We have been tracking the impact of Material Adverse Change (MAC) and Material Adverse Effect (MAE) clauses on M&A transactions and how parties to certain M&A transactions are navigating the issues surrounding the termination of transactions in the context of changing business realities due to the global coronavirus pandemic.

Another recent case involves Juweel Investors Limited (“Juweel”), the owner of the company carrying on the business of American Express Global Business Travel (“GBT”), a corporate global business travel enterprise with over 10,000 clients in more than 140 countries.  In its complaint filed in the Court of Chancery in Delaware on May 11, 2020,  Juweel sought an expedited trial to obtain an order to compel several entities related to The Carlyle Group Inc. (“Carlyle”) and GIC (Ventures) Pte. Ltd (through Pure Magenta Investment Pte Ltd.) (collectively, “GIC”, and together with Carlyle, the “Purchasers”) to complete a transaction in which the Purchasers had agreed to acquire an ownership interest in GBT.

The transactions contemplated by the Share Purchase Agreement, dated December 16, 2019 (“SPA”), were scheduled to close on May 7, 2020.  As was seen in the Victoria’s Secret case reported on in our earlier post, the Purchasers claim that there was an MAE[1] and that GBT failed to comply with interim operating covenants between signing and closing by not operating in the ordinary course of business. Continue Reading Terminations of M&A Transactions: Lessons Learned from American Express Global Business Travel

On May 20, 2020, Canadian Securities Administrators (CSA) issued a news release to announce that the CSA has published new local blanket orders (New Blanket Orders) for market participants that provide a 45-day extension for periodic filings normally required to be made by non-investment fund issuers between June 2, 2020 and August 31, 2020 and provide a 60-day extension for periodic filings normally required to be made by investment fund issuers between June 2, 2020 and September 30, 2020. Market participants need to comply with the conditions set out in the New Blanket Orders to use the extensions.

The CSA had previously published local blanket orders (Original Blanket Orders) for market participants that provided a 45-day extension for periodic filings normally required to be made by market participants between March 23, 2020 and June 1, 2020. The New Blanket Orders do not provide a further extension of any deadline that was previously extended under an Original Blanket Order.

The New Blanket Orders are substantially harmonized across the country. Market participants can view the New Blanket Orders on CSA members’ websites.

The set of new blanket orders consists of:

  • Temporary Exemption from Certain Corporate Finance Requirements with Deadlines during the Period from June 2 to August 31, 2020 (New Corporate Finance Relief Order)
  • Extension of Certain Filing, Delivery and Prospectus Renewal Requirements of Investment Funds with Deadlines during the period from June 2 to September 30, 2020 (New Investment Fund Relief Order)

Details of the Original Blanket Orders and instructions on how to use the New Investment Fund Relief Order and New Corporate Finance Relief Order can be found in our Timely Disclosure article issued on March 24, 2020.

Issuers that have used the Original Blanket Orders to extend any filing, delivery or prospectus renewal deadline occurring on or before June 1, 2020 cannot use the New Blanket Orders to further extend the deadline.

The CSA release advised that the CSA will consider applications for a management cease trade order (MCTO) by non-investment fund issuers that used the Original Blanket Orders and are unable to comply with their filing or delivery obligations by their extended deadline, but anticipate being able to comply shortly thereafter. CSA members will likely reduce the usual period of an MCTO to take into account the 45-day extension.

Issuers who intend to rely on the exemptions in the New Blanket Orders should consider their obligations to provide disclosure materials, including financial statements under any existing contractual obligations as well as the events of default, covenants and other terms of any contracts including debt instruments.


Additional Fasken resources that may also be helpful to issuers include:

The 2020 M&A Deal Terms Study published by SRS Acquiom on May 5, 2020 provides an overview of market trends based on an analysis of over 1,200 of their private-target M&A transactions which closed between 2015 and 2019. The vast majority of this sample involved U.S. public and private buyers, and ranged in transaction size from US$25 million to US$250 million. Here is our selection of their key findings:

