Recent Case Law On Business Acquisition And Buyout Clauses: Say What You Mean And Mean What You Say

Ontario courts have recently continued to maintain their approach to disputes arising from business acquisitions, earnout arrangements and shareholder buyouts. The courts focus on enforcing the agreement as written by the parties and limiting implied terms.

Interpretation: Text, Context and Commercial Sense

The Ontario Court of Appeal in Project Freeway Inc v ABC Technologies Inc.¹ recently decided an appeal from an earnout dispute under a share purchase agreement ("SPA"). The SPA contained a clause accelerating the full earnout whenever the purchaser "sells a material portion of the assets of the Business". Following the purchase, the purchaser entered into a large sale-leaseback transaction ² and a factoring transaction³ with third parties. Both transactions were significant in size. The vendor, therefore, argued that the clause accelerating the full earnout was triggered due to the size/value of the transactions. On the other hand, the purchaser argued that the clause would only be triggered if the transactions impacted earnout payments, not merely because of their size. The trial judge found the term "material portion" to be ambiguous, read it in the context of the factual matrix and commercial purpose, and concluded that it referred to the portion that impacted earnout payments. Having found no palpable or overriding error in the trial judge's decision, the Court of Appeal upheld the trial judge's interpretation.⁴ The Court of Appeal also accepted the trial judge's analysis on commercial absurdity. The trial judge found that it made no commercial sense to accelerate tens of millions in earnout payments in response to transactions (i.e. the sale-leaseback and factoring) that had no effect on the ability of the target companies to hit the contribution margin targets for earnouts.⁵

The Ontario Superior Court of Justice has also adopted a similar interpretive approach in disputes involving closely held businesses. In 1440195 Ontario Inc v 1440194 Ontario Inc. ⁶, two former equal shareholders had a dispute over the proceeds of the sale of their business. At the inception of the business, they owned shares equally. Subsequently, they revised the profit split through a series of amendments to the shareholder agreement. Upon sale of the company, the plaintiff challenged certain provisions of the shareholder agreement while accepting other portions, contending that he had not read the amending agreements before signing and therefore never agreed to the key terms. The court rejected this attempt by the plaintiff to select only favourable contractual provisions, affirmed the binding nature of signed commercial contracts and emphasised that failure to read agreements does not permit a party to avoid them.⁷

Similarly, in Morrison v Gadomski⁸, the court interpreted a share purchase agreement between a deceased shareholder's estate and the surviving shareholder of an equipment business. Two former co‑owners of a small retail business disputed whether a buyout agreement transferred a half‑interest in a business premises or only shares. The parties had operated a small fishing retail business and jointly owned the business property as tenants in common. Upon the death of one of the co-owners, his estate negotiated and received a lump‑sum buyout payment under a share purchase agreement for the deceased's interest in the business, while the surviving co‑owner solely assumed to pay the mortgage and carrying costs of the property. The estate later contended that the SPA dealt only with shares and that an unfulfilled clause about a potential separate agreement of purchase and sale for the property meant that the estate still owned 50% of the property. The court held that this interpretation of the clause would create a commercial absurdity as it would deprive the parties of their intended result as set out in the SPA following the death of the co-owner. Applying a textual, contextual and commercial sense approach, the court found it was the parties' intention for the SPA to cover both shares and the property. The Court therefore declared the survivor sole owner of the property.

In these cases, the courts clearly applied the modern interpretive principles from Sattva ⁹ and Weyerhaeuser ¹⁰ to read the agreements as a whole, having regard to the surrounding circumstances and the commercial context.

Implied Terms and "Industry Practice": a Narrow Gate

These recent decisions also show that the courts are reluctant to imply terms into business sale structures, particularly around valuation, adjustments and conditions. In Zaldin v Goldstein ¹¹, a father and daughter were running an insurance and mutual fund business together (a parent company and its subsidiary) as majority and minority shareholders, respectively. The minority owned 10% of the parent company, while the majority owned 90%. After a breakdown in their relationship, the minority brought an action against the majority for oppression and to assert a right of first refusal with respect to the sale of the business. While the motion was pending, the majority pulled the trigger on a shotgun clause in their shareholders' agreement, offering either to sell the 90% shareholding to the minority or buy her 10% under the reverse shotgun. A share purchase agreement was reached for the minority to purchase the majority's shares. The SPA included a term that the majority would resign from all his positions in the parent company. However, the transaction never closed because the majority failed to obtain the necessary regulatory approval for the resulting change of control of the subsidiary, thereby undermining the minority's ability to secure financing. The majority sought to treat the failure as a rejection of the shotgun offer and therefore exercise his right to purchase the minority shares under a reverse shotgun. The minority urged the Court to imply several terms, including purchase price adjustments, extension of closing date, a termination right if regulatory approvals were not obtained, and the majority's resignation from the subsidiary upon closing. The court held that the majority breached his contractual duty under the shareholder agreement to do all that was required to complete the transfer, and treated her failure to close as an indirect consequence of his breach rather than a distinct default.

The court ultimately granted specific performance of the SPA in favour of the minority and dismissed the majority's attempt to treat the transaction as a failed purchase that entitled him to exercise the reverse shotgun. With respect to the minority's request for implied terms, the court refused to (1) imply "industry standard" price‑adjustment mechanisms into the SPA which the parties intended as a fixed‑price shotgun; (2) extend the closing date; (3) imply a termination right dependent on regulatory approval, and (4) extend the express obligation to resign from positions with the parent company to include an obligation to resign from the subsidiary as well.

Takeaways

Considering these recent decisions, various practical themes emerge for business acquisition and buyout transactions.

• Draft earnout and exit clauses with precision, anticipating how courts will read them in the round, including how triggers relate to the earnout's purpose and how asset sales interact with performance metrics.
• Do not assume courts will import market practice or industry standards. If price adjustments, regulatory approval conditions, specific termination rights or allocation mechanisms matter, they must be clearly spelled out in the agreement.
• Good faith and honest performance are about how a party performs the bargain, not an invitation to rewrite it. The courts use the doctrine of good faith to scrutinize obstructive conduct such as failure to seek regulatory approvals or insistence on new adjustment terms, but the ultimate remedy is to enforce the agreement of the parties, not to craft a new one.

Footnotes

1. 2025 ONCA 855

2. Sale of a large percentage of company's assets but leased and operated sold assets.

3. Sale of company's account receivables to a third party at a discount for cash in hand.

4. Project Freeway, paras. 1–8, 10–15

5. Project Freeway, paras. 9-11, 16–20

6. 2025 ONSC 4420

7. paras. 69–79

8. 2025 ONSC 3365

9. Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53

10. Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007

11. 2025 ONSC 453