COURT FILE NO.: CV-24-716865-00CL DATE: 20250219 SUPERIOR COURT OF JUSTICE – ONTARIO [Commercial List] RE: PROJECT FREEWAY INC. Applicant AND: ABC TECHNOLOGIES INC. and ABC TECHNOLOGIES HOLDINGS INC. Respondents BEFORE: Justice Jana Steele COUNSEL: Robert B. Cohen, Ted Frankel, Meghan Rourke , for the Applicant Brad Berg, Eric Leinveer, Julia Schabas , for the Respondents HEARD: December 16, 2024 REASONS FOR JUDGMENT Overview [ 1 ] The applicant, Project Freeway Inc. (“Project Freeway” or the “Vendor”), sold shares of a business to the respondent, ABC Technologies Inc. (“ABC” or the “Purchaser”), for cash consideration plus an earn out. The earn-out was to be paid over three years depending on the performance of the acquired business. The earn-out clause also contains a trigger which accelerates the payment of the total potential earn-out in certain circumstances. The issue on this application involves the interpretation of the share purchase agreement and whether the acceleration of the total potential earn-out has been triggered. [ 2 ] The clause in question provides that the full earn-out shall immediately become payable if the Purchaser “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 Purchaser.” [ 3 ] Following the close of the transaction, the Purchaser entered into Sale Leaseback (“SLB”) transactions with the acquired real property and started factoring receivables of the acquired business. After the Purchaser informed the Vendor that the contribution margin target for the first earn-out payment had not been attained, the Vendor enquired about the SLB transactions (of which the Vendor was already aware). The Purchaser acknowledges that these transactions were done with arm’s length parties. However, the Purchaser takes the position that these are normal course financing transactions and not the type of transaction that would trigger the acceleration of the total potential earn-out. [ 4 ] For the reasons set out below I have determined that neither the SLB transactions nor the factoring arrangement triggered the clause in the SPA that would require the immediate payment by the Purchaser of the full earn-out payment. Background [ 5 ] In May 2022, representatives from the Windsor Mold Group Companies (the “Target Companies”) and the Purchaser entered into negotiations regarding the proposed sale of 100% of the shares of the Target Companies to the Purchaser. [ 6 ] On October 14, 2022, the Target Companies and the Purchaser, among others, entered into a non-binding letter of intent which described the terms of the share deal pursuant to which the Purchaser would acquire the shares of the Target Companies. [ 7 ] The Vendor was incorporated on December 19, 2022 for the purpose of acting as the seller of the shares of the Target Companies under the share purchase agreement. [ 8 ] The Purchaser, a major automotive systems and components manufacturer, bought the shares of the Target Companies under the share purchase agreement. [ 9 ] ABC Technologies Holdings Inc. (the “Purchaser Guarantor”) is the parent company of the Purchaser and the guarantor of the Purchaser’s obligations under the share purchase agreement. [ 10 ] On or about December 21, 2022, the purchaser, ABC, and the Purchaser Guarantor entered into a share purchase agreement with, the vendor, Project Freeway, among others (the “SPA”). [ 11 ] Excerpts from the SPA are attached as Appendix A. [ 12 ] Under the SPA, ABC purchased shares from Project Freeway in the Target Companies, carrying on the business of manufacturing plastic injection tooling and molded products (the “Business”) at various locations in Canada, the United States and Mexico. [ 13 ] The SPA provides that the compensation the Purchaser must pay the Vendor for the shares of the Target Companies consists of (i) the base purchase price of USD$165,000,000 on Closing; and (ii) up to an additional USD$26,461,000 (the “Full Earn-Out Payment”) in three tranches based on the financial performance of the Business of all the Target Companies (except one) over the following two years. The financial performance of the Target Companies is calculated in accordance with the definition of “Contribution Margin” in the SPA. [ 14 ] The SPA also contains a provision that accelerates the earn-out making the Full Earn-Out Payment immediately due in certain circumstances. Among other things, if the Purchaser sells a material portion of the assets of the Business of the Target Companies to arm’s length parties without the Vendor’s prior written consent, the earn-out is accelerated. [ 15 ] The Purchaser engaged in the following two transactions after Closing (during the First Earn-Out Period): a. The Sale Leaseback (or SLB) Transactions: Effective April 18, 2023, a series of sale and leaseback transactions were done with certain arm’s length entities (“Carey Landlords”) controlled by W.P. Carey Limited. Under these transactions, the Purchaser sold the lands and buildings of the Target Companies (the “WP Properties”) to the Carey Landlords for gross proceeds of approximately $97.9 million. The Carey Landlords leased back the lands and buildings to the Purchaser. b. The Factoring Arrangement: The Purchaser sold to HSBC Bank essentially all of the Target Companies’ customer accounts. The Purchaser had existing agreements with HSBC when it entered into the SPA. Effective March 2, 2023 Joinder Agreements were done between the Purchaser and HSBC to add the newly acquired customer accounts to the Purchaser’s pre-existing Canadian and American Factoring Agreements (collectively, the “Factoring Agreements”). [ 16 ] There was no prior written consent provided by the Vendor in respect of the Purchaser’s SLB transactions and Factoring Arrangement. [ 17 ] In February and March 2023, prior to the Purchaser entering into the SLB transactions and prior to the Closing of the SPA, there were site visits done by WP Carey in connection with the SLB transactions. The site visits were facilitated by David Mastonardi, the President and CEO of Windsor Mold Inc. at the time. Douglas Bierer, the president and sole director