Don’t forget the triangular amalgamation. While these types of amalgamations are more typical in the public company context, they can be a useful tool for private company deals too.
Assume that Holdco owns all of the issued shares of Opco, and Opco proposes to merge with another corporation (Targetco) to form Amalco, which will carry on the businesses of the two predecessor corporations. For now, the shareholders of Holdco and Targetco will continue as shareholders of Holdco. We could complete this transaction on a tax-deferred basis by having the Targetco shareholders sell their shares to Holdco for shares in the capital Holdco. Each of the Targetco shareholders would file an election under section 85 of the Income Tax Act (the “ITA”) to ensure that their sale of shares occurred on a tax-deferred basis. Targetco and Opco could then complete a horizontal short-form amalgamation to form Amalco, which would be a wholly-owned subsidiary of Holdco.
The same result, however, could be achieved more simply using a triangular amalgamation. Subparagraph 175(1)(b)(iii) of the Ontario Business Corporations Act provides for an amalgamation of two corporations where shareholders of a predecessor corporation receive securities of “any body corporate other than the amalgamated corporation.” Opco and Targetco could amalgamate pursuant to a long-form amalgamation. The amalgamation agreement would provide for the issue of shares in the capital Holdco to Targetco shareholders (probably using the same ratios that would have appeared in the section 85 rollover agreements). In general, subsection 87(9) of the ITA permits an amalgamation like this to occur on a tax-deferred basis for the corporations involved and for the shareholders, including the shareholders of Targetco.
Why use this mechanism? The legal documentation would be simpler for one thing. Instead of multiple share purchase agreements and a short-form amalgamation, the lawyer can prepare one amalgamation agreement and long-form articles of amalgamation (which have their own advantages over the short-form variety). The accountant’s life is made easier too because the rollovers under section 87 of the ITA do not require the filing of any elections. In addition, if a shareholder of Targetco happens to be a non-resident, it may be possible to avoid having to obtain a certificate for the shareholder under section 116 of the ITA (cf. ¶45 of IT-474R2 and ¶¶31-32 of IC72-17R5).
