Mitel/Polycom -- summary under Delaware Mergers

Overview

The acquisition of Polycom, a NASDAQ-listed U.S. corporation by Mitel (a TSX and NASDAQ-listed Canadian corporation) in a Delaware merger (in which an indirect Delaware sub of Mitel (“Merger Sub”) is merged into Polycom, with Polycom as the survivor) is structured so that it will be treated for accounting purposes as a purchase by Mitel and as not causing Mitel to be deemed to be a U.S. corporation under Code s. 7874 – even though the market cap of Polycom is almost 50% greater than that of Mitel. This is being accomplished by a portion of the cash consideration for the public’s shares of Polycom being paid in cash (with much of the cash coming from Polycom itself.) Mitel and Polycom intend to treat the merger as divided for Code purposes into two transactions: (1) the redemption of a portion of the shares of Polycom stock held by each Polycom stockholder for the portion of the cash consideration that is funded by Polycom (including any borrowing by Merger Sub and Polycom and any cash distributions from subsidiaries of Polycom (collectively, the "redemption cash")), and (2) the exchange of a portion of the shares of Polycom stock held by each Polycom stockholder for Mitel common shares and the cash which is funded by Mitel (the "merger cash.") The shares of Polycom stock held by each Polycom stockholder will be divided between these transactions based on the relative fair market values of these two merger consideration categories. The payment of the redemption cash will be treated as a distribution in redemption of shares of Polycom stock. The receipt of the merger cash (but not the Mitel common shares) by U.S. Polycom shareholders is expected to be subject to Code s. 304 so that the Polycom stockholders will be treated as if they received additional Mitel common shares in the merger equal in value to the merger cash, and then Mitel redeemed such shares for such merger cash. The merger agreement provides for the issuance, on the merger, of shares by Polycom to Mitel (or Merger Sub’s immediate Delaware parent) in consideration for Mitel's payment of the aggregate consideration to the Polycom shareholders.

Mitel

A Canadian corporation listed on the NASDAQ and TSX which is a global provider of cloud, mobile and enterprise communications and collaboration solutions.

Polycom

A California-based corporation listed on the NASDAQ providing productivity solutions for organizations.

Merger Sub

An indirect wholly-owned subsidiary of Mitel, a direct wholly-owned subsidiary of Merger Sub Parent and a Delaware limited liability company that was formed on April 12, 2016 (originally as a Delaware corporation) for the purpose of effecting the merger.

Merger Sub Parent

A Delaware corporation that is wholly-owned by Mitel and wholly-owns Merger Sub.

Merger

At the effective time of the merger:

• Merger Sub will merge with and into Polycom, with Polycom continuing as the surviving corporation and a wholly owned subsidiary of Mitel.
• Each outstanding Polycom share (other than those held by Polycom, Mitel or their respective subsidiaries and shares of Polycom stock with respect to which appraisal rights are properly demanded and not withdrawn under the Delaware General Corporate Law) will be cancelled and converted into the right to receive the “Merger Consideration,” consisting of cash of $3.12 and 1.31 Mitel common shares.
• All other outstanding shares of Polycom will be cancelled.
• Each outstanding share of Merger Sub will be converted into one common share of the surviving corporation (Polycom).
• The surviving corporation (Polycom) will issue 100,000 common to Merger Sub Parent or Parent in consideration for the Merger Consideration.
• Each outstanding Polycom stock option award will be cancelled in exchange for cash, without interest (less applicable tax withholdings), based on valuing the merger consideration using the sum of $3.12 plus the product of 1.31 multiplied by the average of the volume weighted average price of a Mitel common share on the NASDAQ on each of the five consecutive trading days ending with the complete trading day immediately prior to the closing date of the merger.
• Each outstanding Polycom RSU award and Polycom performance share award that is vested immediately prior to the effective time, vests as a result of the consummation of the merger or is held by any non-employee member of the Polycom Board will be cancelled in exchange for an amount in cash (less applicable tax withholdings) based on the same per share cash value.

Purchase accounting

The merger will be accounted for as an acquisition of Polycom by Mitel under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. The following is a preliminary estimate of the purchase price for the Polycom acquisition:

Mitel cash funding

Mitel expects to fund the cash portion of the consideration in the merger, and the refinancing of its existing credit facilities and those of Polycom, using a combination of cash on hand from the combined businesses and proceeds from new financing and has received debt commitments from Bank of America, N.A. in an aggregate principal amount of $1.085 billion.

Canadian tax consequences

Provided the shares of Polycom exchanged pursuant to the merger are not "taxable Canadian property" to a Non-Canadian Holder for purposes of the Canadian Tax Act at the time of the merger, a Non-Canadian Holder will not be subject to tax under the Canadian Tax Act solely as a result of acquiring Mitel common shares pursuant to the merger.

