Home Capital -- summary under Share Offer
Overview. Home Capital is proposing to repurchase approximately 6% of its outstanding Shares under a Dutch auction at a price of between $34.00 and $38.00 per Share. Deemed dividends will result, as the paid-up capital per Share is around $1.29. “It is a term of the Offer that for the purposes of subsection 191(4) of the Tax Act, the ‘specified amount’ in respect of each Share will be an amount equal to the closing trading price for the Shares on the TSX on the Expiration Date. "
Basic terms of Offer. Shareholders of the Company ("Shareholders") who wish to accept the Offer may do so in one of two ways: (a) by making an auction tender ("Auction Tender") pursuant to which they agree to sell to the Company at a specified price per Share (not less than $34.00 and not more than $38.00 and in increments of $0.10 within that range) a specified number of Shares owned by them; or (b) by making a purchase price tender ("Purchase Price Tender") which will be deemed to have been made at a price of $34.00 per Share. The Offer expires at 5:00 p.m. (EST) on April 15, 2016 subject to extension. On March 8, 2016 (the day the terms of the Offer were announced), the closing price of the Shares on the TSX was $34.06 per Share.
Dutch auction. Under a "Dutch Auction," a Shareholder may select a price of not more than $38.00 per Share and not less than $34.00 per Share (in increments of $0.10) at which that Shareholder is willing to deposit all or part of their Shares. Promptly after 5:00 p.m. (Eastern time) on April 15, 2016, the Company will determine a single Purchase Price, which will be the lowest price per Share of not more than $38.00 and not less than $34.00 per Share at which Shares have been deposited or have been deemed to be deposited under the Offer that will enable the Company to purchase the maximum number of Shares deposited pursuant to the Offer, having an aggregate purchase price not exceeding $150,000,000. The Company will pay the Purchase Price in cash to all Shareholders who have validly deposited (and have not withdrawn) their Shares pursuant to Auction Tenders at prices equal to or less than the Purchase Price or pursuant to Purchase Price Tenders (or Purchase Price Tenders, which will be deemed to have been deposited at a price of $34.00 per Share for purposes of determining the Purchase Price), subject to applicable withholding taxes.
Home Capital. A TSX-listed holding company that operates primarily through its principal, federally regulated subsidiary, Home Trust Company, which offers insured and uninsured deposits, residential and non-residential commercial mortgage lending and consumer lending. Home Trust also conducts business through its wholly owned subsidiary, CFF Bank. The Company's subsidiary Payment Services Interactive Gateway Inc. provides payment card services. As at March 8, 2016, there were 69,965,680 outstanding Shares. The maximum of 4,411,765 Shares that the Company is offering to purchase represents 6.31% of the total outstanding Shares. Assuming the Offer is fully subscribed, the minimum of 3,947,368 Shares that the Company is offering to purchase represents 5.64% of such total.
Pt. VI.1 tax. The Company will not be required to accept for purchase, purchase or pay for any Shares deposited, and may terminate or cancel the Offer if the Company determines, in its sole judgment, acting reasonably, that it would be subject to Part VI.1 tax in connection with the Offer or if the completion of the Offer subjects the Company to any material tax liability. “It is a term of the Offer that for the purposes of subsection 191(4) of the Tax Act, the ‘specified amount’ in respect of each Share will be an amount equal to the closing trading price for the Shares on the TSX on the Expiration Date.”
Liquid market exemption. The Company has concluded it can rely on the "liquid market exemption" specified in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions. In addition, the board of directors of the Company has obtained a liquidity opinion from RBC Dominion Securities Inc.
Canadian tax consequences. Residents. A resident who sells Shares pursuant to the Offer will be deemed to receive a taxable dividend equal to the excess of the amount paid by Home Capital for the Shares over their paid-up capital, which is estimated to be approximately $1.29. Under s. 55(2), a resident Shareholder that is a corporation may be required to treat all or a portion of any deemed dividend that is deductible in computing taxable income as proceeds of disposition and not as a dividend, generally in circumstances where the resident Shareholder would have realized a capital gain if it disposed of any share at fair market value immediately before the sale of Shares to the Company and the sale to the Company resulted in a significant reduction in such capital gain.
