US Silver/RX Gold -- summary under New Holdco
A combination of U.S. Silver (TSX, US OTCQX and Fankfurt) and RX Gold (TSX-V) pursuant to a Combination Agreement originally dated June 7, 2012 is to be effected by (1) each outstanding common share of U.S. Silver being exchanged pursuant to a CBCA plan of arrangement for 0.67 of a common share of a newly-incorporated OBCA holding company (U.S. Silver & Gold Inc., or "Combined Company"), and (2) each outstanding common share of RX Gold being exchanged (at the same time as (a)) pursuant to an Ontario plan of arrangement for 0.109 of a common share of Combined Company. This will result in the former shareholders of U.S. Silver holding 70% of the shares of Combined Company, and receiving an implied premium of 45% based on the pre-announcement trading price. Combined Company will have been a subsidiary of RX Gold before the exchange.
Outstanding options on U.S. Silver and RX Gold common shares are exchanged for the same number of options on common shares of Combined Company, but with the number of optioned shares multiplied by the exchange ratio, and the exercise price divided by the exchange ratio. Warrants become exercisable against Combined Company common shares by their terms. A break fee is payable by each party of 3% of its implied equity value under a "Superior Proposal."
Those who have validly exercised dissent rights will be deemed to have transferred their U.S. Silver or RX Gold shares to Combined Company for an entitlement to be paid the fair value of their shares.
Canadian taxation
The s. 85.1(1) rollover will apply to exchanging shareholders holding their U.S. Silver or RX Gold shares as capital property (unless they elect to report a capital gain or loss). A foreign tax credit for any US tax on the exchange will not be available if there is no US-source income. Resident dissenting shareholders will be considered to have received proceeds of disposition equal to the cash compensation received by them (other than any interest award, which would be ordinary income).
Shares of non-residents may not be taxable Canadian property - and if they are (and are not Treaty-exempt), the s. 85.1(1) rollover generally would be available.
US taxation
Even though U.S. Silver is organized as a Canadian corporation, it should be treated as a US domestic corporation for purposes of s. 7874 of the Code. Combined Company should not be treated as a US domestic corporation because less than 80% of its shares will be held by the former shareholders of U.S. Silver. However, as such shareholders will hold at least 60% of the shares of Combined Company, U.S. Silver is required to recognize any "inversion gain" on the transaction. For a period of 10 years, U.S. Silver will not be able to use any deductions, net operating losses, or credits to offset any inversion gain.
The exchange of a US-resident holder of its U.S. Silver shares should qualify as a tax-deferred transaction under s. 368 or 351 of the Code. However, pursuant to special rules in s. 367(a), the US holder should recognize gain (but not loss) equal to any excess of the fair market value of the Combined Company shares received over the adjusted tax basis of the exchanged shares.
Although U.S. Silver is believed to be a U.S. real property holding corporation, its shares qualify as being traded on an "over-the-counter market," so that only a non-US shareholder with a greater than 5% interest (as defined) in U.S. Silver will be subject to 10% withholding on the gross fair market value of shares of the Combined Company received on the exchange.
RX Gold believes that it has been a PFIC for each year prior to its 2010 fiscal year, but does not expect to be a PFIC in the year of the transaction, and does not expect the Combined Company to be a PFIC. A US holder of RX Gold shares who acquired RX Gold shares when it was a PFIC will be subject to adverse consequences under s. 1291 on the exchange. The exchange of RX Gold by other US holders generally will be a non-recognition event.