GWRC/GWRI -- summary under Outbound mergers
Overview. The sole asset of GWRC is a 48% equity interest in GWRI. In order to take advantage of a term of bonds previously issued by GWRI, which permits their refinancing if GWRI engages in a public offering, it is proposed that GWRC be merged into GWRI under the Delaware corporate law (but as authorized under a B.C. Plan of Arrangement), with GWRI as the survivor – following which a public offering by GWRI would be completed. In light of s. 128.2(2), the merger is expected to trigger asset dispositions under s. 128.1(4)(b) and potential emigration tax (at a 5% rather than 25% rate) under s. 219.1, although no significant tax is anticipated. Canadian shareholders will be eligible for rollover treatment given qualification of the merger under s. 87(8). GWRC will be treated for Code purposes as (i) transferring all of its assets and liabilities to GWRI, in exchange for common shares of GWRI, and (ii) distributing those GWRI shares (a FIRPTA asset) to its shareholders. GWRI is anticipated to have no significant "all earnings and profits amount."
GWRC. A TSX-listed B.C. company which completed its initial public offering in Canada on the TSX on December 30, 2010. Its sole asset is an approximate 47.8% equity interest in GWRI.
GWRI. GWRI operates in the Western U.S. as a water resource management company that owns and operates regulated water, wastewater and recycled water utilities, principally in metropolitan Phoenix, Arizona.
Bond Refinancing. Concurrent with the announcement of the Arrangement, GWRI announced that it has filed a registration statement on Form S-1 with the SEC for a proposed primary offering of its shares of common stock (the "U.S. IPO"). Following the U.S. IPO, GWRI plans to refinance all of its tax-exempt bonds (with a principal of U.S.$106.7 million) issued through The Industrial Development Authority of the County of Pima. The loan agreements relating to such bonds provide a redemption option exercisable by GWRI at a price of 103% of the principal amount redeemed, plus interest accrued up to the redemption date, in the event of a "public offering" of ownership interests in GWRI. The U.S. IPO, once completed, will constitute such a public offering. GWRI believes it can reduce the effective interest rate on the outstanding balance of such debt by approximately 75 to 150 basis points.
Securities laws. Pursuant to an order of the Ontario Securities Commission and the Autorité des marches financiers dated January 27, 2016, GWRC obtained exemptive relief from the formal valuation requirement in MI 61-101 on the basis that the value of the shares of common stock of GWRI will be, in all material respects, economically equivalent to the value of the Common Shares.
Arrangement/Merger.
The Plan of Arrangement is stated to be binding at and after its Effective Time on GWRC, GWRI and the GWRC security holders, and the following would occur thereunder:
- GWRC will be authorized to merge with and into GWRI, which merger shall be effected under the General Corporation Law of Delaware to form one corporate entity, with the same effect as if GWRC had been authorized to amalgamate with GWRI under s. 284 of the BCBCA, and whereby pursuant to such merger and the General Corporation Law the separate legal existence of GWRI will not cease and GWRI will be the surviving entity;
- each outstanding Option will be exchanged for a Replacement Option;
- each outstanding SAR will be exchanged for a Replacement SAR granted by GWRI;
- each outstanding DPU and PSU will be continued;
- each Common Share in respect of which Dissent Rights have been validly exercised and not withdrawn shall be cancelled and become an entitlement to be paid the fair value of such Common Share; and
- each issued and outstanding Common Share shall be exchanged for one share of common stock of GWRI.
Dividends. Following the completion of the Arrangement, GWRI intends to pay a regular monthly dividend on the shares of common stock of GWRI of U.S.$0.021 per share (U.S$0.25 per share annually), or an aggregate of approximately U.S.$4.85 million on an annual basis, which is the U.S.$ equivalent of the current C$0.0283 monthly dividend of GWRC.
Canadian tax consequences. Deemed emigration (governed by s. 128.1(4)) under s. 128.2. Immediately before the merger, GWRC will be deemed to have ceased to be a resident of Canada, its taxation year will be deemed to have ended immediately before that time, and it will be deemed to have sold all of its property (consisting almost exclusively of its shares of GWRI) and received fair market value proceeds therefor.
