Converging Cross-Border Approaches To Deal Litigation

• Published date: 22 July 2021
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Torys LLP
• Author: Mr Andrew Gray, Christopher Caparelli and Gillian B. Dingle

Over the past few years, courts in Delaware and Canada, and Canadian securities regulators, have grappled with approaches to disputes over deal terms, including in recent litigation arising in the context of the COVID-19 pandemic. While different conclusions may be reached on the particular facts of a transaction, Canadian and Delaware deal principles are developing along similar lines in a number of key areas.

In this article, we address recent developments in the jurisprudence around material adverse effect (MAE) clauses, appraisal rights and the board and shareholder processes appropriate for conflicted transactions.

The interpretation of MAE clauses: challenges for buyers on both sides of the border

One unanticipated outcome of COVID-19 has been to force parties to look carefully at MAE clauses and the availability of MAE protection in their deals. Courts on both sides of the border have been asked to consider whether, in refusing to close a deal due to pandemic-driven impacts on the target business, a buyer is exercising a bargained-for right, or is in breach of contract.

Delaware courts have already issued two opinions following trials in such cases. In each instance, the court concluded that the buyer was not entitled to terminate the purchase agreement on the basis of an MAE, but took different paths to get there. The first case, AB Stable VIII LLC v. Maps Hotels & Resorts One LLC¹, concerned the acquisition of hotel assets and the court readily found that the consequences of the pandemic "were sufficiently material and adverse to satisfy the requirements of Delaware case law". The parties, however, had agreed that "natural disasters and calamities" were excluded from the definition of MAE and the court concluded that the COVID-19 pandemic fit within the plain meaning of the term "calamity"².

In the second decision, Snow Phipps Group, LLC v. KCake Acquisition, Inc.³, the court held that the buyer failed to prove that an MAE had occurred where the target's cake decorating business initially experienced a "precipitous drop", but then rebounded prior to the buyer's termination and was projected to continue recovering through this year. The court found, therefore, that the target did not suffer a "sustained drop" in its business performance sufficient to constitute an MAE⁴. Despite that conclusive result, the Snow Phipps court further observed that the parties had excluded the effects of the pandemic from an MAE "arising from or related to...