Written By Drew Broughton, Kevin Zhou, Jesse Fontaine and Jake Mandrusiak

The Ontario Superior Court of Justice recently released its decision in Project Freeway Inc. v ABC Technologies Inc. (2025 ONSC 1048), addressing whether certain post-closing transactions triggered the acceleration of an earn-out under a share purchase agreement (SPA). The Court's interpretation of the SPA, including the earn-out acceleration clause and the meaning of the word "material", provides important guidance for businesses negotiating and enforcing earn-out provisions.

Key Facts

In December 2022, ABC Technologies Inc. (Buyer) and Project Freeway Inc. (Seller) entered into a share purchase agreement (SPA) for the sale of the Windsor Mold Group Companies (the Target Companies) in exchange for cash consideration at closing, along with a post-closing earn-out based on the Target Companies achieving certain financial performance targets. The SPA stipulated that the full earn-out would become payable if Buyer, directly or indirectly, sold, transferred or licensed a "material portion" of the assets of the Target Companies without the consent of Seller during the earn-out period.

After closing, Buyer completed two transactions without obtaining Seller's consent:

• a sale and leaseback (SLB) transaction, whereby the lands and buildings of the Target Companies were sold to an arm's-length purchaser and leased back to the Target Companies, and
• a factoring arrangement (Factoring Arrangement), under which the Target Companies' receivables were sold to the Buyer's existing lender.

Following the delivery of the earn-out statement for the first earn-out period, Seller claimed that a "material portion" of the assets of the Target Companies had been sold without its consent, and therefore the SLB and the Factoring Arrangement triggered the earn-out acceleration clause. Buyer disagreed and argued that these transactions were ordinary-course financing steps that did not affect the Target Companies' operational or financial performance.

Court's Analysis

Contextual Interpretation of "Material"

The Court's interpretation of the term "material" was central to its decision.

The Court rejected Seller's argument that any transaction involving assets of significant value (for example, the SLB transaction involving approximately 59 percent of the purchase price under the SPA) would automatically trigger the earn-out acceleration clause. The Court also rejected Seller's position that the SPA established a bright-line test, or a "complete code," for determining acceleration of the earn-out.

Instead, the Court applied a contextual and purposive interpretation, finding that a bright-line test would be inconsistent with the SPA's overall purpose and the parties' intentions.

Buyer took the position that the word "material" referred to transactions that would impact the calculation of the Target Companies' financial performance and the earn-out itself, as opposed to the size or value of the transactions. The Court agreed, concluding that "material" should be interpreted within the operational and financial context of the business, not solely by reference to asset value.

Operational Impact

Buyer submitted that the SLB and the Factoring Arrangement were ordinary-course financing steps that did not impact business operations. The Court agreed with this analysis, emphasizing that

• the only effect of the SLB was the change in legal ownership of the sites
• the only effect of the Factoring Arrangement was the timing of realization on receivables

After closing, the acquired business continued to operate at the same location, with the same equipment, employees and customers as the day before closing.

These factors supported the Court's conclusion that the SLB and the Factoring Arrangement did not impact the ability of the acquired business to achieve the financial performance targets set out in the earn-out provisions. The Court viewed the purpose of the earn-out regime as striking a balance between Buyer's right to operational freedom in managing the acquired business, and Seller's right to be protected from intentional interference with its ability to receive the earn-out payments. Since the transactions did not materially impact operations, the Court found that they could not be considered material in the context of the earn-out regime and, as a result, did not trigger the acceleration of earn-out under the SPA.

Pre-Closing Knowledge

Additionally, the Court also considered several contextual factors in reaching its decision, namely:

• Seller was aware of Buyer's intention to undertake the SLB before closing
• Seller did not object to the SLB until it was notified that the earn-out payment for the first earn-out period would not be payable
• before closing, senior management of Seller facilitated site inspection visits by the entity which ultimately purchased and leased back the Target Companies' real estate assets

Given the Seller's pre-closing knowledge and the sophistication of both parties (each acting with the assistance of counsel), the Court concluded that it would be commercially absurd for the SLB to trigger the earn-out payment when objections could have been raised before closing.

Key Takeaways for Businesses

This case highlights several important considerations for businesses:

• Drafting Acceleration Clauses Carefully: If parties intend for certain types of transactions to trigger earn-out acceleration, they should be clearly specified in the definitive agreement. Undefined terms like "materiality" can lead to uncertainty and litigation risk.
• Contextual Interpretation: Courts are reluctant to apply rigid rules to the interpretation of significant contractual rights such as earn-out acceleration, and may interpret terms like "material" within the specific context of the agreement, focusing on the practical impact on the parties' obligations. The Court reaffirmed that interpretative principles allow consideration of the genesis, purpose and commercial context of the agreement.
• Objectivity Precludes Commercial Absurdity: Courts interpret agreements objectively in accordance with commercial principles and business sense, while seeking to avoid commercially absurd results. For example, it would be commercially absurd to allow a purchaser to undertake mergers, amalgamations or other internal reorganizations, but not to undertake ordinary-course financing transactions.
• Practical Realities and Ownership: In assessing whether post-closing transactions breach earn-out covenants, courts consider whether the core business operations remain consistent, including business locations, equipment used in the business operations, and the identity of customers and employees. A simple change in asset ownership alone, without operational disruption, will not automatically entitle a seller to immediate payment of the full earn-out amount.
• Inaction Implies Acquiescence: Parties' knowledge and actions (or inactions) can impact the Court's assessment of future arguments. Sellers should carefully consider the downstream financial impacts of any disclosed transactions and raise concerns before closing.
• High Bar for Earn-Out Acceleration: The threshold for establishing materiality in the earn-out context is high. The inclusion of an earn-out acceleration clause does not necessarily increase the chance of a post-closing windfall for sellers.