Project Freeway Inc. v. ABC Technologies Inc. (2025) ONSC 1048 – The Ontario Superior Court’s interpretation of accelerated earn out provisions in a Share Purchase Agreement.
May 29, 2025

By Rutendo Muchinguri

Brief Facts

Project Freeway Inc. (“Seller”) sold all its shares in a group of companies known as Windsor Mold Group of Companies (“Target Companies”) to ABC Technologies Inc. (“Buyer”) for USD$165 million (“Deal”). As part of the Deal, the share purchase agreement (“SPA”) had an earn out provision (“Earn-Out”) which would give the Buyer the obligation to pay over US$26million, spread out over a period of time, to the Seller if the Target Companies achieved certain financial milestones two years after closing of the Deal. There was a caveat to this Earn-Out – if the Buyer directly or indirectly sold or transferred a material portion of the assets of the Business of the Target Companies to a third party without the approval of the Seller, the obligation of the Buyer to pay the Seller would become immediately due and payable as a penalty to the Buyer.

Upon closing of the Deal, the Buyer entered into two transactions (the “Transactions”): a sale and leaseback of the real estate of the Target Companies for over CAD$97million; and a factoring arrangement where the Buyer sold all of the Target Companies’ accounts receivables to HSBC Bank. The Transactions were completed without the prior consent of the Seller.

Over a year after the Transactions, the Seller decided to sue the Buyer on the basis that the Transactions had triggered the acceleration of the Earn-Out by filing an application with the Superior Court of Justice.

Issue

The one issue before the Court was whether the Transactions triggered the accelerated earn-out provision in the SPA making the Buyer liable to pay the Seller over US$26million in one payment.

Court’s Finding

The Court found that neither of the Transactions triggered the accelerated earn-out clause in the SPA. To come to this conclusion, the court stated the following:

  • In interpreting a contract, the Court took a holistic approach which looked at the SPA as a whole (Sattva Capital Corp. v. Creston Moly Corp., 2015 SCC 53);
  • The Court also stated that a contract must be analysed and interpreted in a way that makes business sense and does not lead to a commercially absurd result;
  • The foremost rule is to presume that the parties intended what they included in the contract unless there is evidence to the contrary;
  • The Buyer accepted that the Transactions had been completed without the Seller’s prior consent – however, the Buyer argued that such consent was not required in terms of the SPA;
  • The Buyer alleged that the Transactions do not trigger the accelerated earn-out provision as they were ordinary financing steps; that were publicly disclosed through a press-release prior to completion without any complaint from the Seller and had the effect of generating revenue for the Target Companies which was beneficial to the Seller and the Target Companies;
  • The Court relied on the non-binding Letter of Intent (“LOI”) as an interpretive tool to determine the background facts at the time the parties entered into the SPA. The court relied on the decision of the Ontario Court of Appeal in Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2021 ONCA 592, in which it was accepted that a Court is not precluded from considering admissible evidence of the surrounding circumstances at the time a contract is negotiated or formed;
  • The Court aligned with the Buyer’s interpretation – the accelerated Earn Out was drafted in such a way that only a transfer or sale material to the earn-out provision would trigger the acceleration of the Earn Out amount payable to the Seller;
  • The Court stated that there should be some deference to how a Buyer operates a business post closing – the only proviso was that such operation by the Buyer should not adversely impact the Earn-Out. The SPA specifically stated that Buyer was not prohibited from closing, merging or consolidating any acquired facilities of the Target Companies with any of the Buyer’s; and
  • The Court also considered the fact that the Seller had known about the 2 transactions particularly the sale and leaseback transaction prior to closing and due to the Vendor’s sophistication, they ought to have raised the alarm if they had issues with the 2 transactions triggering the accelerated earn out payable to the Seller.

Takeaways

The judgment by Justice Steele serves as a cautionary tale to business lawyers:

  • Non-binding letters of intent and other surrounding documentation prepared prior to execution of a substantive agreement can be used as interpretive tools by the Courts in determining the intention of the Parties;
  • For SPA’s, the Seller must be sure to include specific types of transactions which they are uncomfortable with – in this case, if the Seller did not want the Buyer to enter into factoring arrangements and a sale and leaseback transaction using the Target Companies, the SPA should have stated so clearly;
  • Despite the existence of earn-out provisions in an SPA, the Buyer is still given the freedom to conduct the Business they have acquired in the manner they deem fit provided such freedom does not interrupt with the Seller’s right to receive the earn-out payment; and
  • A delay in acting can be interpreted as acquiescence or acceptance by the aggrieved party – doctrine of laches and acquiescence.
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