Material adverse change

Significant deterioration of financial circumstances is a normative- undefined legal term that the creditor from a long-term debt ratio ( including loan contract, rental) to enable an extraordinary termination for cause against his debtor, because due to the solvency of the debtor 's business foundation of the contract is omitted or future at risk will.

• 5.1 credit agreements
• 5.2 Corporate Acquisitions

Legal basis

The Civil Code (BGB ) knows this vague legal term loans, particularly in law. Here, the provision of § 490 para 1 BGB has been configured yet believing friendly than, deleted in 2002 § 610 BGB. On the one hand, not only the cancellation of a loan promise is possible in fact to the creditor but an extraordinary right of termination with existing loans rather is awarded in the event of significant deterioration in the financial circumstances; it is sufficient if the circumstances threaten to deteriorate significantly. On the other hand, the contents of the standard was extended to the decline in the value of collateral. The right of termination to the lender open assessing opportunity to reflect on the reasonableness of the credit relationship.

The law itself, however, avoids a definition of the normative- indeterminate legal concept of " significant deterioration in the financial circumstances ". This could lead to a dispute between the parties, what is "essential " and understand by the terms under " financial circumstances ". If the law uses such vague legal terms, it expects a filling by the case law and literature. The concept of substantial deterioration of the financial situation is in the case law to the provisions of § 321 BGB aF largely resolved. In law and literature is now undisputed, what is meant by a significant deterioration in the financial circumstances within the meaning of § 490 BGB.

Significant deterioration

Not every reduction of the assets is a " significant deterioration in the financial circumstances ". Deterioration must relate to the overall financial situation of the debtor. Deterioration of the assets are both asset impairments and worsened marketability of asset components. When individuals enters an outflow of resources, when significant assets to lose value or perish, or the income situation has deteriorated so much that they have to rely on their assets for enterprises must be based on the Liquditäts and equity development,. objective signs are sluggish or missing payments, the financial statements are an important tool. .

Much the deterioration is if it leads to a threat to the repayment claim ( § 490 para 1 BGB). The asset impairment must be significant, percentages in the literature are not found, but it can be assumed that at least 20 %. Therefore, a significant deterioration is present only when the magnitude of the assets visible, and not just temporarily reduced. " Substantial" means that a risk of repayment is required. Can still from the credit plus interest - shrunk - will be repaid assets, the deterioration is certainly not "essential".

But not directly related to the assets related circumstances come into consideration. Thus, the rejection of an application for credit from other banks represent a significant deterioration, as well as enforcement actions of third parties. In a much-cited decision, the Oberlandesgericht Hamm had to hear the case of a locksmith, who had his own business, among other things with the help of public funding loans. After 1 ½ years, the Bank announced the loan on the grounds that the financial situation had deteriorated significantly. The court took over on the that a certain initial loss at a normal start-up and development compared to a predecessor company was even positive. The simple assessment " loss assets equal risk " is not sufficient, at least for a start-up to view company losses as the cause for an important cause for termination.

Credit institutions as lenders

Institutional creditors such as banks have an interest to regulate in a " significant deterioration in the financial circumstances " as expressed increased credit risk, and therefore included this topic in their terms and conditions. There the vague legal concept has been substantiated by a non-exhaustive list of examples.

Report any deterioration

If the enforceability of the claims of a credit institution has already occurred even if any security was, there is an important reason, entitled to credit institutions' credit termination. The right of banks to immediate termination of their credit exposures arising from No. 19, paragraph 3, sentence 2 Conditions of banks in connection with § 314, § 490 BGB. After the dismissal is a business relationship requires a serious cause, the basis of which the terminating party to continue the business relationship can not be expected, with the legitimate concerns of the borrower are considered. Primarily due to a already occurred proven significant deterioration or significant risk to the financial circumstances of the borrower or a detectable significant deterioration in the value of the collateral provided for the loan. Has the borrower's payments already set (contractual interest or principal payments are not or are no longer within the prescribed period ) or declared their intention to stop paying, the conditions for termination without notice credit are met.

An exception to the termination option is for consumer and real estate loan agreements. In consumer loan agreements cancellation is not possible due to deterioration of financial circumstances, as long as the residues in the normal ranges. According to § 498 Paragraph 1 No. 1 BGB due to late payment by the borrower the lender the consumer loan contract with a loan that must be repaid in installments, only cancel if the borrower with at least two consecutive payments in whole or in part, and at least 10 %, at a term of the consumer loan contract over three years with 5% of the principal amount of the loan or part of the payment price is in default. In Immobiliardarlehensverträgen paragraph 1 shall apply, provided that the borrower with at least two consecutive payments must be in whole or in part and at least 2.5 % of the principal amount of the loan in default. § 498 para 3 of the Civil Code was rewritten in this form under the Act to limit the risks associated with financial investments ( Risk Limitation Act ) was. , With effect from August 19, 2008 aim to prevent rather willful dismissal for alleged default in payment. Before entering this scheme, the allowable residues were frequently settled by contract and moving at 5% based on the regulations for consumer loan contracts.

