Lessons from Canadian litigation involving Investor Rights Agreements
Overview
Investor rights agreements are used in public companies by founders, private equity sponsors and other significant shareholders to have express governance rights and obligations, thereby supplementing applicable corporate law. The recent decision in Simpson Oil[1] represents one of several Canadian lawsuits that should inform how investors and companies approach negotiating such agreements.
Facts
The dispute concerned the interpretation of a “material adverse change” (“MAC”) clause in a governance agreement (the “Governance Agreement”) between Simpson Oil Limited (“SOL”) and Parkland Corporation (“Parkland”).
The Governance Agreement required SOL to vote its Parkland shares consistent with the public recommendation of Parkland’s board of directors or to abstain from voting. It also imposed typical standstill restrictions on SQL to restrict any activist-type behaviour. A MAC clause was used to spring SOL from such restrictions. A MAC was defined as:
“Material Adverse Change” means any change that has a material adverse effect on the business, results of operations or financial condition of Parkland and its Subsidiaries, taken as a whole, that would require Parkland to file a material change report (as such term is defined under Securities Laws) with the applicable securities regulatory authorities, which shall include (A) a replacement of a majority of the members of the Board of Directors at any one meeting of shareholders or otherwise within a three month period, and (B) a material change in the composition of senior management at Parkland (which, for greater certainty, will not include any change in titles of such senior management); …
SOL wanted to engage in a proxy contest to replace incumbent directors on Parkland’s board. SOL and Parkland disagreed on whether the standstill restrictions in the Governance Agreement still applied to SOL. Specifically, they disagreed on whether a MAC was triggered after Parkland’s Chief Financial Officer Mr. McMillan, resigned, followed by the departure of 8 out of 10 members of Parkland’s senior management.
The Decision
The Ontario Superior Court considered whether the two scenarios set out at (A) and (B) in the MAC definition were illustrations of the type of event that may constitute a MAC or were rather mandatory events that automatically constitute a MAC.
SOL argued the latter. Parkland argued that the two scenarios in the MAC definition were simply illustrations that could constitute a MAC but were not determinative because for a MAC to occur, the change must (a) have a material adverse effect on Parkland’s business, operational results or financial condition; and (b) oblige Parkland to file a material change report.
The Court agreed with SOL, and determined that the two scenarios were mandatory events that constituted a MAC. As such, both the resignation of Mr. McMillan and the departure of many of Parkland’s senior management constituted a MAC. The Court explained that:
It would be redundant to include paragraphs (A) and (B) if the preconditions in the language prior to (A) (i.e., a material adverse effect on Parkland’s business, results of operations or financial condition, and obligation to file a material adverse change report) also had to be satisfied.
The Court grounded its interpretation in the factual matrix of the Governance Agreement, which included letters of intent indicating the parties had intended for significant management changes to constitute a MAC. This interpretation also made commercial sense as, without it, SOL would have essentially been bound to an indefinite standstill.
Takeaways
- While a MAC clause is very rare in investor rights agreement agreements, this case demonstrates that parties have a great deal of latitude to craft rights and obligations and triggers to modify, suspend or termination such rights and obligations.
- As a general matter, courts will easily find that investors agreed to commercially unreasonable restraints on their rights, absent clear language. Recently in One Move v. Dye & Durham,[2] the Ontario Superior Court determined that an investor rights agreement did not prohibit a shareholder’s request for a shareholder vote to oust its director nominee. The agreement provided the investor with a nomination right for one director to the company’ board but did not contain a term permitting the investor to propose to remove its nominee mid-term. Nevertheless, the Court found that “[u]nless a right afforded a shareholder under the OBCA is expressly or necessarily by implication abrogated by shareholder agreement, the rights of a shareholder under the OBCA apply.”[3]
- That said, a Court will not hesitate to find that contracting parties have waived important rights if broad and clear language is used, unless there is an overriding public policy concern.[4] For instance, in Husack,[5] the Ontario Court of Appeal held that shareholders in a private company had agreed to waive statutory dissent rights in a unanimous shareholder agreement because the language even though the term “dissent rights” was not used.
[1] Simpson Oil Ltd. v. Parkland Corp., 2025 ONSC 799
[2] One Move v. Dye & Durham, 2024 ONSC 5114.
[3] One Move v. Dye & Durham, 2024 ONSC 5114 at para. 57.
[4] Husack v. Husack, 2024 ONCA 117 at para. 7.
[5] Husack v. Husack, 2024 ONCA 117.
