The Ontario Court of Appeal recently dismissed an appeal in Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855, affirming a prior decision of the Ontario Superior Court of Justice that an earn-out acceleration clause was not triggered where a buyer undertook a sale and leaseback (SLB) transaction and entered into a factoring arrangement after closing, but before the end of the earn-out period.
In doing so, the ONCA endorsed a contextual interpretation of the share purchase agreement (SPA) and confirmed that, in the absence of clear drafting, "materiality" in this context turns on the transaction's impact on the earn‑out regime itself, rather than the size or value of the transaction.
Further information and the key facts of the case can be found in our prior blog discussing the ONSC decision.
The ONCA Decision
Interpretation of the Earn-Out Acceleration Clause
The appellant, Project Freeway Inc. (Seller), argued that the phrase "material portion" referred to the size of the transaction, rather than the impact of the transaction on the ability to earn the earn-out. The ONCA rejected this submission, confirming that the trial judge did not err in finding that the phrase "material portion" should be interpreted by reference to the effect of the post-closing transactions on the target's ability to earn the earn-out.
In the earn-out context, the ONCA agreed with the trial judge that materiality may properly be assessed by reference to whether the transaction affects the earn‑out regime itself. It was therefore open to the trial judge to conclude that a transaction that does not negatively impact financial performance is not material for earn‑out purposes, regardless of the value of the transaction.
The Seller also submitted that the phrase "material portion" referred exclusively to the size of the transaction because a separate earn-out acceleration trigger in the SPA expressly referred to conduct that "materially impairs" the Seller's ability to earn the earn‑out. At trial, the ONSC found that this separate provision was not determinative of the parties' contractual intentions. The ONCA did not disturb the trial judge's findings on this point, indicating that the trial judge was entitled to resolve the competing interpretations by favouring the competing interpretation advanced by ABC Technologies Inc. (Buyer).
Commercial Absurdity, Knowledge and the Seller's Conduct
Among other reasons, the ONSC found that the Seller's interpretation of the SPA was commercially absurd because:
- The SPA's definition of "knowledge" included the "actual knowledge of" the target's President and Chief Executive Officer, who testified that he did not view the SLB transaction "as a transaction of significant concern" when he facilitated site visits for prospective SLB purchasers; and
- Despite the fact that the Seller knew at closing that the SLB transaction was being negotiated, the Seller did not object to the Buyer undertaking the SLB transaction until it became aware of the fact that the earn-out would not be earned.
On appeal, the Seller argued that the outcome resulting from its interpretation of the SPA was not commercially absurd because it reflected the "bargain struck" by sophisticated parties. The ONCA disagreed, finding that the Seller's interpretation would lead to a commercially absurd result. The Court noted that where a party submits that its interpretation reflects the "bargain struck", courts will assess whether that interpretation would give rise to commercial absurdity. The ONCA decision affirms the principle that commercial parties' intentions are unlikely to result in commercially absurd consequences.
The ONCA found that the trial judge did not err in relying on the definition of knowledge to support a conclusion that the knowledge of the individuals identified in the SPA was indicative of the knowledge of the Seller. Accordingly, where an individual is listed in the definition of knowledge, a court may consider this as evidence of the connection of the individual to the seller corporation, even when the court is considering provisions of the SPA other than representations and warranties. In addition, the knowledge of such individual may indicate the Seller's intent in relation to not only the SPA provisions, but also the surrounding circumstances within which such provisions were drafted.
While largely affirming the findings of the trial judge, the ONCA acknowledged that the ONSC drew a problematic factual inference from the Seller's delayed objection to the SLB transaction. Specifically, the inference that the trial judge made did not appropriately consider the fact that the Seller's consent was a condition precedent to the Buyer's sale of a material portion of the target's assets. If a seller is led to believe that its consent will be sought before the buyer sells a material portion of the target's assets, such seller would, in the absence of a request for consent, likely assume that the sale did not trigger the consent provision relating to the earn-out acceleration clause.
The appeal was dismissed, with costs payable to the Buyer. Taken together, the Project Freeway line of cases underscores the exceptional nature of earn-out acceleration remedies, as well as the importance of carefully selecting the 'knowledge holders' of the seller under a share purchase agreement.
