What's "Material" In M&A? Key Question, Complex Answer

Overview and Key Takeaways

The concept of “materiality” is integral to M&A. Materiality qualifiers appear in many standard M&A clauses, including representations and warranties, interim period covenants, and closing conditions, among others.

Yet the meaning of “material” in M&A agreements remains elusive. Different Canadian courts have taken sometimes markedly different approaches. The recent ruling of the Ontario Superior Court of Justice (Commercial List) (ONSC) in Project Freeway¹ is the latest example and provides a timely point of comparison.

Our key practical takeaways include:

• Canadian courts tend to incorporate questions of the M&A parties' knowledge (e.g., the buyer's knowledge of the target) into their materiality analysis to some degree.
• Delaware courts have developed two separate and distinct materiality tests in M&A disputes, one applicable to “material adverse effect” (MAE) clauses and another applicable to non-MAE disputes. Canadian courts have not maintained a similarly strict division.
• The overall result for Canadian M&A is threefold. First, it is difficult to predict how a Canadian court will tackle any given M&A materiality dispute. Second, M&A parties should not necessarily expect the same judicial approach to different references to materiality across the same M&A agreement. Third, the governing provincial law may be key.

Our detailed insights follow. For further discussion of “materiality” qualifiers in M&A, see Fasken, Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024). For our two earlier Fasken insights on Project Freeway, see here (earnout bulletin) and here (“entire agreement” clause bulletin). For more Fasken M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe.

Inmet Mining v. Homestake

The 2003 ruling of the British Columbia Court of Appeal (BCCA) in Inmet Mining² arose from the sale of a mine. Following execution, the buyer argued it was excused from closing because the seller was in breach of a representation and warranty that it had disclosed all “material” information to the buyer. This read:

The Vendor represents and warrants... the Vendor has provided to the Purchasers disclosure of all information in its possession or control relating to any material fact which could reasonably be expected to have a material adverse effect on the condition (financial or otherwise), operation or prospects of the business…³

The buyer argued its due diligence after execution had identified certain non-disclosures by the seller that concealed significant concerns regarding the mine's mineral reserves such that the representation was incorrect. The seller argued there was no breach because the buyer had all the relevant information at signing, either because the buyer had actually received it from the seller or based on general industry knowledge.

After the British Columbia Supreme Court (BCSC) ruled for the seller, the “underlying issue” before the BCCA was “the standard of materiality to be applied in interpreting the meaning of ‘material fact' and ‘material and adverse'” in the representation.⁴ Citing the purpose of the clause,⁵ and U.S. and Canadian securities law precedent, the BCCA held that in deciding the materiality of undisclosed information the “focus is on the effect the undisclosed information would have had on [the buyer's] deliberations and decisions in relation to the purchase of the mine.”⁶ The BCCA elaborated on this test later in its ruling, and the result was effectively a hybrid objective / subjective test. It stated:

Whether the undisclosed information… would have significantly affected [the buyer's] deliberations or altered its view must be determined both objectively (what a reasonable purchaser would do) and subjectively (what a reasonable purchaser in the position of [the buyer], with [the buyer's] knowledge, would do).⁷

This led the BCCA to affirm for the seller. Because the facts demonstrated the buyer either “knew,” had “considered” or had “taken into account” the allegedly “material” undisclosed information in entering the transaction, it could not be said the undisclosed information would have “assumed actual significance in the deliberations of a reasonable purchaser...”⁸

Niebergal v. QHR Technologies

The 2020 ruling of the Saskatchewan Court of King's Bench (SKKB) in Niebergal⁹ arose from the purchase of a medical records company. After the transaction closed, the buyer alleged various breaches of the seller's representations and warranties in the share purchase agreement (SPA), including by non-disclosure by the sellers during the buyer's due diligence process as well as critical omissions in the seller's disclosure letter. The buyer's chief complaint was the target's post-closing underperformance and failure to compete in certain markets, including for technological issues.

