Corporate Mergers: What Lenders and Creditors Need to Know

By: Annalays Castro Ramon and Laurence Brosseau

Corporate mergers raise many questions, particularly for lenders and secured creditors. What happens to the securities (guarantees, hypothecs, and other warranties) granted prior to the transaction? Are they automatically transferred to the merged company? Do they remain valid and enforceable? This article provides an overview of the applicable rules and measures to preserve these rights.

Rules Governing Securities and Mergers in Quebec

In Quebec, the regime governing securities is primarily based on the Civil Code of Quebec (CCQ), which regulates the transfer of real and personal rights. This is complemented by legislative provisions governing mergers themselves, mainly:

• Section 186 of the Canada Business Corporations Act (CBCA, federal)
• Section 286 of the Business Corporations Act (QBCA, provincial – Quebec)

The applicable section depends on the jurisdiction of the merging companies, but the principles are similar.

The merged company assumes the entirety of the assets of the merging companies, including their rights, obligations, and, of course, the securities. It becomes responsible for all commitments of each company involved in the transaction[1]. In other words, the merging companies continue to exist through this new entity, whose assets become those of the original companies, now unified. All rights and obligations are automatically transferred, and the merged company also becomes a party to any ongoing legal or administrative proceedings.

Obligations related to the securities of the merging companies therefore continue to apply to the merged company without the need for re-registration.

However, when a company merges with another, certain checks are required for lenders:

• Verification of hypothec ranking: The merger may affect the ranking of the hypothec held by the lender. The Quebec Court of Appeal ruled in a 2000 decision that ranking is determined according to a priority order that considers the securities held by all creditors of all original companies[2]. Indeed, the new merged entity inherits all securities granted by the original companies. Consequently, after the merger, secured creditors retain their rights over all assets of the merged company, and the rank of each security remains determined by its original filing date.

An important nuance arises when the assets in question were acquired before the merger. In a 1989 decision, the Quebec Court of Appeal distinguished between assets acquired before and after the merger. It ruled that, for assets acquired before the merger, priority does not depend on the date of hypothec registration but rather on the origin of the assets. Thus, a creditor could not obtain priority over assets acquired before the merger by a company on which it initially held no security. The hypothecary creditor must verify the acquisition date of the hypothecated assets to determine whether priority derives from the filing of the hypothec or the origin of the assets[3].

After the merger, all rights and securities granted by the original companies remain, and the merged company assumes responsibility for them. However, the priority of a security over assets acquired before the merger depends on the origin of the assets: the security granted by the company that originally owned those assets takes precedence, regardless of the filing date of the other merging company’s security. Conversely, for assets acquired after the merger, priority is determined according to the date the security is registered.

• Updating the RDPRM: If the company on which a movable hypothec is registered changes its name following the merger, it is recommended to update the registration in the Registre des droits personnels et réels mobiliers (RDPRM) using a General Registration form (RG) to ensure that all information on rights, securities, and assets of the resulting company is recorded under its new legal name. This step is not mandatory[4], but it is important because updating the name ensures that rights and securities are clearly associated with the new legal entity, avoiding any confusion for the parties involved.
• Validity of guarantees: If the borrower and the original guarantor of a loan merge, the guarantee becomes invalid. Indeed, a company cannot guarantee its own obligations. In this case, it may be necessary to obtain new securities to secure the loan.

Practical Checks and Steps for Lenders

When a lender is notified of a merger, the following practical steps should be taken:

1. Verify existing securities: Confirm their validity and automatic transfer to the merged company.
2. Analyze hypothec ranking: Examine the priority of securities based on filing dates and the origin of assets.
3. Update the RDPRM: If the company’s name changes, update registrations to ensure clarity and enforceability of rights.
4. Validate guarantees: Check whether guarantees remain valid. If they become void, the lender may require new securities.

These steps help secure the lender’s interests and minimize risks related to the merger. Anticipating these issues and proactively updating securities allows lenders to reduce risks and effectively protect their rights. At KRB, our banking and financing legal team provides expert support to assist you with rigor and efficiency. Please contact us for further information or tailored advice for your situation.

[1] Intention to make a proposal of Azoxco Cryogénique Inc., 2022 QCCA 1387; R. v. Black & Decker Manufacturing Co., 1974 CanLII 15 (SCC)

[2] Royal Bank of Canada v. Canadian Imperial Bank of Commerce, 2000 CanLII 8607 (QC CA)

[3] General Trust of Canada v. National Trust Company Ltd., 1989 CanLII 1290 (QC CA)

[4] Pagé, Nicole, RDPRM – Un registre qu’il faut connaître, Cours de perfectionnement du notariat, Éditions Yvon Blais, 2010-1 (RDPRM – A registry you need to know, Notarial Continuing Education Course, Éditions Yvon Blais, 2010-1)