The Importance of Properly Negotiating and Drafting Material Adverse Change Clauses : The Case of Fairstone Financial Holdings Inc. v. Duo Bank of Canada


Authors: Nicolas Beaudin, Louis-Paul Gamache

Publication ǀ February 10, 2021

The unprecedented uncertainty caused by the sudden Covid-19 pandemic has led many companies to reevaluate their business strategies and growth plans.

In a recent decision, the Honourable Justice Markus Koehnen of the Ontario Superior Court of Justice refused to set aside a major transaction, between the date of signing and closing, despite acknowledging that Covid-19 may at first glance constitute a material adverse effect. The wording of the clause allowing the purchaser to rely on this remedy contained exceptions that applied to the case at bar [1].

This decision reminds us of the paramount importance of properly negotiating and drafting material adverse change or material adverse effect clauses. These clauses ("MAC Clauses") are frequently included in acquisition and financing agreements and may allow a party to withdraw from a transaction when a material adverse change occurs.


On February 18, 2020, less than a month before the World Health Organization declared a global pandemic due to the Covid-19 outbreak, Duo Bank of Canada ("DBC") entered into a Share Purchase Agreement (the "Agreement") with Fairstone Financial Holdings Inc. and its subsidiaries (collectively "Fairstone"), a major consumer finance company, pursuant to which DBC agreed to purchase all of Fairstone's business operations. The transaction was expected to close on June 1, 2020, with a sale price estimated to be over $1 billion [2].

On May 27, 2020, DBC notified Fairstone that it would not complete the transaction, on the basis that the pandemic constituted a "Material Adverse Effect" within the meaning of the Agreement. Fairstone asked the Court to order DBC to complete the transaction.


The Court's decision is based entirely on the interpretation of the Agreement. Justice Koehnen had to interpret article 6.2 of the Agreement, which provided for the following closing condition in favour of the buyer:

Between the date of this Agreement and the Effective Time, there shall not have occurred a Material Adverse Effect.

The term "Material Adverse Effect" was defined in the Agreement as follows:

“Material Adverse Effect” means a fact, circumstance, condition, change, event or occurrence that has (or would reasonably be expected to have) individually or in the aggregate, a material adverse effect on the Business, operations, assets, liabilities or conditions (financial or otherwise) of the Acquired Companies, taken as a whole; except to the extent that the material adverse effect results from or is caused by :

(i) worldwide, national, provincial or local conditions or circumstances, whether they are economic, political, regulatory (including any change in Law or IFRS) or otherwise, including war, armed hostilities, acts of terrorism, emergencies, crises and natural disasters;

(ii) changes in the market or industry in which the Acquired Companies operate;


(iv) the failure of any of the Acquired Companies to meet any internal, published or public projections, forecasts, guidance or estimates, including without limitation of production, revenues, earnings or cash flows (it being understood that the causes underlying such failure may be taken into account in determining whether a Material Adverse Effect has occurred);


provided, however, that in the case of the events described in each of the clauses (i) and (ii), that such events do not have a materially disproportionate adverse impact on the Acquired Companies relative to other Persons in the industries or markets in which the Acquired Companies operate.

The debate before the Court therefore pertained to the interpretation of the specific exclusions provided for in paragraphs (i), (ii) and (iv) of the definition of "Material Adverse Effect".

Following a fairly exhaustive review of the case law on MAC Clauses and the evidence presented, Justice Koehnen acknowledged that the pandemic had a material adverse effect on Fairstone's finances and business [3]. However, the Court refused to cancel the transaction as requested by DBC since the exclusions described in paragraphs (i), (ii) and (iv) above applied.


First, while the pandemic clearly had a material adverse effect, it was also a worldwide emergency, opening the door to the exclusion in paragraph (i), which is worded in very broad terms [4].

Second, the changes that DBC was complaining about were changes affecting the entire market and industry in which Fairstone operated. They were therefore not changes specific to Fairstone, which triggered the application of the exclusion in paragraph (ii) [5].

Third, the Court found that DBC was essentially complaining about the decline in Fairstone's financial performance due to the Covid-19 pandemic, compared to the projections contained in its financial plan. Therefore, the exclusion relating to the failure to achieve financial projections also applied [6].

Moreover, Fairstone was not disproportionately affected by the pandemic compared to other players in its industry.

It appears that Fairstone negotiated a rather restrictive definition of "Material Adverse Effect". Under the terms of the Agreement, which was negotiated between two highly sophisticated parties, DBC bore the systemic risks and the risks related to the financing industry. For this reason, the Court agreed with Fairstone and ordered DBC to complete the transaction [7].


Citing both Canadian and U.S. case law [8], Justice Koehnen noted that the material adverse effect must be of a significant duration in order to constitute a valid reason for terminating an agreement. DBC filed projections showing that the pandemic could have an adverse effect on Fairstone's business until 2022. According to the Court, this was not a significant duration in this case. The evidence indicated that DBC was purchasing Fairstone for the long term. DBC saw the acquisition of Fairstone as an opportunity to realize synergies that could decrease Fairstone's cost of funds and increase the profits of the combined businesses. The synergies only made sense as part of a long-term investment [9]. DBC failed to demonstrate that the pandemic would affect the long-term need for consumer finance [10].


This decision demonstrates the importance of properly drafting a MAC Clause.

MAC Clauses are present in the Canadian transactional environment, as well as in the financing ecosystem, where a material adverse change may, in certain cases, constitute an event of default under a credit agreement.

The turmoil caused by the pandemic highlights the importance for the parties to consider the interpretive guidelines for MAC Clauses and to agree when negotiating contractual agreements on the allocation of systematic risks, industry risks and risks specific to the business itself, and to draft the MAC Clauses accordingly.


[1] Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397.

[2] Id., para. 13.

[3] Id., para. 5.

[4] Id., para. 98 and following.

[5] Id., para. 105 and following.

[6] Id., para. 6.

[7] Id., para. 376.

[8] Id., para. 77-81.

[9] Id., para. 81.

[10] Id., para. 83.