Amalgamation (also known as merger) in the corporate world refers to a process whereby two or more corporations unite to form one corporation and continue in existence as this one corporation. The analogy often used is that amalgamation is like two streams coming together to form one larger river. The assets and liabilities of each corporation would flow and continue within this amalgamated corporation. The shareholders of each predecessor corporation would become the shareholders of the amalgamated corporation.
Although the concept seems simple enough to understand, there are numerous corporate law requirements that must be met in order to proceed with an amalgamation. The amalgamation provisions of the Ontario Business Corporations Act (OBCA) are contained in sections 174-179, and comparable provisions of the Canada Business Corporations Act (CBCA) are contained in sections 181-186.1. One key requirement is that all the corporations looking to amalgamate must be governed under the same statute. A CBCA corporation cannot amalgamate with an OBCA corporation - one of the corporations would need to be continued under the other statute as a pre-condition of the amalgamation, which would require filing Articles of Continuance.
Amalgamations can either proceed as “short-form” or “long-form”. There are two types of short-form amalgamations – vertical and horizontal. In a vertical short-form amalgamation, a holding corporation (aka a “parent” corporation) and one or more of its subsidiary corporations (aka the “children” corporations) would amalgamate. In a horizontal short-form amalgamation, two or more wholly-owned subsidiary corporations (two “child” corporations) of the same holding corporation (the same “parent” corporation) would amalgamate.
A long-form amalgamation must occur if the requirements of a short-form amalgamation cannot be met; the most obvious case being when there are two unrelated, arms-length corporations that wish to amalgamate. Short-form amalgamations are much easier to accomplish than long-form amalgamations because the former only require director approval, while the latter require director and shareholder approval, as well as the preparation of an amalgamation agreement. Such agreement must contain provisions relating to the manner of paying money instead of issuing fractional shares, whether the by-laws of the amalgamated corporation are to be those of one of the amalgamating corporations, and other details that provide for the subsequent management and operation of the amalgamated corporation. As shareholder approval is required for long-form amalgamations, any shareholders who dissent to (i.e., do not approve of) the proposed amalgamation are entitled to be paid fair value of their shares.
Other legal and procedural considerations for amalgamations include how shares must be cancelled, which by-laws to adopt for the amalgamated corporation, how shares can be issued and assets distributed, and stated capital considerations. Regardless of whether you are proceeding with a short or long-form amalgamation, Articles of Amalgamation must also be prepared and filed (with payment of the associated filing fee). Attached to these Articles must also be certain statements sworn by a director or officer of each amalgamating corporation relating to the solvency of the predecessor corporations and amalgamated corporation, as well as whether any creditors would be affected by the amalgamation. Once the amalgamation takes effect, the corporate records of the amalgamated company should be updated to reflect who the current directors and officers will be, confirm the by-laws, issue new share certificates, and make any other required changes. If the amalgamated corporation’s name is not a number name or the name of one the amalgamating corporations, a NUANS name search must be conducted to ensure the new corporate name can be used without conflict. The Canada Revenue Agency also requires that the new amalgamated corporation obtain a new HST number.
Considering all the legal intricacies, requirements and professional fees associated with performing an amalgamation, why would one do it? There are numerous reasons why an amalgamation procedure could prove beneficial. It provides a means of streamlining your privately-held corporate entities in order to simplify corporate structures and get rid of unnecessary or redundant corporations. It also offers a way to shift assets (and liabilities) from one corporation to another without disposing of the assets of any predecessor corporation (contrary to dissolving the corporation, which would cause a deemed disposition of all its assets), therefore avoiding tax disposition consequences under the provisions of the Income Tax Act, Land Transfer Tax Act or Part IX of the Excise Tax Act regarding GST/HST.
Amalgamations can be a useful and flexible tool for achieving your business and tax planning goals. You should always engage your corporate lawyer if you are thinking of entering into an amalgamation, whether it be short-form or long-form, as there are various corporate law requirements that must be met as described above. You should also consult with your accountant before and throughout the amalgamation process, as there are important tax considerations that must be considered as well.