2006 Ruling 2006-0178571R3 - Purchase of Target and Bump -- summary under Subsection 87(1)

Parent-group losses

/FIRPTA. Parent (a.k.a, Target and, following the merger below, Mergeco) is a CBCA public company. It and various direct Canadian subsidiaries (Opco 4 and Opco 2), as well as subsidiaries of Opco 4 (Opco 5C and Opco 7C) have non-capital or net capital losses). Opco 4 also has indirect US subsidiaries which may be relevant to the FIRPT issue referred to below.

Survivor merger

Under the first CBCA plan of arrangement, Parent, Opco2 and Opco4, and subsidiaries of Opco4 will merge with the same effect "as if the parties were amalgamated under section 184 and 186 of the CBCA, except that the separate legal existence of the Parent will not cease and the Parent will survive the Merger." This "approximates a merger of a parent corporation and its subsidiaries as could be effected under U.S. corporate statutes and this type of U.S. merger transaction is the basis for the short-form amalgamation provisions in the CBCA."

Drop-down to LPs for bump purposes

Mergeco then transfer various business assets to subsidiary limited partnerships utilizing the s. 97(2) election.

Funding of Bidco

An existing indirect non-resident shareholder of Mergeco (Shareholder 2) and a private international firm, an LLC, with no previous connection to the structure (Shareholder 1) jointly fund Bidco (a Canadian Newco), with Bidco also borrowing money, and Bidco will acquire convertible senior notes of Mergeco.

Acquisition of Mergeco by Shareholder 1 and 2 group

Under the second plan of arrangement:

• Bidco will transfer the convertible senior notes to Mergeco for cancellation
• The shareholder rights plan for Megeco will be cancelled
• The outstanding Mergeco options will be cash-surrendered to Mergeco
• Mergeco shares of dissenters will be transferred to Bidco for their fair value
• At the same time, all other Mergeco shares will be transferred to Bidco for cash consideration – except that Mergeco shares held by affiliates of Shareholder 2 will be transferred to Buyco 1 (a joint newly-formed 50/50 subsidiary of Shareholder 1 and 2) in consideration for shares of Buyco 1
• All the shares of Bidco held by the Shareholder 1 and 2 groups will be transferred to Buyco 1 in consideration for shares of Buyco 1, so that Buyco 1 is owned equally by the two groups
• The Mergeco shares held by Buyco 1 will be transferred to Buyco 2 (an affiliate of Shareholder 1) for shares of Buyco 2
• Mergeco will elect to cease to be a public corporation (and also elect under s. 256(9) in its tax return)
• Buyco 2 will transfer the shares of Mergeco to Bidco for shares of Bidco.

S. 88(1)(d) bump

Following the continuance of Bidco under the CBCA, Bidco and Mergeco will amalgamate in a vertical short form amalgamation to continue as Amalco.

Amalco will make a bump designation under s. 88(1)(d).

Purposes

The stated purposes include "(ii) to avoid any US FIRPTA…issue that could arise from the combination of the Parent and of the Subsidiaries, (iii) to consolidate, before the Effective Time [of the 2^nd plan of arrangement], the Losses of the various Canadian entities into two corporations…."

Rulings

Ruling that s. 87 will apply to the merger pursuant to the 1^st plan of arrangement; and s. 88(1)(d) bump ruling.