What happens when a buyer amalgamates its holding company with the business it bought?

After a buyer purchases the shares of a company through a holding company, the two still sit one above the other. Amalgamating them merges the pair into a single corporation, which some buyers do to simplify the structure. It merges the two companies for good, and its legal and tax effects begin when the amalgamation takes effect, so it belongs in the post-closing plan rather than being improvised.

What the single corporation inherits

Under Ontario’s Business Corporations Act, once the articles of amalgamation take effect the amalgamating corporations cease to exist as separate entities, and the amalgamated corporation holds all their property and rights and is subject to all their liabilities, contracts and debts. For the buyer, the acquisition debt and the operating company’s obligations end up in one corporation. Lawsuits already under way continue against it.

The short-form route for parent and subsidiary

A holding corporation and its wholly-owned subsidiary can amalgamate by directors’ resolution under both Ontario’s Act and the federal Canada Business Corporations Act, without an amalgamation agreement or a shareholder vote. Corporations Canada calls this a vertical short-form amalgamation. A director’s or officer’s statement (a statutory declaration under the federal Act) must still be attached to the articles. Among other things, under section 178(2) of Ontario’s Act and section 185(2) of the federal Act, it must state that there are reasonable grounds for believing each amalgamating corporation is, and the amalgamated corporation will be, able to pay its liabilities as they become due and that the amalgamated corporation’s assets will be worth at least its liabilities and stated capital of all classes, and either that no creditor will be prejudiced or that adequate notice has been given to known creditors, so the paperwork is not trivial.

The tax year ends and a new one starts

For the purposes of the Income Tax Act, the amalgamated corporation is deemed to be a new corporation whose first taxation year starts at the amalgamation, and a predecessor’s taxation year that would otherwise have ended after the amalgamation is deemed to end immediately before it. Your accountant should plan around those year-ends and the returns they trigger. Check your loan agreement and key contracts for restrictions on mergers or changes of control before starting. See also whether to buy through a holding company.