of Project Freeway, was also aware in early 2023 and prior to the closing of the SPA transaction that the Purchaser was considering entering into the Sale and Leaseback transactions. [ 18 ] On or about March 1, 2023, the transactions contemplated under the SPA closed. [ 19 ] On or about May 12, 2023, ABC Technologies (a publicly traded company at the time) issued a press release, which was posted on SEDAR. The press release discloses the acquisition of the shares of WMG Technologies Holdings Inc. and its subsidiaries (“WMGT”) pursuant to the SPA. In the press release, ABC Technologies also stated that it entered into a sale and leaseback transaction for gross proceeds of $97.9 million on April 18, 2023 in connection with ABC’s acquisition of WMGT. [ 20 ] The First Earn-Out Period expired on or about August 31, 2023. [ 21 ] In November 2023, the Purchaser provided Project Freeway with the First Earn-Out Statement, which illustrates that the Contribution Target Margin was not met. [ 22 ] On or about December 11, 2023, Project Freeway’s counsel emailed ABC’s counsel requesting further information on the SLB transactions. [ 23 ] Counsel for the Purchaser responded to Project Freeway’s letter on or about December 14, 2023, stating that “in response to your concerns regarding the sale leaseback transaction, we interpret “material portion of the assets of the Business” in section 3.10(12)(a) of the SPA to address assets [of the Business] which would be material to the operation of the earn-out. The sale leaseback transaction resulted in new legal ownership of the sites but did not impact the occupancy or use of the sites by WMG or the operation of the WMG business and had no impact on WMG’s failure to meet its specified targets for the first earn-out period.” [ 24 ] On February 13, 2024, Project Freeway’s counsel responded to the December 14, 2023 letter indicating that they disagreed with the Purchaser’s interpretation of section 3.10(12)(a) of the SPA. The letter states that “[p]roperly constructed, there is little or no question that – as a result of the [SLB] Transaction – Section 3.10(12)(a) mandates payment of the entire Earn-Out Payment for the remaining partial and full Earn-Out Periods, to [Project Freeway], immediately.” [ 25 ] On or about February 9, 2024, Project Freeway submitted an Earn-Out Objection Statement in respect of the First Earn-Out Period. [ 26 ] Project Freeway did not mention or complain about the Factoring Arrangement until it was included in Mr. Bierer’s affidavit in May 2024. Issue [ 27 ] The only issue before the Court on this application is whether the sale of the WP Properties pursuant to the SLB transactions and/or the sale of the Target Companies’ customer agreements pursuant to the Factoring Arrangement triggered the Full Earn-Out Payment under section 3.10(12)(a) of the SPA. Analysis [ 28 ] Project Freeway brings the application under Rules 14.05(3) (d) and (h) of the Rules of Civil Procedure , R.R.O. 1990, Reg. 194, for the determination of rights that depend on the interpretation of certain provisions of the SPA. [ 29 ] Project Freeway is of the view that the Full Earn-Out Payment was triggered under section 3.10(12)(a) of the SPA when the Purchaser entered into the Sale Leaseback transactions and/or when the Purchaser sold the Target Companies’ customer agreements under the Factoring Arrangement. The Purchaser takes the position that the Full Earn-Out Payment was not triggered by either of these transactions. [ 30 ] A sale leaseback transaction occurs when a company sells its commercial real estate to an investor for cash and enters into a long-term lease with the new property owner. The leases entered into by ABC with the Carey Landlords are 20-year leases, with 10-year renewal terms. [ 31 ] A factoring transaction involves a company selling its accounts receivable to a third party in exchange for advance payment. ABC describes it as a way for the company to get money faster from the sale of parts. [ 32 ] ABC’s unchallenged evidence in respect of both the SLB transactions and its Factoring Arrangement, was that they had no impact on the Target Companies’ performance or the calculation of the Contribution Margin for the earn-out regime. [ 33 ] Section 3.10(12)(a) of the SPA provides: If, prior to the earlier of (i) the end of the applicable Earn-Out Period, and (ii) the payment of the aggregate Earn-Out Amount, any of the following shall occur without the prior written consent of the Vendor, the entire Earn-Out Payment for the remaining partial and full Earn-Out Periods shall immediately become due and payable to the Vendor: The Purchaser (A) merges, consolidates, sells or otherwise combines any Target Company with, to and/or into any Person other than an Affiliate of the Purchaser; or (B) 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 Purchaser. For greater certainty, the Parties agree that the foregoing clause shall not limit the Purchaser’s right to complete mergers, amalgamations or other internal reorganizations with or among the WM Group and Affiliates of the Purchaser, and shall specifically exclude a change of control of the Purchaser Guarantor; [Emphasis added.] [ 34 ] The parties differ on their interpretation of the above section of the SPA. Both parties cite Sattva Capital Corp. v. Creston Moly Corp. , 2015 SCC 53 , [2015] 3 S.C.R. 419, but have different interpretations of the outcome here when the principles of Sattva are applied. The Supreme Court of Canada in Sattva, at paras. 47 to 50, stated that when interpreting a contract, the contract must be read as a whole “giving the words used their ordinary and grammatical meaning”. Further, a “practical, common-sense approach” must be employed, and the court must try to “ascertain the objective intent of the parties”: [47] ... [T]he interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” ( Jesuit Fathers of Upper Canada v Guardian Insurance Co. of Canada , 2006 SCC 21 , [2006] S.C.R. 744, at para. 27 , per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways ), 2010 SCC 4 , [2010] 1 S.C.R. 69, at paras. 