The past two years have seen numerous bulletins on Canada's two monumental M&A decisions arising from the COVID-19 pandemic. Unfortunately, however, much of this analysis is substantially undermined by an incorrect or incomplete understanding of Delaware law by Canadian legal commentators. We cut through this noise to highlight the key departures by the Fairstone and Cineplex cases from Delaware law on material adverse effect ("MAE") clauses and the ordinary course covenants requiring caution by U.S. counsel in cross-border deals.

Given the notoriety of the decisions cited (Canadian and American), we keep our treatment brief.

Departures regarding MAE Clauses

Fairstone departs from Delaware MAE clause case law in four important and interrelated areas.1 Furthermore, and quite unhelpfully, Fairstone is silent regarding both the fact that it is making these departures as well as its rationale for doing so.

First, Fairstone sends mixed signals regarding whether an MAE analysis includes a subjective component.2 By contrast, Delaware is clear the analysis is entirely objective.

Second, Delaware is equally clear that the concepts of a "material adverse effect" and "materiality" are "analytically distinct." Fairstone does not draw this distinction. Rather, it applies a "purchase decision" analysis of the type derived from TSC Industries3 and firmly rejected in the MAE context in Delaware.4 Specifically, Fairstone applies a "purchase decision" analysis to the question of "durational significance" and hints at it in relation to impact on "overall earnings potential."5

Third, since Akorn,6 Delaware no longer requires the risk giving rise to an MAE to be of an "unknown" nature. Although Fairstone relies on Akorn more than any other case (Canadian or American), Fairstone retains the "occurrence of unknown events" as its first element of an MAE clause. Moreover, this "unknown risk" requirement was subsequently endorsed in Cineplex.7 Fourth, Delaware courts routinely state that the buyer carries a "heavy burden" in seeking to establish an MAE. Fairstone makes several statements towards the opposite end, remarking that MAE clauses are "to be interpreted from the buyer's perspective", including to give the buyer the "benefit of the doubt."8

Departures regarding the Ordinary Course Covenant

Delaware courts have held that, where an ordinary course covenant includes a "consistent with past practice" qualifier, the parties have adopted a standard that looks exclusively to the target's past practice and precludes consideration of the conduct of the target's peers in similar circumstances.9 Fairstone and Cineplex muddy these waters. Both included a "consistent with past practice qualifier." Fairstone drove straight past it in holding that the ordinary course requires comparisons with industry standards before peppering its analysis with comparisons of the target's conduct with that of its peers.10 Cineplex explained that its brief "consideration of peer companies" related only to that part of the target's interim period undertakings requiring it to use "commercially reasonable efforts" to preserve its business relationships and not to the ordinary course covenant.11

Similarly, Canadian and Delaware courts have sent conflicting signals regarding whether the ordinary course includes extraordinary measures in extraordinary times. AB Stable held the formulation "only in the ordinary course of business consistent with past practice" to effectively freeze the target to its past practice.12 In contrast, Fairstone held that it is "part of the ordinary course of any business" to experience macroeconomic disruptions and to "take steps in response to those sorts of systemic economic changes."13 It is arguable that these differing results are primarily attributable to differences in drafting, including the inclusion of the word "only" in AB Stable, but given the contemporaneity of the judgments we can ultimately only speculate. A third important difference between Fairstone and AB Stable is their approach to the qualifier allowing deviation from the ordinary course with the buyer's consent. Both disputes involved such a qualifier, in both clauses the buyer's consent was "not to be unreasonably withheld", and both sellers admitted to never seeking buyer consent. Fairstone effectively held the "reasonableness" aspect of the qualifier could result in deemed or constructive consent.14 AB Stable rejected arguments toward this end, repeatedly emphasizing that the qualifier was "not an empty formality" but rather played an important role by requiring dialogue among the parties where adverse events warranted such communication.15

Departure regarding the Interaction of MAE Clauses and Ordinary Course Covenants

Perhaps most importantly, AB Stable, Fairstone and Cineplex each scrutinized the appropriate interaction between MAE clauses and ordinary course covenants. Moreover, the courts once again came to different conclusions.

AB Stable held that the two clauses "serve different purposes" and "guard against different risks."16 Specifically, it held than an ordinary course covenant protects against a change in how the target operates while an MAE clause protects against a significant decline in the target's operation. The result was that the two should be applied separately.

Fairstone and Cineplex held that the two clauses should be read together, including given the principle that "contracts should be read as a whole."17 Further justification was that a more general provision (i.e., the ordinary course covenant) should yield to a more specific provision (i.e., the MAE clause) as well as preserving the risk allocation established by the MAE clause. Specifically, as both clauses were triggered by the COVID-19 pandemic, and as the MAE clause expressly addressed emergencies and allocated systemic risk to the buyer, the courts held the ordinary course covenant should not be read in a manner that conflicts with the MAE clause.18

It is reasonably arguable that different facts and drafting explain this divergence between Delaware and Canada court's interpretation, and this is the brief indication given in Cineplex.19 However, other aspects of the decisions equally point to a more principled rift between the courts. For example, AB Stable in good part justified construing the clauses separately because Delaware law treats "materiality" and "material adverse effect" as "analytically distinct."20 As mentioned above, Canadian courts do not.

