Covid-19 and M&A transactions: ordinary course of business in extraordinary times

Friday 4 March 2022

Barbara Concolino
BonelliErede, Milan

Letizia Santin
BonelliErede, Milan


The Covid-19 pandemic has affected virtually all aspects of our life, including work and the way companies run their business. From one day to another, many companies had to rethink the way in which they operated. Unsurprisingly, M&A transactions have not been immune from the wave of uncertainty caused by Covid-19. 

Transactions entered before the outbreak of the pandemic, but with a closing date later in time, found themselves in a rather unusual interim period where the conduct of a target’s business according to the ordinary course seemed impracticable. This often caused tension between buyers and sellers, especially in transactions that had no price adjustment mechanisms. While some buyers were no longer willing to buy companies suddenly operating in a different way from their past practice, sellers saw no reason why buyers should not close the transaction at the agreed price. Some of these disputes ended up before national courts and arbitral tribunals.

This article focuses on five decisions that dealt with this matter and resolved in different ways the issue of the interpretation and enforcement of ordinary course of business clauses during the pandemic. While it seems that these decisions have reached different conclusions, the authors will explore whether these differences are based on different interpretations of similar clauses or were justified by other circumstances.

Interim period and ordinary course of business

Ordinary course of business clauses are the bread-and-butter of M&A experts. But for readers that are not M&A experts, it may be useful to have a brief overview of these clauses and how they work.  

Ordinary course clauses are included in M&A agreements to regulate the interim period between signing and closing. The purpose of these clauses is to ensure that, at closing, the target company is essentially the same as the one that the buyer decided to purchase at contract signing. They also aim at avoiding that, during the interim period, target companies carry out actions in the interest of the seller and potentially detrimental to the buyer. To achieve this, the seller undertakes that, during the interim period, the target company will be managed in the 'ordinary course of business' i.e., in the usual way in which the company is normally run. Departures from a target company’s ordinary course of business are usually possible only with the buyer’s consent. In addition, most agreements typically contain lists of specific actions and transactions that may not be carried out without the buyer’s consent. The consent mechanism allows the buyer to exercise its business judgement with respect to actions that are not ordinary and that could distort the contractual balance agreed at signing, but that may still be beneficial to the target company. 

While ordinary course clauses are standard clauses, they may present different wordings. For instance, some clauses may refer to the ordinary course of business 'consistent with past practice'. Others may refer to 'industry practice'. These differences in wording may become crucial to assess whether, in practice, a company’s actions were in the ordinary course.

The decisions of the Delaware Court of Chancery 

One of the first decisions interpreting ordinary course covenants in light of the outbreak of Covid-19 was that of the Delaware Court of Chancery in AB Stable.

The dispute arose from an agreement dated September 2019, under which the buyer MAPS Hotel agreed to purchase from the seller AB Stable one of its subsidiaries (Strategic), a company active in the luxury hotel business. The closing of the transaction was scheduled to occur in mid-April 2020.

The agreement included an ordinary course clause, under which the seller committed that, during the interim period between signing and closing, the business of the target company would be conducted 'only in the ordinary course of business consistent with past practice in all material respects'.

When the Covid-19 pandemic hit, Strategic implemented several measures, including closing hotels or limiting their operations, layoffs and staff reductions, cuts to sales and marketing and decreased capital expenditures. The buyer considered these measures a breach of the ordinary course covenant and refused to close the transaction. The seller filed suit seeking specific performance of the agreement and requesting the Court of Delaware to compel the buyer to close the deal.

The Court of Delaware issued its ruling on 30 November 2020.

The Court rejected AB Stable’s argument that the pandemic necessitated an extraordinary response and acting in the ordinary course of business meant doing what was ordinary during the pandemic. According to the Court, under Delaware law, the ordinary course covenant required the seller to maintain the normal and ordinary routine of the business even if the extraordinary actions adopted were reasonable responses to the pandemic. 