The SKKB noted the term “material adverse effect” was “found in many” of the seller's representations and was thus “central” to the buyer's claim.¹⁰ This led the SKKB to cite the ruling of the BCCA in Inmet Mining.¹¹ The SKKB also cited the 2011 ruling of the Supreme Court of Canada (SCC) in Sharbern Holding,¹² which the SKKB described as the “touchstone authority in Canada respecting the issue of materiality in commercial law”.¹³ Relying on these rulings, the SKKB instructed as follows:

Fundamental to demonstrating a material breach of a representation or warranty, is that the party making such a claim must prove, on a balance of probabilities, the omission or failure to disclose a material fact would have significantly altered the information available to it when determining whether or not to proceed with the transaction in question.¹⁴

Quoting the BCCA's ruling in Inmet Mining, the SKKB added that “assessing materiality is a contextual inquiry made on a case-by-case basis” and that “[w]hat is material in a contractual context” will depend in part on the parties' “knowledge about the subject-matter of the contract.”¹⁵

Applying these standards, the SKKB held the buyer “failed to demonstrate a material breach of a representation or warranty contained in the SPA.”¹⁶ Key to its analysis was the buyer's knowledge of the target entering the transaction and throughout its due diligence process. The court highlighted that the parties “were well known to each other,” that the buyer “knew of [the target's] struggles with attempting to maintain its software for its clients,” and that the buyer “had intimate knowledge respecting the inner workings and organizational structure of [the target]”.¹⁷ The court explained the buyer “came into [the] negotiations with [its] eyes open and armed with much information about [the target]” with the result the SKKB was “satisfied . . . [the buyer] was bent on proceeding with this acquisition, no matter what.”¹⁸ Stated differently, the SKKB held the buyer was “very anxious to acquire” the target and “would have proceeded with this acquisition regardless of what they now assert was material information”.¹⁹

Fairstone Financial v. Duo Bank

The 2020 ruling of the ONSC in Fairstone²⁰ arose during the Covid-19 pandemic and from the sale of a consumer finance company for a purchase price estimated to exceed C$1 billion. Two separate questions of materiality arose. First, in connection with the no “material adverse effect” (MAE) closing condition. Second, in connection with a materiality qualifier applicable to the seller's “ordinary course of business” interim period covenant.

Regarding the no MAE closing condition, the acquisition agreement was executed in the very early stages of the pandemic in mid-February 2020. Closing was set for June 2020, and well after the pandemic had been officially declared by the World Health Organization in mid-March 2020. In late May 2020, the buyer asserted it was not obligated to close based on the non-satisfaction of the no MAE closing condition, i.e., arguing the pandemic had led to a MAE.

The ONSC turned to the rulings of the BCSC and BCCA in Inmet Mining. The ONSC first defined a “material adverse effect” as the occurrence of “unknown events” that “substantially threaten the overall earnings potential of the target in a durationally-significant manner.”²¹ Then, quoting the ruling of the BCSC in Inmet Mining, the court explained:

[T]he key to determining materiality and adversity in the circumstances of the case before me is the knowledge the defendant had as purchaser. If a fact or information were already known to the defendant… it would be of no consequence to the defendant's decision to buy and therefore would not be material or adverse to the defendant.²²

The question for the ONSC was therefore whether, at the time of execution in mid-February 2020, COVID-19 was a “known event” such that it could not be the basis of an MAE. The court acknowledged the “novel coronavirus was already daily news in North America” at that time.²³ However, the court distinguished between knowledge of the virus itself (which the buyer did have) and knowledge of the economic effect the virus would actually have on the target (which the buyer did not yet have) to find the “unknown event” requirement satisfied.²⁴ Later in its MAE analysis the ONSC also endorsed the hybrid objective / subjective materiality test established by the BCCA in Inmet Mining.²⁵

Regarding the materiality qualifier applicable to the seller's “ordinary course of business” covenant, the ONSC held:

[T]he materiality requirement is aimed at determining whether the change in question would be viewed by a reasonable purchaser as having altered the “total mix” of information so as to lead a reasonable purchaser not to acquire the business or to acquire it on significantly different terms.²⁶

The ONSC cites Delaware precedent as authority for this test, known as the “total mix” of information test. However, the test, which was first articulated by the United States Supreme Court in 1976 in TSC Industries,²⁷ a securities law dispute, was cited with approval during the materiality analysis in each of Sharbern Holding,²⁸ Inmet Mining,²⁹ and Niebergal.³⁰ The “total mix” of information test also continues to be applied to M&A materiality disputes (other than MAE disputes) in Delaware.³¹ The ONSC in Fairstone did not ultimately have to apply the test as it held the target had not operated outside the ordinary course.

