ONCA Deals A Blow To Deal Certainty In M&A

Overview and Key Takeaways

The Ontario Court of Appeal (ONCA) has affirmed that the terms of an earlier, non-binding letter of intent (LOI) may be admissible in a dispute under the subsequent purchase agreement even where the agreement expressly bars reference to the LOI.¹

Our key practical takeaways include:

• The rulings impact deal certainty in M&A and arguably overlook the critical role played by "entire agreement" clauses in M&A.
• Dealmakers and their advisors may want to limit the scope of detailed legal provisions in an LOI – even when non-binding – unless they have been carefully considered and negotiated.
• Another key question for dealmakers results: should the substance of "entire agreement" clauses be revised to account for the rulings? Put differently, is new boilerplate needed in pursuit of deal certainty?

For our analysis of the ruling of the Ontario Superior Court of Justice (ONSC) giving rise to the appeal, see here. For more Fasken M&A thought leadership, visit our Capital Markets and M&A hub and subscribe.

The Dispute in Brief: Earnout Acceleration Meets Materiality

The share purchase agreement (SPA) in Project Freeway included an earnout. At issue was what meaning to give to a "materiality" qualifier in the earnout's acceleration clause. The clause stated acceleration would occur if the buyer sold a "material portion of the assets" of the target business without the seller's consent. The seller claimed this had occurred by way of a sale and leaseback arrangement involving land and buildings of the target for proceeds of US$97.9 million.

The seller argued "materiality" meant significant in terms of value, which it claimed had been met by the financial magnitude of the sale and leaseback. The buyer took the position that a sale was only "material" if it impacted the target's post-closing performance and thus the earnout. It argued that the sale and leaseback allowed the target to continue its operations as it had prior to the transaction, so it was not material for purposes of the earnout acceleration clause.

The ONSC preferred the buyer's interpretation, and in part relied on the brief discussion of earnout acceleration in a non-binding LOI the parties had negotiated nine weeks before signing the definitive SPA. Specifically, the ONSC relied on language in the LOI indicating that "materiality" for the purpose of the acceleration clause meant important in connection with the earnout's milestones.

Preliminary Deal Documents: Fair Game Under the Factual Matrix

The seller argued the court was precluded from considering the LOI by the SPA's "entire agreement" clause, which expressly referenced the LOI.² The ONSC disagreed on the basis that the LOI's terms were "objective evidence of the parties' intentions at the time of the definitive agreement." In other words, the ONSC held that, notwithstanding the "entire agreement" clause, the LOI remained fair game as part of the SPA's factual matrix.

The ONCA affirmed the ONSC on the point. It held that the ONSC's "reasoning did not offend" the "entire agreement" cause. It stated that the trial judge "used the LOI as an interpretive aid to identify what the agreement between the parties in the SPA was, so that she could apply the entire agreement in resolving the issue before her," and that "the principles that are reflected in the LOI is an issue of fact that attracts deference." Much like the ONSC, the ONCA noted that a "consistent theme" of the LOI was that the buyer should not act to impair the earnout.

The Importance of Deal Certainty: "Entire Agreement" Clauses in M&A

It is arguable the rulings in Project Freeway overlook the critical role played by LOIs and "entire agreement" clauses in M&A.

M&A transactions are typically highly complex and involve parties putting significant value at risk. They typically involve months of negotiations, due diligence and back and forth drafting. Multiple different work streams are often simultaneously at work, including among business executives and financial and legal advisors.

To facilitate this process, the parties will often negotiate a preliminary, non-binding document. In Project Freeway this took the form of an LOI. Other examples are term sheets and MOUs (i.e., a memorandum of understanding). This is typically done to ensure the parties are aligned on key deal terms before dedicating the time and resources needed to try to reach a definitive purchase agreement. Such preliminary agreements are almost always non-binding. Among other things, this reflects the fact that (1) the buyer will learn more about the prospective target as its due diligence deepens, (2) the balance of power (i.e., negotiating leverage) between the parties may shift, sometimes significantly, and (3) horse-trading on deal points will inevitably occur.

Should the parties execute a definitive purchase agreement, they invariably include an "entire agreement" clause. They do so to protect deal certainty and in recognition of the extensive negotiations that preceded the definitive agreement. They acknowledge that it was only upon comprehensively settling the terms of a definitive agreement that they were finally aligned. By extension, they acknowledge that everything that preceded the definitive agreement must be ignored. They take care, as did the parties in Project Freeway, to expressly agree that any preliminary deal documents such as term sheets, LOIs or MOUs do not reflect the terms of their ultimate bargain. Simply put, they want to ensure their deal lives in one well-defined place. They also want to ensure that, should a dispute under the definitive agreement arise, the other party can't go "cherry picking" amongst the materials that preceded the agreement in search of something that supports their position.

"Entire agreement" clauses thus echo a traditional rule of contractual interpretation: that evidence of negotiations is inadmissible as evidence of the subsequent objective intention of the parties in their definitive agreement.³ This rule recognizes that (1) it is only the final document which records the parties' actual agreement, and (2) evidence of negotiations adds (A) uncertainty to contractual interpretation disputes, and (B) to the cost of legal advice and litigation.⁴

Public Policy Arguments in Support of "Entire Agreement" Clauses

It is unclear from the rulings whether any of the foregoing points were raised by the sellers or otherwise considered by the courts. Three additional points therefore require highlighting.