64-65 , per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning: No contracts are made in a vacuum: there is always a setting in which they have to be placed. ... In s commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. ( Reardon Smith Line , at p. 574, per Lord Wilberforce) [48] The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement [citations omitted]. As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society , [1998] 1 All E.R. 98 (H.L.) : The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. [p. 115] [49] As to the second development, the historical approach to contractual interpretation does not fit well with the definition of a pure question of law identified in Housen and Southam . Questions of law “are questions about what the correct legal test is” ( Southam , at para. 35). Yet in contractual interpretation, the goal of the exercise is to ascertain the objective intent of the parties – a fact-specific goal – through the application of legal principles of interpretation. This appears closer to a question of mixed fact and law, defined in Housen as “applying a legal standard to a set of facts” (para. 26; see also Southam , at para. 35). However, some courts have questioned whether this definition, which was developed in the context of a negligence action, can be readily applied to questions of contractual interpretation, and suggest that contractual interpretation is primarily a legal affair (see for example Bell Canada , at para. 25). [50] With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to words of the written contract, considered in light of the factual matrix. [ 35 ] It is also important that a contract be interpreted in a way that “accords with sound business principles” and avoids “a commercially absurd result:” Weyerhaeuser Company Limited v. Ontario (Attorney General) , 2017 ONCA 1007 , 77 B.L.R. (5 th ) 175, at para. 65 . [ 36 ] In Weyerhaeuser , the Court of Appeal provided the following summary of the principles of contractual interpretation, at para. 65: The general principles guiding adjudicators about “how” to interpret a commercial contract were summarized in Sattva , at para. 47, and by this court in two 2007 decisions – Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust , 2007 ONCA 205 , 85 O.R. (3d) 254, at para. 24 , and Drumbell v. The Regional Group of Companies Inc. , 2007 ONCA 59 , 85 O.R. (3d) 616, at paras. 52-56 . When interpreting a contract, an adjudicator should: i. Determine the intention of the parties in accordance with the language they have used in the written document, based upon the “cardinal presumption” that they have intended what they have said; ii. Read the text of the written agreement as a whole, giving the words used their ordinary and grammatical meaning, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective; iii. Read the contract in the context of the surrounding circumstances known to the parties at the time of the formation of the contract. The surrounding circumstances, or factual matrix, include facts that were known or reasonably capable or being known by the parties when they entered into the written agreement, such as facts concerning the genesis of the agreement, its purpose, and the commercial context in which the agreement was made. However, the factual matrix cannot include evidence about the subjective intention of the parties; and iv. Read the text in a fashion that accords with sound commercial principles and good business sense, avoiding a commercially absurd result, objectively assessed. [ 37 ] The Vendor states that section 3.10(12)(a) of the SPA is a “complete code” with respect to the acceleration of the Earn-Out payments. The Vendor’s position is that the parties agreed to clear and unambiguous contractual language in section 3.10(12)(a). The Vendor states that the contracting parties are presumed to intend the legal consequences of their words and that the court should not read in an additional “materiality” component. [ 38 ] The Vendor submit that on a plain reading of section 3.10(12)(a)(B), if the Purchaser sells or transfers a material portion of the assets of the Business of the Target Companies to any arm’s length person, the Full Earn-Out Payment becomes due and payable to the Vendor. The Vendor says that the Sale and Leaseback transactions and the Factoring Arrangement fall within the language of this provision and therefore the Full Earn-Out Payment ought to be paid. The value of the Sale and Leaseback transaction is significant (about $97.9 million, or approximately 59% of the purchase price under the SPA). [ 39 ] The Vendor says that section 3.10(12)(a) provides a “bright line test” for determining when the Full Earn-Out Payment is to be paid and captures the bargain struck by the parties to the transaction. [ 40 ] The Vendor also contrasts the language in section 3.10(12)(b), which contemplates that the Purchaser shall not breach certain covenants “in a manner which materially impairs the ability of the Vendor Shareholders to earn Earn-Out Payments” with the preceding section 3.10(12)(a). The Vendor submits that given the proximity of the terms and the sophistication of the parties it would be improper to read in “materially impairs the ability of the Vendor Shareholders to earn Earn-Out Payments” into section 3.10(12)(a). The Vendor notes that the absence of words in some areas of a contract, while present in others, is presumed to have meaning: Pass Creek Enterprises Ltd. v. Kootenay Custom Log Sort Ltd. , 2003 BCCA 580 , at para. 17 . [ 41 ] In Bhatnagar v. Cresco Labs Inc. , 2022 ONSC 1745 , at para. 40 , Kimmel J. noted that: One of the cardinal rules of contract interpretation is that the parties are presumed to have intended what they included, and what they did not include, in the contract. Contractual certainty depends on this. [...] [ 42 ] The Purchaser does not dispute that both the Sale Leaseback Transactions and the Factoring Arrangement were sales to arm’s length third parties without the written consent of the Vendor within the meaning of section 3.10(12) of