U.S. Shareholders Grab Foreign Merger Tax Benefit

The deal that marries Petro-Canada and Suncor will deliver tax-free treatment to U.S. investors.
Robert WillensMarch 30, 2009

Bob Willens 2

Last week, the nearly century-old Suncor Energy Inc. and the relatively new Petro-Canada (not quite 35 years old yet) agreed to merge in a deal that would bring the two Canadian oil companies together. The companies plan to complete a so-called “plan of agreement” under the Canadian Business Corporations Act, in what would be considered a tax-free reorganization in the United States.

Indeed, a new company (Newco) will be formed, and Suncor and Petro-Canada each will transfer their assets to the new company, subject to each constituent’s liabilities. Then, Newco will issue its stock to the former shareholders of Suncor and Petro-Canada. Once the plan of agreement is inked, the two companies will cease their separate legal existence.

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Each Petro-Canada shareholder will receive 1.28 shares of Newco in exchange for each Petro-Canada share surrendered in the transaction. Likewise, each Suncor shareholder will receive one share of Newco in exchange for each Suncor share surrendered. The Suncor shareholders will emerge with approximately 60 percent of Newco’s outstanding stock and Petro-Canada shareholders will own 40 percent.

‘A’ Reorganization

Although the transaction involves non-U.S. companies, the deal will constitute a reorganization under the U.S. tax code – specifically under Section 368(a)(1)(A). As a result, the U.S. shareholders of Suncor and Petro-Canada should be eligible for tax-free treatment with respect to the share exchange.

Historically, foreign corporations could not participate in tax free ‘A’ reorganizations and business combinations. In fact, deals involving one or more foreign entities were governed by more restrictive, reorganization definitions, that made it more onerous for U.S. shareholders that were exchanging stock to do so on a tax-free basis. (See Revenue Ruling 57-465.)

However, recently, the definition of an A reorganization has been expanded to encompass the case in which foreign entities participate in the transaction. Accordingly, an A reorganization is now defined as a “statutory merger or consolidation.” In turn, a statutory merger or consolidation is a transaction which meets two criteria: (1) all of the assets and liabilities of each member of one or more “combining units” (Suncor and Petro-Canada) become the assets and liabilities of one or more members of one other combining unit1, and (2) the “combining entity” (Suncor and Petro-Canada) of each transferor unit ceases its separate legal existence. (See Regulation Section 1.368-2(b)(1)(ii).)

Moreover, in the case of Suncor/Petro-Canada, the transaction will satisfy the principal non-statutory requirements necessary to secure reorganization treatment. That means, the transaction will feature “continuity of interest” and the transaction will exhibit “continuity of business enterprise.” The continuity of interest hurdle is cleared because the former shareholders of the acquired corporations – Suncor and Petro-Canada – will maintain a continuing interest in the business enterprises they each formerly conducted. The continuity of business enterprise criteria is met because the issuing corporation – Newco – will continue the historic businesses of each of the constituent corporations. (See Reg. Sec. 1.368-1(b).)

As a result, the Suncor/Petro-Canada deal should easily qualify as an ‘A’ reorganization even though the consolidation is being completed under Canadian law, rather than under U.S. statutes. Indeed, the provenance of the law in merger deals that involve non-U.S. businesses no longer matters – as long as the transaction has “the result” described in the U.S. tax code2. In other words, the merger must satisfy the non-statutory requirements necessary for an acquisition to be considered a reorganization. (See Regulation Section 1.368-2(b)(1)(iii), Example 13.)

Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for


1 ‘A’ reorganization cannot be “divisive” according to Revenue Ruling 2000-5.
2 Regulation Section 1.368-2(b)(1)(ii).