Anonymised, illustrative composite. An Ontario equipment-finance company, a signed share purchase agreement, and a buyer that tried two different clauses to get out of the same deal — and lost on both, for related but distinct reasons.
At a glance
A diversified financial-services holding company agreed to buy 100% of the shares of an Ontario equipment-finance company for $58,000,000. The share purchase agreement carried a fourteen-week gap to closing for regulatory clearance of the change of control. Two clauses stood between signing and a completed deal: a material adverse change clause excluding effects from regional economic conditions and industry-wide changes, and a separate covenant requiring the target to operate, between signing and closing, “in the ordinary course of normal day-to-day operations, consistent with past practice.”
A downturn in the region's manufacturing sector hit the target's equipment-finance book six weeks after signing. The target's management responded the way it had responded to two prior contractions in its twelve-year history: it tightened underwriting criteria on new loans, pulled back discretionary marketing spend, and deferred two planned branch openings. Nothing was sold, nothing was borrowed against, and no obligation was created that would survive to bind the buyer.
The buyer's deal team first reached for the MAE clause — and lost the argument to the clause's own drafting. The decline tracked the regional downturn generally, not anything specific to the target, and the MAE definition excluded exactly that. See a material adverse change claim that failed for a file built entirely around that carve-out mechanic. Here, having lost the MAE argument, the buyer pivoted: if the shock itself was not a MAE, then surely the target's response to the shock was not the ordinary course of its business, since the target had never tightened underwriting or cut marketing before signing was on the table.
$58,000,000 against a loan book that had grown roughly 9% a year for five years. The regional downturn cut new originations by an estimated 22% over the interim period — enough that the buyer's deal team thought a price cut, or an exit, was worth fighting for.
Canadian authority on this precise question is Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397 (Ont. S.C.J.), decided by Koehnen J. on the Commercial List. Duo agreed to buy Fairstone and then tried to avoid closing on four covenants, including the ordinary course covenant and the MAE clause, after the onset of the COVID-19 pandemic disrupted Fairstone's consumer-lending business. The MAE claim failed on carve-outs for market-wide and industry-wide effects — the same mechanic as the sibling file above. Duo then argued, as the buyer does in this file, that Fairstone's pandemic response could not be the ordinary course because it differed from what Fairstone did before signing.
The court rejected that on the words of the clause itself. Ordinary course, as drafted, required conduct “consistent” with past practice — and the court held that “the definition of ordinary course in the SPA requires that Fairstone’s conduct be ‘consistent’ with past practices, not that it be identical to them.” Because Fairstone had responded to earlier contractions the same way, the court found that “during past economic contractions, Fairstone took steps to reduce expenditures and tighten lending requirements” — which made the pandemic-era response consistent with, not a departure from, its own history.
The court also gave a general test for when a prudent response to a shock stays inside the ordinary course: “if the 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.” Tightened underwriting and deferred marketing spend are exactly that — reversible, obligation-free, and taken to keep the business running rather than to change it.
The court's second holding is the one buyers miss. Even read in isolation, Duo's ordinary-course argument might have had some pull. But the MAE clause's carve-outs had already, deliberately, allocated the risk of a market-wide shock to the buyer. Reading the general ordinary-course covenant to claw back that allocation would have made the specific carve-out pointless. The court declined: “given the specificity of the emergency exclusion in the MAE clause, I do not think it would be appropriate to use the more general ordinary course provision to, in effect, override the more specific MAE provision.” A buyer does not get two bites at the same excluded risk just because it pled two different clauses.
Closing proceeded on the original $58,000,000 price, with no adjustment for the interim underwriting changes. The buyer's counsel had treated the ordinary-course covenant as the fallback argument — the one that would work if the MAE argument didn't — on the theory that a covenant breach should be easier to prove than a MAE threshold event. On this fact pattern it was not: both tests asked, in different words, whether the target's response was proportionate to a shock nobody disputed was real, and both answered yes.
Had the covenant argument won, the practical effect would have been to reopen the MAE carve-out through the back door — forcing the target to freeze its normal risk-management response to a downturn for fourteen weeks, at real cost to loan quality, or hand the buyer renegotiating leverage on a risk the MAE clause had already assigned to it at signing. A target locked out of tightening underwriting during a credit contraction absorbs losses it would otherwise have avoided, purely to preserve a buyer's optionality the MAE clause was drafted to remove.
The tell is in how the two clauses were pled together rather than in sequence. A buyer confident in its MAE claim rarely needs the ordinary-course covenant too; reaching for both at once, on the same facts, is itself evidence the underlying complaint is the shock, not the target's conduct — and a court reads that reach for what it is, especially where the MAE clause was specifically negotiated to exclude the very risk in question.
2020onsc7397) returns 403 from this environment and could not be fetched directly; this is a full-text third-party mirror of the same reported judgment, page-stamped “2020 ONSC 7397 (CanLII)” throughout, used here for the quoted passages.A 30-minute call is enough to tell you whether AI pays for itself here.
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