Can tariffs trigger a “material adverse effect” (MAE) in an M&A transaction? What aspects of an MAE analysis may be pivotal in deciding the point?
These questions are quickly becoming front of mind for North American dealmakers. History instructs that periods of abrupt macroeconomic uncertainty – see 9/11, the 2008 financial crisis, and the COVID-19 pandemic – increase the incidence of MAE disputes in M&A. The next chapter of similar turbulence may be upon us given the momentous shifts in trade dynamics being triggered by the new U.S. administration’s policies.
In this rapidly evolving context, it is important that cross-border dealmakers appreciate three key differences between Delaware and Canadian law regarding MAE clauses. First, Canadian courts have retained the “unknown event” requirement. Second, Canadian courts have not imposed a “heavy burden” on a buyer claiming an MAE has occurred. Third, Canadian courts have interpreted and applied MAE clauses and “ordinary course of business” covenants together.
We briefly explain each of these divergences. We conclude with related practical considerations and drafting takeaways.
This article was first published in The M&A Lawyer (March 2025), and is available here (PDF, 388KB). For Fasken’s other M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe.
Fairstone and Modern Canadian MAE Law
Prior to the pandemic, Canadian judicial guidance regarding MAE clauses was thin and scattered. Almost ten MAE rulings had been made, but almost all were low value disputes whose MAE analysis was relatively brief and unsophisticated. This changed in December 2020 with the issuance of Fairstone Financial v. Duo Bank.[1]
The dispute arose from the acquisition of a large consumer finance company for a price estimated to exceed C$1 billion. The deal was signed in mid-February 2020, i.e., the very early stages of the COVID-19 pandemic. The target closing date was June 1, 2020, but five days earlier the buyer backed out, claiming the pandemic had triggered an MAE.
Citing the 2001 ruling of the Delaware Court of Chancery in In re IBP Shareholders Litigation v. Tyson Foods,[2] the Ontario court set a tripartite test whereby an MAE required “an unknown event, a threat to overall earnings potential and durational significance”. While the Court held that each of these three elements had been met, it also held that three carve-outs within the MAE definition applied to defeat the buyer’s MAE claim, including the “emergency” and “general market change” carve-outs. The court also held that the target had not been “disproportionately affected” by the pandemic such that the buyer could not rely on this qualifier to the carve-outs.
In reaching its MAE decision, the Ontario court relied much more on Delaware precedent than Canadian precedent, citing the former 25 times and the latter only 11 times. But while the majority of the Ontario court’s MAE analysis aligns with Delaware, three key differences remain.
The “Unknown Event” Test Endures
Although Fairstone cited the Delaware Court of Chancery’s landmark 2018 ruling in Akorn, Inc. v. Fresenius Kabi AG[3] more that any other U.S. or Canadian case, citing the decision nine times, the Ontario court quite curiously overlooked what is arguably Akorn’s most important aspect. Specifically, that Akorn definitively reversed almost two decades of Delaware law that had required an MAE to arise from an “unknown event”.[4]
Fairstone retained the “unknown event” requirement in reliance on the 2001 Delaware ruling in IBP v Tyson Foods, as mentioned above. The Ontario court also found support for this approach in a 2002 ruling by a British Columbia court, which held as follows:
In my view, the 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, or if the defendant did not rely on it, the failure of the plaintiff to disclose it or information related to it would be of no consequence to the defendant's decision to buy and therefore would not be material or adverse to the defendant.[5]
A “Heavy Burden” vs “From the Buyer’s Perspective”
Delaware courts regularly specify that the buyer carries a “heavy burden” in seeking to prove an MAE has occurred. So too does Delaware caselaw and commentary regularly highlight policy concerns that weigh in the same direction and toward the protection of “deal certainty”. The result is that Akorn remains the sole instance in which a Delaware court has held an MAE to have occurred.