Project Freeway v. ABC Technologies

The 2025 ruling of the ONSC in Project Freeway³² arose from an SPA featuring both a closing cash payment of US$165,000,000 and a three tranche earnout for a maximum amount of US$26,461,000. The earnout included an acceleration clause that would be triggered should the buyer divest a “material portion” of the target's assets without the seller's consent. The issue was whether two post-closing financing transactions, including a series of sale and leaseback transactions of the target's real estate for an aggregate value of US$97.9 million (i.e., 59% of the purchase price), triggered the acceleration clause.

The seller argued “materiality” meant significant in terms of value. The buyer argued something was only “material” if it impacted the target's performance and thus the pursuit of the earnout.

The ONSC, as had both parties, relied principally on the SCC's 2014 ruling in Sattva.³³ The court summarized that, per Sattva, the SPA must be “read as a whole” giving its words their “ordinary and grammatical meaning”, and that the court should adopt a “practical, common-sense approach” as it tried to “ascertain the objective intent of the parties”.³⁴

The ONSC agreed with the buyer that it should “examine the purpose” of the earnout “in light of the SPA as a whole.”³⁵ Doing so, the court saw the earnout as striking a balance between, first, the seller's right to the potential earnout payments, and, second, the buyer having “operational freedom” to run the target business as it saw fit “as long as it does not impair” the pursuit of the earnout.³⁶

The result was that the ONSC agreed with the buyer that the word “material” as used in the earnout meant material to the earnout.³⁷ Therefore, as the buyer had submitted “unchallenged evidence” the two financing transactions had “no impact” on the target's performance or the earnout calculation,³⁸ the court found it “difficult to see” how the financing transactions “could be ‘material' within the meaning” of the acceleration clause.³⁹

The ONSC did not cite the materiality analysis in any of Inmet Mining, Niebergal or Fairstone. ⁴⁰ That said, the court repeatedly highlighted the seller was, prior to closing, aware of the possibility of the financing transactions occurring, but did not object to them until after being notified the first earnout target had not been met.⁴¹ The court also stated it was “notable” the same two senior executives of the seller that had knowledge of the possibility of the financing transactions occurring were among the five people whose knowledge constituted the seller's knowledge under the SPA.⁴² For the court, under Sattva, this helped in “acertain[ing] the objective intent of the parties” regarding the meaning of the materiality qualifier.⁴³

Key Practical Takeaways

As the foregoing discussion illustrates, “materiality” disputes in M&A are complex. Our key practical takeaways include:

• Canadian courts tend to incorporate questions of the M&A parties' knowledge (e.g., the buyer's knowledge of the target) into their materiality analysis to some degree. One of the roots of this approach is reference to a test derived from U.S. securities law, i.e., the “total mix” of information test. The other is reference to Canadian M&A caselaw that predates the 2002 and 2003 rulings in Inmet Mining.⁴⁴ However, even in Project Freeway, where the ONSC did not rely on any of these authorities, issues of knowledge still informed the court's materiality analysis.
• In Delaware, the courts have developed two separate and distinct materiality tests in M&A disputes. The first is a purely quantitative and qualitative analysis and is applicable to MAE disputes.⁴⁵ The second is the “total mix” of information test and applies to other M&A materiality disputes.⁴⁶ Canadian courts have not maintained a similarly strict division. The MAE analysis in Fairstone largely follows Delaware law, but also departs from it in several respects.⁴⁷ There is no consistent Canadian approach to non-MAE materiality disputes in M&A.
• The overall practical result for Canadian M&A is threefold. First, it is difficult to predict how a Canadian court will tackle any given M&A materiality dispute. Second, M&A parties should not necessarily expect the same judicial approach to different references to materiality across the same M&A agreement. The particular wording may matter. The nature of the clause, e.g., representation and warranty, versus interim period covenant, versus closing condition, may matter. Whether or not the dispute is a pre-closing or post-closing dispute may matter. Third, governing law may be key. For example, a dispute under B.C. law can be expected to give significant weight to the BCCA's ruling in Inmet Mining. By contrast, future disputes under Ontario law may give more weight to Project Freeway (which relied principally on the SCC's 2014 ruling in Sattva) than Fairstone (which relied principally on pre-Sattva caselaw such as Inmet Mining). The approach to be taken by the Alberta courts remains to be seen.

