Nuvo/Crescita -- summary under Butterfly spin-offs

Overview. Nuvo will implement a butterfly spin-off of its "Drug Development Business" as "Crescita" under an OBCA Plan of Arrangement, and retain it existing revenue and EBITDA generating "Speciality Pharmaceutical Business." No butterfly ruling has been sought, and it would be reasonable to expect that Code s. 355 would apply to the spin-off. After distribution by Nuvo of the subsidiary (Subco) to which the Drug Development Business has been transferred to the intended transferee corporation (Holdco), Holdco and Subco will amalgamate as part of the same Plan of Arrangement to form Amalco. Thus, Amalco is not the transferee corporation (see Read) and Holdco is (see 1996 CMTC Roundtable, Q. 16). The granting of fresh options by Holdco to optionholders is expressed to be part consideration for the distribution. Full stated capital is allocated to the "butterfly shares" of Nuvo created on its preliminary s. 86 reorg.

Nuvo. A TSX-listed OBCA specialty pharmaceutical company with a market cap of under $100 million. It has a Mississauga head office and a manufacturing and research facility in Varennes, Québec.

Crescita. Will be a drug development company with a diversified pipeline of product candidates and sufficient cash resources to execute its current business plan for the next 24 months.

Holdco and Subco. Were formed under the OBCA in order to carry out the Arrangement, and have no assets or liabilities.

Pre-Arrangement Transactions. The Drug Development Business is currently owned and operated by Nuvo and Nuvo subsidiaries. Prior to the Arrangement time, the Parties are expected to enter into the Separation Agreement and several ancillary agreements to complete the transfer from Nuvo of (a) ownership of the Drug Development Business (on an "as-is", "where-is" basis) to Subco (through the direct and indirect transfer to Subco of the shares of these subsidiaries and/or the assets and liabilities of Nuvo related to the Drug Development Business and (b) an estimated $35 million in cash to Subco. Subco will generally agree to indemnify Nuvo and its affiliates against any liabilities associated with, among other things, the Drug Development Business, whether relating to the period, or arising, prior to or after the Arrangement Date. Conversely, Nuvo will generally agree to indemnify Subco and its affiliates from and against any liabilities relating to, among other things, the Speciality Pharmaceutical Business. Nuvo and Subco also will indemnify each other with respect to non-performance of their respective obligations under their Separation Agreement.

Plan of Arrangement

1. Each Nuvo DSU participant will exchange his or her DSUs for Nuvo Common Shares.
2. The articles of Nuvo will be amended to change the designation of Nuvo's common shares from "Common Shares" to "Class A Common Shares" and to increase their voting rights to two votes per share.
3. The Class A Common Shares of each Nuvo common shareholder other than a dissenting shareholder (a “Participating Shareholder”) will be changed into one Post-Arrangement Nuvo Common Share and one Nuvo Butterfly Share, with stated capital equal to the fair market value of the Nuvo Butterfly Share allocated to suahc share, and the balance to the Post-Arrangement Nuvo Common Share.
4. Each Participating Shareholder will transfer each of its its Nuvo Butterfly Shares to Holdco in exchange for the issuance by Holdco of one Holdco Common Share.
5. Each option on Nuvo common shares will exchanged for one Post-Arrangement option to be granted by Nuvo that will upon vesting entitle the holder thereof to acquire one Nuvo Common Share, and for one option to be granted by Crescita that will upon vesting entitle the holder thereof to acquire one Crescita Common Share. The original exercise price of each outstanding Nuvo Option will be allocated to the Post-Arrangement Nuvo Option and the Crescita Arrangement Option, such that an amount equal to the Butterfly Proportion (see below) of the original exercise price will be payable to Crescita for each Crescita Common Share acquired under the Crescita Arrangement Option and an amount equal to the remainder of the original exercise price will be payable on exercise of the Post-Arrangement Nuvo Option.
6. Each holding of Nuvo will be exchanged for Post-Arrangement Nuvo SARs and Crescita Arrangement SARs.
7. Nuvo will transfer all of the common shares in the capital stock of Subco to Holdco in exchange for the granting by Holdco to the Nuvo Option Holders of Crescita Arrangement Options in accordance with 5 above, the granting by Holdco to the Nuvo SARs Holders of Crescita Arrangement SARs in accordance with 6 above and the issuance by Holdco to Nuvo of one Holdco Reorganization Share for each Subco Share transferred to Holdco.
8. Holdco will redeem from Nuvo all the Holdco Reorganization Shares and will issue to Nuvo, as payment therefor, a non-interest bearing demand promissory note.
9. Nuvo will redeem from Holdco all the Nuvo Butterfly Shares and will issue to Holdco, as payment therefor, a non-interest bearing demand promissory note.
10. The notes issued in 8 and 9 will be set-off.
11. Holdco and Subco will amalgamate and all issued and outstanding shares of Subco will be deemed cancelled.

