Anonymised, illustrative composite. A purchase price adjustment nearly inflated by 5.9% because the balance sheet date behind it was chosen for a corporate-approval reason that had nothing to do with how the business actually runs.
At a glance
A buyer agreed to purchase substantially all of the assets of an Ontario garden centre and landscape retailer for $3,200,000, structured around a completion-accounts mechanism: a target net working capital — the peg — agreed at signing, with a true-up payment at closing based on the actual figure. See the net working capital peg and the completion accounts glossary entries for how the mechanism itself works.
Because the transaction was a sale of substantially all of the seller's assets outside the ordinary course of business, it required a shareholder vote under the CBCA. The deal team, needing a fixed reference balance sheet to build the peg from, defaulted to the balance sheet dated to that shareholder resolution — a date chosen for corporate-approval reasons, not because anyone had checked whether it represented a normal month for the business. It fell in January, the retailer's dead season: minimal inventory, minimal receivables, minimal working capital tied up in the business.
Section 189(3) of the CBCA requires that a “sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business” be approved by the shareholders, with every share carrying a vote on the question “whether or not it otherwise carries the right to vote.” That resolution — and the January balance sheet dated to it — became the $420,000 peg.
Closing itself did not occur until April, once the garden centre had begun building spring inventory and receivables ahead of its busiest season. Actual net working capital at closing: $610,000. $610,000 − $420,000 = $190,000 — the true-up amount the completion-accounts mechanism, read literally, would have required the buyer to pay on top of the $3,200,000 headline price. $190,000 ÷ $3,200,000 = 5.9% — not because the business was worth more, but because the peg had been dated to January and the closing balance sheet was dated to April.
Nothing in the CBCA says a working capital peg has to be dated to the shareholder-approval balance sheet — the statute only requires that the approval happen at all. The deal team's own convenience, not any legal requirement, put the two dates on the same document. Once the mismatch was visible, the fix was straightforward: the peg needed to reflect the business's normal operating cycle, not whichever balance sheet happened to exist when the corporate-approval paperwork was signed.
The buyer's diligence team caught the January-to-April gap before the definitive agreement was signed and renegotiated the peg to a trailing-twelve-month average of monthly net working capital — a figure that smooths seasonality rather than freezing it at one point in the cycle. The $190,000 gap disappeared from the deal; the shareholder resolution still happened on its own schedule, entirely separately from the number the peg was built on.
For a related closing-stage dispute over funds held back at the end of the same kind of deal, see an escrow neither side could agree to release, and for the adjustment mechanism itself, the purchase price true-up glossary entry.
Had the mismatch gone uncaught, the buyer would have paid $3,390,000 in total consideration for a business both sides had agreed, at signing, was worth $3,200,000 against a normalized working capital position — a 5.9% premium created entirely by a reference-date accident, with no corresponding increase in what the buyer actually received.
The reference date for the peg had never been chosen by looking at the business's own operating calendar at all — it was chosen because it was the date on a shareholder resolution, a purely administrative artifact of how CBCA approval happened to be documented. Any deal involving a seasonal business is worth a direct question at signing: is the reference balance sheet dated to the business cycle, or to whatever corporate-approval paperwork happened to exist that month?
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