1 is the latest example and provides a timely point of comparison.

Our key practical takeaways include:

• Canadian courts tend to incorporate questions of the M&A parties' knowledge (e.g., the buyer's knowledge of the target) into their materiality analysis to some degree.
• Delaware courts have developed two separate and distinct materiality tests in M&A disputes, one applicable to “material adverse effect” (MAE) clauses and another applicable to non-MAE disputes. Canadian courts have not maintained a similarly strict division.
• The overall result for Canadian M&A is threefold. First, it is difficult to predict how a Canadian court will tackle any given M&A materiality dispute. Second, M&A parties should not necessarily expect the same judicial approach to different references to materiality across the same M&A agreement. Third, the governing provincial law may be key.

Our detailed insights follow. For further discussion of “materiality” qualifiers in M&A, see Fasken, Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024). For our two earlier Fasken insights on Project Freeway, see here (earnout bulletin) and here (“entire agreement” clause bulletin). For more Fasken M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe.

Inmet Mining v. Homestake

The 2003 ruling of the British Columbia Court of Appeal (BCCA) in Inmet Mining² arose from the sale of a mine. Following execution, the buyer argued it was excused from closing because the seller was in breach of a representation and warranty that it had disclosed all “material” information to the buyer. This read:

The Vendor represents and warrants... the Vendor has provided to the Purchasers disclosure of all information in its possession or control relating to any material fact which could reasonably be expected to have a material adverse effect on the condition (financial or otherwise), operation or prospects of the business…³

The buyer argued its due diligence after execution had identified certain non-disclosures by the seller that concealed significant concerns regarding the mine's mineral reserves such that the representation was incorrect. The seller argued there was no breach because the buyer had all the relevant information at signing, either because the buyer had actually received it from the seller or based on general industry knowledge.

After the British Columbia Supreme Court (BCSC) ruled for the seller, the “underlying issue” before the BCCA was “the standard of materiality to be applied in interpreting the meaning of ‘material fact' and ‘material and adverse'” in the representation.⁴ Citing the purpose of the clause,⁵ and U.S. and Canadian securities law precedent, the BCCA held that in deciding the materiality of undisclosed information the “focus is on the effect the undisclosed information would have had on [the buyer's] deliberations and decisions in relation to the purchase of the mine.”⁶ The BCCA elaborated on this test later in its ruling, and the result was effectively a hybrid objective / subjective test. It stated:

Whether the undisclosed information… would have significantly affected [the buyer's] deliberations or altered its view must be determined both objectively (what a reasonable purchaser would do) and subjectively (what a reasonable purchaser in the position of [the buyer], with [the buyer's] knowledge, would do).⁷

This led the BCCA to affirm for the seller. Because the facts demonstrated the buyer either “knew,” had “considered” or had “taken into account” the allegedly “material” undisclosed information in entering the transaction, it could not be said the undisclosed information would have “assumed actual significance in the deliberations of a reasonable purchaser...”⁸

Niebergal v. QHR Technologies

The 2020 ruling of the Saskatchewan Court of King's Bench (SKKB) in Niebergal⁹ arose from the purchase of a medical records company. After the transaction closed, the buyer alleged various breaches of the seller's representations and warranties in the share purchase agreement (SPA), including by non-disclosure by the sellers during the buyer's due diligence process as well as critical omissions in the seller's disclosure letter. The buyer's chief complaint was the target's post-closing underperformance and failure to compete in certain markets, including for technological issues.

