Vertical amalgamations
- It is common for an “Acquisitionco” to acquire all the shares of a public company target (“Targetco”), whose shares are not delisted until after a delay, and to vertically amalgamate with it.
- In order to qualify as a “reorganization transaction” under para. (b) of the definition, the equity holders of the covered entity (Acquisitionco as the holder of Targetco shares) must receive equity of Amalco – and such equity is instead cancelled for no consideration.
- Since Targetco continues as a "covered entity" after the acquisition, the amalgamation may result in the imposition of the share buyback tax.
Wind-Up of Targetco into Acquisitionco
- A public company target (“Targetco”), whose shares are not delisted until after a delay, is acquired by “Acquisitionco” and then wound-up into it.
- In order for the wind-up of Targetco to qualify as a "reorganization transaction" under para. (c) of the definition, all or substantially all of the property of Targetco must be distributed to Acquisitionco (as the equity holder of Targetco).
- This requirement is problematic where more than 10% of Targetco's assets are debt or equity of Acquisitionco (which could have been held prior to the acquisition), since such shares or debt will be extinguished by operation of law on the wind-up rather than being "distributed" to Acquisitionco.
Potential duplication under s. 183.3(2)
- Under a literal reading of s. 183.3(2), every covered entity would have an amount under Variable B when equity of any other covered entity is redeemed, acquired or cancelled pursuant to a reorganization transaction (and a portion of the consideration is not equity).
Acquisition of Targetco for cash and Acquisitionco equity
- Where the shareholders of Targetco (which will not be delisted until some time thereafter) are to receive a combination of cash and shares of Acquisitionco, the cash component is included in Variable B of the formula in proposed s. 183.3(2) (so that it is subject to the tax) because equity of a covered entity (Targetco) is acquired in the taxation year pursuant to a reorganization transaction described in para. (a) of that definition and a portion of the consideration received by a holder for the Targetco shares is not equity consideration described in para. (a) or (b) of the definition of reorganization transaction.
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