Menace

After the reform of contract law in 2002, the deterioration need not be only occurred; it is sufficient that the risk of deterioration is imminent. The imminent threat of insolvency of the borrower entitles the creditor to immediate termination of the loan for good cause. A danger exists when compliance with the payment obligations is jeopardized by the Borrower or the enforceability of claims even if any security was. This is partly the case, if a substantial deterioration or significant risk to the financial circumstances of the borrower or in the value of the collateral provided for the loan occurs, especially if the customer declares that he intends to suspend the payments. There is even an important reason for immediate termination of a loan if the indebtedness is not found. If the liquid cash of the borrower to meet the future liabilities due loans are not enough permanent and not temporary, is just before an impending danger. Own overdue receivables of the borrower not be him doing for its own credit payments owed ​​to the bank to its customers and may therefore not be in the liquidity plan. An imminent onset of insolvency of the borrower endangers the fulfillment of its liabilities to a bank. The banks, however, are held against each other detectable weigh their own interests to immediate termination and the interests of the borrower in pursuing the loan ratio from dismissal.

Existing collateral

The mere existence of collateral is not sufficient to exclude the right of termination. Sufficient safeguards exist when they are utilizable according to the judgment of a disinterested, qualified third party with regard to the overall circumstances to cover the full credit risk sufficient and without any particular difficulty. Here, too, are considered " significant deterioration " in collateral value the interpretations to deterioration of assets. Occurs when collateral therefore a significant decline in the value received, the credit institutions have by No. 22, Section 1 Conditions of savings banks a Nachbesicherungsrecht. If the borrower is not in accordance with this claim on additional collateral, this triggers a dismissal by No. 26, para 2 lit. b Conditions of savings banks (see: funding obligation ).

Verifiability

The assessment of the creditor that a significant deterioration in the financial circumstances or collateral had occurred or such a rebuke, is judicial review. The view of the creditor must therefore be objectified. Responsible acting creditors to be tied to facts, mere unprovable fears are not enough. As in the case BGH is checked by the courts, even done, which stood liquidity available to meet liabilities when due credit liabilities. In the cited case had a doctor overdue fee claims against the physicians' association, which are nor-mally but only paid 3-4 months after each quarter; these claims, however, were not available at the relevant time as cash and therefore could not be considered as liquidity for the credit operation. Important evidence for the inability to pay regularly the knowledge of the payments. Knowledge means a held for certain knowledge in general. According to § 130 para 2 of the Insolvency knowledge of insolvency or opening application is equal to the knowledge of circumstances which can include mandatory on the insolvency or the opening application. The overriding conclusion from the evidentiary facts on which insolvency can only be drawn if an honest thinker who is not influenced by the thoughts of one's own advantage, given the known facts before the inspection can not close, the debtor was insolvent. Especially the non-payment of loan principal and interest, which are typically only not balanced at maturity if the necessary funds for this purpose are not available, indicates the default of the borrower.

Formally this contract provision is verifiable, since it is a standard terms. If they do not individually discussed with the client and negotiated, it is subject to judicial namely content control.

International Law

In international law, is the " material adverse change " clause (also: MAC clause) a similar provision exists. Occasionally, the term "Material Adverse Event " (also: MAE ) application.

Credit agreements

For credit agreements, the MAC clause gives the creditor the contract without termination right in the event that the borrower especially due interest and principal payments does not pay on time. Additionally, events or transactions are also enumerated examples, which are suitable for a substantial (material) deterioration ( adverse change ) the economic or legal circumstances, as they are reflected from a later financial statements of the borrower, a material effect on the business, financial trigger position or performance of the company concerned or its affiliated companies -. First of all, a deterioration of these events relative to the initial position when the loan is granted must be recognizable. Then, however, not only an insignificant deterioration must have occurred for the application of the clause. The " material adverse change " clause is an essential part of the covenants.

Corporate Acquisitions

In acquisition agreements MAC clauses are also increasingly used. They should protect the buyer from material adverse changes in the Transaktiosgrundlagen in the period between signing the contract (so-called " signing " ) and the transfer of ownership (so-called " Closing" ). In contrast to the use case of credit agreements MAC clauses explain in acquisition agreements will not benefit, but to give the buyer the right to cancel the contract before it has become binding effect. Between signing and closing several weeks can be up months depending on the transaction. The most common causes for the disintegration of both deadlines are Cartel procedures and refinancing negotiations. The MAC clauses have won especially after the events of 11 September 2001 and with the occurrence of the so-called financial crisis from 2007 to importance. Both events led to the fact that the general economic environment has changed overnight.

The legal effectiveness of MAC clauses is very controversial. Relevant sentences were in the U.S. on "The Court of Chancery of the State of Delaware " like. In Europe, the British " Panel on Takeovers and Mergers " was confronted with a MAC clause. Both the district court in Delaware and the panel rejected the existence of an MAE, in the cases mentioned above. In part, was based on the lack of delineation of the arguments put forward by the plaintiff MAE of other circumstances, on the other hand the (too) broad scope of the clause was objected to.