Should the buyer and target amalgamate after closing?

After a buyer acquires the shares of a company, the buyer’s company and the target remain two separate corporations, one owning the other. Amalgamating them is an optional later step, not part of closing, and many buyers never take it. The real question is whether one merged corporation is worth giving up the separation between the two, and which route the law allows given how the shares are held. Our glossary entry on amalgamation defines the term.

What you must own to use the quick route

Corporations Canada describes a short-form amalgamation as one approved by a directors’ resolution without shareholder approval, and a vertical short-form involves a holding corporation and its wholly-owned subsidiaries, and a horizontal one involves wholly-owned subsidiaries of the same holding corporation. The quick route therefore fits a buyer that owns all of the target’s shares. A long-form amalgamation instead needs an amalgamation agreement approved at a meeting of shareholders, so confirm with your lawyer which route your ownership allows.

Different statutes need a first step

Corporations Canada says that for an amalgamation under the Canada Business Corporations Act, a corporation incorporated under another statute must first continue into that Act before it can amalgamate with the others. The articles of continuance can be filed at the same time as the articles of amalgamation, and provincial and federal corporations can also amalgamate through an arrangement. If your company and the target sit under different statutes, build that extra step into the plan.

The old companies stop existing

Under Ontario’s Business Corporations Act, the amalgamating corporations cease to exist as separate entities, and the amalgamated corporation holds all their property and is subject to all their liabilities, contracts and debts. The articles of amalgamation must also carry a statement from a director or officer of each amalgamating corporation. Among other things, under section 178(2), it must state that there are reasonable grounds for believing each corporation, and the amalgamated corporation, can pay its liabilities as they become due and that the amalgamated corporation’s assets will be worth at least its liabilities and stated capital, and either that no creditor will be prejudiced or that adequate notice has been given to known creditors. Our answer on buying through a holding company covers the structure that comes first.