In answering that question, the Court helpfully set out a number of important points of guidance for the construction of an MAE or MAC clause in an English law-governed SPA (noting that the construction of any given clause will depend on the terms used). 

1. When considering MAE/MAC clauses, the ordinary principles of contract construction should apply, having regard to the natural and ordinary meaning of the words used, in context, and in light of their purpose, commercial common sense and the factual background.
2. While it is helpful to look at US authorities on MAE/MAC clauses, there is no ”special principle” derived from US case law that MAE/MAC clauses must be construed narrowly, or that the party invoking the clause bears a ”high burden”.
3. When assessing what is ”material”, there is no ”bright-line test” to be applied, either in absolute or percentage terms (both a 10% reduction in group sales and a 20% reduction in equity value have been found to be material in past cases). What is material will depend on the facts, including the size of the transaction and the nature of the assets. ”Material” is intended to mean ”significant or substantial” and it has been held that the important thing is where the company has suffered ”an MAE in its business or results of its operations that is consequential to the company’s earnings power over a commercially reasonable period… measured in years rather than months”.
4. When assessing what degree of likelihood is implied by the words ”would reasonably be expected”, following the US case of Akorn (see this blog for a summary), the test will be satisfied if a reasonable person would have considered it more likely than not that the matter would turn out to be material. The test is an objective one and must be assessed at the date of termination of the contract. Post-termination events can be taken into account in making that assessment, but they should be treated with caution so that they do not “overwhelm” an assessment of what would have been said looking forward.
5. Although some case law suggests that there can be both qualitative and quantitative aspects of the test of whether there has been an MAE/MAC, it is questionable whether a qualitative test is needed (or exactly what this constitutes), as any qualitative MAE should, by definition, also satisfy a quantitative test. Similarly, any event that fails a quantitative test will necessarily fail a qualitative test.
6. It is questionable what, if anything, the ”objects”' provision of an MAE clause (i.e., the typical list of aspects of the target which the MAE could affect – in this case: “the business, financial condition, results of operations, properties, assets, liabilities or operations”) adds to the meaning of the clause. Drafting that refers simply to an effect ”on the company” is probably sufficient.

2. “Revelatory events”

An interesting point of construction related to a concept the sellers called a “revelatory event”. 

Whilst the sellers denied that the GE had revealed wider problems with the east wall of the Santa Rita pit as contended for by Sibanye (broadly, that slope angles on the east wall of the mine - not confined to the area of the GE - were too steep and needed to be reduced), they argued that, even if this had been the case, the GE did not qualify as an MAE because these problems were pre-existing issues, albeit they may have been revealed by the GE. 

The Court agreed and held that in order for an MAE to have occurred, the “change, event or effect” had, itself, to be material and adverse. While it was right that some consequences or effects of the GE could be taken into account in determining if there had been an MAE, these should be limited to only those which “quantify or illuminate” the significance of the event itself. This was the case even though, as argued by Sibanye, the MAE referred to a “change, event or effect”. As it happened, the Court did not consider those other pre-existing issues to be material enough to constitute an MAE in any event.

3. Materiality in the context of a geotechnical event

Applying the MAE clause to the GE, the Court held that the GE was not an MAE given that it was not "material". In reaching this conclusion, the Court noted the following factors, several of which may provide useful guidance when considering whether a geotechnical event qualifies as an MAE: 

• the GE was an occurrence of a type which often happens at open pit mines (noting that there had been 166 geotechnical events at the relevant mine during 2021); 
• the GE only involved a dislocation, not a detachment, of part of the slope; 
• no one was killed or injured; 
• no equipment was lost; 
• movement stopped very shortly after the GE; 
• operations at the mine resumed on the same day; 
• the GE was not shown to have had any adverse regulatory consequences;
• the GE did not lead to ore being lost; 
• the GE did not affect the life of the mine;
• the GE did not affect the amount of ore that was in fact mined (indeed, more ore than anticipated was mined in 2021);
• the anticipated delay in ore mining caused by the GE only had an impact of c. US$5.4 million, with an added cost of mining additional waste of c. US$7.26 million, and although the GE contributed to a separate incident, the cost of that incident was also only US$8 million - resulting in additional costs of c. US$20 million in total. Those costs were not material, given they were well below 5% of the purchase price of Atlantic Nickel under the SPA; and
• the estimated impact of the GE on the value of the mine was also less than 10%, and therefore below the level of materiality.

For similar reasons, the GE was not an event that “would reasonably be expected” to be material. In this regard, the Court reviewed the materials informing Sibanye's assessment at the date of termination (including various reports from expert advisers). Although the Court accepted that those materials could be of some assistance in ascertaining what “a reasonable person in the position of the parties would have expected in January 2022”, the Court ultimately held that those assessments were not reliable or based on reasonable assumptions regarding how the GE would affect the mine and, therefore, Atlantic Nickel's business. Notably, the Court put some weight on the fact that the contemporaneous assessments prepared for Sibanye in relation to the GE had not been shared with the claimants to check if the analysis was correct or reasonable.

Given the Court's judgment was concerned only with liability, the parties' dispute should now proceed to a quantum phase, subject to any appeal.