On January 3, 2019, the final phase of the Canadian Securities Administrators (“CSA”)’s Modernization of Investment Fund Product Regulation Project relating to the establishment of a regulatory framework for alternative mutual funds came into effect. These amendments introduced a new category of mutual funds, “alternative mutual funds”, which are mutual funds that have adopted investment objectives that permit those funds to invest in physical commodities or specified derivatives, borrow cash or engage in short selling in a manner not typically permitted for “regular” mutual funds.

These amendments moved most of the regulatory framework then applicable to commodity pools under National Instrument 81-104 – Commodity Pools (now renamed “Alternative Mutual Funds”) (“NI 81-104”) into National Instrument 81-102 – Investment Funds, with the exception of the proficiency standards for mutual fund dealers distributing alternative mutual funds. These proficiency standards actually prevent mutual fund restricted individuals[1] (“Restricted Individuals”) from distributing alternative mutual funds unless they possess one of the courses set forth under Part 4 of NI 81-104. These provisions were retained by the CSA “in recognition that alternative mutual funds can be more complex than other types of mutual funds and that additional proficiency may be needed for mutual funds dealers selling these products[2]”. It was the CSA’s view that maintaining more robust dealer proficiency standards for alternative mutual funds ensured Restricted Individuals were better equipped to sell these products.

Recognizing that the proficiency standards set forth under NI 81-104 have in fact limited retail investors’ access to alternative investment strategies through the mutual fund dealer channel, each member of the CSA issued on January 28, 2021 a blanket relief (the “Blanket Relief”) so as to provide Restricted Individuals and individuals designated to be responsible for the supervision of trades of securities of alternative mutual funds (“Supervisors”) with additional proficiency options in order to be authorized to distribute alternative mutual funds. These additional proficiency options are meant to expedite retail investors’ access to alternative mutual funds and enable them to benefit from additional portfolio diversification opportunities through alternative strategies.

Below is a table listing current and additional proficiency standards for Restricted Individuals and Supervisors and the terms and conditions set forth in the Blanket Relief. Note that a dealer must provide its principal regulator with a one-time notice prior to the first of any of its Restricted Individuals or Supervisors relying on the Blanket Relief.

Finally, note that this Blanket Relief is permanent in every jurisdiction except for Ontario, New Brunswick and the Northwest Territories where the Blanket Relief will cease to be effective on July 28, 2022. We expect this Blanket Relief to be codified prior to that date to make these additional course options a permanent solution.


[1] An individual registered as a dealing representative of a registered dealer, if the activities of that individual are restricted to trading in securities of mutual funds.

[2] See CSA Notice of Publication “Modernization of Investment Fund Product Regulation – Alternative Mutual Funds”, October 4, 2018.

Le 3 janvier 2019, la dernière étape du projet de modernisation de la réglementation des produits de fonds d’investissement des Autorités canadiennes en valeurs mobilières (les « ACVM ») concernant l’établissement d’un encadrement réglementaire des organismes de placement collectif est entrée en vigueur. Ces modifications ont introduit une nouvelle catégorie d’organismes de placement (ci-après, les « OPC »), soit les « OPC alternatifs », une expression qui désigne les OPC qui ont adopté des objectifs de placement leur permettant d’investir dans des marchandises physiques ou des dérivés visés, d’emprunter des fonds ou d’effectuer des ventes à découvert d’une manière généralement non permise aux OPC « réguliers ».

Ces modifications ont transféré la majorité du cadre réglementaire alors applicable aux fonds de marché à terme en vertu du Règlement 81-104 sur les fonds marché à terme (renommé le Règlement 81-104 sur les organismes de placement collectif alternatifs) (le « règlement 81-104 ») vers le Règlement 81-102 sur les fonds d’investissement, à l’exception des normes de formation visant les courtiers en épargne collective qui font des opérations sur des OPC alternatifs. Ces normes de formation interdisent aux personnes physiques dont les activités sont restreintes aux OPC[1] (les « personnes physiques dont les activités sont restreintes ») de faire des opérations sur les titres d’un OPC alternatifs sauf si elles ont réussi l’un des cours prévus dans la partie 4 du règlement 81-104. Ces normes de formation ont été conservées par les ACVM, qui « [reconnaît] que les OPC alternatifs peuvent être plus complexes que d’autres types d’OPC, et qu’une formation additionnelle pourrait s’avérer nécessaire pour les courtiers en épargne collective offrant ces produits[2] ». Selon les ACVM, le maintien de normes de formation plus rigoureuses à l’égard des OPC alternatifs contribuera à mieux outiller les personnes physiques dont les activités sont restreintes pour offrir ces produits. Continue Reading Nouvelles options de formation pour les OPC alternatifs