  • Numbers: Is it All Downhill From Here?: 2019 appears to have been a year of slight decline. The median amount of equity capital invested dropped to $27 million (down from $31 million in 2018) and the median multiple return on investment declined to 3.4x (down from 3.8x in 2018, and down even further from 4x in 2017). This may be linked to 2019’s shorter median amount of time from first investment round to exit (6 years), as well as a smaller number of average equity financing rounds (3).
  • Broaden Your Knowledge!: 93% of M&A transactions make use of the concept of “constructive” knowledge, as opposed to relying on the “actual” knowledge of one or more persons. Furthermore, it seems that the notion of constructive knowledge is increasingly being based upon the knowledge of “the company” as a whole, rather than on an obligation of the seller to inquire with specific key members of the company’s personnel.
  • How Much Do I Really Have to Disclose?: Parties seem to be taking an increasingly hard line as regards their respective duties to disclose or to notify the other party of known breaches or inaccuracies in representations and warranties. In 2019, parties were less likely to include an express duty to notify the buyer of a pre-closing breach of representations and warranties (61% compared to 70% in 2018). Furthermore, 54% of deals contained a pro-sandbagging provision, remaining consistent with trends in U.S. M&A transactions over the past few years. Therefore, in most of the deals analysed, sellers have no obligation to inform buyers of known breaches or inaccuracies in their representations and warranties and what’s more, they are expressly permitted to close the deal and then sue on exactly that basis. We note that such clauses tend to be less popular in Canada, and particularly in Quebec, possibly due to the civil law’s emphasis on good faith in contractual negotiations.
  • And How Accurate Do I Really Have to Be? In terms of how accurate a seller’s representations must be in the context of two-step transactions, only a small percentage of deals (less than 5%) in 2018 and 2019 made use of the onerous “in all respects” standard. The “in all material respects” standard continues to be the most popular, appearing in over 50% of deals in both 2018 and 2019. But a new trend is on the rise. The “Material Adverse Effects” formulation (requiring accuracy in all respects, except to the extent that inaccuracies do not and could not reasonably be expected to have a Material Adverse Effect) has been steadily gaining ground, increasing to 44% in “at signing” clauses and to 48% in “at closing” clauses. That said, in deals with materiality or Material Adverse Effects qualifiers in the “accuracy of representations” condition, those clauses are most often (approximately 90% of the time) accompanied by a materiality scrape, providing that such qualifiers are to be disregarded for the purposes of determining accuracy of the representations and warranties.
  • …Speaking of Scrapes: Materiality scrapes are a contractual feature that typically favour the buyer, and which are included to remove any materiality qualifiers built-in to representations and warranties for indemnification purposes. Inclusion of materiality scrapes in purchase agreements for determining both breach and damages was included 60% of the time in 2019, a notable jump from 48% in 2018. So just in case you thought that emerging trends in M&A transactions were looking a little too seller-friendly, take comfort in the fact that we are seeing the opposite here.
  • Indemnification: Getting Exclusive: Indemnification as the exclusive remedy for breach continues to be a major trend in M&A transactions. Indemnification was specifically stated to be the exclusive remedy in 96% of deals (with 2% being silent, and only 2% providing for some alternative remedy). Carveouts to this exclusive remedy are also increasingly few and far between. While equitable remedies and fraud are commonly carved out, intentional misrepresentation is carved out only 25% of the time, and wilful breach of covenants is carved out only 9% of time (a significant decline from 14% in 2018. In this optic, the negotiation of the indemnity escrow takes on increased significance. The median general survival period for indemnity escrows remains 15 months, and the median escrow size was 9.9% of the transaction value (10.5% for deals with no representations and warranties insurance) – in both cases, a slight but not marked increase from the 2018 numbers.
  • Bye Bye Baskets: Perhaps precisely because of how often indemnification is limited to the “four corners of the agreement”, baskets seem to be dropping in popularity. For the first time since 2015, 10% of M&A transactions had no baskets (up from a low of 4% in 2017). In deals that do have baskets, the “first dollar” or threshold formulation remains only slightly more popular than the “deductible” formulation. In addition, the size of the basket as a percentage of transaction value is decreasing rapidly – in 2019, almost 60% are set at 0.5% or less. Common carveouts to baskets in 2019 included capitalization (87%), due authority (86%), due organization (84%), ownership of shares (81%), taxes (77%), broker and finder fees (77%), and fraud (75%).
  • Cutting Caps: 2019 has also seen a decrease in the amount of caps on indemnification as a percentage of transaction value. The median cap for all deals for 2019 was 10% of transaction value. This can be partly attributed to the increasing popularity of representations and warranties insurance, which generally results in a smaller liability cap. When reps and warranties insured deals are removed from the data set, the median cap rose to 10.7% of transaction value. 2019 also saw a notable rise in the number of deals capped at the purchase price (5%, up from just 1% in the two preceding years). Common carveouts to caps in 2019 included fraud (87%), capitalization (84%), due authority (83%), due organization (81%), ownership of shares (80%), taxes (78%), and broker and finder fees (74%).
  • Standing Alone: In 2019, the following standalone indemnities were found in more than half of all M&A transactions: taxes (85%), accuracy of closing certificates (75%), capitalization (74%), litigation (67%), transaction expenses (60%), and payments to dissenting shareholders (56%). The next most common (both at 44%) were for fraud and wilful misrepresentation and purchase price adjustments.
  • Resolving Disputes the Old Fashioned Way: There has been a steady decline in the number of M&A transactions that include alternative dispute resolution (“ADR”) clauses. In 2019, only 18.1% of deals contained an ADR clause, compared to an all-time high of 28% several years ago. For those deals that did provide for some form of ADR, there was a marked increase in the number of agreements providing that the fees are to be paid by the losing party.
  • Breaking Up with Breakup Fees: There has also been a steady decline in the number of deals that include termination or “break up” fees. That number is down to just 12% in 2019. In those few deals that do contain termination fees, 2019 has also seen a drop in the median fee payable by both buyers and sellers. So in the end, breaking up is not that hard to do.

