Post-Closing Price Adjustments: Playing With Fire

• Published date: 20 September 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law
• Law Firm: MLT Aikins LLP
• Author: Mr Jason Mohrbutter

The deal has closed and the shares have transferred. However, the agreement notes the possibility of a post-closing price adjustment for adjustments discovered before a deadline, but there is no adjustment formula or mechanism in the agreement. How should this process unfold?

The Saskatchewan Court of Appeal recently considered this question when it upheld a trial decision that found no adjustments were warranted in the case of Niebergal v QHR Technologies Inc., 2020 SKQB 327 (Trial Decision) and 2022 SKCA 85 (Appeal Decision).

QHR and Clinicare

In this case, the purchaser, QHR, issued promissory notes in partial payment for its shares of Clinicare as set out in a share purchase agreement ("SPA"). Following the close, QHR eventually advanced adjustments pursuant to a price adjustment clause ("PAC") to the effect that none of the amounts in the promissory notes remained owing. This amounted to an approximate 20% reduction in share value from the amount negotiated in the SPA (which was based on an agreed base price plus certain assets minus certain liabilities subject to adjustment).

The trial judge interpreted the PAC such that the negotiated share value in the SPA, and consequently the amounts in the promissory notes, remained the same and owing to the sellers without adjustment. The parties tendered a great deal of evidence over the three-week trial in relation to the validity of each of the many adjustments QHR advanced. There was further argument whether the SPA, properly interpreted, allowed for the adjustment of assets in addition to liabilities. However, the trial judge disposed of the issue by concluding the adjustments had not been properly communicated by a deadline set out in the SPA.

The negotiated assets and liabilities were incorporated into schedule C of the SPA. The PAC was contained in a note at the bottom of Schedule C immediately below a list of outstanding liabilities. Apart from that notation set out below, the SPA did not provide a mechanism or formula for adjusting the purchase price payable for the shares:

Any Price Adjustment per Clause 1.1 (c) and 2.2 if made due to underestimating the liabilities set out above shall be made only to the extent that the underestimate is greater than $75,000 and is discovered before 1 February 2010.

Trial Findings and Appellate Approval

The trial judge concluded:

(a) Adjustments were confined to liabilities and did not include assets, as QHR argued. Further, the adjustments had to be "discovered"...