A series of lawsuits in 2020 related to COVID-19’s effect on purchase or merger agreements have raised key questions about whether the pandemic caused a Material Adverse Effect (MAE) that excused buyers’ obligation to close, and whether targets breached ordinary course covenants in their pandemic responses.

The first question in analyzing a potential MAE breach is how the parties allocated risk between them—e.g., whether they excluded the impact in question. In some cases, the MAE definitions explicitly excluded impacts from pandemics, such that COVID-19 ostensibly would not affect the accuracy of a seller’s representations and warranties. Such a carve-out was present in the Delaware Court of Chancery case SP VS Buyer v. L Brands, where a private-equity firm sought to terminate its $525 million take-private of Victoria’s Secret after the brand cut executive salaries, missed rent payments for stores, and furloughed employees.