Jackpotjoy/Intertain

Overview

Intertain, which is an OBCA holding company listed on the TSX, holds most of its assets in non-resident subsidiaries and generates substantially all of its (on-line gaming) revenues in Europe through such subsidiaries. In order to effectively move its residence to the U.K., it has caused the formation of a U.K. plc (“Jackpotjoy”) which (except for those Canadian shareholders who have elected for rollover treatment) will issue its shares to the Intertain shareholders under an OBCA Plan of Arrangement in consideration for the transferring all but one of their shares to a grandchild Canadian subsidiary of Jackpotjoy (“ExchangeCo”) and for transferring the remaining common share to Jackpotjoy, for contribution down the chain to ExchangeCo. Those electing for rollover treatment instead will have their Intertain shares exchanged for Class B shares of the amalgamated corporation resulting from the amalgamation of ExchangeCo and Intertain (“AmalCo”), and then exchange those Class B shares under a s. 86 reorg for exchangeable shares. On the issuance of these exchangeable shares, Jackpotjoy will issue a corresponding number of shares to a Jersey company owned by a charitable trust, with the voting rights on those shares thereafter exercised as directed collectively by the exchangeable shareholders. When an exchangeable shareholder retracts (or AmalCo gives notice of redemption), the immediate parent of AmalCo (“CallCo”) will exercise its overriding call right, so that the exchangeable shareholder will transfer its exchangeable shares to CallCo, CallCo will issue shares to Jackpotjoy and in consideration therefor Jackpotjoy will direct the Jersey company to deliver the relevant number of Jackpotjoy Shares to the former exchangeable shareholder. The exchangeable shares are slated to mature no later than the 5th anniversary of their issuance and, in the meantime, are expected to be listed on the TSX.

Intertain

A TSX-listed online gaming holding company existing under the OBCA. With the exception of Intertain Holdings, it holds its non-resident subsidiaries through a Malta and Bahamas hoding company.

Jackpotjoy

A public limited company incorporated under the Companies Act in England and Wales. At the date of the Circular, the sole issued and outstanding Jackpotjoy Share was held by Intertain ListCo Holdings Ltd, which was resident in Canada.

CallCo

CallCo was incorporated as a Nova Scotia unlimited liability company on August 16, 2016 for the purpose of implementing the Arrangement. CallCo will hold call rights on the Exchangeable Shares. Jackpotjoy currently holds 100% of its issued and outstanding shares.

ExchangeCo

ExchangeCo is a company incorporated under the OBCA on August 16, 2016 for the purpose of implementing the Arrangement. It is a wholly-owned subsidiary of CallCo.

Intertain Holdings

Intertain Holdings Inc., an Ontario corporation and a wholly-owned subsidiary of Intertain.

JerseyCo

A Jersey company incorporated on August 15, 2016 for the purpose of implementing the Arrangement. The entire issued and outstanding share capital of JerseyCo is held by MO Nominees Jersey (One) Limited, acting in its capacity as trustee of Intertain JerseyCo Charitable Trust. Under the Voting and Exchange Trust Agreement, JerseyCo will irrevocably waive its rights to receive Distributions attaching to the Underlying Jackpotjoy Shares from time to time for as long as it holds such shares.

Voting Trustee

The Voting Trustee under the Voting and Exchange Trust Agreement is expected to be Computershare Trust Company of Canada.

AmalCo

As a step of the Arrangement, ExchangeCo, Intertain and Intertain Holdings will amalgamate to form AmalCo and Jackpotjoy will become the ultimate holding company of CallCo, AmalCo and Intertain's operating Subsidiaries which, collectively, will form the Jackpotjoy UK Group.

Exchangeable Share exchange right

Pursuant to the Exchangeable Share Provisions, at its option, a holder of Exchangeable Shares may exchange its Exchangeable Shares at any time before the Redemption Date for the Exchangeable Share Retraction Price, subject to CallCo's Retraction Call Right.

Call Rights Agreement

As part of the Arrangement, Jackpotjoy, AmalCo and CallCo will enter into the Call Rights Agreement, under which CallCo will agree to exercise its overriding Retraction Call Right, Redemption Call Right and/or Liquidation Call Right whenever it is possible for it to do so.