the SPA. [ 43 ] The Purchaser’s position is that the SLB transactions and Factoring Arrangement should be viewed as (i) non-substantive; (ii) ordinary financing steps; (iii) publicly disclosed for months without complaint by the Vendor; and that (iv) there is no evidence of any impact on the business other than to generate extra cash for the business. [ 44 ] The Purchaser submits that the Vendor should not be entitled to a windfall. The other two tranches of the earn-out are still outstanding and to be determined based on the performance of the Business. [ 45 ] The Purchaser says that the Vendor knew about these transactions before they occurred. Among other things, the SLB transaction was publicly disclosed in the April 2023 press release. The Vendor did not complain about the SLB transactions until after it was notified that the Contribution Margins in respect of the first earn-out had not been met. Further, senior management of the Vendor was advised of the Purchaser’s intention to enter into the SLB transactions and participated in the Sale Leaseback transactions process by, among other things, facilitating site inspection visits for WP Carey. [ 46 ] The Purchaser agrees that the premises where auto parts are made is important, as are the customer accounts. However, the Purchaser submits that this does not address what is meant by “material” within the meaning of section 3.10(12). The Purchaser’s position is that “material” must have a meaning behind it – specifically, it has to impact the calculation of the Contribution Margin and Earn-Out. The Purchaser submits that “material” cannot simply mean big or expensive; it must mean something within the context of the Earn-Out. [ 47 ] The Purchaser asks the Court to examine the purpose of the provision in light of the SPA as a whole. [ 48 ] The Purchaser submits that section 3.10 of the SPA balances various interests. On the one hand, the Vendor has the opportunity to receive the Earn-Out assuming the Contribution Margins are met. On the other hand, the Purchaser is to have operational freedom to run the business as it sees fit as long as it does not impair the Contribution Margin and Earn-Out. [ 49 ] The Purchaser further submits that the court should have regard to the non-binding Letter of Intent (“LOI”) entered into between the parties on October 14, 2022. The Purchaser agrees that action cannot be taken under the LOI; however, it submits that it is still important to have regard to objective evidence of the parties at the time of the definitive agreement. The Purchaser points to para. 58 of Sattva , where the Supreme Court of Canada states: The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract ( King , at paras. 66 and 70), that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting. Subject to these requirements and the parole evidence rule discussed below, this includes, in the words of Lord Hoffmann, “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man” ( Investors Compensation Scheme , at p. 114). Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact. [ 50 ] The Vendor submits that the Entire Agreement clause precludes consideration of the LOI. However, as noted by the Court of Appeal in Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation , 2021 ONCA 592 , at para. 62 , “[a]n entire agreement clause alone does not prevent a court from considering admissible evidence of the surrounding circumstances at the time of contract formation.” [ 51 ] I agree that regard may be had to the LOI for the purpose of ascertaining background facts at the time the SPA was entered into. [ 52 ] The evidence of John Loehr, the Chief Transformation Officer at ABC Technologies, was that when the parties executed the LOI they had not negotiated the final terms of the Earn-Out. However, they had agreed on certain principles, which were contained in Exhibit A to the LOI, including certain covenants related to the Earn-Out: • Buyer agrees (a) not to take any action to intentionally impair Seller’s ability to earn the Earn-Out Payments, including agreeing not to divert resources, customers, contracts with customers, or direct business opportunities generated by the Business away from the Business in a manner that materially impairs the ability to achieve the Contribution Margin Target(s) and (b) not to act in bad faith to intentionally impair the Seller’s ability to earn any Earn-Out Payments, provided that, (i) the Buyer shall have no obligation or duty (fiduciary or otherwise), other than as provided in clauses (a) and (b) above and its duty to exercise its contractual discretion in good faith, to protect, achieve and maximize any Earn-Out Payment, and (ii) the Buyer shall not be prohibited in any way from closing, merging or consolidating any of the acquired facilities of the Business with any of the Buyer or its Affiliates facilities (so long as the Buyer continues to account for and include the applicable Contribution Margin from the purchase contracts/customer business in the earn-out payment calculations). • Buyer agrees to maintain an adequate amount of working capital for the Business consistent with the Buyer’s other business units (provided that, for greater certainty, the Buyer shall not be prohibited in any way from closing, merging or consolidating any of the acquired facilities of the Business with any of the Buyer or its Affiliates facilities, so long as the Buyer continues to account for an include the applicable Contribution Margin from the purchase contracts/customer business in the earn-out payment calculations). • Acceleration of the Earn-Out Payment(s) for business transactions – sale of Business (to exclude a change of control of Parent) or failure to follow the operating covenants in the definitive purchase agreement (which will be consistent with those detailed herein) in a manner which materially impairs ability of Seller to earn Earn-Out Payments, will result in the acceleration of the Earn-Out Payment(s) for the applicable Earn-Out Period(s) that has not been completed at the relevant time of such event. [ 53 ] The