In the case of Project Freeway Inc. v. ABC Technologies Inc., 2025 ONSC 1048, the dispute centers around the interpretation of a share purchase agreement (SPA) between Project Freeway Inc. (“Project Freeway” or the “Vendor”) and ABC Technologies Inc. (“ABC” or the “Purchaser”). The agreement involved the sale of shares of the Target Companies, which are part of the Windsor Mold Group, to ABC, a major automotive systems and components manufacturer. The SPA included a base purchase price of USD $165,000,000 and an additional earn-out payment of up to USD $26,461,000, contingent on the financial performance of the acquired business over a specified period.
The primary issue in this case was whether certain transactions conducted by ABC triggered an acceleration clause in the SPA, which would require the immediate payment of the full earn-out amount. The clause in question stipulated that the full earn-out would become payable if ABC sold, transferred, or licensed a material portion of the assets of the Target Companies to a third party without the Vendor’s consent. After the transaction closed, ABC engaged in Sale Leaseback (SLB) transactions and a factoring arrangement, which Project Freeway argued triggered the acceleration clause.
Justice Steele focused on the interpretation of the SPA’s earn-out clause. The Court examined whether the SLB transactions and factoring arrangements constituted a sale of a “material portion” of the business’s assets, which would trigger the earn-out acceleration.
The Court applied principles from the Supreme Court of Canada’s decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 SCR 633, emphasizing a practical, common-sense approach to contract interpretation. The Court must ascertain the objective intent of the parties, considering the contract as a whole and the surrounding circumstances at the time of its formation.
Justice Steele concluded that neither the SLB transactions nor the factoring arrangements triggered the earn-out acceleration clause. The Court found that these transactions were ordinary course financing steps that did not materially impact the business’s performance or the calculation of the contribution margin, which was central to the earn-out regime.
The Court noted that the parties’ intent, as reflected in the SPA and the surrounding circumstances, was to allow ABC operational freedom to manage the business, provided it did not impair the contribution margin or earn-out payments. The Court rejected Project Freeway’s interpretation, which would have resulted in a windfall, as commercially unreasonable.
This decision underscores the importance of clear and precise language in contractual agreements, particularly in clauses related to earn-outs and acceleration of payments. Business owners should ensure that the terms of such clauses are well-defined and consider the potential implications of ordinary business transactions on these terms. The case highlights the need for careful negotiation and drafting of SPAs to avoid disputes over the interpretation of key provisions.
The ruling in this case may influence future contractual disputes involving earn-out provisions and acceleration clauses. The Court’s emphasis on the context and purpose of the earn-out provision, as well as the interpretation of “material” in relation to the earn-out, provides guidance for similar cases. It reinforces the principle that contractual terms should be interpreted in a manner consistent with the overall purpose of the agreement and sound business principles.
The decision in Project Freeway Inc. v. ABC Technologies Inc. serves as a reminder of the complexities involved in interpreting contractual agreements and the potential for disputes over earn-out provisions. It highlights the need for parties to clearly articulate their intentions and expectations in contractual language to avoid costly litigation. As businesses continue to engage in complex transactions, the lessons from this case will be valuable in guiding the drafting and negotiation of future agreements.
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