Forbes/Deans

For the subsequent CRA attack, see under Spin-Offs & Distributions – Liquidations.

Overview

All the shareholders of the Corporation transferred their shares to a new holding company ("Forbes") in exchange for Forbes shares, and the Corporation transferred its assets to Forbes so that it had no assets other than substantial tax shelter. It then issued a convertible debenture for $3M to a company (Matco) which was mostly convertible into non-voting shares, presumably so that there would be no acquisition of control. Shortly thereafter and immediately after the convertible bond conversion, it issued $100M of voting common shares under a public offering (now representing most of its shares), with the proceeds used in a new corporate high-yield bond investing business. The existing shareholders at the time of the IPO (Matco under 80%, Forbes over 20%) effectively received part payment for the tax shelter through dilution of the new investors.

Prior history

Prior to the 2008 reorganization described below (the "Reorganization"), the Corporation was a TSX and NASDAQ-listed life sciences company which had accumulated investment tax credits of $7M, non-capital losses of $19.4M and undeducted SR&ED expenditures of $34.4.

2008 share exchange

On February 27, 2008, the Corporation reorganized its corporate structure pursuant to a plan of arrangement under the CBCA (the "Arrangement"). Pursuant to the Arrangement, the Corporation changed its name from "Forbes Medi-Tech Inc." to "Forbes Medi-Tech Operations Inc." and all of the Corporation's then outstanding common shares, options and warrants were exchanged for common shares, options and warrants of Forbes, a newly formed B.C. corporation. As a result of the exchange of shares, the Corporation became a wholly-owned subsidiary of Forbes and the common shares of Forbes began to trade on the TSX and NASDAQ in substitution for the common shares of the Corporation. In order to have a qualifying arrangement, the shareholders first eliminated the Corporation's deficit through a stated capital reduction of $98.5M

2008 asset disposal and convertible debenture issuance

On May 9, 2008, the Corporation completed the Reorganization pursuant to which it transferred all of its assets and operations (having a realizable value of $15.9M) to Forbes, and Forbes assumed the related liabilities. As a result the Corporation held no material assets other than the tax attributes described above. As part of the Reorganization, Matco (a private investment company of D. Alan Ross) subscribed $3M for the Convertible Debenture. The Convertible Debenture was convertible into voting common shares (the "Shares) and non-voting common shares (the "Non-Voting Shares") representing under 80% of all the issued and outstanding Common Shares prior to giving effect to the Offering described below (and representing 35% of the Shares and 100% of the Non-Voting Shares), being approximately $5.0 million of common shares based on the $10.00 per Share offering price. Matco agreed with the Corporation that it would convert the Convertible Debenture in full immediately prior to the Closing of the Offering.

2009 Offering

On February 6, 2009, the Corporation, filed articles of amendment to be renamed Deans Knight Income Corporation, to consolidate its shares on a 382-for-1 basis, to provide investment objectives and limitations, and to provide for the redemption of its shares on April 30, 2014 for a cash amount equal to 100% of the Net Asset Value per Share. It completed an initial public offering on March 17, 2009. It issued 10.04M Shares for gross proceeds of $100.4M. The net proceeds were used to invest in a portfolio of corporate bonds under the management of Deans Knight Capital Management Ltd., a B.C.-based investment firm.

Canadian tax consequences

Arrangement. The share exchange with Forbes is governed by s. 85.1, and the option and warrant exchanges occur on a taxable basis.

Offering

The Corporation will not be a mutual fund corporation. "Based in part upon representations from the Company as to certain factual maters, the Shares will not be ‘taxable preferred shares' or ‘short term preferred shares'… ."

U.S. tax consequences

The Corporation intends the Arrangement to qualify as either a tax-deferred reorganization under Code s. 368(1)(a) and/or a tax-deferred exchange under Code s. 351. The Corporation expects that it has been a PFCI for 2007 and onwards.