S. 219.1 emigration tax. Emigration tax will be imposed on the amount by which the fair market value of all of the properties of GWRC immediately before the end of the of its Deemed Taxation Year exceeds the aggregate of (i) the paid-up capital of the Common Shares immediately before the end of the deemed taxation year, and (ii) the amount of all debts owing by GWRC (other than amounts payable in respect of dividends and this emigration tax), as of the end of the deemed taxation year. The emigration tax must be paid on or before the day on which GWRC is required to file its income tax return for the deemed taxation year and cannot be offset by any losses of GWRC. The emigration tax will be imposed at a rate of 5%, unless it can reasonably be concluded that one of the main reasons that GWRC became resident in the U.S. was to reduce the emigration tax or Canadian withholding tax payable by GWRC, in which case the rate of emigration tax would be 25%. GWRC is of the view that it would not be reasonable to so conclude. Based on its current and expected circumstances, GWRC does not expect to be subject to material Canadian taxation as a result of either the deemed disposition of the property of GWRC or the imposition of the corporate emigration tax.
Application of foreign merger rules to shareholders. It is expected that the merger will be a "foreign merger" for purposes of the Tax Act. Except where a particular Resident Holder chooses to recognize a capital gain (or capital loss) on the merger (as discussed below), pursuant to subsection 87(8) of the Tax Act, Resident Holders will be deemed to have disposed of Common Shares for proceeds of disposition equal to the aggregate adjusted cost base of such shares immediately before the Merger and will be deemed to have acquired the shares of common stock of GWRI received on the merger at a cost equal to the same amount. It is not possible for a Resident Holder to elect to recognize only a portion of the capital gain or capital loss otherwise realized on a disposition of Common Shares.
Dissenting shareholders. Although the treatment of a dissenting Resident Holder who receives cash for his or her Common Shares following the merger is not without doubt, it is expected that such amounts will constitute proceeds of disposition of the Common Shares.
U.S. tax consequences. Merger. The Merger is intended to qualify as a tax-deferred reorganization within the meaning of Code s. 368(a). As a result of the merger, GWRC will be treated for Code purposes as (i) transferring all of its assets and liabilities to GWRI, in exchange for shares of common stock of GWRI, and (ii) distributing the shares of common stock of GWRI to its Shareholders pursuant to a Reorganization.
FIRPTA. GWRC and GWRI believe that GWRI is and will be a "United States real property holding corporation." On this basis, GWRC will be required to recognize gain (if any), but not loss, upon the deemed distribution of shares of common stock of GWRI to its Shareholders pursuant to the merger. The amount of gain subject to U.S. federal income taxation will be the amount, if any, by which the fair market value of the shares of common stock of GWRI held by GWRC exceeds GWRC's adjusted basis in such shares. GWRC does not expect to be subject to material U.S. federal income taxation upon the deemed distribution of shares of common stock of GWRI to its Shareholders pursuant to the Merger.
S. 367(b) gain. Assuming the merger qualifies as a U.S. tax-deferred reorganization, a U.S. Holder who owns (actually or constructively) U.S.$50,000 or more of Common Shares, but less than 10% of the voting power of all Common Shares entitled to vote, generally will be required to recognize gain (but not loss) with respect to the deemed receipt of shares of common stock of GWRI in the merger under Code s. 367(b), even if such holder continues to hold such shares of common stock of GWRI and receives no cash as a result of the merger. As an alternative to recognizing gain, however, such U.S. Holder may elect to include in income as a dividend the "all earnings and profits amount" attributable to its Common Shares. GWRC intends to provide each U.S. Holder eligible to make the election with information regarding its earnings and profits upon request, which it does not expect to be materially greater than zero through the date of the merger. Pursuant to s. 367(b), a U.S. Holder who owns (actually or constructively) 10% or more of the voting power of all Common Shares entitled to vote generally will be required to recognize as a dividend the "all earnings and profits amount" attributable to such holder's Common Shares. The foregoing consequences under s. 367(b) should not apply to a U.S. Holder who owns Common Shares with a fair market value of less than U.S.$50,000 on the date of the merger.
PFIC rules. GWRC does not believe that it will be a PFIC for the current taxable year, nor does it believe that it was a PFIC in prior taxable years.