This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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Amalgamation is a corporate restructuring process that allows two or more corporations to combine into a single legal entity. In Ontario, as in the rest of Canada, amalgamations can be governed either by federal or provincial laws, primarily the Business Corporations Act (Ontario) (OBCA) for Ontario corporations and the Canada Business Corporations Act (CBCA) for federal corporations.
This article will explain what amalgamations are, how they are structured, the legal and financial considerations, and the benefits and risks associated with amalgamations in Ontario.
- What is an Amalgamation?
An amalgamation occurs when two or more corporations combine to form a single new entity, or one corporation continues to exist while the others cease to exist. In Ontario, amalgamations can be done through two primary types:
A. Vertical Amalgamation: This involves a parent corporation and one or more of its subsidiaries amalgamating. The parent company continues to exist while the subsidiary or subsidiaries cease to exist as separate legal entities.
B. Horizontal Amalgamation: This involves two or more corporations of the same type (such as two independent corporations) combining to form a new corporation or one continuing entity. These are typically seen in cases where companies seek to achieve synergies and economies of scale.
Under the Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA), the amalgamation of corporations can either be done through a “short-form” or a “long-form” process.
A. Short-Form Amalgamation: This is used when the parent corporation owns all of the shares of the other corporation(s) involved in the amalgamation. It is a simpler and quicker process because no shareholder vote is required.
B. Long-Form Amalgamation: This occurs when the companies involved do not meet the criteria for a short-form amalgamation, often requiring a shareholder vote and more detailed filings.
- Legal Framework for Amalgamations in Ontario
In Ontario, amalgamations are primarily governed by the Business Corporations Act (OBCA) (R.S.O. 1990, c. B.16). The OBCA sets out the procedural and substantive requirements for amalgamations, which are subject to approval by shareholders and, in some cases, creditors.
For federal corporations, the Canada Business Corporations Act (CBCA) applies, which has similar provisions for the amalgamation process.
- Key Steps for Amalgamation under the OBCA:
Preparation of the Amalgamation Agreement: The boards of directors of the corporations must first negotiate and prepare an amalgamation agreement that outlines the terms and conditions of the merger. This agreement includes details on the corporate structure, the allocation of shares, and any changes in the company’s business operations.
Approval of the Amalgamation Agreement: In the case of a short-form amalgamation, the parent company’s board of directors can approve the transaction. For long-form amalgamations, both the boards of directors and the shareholders of the merging corporations must approve the agreement. Shareholder approval typically requires a special resolution.
Filing of Documents: Once the agreement has been approved, the amalgamating corporations must file Articles of Amalgamation with the Ontario government, specifically the Ministry of Government and Consumer Services. This filing includes details of the newly amalgamated corporation, such as its name, directors, and registered office.
Effective Date: The amalgamation becomes effective on the date specified in the Articles of Amalgamation, or upon filing, whichever occurs later.
Post-Amalgamation Filing: Following the amalgamation, the new corporation must comply with all relevant corporate governance requirements under the OBCA, including filing annual returns, updating shareholder information, and notifying relevant stakeholders.
- Types of Amalgamations
Pure Amalgamation (Non-Successive Amalgamation): In this scenario, the merging companies combine to form a new corporation, and the previously existing corporations cease to exist. The assets, liabilities, and ongoing business operations of the pre-amalgamation entities transfer to the new company.
Successive Amalgamation: This type involves a situation where one corporation continues to exist, and the other(s) cease to exist. The continuing corporation takes over the assets and liabilities of the other company or companies. This form of amalgamation is more common in vertical mergers, where a parent company absorbs its subsidiary.
- Key Legal Considerations for Amalgamations
Amalgamations involve several important legal considerations that both parties must understand before proceeding with the transaction:
A. Shareholder Approval and Rights
For a long-form amalgamation, the approval of the shareholders of each company involved is required. Shareholders typically must pass a special resolution by a two-thirds majority vote. In addition, shareholders may have dissenting rights if they disagree with the amalgamation terms. Under section 185 of the OBCA, dissenting shareholders are entitled to compensation if they oppose the transaction.
B. Due Diligence
Amalgamating companies should conduct thorough due diligence before finalizing the amalgamation agreement. This process involves examining the financial, legal, operational, and tax aspects of the businesses to identify any potential issues that could affect the value or structure of the transaction. Due diligence helps mitigate risks such as undisclosed liabilities or unfavorable contracts.
C. Tax Considerations
Amalgamations can have significant tax implications for both the buyer and the seller. The tax treatment depends on the type of transaction, whether it is structured as an asset or share amalgamation, and the specific tax characteristics of the corporations involved. For instance, the amalgamation could trigger capital gains taxes or affect the ability to use certain tax attributes, such as tax losses.
Moreover, the Canada Revenue Agency (CRA) has specific rules regarding the transfer of tax attributes like capital losses or non-capital losses between amalgamated entities. Consulting with a tax professional is crucial to understanding these implications.
D. Transfer of Contracts and Licenses
One of the legal complexities of amalgamation involves the transfer of contracts, permits, licenses, and intellectual property rights. In some cases, existing contracts may need to be renegotiated or assigned to the new corporation, particularly in instances where third-party consent is required.
E. Employee Considerations
The amalgamation may trigger changes to employee benefits, pension plans, and other employment-related agreements. Both the buyer and seller must consider how the merger affects employees, and whether new employment contracts or amendments to existing agreements are needed.
- Benefits of Amalgamation
Efficiency and Cost Savings: Amalgamations often result in operational efficiencies, such as reduced overhead, streamlined management structures, and economies of scale.
Increased Market Power: By combining resources, the amalgamated company may have greater competitive strength, improved market share, and access to new markets or customers.
Tax Benefits: Depending on the structure of the amalgamation, the new company may benefit from tax advantages, such as the ability to carry forward tax losses or use certain tax credits.
Access to Capital: Larger companies resulting from amalgamations often have better access to financing and capital, enabling them to pursue growth opportunities and strengthen their financial position.
- Risks of Amalgamation
Integration Challenges: Integrating the operations, culture, and management of two corporations can be complex and may result in unforeseen challenges. Cultural clashes, operational inefficiencies, and management disagreements are risks that need to be managed carefully.
Liability Exposure: In certain situations, amalgamation can expose the acquiring company to the liabilities of the target company, including hidden or undisclosed risks.
Regulatory Scrutiny: Amalgamations may attract scrutiny from regulatory bodies such as the Ontario Securities Commission (OSC) or the Canadian Competition Bureau, especially in cases where the merger could reduce competition in the market.
- Conclusion
Amalgamations in Ontario can offer significant benefits, including operational efficiencies, tax advantages, and increased market power. However, the process is complex and requires careful planning and legal guidance to ensure compliance with the relevant statutes and regulations, such as the Business Corporations Act (OBCA). Companies considering an amalgamation should engage legal, financial, and tax professionals to help navigate the process effectively and mitigate potential risks.
By understanding the legal framework, due diligence requirements, and strategic considerations, businesses can make informed decisions that align with their long-term goals and maximize the potential benefits of the amalgamation process.
Sources:
Business Corporations Act (Ontario), R.S.O. 1990, c. B.16.
Canada Business Corporations Act, RSC 1985, c. 44 (2nd Supp.).
Ontario Ministry of Government and Consumer Services