In Simpson Oil Ltd. v. Parkland Corp., 2025 ONSC 799, the Ontario Superior Court of Justice interpreted a material adverse change (MAC) clause in a governance agreement (the Governance Agreement) between Parkland Corporation (Parkland), a publicly traded fuel distributor, marketer, and retailer, and its most significant shareholder, Simpson Oil Ltd. (SOL). The occurrence of a material adverse change would trigger an end to certain restrictions on SOL regarding its shares, which prohibited SOL from engaging in any activism against Parkland or soliciting bids to acquire the company.
One of the specified changes in the MAC clause was a “material change in the composition of senior management at Parkland”, subject to certain clarifying language and carve-outs. After two directors resigned from Parkland’s board in late 2023, SOL took the position that a material adverse change had occurred (in addition to earlier events that it argued also constituted a material adverse change).
The Court agreed that a material adverse change within the meaning of the clause had occurred, and SOL was therefore released from the restrictions. This was a significant development for Parkland and its shareholders given the factual context: after Parkland had rebuffed a nearly $8 billion takeover offer in 2023 from Sunoco LP, SOL openly called for Parkland to put itself up for sale. With the Governance Agreement no longer in effect, SOL is now able to take a more active approach with respect to Parkland’s affairs. More generally, this decision reinforces the importance of precision and clarity in drafting.
Key Facts and Issues
The Governance Agreement was executed in 2019, in connection with a business combination agreement. At the end of 2019, Parkland’s CFO left, and SOL passed an internal resolution resolving that a material adverse change had occurred, triggering the clause. After becoming aware of this in 2022, Parkland disputed SOL’s position (noting it had not filed a material change report under the Act,1 among other things), and the parties reserved their rights. SOL commenced an application to determine whether a material adverse change had occurred on the facts of this case. In addition to the departure of the two directors in late 2023, eight of the ten members of senior management had departed since the Governance Agreement was executed in 2019.
The Governance Agreement defined a material adverse change as “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) …”(emphasis added). The parties disagreed as to whether (A) and (B) were intended to function merely as examples of the type of event that may constitute a material adverse change (as Parkland contended), or whether they were mandatory events that automatically constituted a material adverse change (SOL’s argument).
The Court’s Decision
The Court addressed the nature of governance agreements more generally, reinforcing the need to consider them in the context of the nature of the transaction and the concerns of the parties, and noting the relatively uncommon choice to include a MAC clause in such an agreement. The Court then applied principles of contractual interpretation outlined by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, which included reading the contract as a whole, giving the words used their ordinary and grammatical meaning, and applying a practical, common-sense approach to ascertain the objectives of the parties.
While Parkland argued that the departure of their CFO was not a material change, nor an adverse one, SOL argued that in addition to the departure of the CFO, the departure of seven other members of senior management between October 2019 and April 2024 was also a material change in Parkland’s senior management, specifically because there was no defined time frame enunciated in the Governance Agreement regarding departures of senior management. The Court agreed that there had been a material change in the composition of Parkland’s senior management, thereby concluding that a material adverse change had occurred.
Key Takeaways
Parties to a contract, particularly a heavily negotiated commercial agreement entered into by parties represented by sophisticated counsel, are typically held to their bargain. While extrinsic evidence such as draft agreements and letters of intent, and expert evidence regarding the type of agreement and industry at issue, will also be considered, the words in the agreement are of paramount importance.
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1 Securities Act, R.S.O. 1990, c. S.5 (the Act).