An Alberta judge has ruled that a case over whether the COVID-19 pandemic is a material change that could justify terminating a deal to buy a company must go to a trial or other court hearing for further evidence
Justice April Grosse of the Alberta Court of Queen’s Bench delivered the oral decision on Wednesday in a case that has been closely watched by the legal and business communities because there is little Canadian law on the topic.
The judge presided over a full-day hearing on Friday, but ruled that the court does not have enough evidence before it to come to a fair determination of the main issue at stake: whether a material adverse effect (MAE) had occurred and the deal should be terminated.
Such terms, which are sometimes referred to as material adverse change (MAC) clauses, are often found in merger and acquisition contracts, and parties often carefully negotiate the wording. A buyer who invokes an MAE clause is essentially arguing that the circumstances that now affect a target company have fundamentally changed the nature of the intended agreement.
Lawyers say that such clauses could be top of mind for any parties to deals that were signed in the weeks or months before the COVID-19 crisis rocked the economy, but have not yet closed.
The case before the Alberta courts involves the $25.5-million sale of Red Deer-based Rifco Inc., an alternative auto financing company that trades on the TSX Venture Exchange. Toronto-based CanCap Group Inc. – the privately owned parent of AutoCapital Canada Inc., another auto finance company – announced a deal to buy Rifco on Feb. 3, about five weeks before the World Health Organization declared a pandemic.
The agreement proceeded by way of a plan of arrangement, which requires court and shareholder approval. Rifco shareholders voted to approve the transaction on April 3 even though days earlier, on March 27, CanCap sent Rifco a letter that it said terminated the deal.
CanCap’s letter listed about 10 factors that have happened since the deal was signed, and claimed that “one or more” of them amounted to an MAE. Those included the outbreak of the pandemic, the collapse in oil prices, business closings, a decline in available funding and prospective customers, and payment defaults by Rifco customers.
Rifco applied to the court for a final order approving the plan of arrangement and also asked the court to declare that an MAE had not occurred. So far, the court has had only written evidence in the case.
Justice Grosse, who delivered her ruling in a virtual hearing over a video conferencing service, said major facts are still in dispute. For example, she said that there is disagreement over the correct metrics to use to determine whether Rifco’s customers are more likely to default on their loan payments. She said expert evidence might also be required.
“I find there are substantial facts in dispute and cannot make a just determination of the issues on the current record,” Justice Grosse said.
Rifco’s lawyer, Derek Bell, a partner with DLA Piper Canada LLP, had argued that commercial disputes such as this one must be determined by courts in a timely fashion. Justice Grosse acknowledged that point, but said it would still be premature for her to provide a definitive ruling on the MAE issue at this time.
She noted that a lengthy trial is not necessarily required, and said she would ordinarily order one to be expedited, but that is not possible now due to limitations on court resources related to COVID-19. But she said the parties could consider options on how to proceed, including limiting the amount of pre-trial information exchanged by the parties, having a trial on just some issues, or holding a “hybrid” trial that would be based on a combination of oral and written evidence.
The judge plans to hold a confidential meeting with the parties on Friday to determine next steps.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.