Endo/Paladin -- summary under New NR Holdco (Inversion)

Overview

It is proposed that a newly-formed Irish company (New Endo) will become the publicly-traded holding company for two public companies: Endo (a US public company) and Paladin (a Canadian pubic company). This is anticipated to avoid the U.S. anti-inversion rules in Code s. 7874 by virtue inter alia of the former Paladin shareholders holding more than 20% of the shares of New Endo (i.e., approximately 22.6%, corresponding to 35.4M ordinary shares). Under the terms of the Arrangement Agreement, (a) New Endo will cause it indirect newly-formed Canadian subsidiary (CanCo 1) to acquire the common shares of Paladin (the "Paladin Shares") pursuant to a CBCA Plan of Arrangement and (b) an indirect LLC subsidiary of Endo (Merger Sub) will merge with and into Endo, with Endo as the surviving corporation in the Merger. At the Merger Effective Time, each Endo Share will be converted into the right to receive one New Endo Share. As an alternative to selling their Paladin Shares directly, resident shareholders generally have the option of transferring their Paladin Shares to a respective newly-incorporated Canadian holding company (a Qualifying Holdco) solely in consideration for common shares, with the shareholders (presumably after engaging in a safe income strip) then transferring their Qualifying Holdco shares to CanCo 1. As a result of the above transactions, both Endo and Paladin will become indirect wholly-owned subsidiaries of New Endo. The Arrangement also includes the spin-off to Paladin Shareholders of a new Canadian public company (Knight Therapeutics) that intends to become a specialty pharmaceutical company.

New Endo (a.k.a. IrishCo)

Was incorporated, apparently by Paladin, as an Irish private limited company, with Paladin holding one ordinary share (see 7 of the Plan of Arrangement summary below). New Endo will be re-registered as a public limited company in connection with the Arrangement. It will be listed on the NASDAQ and TSX. It is expected to have the same executive officers as Endo.

Endo

Endo is a U.S.-based Delaware-incorporated specialty healthcare company whose shares trade on the NASDAQ.

Paladin

Paladin is a specialty pharmaceutical CBCA corporation trading on the TSX. Jonathan Ross Goodman and the other principal Paladin Shareholders, who owned in the aggregate approximately 34% of the outstanding Paladin Shares as of the date of the Arrangement Agreement, entered into Voting Agreements with Endo.

Merger Sub

Merger Sub is a Delaware LLC which has been newly formed and is wholly owned by Endo U.S.

Endo U.S

Endo U.S. is newly-formed under the laws of Delaware and is an indirect subsidiary of New Endo.

Interco (a.k.a., Endo Limited)

An Irish private limited company.

Interco 2

A private limited company incorporated in Ireland prior to the Effective Time of the Arrangement as a direct wholly-owned subsidiary of Interco.

Knight Therapeutics (a.k.a. Therapeutics)

Knight Therapeutics was incorporated under the CBCA on November 1, 2013 as a wholly-owned subsidiary of Paladin, and will hold a Barbados international business corporation and a Delaware subsidiary. The world-wide rights to the Impavido drug will be transferred to Knight Therapeutics or a Knight Therapeutics affiliate before the Arrangement by Paladin Labs (Barbados) Inc., a Barbados IBC and indirect subsidiary of Paladin.

Arrangement Consideration

The Arrangement Cash Consideration for a Paladin Share consists of the Arrangement Cash Consideration, the Arrangement Stock Consideration and the Arrangement Therapeutics Consideration. The Arrangement Cash Consideration is $1.16 in cash, subject to adjustment. The Arrangement Stock Consideration is 1.6331 newly issued ordinary shares of New Endo. The Arrangement Therapeutics Consideration is one Knight Therapeutics Share.

Adjustment of Arrangement Cash Consideration

The Arrangement Cash Consideration to be received by Paladin Shareholders will be increased if Endo's 10-day volume weighted average price declines during the ten trading day period ending on the third trading day prior to the Paladin shareholders' meeting by more than 7% relative to a reference price of US$44.4642 per share. Full cash compensation (determined on a U.S. dollar basis converted into and paid in Canadian dollars) will be provided by Endo to Paladin Shareholders for any share price declines of more than 7% but less than 20% from the reference price. If Endo's share price declines between 20% and 24% from the reference price during the agreed reference period, Endo will provide cash compensation (determined on a U.S. dollar basis converted into and paid in Canadian dollars) for one half of the incremental decline to Paladin Shareholders. Declines in Endo's share price beyond 24% from the reference price will not give rise to further cash compensation to Paladin Shareholders. The maximum amount potentially payable to Paladin Shareholders under this price protection mechanism is US$233 million.

