Anonymised, illustrative composite. A locked-box share purchase, a daily ticker on the fixed price, and the one price mechanic in this hub where the statute that actually governs it is the same one that trips up blended-payment mortgages.
At a glance
A private equity buyer agreed to acquire 100% of the shares of an Ontario specialty-manufacturing business on a locked-box basis: the equity purchase price was fixed at $14,200,000 by reference to a balance sheet dated March 31, with closing expected roughly five months later once financing and a customer-consent process were complete. As is standard in a locked-box structure, the agreement added a daily equity ticker to compensate the seller for the time value of delivering the company’s equity value on an earlier date than the money actually changed hands. The clause, drafted by the seller’s counsel from a precedent that had never been checked against this exact statute, read: “the Purchase Price shall be increased by an amount equal to 0.0192% of the Fixed Equity Value per day, accruing from the Locked Box Date to the Closing Date.” Both sides understood 0.0192% a day to be, in substance, about 7% a year. Nothing in the agreement said so.
Six weeks into the interim period, the target’s largest customer — 14% of revenue — gave notice that it was consolidating its supply chain and would not renew. The loss was disclosed promptly and in good faith; it was ordinary course and well short of a material adverse change under the agreement’s own carve-outs, so the deal closed on schedule at the fixed price plus five months of accrued ticker. It was the buyer’s incoming general counsel, reviewing the closing mechanics for an unrelated reason two months after closing, who noticed the ticker clause had never stated an annual rate — only a daily one.
At 0.0192% a day for 153 days (March 31 to August 31), the ticker added $417,000 to the purchase price — the 7% annualised return both sides had actually negotiated. Over the same five months, the customer loss took an estimated $620,000 off run-rate EBITDA relative to the figures the locked-box price was built on. Neither number, on its own numbers, is what this file turns on.
Section 4 of the Interest Act, R.S.C. 1985, c. I-15, provides: “except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.” Section 5 adds the remedy: a sum paid on account of interest not chargeable under section 4 “may be recovered back or deducted from any principal or interest payable under the contract.”
The section is not confined to mortgages or even to loans in the conventional sense — it is triggered by any written contract that states a sub-annual rate on principal money without also stating the annual equivalent. Ontario courts have applied it outside residential lending to commercial, non-consumer credit arrangements: in Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONSC 7286, the court found charges calculated on a sub-annual basis in commercial loan documents to be interest within the meaning of section 4, and reduced the effective rate across the arrangement to 5% per annum for want of a stated annual equivalent.
Whether a locked-box ticker is “interest” within section 4 has not been tested in a reported Canadian decision on these exact facts — no case applying it to an M&A locked-box mechanism specifically was found. But the statute does not ask whether the parties called it interest; it asks whether an amount is payable, under a written contract, on account of principal money, at a rate stated for a period of less than a year. A locked-box ticker is, functionally, exactly that: the $14,200,000 fixed equity value is the principal money the seller is owed and has not yet been paid, and the ticker is the additional amount payable because payment is delayed — the same economic function as interest on a deferred purchase-price note, which courts have not hesitated to bring within section 4. On that reading, this ticker, stated only as “0.0192% per day” with no annual-equivalent statement anywhere in the agreement, was recoverable at only 5% per annum, not the 7% actually negotiated.
At 5% for the same 153 days, the ticker should have been $298,000, not $417,000 — a $119,000 overpayment recoverable under section 5, regardless of what either side had actually intended to negotiate.
The buyer's counsel raised section 4 in the post-closing adjustment process, and the seller, on advice, did not contest it — the drafting gap was plain on the face of the clause, and litigating a live, unsettled point of statutory interpretation over $119,000 was not worth the exposure to either side. The seller repaid the difference. The $620,000 performance decline, entirely separate from the ticker calculation, remained the buyer's to absorb: no clause, statutory cap included, was ever built to measure whether the business actually performed the way a flat ticker assumed it would.
Had the clause instead read “an amount equal to 7% per annum of the Fixed Equity Value, calculated daily, accruing from the Locked Box Date to the Closing Date,” section 4 would never have engaged at all — the express statement of the yearly rate is the entire condition the section turns on, and it costs a drafter nothing but the words themselves. The seller lost $119,000 it had actually bargained for, not because the rate was wrong, but because the clause said it the wrong way.
The tell was that the clause was inherited from a precedent used on an unrelated financing transaction, where a daily-accrual formula without a stated annual rate had never mattered because nobody had checked. A boilerplate clause copied across transaction types carries whatever defects it always had — they just wait for the fact pattern that finally makes them expensive.
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