The term “sells” seems straightforward. Interpretation of what constituted a sale turned out controversial, however, in the recent case of Project Freeway Inc. v. ABC Technologies Inc., 2025 ONSC 1048 (“Project Freeway”), which involved sale and leaseback (“SLB”) transactions. The case provides insight into how commercial purpose informs courts’ interpretation of contractual provisions.
Nature of the Dispute
The dispute in Project Freeway arose from a share purchase agreement (the “SPA”) between Project Freeway Inc. (“PFI”) and ABC Technologies Inc (“ABC Tech”). The SPA included an earn-out clause, which entitled PFI to receive additional payments based on the financial performance of the acquired business over a specified period. Importantly, the SPA stated that the full earn-out would become immediately payable if ABC Tech “directly or indirectly, sells, transfers or licenses a material portion of the assets of the Business of the Target Companies in one or a series of transactions to any Person other than an Affiliate of the Purachser” without the vendor, PFI’s, consent.
After the transaction closed, ABC Tech entered into SLB transactions with arm’s-length parties, selling the real estate of the acquired companies to third parties and leasing it back. ABC Tech also factored receivables, selling customer accounts to a bank. PFI argued that these actions triggered the earn-out clause, claiming they constituted a sale of a material portion of the acquired business’s assets.
“Material Portion of the Assets”
Justice Steele of the Superior Court of Justice’s Commercial List was tasked with determining whether the SLB and factoring transactions triggered the earn-out clause. The Court’s analysis focused on the interpretation of the term “material portion of the assets” within the SPA. Notably, the SPA explicitly allowed ABC Tech to engage in mergers, amalgamations or other internal reorganizations without triggering the earn-out clause.
The Court emphasized the importance of understanding the contractual language in the context and the parties’ intentions at the time they entered agreement. Justice Steele noted that the SLB transactions and factoring arrangements were typical financing steps that did not impact the acquired business’s operations or its ability to meet the earn-out targets. It also seemed important to Justice Steele that PFI knew ABC Tech intended to enter the SLB transactions before the SPA closed.
Additionally, the Court found that the SLB transactions and factoring arrangements did not affect the “contribution margin” that determined PFI’s entitlement to the earn-out. The business continued to operate as before, with no change in its operational capacity.
Thus, the Court held that a “material” sale in the context of the relevant SPA provision should be interpreted as material to the earn-out, not merely in terms of size or value. Justice Steele reasoned that this aligned with the parties’ intention to allow ABC Tech operational freedom while ensuring the earn-out targets were not compromised.
Not Always Straightforward
Project Freeway reminds us that the implications of contractual provisions are not always captured by a superficial plain reading. The intentions of the parties can be inferred from the commercial context, determined objectively, and the contract as a whole. As a result, a sale is not always a sale in the eyes of the law. What at first might appear to be a straightforward sale instead could be a financial maneuver that does not alter the fundamental nature of the business.
Michael Crampton