Plan of Arrangement

1. Each Paladin stock option with a positive in-the-money value will vest and be transferred to CanCo 1 in exchange for the delivery by Amalco (as the successor of CanCo 1) of one common shares of Knight Therapeutics plus a number of New Endo Shares equal to 1.6331 multiplied by a factor determined by dividing (y) the sum of the Arrangement Cash Consideration plus the in-the-money value per Paladin Share, by (z) the closing price of a Paladin share on TSX on the trading day immediately preceding the Effective Date of the Plan of Arrangement.
2. Rights under the Paladin Share purchase plan will be cancelled in exchange for a cash amount based on the Paladin Share price immediately prior to Closing.
3. Each outstanding Paladin Share other than a share held by a Qualifying Holdco will be transferred to CanCo 1 in consideration for the payment by New Endo on behalf of CanCo 1 of the Arrangement Cash Consideration, the delivery by New Endo on behalf of CanCo 1 of the Arrangement Stock Consideration and the delivery by Amalco (as a successor of CanCo 1) of the Arrangement Therapeutics Consideration. (However, per s. 2.6(e) of the Arrangement Agreement, Endo in its sole discretion may amend this alternative to permit it to be effected as a tuck-under transaction.)
4. All of the outstanding share of the Qualifying Holdcos will be transferred to CanCo 1 in exchange for the payment by the same consideration as in 3, as adjusted for the number of Paladin Shares held by the respective Qualifying Holdcos.
5. In consideration for the above-noted consideration, CanCo 1 will issue 35M common shares to New Endo having full stated capital.
6. Each such CanCo 1 share will be contributed by New Endo to Interco, and Interco will in turn contribute those shares to Interco 2.
7. Paladin's one ordinary share of New Endo will be transferred to a person identified by Endo for €1.
8. CanCo 1 and each Qualifying Holdco will amalgamate under the CBCA, with each share of a Qualifying Holdco being cancelled, and the share capital including stated capital of Amalco being that of CanCo 1.
9. All the outstanding common shares of Knight Therapeutics will be transferred to Amalco in exchange for a promissory note equal to their fair market value.
10. Amalco, as the successor to CanCo 1 will deliver the Arrangement Therapeutics Consideration as required under 3, and the comparable (Knight Therapeutics share consideration) contemplated under 1 and 4), with Knight Therapeutics contemporaneously filing an election with CRA to be a public corporation.

Creation of New Endo distributable reserves

Under Irish law, dividends may only be paid (and share repurchases and redemptions must generally be funded) out of "distributable reserves". New Endo will not have distributable reserves immediately following the completion of the Transactions. Although New Endo does not expect to pay dividends for the foreseeable future, shareholders of Endo and Paladin are being asked at their respective special meetings to approve the creation of distributable reserves of New Endo (through the reduction of some or all of the share premium account of New Endo), in order to permit New Endo to be able to pay dividends (and repurchase or redeem shares) after the Arrangement.

Canadian tax consequences (per Summary)

The exchange of Paladin Shares for the Arrangement Consideration by a Paladin Shareholder who is a resident of Canada will generally be a taxable event… . A Paladin Shareholder who is not a resident of Canada will generally not be subject to tax in Canada in respect of such exchange of Paladin Shares unless such Paladin Shares constitute "taxable Canadian property" and are not "treaty-protected property" to such Paladin Shareholder… .

U.S. tax consequences (per Summary)

Under current U.S. federal income tax law, a corporation generally will be considered to be resident for U.S. federal income tax purposes in its place of organization or incorporation. Accordingly, under the generally applicable U.S. federal income tax rules, New Endo, which is an Irish incorporated entity, would generally be classified as a non-U.S. corporation (and, therefore, not a U.S. tax resident). Section 7874 of the Code…contain[s] specific rules…that may cause a non-U.S. corporation to be treated as a U.S. corporation for U.S. federal income tax purposes. These rules are complex and there is little or no guidance as to their application. …Section 7874… is currently expected to apply in a manner such that New Endo should not be treated as a U.S. corporation for U.S. federal income tax purposes. …Endo's obligation to complete the Transactions is conditional upon its receipt of the Section 7874 Opinion [of Skadden]. [Risk factors re this result then discussed.]

U.S. risk factors

Following the acquisition of a U.S. corporation by a foreign corporation, Section 7874 of the Code may limit the ability of the acquired U.S. corporation and its U.S. affiliates to utilize certain U.S. tax attributes such as net operating losses to offset U.S. taxable income resulting from certain transactions… .

New Endo may be subject to U.S. federal withholding tax as a result of Endo U.S.'s subscription for New Endo Shares in exchange for its promissory note.

Regardless of the application of Section 7874…New Endo is expected to be treated as an Irish resident company for Irish tax purposes because New Endo is incorporated under Irish law and is intending to have its place of central management and control (as determined for Irish tax purposes) in Ireland.

Irish tax consequences

Shareholders who are not resident in Ireland and do not hod their shares in connection with an Irish trade will not be subject to Irish tax on chargeable gains. A transfer of New Endo shares by transfer of book entry interest in DTC will not be subject to Irish stamp duty. Discussion of circumstances in which dividends of New Endo would be exempt from Irish withholding tax.