The SKKB noted the term “material adverse effect” was “found in many” of the seller's representations and was thus “central” to the buyer's claim.¹⁰ This led the SKKB to cite the ruling of the BCCA in Inmet Mining.¹¹ The SKKB also cited the 2011 ruling of the Supreme Court of Canada (SCC) in Sharbern Holding,¹² which the SKKB described as the “touchstone authority in Canada respecting the issue of materiality in commercial law”.¹³ Relying on these rulings, the SKKB instructed as follows:

Fundamental to demonstrating a material breach of a representation or warranty, is that the party making such a claim must prove, on a balance of probabilities, the omission or failure to disclose a material fact would have significantly altered the information available to it when determining whether or not to proceed with the transaction in question.¹⁴

Quoting the BCCA's ruling in Inmet Mining, the SKKB added that “assessing materiality is a contextual inquiry made on a case-by-case basis” and that “[w]hat is material in a contractual context” will depend in part on the parties' “knowledge about the subject-matter of the contract.”¹⁵

Applying these standards, the SKKB held the buyer “failed to demonstrate a material breach of a representation or warranty contained in the SPA.”¹⁶ Key to its analysis was the buyer's knowledge of the target entering the transaction and throughout its due diligence process. The court highlighted that the parties “were well known to each other,” that the buyer “knew of [the target's] struggles with attempting to maintain its software for its clients,” and that the buyer “had intimate knowledge respecting the inner workings and organizational structure of [the target]”.¹⁷ The court explained the buyer “came into [the] negotiations with [its] eyes open and armed with much information about [the target]” with the result the SKKB was “satisfied . . . [the buyer] was bent on proceeding with this acquisition, no matter what.”¹⁸ Stated differently, the SKKB held the buyer was “very anxious to acquire” the target and “would have proceeded with this acquisition regardless of what they now assert was material information”.¹⁹

Fairstone Financial v. Duo Bank

The 2020 ruling of the ONSC in Fairstone²⁰ arose during the Covid-19 pandemic and from the sale of a consumer finance company for a purchase price estimated to exceed C$1 billion. Two separate questions of materiality arose. First, in connection with the no “material adverse effect” (MAE) closing condition. Second, in connection with a materiality qualifier applicable to the seller's “ordinary course of business” interim period covenant.

Regarding the no MAE closing condition, the acquisition agreement was executed in the very early stages of the pandemic in mid-February 2020. Closing was set for June 2020, and well after the pandemic had been officially declared by the World Health Organization in mid-March 2020. In late May 2020, the buyer asserted it was not obligated to close based on the non-satisfaction of the no MAE closing condition, i.e., arguing the pandemic had led to a MAE.

The ONSC turned to the rulings of the BCSC and BCCA in Inmet Mining. The ONSC first defined a “material adverse effect” as the occurrence of “unknown events” that “substantially threaten the overall earnings potential of the target in a durationally-significant manner.”²¹ Then, quoting the ruling of the BCSC in Inmet Mining, the court explained:

[T]he key to determining materiality and adversity in the circumstances of the case before me is the knowledge the defendant had as purchaser. If a fact or information were already known to the defendant… it would be of no consequence to the defendant's decision to buy and therefore would not be material or adverse to the defendant.²²

The question for the ONSC was therefore whether, at the time of execution in mid-February 2020, COVID-19 was a “known event” such that it could not be the basis of an MAE. The court acknowledged the “novel coronavirus was already daily news in North America” at that time.²³ However, the court distinguished between knowledge of the virus itself (which the buyer did have) and knowledge of the economic effect the virus would actually have on the target (which the buyer did not yet have) to find the “unknown event” requirement satisfied.²⁴ Later in its MAE analysis the ONSC also endorsed the hybrid objective / subjective materiality test established by the BCCA in Inmet Mining.²⁵

Regarding the materiality qualifier applicable to the seller's “ordinary course of business” covenant, the ONSC held:

[T]he materiality requirement is aimed at determining whether the change in question would be viewed by a reasonable purchaser as having altered the “total mix” of information so as to lead a reasonable purchaser not to acquire the business or to acquire it on significantly different terms.²⁶

The ONSC cites Delaware precedent as authority for this test, known as the “total mix” of information test. However, the test, which was first articulated by the United States Supreme Court in 1976 in TSC Industries,²⁷ a securities law dispute, was cited with approval during the materiality analysis in each of Sharbern Holding,²⁸ Inmet Mining,²⁹ and Niebergal.³⁰ The “total mix” of information test also continues to be applied to M&A materiality disputes (other than MAE disputes) in Delaware.³¹ The ONSC in Fairstone did not ultimately have to apply the test as it held the target had not operated outside the ordinary course.

