Material Adverse Effect (MAE) Clauses in Canada: What U.S. Counsel Needs to Know

The recent decision in Fairstone v. Duo Bank is an important addition to Canadian “material adverse effect” jurisprudence and, in addition to Canadian caselaw, relies heavily on Delaware precedent. On the face of the decision, Fairstone appears to be either adhering to or adopting such precedent. However, while this is the case in numerous respects, in several other ways Fairstone departs significantly from its Canadian and Delaware counterparts. It also makes these departures without either signaling it is doing so or explaining why it is doing so. The result is several interrelated, unresolved, and problematic issues of which U.S. and Canadian counsel should be aware and take caution. Stated differently, the result is an unusual and uncertain path between Canadian and Delaware MAE caselaw of consequence for all M&A transactions governed by Canadian law. Finally, given that the U.S. is by far the largest source of foreign investment into Canada, this confusion will be of particular interest to U.S. counsel with a cross-border practice.