The Competition Bureau announced the 2021 transaction-size pre-merger notification threshold under the Competition Act is decreasing to C$93 million, effective February 13, 2021. Innovation, Science and Economic Development Canada also announced new, lower foreign investment review thresholds under the Investment Canada Act, effective January 1, 2021.

These thresholds are adjusted annually based on GDP formulas. As a consequence, they generally increase each year. This year’s decrease in merger review thresholds is a consequence of Canada’s economic contraction following from extensive restrictions on economic activity imposed by governments which were intended to slow the spread of COVID-19. If the economy recovers, it is likely these thresholds will increase in 2022.

Competition Act

In general terms, certain transactions that exceed prescribed thresholds under the Competition Act trigger a pre-merger notification filing requirement; such transactions cannot close until notice has been provided to the Commissioner of Competition (the “Commissioner”) and the statutory waiting period under the Competition Act has expired or has been terminated or waived by the Commissioner. Where both the “transaction-size” and “party-size” thresholds are exceeded, a transaction is considered “notifiable”.

Transaction-Size Threshold: the 2021 transaction-size threshold requires that the book value of assets in Canada of the target, (or in the case of an asset purchase, the book value of assets in Canada being acquired), or the gross revenues from sales in or from Canada generated by those assets exceeds C$93 million (down from C$96 million in 2020).

Party-Size Threshold: the party-size threshold requires that the parties to a transaction, together with their affiliates (as defined in subsection 2(2) of the Competition Act), have assets in Canada or annual gross revenues from sales in, from or into Canada, exceeding C$400 million. The party-size threshold remains unchanged from 2020.

It is important to note that regardless of whether a transaction is notifiable (i.e., the applicable thresholds discussed above are exceeded) the Commissioner can review and challenge all mergers prior to or within one year of closing.

Investment Canada Act

Under the Investment Canada Act (the “ICA”), the direct acquisition of control of a Canadian business by a non-Canadian is subject to a pre-closing review and approval process (an “ICA Review”) where a specified threshold is exceeded. The following thresholds for ICA Reviews have increased, effective January 1, 2021:

  • For a direct acquisition of control of a Canadian (non-cultural) business involving either a purchaser or a controlling vendor from Australia, Brunei, Chile, Colombia, the European Union (not including the United Kingdom), Honduras, Japan, Malaysia, Mexico, New Zealand, Panama, Peru, Singapore, South Korea, the United States or Vietnam, the threshold has decreased from C$1.613 billion to C$1.565 billion in enterprise value, provided that the purchaser is not a foreign state-owned enterprise.
  • For a direct acquisition of control of a Canadian (non-cultural) business involving either a purchaser or a controlling vendor that qualifies as a World Trade Organization (WTO) memberinvestor (“WTO Investor”) from a country not listed above, the threshold has increased from C$1.075 billion to C$1.043 billion in enterprise value, provided that the purchaser is not a foreign state-owned enterprise.
  • For a direct acquisition of control of a Canadian (non-cultural) business involving a purchaser that is a foreign state-owned enterprise controlled by a WTO member state, the threshold has increased from C$428 million to C$415 million in asset book value.

If the applicable threshold for a pre-merger review under the ICA is not met or exceeded, the acquisition of control of any Canadian business by a non-Canadian entity is subject to a relatively straightforward notification. In most cases, indirect acquisitions of non-cultural businesses involving WTO Investors, including state-owned enterprises, are not reviewable but are subject to a notification that may be filed before or within 30 days of closing.

All transactions have the potential to be reviewed under the national security review provisions of the ICA.


On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) filed an action against Ripple Labs Inc. (“Ripple”), Christian Larsen, the company’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO (together, the “Defendants”) for conducting an unregistered securities offering with a total value of US$1.38 billion.

The Defendants have sold over 14.6 billion units of Ripple’s digital asset known as “XRP” to investors in the U.S. and worldwide for cash or other considerations since the beginning of 2013.