The Court considered that the measures taken by Strategic were 'extraordinary changes to its business' and a deviation[1] from the seller’s contractual commitment to operate the company only in the 'ordinary course of business consistent with past practice'. AB Stable appealed the decision, but on 7 December 2021, the Supreme Court of the State of Delaware affirmed the decision of the Court of Chancery.

In April 2021, the Court of Delaware issued another ruling regarding ordinary course covenants and the Covid-19 pandemic, reaching an opposite result.

In early March 2020, buyer Kohlberg entered into an agreement with the private equity firm Snow Phipps to acquire DecoPac, a cake decorations supplier. Seller Snow Phipps agreed to cause the target company DecoPac to 'operate the business in a manner consistent with the past custom and practice of the Group Companies […] in all material respects'.

A month after signing, the buyer informed the seller that it would not close the deal, contending, inter alia, that DecoPac failed to operate, pending closing, in the ordinary course of business by drawing down USD 15 million on its USD 25 million revolver and by implementing cost-cutting measures (including cuts to marketing, capital expenditures and labour costs).

Judge McCormick concluded that DecoPac’s response to the Covid-19 crisis did not divert from its past practice and did not breach the ordinary course covenant.

The Snow Phipps decision only seemingly contradicts the findings in AB Stable. Quite the contrary, judge McCormick took AB Stable into consideration and relied on the same interpretation of ordinary course to mean 'the normal and ordinary routine of conducting business'. Both decisions assert that, generally speaking, to establish what constitutes the ordinary course of business, the court can look to two sources of evidence '(i) how similar companies have operated or (ii) how the specific seller company has operated'. Yet, they clarified that when an ordinary course provision includes the phrase 'consistent with past practice' or a similar phrase (as it was in both cases), 'the court evaluates the second category only'.[2] 

Consistently with this principle, both courts analysed whether the measures adopted constituted or not a departure from the target companies’ previous practice. While in AB Stable the measures taken were considered 'extraordinary changes' inconsistent with Strategic’s previous practice, DecoPac’s measures were deemed limited and in line with the actions DecoPac took in the past in times of declining sales or economic downturns. 

The decision of the Ontario Superior Court of Justice

In December 2020, the Ontario Superior Court of Justice dealt with similar issues in its judgment in Fairstone Financial Holdings Inc. v. Duo Bank of Canada

In February 2020, Canadian Duo Bank (buyer) agreed to purchase Fairstone’s business from Fairstone Financial Holdings Inc. (one of Canada’s largest consumer finance companies). The share purchase agreement included an ordinary course covenant requiring Fairstone to act, between signing and closing, in a manner that 'is consistent with [its] past practices […] and is taken in the ordinary course of the normal day-to-day operations'. 

Following the outbreak of Covid-19, Duo Bank refused to close the transaction alleging, among other things, that the actions taken by Fairstone in response to the pandemic –including alleged changes to its branch operations model, collection process, employment policies, expenditures and accounting methods – constituted a breach of the ordinary course covenant. Fairstone commenced legal proceedings seeking specific performance.

The Ontario Court’s interpretation of the meaning of ordinary course departed to some extent from that of the Delaware Court of Chancery. Specifically, while also in this case the ordinary course covenant included the language 'consistent with past practice', the Court considered relevant to assess Fairstone’s measures in light of what could be expected from the company during the crisis and the measures taken by the company’s industry peers in response to the same challenges. 

Similar to the Delaware Court of Chancery, however, the Ontario Court assessed Fairstone’s actions in light of its past practice and concluded that 'Fairstone’s response to the pandemic was consistent with past practices in the sense that, during past economic contractions, Fairstone took steps to reduce expenditures and tighten lending requirements'. Additionally, the Court considered that Fairstone’s actions to be 'modest measures to navigate through an economic downturn'.[3] 

The Court, therefore, concluded that Fairstone did not breach its ordinary course covenant. 

