QLT/Auxilium -- summary under Reverse takeovers

Overview

To effect the combination of Auxilium and QLT, AcquireCo, an indirect wholly owned subsidiary of QLT, will be merged with and into Auxilium (the "merger"). Auxilium will be the surviving corporation and, through the merger, will become an indirect wholly owned subsidiary of QLT ("New Auxilium"). Auxilium stockholders will receive a fixed ratio of 3.1359 QLT common shares for each Auxilium common share. The equity exchange ratio may be increased by up to 0.0962 QLT common shares depending on the aggregate cash consideration (if any) received by QLT or its subsidiary at or immediately after the merger effective time in respect of any sale or licence of QLT's synthetic retinoid product in development. QLT shareholders will continue to own their existing QLT common shares after the merger. Upon the closing, current QLT shareholders and former Auxilium stockholders will own approximately 24% and 76% of the combined company on a fully diluted basis, so that it is anticipated that Code s. 7874 will not deem New Auxilium to be a U.S. corporation.

QLT

A TSX and NASDAQ listed B.C. biotech corporation engaged in the development of ocular products.

Auxilium

A NASDAQ listed Delaware specialty biopharmaceutical corporation. In negotiations with QLT it projected that it would have pre-tax non-GAAP income of $109M and $182M in 2015 and 2018, respectively.

HoldCo

A wholly-owned Delaware subsidiary of QLT formed the purpose of effecting the merger.

AcquireCo

QLT Acquisition Corp., a wholly-owned Delaware subsidiary of HoldCo.

Merger

1. Immediately prior to the "Merger Effective Time," QLT will subscribe for a number of shares of common stock of HoldCo that is equal to the number of Auxilium Shares issued and outstanding immediately prior to the Merger Effective Time multiplied by the "Equity Exchange Ratio" (described below), for a purchase price in cash equal to the fair market value of such shares (the "Subscription Price").
2. HoldCo will subscribe for a number of common shares of QLT that is equal to the number of Auxilium Shares issued and outstanding immediately prior to the Merger Effective Time multiplied by the Equity Exchange ratio for a purchase price in cash equal to the Subscription Price.
3. At the Merger Effective Time:
   
   1. AcquireCo will be merged with and into Auxilium and the separate existence of AcquireCo will cease. Auxilium will survive the merger as an indirect wholly owned subsidiary of QLT.
   2. Each issued and outstanding common share of AcquireCo shall be converted into one fully paid share of redeemable preferred stock of the Surviving Company, such redeemable preferred stock to have an aggregate redemption amount and fair market value equal to the fair market value of converted common shares immediately prior to the Merger Effective Time.
   3. Each issued and outstanding Auxilium share shall be converted into the right to receive (from HoldCo, on behalf of AcquireCo) QLT shares based in number on the Equity Exchange Ratio.
   4. The Surviving Company, as successor to AcquireCo, shall issue such number of shares of common stock to HoldCo equal to the number of Auxilium shares issued and outstanding immediately prior to the Merger Effective Time multiplied by the Equity Exchange Ratio in consideration for HoldCo delivering (on behalf of AcquireCo) common shares of QLT to the former Auxilium Stockholders.
4. The terms of the Auxilium stock option plan will be adjusted and QLT will assume such options.

The "Equity Exchange Ratio" reflects the right to receive, for each outstanding share of Auxilium common stock, 3.1359 QLT common shares (the "equity exchange ratio"), provided that in the event that, at or immediately after the merger effective time, QLT or its subsidiary receives aggregate cash consideration pursuant to the sale, license, sublicense or similar transaction related to its proprietary synthetic retinoid product in development known as "QLT091001", which is less than $25 million but equal to or greater than $20 million then, the equity exchange ratio shall be increased by 0.0192; and so on for further specified $5M increments as follows:

• $20 million to $15 million: 0.0385;
• $15 million to $10 million: 0.0577;
• $10 million to $5 million: 0.0770;
• or less than $5 million, or in the event that no such transaction is consummated at or immediately after the merger effective time, then the equity exchange ratio shall be increased by 0.0962.

