Mergers and the long arm of the law
Foreign combinations
Different mechanisms exist in foreign jurisdictions for amalgamating and altering corporate structures. These different mechanisms are not replicated in the Corporations Act 2001 (Cth). Complex interpretation issues arise in a landholder duty context in determining whether the mechanisms permitted under foreign laws trigger a liability to duty.
Foreign groups are also confronted with addressing the different State/Territory regimes across Australia. For example, WA enacted a new set of merger provisions in June 2019[1]. NSW and VIC contain merger vesting provisions in a transfer duty context. The landholder provisions have been litigated in the NT Supreme Court in Crocodile Gold[2] following a Canadian amalgamation.
In Crocodile Gold there was holistically one arrangement, but the NT Revenue Office attempted to impose 3 rounds of landholder duty on the transaction steps. One exposure was triggered by the merger provisions but further exposures related to the issue of shares within the amalgamated structure. The issue of shares was a product of the mechanics of amalgamating a Canadian company into another Canadian company pursuant to the Ontario Business Corporations Act.
The NT Supreme Court reviewed Canadian authorities to characterise the transaction. Kelly J found[3]:
It is apparent both from the statutory provisions and the case law that the amalgamating companies continue to exist “inside” the amalgamated company. It does not “acquire” those assets, it possesses them as a consequence of the amalgamation.
Her Honour found that the amalgamated company is a “fusion” of the pre-amalgamation companies.
This new, fused entity is not identical to the former companies but represents an amalgam of the assets and liabilities of the former companies. Under Canadian law there is no acquisition or disposal of tenements when companies amalgamate in certain circumstances[4].
Australian application
Crocodile Gold highlights the importance of a cogent understanding of the relevant foreign laws. Purely examining Australian statutory construction issues will be less persuasive than drawing from the mechanics of the foreign law. Taxpayers should not rely solely on narrow Australian tax positions.
It will be interesting to observe the approach of Revenue WA in applying the elements of the merger provisions. There are inherent difficulties in interpreting the landholder duty implications of restructure/acquisition mechanisms in foreign jurisdictions. For example, queries arise when reconciling the new merger provisions with the relevant acquisition provisions. Deeming provisions can cause uncertainty for foreign taxpayers - particularly where there is no acquisition or disposal of property /rights under foreign law.
The calculation provisions should also be closely considered to determine whether there are gaps in the statutory drafting, and to ensure pre-existing interests are taken into account.
Ultimately in Crocodile Gold, the taxpayer paid landholder duty once but significant resources were deployed to rebut the other 2 rounds of exposure. Best practice is to understand the landholder implications at the start of a transaction to mitigate objection and litigation expenses.
Takeaway
Any foreign group with downstream Australian interests undertaking a transformational transaction needs to consider the application of the merger rules even where a merger leads to less than 50% being ultimately acquired by the shareholders of the junior party.
Taxpayers should also consider whether any concessions / relief applies to the transaction. Certain State authorities provide a ruling system that binds the Commissioner.