According to the 2019 ABA Private Target M&A Deal Points Study, in the US 52% of purchase agreements examined included references to representation and warranty insurance (“RWI”)[1]. While this trend seems less pervasive in Canada, we are witnessing a growing trend where buyers and sellers are turning to RWI as an additional coverage to standard indemnity mechanisms. This trend, combined with a reduction in M&A activity in light of the COVID-19 pandemic, has led to growing competition among insurers and increased negotiation power for parties seeking RWI. While some companies may struggle with a significant loss in share value, assets may still be valuable to potential buyers, resulting in an anticipated increase in asset-based transactions. In addition, the pandemic will surely give rise to an increase in distressed transactions with buyers turning to RWI as a source of protection for breaches in representations and warranties, including possibly fundamental representations and warranties. We have summarized below key insights and takeaways regarding the current RWI market in Canada to help parties when deciding which policy best fits their needs.

Continue Reading Diagnosing the impact of COVID-19 on representation and warranty insurance

The global coronavirus pandemic has undoubtedly had an impact on businesses and M&A activity worldwide.  In light of current events, companies negotiating deals and the lawyers penning the contracts are paying closer attention to the paperwork.  In particular, careful drafting and thoughtful consideration of the Material Adverse Change (MAC) and Material Adverse Effect (MAE) clauses in transaction agreements (see our previous posts on MAC provisions) and a potential Canadian court decision on MAC clauses (see our previous post of April 30, 2020 and May 7, 2020), as well as the target company’s covenants, representations and warranties and the buyer’s closing conditions related to such representations and warranties, have proven especially important in how parties have been responding to the onset of the pandemic.

In recent months, we have seen a number of attempts in the U.S. to terminate deals on the basis of the impact of the pandemic to target companies’ businesses.   Continue Reading Terminations of M&A Transactions: Lessons Learned from Victoria’s Secret and WeWork

With the COVID-19 outbreak still ongoing, many public issuers are fighting to keep their business alive, while others are trying to reinvent their modus operandi or simply seeking new business opportunities. Regardless of the situation, executive teams are attempting to make the right decisions in an environment where no playbook exists. In such circumstances, it is of vital importance to maintain proper disclosure as regulators expect more — not less — from public issuers as they look to protect investors and foster efficient financial markets.

In a recent bulletin, we highlighted the guidance provided by the U.S. Securities and Exchange Commission relating to the disclosure public issuers ought to make in connection with the coronavirus disease pandemic.

On May 6, 2020, the Canadian Securities Regulators (“CSA”) issued their own set of guidelines. The CSA’s statement came in the form of a PowerPoint presentation detailing its expectations in terms of the continuous disclosure obligations of reporting issuers in relation to the effects of the COVID-19 pandemic. Continue Reading Canadian Securities Regulators Provide Guidance on Public Disclosure in Time of COVID-19

On May 1, 2020, the Canadian Securities Administrators (CSA) issued a news release, announcing local blanket orders (Blanket Orders) for market participants in connection with meetings delayed as a result of the COVID-19 crisis. This relief is in addition to the relief announced March 23, 2020, by the CSA with respect to certain reporting deadlines and further clarified by CSA Staff Notice 51-360.

Pursuant to the Blanket Orders, public companies are relieved from filing the executive compensation disclosure required by section 9.3.1(1) of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) until December 31, 2020. This exemption allows companies that are delaying their annual meetings (and therefore their management information circulars) to also delay completion and filing of their executive compensation disclosure which is usually contained in their information circulars. Similar to the requirements in the previously announced relief by the CSA, a public company must issue a news release on SEDAR of its intention to rely on this exemption, in advance of the usual filing deadline for its executive compensation disclosure under section 9.3.1(2.2) of NI 51-102.

