COVID-19 Issues in Canadian M&A: What We’re Seeing So Far

March 19, 2020

The global coronavirus outbreak is changing M&A practice in Canada over the near to medium term. In this post, we review a few key developments as the market adjusts to the reality of social distancing, border controls and reduced economic activity. These include developments relating to material adverse changes, due diligence, purchase price adjustments and deal mechanics.

Material Adverse Changes (MACs)

Material adverse change (MAC) clauses typically have several parts:

  • The first part provides a general definition of what constitutes a MAC for purposes of the agreement (i.e. what is the seller’s risk);
  • The second part excludes or carves out certain specific matters that would otherwise be part of that general definition (the risks of the exclusions/carve-outs being assigned to the buyer); and
  • The third part excludes or carves out matters from the exclusions/carve-outs in the second part to the extent that they disproportionately affect the target as compared to other companies in the industries in which the target operates (the risk of the disproportionate effect being assigned to the seller).

Parties seeking to rely on or invoke a MAC clause in the context of an M&A transaction should be cautious. The specific wording of the MAC clause and the consequences triggered by a MAC should be evaluated in the context of the particular transaction and the events in question. 

How the pandemic response is affecting MAC clauses

The effects of the COVID-19 pandemic are only partly understood at this point. Generally, MAC clauses require proof of a sustained decline in business as a result of a change that is specific to the business, or a wider change that affects the business in a disproportionate way.

Going forward, for new transactions it may be difficult to make the case that a MAC has occurred because the pandemic is now a known event. Of course, parties could still craft language or a mechanism respecting the specific allocation of COVID-19 risk. In this regard, parties should carefully consider the risks (and how to allocate them), including whether to qualify certain matters with “disproportionate effect” language.

Finally, buyers using third-party debt financing may be concerned about a lender’s ability to walk away from its funding obligations as a result of MAC clauses in financing commitment letters. However, depending on the wording of the commitment letter, the risk may be limited.

Due Diligence

In general, due diligence will need to take into account the effects of COVID-19 on the target in light of the target’s industry, location and jurisdiction, as well as those of its supply chain and customers.

A buyer will need to consider the effects of COVID-19 and the containment measures on the target’s financial projections, including the potential cash-flow impact of an extended slowdown of economic activity. Any such analysis may require more than the usual time and expense, given the scope of the crisis and the uncertainties surrounding it.

Similar consideration should be given to the target’s material contracts with a heightened focus on force majeure and other similar clauses in key customer or supplier contracts, as well as any potential liability that may occur as result of workforce or supply chain issues.

Other areas of focus in typical due diligence that may require additional consideration as result of COVID-19 risks include employment and workplace safety as well as insurance coverage for pandemic-related losses, e.g. business interruption and employee health and disability insurance.

Purchase Price Adjustments

Standard purchase price adjustment mechanisms, notably the working capital adjustment, will be affected by the economic uncertainty caused by the pandemic response. The working capital adjustment target is usually determined on the basis of historical averages that may not be appropriate at a time of economic volatility, when many businesses face the possibility of interruptions to their business and adjustments to supply chains. As a consequence, more time and effort may be required to negotiate purchase price adjustments, with more complex mechanisms (such as floating targets) possibly required in some situations.

COVID 19 may also cause a valuation gap between a buyer and seller. An earnout can be an effective means of resolving differences between buyers and sellers with respect to the future prospects (and, by extension, present value) of the target business. Earnouts achieve this by making the ultimate purchase price partly contingent on actual future performance – in other words, by breaking the payment down into an up-front component and a post-closing payment or payments, the amounts of which (or in some cases the very existence of which) are tied to agreed performance milestones during a specified post-closing period. With an earnout, some of the purchase price could be pushed out to a future time period after recovery.

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Deal timing may be thrown off

An “outside date” is a specified date by which a transaction can be terminated if the closing conditions have not been met. Outside dates and termination rights should be carefully considered given that timing issues will take on added significance as all parties involved and, even third parties, are likely to be distracted by personal and business impacts of the pandemic. The delivery of financial statements, certificates, and consents may take more time. This is especially true for certificates, consents and approvals from regulatory authorities, as regulators face novel issues requiring new analytical approaches and, at the same time, deal with their own workflow issues resulting from staffing shortages and work-at-home policies.

Representations and warranties under scrutiny

Representations and warranties that can be uncontroversial in ordinary circumstances are now being subjected to greater scrutiny. Supply chain issues are leading to more detailed representations and disclosure on the issue of inventory maintenance, while general economic instability is focusing more attention on disclosure related to collectability of receivables. Other disclosure developments include sellers’ insistence on non-reliance on financial projections and a preference for frequent updates about the target’s current financial condition. Some parties are specifically adding representations and warranties regarding the impact of the pandemic on the business.

The interim period takes on added significance

Interim period covenants are used to control what happens during the period between signing and closing to ensure the completion of the transaction and maintain the value of the asset or shares being purchased. One typical interim period covenant creates an obligation on the target’s part to carry on the business in the ordinary course until closing (this may be coupled with a series of negative covenants). Careful thought should be given to the ordinary course covenants as the parties will need to balance buyer’s desire to maintain the target’s business in the ordinary course and the seller’s need to respond rapidly to COVID-19 and the measures used to contain it during the interim period.


As this situation evolves, new issues may develop. Stay tuned!

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at

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