The Ontario Superior Court’s decision in Project Freeway Inc. v. ABC Technologies Inc. (2025 ONSC 1048) provides critical insight into how courts assess earn-out acceleration clauses. The decision highlights the implications for structuring earn-out provisions and reinforces the importance of clearly drafted SPAs that define and document key deal terms with precision.
Background Summary
The case centered on the interpretation of an earn-out acceleration clause within a share purchase agreement (“SPA”).
Under the SPA, the vendor received an upfront base purchase price of USD $165 million, with the potential to earn an additional USD $26.5 million based on the acquired business’ post-close performance. Earn-out performance was measured by a pre-defined “Contribution Margin” concept in the SPA, over three distinct earn-out periods.
The SPA also included an earn-out acceleration clause requiring immediate payment of the remaining earn-out amount if the buyer undertook certain transactions without the vendor’s prior written consent. These triggers included:
- Merging, consolidating, selling, or combining a target company with a non-affiliate, or
- Selling, transferring, or licensing a material portion of the business’ assets to a non-affiliate.
The dispute arose when ABC Technologies executed two post-close financing strategies:
- A sale-leaseback (“SLB”) of the target’s real estate, generating proceeds of $97.9 million (equivalent to over 59% of the base purchase price); and
- An accounts receivable (“A/R”) factoring arrangement that transferred substantially all customer receivables to HSBC for upfront cash.
The vendor argued that these transactions constituted the sale or transfer of a “material portion of the assets” under section 3.10(12)(a) of the SPA, thereby triggering the acceleration clause of the earn-out and requiring immediate payment of the full amount.
The buyer countered that both were ordinary-course financing arrangements, executed without impairing the business’ operations or its ability to meet Contribution Margin targets.
The court ultimately agreed with the buyer, citing that materiality must be assessed in terms of the transaction’s measurable effect on the business’ ability to achieve the earn-out, not simply the dollar value of the assets involved. The court determined that since neither the SLB nor the factoring arrangement affected Contribution Margin, the acceleration clause was not triggered.
This ruling is insightful for financial due diligence (“FDD”) and deal structuring specialists, as it underscores how courts may interpret earn-out mechanics, the definition of materiality, and provides precedent for what may constitute evidence when opining on deal dispute matters.
What This Means for Financial Due Diligence & Deal Structuring
Materiality Should Be Measured By Performance Impact
In Project Freeway, the court held that a $97.9 million SLB and full receivables factoring did not trigger the acceleration clause in the earn-out because they had no operational impact on Contribution Margin. Materiality in this context referred specifically to the ability of a transaction to affect earn-out metrics, rather than its absolute dollar value. FDD specialists must therefore assess whether post-close activities will materially affect the ability to meet earn-out targets and ensure that materiality is clearly defined within the appropriate context in definitive agreements.
Earn-Out Clauses Should Be Operationally Grounded
This decision highlights the importance of linking earn-out and acceleration clauses to measurable, operationally driven financial outcomes such as revenue, gross profit, or EBITDA. Tying contingent payments to metrics that reflect normal-course operating performance, and align with the recast figures produced during FDD, promotes fairness, transparency, and clarity. When earn-out mechanics are not clearly tied to observable and operational financial results, the risk of post-close disputes rises. A well-structured earn-out mechanism minimizes ambiguity and ensures that outcomes remain anchored to genuine operational performance.
Pre-Close Silence Can Undermine Post-Close Claims
The vendor’s leadership was aware of the buyer’s plan to execute an SLB prior to closing, and even facilitated site inspections for real estate diligence. Yet no objection was raised to the SLB until after the first earn-out target was missed. This underscores the importance of documenting known risks, intentions, and counterparty disclosures in diligence files, model sensitivities, and SPA schedules. If the vendor believed the SLB would negatively affect the earn-out, it could have insisted on language clarifying that such a transaction would trigger acceleration or withheld its consent at closing. Conversely, the buyer could have avoided the dispute by negotiating an explicit carve-out confirming that the SLB would not trigger acceleration – a reminder that clarity on both sides can prevent costly litigation.
Courts May Look Beyond the Final SPA
Although the LOI was non-binding and the SPA contained an “entire agreement” clause, the court nonetheless considered the LOI and related pre-SPA exchanges in assessing the parties’ intent. The court treated these background documents as objective evidence of how the parties understood the earn-out provisions and their intent at the time of negotiation. The takeaway is clear: even non-binding documents can shape judicial interpretation. Parties should therefore ensure that LOIs are drafted with enough detail to reflect commercial intent. At the same time, the definitive agreement must eliminate gaps, address all key terms with equal or greater detail than earlier documents, and serve as the final, authoritative record of the parties’ intent. This decision also underlines the value of embedding diligence-driven examples, such as sample calculations or schedules, directly into the SPA to minimize ambiguity and reduce the risk of post-close disputes.
Why Would a Buyer Execute an SLB or A/R Factoring Strategy?