covenants in the LOI accord with the Purchaser’s interpretation of the SPA. Specifically, the word “material” in the context of section 3.10(12)(a) should be interpreted as material to the Earn-Out. That is, the Purchaser ought to be free to run the Business as it sees fit, provided that it does not negatively impact the Contribution Margin or Earn-Out. In the context of the earn-out provision, the prohibition on selling or transferring a “material portion of the assets of the Business” logically refers to the sale or transfer of the assets of the Business that would be material to the Earn-Out. [ 54 ] The fact that the parties contemplated that the Purchaser should be able to operate the Business as it sees fit, provided that it does not negatively impact the Contribution Margin or Earn-Out, is supported by language in sections 3.10(12)(a) and 3.10(13). Specifically, in section 3.10(13)(a), the SPA provides that the Purchaser “shall not be prohibited in any way from closing, merging or consolidating any of the Acquired Facilities with any of the Purchaser’s or its Affiliates’ facilities” as long as the Contribution Margin of the product line is tracked to the next facility. In section 3.10(12)(a), the “for greater certainty” language provides that the parties agree that a limitation on the ability of the Purchaser to sell a material portion of the assets of the business “shall not limit the Purchaser’s right to complete mergers, amalgamations or other internal reorganizations with or among the WM Group and Affiliates of the Purchaser and shall specifically exclude a change of control of the Purchaser Guarantor.” It would be commercially absurd if the Purchaser could complete mergers and other internal reorganizations, or close and consolidate facilities without Project Freeway’s consent, but could not engage in ordinary course financing transactions. [ 55 ] Further, the fact that the Vendor was aware that the Purchaser intended to enter into the SLB transactions prior to the close of the SPA supports the interpretation propounded by the Purchaser. The evidence of David Mastronardi, the President and Chief Executive Officer of Windsor Mold Inc. at the time of the transaction, was that “while [he] was aware of the SLB transaction and assisted ABC in facilitating WP Carey’s diligence for the SLB transaction, [he] did not view the SLB as a transaction of significant concern.” Mr. Bierer was also aware that ABC was considering entering into an SBL transaction with WP Carey prior to the close of the transaction. It is notable that “Knowledge” of the vendor parties under the SPA “refers to the actual knowledge of ... Douglas Bierer and ... David Mastronardi [among 3 others].” The key players negotiating the deal knew about the intent of the Purchaser to enter into the SLB transactions. If there was a concern that the full earn-out may be triggered when the Purchaser proceeded with these ordinary course financing transactions, presumably one of the sophisticated parties or counsel would have raised it. [ 56 ] I agree with the submission of the Purchaser that the SLB transactions and the factoring arrangement are ordinary course financing steps that did not impact the operation of the business. Following the close of the SLB transactions, and the close of the factoring agreements, the acquired business continued to operate in the same place, with the same equipment, employees, and customers as the day prior to the close of these financing transactions. The only thing that changed under the SLB transactions was the legal ownership of the sites. The only thing that changed under the factoring arrangement was that the Purchaser was able to realize more quickly on its receivables. I agree with the Purchaser, and the record supports, that the SLB transactions and factoring arrangement would not impact whether the Contribution Margin Target was attained during the relevant earn-out period. Because the SLB transactions and the factoring arrangement do not impact the ability of the Business to hit the Contribution Margin targets, it is difficult to see how they could be “material” within the meaning of section 3.10(12). The Earn-Out regime must have a purpose to it, which as noted earlier, is a balance between providing the Purchaser with the operational freedom to run the business as it sees fit as long as it does not impair the Contribution Margin and earn-out. [ 57 ] As noted in Sattva , at para. 49, “the goal of the exercise [of contractual interpretation] is to ascertain the objective intent of the parties.” When I consider all the circumstances, including the LOI terms (objective evidence of the parties’ intentions at the time of the definitive agreement), the purpose of the earn-out provision in the SPA, and the fact that the key principals at the Vendor were aware of the Purchaser’s intent to enter into SLB transactions, I am satisfied that the word “material” in section 3.10(12)(a) of the SPA means material to or within the context of the earn-out regime. Adopting the interpretation propounded by Project Freeway would result in a significant windfall to Project Freeway where there was a shortfall in the first Contribution Margin, which was not caused or impacted by the SLB transactions and/or the Factoring Arrangement. [ 58 ] Accordingly, I am satisfied that the SLB transactions and the Factoring Arrangement did not trigger the Full Earn-Out Payment. [ 59 ] Project Freeway shall pay ABC’s costs fixed in the amount of $300,000. Justice Jana Steele Date: February 19, 2025 COURT FILE NO.: CV-24-716865-00CL DATE: 20250219 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: PROJECT FREEWAY INC. Applicant AND: ABC TECHNOLOGIES INC. and ABC TECHNOLOGIES HOLDINGS INC. Respondents REASONS FOR JUDGMENT Justice Jana Steele Released: February 19, 2025 APPENDIX A EXCERPTS FROM THE SHARE PURCHASE AGREEMENT Section 1.1 Defined Terms “Business” means the business as currently carried on by the Target Companies, being the manufacturing, engineering, sale, research and development of, among other things, plastic injection tooling