Tariffs, Cross-Border M&A And The "Ordinary Course Of Business"

The trade tensions currently unfolding between the U.S. and Canada are highly unusual. What, then, would be an "ordinary course" reaction by a Canadian target to such unprecedented circumstances? As corporate and financial dealmakers scan the market for opportunities, this question has become front of mind for U.S. buyers considering a Canadian acquisition.

In our previous article with The M&A Lawyer, we explored the interaction of tariffs and "material adverse effect" ("MAE") clauses to highlight three key differences between Delaware and Canadian law regarding these complex M&A risk allocation mechanisms.

We now explore the interaction of tariffs and "ordinary course of business" covenants to do the same, i.e., to highlight key differences between Delaware and Canadian law regarding these critical interim period undertakings by the seller and associated buyer rights. We once again also provide related drafting takeaways for U.S. buyers (and their counsel) to consider.

This article was first published in The M&A Lawyer (May 2025) and is available below.

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The Pandemic and "Ordinary Course" Caselaw

Prior to the pandemic, ordinary course covenant caselaw in Canada was almost non-existent. Not surprisingly, this sometimes meant the clauses were less heavily negotiated than such higher profile terms such as MAE definitions.

The COVID-19 pandemic quickly changed this. As in the U.S., a key realization among Canadian M&A lawyers was that a breach of an ordinary course covenant could result in a buyer termination right for events potentially far less significant than an MAE. Increased focus on the covenant followed, as did more complex and nuanced drafting.

And just as the pandemic gave rise to the landmark rulings of the Delaware Court of Chancery and Delaware Supreme Court in AB Stable,¹ so too did the pandemic give rise to two significant ordinary course rulings in Canada. The first was Fairstone,² a billion-dollar dispute over the acquisition of a consumer finance company. The second was Cineplex,³ a billion-dollar dispute over the acquisition of a movie theatre, media and entertainment company.

Key Comparisons for Cross-Border Lawyers

The Fairstone ruling was released in late 2020, near in time to the Delaware Court of Chancery ruling in AB Stable. The Cineplex ruling was issued in late 2021, near in time to the Delaware Supreme Court ruling in AB Stable.

Importantly for cross-border M&A into Canada, while the three rulings share much in common, four key differences require highlighting. These relate to three of the most common qualifiers included in ordinary course covenants, being:

"consistent with past practice" qualifiers;
"except as otherwise provided by this agreement" qualifiers; and
"buyer consent" qualifiers.

We review these in turn and provide potential drafting considerations for each.

"Consistent with Past Practice" Qualifiers

A "consistent with past practice" qualifier ties a target's ordinary course to its operating history. AB Stable instructs that by employing the phrase "consistent with past practice" the parties create "a standard that looks exclusively to how the business has operated in the past" and precludes the court from considering any other behaviour or standards. By contrast, Canadian courts have sent mixed signals on this point.⁴

Notwithstanding that the "consistent with past practice" qualifier in Fairstone was expressly tied to the target,⁵ the court stated the ordinary course requires comparisons with "standards in the industry" as well as whether the conduct would "surprise a reasonable businessperson." It then peppered its ordinary course analysis with comparisons of the target's conduct during the pandemic with that of its peers. Cineplex, on the other hand, 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 court's ordinary course analysis.⁶

Drafting takeaway: U.S. buyers can consider addressing the matter in greater detail, e.g., by additional language reinforcing that the "ordinary course" is determined solely by reference to the target's—and not any third party's—history or practice.

"Except As Otherwise Provided by This Agreement" Qualifiers

It is apparent that the "except as otherwise provided by this agreement" qualifier often included in ordinary course covenants is intended to create exceptions to the ordinary course undertaking.⁷ Less clear is which other M&A clauses should be caught by this reference. Candidates considered by the courts include more bespoke interim period covenants and the seller's representations and warranties. Unfortunately, these points were not ultimately decided.⁸

A closely related analysis the courts have definitively decided is the appropriate interaction between ordinary course covenants and MAE clauses. That said, their rulings varied.⁹

AB Stable held that the two clauses "serve different purposes" and "guard against specific risks." Specifically, AB Stable held that an "ordinary course" covenant protects against a change in how the target operates while a MAE clause protects against a significant decline in the target's value. This did not mean changed circumstances could not trigger both clauses. But it did mean the "contractual results" flowing from the changed circumstances could be different such that the outcome under one clause did not "dictate the outcome" under the other clause.