The CSA has also provided an exemption from: (i) the requirement of section 4.6(1) of NI 51-102 for a reporting issuer to send a request form annually to its securityholders, other than holders of debt instruments, and (ii) the requirement of sections 4.6(3) and 5.6(1) of NI 51-102 for a reporting issuer to send annual financial statements and MD&A, or interim financial reports and MD&A, to its securityholders, other than holders of debt instruments, who requested them, by the deadlines set out in section 4.6(3) of NI 51-102 (send-on request requirements), in respect of annual financial statements and MD&A, provided that the reporting issuer sends to its securityholders (other than holders of debt instruments), its financial statements and MD&A on or before December 31, 2020 and in accordance with National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer.

A reporting issuer is also exempt from the send-on request requirements for requests received before December 31, 2020, provided that the reporting issuer sends a copy of any requested financial statements and MD&A to the securityholders that made the request as soon as reasonably practicable after the applicable sending deadline set out in section 4.6(3) of NI 51-102.

The CSA updated the previously announced CSA Staff Notice 51-360 to reflect the above-noted relief, and clarified that any issuers that rely on CSA relief with respect to continuous disclosure filings may also delay paying any associated filing fees and will not be noted in default as a result, provided that the applicable filing and fee payment is made within the extension period.

Other Fasken resources that may also be helpful to issuers include:

Further to our earlier post discussing COVID-19 and Material Adverse Change (“MAC”) provisions in mergers and acquisitions agreements and the hearing held last week in connection with an application for the final order (“Final Order Application”) in respect of the proposed plan of arrangement (the “Arrangement”) involving Rifco Inc. (“Rifco”), an alternative auto financing company that trades on the TSX Venture Exchange, its potential acquiror, ACC Holdings Inc. (“Purchaser”), and the Purchaser’s parent company, CanCap Management Inc. (“CanCap”), the Court of Queen’s Bench of Alberta (the “Court”) made a procedural ruling (the “Ruling”) yesterday related to CanCap and the Purchaser’s purported termination of the Arrangement on the basis that Rifco has suffered a MAC.

While the Ruling did not determine if the purported termination of the Agreement was unlawful or if the Purchaser and CanCap were required to close the Arrangement, the Court did make several key procedural and other rulings. In the Ruling, the Court:

  • rejected a procedural objection by the Purchaser and CanCap that the validity of the Purchaser’s termination of the Agreement could not be determined at a Final Order Application;
  • rejected an argument by the Purchaser and CanCap that delivering a notice of termination of the Agreement was sufficient to defeat a Final Order Application;
  • was satisfied that it was potentially empowered to require the Purchaser to complete the Arrangement (but that a definitive ruling on this point would be made at a later date);
  • noted that the Purchaser provided limited evidence that the Agreement was validly terminated and that additional evidence would be required;
  • determined that a lengthy trial process is not required by the Court;
  • acknowledged an undertaking by the Purchaser that it would not rely on the Agreement’s “Outside Date” of May 7, 2020 in order to terminate the Agreement; and
  • found that the Purchaser’s delivery of the termination notice is not sufficient evidence to prove that the Agreement had been terminated.

We will continue following these court proceedings, and will provide updates as the situation evolves and new information becomes available.

Further to our earlier post discussing COVID-19 and Material Adverse Change (“MAC”) provisions in M&A Agreements that addressed the lack of relevant Canadian court decisions and the associated uncertainty in their interpretation, Canadian capital market participants are watching with keen interest the dispute between Rifco Inc. (“Rifco”), an alternative auto financing company that trades on the TSX Venture Exchange, and its potential acquiror CanCap Management Inc. (“CanCap”).

CanCap is looking to back out of the deal signed on February 2, 2020 on the basis Rifco has suffered a MAC for, among other reasons, the outbreak of COVID-19. We note that the definition of a MAC in the agreement does not specifically carve-out COVID-19 or pandemics. A full-day hearing tomorrow at the Court of Queen’s Bench of Alberta in Calgary is expected to consider the proposed arrangement and the purported MAC. We will provide a further update as the saga unfolds.

Against the backdrop of the COVID-19 pandemic and the novel challenges with which public companies around the world have been faced, Glass Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services Inc. (“ISS”), two established proxy advisory firms, have released updates in connection with how their voting policies will be applied in the course of the 2020 proxy season. The central themes from both advisors are that the COVID-19 pandemic is creating exceptional and difficult circumstances for Boards to navigate, and that the firms will have an increased flexibility in their approach to proxy contest reviews, with an emphasis on the quality of companies’ decision-making, disclosure and reasoning in respect of any changes to governance, compensation and capital structure.

Continue Reading Proxy Voting Guidelines in the COVID-19 Context