Project Freeway

Parties in M&A transactions have long been able to rely on “entire agreement” clauses to ensure that only the terms specifically agreed to in a definitive and executed purchase agreement will govern their relationship. However, “entire agreement” clauses may no longer be as definitive as traditionally conceived.

In Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855, the Court of Appeal for Ontario (“ONCA”) found that, notwithstanding the inclusion of a customary entire agreement clause, the terms of a non-binding letter of intent (“LOI”) could be used to inform findings of the parties’ intent as it related to a share purchase agreement.

The facts of the case are as follows: ABC Technologies Inc. (“ABC”) purchased various corporations (the “Target Companies”) owned by Project Freeway Inc. (“Freeway”). In addition to the purchase price, the purchase agreement included an earn-out clause as additional consideration to Freeway. Payments would be made under the earn-out based on the performance of the Target Companies. Payment of the earn-out could be accelerated and become due immediately if ABC disposed of a “material” portion of the assets of the Target Companies. This issue arose post-closing when the purchaser entered into a sale and leaseback agreement for the Target Companies’ assets and a factoring agreement with third parties for the Target Companies’ accounts receivable without Freeway’s consent.

Interpretation Disagreements

The issue in dispute was how the term “material” was defined and interpreted in the context of triggering the acceleration clause. On one side, Freeway argued that “material” meant that a material portion of the assets of the business had been disposed of, while ABC took the position that the subsequent transactions did not materially impair the financial performance of the Target Companies or their ability to service the earn-out as described in the purchase agreement. Therefore, they had not breached the terms of the purchase agreement. The courts held that, utilizing the purchase agreement and the LOI together, “materiality” meant any impairment to the earn-out’s milestones.

Why This Ruling Matters

What made this decision remarkable is that the courts used the terms of the non-binding LOI (entered into well in advance of executing the SPA) to aid in interpreting the terms of the SPA. In general, courts look to uphold the business terms entered into by parties in their contracts. The ONCA held that the LOI was permissible as an interpretive aid for the trial judge, in addition to considering the totality of the circumstances.

The court took this as a sign of the general intent of the parties in the absence of clarity in the purchase agreement. This decision may signal the beginning of a change in how courts interpret the terms of M&A transactions, and specifically the “entire agreement” clause. Buyers and sellers have long been able to rely on the concept that any non-binding agreements, usually in the form of LOIs or a memorandum of understanding (“MOU”), will not be considered if a purchase agreement is litigated. Instead, this ruling demonstrates that an LOI or MOU may be used as an aid to interpret the intentions of the parties if a purchase agreement is ambiguous.

Freeway Rolls On: Things to Consider Going Forward

LOIs and MOUs serve a significant purpose in dealmaking, as they allow parties in the early stages of a deal to understand the general position of their counterpart. The function of the LOI being non-binding is that it is meant to get parties aligned with an agreement in principle before the bulk of the work begins, subject to change with diligence.

The “entire agreement” clauses that are generally included in purchase agreements are an acknowledgement by both parties that these preliminary agreements are not to be considered once a definitive agreement has been reached.

Buyers and sellers, as well as their lawyers, will need to be aware going forward that non-binding LOIs and MOUs may carry more weight than they have in the past if purchase agreements contain ambiguity. This may result in negotiation documents being used as an aid for interpretation by a court.

KMB offers assistance to business buyers and sellers through our dedicated M&A team. If you have any questions about how this ruling may affect the purchase or sale of your business, please do not hesitate to contact our team.