In this dispute, the court ultimately found that neither the post-close SLB nor the A/R factoring program constituted a trigger for the accelerated earn-out payment. However, to many outside the M&A space, these moves might raise questions – why would a buyer enter into such financing arrangements involving key assets right after closing? From an FDD and deal structuring lens, both transactions were textbook capital efficiency plays:
- The SLB Strategy
Selling the target’s real estate portfolio to an arm’s-length third party and leasing it back under 20-year terms, the buyer unlocked $97.9 million in liquidity, equal to over 59% of the total purchase price. Operations continued in the same facilities without disrupting the company’s ability to achieve the Contribution Margin targets that underpinned the earn-out, allowing the buyer to monetize a non-core asset and release trapped equity. - The Factoring Strategy
Factoring A/R converted receivables and smoothed cash flows during a sensitive integration period. This reduced days sales outstanding (DSO) and improved liquidity without requiring equity injections. In capital allocation terms, redeploying equity tied up in real estate and receivables into higher return opportunities (such as automation, product expansion, or integration efforts) improved balance sheet efficiency while leaving Contribution Margin intact. Both strategies reflect legitimate post-close liquidity management, freeing up capital to pursue value creation activities, and do not constitute earn-out manipulation. Accordingly, since the transactions did not impact Contribution Margin, they did not trigger the acceleration clause in the earn-out.
Could This Be the Moment Investors Rethink the Role of Due Diligence?
This ruling suggests that deal participants should expand the role of FDD specialists beyond traditional Quality of Earnings work. By engaging FDD at the LOI stage, during SPA drafting, and through closing and post-closing purchase price adjustment procedures, parties can create value arbitrage and reduce the risk of post-close disputes. Had the parties more clearly defined materiality, negotiated SLB protections or recognized real property as a non-core asset upfront, this dispute may have been avoided. Diligence is not just for confirmatory analysis; it is a strategic tool for shaping earn-out logic, deal structuring, closing mechanisms, and legal protections.
Structuring Matters: Drafting Lessons from the SPA
While the buyer ultimately prevailed, the SPA excerpts featured in the decision highlight opportunities where clearer drafting could have reduced ambiguity and mitigated litigation risk.
Note: The observations below are based solely on the publicly available excerpts from the SPA included in the court’s published decision. We have not reviewed the full SPA, and our commentary is limited to the provisions excerpted in Appendix A.
Refine Earn-Out Acceleration Triggers to Distinguish Between Liquidity Optimization and Operational Harm
The vendors argued that the SLB and A/R factoring arrangements were designed to circumvent the earn-out, while the buyer characterized them as legitimate post-close liquidity strategies. The SPA’s language, however, failed to clearly distinguish between operating actions that could impair Contribution Margin and capital structure decisions that do not. Precision on this point would have preserved the economic intent and reduced the likelihood of dispute.
This could be addressed by adding express exclusions (or ‘carve-outs’) for non-operating transactions that do not impair the ability to achieve the earn-out, such as SLBs, factoring programs, or intercompany refinancing.
Be Deliberate About Visibility, Not Just Access
While the vendors were not formally notified of the SLB or A/R factoring transactions post-close, the court noted that they were aware of the intent to pursue the SLB and that third parties were conducting due diligence on the real estate prior to signing the SPA. This weakens any claim of deliberate concealment, but still leaves room for perceived misalignment. For future deals, incorporating formal notification or information-sharing protocols pre-SPA execution and during the earn-out period can help prevent misunderstandings, especially when transactions involve multiple overlapping workstreams.
Contribution Margin Calculation Methodology
Although Contribution Margin is defined in detail in Schedule A, the agreement would have benefited from a worked example or stub calculation, a common source of friction in post-close disputes. As highlighted in prior Kalos LLP presentations and training, a practical enhancement is to include a pro forma calculation schedule as an exhibit, illustrating how the earn-out metric is derived from pre-close financials. FDD teams play a key role in preparing and validating this Schedule.
The SPA should also explicitly define the treatment of non-recurring items, management fees, overhead allocations, and intra-group charges, all of which can materially affect how performance is measured, and earn-outs are enforced. FDD teams can assist in identifying these items during due diligence and ensure they are reflected in the agreement.
Review Earn-Out Language for Ambiguity in Key Terms
Earn-out provisions frequently depend on terms that, if undefined, invite post-close disputes. Here, the phrase “material portion of the assets” proved central, but ambiguous. To mitigate this risk, FDD specialists and legal counsel must collaborate to ensure critical terms are explicitly defined and tied to the commercial intent revealed through diligence.
Bottom Line
The key lesson from this court decision is that definitive agreements must capture the intended commercial terms with clarity and precision. The court interpreted “materiality” in light of both context and commercial intent, focusing on the economic substance – namely, whether the transactions in question actually impaired the business’ ability to achieve its earn-out performance metrics.
This ruling reminds deal specialists that earn-out mechanics must be verifiable, defensible, and performance-linked, with as much clarity as possible. At Kalos LLP, we partner with clients and legal advisors to ensure FDD, financial modelling, closing mechanisms, and post-close financial analysis move in lockstep – from LOI through post-close monitoring.
Sources:
- Project Freeway Inc v. ABC Technologies Inc.: 2025 ONSC 1048, 2025 CarswellOnt 2312, 2025 A.C.W.S. 796, 58 B.L.R. (6th) 296
Other Articles on the Matter:
- Fasken Publication: Rare Earnout Ruling Gives Guidance (and Raises Questions) for M&A | Knowledge | Fasken
- Bennett Jones Publication: ONSC Denies Claim for Acceleration of Earn-Out Payment | Bennett Jones
- McCarthy Publication: Rare Earn-out Decision Provides Guidance for M&A Transactions