The Honeywell cash purchase price for COM DEV is reduced by capital gains tax realized by COM DEV on spinning out a subsidiary (exactEarth)

It is proposed that COM DEV spin-off its 73% interest in a subsidiary (exactEarth) under a s. 86 reorg and that its common shares then be acquired by an indirect Canadian sub of Honeywell International for an initial cash payment of $5.125 per common share plus a second “Contingent Payment Amount” approximately two weeks following the closing date of up to $0.125 per Common Share (based on whether the exactEarth shares have appreciated over a pegged figure in post-closing trading on the TSX.)

The rationale for the contingent payment is that Honeywell is only willing to pay the last $10 million of the purchase price for the COM DEV shares if the fair market value of the exactEarth Shares distributed by COM DEV on the s. 86 reorg (as evidenced by their trading prices on the TSX for the first five trading days after the Arrangement) does not exceed $7.15 per share (which is already a premium over the $6.50 per share at which COM DEV and the minority exactEarth shareholder will have subscribed for exactEarth shares shortly before the Arrangement.) To the extent that the market values exactEarth higher than this, the second cash payment by Honeywell to the former COM DEV shareholders will be reduced by the capital gains tax payable by COM DEV on that appreciation (at an assumed rate of 13%).

Neal Armstrong. Summary of COM DEV Circular unde Mergers & Acquisitions – Cross-Border Acquisitions – Inbound - Canadian Buyco.