and plastic injection molded products (but does not include the Excluded Assets). “Disclosure Letter” means the disclosure letter dated as of the date of this Agreement and delivered by the Vendor Parties to the Purchaser with this Agreement. “Letter of Intent” means the letter of intent dated October 14, 2022 between the Purchaser and the Predecessor Vendor Shareholders. Section 1.6 Knowledge Where any representation or warranty contained in this Agreement is qualified by reference to the knowledge of the Vendor Parties, it refers to the actual knowledge of (x) Douglas Bierer; and (y) David Mastronardi, Peter Wasylyk, Emily Tyler and Elizabeth Musyj; in each case, after due inquiry of their direct reports, without personal liability on the part of any of them. Section 3.10 Earn-Out Amount. (1) For the purposes of this Section 3.10: (a) “Earn-Out Accounting Principles” means: i. The accounting principles used to calculate the representative calculation set forth in Section A and those listed in Sections B and C of Exhibit D; ii. To the extent not addressed in (i) and only to the extent consistent with IFRS, the accounting principles, policies, practices and procedures used in the preparation of the Audited Financial Statements; and iii. To the extent not addressed in (i) and (ii), IFRS, and for the avoidance of doubt, in the event of any inconsistency or conflict between clauses (i), (ii) and/or (iii), clause (i) shall take precedence over clauses (ii) and (iii) and clause (ii) shall take precedence over clause (iii). (b) “Contribution Margin” means Gross Margin plus Fixed Costs. Contribution Margin shall be calculated as the sum of the individual operating results of all the Earn-Out Acquired Facilities for an Earn-out Period. (c) “Earn-Out Acquired Facilities” means the Acquired Facilities, other than: (i) the Saline Facility (the operating results of which have been excluded in the calculation of the Contribution Margin Targets and will be excluded from the Contribution Margin used to calculate the Earn-Out Payments); (ii) those Acquired Facilities which have been shut down, merged or combined by the Purchaser (other than the Saline Facility) following Closing which results shall be tracked into any successor facility so that such results are included in the calculation of the Contribution Margin; and (iii) for greater certainty, facilities acquired after Closing. (d) “Earn-Out Amount” means the aggregate amount of Earn-Out Payments up to USD$26,461,000, calculated pursuant this Section 3.10 provided that if the Earn-out Amount is a negative amount, it shall be deemed to be nil. (e) “Earn-Out Periods” means the following: i. the period beginning on the Closing Date and ending on the 6-month anniversary of Closing (the “First Earn-Out Period” ); ii. the 6-month period beginning on the first day following the end of the First Earn-Out Period and ending on the 1-year anniversary of Closing Date (the “Second Earn-Out Period” ); and iii. the 12-month period beginning on the first day following the end of the Second Earn-Out Period and ending on the 2-year anniversary of Closing Date (the “Third Earn-Out Period” ). (f) “Earn-Out Term” means 24 calendar months from the Closing Date. (g) “Fixed Costs” means insurance, property taxes, depreciation, and amortization, only to the extent any such costs were deducted from sales in the Gross Margin. (h) “Gross Margin” means sales less material less direct labour and less manufacturing expenses (inclusive of indirect labour). (i) “Saline Facility” means the land and premises known municipally as 1294 Beach Ct., in the City of Saline, in the State of Michigan. (j) The Parties agree that (i) definitions of each component term in Contribution Margin and (ii) the calculation of Contribution Margin shall be determined in accordance with the Earn-Out Accounting Principles. (2) “Contribution Margin Targets” means i. For the First Earn-Out Period: USD$29,547,000; ii. For the Second Earn-Out Period: USD$28,320,000; and iii. For the Third Earn-Out Period: USD$60,483,000. (3) “Earn-Out Payments” means the amounts payable as follows: a) In respect of the First Earn-Out Period, the amount based on the Contribution Margin during the First Earn-Out Period, up to USD$10,000,000; b) In respect of the Second Earn-Out Period, the amount based on the Contribution Margin during the Second Earn-Out Period, up to USD$10,000,000; and c) In respect of the Third Earn-Out Period, the amount based on the Contribution Margin during the Third Earn-Out Period, up to USD$6,461,000 The above Earn-Out Payments shall be subject to the payment of a decreased amount based on scaling of Contribution Margin Target (on the pro rata basis set forth below) and a subsequent increase based on the application of the catch-up provision (as provided below); provided that in no circumstance shall the total aggregate amount of the Earn-Out Payments exceed USD$26,461,000. (4) The Earn-Out Payments shall be calculated as follows: a) To the extent that the (i) Contribution Margin for the applicable Earn-Out Period equals or exceeds the Contribution Margin Target for such Earn-Out Period or (ii) equals at least the lower end of the percentage set forth in Section 3.10(4)(b), the Earn-Out Payment (in the case of (i)) or (as applicable) a proportion of such Earn-Out Payment (in the case of (ii)), for such Earn-Out Period, shall be paid by the Purchaser to the Vendor. b) The Earn-Out Payments shall be scaled at between (i) 80% and 100% of the Contribution Margin Target for the First Earn-Out Period and (ii) 85% and 100% of the Contribution Margin Targets for each of the Second Earn-Out Period and the Third Earn-Out Period, so that the Vendor shall receive a pro rata payment on a linear basis (for example and for illustrative purposes only, if 90% of the Contribution Margin Target is achieved in an Earn-Out Period, 90% of the applicable Earn-Out Payment shall be paid) if (A) in respect of the First Earn-Out Period, the actual Contribution Margin is from 80% to 100% of the Contribution Margin Target for the First Earn-Out