Transitional Services Agreement. Nuvo and Crescita will agree to provide each other, on a transitional basis, certain services in order to facilitate the orderly transfer of the Drug Development Business to Crescita. Crescita will lease from Nuvo the portion of Nuvo's manufacturing facility in Varennes, Quebec, and various trade marks will be licensed.

Butterfly Proportion. Means an amount equal to the fraction (A)/(B) where:

(A) is the volume weighted average trading price of the Crescita Common Shares on the TSX for the first five trading days commencing on the date upon which the Crescita Common Shares commence trading on the TSX following the completion of the Arrangement; and

(B) is the sum of the amount determined under (A) above, plus the volume weighted average trading price of the Post-Arrangement Nuvo Common Shares on the TSX for the first five trading days commencing on the date upon which the Post-Arrangement Nuvo Common Shares commence trading on the TSX without any entitlement to the Crescita Common Shares.

Canadian tax consequences. S. 86 exchange. Each Resident Shareholder (other than a dissenting shareholder) will, in exchange for each Nuvo Common Share, receive one Post-Arrangement Nuvo Common Share and one Nuvo Butterfly Share. On such exchange, a Resident Shareholder will be deemed to have disposed of such Nuvo Common Shares for proceeds of disposition equal to the adjusted cost base of such shares at the time of the exchange. Accordingly, a Resident Shareholder will not realize a capital gain or a capital loss as a result of such share exchange.

Allocation of ACB. The adjusted cost base immediately before the share exchange of a Resident Shareholder's Nuvo Common Shares will be allocated among the Resident Shareholder's Post-Arrangement Nuvo Common Shares and Nuvo Butterfly Shares in proportion to the relative fair market value of such shares immediately after the share exchange. Nuvo intends to inform Resident Shareholders on Nuvo's website following the Arrangement as to Nuvo's estimate of the proportionate allocation.

S. 85.1 exchange. Each Nuvo Butterfly Share acquired by a Resident Shareholder pursuant to the Arrangement will be transferred by the Resident Shareholder to Crescita in consideration for the issuance to the particular Resident Shareholder of one Crescita Common Share. On such transfer, a Resident Shareholder who does not include in computing income for the year any portion of the resulting gain or loss, as otherwise determined, will be deemed to have disposed of such Nuvo Butterfly Shares for proceeds of disposition equal to the adjusted cost base of such shares immediately prior to such exchange.

U.S. tax considerations. S. 355. Code s. 355 requires that (in addition to the Arrangement being treated as a distribution of the stock of Crescita Common Shares notwithstanding its form as a series of transactions other than a distribution): the transaction be effected for one or more corporate business purposes; the transaction not be used "principally as a device for the distribution of the earnings and profits" of Nuvo or Crescita; and that both Nuvo and Crescita continue to be engaged after the transaction in one or more trades or businesses actively conducted by Nuvo or its subsidiaries throughout the 5-year period ending on the date of the deemed distribution. The Corporation believes that it would be reasonable for U.S. Holders to take the position that s. 355 will apply to the deemed distribution of Crescita Common Shares to holders of Nuvo Common Shares. If s. 355 applies, then, in general, no gain or loss will be recognized for Code purposes by the holders of Nuvo Common Shares by reason of the receipt of the distribution.

Alternate dividend treatment. If s. 355 does not apply to the deemed distribution of Crescita Common Shares to holders of Nuvo Common Shares, the deemed distribution of Crescita Common Shares to holders of Nuvo Common Shares will be taxable to U.S. Holders under the rules of s. 301. In such event, U.S. Holders will be required to include the fair market value of the Crescita Common Shares received pursuant to the Arrangement in gross income as a dividend to the extent of the current and accumulated "earnings and profits" of Nuvo.

PFIC rules. Nuvo does not believe that it was a PFIC for 2015, and, based on current business plans and financial projections, does not expect that it will be a PFIC for 2016. Nuvo has made no determination as to whether it or Crescita may be a PFIC for any other taxable year.