An amalgamation of Target rather than its winding-up may be preferable from a bump perspective if Target creditors may be prohibited persons – and bump transactions for private equity funds are fraught

Comments of Stepak and Xiao on the s. 88(1)(d) bump rules include:

  • The exclusion in s. 88(1)(c.3)(i), from substituted property, for property which "at any time after the acquisition of control" has 10% or less of its fair market value attributable to property distributed on the winding-up should in context be interpreted as being fulfilled if the relative FMV test is met during the bump series of transactions rather than being required to be satisfied during a more extended and indefinite period.
  • Although when Target is amalgamated with Bidco, there arguably might be an acquisition by creditors of Bidco (who could be prohibited persons) of debt of a new corporation which, therefore, would not fit within the specified property exclusion in s. 88(1)(c.4)(ii), "paragraph 88(4)(b), when read in context, should reasonably be considered to have the effect of deeming the securities of Amalco to be the same as the securities of the predecessor corporation [here, Target]" so that the exclusion is available. However, if Target is wound-up rather than amalgamated "the above argument with respect to paragraph 88(4)(b) would not apply to debt of [Target] assumed by parent on the winding-up because paragraph 88(4)(b) only applies to amalgamations, not windings-up."
  • Where the 10% attributed property safe harbour will not clearly be met, the funding of Bidco by a private equity fund will be problematic, as PE funds (which potentially could have prohibited persons as investors) will be loathe to disclose their investors and because for confidentiality reasons the PE fund manager typically will not be able to approach the fund investors to inquire as to any cross-ownership in the Target until after a deal has been announced.
  • Where following the amalgamation of Bidco and Target, Amalco sells one of Target's subsidiaries (Spinco) to a third party (Spinco Buyer) which, in turn and as part of the same series of transactions, sells Spinco to a fourth party, that final sale could taint the bump if the fourth party (or perhaps its shareholders) is a prohibited person – so that it is insufficient that diligence was performed on Spinco Buyer and its shareholders to assess whether they were prohibited persons. This will be the case even if Spinco itself was not bumped.
  • In light of the foreign affiliate dumping rules, it is appropriate for bumped shares of a foreign subsidiary of Target to be distributed to their ultimate resting place beneath the new foreign parent through a PUC distribution by Amalco rather than in repayment of an intra-group loan made to Bidco.
  • Under the scheme of the Act, "significant" in s. 88(1)(c.2)(iii)(A) means 10% or more, so that a toehold in Target of less than 10% (in the context of there being an indirect third-party participant in the bid who is not a specified person) should be exempted.

Neal Armstrong. Summaries of Paul Stepak and Eric C. Xiao, "The 88(1)(d) Bump – An Update," Draft paper for 2013 Conference Report (annual CTF conference) under s. 88(1)(c.3)(i), s. 88(1)(c.4)(ii), s. 88(1)(c)(vi)(B)(II)s. 88(1)(c)(vi), s. 212.3(9) and s. 88(1)(c.2)(iii)(A).