A locked-box mechanism fixes a deal's price to a target's historical balance sheet at signing, protected only by a leakage covenant — with no post-closing working-capital adjustment of the kind Ontario deals typically run.
No Canadian statute defines a locked-box mechanism, and it is the one closing-mechanics term the standard Ontario purchase-price literature does not cover directly: the default described for Ontario deals is a target working capital level, measured at or after closing, with the price adjusted against it — in other words, a completion-accounts approach. A locked box is the alternative to that default: instead of measuring the target's financial position on the actual closing date, the parties agree the price at signing against a historical, audited (or at least reviewed) balance sheet from an earlier "locked-box date," and there is no post-closing recalculation at all. It is imported deal-structuring practice, most common in larger, sponsor-backed or auction-process Canadian transactions where a seller wants price certainty and a clean exit at signing rather than a months-long true-up.
Because the price is fixed before closing, the mechanism does its protective work through a covenant, not an adjustment: the seller agrees to operate the business normally between the locked-box date and closing, and to repay, dollar-for-dollar, any value it extracts from the target in that gap that is not on an agreed "permitted leakage" list — ordinary-course, already-scheduled salaries or dividends, typically. Anything else that flows to the seller in that window, a special dividend or an above-market management fee, is "leakage" the seller must hand back, usually with interest, rather than something a completion-accounts-style true-up would catch after the fact.
A fund agrees on March 1 to buy 100% of a target off its audited December 31 accounts — the locked-box date. Signing and closing follow on May 1 at a fixed price with no post-closing true-up. The purchase agreement lists permitted leakage: the regular monthly owner's salary already budgeted for January through April. In March, the seller also pays itself a one-time $180,000 special dividend that was not on the list. Under the leakage covenant, that $180,000 is repaid to the fund dollar-for-dollar at closing, on top of the fixed price already agreed — the locked box's substitute for a working-capital peg and a post-closing reconciliation.
See also: Completion accounts · Net working capital peg.
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