Bryan Haynes comments in the Lexpert Special Edition: Finance and M&A 2021 on the Ontario Superior Court of Justice decision in Fairstone Financial Holdings Inc. v. Duo Bank of Canada—the first in Canada in which a court considered whether a purchaser could refuse to close in the context of the pandemic. The court weighed in on the material adverse effect (MAE) clauses in an M&A context.

Previous cases dealing with MAE clauses have been in the context of bankruptcy, landlord-tenant or bank loan situations, says Bryan Haynes, a partner at Bennett Jones LLP in Calgary. “This is a very welcome development because [the decision] provides a very extensive overview of all of the various issues and analysis of relevant case law and then a pronouncement by the court on the principles that the Canadian courts should follow.”

Those principles are mainly in line with what the Delaware courts have laid down in the past, particularly in the landmark 2018 decision in Akorn Inc. v Fresenius Kabi AG, Haynes adds.

(T)he behaviour of both parties will be scrutinized by courts. In Fairstone, although there was nothing illegal or unbecoming in the buyer’s behaviour, “you could sense through reading the judgment that the judge felt that the buyer was behaving through the process to try to justify its termination . . . perhaps pulling the trigger too quickly to terminate the transaction,” Haynes continues.

“That’s something that you can’t really articulate as a principle, other than act in good faith, be honest in your dealings. Those are principles that the courts have laid down, [and] the reality of who the parties are and how they behave does impact on decisions. . . . It’s one of those factors that is important.”

As well, he says, “In all these cases, it’s important to understand these are factually specific and contextual cases . . . Each case is very different, decided on its own merits.”

The pandemic has brought to the fore the importance of MAE clauses. One result is that parties to transactions will scrutinize and negotiate these clauses more than ever, says Haynes. “The pandemic has shown that these clauses can no longer be boilerplate.”

If parties don’t like the allocation of risk in a SPA, “they need to change the clauses.” Even carveouts will become highly negotiated, Haynes predicts, with parties even negotiating “exception to exceptions.”

The Lexpert Special Edition: Finance and M&A 2021 profiles selected Lexpert-ranked lawyers whose focus is in Corporate Finance, M&A and related practices. Also included are feature articles on legal aspects of Canadian business issues.