Prominent U.S. Criticism of the Canadian Court's Approach

Notably, writing in the Columbia Law Review Professor Subramanian (Harvard) & Petrucci (Harvard) take Fairstone's logic on two points discussed above to task.

Regarding Fairstone's holding that the ordinary course includes extraordinary measures in extraordinary times, they essentially counter that "ordinary" means "ordinary."21 Beyond this plain reading critique their arguments include encouraging "precise drafting", avoiding inviting the sort of "moral hazard" ordinary course covenants are intended to guard against, and avoiding the possibility of the seller being in breach for doing "too little."22

Regarding Fairstone's holding that the buyer's consent to conduct outside the ordinary course can be deemed via a stipulation that consent not be "unreasonably" withheld, they describe it both as "concerning" and as "poor policy."23 In particular, they argue Fairstone's ruling is problematic as it "short-circuits the negotiation between buyer and seller over the optimal mitigation approach."24

Concluding Comments

Fairstone is deceptive in that, read on its face, it states it is following Delaware law. This has lured many Canadian M&A lawyers into believing this is true, content to rely on the court and not dig deeper.

Cineplex is similarly tricky, but in somewhat different ways. Like Fairstone, it relies on Akorn, but then in direct conflict with Akorn states an MAE clause requires an "unknown" risk. Where Cineplex diverges from Fairstone (i.e., regarding whether it is appropriate to consider industry peers' conduct amidst a "consistent with past practice" qualifier), it stays silent both regarding the fact it is doing so as well as why it is doing so. Finally, where Cineplex acknowledges it is departing from Delaware law (i.e., regarding the interaction of MAE clauses and ordinary course covenants), it attributes this exclusively to drafting and factual differences without (knowingly or not) tackling AB Stable's different conceptual footing.


1. For comprehensive analysis, see Paul Blyschak, "MAE Clauses in Canada: What U.S. Counsel Need to Know", (2022) 16(2) Virginia Law & Business Review 327.

2. See Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397 [Fairstone] paras. 66 and 86 note 36 citing Inmet Mining Corp. v. Homestake Canada Inc., 2003 BCCA 610 para. 102.

3. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

4. Frontier Oil at page 108; Channel Medsystems, Inc. v Boston Scientific, C.A. No. 2018-0673-AGB (Del. Ch., Dec. 18, 2019) at pages 48 and 68; AB Stable VIII LLC, v Maps Hotels and Resorts One LLC et al, C.A. No. 2020-0310 (Del. Sp. Ct., Dec. 8, 2021) [AB Stable DESC] at pages 35-36.

5. Fairstone paras. 75-76 and 88.

6. Akorn, Inc v. Fresenius Kabi AG et al, C.A. No. 2018-0300-JTL (Del. Ch., Oct. 1, 2018).

7. Cineplex v. Cineworld, 2021 ONSC 8016 [Cineplex] at paras. 105-106.

8. Fairstone paras. 25-26, 72 and 86.

9. AB Stable VIII LLC, v Maps Hotels and Resorts One LLC et al, C.A. No. 2020-0310 (Del. Ch., Nov. 30, 2020) [AB Stable DECH] page 160; Snow Phipps Group, LLC v KCake Acquisition, Inc. et al, C.A. No. 2020-0282-KSJM (Del. Ch., Apr. 30, 2021) pages 85-86.

10. Fairstone paras. 182, 199, 202-203, 239-240.

11. Cineplex para. 124 note 15.

12. AB Stable DECH page 171; AB Stable DESC pages 27-29.

13. Fairstone paras. 178, 202 and 205.

14. Fairstone paras. 158 and 297-302.

15. AB Stable DECH pages 187-188; AB Stable DESC page 39.

16. AB Stable DECH pages 166-171; AB Stable DESC pages 36-37.

17. Fairstone paras. 188-190; Cineplex paras. 119-120 and 126-128.

18. Fairstone paras. 188-190; Cineplex paras. 119-120 and 126-128.

19. Cineplex para. 129.

20. AB Stable DECH pages 166-168; AB Stable DESC page 35.

21. Guhan Subramanian & Caley Petrucci, "Deals in the time of Pandemic", (2021) 121(5) Columbia Law Review 1405 [Subramanian & Petrucci] pages 1410 and 1470.

22. Subramanian & Petrucci pages 1470-1472.

23. Subramanian & Petrucci page 1472.

24. Subramanian & Petrucci page 1472.

Originally published by American Bar Association (ABA) M&A Committee's Deal Points Newsletter.

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.