Fairstone did not follow Delaware on this front. Indeed, in what can be interpreted as a conflicting approach, the Ontario court repeatedly instructed, rather ambiguously, that MAE clauses should be “interpreted from the buyer’s perspective”. The court also made other statements that can be interpreted as “buyer-friendly”, including that, in deciding whether the pandemic met the “unknown event” requirement of an MAE (see above), it was inclined to give the buyer the “benefit of the doubt” on the issue. Lastly, whereas Akorn remains the sole instance of a Delaware court holding an MAE to have occurred, six Canadian decisions have done so (although, as previously mentioned, most of these were relatively low value disputes).[6]
All of this leaves the impression that Canadian MAE caselaw leans away from imposing a “heavy” burden on the buyer and, if anything, toward a more neutral or even somewhat “buyer-friendly” approach. That said, no firm conclusions can be drawn, and it is possible that Canadian courts may take a different approach where the MAE “carve-outs” don’t clearly prevent a buyer from walking away.
MAE Clauses and Ordinary Course Covenants are Read Together
In AB Stable v MAPS Hotels,[7] another pandemic-era dispute, the Delaware Court of Chancery and Delaware Supreme Court held that, generally speaking, MAE clauses and “ordinary course of business” covenants should not be interpreted together. The courts explained that the two clauses “serve different purposes” and “guard against specific risks”. Specifically, the courts 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 that changed circumstances could not trigger both clauses. But it did mean that the “outcome of the analysis” and 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 (a second M&A dispute ruling issued in Ontario during the pandemic)[8] deemed it appropriate to read the two clauses together given the basic 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. Stated differently, as both clauses were triggered by the pandemic, and as the MAE clause expressly addressed emergencies and allocated such systemic risk to the buyer via the MAE definition’s “carve-outs”, the courts held the “ordinary course” covenant should not be read in a manner that conflicts with the MAE clause’s risk allocation.
Key Practical and Drafting Takeaways
MAE clauses include multiple component parts that warrant specific consideration in connection with tariffs and the risks they may pose to a target. An exhaustive review of these is beyond the scope of this article, and so we have focused only on key differences between Delaware and Canadian MAE caselaw.
Regarding the fact Canadian courts have not imposed a “heavy burden” on a buyer who is claiming an MAE has occurred, we do not necessarily view this as a matter requiring attention by drafting, although the parties are, of course, free to do so. However, both the buyer and seller should be aware of this point in case a potential MAE dispute arises.
Regarding the fact Canadian courts have interpreted and applied MAE clauses and ordinary course covenants together, it is arguable that different facts and drafting explain the different approach 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, and that Fairstone did not follow Akorn on several key points is evidence of this. What is not debateable for M&A in Canada is that MAE clauses and ordinary course covenants should be considered in tandem and that, should the M&A parties desire otherwise, they can consider drafting toward that end.
Regarding the fact Fairstone retained an “unknown event” requirement, this raised a complicated question that could also be raised by the rapidly evolving and momentous shifts in North American trade and investment dynamics being triggered by the new U.S. administration’s policies.
In Fairstone, when the deal was signed in mid-February 2020, the “novel coronavirus was already daily news in North America”, but the official World Health Organization declaration of the pandemic and the issuance of sweeping “stay at home” orders by governments and business, which occurred in mid-March 2020, were still a month away. Most importantly, the exact “effect” on the target the pandemic would go on to have was not yet foreseeable. The court therefore decided to give the buyer the “benefit of the doubt” on the point and ruled that COVID-19 satisfied the “unknown” event requirement. Stated differently, while COVID-19 was not “unknown” at the time of execution in mid-February 2020, the exact effect COVID-19 would go on to have on the target still remained “unknown”.
There are clear parallels with the looming North American tariff war. Tariffs have been threatened (in some form) since late 2024 and therefore are not “unknown” in that sense. However, the exact “effect” they will have on the Canadian economy and any particular Canadian target remains debatable. The exact mix and substance of U.S. tariffs is also subject to change over time amid any prolonged trade war, should that eventuate. Retaliatory tariffs by Canada on U.S. exports are also capable of adversely impacting domestic business. The “unknown” event MAE requirement retained by Fairstone is therefore capable of raising very complex interpretive issues vis-à-vis tariffs depending on the circumstances. However, should a U.S. buyer wish to avoid these uncertainties, a potential solution is available: attempt to negotiate for a clarifying qualifier in the MAE definition to include known and/or foreseeable events.
