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ANSWERS (C) An acquisition company incorporated in a Canadian jurisdiction will typically be preferred when a non-resident corporation wishes to buy a Canadian business. By funding the amount of the purchase price first to the Canadian acquisition company, either as equity or part equity and part debt, then having it pay the price to the vendor, paid-up capital and/or a shareholders' loan is created in the acquisition company. Profits from the Canadian business may then be distributed to the for- eign parent as a tax-free distribution of capital or loan repayment rather than a taxable dividend. Among other things, attention should be paid to applicable "thin capitalization" rules, the advan- tages and disadvantages of incorporating in various Canadian jurisdictions and the possibility of a post-closing amalgamation of the acquisition company and ABC. (D) The notice and review requirements of the Invest- ment Canada Act must be considered whenever a non-Canadian investor directly or indirectly acquires control of a Canadian business. The fact that a Canadian acquisition company is used to acquire the shares of ABC is irrelevant since it is the nationality of the ultimate owners of Tex Industries that matters. Since Tex Industries is owned by an American individ- ual, Tex Industries and its Canadian acquisition company would be considered to be non-Canadian. Accordingly, at the very least, the notification requirements of the Investment Canada Act would apply. Whether the pre-closing review requirements apply depends on whether the applicable financial thresholds established by the Investment Canada Act are exceeded. For acquisitions by investors which are "WTO investors" (which Tex Industries would be since it is owned by an American and the United States is a WTO member), the transaction, if completed in 2010, would be reviewable if the assets shown on the balance sheet of ABC at the end of its most recently completed fiscal year equal or exceed $299 million. (B) Section 85.1 of the Income Tax Act permits the disposition of shares (or other eligible property) on a tax-deferred basis where the consideration paid for those shares includes shares of the transferee corporation, but only where the trans- feree is a "taxable Canadian corporation" for the purposes of the Income Tax Act. As a Delaware corporation, Tex Industries would not qualify. The desired results may be achieved by using an exchangeable share structure and you should consider and canvass this option with Bud. (C) If the judgment is sought from an Ontario court, such judgment could not be given in U.S. dollars. Under s. 12 of the Currency Act (Canada), any monetary amount awarded in a legal proceeding in Canada must be in Canadian dollars. You should inform Bud of this requirement but you can also tell him that his client can get the result it seeks by including a "judgment currency" clause in the purchase agreement. Such a clause should provide that the amount of any judgment that would be awarded in Canadian dollars shall be converted to U.S. dollars with reference to an agreed-upon exchange rate and should contain a separate indemnity that requires the vendor to pay any shortfall resulting from a currency conversion at a date other than the date of payment. (B) Under s. 118(3) of the Business Corporations Act (Ontario), at least 25 per cent of the directors of an Ontario corporation must be resident Canadians, but where a corporation has less than four directors, at least one director must be a resident Canadian. Consequently, the American indi- vidual who owns Tex Industries cannot be the sole director of ABC going forward. You should have thought of this earlier and advised the client accordingly. YOUR RANKING? One or less correct: Might be time to brush up Two or Three correct: Not bad, but some further work needed Four correct: Very well done, but not perfect Five correct: Impressive FEEDS LEGAL A daily blog of The Blog of 12 • DECEMBER 2010/JANUARY 2011 INHOUSE Canadian Legal News Coming soon to & 1 2 3 5 4 canad canad ianlaw ian L yermag w a ye r .com L a w Tim