MMV Capital – Federal Court of Appeal applies Deans Knight regarding acquiring an approximate 100% interest in a Lossco with no change of de jure control

A venture capital corporation (MMV) acquired 49% of the voting common shares of the respondent while in interim bankruptcy proceedings and subscribed $1,000 for a large number of non-voting common shares giving it over 99.8% of all the common share equity. It then financed taking the respondent out of bankruptcy proceedings at a modest cost, and transferred a loan portfolio of U.S.$86 million to the respondent, effectively in consideration for secured debt and preferred shares, thereby reducing the equity interest of the five arm’s length holders of 51% of the MMV voting common shares to less than 0.01% and also permitting the use of the respondent’s non-capital losses.

In applying Deans Knight to reverse the Tax Court finding that there was no abuse of s. 111(5), Monaghan JA stated:

The object, spirit and purpose of subsection 111(5) – its rationale – is “to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders”.

As in Deans Knight, what happened here is exactly what subsection 111(5) seeks to prevent.

Regarding the respondent’s submission that the original five voting common shareholders still could have exercised their de jure control to elect a new board that would pay them dividends, she noted that MMV could at any time retract its preferred shares and demand on its loan to deplete the respondent of all its assets, so that “while their common shares provided the five original shareholders with de jure control, they had no effective way to use that control to benefit from the respondent’s losses.”

Neal Armstrong. Summary of The King v. MMV Capital Partners Inc., 2023 FCA 234 under s. 245(4).