Non-residents. A deemed dividend will be subject to Canadian withholding tax at a rate of 25% or such lower rate as may be substantiated under the terms of an applicable Canadian tax treaty. A non-resident Shareholder will not be subject to tax under the Tax Act in respect of any capital gain realized on the disposition of Shares under the Offer unless the Shares are "taxable Canadian property" to the Non-Resident Shareholder at the time of such sale and such gain is not otherwise exempt from tax under the Tax Act pursuant to the provisions of an applicable income tax convention (if any). Non-Resident Shareholders should consult their own tax advisors regarding selling their Shares in the market as an alternative to selling Shares pursuant to the Offer.
U.S. tax consequences. Three s. 302 tests. Under Code s. 302, a U.S. Holder whose Shares are tendered and sold for cash pursuant to the Offer will be treated as having engaged in a "sale or exchange" of such Shares and, thus, will recognize gain or loss if the transaction (a) constitutes a "substantially disproportionate" distribution by the Company with respect to such U.S. Holder, (b) results in "complete termination" of such U.S. Holder's equity interest in the Company, or (c) is "not essentially equivalent to a dividend" with respect to the U.S. Holder. These tests are explained below.
"Substantially disproportionate" distribution. The receipt of cash by a U.S. Holder generally will constitute a "substantially disproportionate" distribution by the Company with respect to the U.S. Holder if (1) the percentage of the outstanding voting shares of the Company actually and constructively owned by the U.S. Holder immediately following the sale of Shares pursuant to the Offer (treating Shares purchased pursuant to the Offer as not outstanding) is less than 80% of the percentage of the outstanding voting shares of the Company actually and constructively owned by the U.S. Holder immediately before the exchange (treating Shares purchased pursuant to the Offer as outstanding), and (2) immediately following the exchange, the U.S. Holder actually and constructively owns less than 50% of the outstanding voting shares.
"Complete termination" of equity interest. The receipt of cash by a U.S. Holder will be treated as a complete termination of the U.S. Holder's equity interest in the Company if either (a) all of the Shares actually and constructively owned by the U.S. Holder are sold pursuant to the Offer, or (b) all of the Shares actually owned by the U.S. Holder are sold pursuant to the Offer and the U.S. Holder is eligible to waive, and effectively waives, the attribution of all Shares constructively owned by the U.S. Holder in accordance with the procedures described in Code s. 302(c)(2).
"Not essentially equivalent to a dividend." The receipt of cash by a U.S. Holder will generally be treated as "not essentially equivalent to a dividend" if the U.S. Holder's sale of Shares pursuant to the Offer results in a "meaningful reduction" of the U.S. Holder's proportionate interest in the Company. ….In the case of a U.S. Holder holding a small minority interest (for example, less than 1%) in the Shares and exercising no control over corporate affairs, a small reduction in such interest is likely to be treated as a "meaningful reduction" in that Holder's interest, and thus satisfy the "not essentially equivalent to a dividend" test.
Simultaneous sale. Under certain circumstances, it may be possible for a tendering U.S. Holder to satisfy one of the s. 302 tests by contemporaneously selling or otherwise disposing of all or some of the Shares that are actually or constructively owned by the U.S. Holder, but that are not purchased pursuant to the Offer.
Distribution alternative. If a U.S. Holder is not treated under s. 302 as having engaged in a "sale or exchange" of its Shares, then the amount received (taking into account certain currency adjustments and before any withholding tax) by it will be treated as a distribution by the Company in respect of such U.S. Holder's Shares. Subject to the PFIC rules, such distribution will be treated as a dividend, without reduction for any Canadian taxes withheld from the amount paid, to the extent of the Company's current or accumulated "earnings and profits." Amounts treated as distributions that are in excess of the Company's current or accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder's adjusted tax basis in the Shares and, to the extent in excess of such basis, will be treated as capital gain with respect to such Shares.