Rifco Inc. (Re), 2020 ABQB 366

The Court delved into extent of Purchaser’s reliance on ‘Material Adverse Effect’ clause in the agreement to terminate the same in wake of COVID-19 pandemic.

On February 2, 2020 Rico Inc, ACC Holding Inc. and Cancap Management in which Cancap is a party to a parent company ACC entered into an Arrangement Agreement wherein ACC reportedly agreed to purchase outstanding shares of Rifco, a public company. This arrangement agreement contained all details ranging from plan of arrangement to other minor details. However, on March 27, 2020 ACC came forward to terminate the contract by invoking Clause 8.2 of the Arrangement Agreement which provided that if after the date of agreement but before its effective date a material adverse effect occurs, due to such exceptional circumstances, the contract will stand discharged. The reason stated by ACC was unanticipated occurrence of COVID-19 and rising prices of oil and among other things qualifying as required ‘Material Adverse Effect’.

Since it was a plan of arrangement, the contract required approval of both the Court and shareholders and prior to notice of termination from ACC, Rifco shareholders had already voted overwhelmingly in approval of the said arrangement. Thereafter, Rifco sought to go ahead to obtain final order from court for the approval of the plan and a declaratory relief that the termination of the arrangement by ACC was unlawful and hence had no effect in the eyes of law.

Amongst other arguments from both the parties, ACC contended their termination of agreement being valid as it was before pre-requisite of approvals both from the shareholders and the Court was fulfilled and that advent of COVID-19 qualifies as Material Adverse effect.

On the other hand, Rifco claimed that court has jurisdiction for declaratory relief as sought under section 193 of Alberta Business Corporations Act and section 11 of the Judicature Act, RSA 2000 with the support of precedent in Weir jones technological incorporated v. Purolator Courier ltd, 2017 ABCA 49.

The court noted that the ACC bore the burden to establish existence of circumstances entitling them to invoke material adverse effect clause but the evidences presented by them don’t sufficiently support their contention as COVID-19 or its aftermath don’t even seem to be material in given facts. Hence, there is no special exclusion for pandemic or disease and all the statements alleged by ACC stand out of the purview of the Material Adverse Effect. However, the Court observed that it could not decide the issue of validity of termination. In addition, highlighting the flexibility provided by Rules 3.12 and 3.14 it also declined to make any procedural direction in the light of ongoing COVID-19 restrictions on the court functioning and ended up suggesting the parties to proceed to a case conference instead.