Often in relation to mergers and acquisitions the term “amalgamation” surfaces.
To many readers that term will be meaningless and in this article we attempt
to explain what is meant by an amalgamation and when an amalgamation might be
used to complete an acquisition.
An amalgamation in essence involves a blending of the business of one company
with the business of one or more other companies to form an amalgamated company.
The shareholders of each blending company become the shareholders in the amalgamated
company. In that way two or more businesses are combined and the respective
owners of those businesses continue to own them through the amalgamated company.
Usually no cash changes hands. The respective owners of the businesses that
are combined are each issued shares in the amalgamated company in proportion
to their contribution to the amalgamated company’s assets. In other words
the percentage shareholding each person gets in the amalgamated company is
determined by the value of their business relative to the value of each other
business with which it is combined in the amalgamated company.
The result of an amalgamation is that each of the amalgamating companies,
except the amalgamated company, ceases to exist. For example, if Company A
amalgamates with Company B and Company A is the amalgamated company, Company
A survives and Company B does not. Alternatively, it might be desirable to
establish a new company, Company C, to be the amalgamated (surviving) company
to which the businesses of Company A and Company B are transferred. In that
case both Company A and Company B would be struck off and cease to exist. Their
businesses would continue to operate through Company C.
Essentially, there are two types of amalgamation, namely long form amalgamations
and short form amalgamations. The former are used where the companies proposing
to amalgamate are not part of the same group; the latter is used where it is
proposed to amalgamate a company with one or more subsidiaries or sister (commonly
owned) companies. Long form amalgamations require shareholder approval for
which purpose a document called an ‘amalgamation proposal’ must
be prepared and sent to each shareholder. The amalgamation proposal must describe
the terms on which the amalgamation is proposed to be effected. They range
from 2 to 3 pages in length to up to 50 pages, depending on the complexity
of the arrangements being proposed.
These contrast with short form amalgamations which simply require approval
of the Boards of the respective companies to the amalgamation and which are
administratively simple to achieve. Short form amalgamations are an ideal tool
for removing group companies that have become redundant and are no longer wanted.
They nevertheless demand management time through the need to prepare accounts,
annual returns, and tax returns, (ie income tax, GST and FBT returns). It is
certainly worth getting rid of these unwanted companies by amalgamating them
rather than liquidating them.
As always in the commercial world there are quirks and pitfalls to avoid particularly
in relation to the tax consequences of amalgamations. These play a part in
calculating the available subscribed capital balance of the amalgamated company
(the amount that can ultimately be returned to shareholders tax free) and analysing
the effect on imputation credits and tax losses. In addition care needs to
be taken to ensure no unanticipated taxable dividends result which in turn
requires analysis of the effects of amalgamating upwards (subsidiary company
amalgamates into its parent; subsidiary ceases to exist) or downwards (parent
company amalgamates into its subsidiary; parent ceases to exist).
We recommend amalgamations as a tool for acquisitions, depending on the circumstances,
and would be happy to assist readers in this area.
For more information, please contact:
Brendan Meech
Partner
t: +64 9 979 2209
e: Brendan Meech
Last updated:
These articles are intended to be brief in nature and should be used for information only. They should not be relied on as legal advice. |
