If commercially feasible, deferred share consideration can be used instead of a share sale occurring on a cash earnout basis

Some points made on share sale earnouts, or achieving their equivalent without having to address s. 12(1)(g), include:

• The contingent payment terms can be embedded in the terms of special shares issued by the Canadian purchaser, thereby permitting s. 85(1) rollover treatment, and with a Callco needed in the buyer structure to avoid Pt. VI.1 and IV.1, or IV, taxes arising on retraction of such shares.
• It would be important to embed the terms of the earn-out in the special shares themselves so as to not engage the derivative forward arrangement rules.
• Where the vendor has the contingent right to receive additional shares of the purchaser, the receipt of at least some purchaser shares at closing will satisfy that precondition for s. 85(1) to apply, whereas the contingent right to receive shares will not constitute boot under the s. 85(1)(b) wording, thereby permitting the s. 85(1) deferral.
• However, the election form (T2057) creates difficulties in that it refers only to the “share consideration” rather than also including rights to receive shares in that quoted phrase.
• It is suggested that s. 87(7) (which also applies to s. 88(1) wind-ups by virtue of s. 88(1)(e.2)) has the effect of deeming Amalco, as successor to the purchaser, as having incurred an earnout obligation of the latter.

The paper also discusses inter alia ss. 110.6(14)(b) and 111(4)(e) planning in a pre-substantive CCPC context, and various issues (mostly US other than under the foreign-affiliate dumping rules) regarding exchangeable share structuring.

Neal Armstrong. Summaries of Kim Maguire and Jeffrey Shafer, “Trends in Buy/Sell Transactions,” draft 2021 Conference Report under s. 12(1)(g), s. 85(1)(b), s. 87(7) and s. 110.6(14)(b).