The (corporate) shareholders of Holdco (a Canadian-controlled private corporation) wish to accommodate the purchase of shares of the Holdco for an operating subsidiary (Opco) by an Opco key employee on an earnout basis and with the key employee’s purchase being governed by the s. 7 rules. (This cannot be accommodated by issuing treasury shares of Holdco or Opco to the key employee on an earnout basis as the governing Business Corporations Act requires that shares is be fully-paid on issuance.) Under the ruled-upon transactions:
- The Holdco shareholders transfer a portion of their Holdco common shares on a s. 85(1) rollover basis to Opco in consideration for tracking preferred shares of Opco;
- The key employee immediately purchases those Holdco common shares from Opco in consideration for five annual instalments, with each annual instalment based on the most recent year’s earnings (plus, in the case of the first instalment, the opening shareholders’ equity), with adjustments to the purchase price on any IPO or business acquisition; and
- Each instalment payment is immediately dividended by Opco to the Holdco shareholders on the tracking preferred shares.
This purpose of accessing the s. 6 rules for a sale of non-treasury shares was noted, but not ruled upon.