Structure
Amalco (which resulted from a recent amalgamation of Holdco 1 and its subsidiary, Opco) carries on Business 1 in Facility 1 and Facility 2, and Business 2 in Facility 2. Mother controls Amalco through her Amalco Class A Voting Special Shares. The Amalco Class A Voting Common Shares are owned by Mother and Holdco 2, the Amalco Class B Voting Common Shares are owned by Daughter and the Amalco Class B Non-Voting Special (redeemable) shares are owned by Mother and Daughter. The shares of Holdco 2 are held by Mother (who controls it) and by Trust, and the assets of Holdco 2 are an investment property, and shares of and loans to Amalco and XCo. Mother is the sole trustee of Trust and the two minor children of Daughter (mother’s grandchildren) are its beneficiaries. Its assets include Amalco Class C Voting Common Shares and Holdco 2 Class A voting common shares.
Previous dispute re development project
Mother asked an unrelated individual (the “Investor” - who had provided consulting services to Amalco and Opco) to participate in a development plan. Daughter opposed the development plan and she did not want Opco to undertake the Development Plan if it proceeded. Accordingly, Mother and the Investor incorporated and jointly subscribed for common shares of Xco, and Xco used borrowed funds received from Opco (the “Opco XCo Receivable”) which, in turn, had borrowed those funds from a bank, and from the Investor (the “Investor XCo Receivable”) to acquire the piece of land in question (the “Land”), and is in the process of developing it using further such borrowed funds.
Daughter wanted Mother to sell Opco. Mother refused. Consequently, Daughter wanted to sell her entire shareholding interest in Opco and Holdco 1 by: (a) taking Facility 2, but without Business 1 and its related business assets, and (b) operating Business 2 solely in Facility 2.
Through a series of debt repayment transfers, the Opco XCo Receivable was transferred into the hands of Holdco 2. The Investor and Holdco 2 converted the Opco XCo Receivable and Investor XCo Receivable into XCo Class B non-voting special shares (collectively, the “Acquisitions”), with Mother thereafter continuing to control XCo.
Proposed transactions
- Daughter will incorporate Newco and subscribe for Newco Common Shares.
- Daughter will transfer all of her Amalco shares to Newco in consideration for redeemable retractable non-voting non-cumulative Newco Class A Special Shares, with a joint s. 85(1) election being made.
- Amalco will transfer a portion of its property to Newco and Newco will assume a portion of Amalco’s existing liabilities such that immediately thereafter, Newco will have acquired, a proportion of the net FMV of all property owned by Amalco corresponding to the relative FMV of the Daughter Amalco Shares owned by Newco. Newco will issue redeemable retractable non-voting non-cumulative Newco Class B Special Shares to Amalco. Joint s. 85(1) and 22 elections will be made. The Distribution Property will include Facility 2, but without Business 1 including its related assets and Amalco’s accounts receivable relating to Business 2.
- The shareholdings between Newco and Amalco will be redeemed for notes and the notes set off.
- Amalco will enter into a lease agreement (Lease) with Newco to lease at a FMV rent the portion of Facility 2, with such Lease to will continue until development on the Land is completed and the Province has permitted the transfer by Amalco of the XXXXXXXXXX that related to Business 1 in Facility 2 to XCo.
Additional information
The Acquisitions did not rely on the Proposed Transactions in order to produce a given result, or vice versa, and none of the Acquisitions was undertaken in contemplation of any of the Proposed Transactions and each would have been undertaken irrespective of whether any of the Proposed Transactions will be implemented.
Amalco will transfer Business 1 in Facility 2 including the XXXXXXXXXX to XCo at FMV after:
(a) the Province has approved such transfer of the XXXXXXXXXX; and
(b) the XXXXXXXXXX has been completed on the Land.
Ruling
By virtue of s. 55(3)(a), the provisions of s. 55(2) will not apply to any of the dividends arising on the cross-redemptions provided that there is no disposition or significant increase in interest described in any of ss. 55(3)(a)(i) to (v) as part of the series that includes such dividends that is not described in the letter.