Period and (B) in respect of the Second Earn-Out Period and the Third Earn-Out Period, the actual Contribution Margin is from 85% to 100% of the applicable Contribution Margin Target for either or both of such Second Earn-Out Period or Third Earn-Out Period. (5) Intentionally deleted. (6) If a Contribution Margin Target is exceeded during any Earn-Out Period, other than the First Earn-Out Period (such excess amount the “Contribution Margin Excess” ), then (a) the Contribution Margin Excess shall be added to a shortfall (if there is any) of the Contribution Margin, at the sole discretion of the Vendor, in the prior Earn-Out Period(s) (first to the immediately preceding Earn-Out Period and then to the earlier Earn-Out Period) up to, but not exceeding the Contribution Margin Target for such Earn-Out Period, and (b) the Contribution Margin for such prior Earn-Out Period(s) will be recalculated to include the Contribution Margin Excess and any additional Earn-Out Payment shall be paid, within ten (10) Business Days, to the Vendor equal to the difference between the Earn-Out Payment actually paid or payable without including the Contribution Margin Excess and the Earn-Out Payment payable including the Contribution Margin Excess. (7) Within ninety (90) days following the end of each Earn-Out Period, the Purchase shall deliver to the Vendor a written statement (the “Earn-Out Statement” ) setting forth the Purchaser’s calculation of the Contribution Margin for such Earn-Out Period and any resulting Earn-Out Payment. (8) If the Vendor has any objections to the Earn-Out Statement then it shall deliver to the Purchaser a written statement (an “Earn-Out Objection Statement” ) setting forth, in reasonable detail: (a) its disputes or objections to the Earn-Out Statement; and (b) its proposed alternative calculation of the Contribution Margin and the amount of the applicable Earn-Out Amount. If an Earn-Out Objection Statement is not delivered to the Purchaser within ninety (90) days after receipt of the Earn-Out Statement, then the Earn-Out Statement as originally delivered by the Purchaser shall be final, binding and non-appealable by the Parties. If an Earn-Out Objection Statement is timely delivered, then the Purchaser and the Vendor shall negotiate in good faith to resolve such dispute, but, without prejudice to the Parties’ rights pursuant to Article 11 to any other remedies hereunder during the thirty (30) days after the receipt of the Earn-Out Objection Statement. In the event that a Party makes a claim under Article 11 in connection with such dispute, the thirty (30) day period to seek a final resolution of the dispute shall be tooled for the period of time that the Party is pursuing such indemnification claim. In circumstances where the Vendor and Purchaser do not reach a final resolution within thirty (30) days after the delivery of the Earn-Out Objection Statement, the Vendor and the Purchaser shall submit their respective calculations of the Contribution Margin and the Earn-Out Amount, along with supporting information (including any Finally Resolved claim under Article 11, which shall be incorporated into the determination of the Independent Accountant), to the Independent Accountant to resolve in accordance with the procedure set forth in Section 3.5(4) (with any costs fees and expenses to be treated in accordance with Section 3.5(7)) mutatis mutandis . (9) During the period of time from the delivery of the Earn-Out Statement until such time as the Earn-Out Statement is finalized in accordance with Section 3.10(8), the Purchaser shall provide access to the Vendor and its Representatives, upon reasonable request by the Vendor to the Purchaser, during normal business hours, to all work papers of the Target Companies, accounting books and records of the Target Companies (including the Books and Records of the Target Companies) and the appropriate personnel at the Target Companies who had responsibility for the preparation of the Earn-Out Statement, in each case, subject to receipt of a customary confidentiality undertaking and access letters. (10) The Purchaser shall pay the applicable Earn-Out Payment to the Vendor as follows: (a) within ten (10) Business Days of delivering the Earn-Out Statement to the Vendor, the Purchaser shall pay any Earn-Out Payment reflected on such Earn-Out Statement; and (b) in respect of any portion of the Earn-Out Statement that is subject to any Earn-Out Objection Statement, within ten (10) Business Days after the date on which the Contribution Margin (and corresponding amount of the Earn-Out Payment) becomes final and binding (however determined pursuant to this Section 3.10). (11) Each Earn-Out Payment (including any recalculated portion of any Earn-Out Payment determined in accordance with Section 3.10(6)) shall be paid to the Vendor by wire transfer of immediately available funds to the account(s) designated by the Vendor in writing. (12) If, prior to the earlier of (i) the end of the applicable Earn-Out Period, and (ii) the payment of the aggregate Earn-Out Amount, any of the following shall occur without the prior written consent of the Vendor, the entire Earn-Out Payment for the remaining partial and full Earn-Out Periods shall immediately become due and payable to the Vendor: a) The Purchaser (A) merges, consolidates, sells or otherwise combines any Target Company with, to and/or into any Person other than an Affiliate of the Purchaser; or (B) 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 Purchaser. For greater certainty, the Parties agree that the foregoing clause shall not limit the Purchaser’s right to complete mergers, amalgamations or other internal reorganizations with or among the WM Group and Affiliates of the Purchaser, and shall specifically exclude a change of control of the Purchaser Guarantor; b) The Purchaser breaches any of the covenants in Section 3.10(3) in a manner which materially impairs the ability of the Vendor Shareholders to earn Earn-Out Payments; or c) (i) an order is made or an effective resolution is passed for the winding-up of the