The approach of an ICC arbitral tribunal

An ICC arbitral tribunal has recently rendered two nearly twin arbitral awards in two separate disputes in which the buyer was respondent and the seller and the target company were claimants. The two awards, the parties and the members of the Tribunal remain confidential.

The core of the two disputes was virtually identical. Seller and buyer had entered into an agreement for the sale of the target company in 2019. The contract included an ordinary course clause which provided that, during the interim period, the target company had to act'“in the ordinary and usual course of business consistent with past practice'.

During the interim period between signing and closing, the Covid-19 pandemic hit and the target company adopted a number of measures to face the pandemic without the buyer’s consent. These measures included halting payments to landlords and suppliers, renegotiating rental agreements and cutting significantly marketing and capital expenditures. 

In the arbitration, the seller and the target company argued that the measures were in the target’s ordinary course of business relying on two main arguments: (i) the target’s actions were in line with the actions that peer companies took and were therefore ordinary actions in response to an extraordinary event; and (ii) the target’s actions were required to preserve the financial viability of the company and were therefore in line with the company’s policy to safeguard its financial stability. The buyer argued that the Covid-19 measures adopted by the target company departed significantly from the way in which the company had normally operated in the past and were therefore outside the ordinary course of business.

The Tribunal concluded that the target’s actions were not within the ordinary course of business. In doing so, the Tribunal relied on the contract clause requiring that the business be conducted in the ordinary course 'consistent with past practice'. While the Tribunal acknowledged that 'consistent with' does not mean 'identical', it noted that the measures adopted by the target company were a significant departure from its prior plans and practice and could not be considered generally in line with them. The Tribunal expressly rejected the argument that in extraordinary times, an otherwise extraordinary action becomes automatically ordinary. According to the Tribunal, this logic would deprive the buyer of the protection that an ordinary course clause is supposed to provide, especially in times of extraordinary crises, and there was no indication that this was the parties’ common intention or reasonable expectation when entering into their agreement. 

The Tribunal also rejected the argument that to determine whether the target’s actions were in the ordinary course it would be relevant to assess how similarly situated companies acted during the pandemic. Relying specifically on the contract clause, which expressly referred to the target’s past practice, the Tribunal concluded that there was no evidence that the parties reasonably expected the actions of other companies to be relevant.

In short, the Tribunal concluded that the ordinary course clause could not be read to permit the target company to do whatever peer companies would ordinarily do when facing a pandemic. Instead, the company’s actions had to be compared with how the company routinely operated.


The decisions briefly discussed above all concern disputes in which the ordinary course covenants included the specification 'consistent with past practice' or similar language. The courts and tribunal’s decisions seem very much focused on this language and on the analysis of whether the measures adopted by the target companies constituted a deviation from the way in which the companies had usually run their businesses in the past.

In the two cases in which courts concluded that there was no breach of the ordinary course covenant (i.e., Snow Phipps and Fairstone), the measures adopted were deemed to be limited and comparable to measures that had been adopted by the company in the past.

While the decision of the Ontario Superior Court of Justice sticks out in that it considered relevant to look at what peer companies did and to assess what could be expected from the company during the crisis, it ultimately found that the measures adopted by Fairstone were 'modest' and consistent with Fairstone’s practices during past economic contractions.

The takeaway is that the wording of ordinary course of business clause is key. Had the clauses not included the language 'consistent with past practice' the outcome could have been different.

[1]Delaware Court of Chancery, AB Stable VIII LLC v. Maps Hotels and Resorts One LLC et al, C.A. No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020), p. 171.

[2]Delaware Court of Chancery, Snow Phipps Group, LLC v. KCAKE Acquisition, Inc., C.A. No. 2020-0282-KSJM (Del. Ch. Apr. 30, 2021), p. 27 quoting AB Stable.

[3]Ontario Superior Court of Justice, Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2 Dec. 2020, 2020 ONSC 7397, pp. 39-40.