Alberta case could set precedent MAE clause interpretation

June 29, 2020

Dealmakers across Canada are monitoring a potentially precedent-setting court case between two auto financing companies on the interpretation of material adverse effect (MAE) clauses in merger agreements.

The case in front of the Court of Queen’s Bench of Alberta is between CanCap Group—the parent company of AutoCapital Canada—and Rifco. The companies signed a deal where AutoCapital would acquire Rifco.

Mergermarket reports that AutoCapital Canada walked away from the deal in March, “citing a material adverse effect (MAE) from the coronavirus pandemic and oil price crash, among other reasons.”

Legal pundits believe the decision may have an effect on Canadian M&A, not only because it is set to determine how Canada reviews an MAE dispute, but also because in Canada there are “few relevant court decisions on what constitutes an MAE”.

This lack of precedent may prompt the Alberta court to turn to Delaware for guidance, particularly to IBP v. Tyson Food and Akorn v. Fresenius Kabi.

Speaking to Mergermarket, litigation partner Andrew Gray said it will be specifically interesting to watch the “the court’s method to the threshold question of defining ‘materiality’”.

Andrew said “Delaware’s precedent has focused on the duration of the disruption when evaluating materiality”. In the IBP case, the Mergermarket article says, “MAEs are defined as ‘unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner,’ and the test cannot be met by a ‘short-term hiccup in earnings.’”

Get Torys’ litigators analysis of what post-pandemic litigation risks lie ahead and what businesses should be thinking about in their article “Changes to litigation risk in a new economic environment.”

You can read more of Torys’ insights on Litigation and Dispute Resolution on the practice page.


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