The certificate of incorporation of AcquireCo immediately prior to the Merger Effective Time, shall be the certificate of incorporation of the surviving company. The Board of Directors of New Auxilium will consist of seven individuals designated by Auxilium and two individuals designated by QLT who are acceptable to Auxilium. Closing of the merger will occur on the earlier of December 31, 2014 and three business days after satisfaction of the stipulated conditions including approval by both companies' shareholders, regulatory approvals and lender consents. Auxilium will use commercially reasonable efforts to ensure that the Auxilium meeting will occur no more than two business days after the QLT meeting.

S. 7874 merger conditions

Auxilium's obligation to complete the merger is subject to there being no change in applicable law (whether or not yet effective) respecting Code s. 7874 of the Code or any official interpretations (other than IRS News Releases) thereof (whether or not yet effective), and there being no bills to implement such a change which have been passed by both houses of Congress and for which the time period for the President signing or vetoing such bills has not yet elapsed, in each case prior to October 31, 2014, that, once effective, in the opinion of nationally recognized U.S. tax counsel, would cause New Auxilium to be treated as a U.S. domestic corporation. Any such event after October 31, 2014 would not relieve Auxilium of its obligation to complete the merger. In addition, Auxilium's obligation to complete the merger is subject to receiving a Skadden, Arps opinion dated as of the closing date of the merger that s. 7874 should not apply so as to cause QLT to be treated as a domestic corporation from and after the closing date. Skadden's s. 7874 opinion will be based only on the tax laws in effect on or before October 31, 2014. Accordingly, in the event of such change of tax law after October 31, 2014 but before the closing date of the merger (other than as a result of bills that have been passed by both houses on or prior to October 31, 2014), Auxilium would be required to complete the merger even though New Auxilium would be treated as a U.S. domestic corporation for U.S. federal income tax purposes.

Canadian tax consequences

As of December 31, 2013 QLT had approximately $284.6 million of capital loss carryforwards and $102.9 million of non-capital loss carryforwards. QLT will be subject to a "loss restriction event" as a result of the acquisition of QLT common shares by Auxilium stockholders under the merger agreement.

U.S. tax consequences

Tax residence of New Auxilium (s. 7874). New Auxilium, including its expanded affiliated group, is not expected to have substantial business activities in Canada. However, after the merger, Auxilium stockholders are expected to be treated as holding less than 80% (by both vote and value) of the New Auxilium common shares by reason of their ownership of Auxilium common stock. The disclosure assumes that New Auxilium will not be treated as a U.S. corporation.

Offsetting of inversion gains

The Auxilium stockholders are expected to receive at least 60% (but less than 80%) of the vote and value of the New Auxilium common shares by reason of holding Auxilium common shares. Furthermore, Auxilium currently expects that the substantial business activities test will not be satisfied. As a result, Auxilium and its U.S. affiliates could be limited in their ability to utilize their U.S. tax attributes to offset any inversion gain (including gain from the transfer of shares or certain other property and income from licensing property which is transferred or licensed as part of the acquisition or to a foreign related person). However, neither Auxilium nor its U.S. affiliates expect to recognize any inversion gain as part of the proposed transaction, nor do they currently intend to engage in any transaction in the near future that would generate inversion gain. In addition, Auxilium expects that it will undergo an "ownership change" under s. 382 (see below). Nevertheless, Auxilium expects that it will be able to fully utilize its U.S. net operating losses prior to their expiration, to offset U.S. taxable income generated after the proposed transaction through ordinary business operations.

Shareholder gain recognition

Although the merger will qualify as a "reorganization" under s. 368(a), as New Auxilium should be respected as a foreign corporation the s. 367(a) rules will require U.S. holders exchanging shares of Auxilium common stock for New Auxilium common shares to recognize gain. Accordingly, a U.S. stockholder of Auxilium should recognize gain equal to any excess of the fair market value of the QLT common shares received on the merger over its adjusted tax basis in the shares of Auxilium common stock.

PFIC status

QLT believes that it may have been treated as a PFIC for U.S. federal income tax purposes for its taxable years ending December 31, 2008 through 2013. Nonetheless, New Auxilium is not currently expected to be treated as a PFIC for U.S. federal income tax purposes for the taxable year that includes the merger or for foreseeable future taxable years.

S. 382 (per Risk Factors)

As of December 31, 2013, Auxilium had approximately $135.9 million of net operating loss carryforwards. The merger is expected to result in an ownership change under Code s. 382 of the Code for Auxilium, potentially limiting the use of Auxilium's net operating loss carryforwards in future taxable years.