Words and Phrases - "doctrine of merger"

Two public-company predecessors by amalgamation of the taxpayer made cash payments for the surrender by employees of their options previously granted to them under employee stock option plans. Such surrenders occurred (and were previously contemplated in agreements with purchaser corporations to occur) in connection with the acquisition of all their shares by unrelated corporate purchasers.

In the course of determining that the surrender payments were “eligible capital expenditures,” Sommerfeldt J found that the exclusion in para. (f) of the ECP definition for “the cost of … a right to acquire [a share]” did not apply given that “the word ‘cost’ contemplates an acquisition of an asset or other property” (para. 103), whereas “when a stock option is surrendered to the issuing corporation, the rights represented by that option [instead] are extinguished” (para. 122). In this regard he referenced the doctrine of merger (which, as noted at para. 119, is based on the rationale “that ‘it is not possible to contract with oneself’,”) then stated (at para. 120) that “a property ceas[es] to exist, the context of a merger of rights and liabilities, at the moment of transfer, such that there is no continuing existence of the particular property in the hands of the person to whom it was disposed” and further stated (at para. 123):

Based on Griener and Anderson (sub nom. Huestis) when the holder of a stock option surrenders or sells the option to the grantor thereof, the option is extinguished at the moment of surrender or sale. Just as a person cannot at the mae time be both lessor and lessee of the same property (see the BCN case above), a corporation cannot at the same time be both the grantor and the holder of the same stock option.