The SEC has taken the position that XRP are “investment contracts” and therefore securities under the Securities Act of 1933. Because the Defendants did not view XRP to be a security, they did not seek to register XRP with the SEC and accordingly failed to meet the SEC’s requirements for securities offerings. Similar to the previous enforcement actions against Kik Interactive Inc., the SEC is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil penalties against the Defendants.

This case holds implications for participants throughout the entire crypto asset industry. Issuers of digital assets are faced with yet another conservative interpretation of the Howey Test, a 75-year old test believed by many to be ill-suited for crypto assets. Crypto exchanges and brokerages are left in limbo, uncertain whether to continue supporting a popular and well-performing asset for fear of attracting regulatory scrutiny themselves.  


Ripple was founded in 2012. It developed and manages the XRP ledger, an underlying peer-to-peer database on which the XRP tokens operate. As a digital asset, XRP is different from Bitcoin or Ethereum in that the latter two are minted through an ongoing process called mining. The supply of XRP, on the other hand, was fixed in advance at 100 billion XRP in 2012, 80 billion of which was to be held in reserve for scheduled allotments, and the remaining 20 billion XRP is held by individuals, including the two executives. Since then, Ripple has gradually released XRP pursuant to the alleged unregistered described above.

The SEC alleges that Ripple began its efforts of increasing speculative demand and trading volume for XRP in 2013 and pursued those efforts through multiple avenues: 1) Ripple conducted a “Market Sale” through intermediaries who sold XRP to public investors; 2) Ripple offered and sold XRP to at least 26 institutional investors through its “Institutional Sale”; 3) Ripple distributed and transferred XRP to third parties as compensation, service fee, commission and incentives with no restrictions on the resale of XRP; and 4) Ripple provided incentives in XRP to at least 10 digital asset trading platforms for listing XRP and meeting certain trading volume metrics. According to the SEC, prior to the distribution, Ripple was fully aware that XRP could be considered an “investment contract” (thus a security) and was warned by its lawyers regarding the risk should the SEC made such a finding.

In 2018, Ripple developed a use case for XRP – the “On-Demand Liquidity” (ODL) product. The ODL network enables money transmitting businesses to make cross-border payments through XRP as an intermediary between two local fiat currencies. Ripple issued 324 million XRP to entities associated with ODL.

XRP, sold as a “security”, for “use”, or as “currency”? 

The SEC claims XRP is a security because money was invested in a common enterprise with a reasonable expectation of profit to be derived from the entrepreneurial or managerial effort of others (this analysis is commonly referred to as the “Howey Test”, after the 1946 US Supreme Court case SEC v. W.J. Howey Co.). In its analysis, the SEC highlighted the following aspects of the offering that led to the conclusion:

  • Ripple distributed XRP for cash or other considerations worth over 1.38 billion USD.
  • Purchasers of XRP made an investment into a common enterprise because the gain and loss of XRP were tied to Ripple’s success and failure in driving the demand and price of XRP. Ripple, as an entity, not only manages the public market of XRP, it also shares a common interest with the investors as it holds a significant amount of XRP and uses proceeds from XRP sale to fund its operation.
  • The Defendants promised to undertake significant efforts to develop, monitor, and maintain a public market and a secondary market for XRP with a goal to increase trading volume and resale opportunities. The Defendants made repeated public statements highlighting its business development effort that will drive demand, adoption and liquidity of XRP.
  • Ripple held itself out as the primary source of information regarding XRP. These efforts led investors to reasonably expect that Ripple’s entrepreneurial and managerial effort would drive the success or failure of Ripple’s XRP Project.

After concluding that XRP is an investment contract under the Howey Test, the SEC further argued XRP is not sold for its utility function within the ODL network. According to the SEC, ODL was not commercially available until 2018, and even after its launch, usages of XRP by money transmitters were heavily incentivized by Ripple. XRP was sold and traded in an amount that “far exceeds any potential use of XRP as a medium to transfer value”. Furthermore, the SEC denied the possibility that XRP as “currency” because “using XRP as a ‘bridge’ between two real fiat currencies does not bestow legal tender status on XRP”.

The SEC also alleged that Ripple manually controlled XRP’s trading activity by “selectively disclosing information” to investors. The SEC further alleges that Ripple manipulated the price and liquidity of XRP to maximize the amount of money Ripple could raise.

