BM Brazil I Fundo De Investimento Em Participações Multistrategia & Ors v Sibanye BM Brazil (Pty) Ltd & Anor

A material adverse effect clause in a share purchase agreement is construed by ordinary contractual principles. It concerns a post-signing change, event or effect which is itself materially adverse. A pre-existing problem revealed by that event does not become a material adverse effect merely because it is thereby discovered.

The objective question whether an effect would reasonably be expected to be material is assessed at the date of termination, on the information then available. A mere risk is insufficient; the effect must, at least, be more likely than not to be material. Materiality ordinarily requires a significant or substantial adverse effect on the target’s earnings power over a commercially reasonable period, viewed in the context of the transaction.

The claimants sought declarations and damages after the defendants terminated two inter-conditional sale and purchase agreements for Brazilian mining assets. The defendants relied principally on a geotechnical event at the Santa Rita nickel mine, contending that it constituted a Material Adverse Effect under the Atlantic Nickel SPA and discharged their obligation to close.

They also relied on the expiry of the Outside Date and alleged non-compliance with closing covenants. The claimants contended that the geotechnical event was not material, that the termination provisions were unavailable after the Closing Date, and that the alleged documentary defect did not prevent closing.

1. The geotechnical event was not a Material Adverse Effect. The relevant event had to be assessed under the wording of the SPA and was not material either in its actual consequences or in what would reasonably have been expected at the termination date.
2. The MAE definition addressed the change, event or effect itself. It did not permit a pre-existing condition of the mine, revealed by the event or subsequent investigation, to be treated as part of that event. Consequences could be considered only insofar as they quantified or illuminated the significance of the event itself.
3. The reasonable-expectation limb required an objective evaluative judgment, not a range-of-reasonable-views test. The court considered the information available to either party, and held that a mere risk of serious consequences was insufficient. The appropriate threshold was, at least, that a reasonable person would regard materiality as more likely than not.
4. Material meant significant or substantial. The relevant inquiry concerned the target’s earnings power over a commercially reasonable period, normally measured in years rather than months. There was no fixed percentage threshold, but the size and nature of the transaction, the mining context and the detailed contractual allocation of risk militated against a low threshold.
5. The defendants’ financial estimates were unreliable. They depended on unjustified assumptions, including that mining below the event was unsafe, that ore production would fall by 30 per cent, and that reductions would be permanently lost. The independent evidence supported only relatively modest remediation costs and no material long-term loss of ore production.
6. Had it been necessary to decide the carve-out, the event would not have fallen within the exclusion for matters attributable to performance of the SPA. That exclusion concerned matters resulting from entry into, performance of, or announcement of the SPA, not events arising from the ordinary operation of the mine.
7. The defendants were obliged to close on 14 January 2022. Termination under section 10.1(d) was unavailable because notice was given after the Closing Date. The alleged accounting error did not prevent delivery of the required closing documents or provide a valid basis for termination.
8. The claim of wilful misconduct failed. The relevant decision-makers genuinely believed that the event constituted an MAE, although their analysis was hurried and unreasonable in important respects.

The court concluded that the defendants had no contractual basis for termination. Further submissions on the appropriate order were invited.