Exchangeable shares level the playing field for foreign bidders
Recent months have seen an increased use of exchangeable shares by foreign companies seeking to acquire Canadian companies using the foreign companies' stock. While originally developed for American companies bidding for Canadian targets, the recent $514 million merger of AGRA with the British company AMEC shows that the structure is not limited to US acquirors.
Exchangeable shares permit a foreign public company to acquire a Canadian public company for stock, while preserving certain tax advantages for the target's Canadian shareholders. This is accomplished by offering Canadian target shareholders the option of receiving shares of a newly-created Canadian incorporated subsidiary of the foreign company, which are exchangeable into stock of the foreign company and which are listed on a Canadian stock exchange. A support agreement and a voting trust and exchange agreement ensure economic equivalency to the parent company's stock.
- Canadian shareholders can defer all, or a portion, of any
taxable capital gain which would otherwise be payable;
- Deferred income plans, such as registered pension plans,
can exclude the exchangeable shares from inclusion in the
foreign property basket;
- Canadian shareholders can continue to receive more favourable tax treatment on dividends received from a taxable Canadian corporation.
Canadian securities law considerations
Once the transaction is completed, the subsidiary will be a reporting issuer under applicable Canadian securities legislation. As such, without regulatory relief, it would be subject to continuous disclosure requirements. It has become common practice in these types of transactions for the subsidiary to be exempted from the continuous disclosure requirements of applicable Canadian laws, provided that the parent company is subject to reporting requirements in the United States or the United Kingdom and the materials which are required by law to be sent to shareholders resident in either the United States or the United Kingdom, as the case may be, are sent to exchangeable shareholders, and provided that the parent company files with Canadian regulators the materials it files with regulators in its home jurisdiction.
Nicholas Dietrich and Tina Woodside
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