The Ontario Court of Appeal has dismissed a seller’s appeal of a trial judge’s interpretation of a share purchase agreement provision, which addressed one of three potential trigger events to accelerate the buyers’ payment of the maximum earn-out.
In Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855, the respondent purchasers wanted to buy certain target companies owned by the appellant seller. The purchasers agreed to pay the seller earn-outs of up to US$26,461,000 as part of the purchase consideration.
The share purchase agreement entitled the seller to receive the earn-out payments at the end of each earn-out period based on the target companies’ performance.
However, s. 3.10(12) identified three trigger events that would require the purchasers to pay the entire maximum earn-out at once. One trigger event in s. 3.10(12)(a) concerned the purchasers’ sale of a material portion of the target companies’ business assets to a non-affiliated purchaser, without the seller’s prior written consent.
Soon after the purchase, without the seller’s prior written consent, the purchasers sold a large percentage of the target companies’ assets to a non-affiliated purchaser via a sale leaseback arrangement that allowed the purchasers to keep leasing and operating the assets. It also factored the target companies’ accounts receivable, sold at a discount for an immediate infusion of funds.
The seller sued the purchasers for contractual breach. The seller alleged that the sale leaseback arrangement triggered the earn-out payments, with the factoring agreement constituting an independent trigger.
Last Feb. 19, Justice Jana Steele of the Ontario Superior Court of Justice dismissed the seller’s action upon finding no breach of the share purchase agreement. The trial judge ruled that a transaction should be material to the operation of the earn-out to trigger accelerated earn-out payments under s. 3.10(12)(a).
The judge explained that neither the sale leaseback nor the factoring agreement impacted the businesses’ ability to meet the financial performance targets used to calculate earn-out payments.
The judge acknowledged her obligation to read the written agreement’s text as a whole and give the words their ordinary and grammatical meaning. She deemed s. 3.10(12)(a) ambiguous and preferred the purchasers’ interpretation, which was:
- supported by the contract’s factual matrix
- commercially reasonable
- consistent with the purpose of the contract in its entirety
- aligned with the seller’s conduct before bringing the action
On appeal, the seller argued that the judge made a legal error in misinterpreting s. 3.10(12)(a) and committed palpable and overriding factual errors concerning the sale leaseback’s and factoring agreement’s impacts on its ability to obtain the earn-out payments.
Interpretation upheld
The Court of Appeal for Ontario dismissed the seller’s appeal and ordered it to pay the purchasers $40,000 in costs, including the applicable taxes and disbursements.
The appeal court found that the trial judge:
- applied the construction principles cited by the seller
- made an interpretation reasonably supported by the language of s. 3.10(12)(a)
- adopted a practical and commonsense approach, not an overly technical approach, to the interpretive exercise
- did not misapprehend the parties’ language or the need to read it in context
- made no errors in her conclusions
The appeal court agreed with the judge that the term ‘material portion’ in s. 3.10(12)(a) had an ordinary and grammatical meaning that was ambiguous, not clear, because a question arose regarding when a ‘portion’ would be ‘material.’ The appeal court noted that a ‘portion’ sold might be ‘material’ due to asset size or the sale’s impact on the earn-out payments.