FirstService/Collier -- summary under Butterfly spin-offs

Overview

Under a spin-off s. 55(3.02) butterfly reorganization occurring under an OBCA Plan of Arrangement, the residential real estate and property services business of FirstService will be spun-off as New FSV (to be renamed FirstService), and (old) FirstService following its amalgamation with FCRESI will carry on the (retained) commercial real estate services division, with the amalgamated corporation to be called Colliers. Colliers and (spun-off) FirstServices will have pro forma opening equity of $65.5M and $158.7M, respectively, and will be highly levered. Completion of the arrangement is conditional inter alia on a Canadian tax ruling (respecting rollover treatment for FirstService, New FSV and most Canadian-resident shareholders) and a U.S. tax opinion of PWC respecting treatment as a Code s. 355 spin-off. Arrangements for a purchase of the shares of minority shareholders of FCRESI in exchange for Colliers shares will be entered into before the Arrangement, but will be timed to occur immediately after the butterfly distribution so as not to run afoul of s. 55(3.1)(a).

FirstService

An OBCA corporation whose (34.6M outstanding) FirstService Subordinate Voting Shares ("SVS"), which are listed on the TSX and NASDAQ, carry one vote per share and whose (1.3M outstanding) FirstService Multiple Voting Shares ("MVS") carry 20 votes per share and are convertible on a one-for-one basis into the FirstService SVS. It is controlled by Jay S. Hennick, the founder and CEO indirectly holding 6.6% of the SVS and 100% of the MVS, who provides management services through "Jayset." Minority shareholders hold 8.8% of a commercial real estate services subsidiary (FCRESI).

Pre-Arrangement transactions

The assets and liabilities associated with the residential and property services business of FirstService were transferred by it to FSV Holdco, a new B.C. subsidiary in exchange inter alia for a U.S.$187.5M note, which upon completion of the Arrangement will be repaid by New FSV drawing down under a line of credit and by the assumption of U.S.$150M of 2025 Notes. Outside of the Plan of Arrangement, the FCRESI Arrangements will be entered into under which, upon their becoming effective immediately after the commencement of FSV Holdco's dissolution under the Plan of Arrangement, FCRESI will become wholly-owned by FirstService and with the former minority shareholders of FCRESI holding Colliers Subordinate Voting Shares.

Plan of Arrangement

1. FirstService Shares held by dissenting shareholders will be deemed to be transferred to FirstService;
2. concurrently with the FirstService Share Exchange described below the FirstService stock options will be disposed of to New FSV and FirstService for replacement options, with the exercise prices being allocated based on the relative net fair market value of the property distributed to New FSV compared to the net fair market value of all property owned by FirstService immediately before the distribution;
3. under the "FirstService Share Exchange" each FirstService Multiple Voting Share (after being amended to increase the votes to 40 per share) and FirstService Subordinate Voting Share (after being amended to increase the votes to two per share) will be exchanged respectively for one FirstService New Multiple Voting Share (having 20 votes per share) and one FirstService MV Special Share, and for one FirstService New Subordinate Voting Share (having one vote per share) and one FirstService SV Special Share, with a proportionate allocation of the stated capital of the exchanged shares occurring;
4. each outstanding FirstService MV Special Share and FirstService SV Special Share will be transferred to New FSV (on a s. 85 rollover basis if so requested within 120 days by a shareholder that is a taxable resident Canadian, a non-resident whose shares are taxable Canadian property or a partnership with such a partner) in exchange for one New FSV Multiple Voting Share or one New FSV Subordinate Voting Share, with the stated capital of the new shares not exceeding any applicable s. 85 elected amount;
5. FirstService will transfer the common shares of FSV Holdco to New FSV in consideration for 1,000,000 New FSV Special Shares having an aggregate redemption amount equal to the fair market value of the Distribution Property and with FirstService and New FSV to elect under s. 85(1) and with the stated capital of the New FSV Special Shares to be limited accordingly;
6. New FSV will redeem the New FSV Special Shares for the New FSV Redemption Note;
7. FirstService will redeem all the FirstService MV Special Shares and FirstService SV Special Shares held by New FSV in consideration for the FirstService Redemption Note;
8. each Note will be repaid through the transfer to the creditor of the other Note;
9. New FSV will resolve to voluntarily dissolve FSV Holdco under the BCBCA in accordance with s. 88(1);
10. the stated capital of all the FCRESI shares will be reduced to $1;
11. FirstService and FCRESI will amalgamate under the OBCA to continue as Colliers, with the Certificate of Arrangement deemed to be the certificate of amalgamation of Colliers and with each share of FCRESI held by FirstService cancelled.

Butterfly covenants

Acts of FirstService or New FSV listed on p. 61 that would cause the above butterfly to be taxable would trigger an indemnity obligation. In particular FirstService (which will then be Colliers) and New FSV, for a period of three years after the Effective Date of the Arrangement, will not (and will cause their subsidiaries to not) take any action, omit to take any action or enter into any transaction that could cause the Arrangement or any transaction contemplated by the Arrangement Agreement to be taxed in a manner inconsistent with that provided for in the Tax Ruling and U.S. Tax Opinion. With respect to Canadian income taxation, in addition to various transactions that the respective parties are prohibited from undertaking prior to and after the implementation of the Arrangement, after the implementation of the Arrangement, neither Colliers nor New FSV will be permitted to dispose of or exchange property having a fair market value greater than 10% of the fair market value of its property or, among other things, undergoing an acquisition of Control.

Canadian tax consequences

Increase in voting rights. The increase in voting rights for the FirstService Subordinate Voting Share and FirstService Multiple Voting Shares will not result in their disposition.

FirstService Share Exchange

The exchange of FirstService Subordinate Voting Shares for FirstService New Subordinate Voting Shares and FirstService SV Special Shares will result in a disposition at Adjusted cost base, with the allocation thereof between the FirstService New Subordinate Voting Shares and FirstService SV Special Shares to be based on relative fair market values of the shares immediately after the exchange – and similarly for the multiple voting shares. FirstService will post its estimate of the proportionate allocation by press release or on its website following the Arrangement.

Transfer to New FSV

The transfer of FirstService MV Special Shares and FirstService SV Special Shares to New FSV will occur on a rollover basis under s. 85.1 unless the transferor shareholder chooses to elect capital gains or capital loss treatment on the transfer or jointly elects under s. 85(1) or (2).

Amalgamation

No capital gain or loss will be recognized by a shareholder as a result of the amalgamation.

Dissenting shareholders

May be deemed subject to s. 55(2) to have received a dividend based on the paid-up capital of their shares.

RRSP eligibility

The Colliers Subordinate Voting Shares are expected to be listed when issued but, in any event, it will make the election under the postamble of s. 89(1) - public corporation from the beginning of its first year.

U.S. tax consequences

Code s. 355 is intended to apply to the transfer of the New FSV Shares to U.S. holders (notwithstanding that the form of the transactions is not a distribution), so that in general no gain or loss will thereby be recognized, and with the former tax basis being allocated on a relative fair market value basis.