Implications and Impact

This lawsuit marks another high-profile case in the SEC’s continued enforcement activities against unregistered offerings of crypto tokens. XRP is among the top five most traded cryptocurrency with a market cap of $12.1 billion.[1]. Different from other digital tokens, XRP is held by a large number of institutional investors and money transmitters like banks. According to Ripple’s CEO Brad Garlinghouse, who is also a defendant to the complaint, Ripple will fight back and “prove their case in the court.”[2]. Garlinghouse argued the legal action against the XRP is “an assault on crypto at large” and will have a “snowball effect” on the industry as a whole.[3].

Crypto-asset exchange platforms like CoinDesk have delisted XRP pending the result of this litigation. Given the regulatory uncertainty, Ripple is also considering moving its headquarters outside the US to a country that does not consider XRP as a security.

Industry participants who hold XRP or have business dealing in XRP should proceed with caution and re-evaluate the potential implications of the SEC succeeding with this lawsuit. Industry participants who seek to deal exclusively in assets that are not securities might find themselves subject to securities regulatory requirements in the event the lawsuit is determined in favour of the SEC.

We will continue to monitor the development of this case and encourage issuers and stakeholders to consult advisors and securities commissions for further guidance.


[1] CoinMarketCap as of Jan 25: https://coinmarketcap.com/

[2] https://ripple.com/insights/the-secs-attack-on-crypto-in-the-united-states/

[3] ibid.



On January 14, 2021, Laurel Hill Advisory Group (“Laurel Hill”) and Fasken hosted a webinar on ESG (environmental, social and governance) considerations of which companies should be aware for the upcoming 2021 proxy season. The webinar’s panelists were David Salmon of Laurel Hill and Emilie Bundock, Stephen Erlichman and Grant McGlaughlin of Fasken and was moderated by Gordon Raman of Fasken. Set out below are some of the comments made by the speakers on the webinar.


The importance of ESG considerations in today’s corporate governance model has developed over the past 50 years.  In the early 1970’s the Milton Friedman view of corporations was the dominant business mindset.  In a forceful New York Times article he said that business leaders that “believed business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends …[were]… preaching pure and unadulterated socialism”.  Since that time, certainly in North America,  corporations have assumed a central role in the growth of economies.  With that central role has come the recognition that corporations play a greater role in society, as noted in 2017 by Larry Fink, the head of Blackrock.  In his annual letter to CEOs he wrote: “ To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” Continue Reading Proxy Season Preview 2021: ESG Considerations

On January 14, 2021, the Toronto Stock Exchange (“TSX”), Laurel Hill Advisory Group (“Laurel Hill”) and Fasken hosted a conversation on important disclosure and corporate governance considerations for issuers leading into the 2021 proxy season. The panel discussed four discrete areas of recent developments in corporate governance which companies should be aware of before this upcoming 2021 proxy season:

  1. An Update from Proxy Advisory Firms
  2. An Update from the TSX
  3. Diversity Disclosure
  4. COVID-19: Lasting Repercussions

The webinar discussion featured Bill Zawada of Laurel Hill, Valérie Douville of the TSX, and Sarah Gingrich and Neil Kravitz of Fasken and was moderated by Gordon Raman of Fasken. Continue Reading Proxy Season Preview 2021

Proxy advisory firms Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) recently published updated guidelines governing shareholder meetings for the 2021 proxy season. The ISS Benchmark Policies for Canadian issuers and Glass Lewis Guidelines focused on key issues, including gender diversity, environmental and social risk oversight, board refreshment, and other corporate governance matters.

These updates come in addition to the recent guidelines by ISS and Glass Lewis published in response to the COVID-19 pandemic.

Board Diversity

Glass Lewis has provided that board of directors with less than two female directors would be noted as a concern in 2021; and in 2022, Glass Lewis will recommend withholding a vote for the nominating committee chair when a board of directors has less than two female directors (for a board with six or fewer members, this changes to only one female director).

