Earn-out information and audit rights

The CRA’s archived bulletin on shares sold subject to an earnout describes a sale where the proceeds are at least partially determined by reference to future earnings generated by the underlying assets of the corporation. If the buyer holds the records after closing, information and audit rights are the contract terms that can give the seller access to check the figures. See what happens if an earn-out target is missed and the earn-out entry.

What the courts add

In C.M. Callow Inc. v. Zollinger, the Supreme Court of Canada said the duty of honest performance is not to be equated with a positive obligation of disclosure, though parties must not lie or otherwise knowingly mislead each other about matters directly linked to performance. In Wastech, the Court said good faith requires a party to exercise a contractual discretion in a manner consistent with the purposes for which it was granted, and that the duty is breached only where the discretion is exercised unreasonably, in a manner unconnected to the purposes underlying it. These are common-law decisions; this entry does not cover Quebec’s civil-law rules.

What to check

• Which statements the buyer must deliver, and when
• Whether the seller or an accountant may inspect the records behind them, and on what notice
• How a disagreement over the calculation is resolved, and who pays for it
• Whether the buyer’s freedom to run the business is limited while the earn-out runs