Amalgamations of Corporations in Ontario: Key Considerations for Secured Creditors

In Ontario, an amalgamation occurs when two or more corporations merge or carry on as one newly formed corporation. This can happen through either (i) a long-form amalgamation by way of an agreement, which is designed for arm’s length entities (requiring board and shareholder approval) or (ii) a short-form amalgamation by way of filing of articles of amalgamation, which is designed for non-arm’s length entities (requiring board approval). Through either process, the newly formed corporation (“Amalco”) inherits the assets and liabilities of its predecessor corporations.

For secured creditors, understanding the legal implications of amalgamations is crucial for preserving their security interests. The following outlines the key steps and deliverables to ensure effective risk management.

Diligence Process

• Review of Amalgamating Entities:
  Prior to the effectiveness of the amalgamation, the secured creditor will want to conduct diligence with respect to the amalgamating corporations.  Diligence steps will include conducting customary searches (including personal property security registry (“PPSR”), Bank Act, corporation profiles, bankruptcy, writ, litigation and intellectual property) against each of the amalgamating corporations. 
• Secured Creditor Consent:
  Many credit agreements will contemplate that written consent or approval from the secured creditors (or a specific set of secured creditors) is required prior to effecting any change to a credit party’s corporate structure. Other credit agreements may already permit amalgamation, consolidations etc. between existing credit parties. It is crucial to review these provisions to determine whether any consent will be necessary.
• Existing Security Documents:
  As mentioned above, Amalco will inherit the obligations of its predecessor corporations under Ontario law. However, it is important to review each of the existing security documents to determine if the security applies to successors and assigns of the predecessor corporations (including successors by way of amalgamation). 

 Key Deliverables

• Secured Creditor Consent:
  If required pursuant to the terms of the credit agreement, a secured creditor will need to provide written consent approving the amalgamation. The consent should specify the details of the amalgamation and the corporations involved in the reorganization (which information would be provided by the credit parties to the secured creditors by way of memorandum or other equivalent form).
• Confirmation or Reaffirmation of Security:
  Since, by operation of law, Amalco is a newly formed corporation (distinct from the predecessor corporations), a secured creditor would typically require that Amalco deliver a confirmation or reaffirmation of security to expressly acknowledge and confirm the continuation of security interests granted by the predecessor corporations pursuant to the original security documents, ensuring that the secured creditor’s rights in the collateral continues after completion of the amalgamation. 
  All other guarantors would typically provide a confirmation confirming that, notwithstanding the amalgamation, the guarantees continue to guarantee the obligations of Amalco.
  The parent entity of Amalco, if applicable, would typically to deliver a reaffirmation, confirming that the shares of Amalco held by such parent entity continue to be pledged in favour of the secured creditor.
• PPSA Registration:
  If Amalco adopts a name distinct from any of its predecessors, the secured creditor must file financing change statements with the PPSR with respect to each predecessor debtor within 30 days from completion of the amalgamation. No new registration is required against Amalco if it adopts the name of one of its predecessor corporations. 
• Corporate Documents and Legal Opinions:
  Secured creditors should request executed resolutions from Amalco's board of directors and/or shareholders, confirming authorization to enter into the confirmation or reaffirmation agreement described above. Legal opinions are often requested as well, to further confirm the validity of the amalgamation and the continuing effect of the security.
• Share Certificates and Transfer Powers:
  The share capital of Amalco may be distinct from each of its predecessor entities. In this case, a secured creditor will want to ensure that the shares of Amalco are properly pledged to the secured creditor. It will be necessary for the secured creditor to obtain a newly issued share certificate in respect of Amalco’s shares, together with an executed stock transfer power.  In exchange, the secured creditor will be expected to return for cancellation the previously pledged share certificates and stock transfer powers in respect of any and all pledged shares of each predecessor corporation.

Conclusion

Amalgamations of credit parties in Ontario require careful consideration to ensure that the security interests of secured creditors remain protected and unaffected by an amalgamation. By conducting necessary due diligence, requiring appropriate deliverables, and ensuring proper documentation, secured creditors can protect their security interests amid these corporate changes. Effective communication with legal counsel throughout the process is essential to address any emerging issues and safeguard security interests.