By contrast, Fairstone and Cineplex deemed it appropriate to read the two clauses together based on the principle that "contracts should be read as a whole." Additional support for this approach was that a more general provision (i.e., the ordinary course covenant) should yield to a more specific provision (i.e., the MAE clause) and that the risk allocation set by the MAE clause should be preserved. Put differently, as both clauses were triggered by the pandemic, and as the MAE clause expressly allocated the risk of "emergencies" to the buyer, the courts held the ordinary course covenant should not be read in a manner that conflicts with the MAE clause.

Drafting takeaway: It is arguable that different facts and drafting explain these divisions between AB Stable, on the one hand, and Fairstone and Cineplex, on the other hand, and this is the brief indication made in Cineplex. Other aspects of the decisions suggest a more principled rift between the courts, however. The takeaway for cross-border M&A into Canada is that ordinary course covenants and MAE clauses should be considered in tandem and that, should the parties desire otherwise, they can consider drafting toward that end.

"Buyer Consent" Qualifiers

A third common qualifier to an ordinary course covenant is whereby the target can deviate from the ordinary course with the buyer's consent. Each of AB Stable and Fairstone included this qualifier, and the version in AB Stable read:

unless the Buyer shall otherwise provide its prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed)...

The qualifier in Fairstone was substantively identical.¹⁰ In both cases the sellers admitted to never seeking buyer consent. Once again, however, the courts came to opposite conclusions.¹¹

Fairstone held that even if the target had been operating outside of the ordinary course, it would have been unreasonable for the buyer to have withheld its consent. Important for the court was that the target measures at issue "were not particularly complex, were often mandated by government regulation [and] were common to those that businesses around the world had taken." The court also stressed that the buyer "did not introduce any evidence of what it would have done differently or what it did differently in its own business". The sellers were therefore not in breach.

By contrast, AB Stable rejected arguments that the "reasonableness" element of the qualifier could result in any manner of deemed or constructive consent. The court held that compliance with the qualifier was "not an empty formality" because it entitles the buyer to "engage in discussions with the seller" and if warranted "seek [additional] information about the situation under its access and information rights" under the purchase agreement. This was important as it enables the buyer to "protect its interests", including by "propos[ing] reasonable conditions to its consent" and "anticipat[ing] and account[ing] for the implications of the non-ordinary course actions when planning for post-closing operations". The seller had therefore breached the qualifier by failing to consult with the buyer regarding its pandemic response.

Drafting takeaway: Given the ruling in Fairstone and the rationale of AB Stable, cross-border M&A buyers into Canada can consider expressly excluding the possibility of a reference to reasonableness in a buyer consent qualifier leading to deemed or constructive consent.

Concluding Comments: Does the Ordinary Course Include Extraordinary Measures in Extraordinary Times?

A last issue related to the foregoing that is particularly relevant in the context of evolving North American trade dynamics is whether the ordinary course should include extraordinary measures in extraordinary times.¹²

AB Stable held that the formulation "only in the ordinary course of business consistent with past practice" effectively froze the target to its past practice, even in the face of COVID-19 and even if the target's actions were reasonable responses to the pandemic.

By 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 This led the court to hold that the target's reactions to the pandemic that were "prudent", didn't have "long-lasting effects" and didn't "impose any obligations" on the buyer were not outside the ordinary course. Similarly, the court sought evidence the changes were pursued in "good faith" for the purpose of continuing the business "as normally as possible" in light of the pandemic, and "not changing it."

The takeaway for U.S. buyers is to weigh whether to specifically address whether extraordinary circumstances can impact the ordinary course.

Footnotes

1. AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, C.A. No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020), aff'd AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, 268 A.3d 198 (Del. Sup. Ct. Dec. 8, 2021) [collectively, AB Stable].

2. Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397 (CanLII) [Fairstone]

3. Cineplex v. Cineworld, 2021 ONSC 8016 (CanLII) [Cineplex].

4. See Fasken's Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §5.02[2][c]. SEE MORE"

5. The acquisition agreement in Fairstone defined the "ordinary course" as, "with respect to an action taken by a Person, that such action is consistent with the past practices of the Person and is taken in the ordinary course of the normal day-to-day operations of the Person."

6. The acquisition agreement in Cineplex defined the "ordinary course" as actions "taken in the ordinary course of the normal day-to-day operations of the business of the Company...consistent with past practice."

7. In Fairstone, this qualifier read: "Except as expressly provided in this Agreement..." In AB Stable, the qualifier read: "Except as otherwise contemplated by this Agreement...

8. See Fasken's Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §5.02[2][d]. SEE MORE

9. See Fasken's Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §5.02[2][d][i]. SEE MORE

10. It read: "the prior written consent [/i]of Purchaser, which consent [i]shall not be unreasonably withheld..."

11. See Fasken's Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §5.02[2][e]. SEE MORE

12. See Fasken's Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §5.02[2][c][i]. SEE MORE

13. The point was not at issue in Cineplex.

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.