With a similar approach, currently ISS will generally recommend withholding a vote for a chair of a nominating committee, or other directors responsible for board nominations, of “widely-held” companies where the company has either (i) no formal gender diversity policy; or (ii) zero women on its board of directors. Beginning in February 2022, ISS will recommend withholding a vote for the chair of the nominating committee, or other directors responsible for board nominations,  where either: (i) women comprise less than 30% of the board and the company has not disclosed a formal written gender diversity policy; or (ii) the company’s formal policy does not include a commitment to achieve at least 30% women on the board over a reasonable timeframe. The existing policy will continue to apply to TSX-listed, non-TSX Composite Index companies which are considered “widely-held” by the ISS.[1]

Environmental and Social Risk Oversight

Glass Lewis will note as a concern when board of directors of companies in the S&P/TSX 60 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Further, beginning with shareholder meetings held in 2022, Glass Lewis will recommend withholding a vote for the governance committee chair of a company in such the S&P/TSX 60 Index which fails to provide explicit disclosure concerning the board of directors’ role in overseeing these issues.

Current ISS policy recommends withholding votes for individual directors, committee members and entire boards due to, among other things, material failures of governance, stewardship, risk oversight or fiduciary responsibilities at the company. Commencing 2021, ISS policy guidelines expand risk oversight failure examples to expressly include failures relating to environmental and social factors, including climate change.

Exclusive Forum

Glass Lewis and ISS have made updates to their policies in response to an increasing number of Canadian companies adopting exclusive forum bylaws, which designate and require corporate litigation to be conducted in a single jurisdiction.

Glass Lewis recommends that shareholders vote against any amendments to the bylaws or articles seeking to adopt an exclusive forum provision unless the company: (i) provides a compelling argument on why the provision would directly benefit shareholders; (ii) provides evidence of abuse of legal process in other, non-favored jurisdictions; (iii) narrowly tailors such provision to the risks involved; and (iv) maintains a strong record of good corporate governance practices.

Beginning February 2021, ISS will recommend voting on a case-by-case to proposals adopting exclusive forum bylaws or amending bylaws. Case-by-case determinations will take into account: (i) the company’s jurisdiction of incorporation; (ii) board rationale for adopting the bylaw provision; (iii) legal actions subject to the bylaw provision; (iv) evidence of past harm as a result of shareholder action against the company originating outside of the jurisdiction of incorporation; (v) the company’s governance provisions and shareholder rights; and (vi) any other problematic provisions that raise concerns regarding shareholder rights.

Additional key updates include the following:

Glass Lewis

  • Board Refreshment: Glass Lewis will note instances where the average tenure of a non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years as a potential concern.
  • Financial Expertise: Glass Lewis will increase scrutiny on the level of professional expertise on audit committees, which should have members with sufficient professional experience to fit the role.
  • Director Attendance / Committee Meeting Disclosure: Glass Lewis will recommend against voting for the governance committee chair when records for board and committee meeting attendance are not disclosed and the number of audit committee meetings that took place are not disclosed. Additionally, Glass Lewis will recommend against voting for the audit committee chair if the committee did not meet at least four times during the year.
  • Change of Continuance: Proposals requesting a continuance to another jurisdiction will be evaluated on a case-by-case basis to determine if they are in the best interests of the company and its shareholders.
  • Poor Disclosure: Additional scrutiny will be given to companies with disclosure standards that are unclear, poor, contradictory, or outdated.
  • Clarifying Amendments: Glass Lewis made some additional clarifying amendments to its independence classification, provided additional factors for compensation committee performance, provided additional factors for evaluation of a company’s short-term and long-term incentive plans, added language regarding option exchanges and repricing proposals, and announced a change of its peer group data provider.


  • Equity-Based Evergreen Compensation Plans: ISS will recommend against voting for the compensation committee members (or the board chair, as applicable) for Canadian Securities Exchange listed companies, if the company maintains an evergreen equity compensation plan but has not sought shareholder approval in the past two years and is not seeking approval at the upcoming meeting.

For a discussion on these topics, as well as other considerations for issuers as they prepare for the 2021 proxy season, Fasken will be hosting its annual Proxy Season Preview, this year titled “Recent Developments in Corporate Governance and the Importance of ESG Considerations” through a webinar to be held on January 14,, 2021 at noon (EST).

[1] Note: “widely-held” companies is defined as S&P/TSX Composite Index companies and other companies designated as such by ISS based on the number of ISS clients holding securities of the company.

