Corporate Deal Structure

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Although the fundamentals of the target business are central to any business merger or acquisition, the corporate deal structure through which the transaction is to be undertaken plays a critical role in optimizing the full potential of the intended transaction. For a flawed deal structure can result in the purchasing party not attaining all that was intended or should otherwise have been realized in the originally proposed merger or acquisition. For without the appropriate deal structure and implementation, the repurcussions and shortcomings of the transaction can be increasingly serious, such that the purchasing party tends to benefit considerably from working with knowledgeable and experienced legal counsel to effectuate the deal structuring and implementation of their intended corporate merger and acquisition transactions.

From a high-level merger or acquisition deal perspective, there are three primary corporate deal structures for a merger or acquisition: an asset purhase transaction, a share purchase transaction, and an amalgamation.

A. Asset Purchase Transaction

In an asset purchase, the buyer directly purchases specific assets and assumes specific liabilities from the target company. The target company's legal entity remains, but it may sell off all or a portion of its assets. This structure is often used when a buyer only wants a specific division or business unit, or when they want to avoid inheriting the target business' unknown or unwanted liabilities.

Key Characteristics of an Asset Purchase Transaction:

• Selective Acquisition: The buyer can "cherry-pick" assets and liabilities, leaving behind any undesirable ones.

• Liabilities: The buyer only assumes liabilities that are explicitly agreed upon in the purchase agreement.

• Due Diligence: Due diligence is focused on the specific assets being acquired.

• Tax Implications: The buyer generally receives a "stepped-up" basis in the assets, which can lead to higher depreciation and amortization deductions and, therefore, tax benefits in the future. However, the seller may face double taxation—once at the corporate level and again at the shareholder level.

• Complexity: This can be a more complex and time-consuming process due to the need to identify, value, and legally transfer each individual asset.

B. Share Purchase Transaction

A share purchase transaction is where the buyer acquires the target company by purchasing its outstanding shares directly from the shareholders. This effectively means the buyer is acquiring the entire legal entity, including all of its assets and liabilitiesd, whether known or unknown.

Key Characteristics of a Share Purchase Transaction:

• Acquisition of Entire Entity: The buyer takes control of the company "as-is" with all its assets, liabilities, contracts, and permits.

• Liabilities: The buyer assumes all of the target company's liabilities, including any undisclosed or unforeseen ones. This is a significant risk that requires extensive due diligence.

• Due Diligence: The due diligence process is comprehensive, focusing on the company's entire financial and legal history.

• Tax Implications: This structure is often more tax-efficient for the seller, as the proceeds from the sale of stock are typically taxed at a single, lower capital gains rate. For the buyer, there is no step-up in the tax basis of the assets, which is a disadvantage.

• Simplicity: It's generally a simpler and faster process than an asset purchase because individual asset transfers are not required. The company's legal status, contracts, and permits remain intact.

C. Amalgamation

An amalgamation facilitates the combination of two or more companies into a new, single company; with all the amalgamating companies in the new, amalgamated company, such that the new entity inherits all the rights, liabilities, and obligations of its predecessors by operation of law. Canadian corporate law provides for two main types of amalgamations:

I. Long-Form Amalgamation

This is the standard amalgamation process used for combining two or more unrelated corporations. It is a more formal and comprehensive process designed to protect the interests of shareholders and creditors.

Key Characteristics of a Long-Form Amalgamation:

• Amalgamation Agreement: The boards of directors of each amalgamating company must enter into a formal amalgamation agreement. This agreement outlines the terms of the merger, including the shares of the new company, the names of the directors, and the proposed by-laws.

• Shareholder Approval: The amalgamation agreement must be approved by a special resolution of the shareholders of each amalgamating company. A special resolution typically requires approval from two-thirds of the votes cast at a shareholders' meeting.

• Creditor Protection: The Canada Business Corporations Act and similar provincial acts require that the directors of each amalgamating company have "reasonable grounds" to believe that no creditor will be prejudiced by the amalgamation. In some cases, notice may need to be given to creditors.

• Articles of Amalgamation: Once approved, articles of amalgamation are filed with the relevant corporate registry and a Certificate of Amalgamation is issued, legally creating the new entity.

II. Short-Form Amalgamation

This is a simplified, expedited process available for related companies and does not require a formal amalgamation agreement or shareholder approval. It is designed to be more efficient for internal corporate reorganizations. There are two types of short-form amalgamations:

• Vertical Short-Form Amalgamation Structure: This involves a parent holding corporation and one or more of its wholly-owned subsidiary corporations. The amalgamation is approved solely by a resolution of the directors of each amalgamating corporation. No shareholder approval is needed because the parent company is the sole shareholder of the subsidiary(ies). The result is that the shares of the subsidiary are cancelled, and the articles of the new, amalgamated corporation are generally the same as the parent company's articles.

• Horizontal Short-Form Amalgamation Structure: This involves two or more wholly-owned subsidiaries of the same parent holding corporation. Similar to a vertical amalgamation, it is approved by a resolution of the directors of each amalgamating subsidiary. The result of this this particular form of amalgamation is that the shares of all but one of the subsidiaries are cancelled, and the articles of the amalgamated corporation are the same as the surviving subsidiary.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.