First, the rulings include an inherent contradiction. In consulting the LOI in the attempt to determine the parties' objective intent regarding the "materiality" qualifier in the earnout, the courts disregarded the parties' plainly stated objective intent per the "entire agreement" clause that reference to the LOI is inappropriate.

Second, the courts overruled the "entire agreement" clause in favour of an unreliable exercise. The courts assumed that the parties' intent around the earnout at the time of the LOI carried over to the definitive SPA nine weeks later, without change. This assumption is suspect: had the parties' intent regarding the earnout remained the same at the time of the SPA as it was at the time of the LOI, would they not have repeated the text of the LOI in the SPA? The fact that they did not indicates that their bargain had changed, not that it stayed the same.

Third, as our second point illustrates, and as caselaw supporting the traditional rule that evidence of negotiations is inadmissible in contractual interpretation disputes argues,⁵ admitting evidence of negotiations injects significant uncertainty into contractual relations. It decreases the confidence contractual counterparties can have in the terms of their written agreement. It means the full terms will always be subject to evidentiary discovery and the view of that wider context by the particular trier of fact. It can only increase the cost of legal advice and litigation regarding contractual matters. It can also only increase the chance of speculative contractual litigation. As such, disregarding an "entire agreement" clause is undesirable on public policy grounds.

Concluding Comments: Is a New Approach Needed in Pursuit of Deal Certainty?

The ONCA has previously recognized that "entire agreement" clauses are intended to "lift and distill the parties' bargain from the muck of the negotiations."⁶ The rulings in Project Freeway effectively mean that the muck is never truly behind M&A parties, even when those parties are highly sophisticated.⁷

Three principal issues result for dealmakers and their advisors:

• Whether it may now be prudent to limit the scope of detailed legal provisions in an LOI – even a non-binding one – unless they have been carefully considered and negotiated.
• Whether new boilerplate may now be prudent to account for the rulings and in pursuit of deal certainty. We explored two options in our article on the ONSC ruling.
• While the ONCA ruling is only binding in Ontario, it is likely to be considered, and may be found persuasive, in other Canadian jurisdictions.

That said, further context may provide some comfort to dealmakers. As we observed in our bulletin on the ONSC ruling, the court noted, and was clearly influenced by, the following factors:

• The acquired business had not achieved the first tranche of the earnout payment.
• The financing transactions in question had no adverse impact on the acquired business's performance.
• The seller had been aware of the likelihood of one of the financing transactions pre-closing but only objected to them when it learned that the first earnout target had not been met.

In other words, the ONSC appears influenced by the fact the seller was attempting to capitalize on a financing transaction that had no impact on the business' performance to collect an earnout that was not otherwise going to be paid. Where similar factors are absent in a dispute, a court may, notwithstanding the ONCA's ruling, be less willing to consult an earlier deal document precluded by an "entire agreement' clause.

Footnotes

1. Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855 (CanLII), affirming Project Freeway Inc v. ABC Technologies Inc., 2025 ONSC 1048 (CanLII). https:/www.canlii.org/en/on/onca/doc/2025/2025onca855/2025onca855.html? searchUrlHash=AAAAAQAaIlByb2plY3QgRnJlZXdheSIgLzMgIkFCQyIAAAAAAQ

2. The clause read: "This Agreement, the Disclosure Letter and the other Transaction Documents and the other agreements, documents and other instruments contemplated to be delivered by the Parties pursuant hereto, constitute the entire agreement among the Parties with respect to the transactions contemplated by this Agreement, and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties with respect to such transaction, including the Letter of Intent, except for the Non-Disclosure Agreement, which shall terminate and have no further force and effect upon the Closing..."

3. See G. Hall, Canadian Contractual Interpretation Law (4th Ed.) (LexisNexis, 2020) [Hall] at page 425: "Canadian courts have consistently followed the English courts to hold that the factual matrix does not include evidence of the negotiations leading up to a final agreement."

4. See the House of Lords in Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.) and Chartbrook Ltd. v. Persimmon Homes Ltd., [2009] 4 All E.R. 677, [2009] UKHL 38, discussed by Hall at pages 423-425.

5. See the House of Lords in Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.) and Chartbrook Ltd. v. Persimmon Homes Ltd., [2009] 4 All E.R. 677, [2009] UKHL 38.

6. 10443204 Canada Inc. v. 2701835 Ontario Inc., 2022 ONCA 745 (CanLII) at para. 24, quoting Soboczynski v. Beauchamp, 2015 ONCA 282 (CanLII). These disputes involved acquisition transactions. https:/www.canlii.org/en/on/onca/doc/2022/2022onca745/2022onca745.html? resultId=b8ee7bcec1224278b6cfcdbdcf99a59e&searchId=2025-12 15T09:49:34:286/a0cb78db8f3e4b71b1786f1f391145bc

7. The rulings in Project Freeway relied on Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2021 ONCA 592 (CanLII) at para. 62. This dispute arose under a "Gaming Revenue Sharing and Financial Agreement" and not under an acquisition transaction. https:/www.canlii.org/en/on/onca/doc/2021/2021onca592/2021onca592.html? resultId=531b4930f278441b84e8f5840680673f&searchId=2025-12 17T11:14:45:379/7afcbec9326f42be9823331cec589d25

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