Project Freeway v. ABC Technologies

The 2025 ruling of the ONSC in Project Freeway³² arose from an SPA featuring both a closing cash payment of US$165,000,000 and a three tranche earnout for a maximum amount of US$26,461,000. The earnout included an acceleration clause that would be triggered should the buyer divest a “material portion” of the target's assets without the seller's consent. The issue was whether two post-closing financing transactions, including a series of sale and leaseback transactions of the target's real estate for an aggregate value of US$97.9 million (i.e., 59% of the purchase price), triggered the acceleration clause.

The seller argued “materiality” meant significant in terms of value. The buyer argued something was only “material” if it impacted the target's performance and thus the pursuit of the earnout.

The ONSC, as had both parties, relied principally on the SCC's 2014 ruling in Sattva.³³ The court summarized that, per Sattva, the SPA must be “read as a whole” giving its words their “ordinary and grammatical meaning”, and that the court should adopt a “practical, common-sense approach” as it tried to “ascertain the objective intent of the parties”.³⁴

The ONSC agreed with the buyer that it should “examine the purpose” of the earnout “in light of the SPA as a whole.”³⁵ Doing so, the court saw the earnout as striking a balance between, first, the seller's right to the potential earnout payments, and, second, the buyer having “operational freedom” to run the target business as it saw fit “as long as it does not impair” the pursuit of the earnout.³⁶

The result was that the ONSC agreed with the buyer that the word “material” as used in the earnout meant material to the earnout.³⁷ Therefore, as the buyer had submitted “unchallenged evidence” the two financing transactions had “no impact” on the target's performance or the earnout calculation,³⁸ the court found it “difficult to see” how the financing transactions “could be ‘material' within the meaning” of the acceleration clause.³⁹

The ONSC did not cite the materiality analysis in any of Inmet Mining, Niebergal or Fairstone. ⁴⁰ That said, the court repeatedly highlighted the seller was, prior to closing, aware of the possibility of the financing transactions occurring, but did not object to them until after being notified the first earnout target had not been met.⁴¹ The court also stated it was “notable” the same two senior executives of the seller that had knowledge of the possibility of the financing transactions occurring were among the five people whose knowledge constituted the seller's knowledge under the SPA.⁴² For the court, under Sattva, this helped in “acertain[ing] the objective intent of the parties” regarding the meaning of the materiality qualifier.⁴³

Key Practical Takeaways

As the foregoing discussion illustrates, “materiality” disputes in M&A are complex. Our key practical takeaways include:

• Canadian courts tend to incorporate questions of the M&A parties' knowledge (e.g., the buyer's knowledge of the target) into their materiality analysis to some degree. One of the roots of this approach is reference to a test derived from U.S. securities law, i.e., the “total mix” of information test. The other is reference to Canadian M&A caselaw that predates the 2002 and 2003 rulings in Inmet Mining.⁴⁴ However, even in Project Freeway, where the ONSC did not rely on any of these authorities, issues of knowledge still informed the court's materiality analysis.
• In Delaware, the courts have developed two separate and distinct materiality tests in M&A disputes. The first is a purely quantitative and qualitative analysis and is applicable to MAE disputes.⁴⁵ The second is the “total mix” of information test and applies to other M&A materiality disputes.⁴⁶ Canadian courts have not maintained a similarly strict division. The MAE analysis in Fairstone largely follows Delaware law, but also departs from it in several respects.⁴⁷ There is no consistent Canadian approach to non-MAE materiality disputes in M&A.
• The overall practical result for Canadian M&A is threefold. First, it is difficult to predict how a Canadian court will tackle any given M&A materiality dispute. Second, M&A parties should not necessarily expect the same judicial approach to different references to materiality across the same M&A agreement. The particular wording may matter. The nature of the clause, e.g., representation and warranty, versus interim period covenant, versus closing condition, may matter. Whether or not the dispute is a pre-closing or post-closing dispute may matter. Third, governing law may be key. For example, a dispute under B.C. law can be expected to give significant weight to the BCCA's ruling in Inmet Mining. By contrast, future disputes under Ontario law may give more weight to Project Freeway (which relied principally on the SCC's 2014 ruling in Sattva) than Fairstone (which relied principally on pre-Sattva caselaw such as Inmet Mining). The approach to be taken by the Alberta courts remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.