Ordinary Course Covenants: Australia's Highest Court Addresses An Important Question Left Open By AB Stable, And Lessons For Cross-Border M&A

Published date21 July 2023
Subject MatterCorporate/Commercial Law, M&A/Private Equity, Compliance
Law FirmFasken
AuthorMr Gesta Abols, Neil Kravitz, Mark Pontin and Paul Blyschak

The importance of the decisions of the Delaware Court of Chancery and Supreme Court in AB Stable to M&A practice are hard to overstate. Simply put, the decisions provide a deep dive into the interpretation and application of ordinary course covenants to a degree previously unseen.

That said, AB Stable left a significant question unanswered: when might an obligation to comply with law or government guidelines be read into an ordinary course undertaking otherwise silent on the point?

This question recently came squarely before the High Court of Australia ('HCA'), that country's highest and final court of appeal. We explore the decision, including the overlap between the HCA's ruling and the arguments advanced, but ultimately left undecided, in AB Stable. We also compare notes with relevant Canadian M&A caselaw to provide practical takeaways for M&A counsel.

Ordinary Course and Compliance with Law in AB Stable

As is well known, in AB Stable the Delaware courts concluded that, although the seller's significant curtailing of operations at the target hotels was a reasonable response to the COVID-19 pandemic, these rollbacks were nonetheless outside of the ordinary course as measured by the target's past practice, and accordingly breached the ordinary course covenant in the purchase agreement.

An important question left undecided by the courts, however, was the relationship between an undertaking to operate in the ordinary course and compliance with applicable law. The seller argued it was contractually obligated to depart from the ordinary course given that it had represented that the target's business was being conducted in accordance with law. Specifically, the seller argued this representation created an implied duty to continue to operate the business in accordance with law to ensure that the representation remained correct.

The Court of Chancery ultimately held that this argument had been waived as it was only raised in a cursory manner (a single sentence!) in the seller's post-trial briefs, and because of this finding of waiver the point was not addressed by the Supreme Court on appeal. Nonetheless, the Court of Chancery did provide some initial commentary, describing the question as a 'difficult issue' with 'credible and contestable' arguments on either side.1

On the one hand, the Court acknowledged that had a governmental authority issued an order requiring the closure of the target hotels entirely, the seller's obligations under the ordinary course...

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