Several months ago we asked whether a COVID-19-related impact on a business might constitute a “Material Adverse Change” (referred to as a “MAC,” or a material adverse effect, “MAE”) under merger agreements, and we noted the near complete absence of case law on the issue in Canada (see: “COVID-19 and Material Adverse Change Provisions in M&A Agreements”). Fortunately, we now have some Canadian case law to provide guidance. A recent decision of the Ontario Superior Court of Justice relating to the impact of COVID-19 suggests that MAC/MAE clauses will be interpreted narrowly in Canada, which follows the trend in the case law from Delaware courts.

The Decision: Fairstone Financial Holdings Inc. v Duo Bank of Canada

In February 2020, Duo Bank of Canada (Duo) announced that it would acquire consumer finance company Fairstone Financial Holdings Inc. (Fairstone) by way of a share purchase agreement (SPA). The transaction was expected to be completed on June 1, 2020. In the intervening time, the COVID-19 pandemic hit North America and Fairstone’s business was significantly affected. In May 2020, year-over-year new loan origination had decreased by 56%, and it was clear that Fairstone would have to reduce lending and tighten lending requirements, thus reducing its earnings potential.

In late May, Duo informed Fairstone that it did not intend to complete the transaction on the basis that, among other things, there had been a material adverse effect on Fairstone’s business and various steps Fairstone took to manage its business through  the pandemic violated its covenant to operate its business in the ordinary course.  Duo was careful, however, not to terminate the SPA.  As the court noted, Duo was the successful and aggressive bidder in an auction and it knew that if it terminated the SPA, Fairstone would not be able to sell the business for the same price that Duo had offered.  If Duo turned out to be wrong about its right to terminate, it would be responsible for damages potentially in the hundreds of millions of dollars.

In response to Duo’s notice, Fairstone sought to compel Duo to complete the transaction by way of a court application for specific performance.  Fairstone sought damages for breach of the SPA as an alternative to specific performance, although Duo made clear that it would prefer to complete the transaction rather than pay damages.

Was there an MAE?

In its decision, the court acknowledged that “at first blush,” it appeared that an MAE had occurred as a result of COVID-19. However, the MAE clause in the SPA contained a number of carveouts which excluded material effects caused by (i) worldwide, national, provincial or local conditions or circumstances, including emergencies; (ii) changes to the markets or industry in which Fairstone operates; and (iii) the failure of Fairstone to meet any financial projections.  The first two carveouts included the further requirement that only an MAE caused by emergencies or market changes which had a “materially disproportionate adverse impact” on Fairstone would relieve Duo of its obligation to complete the transaction.  The court concluded that COVID-19 fell into the definition of the first carveout, and also that the changes to Fairstone’s business were changes to the entire market and industry in which Fairstone operates and Fairstone had not been disproportionately affected.

There are several important takeaways from the court’s analysis of the parties’ arguments regarding an MAE:

  1. Burden of Proof: The party alleging the MAE (in this case, Duo) bears the burden of proving it. However, the court also found that the burden shifted back to Fairstone to establish that one of the carveouts to the definition of MAE is present.
  2. Standard of Proof: The court considered whether the parties’ use of the phrase “has (or would reasonably be expected to have)…a material adverse effect on the business” in the SPA signalled an intention that something lower than the civil burden of proof (i.e. a balance of probabilities) was required to establish an MAE. After surveying the case law on the interpretation of similar language in both Canada and the United States, the court confirmed that the ordinary civil burden of proof applied, such that Duo needed to demonstrate on a balance of probabilities that the conditions of the COVID-19 pandemic would reasonably be expected to have a material adverse effect on Fairstone’s business.
  3. The Role of Expert Evidence: The determination of whether there had been a disproportionate effect on Fairstone turned on expert evidence.  Fairstone’s experts addressed directly the issue by comparing Fairstone to its direct competitor and others in the industry across a broad range of qualitative and quantitative factors, including net income, expenses, impairment charges, operational expenses and history of managing problems. The court preferred this evidence to that of Duo’s expert, who compared Fairstone’s results against results derived from analysts’ projections for public companies for a similar period.
  4. Definition of MAE: The court adopted the widely used definition of MAE from Delaware case law: “…the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.”

Had Fairstone Conducted its Business in the Ordinary Course?