U.S. tax considerations

Merger conditions

The merger agreement provides that neither (1) a change or proposed change in Code s. 7874 nor (2) a decline in the trading price of a Mitel common share that would result in Mitel being treated as a domestic corporation for U.S. federal income tax purposes as of the effective time of the merger will give Mitel or Polycom any right to avoid or delay closing of the merger or terminate the merger agreement. In any such case, however, the parties have agreed to consider in good faith changes to the structure of the transaction that would avoid or materially reduce the adverse consequences of such event.

Bifurcation of transaction

Mitel and Polycom intend to treat the merger as divided for U.S. federal income tax purposes into two transactions: (1) the redemption of a portion of the shares of Polycom stock held by each Polycom stockholder for the portion of the cash consideration that in funded by Polycom (including any borrowing by Merger Sub and Polycom and any cash distributions from subsidiaries of Polycom (collectively, the "redemption cash"), and (2) the exchange of a portion of the shares of Polycom stock held by each Polycom stockholder for Mitel common shares and the cash which is funded by Mitel (the "merger cash.") The shares of Polycom stock held by each Polycom stockholder will be divided between these transactions based on the relative fair market values of the merger consideration exchanged for such shares.

Redemption cash

The payment of the redemption cash will be treated as a distribution in redemption of shares of Polycom stock, which will be subject to the s. 302 tests described below. Under such tests, Mitel and Polycom intend to treat such payment as a sale or exchange of the shares so redeemed. In such case, each U.S. Holder will recognize capital gain or loss equal to the difference between the amount of redemption cash received and the U.S. Holder's adjusted tax basis in its shares of Polycom stock treated as surrendered in the redemption. A redemption will be treated as a sale or exchange pursuant to s. 302 if the exchange (1) results in a "complete termination" of the U.S. Holder's stock interest in the redeeming corporation; (2) is a "substantially disproportionate" redemption with respect to the U.S. Holder; or (3) is "not essentially equivalent to a dividend" with respect to the U.S. Holder. Specifically, for purposes of applying the S. 302 tests to the receipt of redemption cash, a U.S. Holder generally will not be treated as owning shares of Polycom stock owned by Mitel after the merger. Accordingly, such U.S. Holder generally would be treated as having completely terminated its interest in Polycom and would treat the distribution of redemption cash as a sale or exchange under the s. 302 tests.

Treatment of exchange.

The exchange of shares of Polycom stock for Mitel common shares and the merger cash in the merger will generally be taxable to U.S. Holders for U.S. federal income tax purposes. Gain realized by a Non-U.S. Holder on an exchange of shares of Polycom stock for the Mitel common shares and the merger cash generally is not expected to be subject to U.S. federal income tax.

Merger cash

The receipt of the merger cash (but not the Mitel common shares) by U.S. Holders is expected to be subject to Code s. 304. Under that provision, the Polycom stockholders will be treated as if they received additional Mitel common shares in the merger equal in value to the merger cash, and then Mitel redeemed such shares for such merger cash. This deemed redemption will be subject to the s. 302 tests described above.

80% inversion rules

Mitel is, and after the merger generally would be, classified as a non-U.S. corporation (and, therefore, as a non-U.S. tax resident) under general rules of U.S. federal income taxation. Section 7874, however, contains rules that can cause a non-U.S. corporation to be taxed as a U.S. corporation for U.S. federal income tax purposes. After the merger, the former stockholders of Polycom should own, in the aggregate, less than 80% (by vote and value) of the stock of Mitel by reason of their ownership of Polycom stock based on the rules for determining share ownership under s. 7874 and certain factual assumptions. These rules include the proposed and temporary regulations released on April 4, 2016 by the IRS and the U.S. Department of the Treasury. The application of the pre-combination distribution rule and the look-back rule will increase the percentage of Mitel deemed to be owned by former stockholders of Polycom by reason of their ownership of Polycom stock, but this percentage is still expected not to equal or exceed 80%, based on current law and facts (including the current trading price of Mitel common shares). However, because the cash portion of the consideration payable to Polycom stockholders in connection with the merger is fixed, based on the operation of these rules, a substantial decline in the trading price of Mitel common shares could cause the Section 7874 ownership percentage to equal or exceed 80%, in which case Mitel would be treated as a U.S. corporation for U.S. federal income tax purposes, unless the transaction is restructured as described below.

Regardless of the application of s. 7874, Mitel will be a Canadian resident company for Canadian tax purposes.

60% inversion rule

For purposes of s. 7874, after the merger, the former stockholders of Polycom should be treated as owning more than 60% (by vote and value) of Mitel by reason of their ownership of Polycom stock (based on the rules, including the Inversion Regulations, for determining share ownership under s. 7874 and certain factual assumptions). Accordingly, the limitations on the utilization of certain tax attributes, and the adverse consequences under the Inversion Regulations, are expected to apply to Polycom and its U.S. affiliates. Neither Polycom nor its U.S. affiliates expects to recognize any inversion gain as part of the merger, nor do they currently intend to engage in any transaction in the near future that would generate a material amount of inversion gain.