Purchaser Guarantor, or (ii) the Purchaser Guarantor, on its own behalf makes an assignment for the benefit of its creditors, (iii) the Purchaser Guarantor is declared or adjudged bankrupt pursuant to, makes an authorized assignment under, or if a custodian, trustee or receiver is appointed under the Bankruptcy and Insolvency Act (Canada) or the Companies’ Creditors Arrangement Act (Canada), (iv) a compromise or arrangement is proposed by the Purchaser Guarantor to creditors or any class of creditors, (v) a receiver, receiver-manager or other officer with like powers is appointed, or if an encumbrancer will take possession of the property, of the Purchaser Guarantor pursuant to the Bankruptcy and Insolvency Act (Canada) or the Companies’ Creditors Arrangement Act (Canada), unless, in each case, prior to any such resolution, order, declaration, adjudging, assignment, proposal or appointment appropriate arrangement mutually agreed to by the Parties, acting reasonably, have been made to secure the payment of the amounts payable to the Vendor pursuant to this Section 3.10(2). (13) During the Earn-Out Term: a) The Purchaser covenants and agrees: (i) not to take any action to intentionally impair the Vendor’s ability to earn the Earn-Out Payments with such action, including, diverting resources, customers, or contracts with such customers, or directing business opportunities generated by the Business, away from the Business in a manner that materially impairs the ability to achieve the Contribution Margin Target(s) and (ii) not to act in bad faith to intentionally impair the Vendor’s ability to earn any Earn-Out Payments; provided that, (A) the Purchaser shall have no obligation or duty (fiduciary or otherwise) to the Vendor or the Vendor Shareholders, other than (x) as provided in clauses (i) and (ii) above and (y) its duty to exercise its contractual discretion in good faith to protect, achieve and maximize any Earn-Out Payment and (B) the Purchaser shall not be prohibited in any way from closing, merging or consolidating any of the Acquired Facilities with any of the Purchaser’s or its Affiliates’ facilities (so long as the Purchaser continues to account for an include the applicable Contribution Margin from the purchase contracts/customer business of the Earn-Out Acquired Facilities in the Earn-Out Payment calculations). b) The Purchaser covenants and agrees to maintain an adequate amount of working capital for the Business consistent with the Purchaser’s other business units (provided that, for greater certainty, the Purchaser shall not be prohibited in any way from closing, merging or consolidating any of the Acquired Facilities with any of the Purchaser’s or its Affiliates’ facilities, so long as the Purchaser continues to account for and include the applicable Contribution Margin from the purchase contracts/customer business of the Earn-Out Acquired Facilities in the Earn-Out Payments calculations). c) For certainty, the Purchaser and its Affiliates are permitted to have (including by way of merger, amalgamation, acquisition or investment) other business or strategic relationship or ventures that are or may be competitive with the Business and to pursue and engage in such other business and shall not be prohibited in any way from manufacturing, marketing, selling or distributing products or services of other businesses that may compete with the Business. The Purchaser shall not be obligated to inform any Vendor Party of any opportunity, relationship or investment in any such other business or to present any such opportunity, relationship or investment in the Acquired Facilities. d) Notwithstanding any provision hereof, Purchaser may take action or make changes to the Business that would materially impair the Vendor Shareholders’ ability to achieve any of the Earn-Out Payments if the appropriate Contribution Margin Target(s) are adjusted to take into consideration the changes as mutually agreed in writing in advance of such changes by the Vendor and the Purchaser. e) The Purchaser covenants and agrees to: i. Provide the Vendor with individual operating results of all the Earn-Out Acquired Facilities (other than those that haven combined, merged or shut down) prepared in accordance with the Earn-Out Accounting Principles, which show the tracking of the Earn-Out Amount per six-month period, 90 days after each 6-month period during the Earn-Out Term, so the Vendor can track the actual Contribution Margin achieved per applicable six-month period; ii. Maintain separate Books and Records for the Business in which it will accurately record all financial transactions in respect of the WM Group or business units, as applicable, in accordance with IFRS; iii. Maintain a financial record-keeping system that enables the Purchaser to separately account for the items of revenue and expense for the Business necessary to calculate the Contribution Margin and any resulting Earn-Out Payments; iv. Generate separate consolidated financial statements for the Business prepared in accordance with IFRS to allow the Contribution Margin to be calculated every 6 months; and v. Provide the Vendor with written notice in advance of any actions, order or (to the knowledge of the Purchaser) threatened actions or orders set forth in Section 3.10(12), provided, with respect to Section 3.10(12)(a), such notice shall be subject to any applicable confidentiality obligations agreed to by Purchaser or its Affiliates in connection with such transaction.... f) The Purchaser covenants and agrees to comply with Sections B and C of Exhibit D. (14) The Parties acknowledge and agree that the right to receive the Earn-Out Amount, if any, pursuant to this Agreement is an integral part of the total consideration for the Purchased Shares and it is reasonable to assume that the Earn-Out Amount relates to underlying goodwill, the value of which cannot reasonably be expected to be agreed upon by the Vendor and Purchaser at the Closing Date. Section 14.11 Entire Agreement. 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 pursuant to Section 5.3.
minicounsel