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Earn‑outs are a familiar tool in M&A transactions, often helping bridge valuation gaps by tying part of the purchase price to the future performance of the business. But they also generate some of the most common post‑closing disputes, especially around whether certain buyer actions trigger early payment of the remaining earn‑out. 

The Ontario Superior Court of Justice’s 2025 decision¹ and the Court of Appeal’s 2025 confirmation in Project Freeway Inc. v. ABC Technologies Inc.² provide practical guidance on how courts may interpret earn‑out acceleration clauses and the extent to which pre‑closing documents, such as letters of intent (LOIs), can influence that interpretation. See our summary of the case and its key takeaways below.

The dispute

Project Freeway Inc. sold its business to ABC Technologies Inc. under a share purchase agreement (SPA) that included a potential US$26.4 million earn‑out and an acceleration clause requiring immediate payment of any remaining earn‑out if ABC sold a “material portion” of the business’s assets to a non‑affiliate without the seller’s consent. Project Freeway and ABC had, prior to entering into the SPA, entered into a non-binding LOI in respect of the transaction.

After closing, ABC completed two transactions without Project Freeway’s consent: (a) a sale‑leaseback of major operating real estate, and (b) an accounts receivable factoring arrangement. Project Freeway asserted that each transaction triggered automatic acceleration. The trial judge disagreed with Project Freeway, and the Court of Appeal affirmed the trial judge’s decision.

What the court decided

The key issue was the interpretation of “a material portion” of the assets. The courts found the phrase ambiguous and applied a contextual and purpose-based approach, focusing on the economic function of the earn‑out rather than a formal, size‑only trigger.

Because the earn‑out was calculated using contribution‑margin metrics, the courts examined whether the post‑closing transactions impaired the business’s ability to meet those targets. They concluded the transactions did not harm the earn‑out regime, and therefore, acceleration was not engaged in the absence of actual economic prejudice to the seller.

Why the LOI still mattered

Although the SPA contained an entire agreement clause, the court considered the LOI and other surrounding circumstances in interpreting the ambiguous term “material,” serving as a reminder that early deal documents can inform the meaning of later provisions in definitive contracts, particularly where the drafting of definitive contracts is ambiguous.

What this means for M&A transactions

• Earn‑outs are grounded in economic purpose, not formal triggers; acceleration should not be expected as a windfall.
• Vague terms like “material” invite disputes. Courts may interpret “material” in earn out provisions by reference to economic impact on the earn out, not simply quantitative thresholds. If the parties intend size alone to govern, that intention must be explicit.
• Early deal documents influence later interpretation despite standard “entire agreement” clauses. Any intention to deviate from those early documents should be made clear in the SPA.
• Contracts, both preliminary and final, should be drafted precisely. If specific events (such as sale‑leasebacks and receivables factoring) are meant to trigger the earn-out, this should be expressly stated.

Final thoughts

The Project Freeway decisions underscore that earn‑outs function best when the parties share a clear understanding of their economic purpose and draft the mechanics with precision. In practice, this calls for alignment between preliminary documents (such as letters of intent or term sheets) and the definitive agreement, and where the parties intend to deviate from those preliminary documents, an express indication of that departure in the definitive agreement. 

Thoughtful drafting at each stage of the negotiation process remains the most effective way to avoid disputes and preserve the intended economic balance of the deal. The NRF team is available to assist you in this regard.