As mentioned above, Duo also alleged that Fairstone, in responding to the pandemic, had breached its covenant to conduct its business in the ordinary course.  The term “ordinary course” was defined in the SPA as “consistent with past practices”.  In effect, Duo argued that nothing done by Fairstone in response to the pandemic could be ordinary course because the pandemic is an extraordinary event.  In rejecting Duo’s position, the court noted that such a conclusion would make the pandemic a reason for not closing the transaction even though emergencies in the nature of the pandemic were excluded from the definition of MAE.  The court found that in reading the SPA as a whole and not as a series of unrelated, standalone provisions, precedence ought to be given to the specific emergency exclusion in the MAE clause over the more general ordinary course provision.

The court noted that the “fundamental purpose” of the ordinary course covenant is “to protect the purchaser against company specific risks and the moral hazard of management acting in a self-interested, opportunistic manner detrimental to the purchaser’s interests.  Without purporting to set out a universal rule, the court set out a number of principles to assist in the consideration of what actions can be said to be taken in the “ordinary course”:

  1. As a general rule, the purchaser of a business accepts systemic economic risks associated with the ownership of a business, including the risk of economic contractions and the detrimental effect they have on a business.
  2. It is part of the ordinary course of any business to encounter local or national recessions and to take steps in response to those sorts of systemic economic changes. Whether these steps are taken in the ordinary course will involve a comparison of (a) what the business has done in similar economic circumstances to what it is doing now, or (b) what the business is doing now to what other businesses are doing.
  3. If a business takes prudent steps in response to an economic contraction, that have no long-lasting effects and do not impose any obligations on the purchaser, it should not be seen to be operating outside of the ordinary course.

Recent Delaware Decision

The Fairstone decision aligns with the American approach to determining when a MAC/MAE has occurred. As noted above, the Ontario court adopted the definition of MAE used in Delaware case law.

It is also noteworthy that in a decision released just two days before Fairstone, the Delaware Court of Chancery reached a similar conclusion on the issue of whether COVID-19 constituted an MAE. The Delaware court found that the consequences of the COVID-19 pandemic fell within an exception to the MAE clause for effects resulting from “natural disasters and calamities.”

However, the Delaware court found a breach of the ordinary course covenant.  Significantly, the court found that the actions of the seller “departed radically from the normal and routine operation of the [business] and were wholly inconsistent with past practice.”  This result was driven by very different facts than were present in the Fairstone decision, but it is noteworthy that the Delaware court declined to consider the MAE clause in its interpretation of the ordinary course covenant.  As discussed above, the Ontario court adopted an approach that considered the SPA as a whole and not as a series of unrelated, standalone provisions.


The Fairstone decision provides valuable guidance as to how Canadian courts will interpret MAE carveouts and ordinary course covenants, which makes it a must-read for participants in Canadian M&A.

On December 1, 2020, the TSX Venture Exchange (Exchange) issued a news release to announce changes to its Capital Pool Company (CPC) program that will come into force on January 1, 2021.  The CPC program is a way for private companies to go public in Canada. The CPC program enables seasoned directors and officers to form a CPC, raise a pool of capital and list the CPC on the Exchange with no assets other than cash and no commercial operations. The CPC then uses the capital raised to identify a private operating company to complete a qualifying transaction with the CPC (Qualifying Transaction). After the CPC has completed its Qualifying Transaction, the resulting issuer’s shares trade as a regular listing on the Exchange.

The Exchange advised that the changes are aimed at providing increased flexibility by included additional jurisdictions, easing the residency requirements and simplifying spending restriction.  The changes are also aimed at reducing regulatory burden by relaxing the requirements on shareholder distribution and shareholder approvals. Continue Reading TSX Venture Exchange Adopts Changes to Capital Pool Company Policies

The Canadian Securities Administrators (“CSA”) recently published a Staff Notice (the “Notice”) to report on the results of the reviews conducted  by the CSA within the scope of its Continuous Disclosure Review Program. The goal of this program is to improve the completeness, quality and timeliness of continuous disclosure provided by reporting issuers.

The focus on this post is mainly aimed towards the Notice’s guidance for continuous disclosure in the context of the coronavirus pandemic. In order to support investors in making informed investment decisions, CSA reminds reporting issuers to provide transparent disclosure, including information about the impact of COVID-19 on their operating performance, financial position, liquidity and future prospects. The guidance builds on information disseminated by the CSA earlier this year, as we have discussed in this previous blog post. Continue Reading Canadian Securities Administrators publish Guidance on Continuous Disclosure in Time of COVID-19