An amalgamation occurs when two or more corporations merge and form a new corporation. From a legal and commercial perspective, an amalgamation has the advantage of being a relatively straightforward transaction in that if the requisite conditions are met, the assets and liabilities of the predecessor corporations automatically become the assets and liabilities of the amalgamated corporation on the effective date of the amalgamation without the need for any complicated conveyancing. This makes the use of an amalgamation a very attractive tool for implementing a reorganization or merging of corporations.
There are three different types of amalgamations:
- the long-form of amalgamation;
- the short-form of amalgamation; and
- the triangular amalgamation.
The type of amalgamation that you choose will depend on the corporate structure involved because the legal requirements and procedures for each type of amalgamation are quite different. The most common type of amalgamation is the short-form amalgamation, which can be vertical or horizontal. Where the corporations to be merged have a parent-subsidiary relationship, the process is referred to as a vertical amalgamation. Alternatively, where the corporations are sisters (i.e. each corporation is owned by the same parent corporation) their merger is a horizontal amalgamation.
An amalgamation of unrelated corporations requires a long-form amalgamation, as does a triangular amalgamation. A triangular amalgamation is one in which the shareholders of the predecessors receive shares of another corporation on the amalgamation, instead of shares of the newly formed amalgamated corporation.
From a tax perspective, another benefit of utilizing an amalgamation is that two or more corporations can transfer their assets to the new amalgamated corporation on a tax-free rollover basis. For example, the amalgamation of Opco and Subco, where Subco is a wholly-owned subsidiary corporation, will be tax-deferred if the following conditions in subsection 87(1) of the Income Tax Act (the “Act”) are met:
- Immediately before the merger, Opco and Subco are taxable Canadian corporations and are combined to form one amalgamated corporation (Amalco);
- All of the property (except inter-predecessor receivables and shares in Subco) and liabilities (except inter-predecessor payables) of Opco and Subco become the property and liabilities of Amalco;
- All of the shareholders of Opco immediately before the amalgamation receive only shares of Amalco; and
- The property and shares noted above are not purchased, acquired, or otherwise obtained on a windup of a corporation.
Once these steps are complete, all the assets of the Subco will be transferred to Amalco on a tax-deferred basis, such that no income, capital gains, or recapture is triggered.
Benefits of the Bump-Up
On an amalgamation where a parent company owns 100% of the shares of its subsidiary company, the new amalgamated company is allowed to bump up the adjusted cost base (ACB) of any non-depreciable capital properties (shares, land, partnership units) that the subsidiary company continuously owned since the parent last acquired control of the subsidiary. The policy reason for this is that the parent company likely paid for shares at a value that is higher than the value of the subsidiary company’s net assets. As a result, the amalgamated company is allowed to bump-up the ACB of any non-depreciable capital property to make up for this difference. These types of “bump” transactions are extremely complex and must be reviewed carefully.
Choosing a Jurisdiction
Just as a corporation can only be incorporated in one jurisdiction, the same principle applies with respect to determining the jurisdiction of the amalgamation since the amalgamated entity is deemed to be incorporated in one jurisdiction. If a corporation will conduct business in multiple jurisdictions, special attention should be given to a number of factors, such as each jurisdiction’s corporate law, in order to determine the best jurisdiction to amalgamate. Take the jurisdiction of Alberta for example. Although prescribed solvency tests must be met before two or more corporations can amalgamate, Alberta applies the test more narrowly than the other Canadian jurisdictions. Thus, if the solvency of one predecessor corporation is questionable, Alberta’s corporate law may offer a way to complete the amalgamation that would not be possible in other jurisdictions. Generally speaking, two or more corporations that plan to amalgamate must be incorporated in the same jurisdiction. It may be possible to continue from jurisdiction to another prior to the amalgamation if required.