Exchangeable Share Redemption Date

The Exchangeable Shares will be redeemed on the fifth anniversary of the Effective Date of the Arrangement and may or will be redeemed in specified circumstances prior to such fifth anniversary, including (a) if the number of Exchangeable Shares outstanding (and not held by Jackpotjoy and its affiliates) is fewer than 10% of the number of Exchangeable Shares issued on the Effective Date, (b) a Jackpotjoy Control Transaction occurs (generally respecting an acquisition of Jackpotjoy that is recommended by the Jackpotjoy board); (c) in circumstances relating to the liquidation or insolvency of Jackpotjoy and/or AmalCo; and (d) on or after January 1, 2019, if Jackpotjoy has determined to migrate to the premium listing segment of the Official List of the Financial Services Authority and Jackpotjoy requests such redemption. Upon such a redemption, holders of the outstanding Exchangeable Shares will receive the Exchangeable Share Redemption/Liquidation Price (defined similarly to the Exchangeable Share Retraction Price.)

Exchangeable Share distributions

There is no current intention for distributions to be paid on the Exchangeable Shares. However, to maintain substantial economic equivalence of the Exchangeable Shares with the Jackpotjoy Shares, Exchangeable Shareholders will be entitled to receive the “Economic Equivalence Payment” to match distributions (including, in-kind distributions) declared and paid on the Jackpotjoy Shares.

Underlying Jackpotjoy Shares

To enable Exchangeable Shareholders to direct the exercise under the Voting and Exchange Trust Agreement of the exercise of voting rights to Jackpotjoy Shares, Jackpotjoy Shares equal in number to the number of Exchangeable Shares issued under the Arrangement will be issued to JerseyCo (the “Underlying Jackpotjoy Shares.”)

Voting and Exchange Trust Agreement

Under this agreement, JerseyCo will grant an irrevocable power of attorney in respect of the voting rights attaching to the Underlying Jackpotjoy Shares held by it to the Voting Trustee. The “Beneficiaries” (i.e., Exchangeable Shareholders other than Jackpotjoy and its affiliates) will, in the aggregate, be entitled to direct the Voting Trustee as to the voting of a number of Underlying Jackpotjoy Shares equal to the then outstanding number of Exchangeable Shares held by all Beneficiaries. JerseyCo will irrevocably waive its rights to receive distributions attaching to the Underlying Jackpotjoy Shares from time to time for as long as it holds such shares.

Optional Retraction of Shares

Pursuant to the Exchangeable Share Provisions, a holder of Exchangeable Shares may at its option exchange its Exchangeable Shares at any time before the Redemption Date for the Exchangeable Share Retraction Price, subject to CallCo's Retraction Call Right. If Jackpotjoy Shares are to be delivered to the (former) Exchangeable Shareholders, it is currently expected that Jackpotjoy will direct JerseyCo to transfer the relevant number of Jackpotjoy Shares to such Exchangeable Shareholder.

Exchangeable Share Retraction Price

Means the “Jackpotjoy Share Consideration” (i.e., one Jackpotjoy Share – or, at the option of Jackpotjoy, AmalCo or CallCo, as the case may be, or in the case of a U.S. Holder - the cash equivalent based on the net cash proceeds realized from the sale of the relevant Jackpotjoy Share outside the U.S.) plus a cash payment (the Economic Equivalence Payment) plus any declared and unpaid distribution on the Exchangeable Share.

CallCo's Retraction Call Right (similar to Liquidation and Redemption Call Right)

In the event that a holder of Exchangeable Shares exercises its retraction right to require that AmalCo redeem any of its Exchangeable Shares, CallCo will have an overriding right (the "Retraction Call Right") pursuant to the Exchangeable Share Provisions to purchase all but not less than all of those Exchangeable Shares for a price per Exchangeable Share equal to the Exchangeable Share Purchase Price.

Mechanics of exchange

When an Exchangeable Shareholder retracts (or AmalCo gives notice of redemption), CallCo will exercise its overriding call right, so that the Exchangeable Shareholder will transfer its Exchangeable Shares to CallCo, CallCo will issue shares to Jackpotjoy and in consideration therefor Jackpotjoy will direct JersyCo to deliver the relevant number of Jackpotjoy Shares to the former Exchangeable Shareholder.

Exchangeable Share Support Agreement

As part of the Arrangement, Jackpotjoy, CallCo and AmalCo will enter into the Exchangeable Share Support Agreement to impose obligations on Jackpotjoy to provide support to AmalCo and CallCo of their respective obligations.

Plan of Arrangement

1. Each dissenting share will be acquired by ExchangeCo.
2. Each outstanding Intertain Share - other than a share (an “Exchangeable Elected Share”) respecting which its holder, provided it is a Canadian resident or a partnership of which there is a Canadian resident, had elected to receive an Exchangeable Share - will be transferred by its holder (the “Non-Electing Shareholders”) as follows: (a) as to one of the Intertain Shares held by each Non-Electing Shareholder, to Jackpotjoy (each a “Direct Transfer Share”); and (b) as to the remainder of the Intertain Shares held by each Non-Electing Shareholder, to ExchangeCo (each a “Non-Rollover Share”).
3. Jackpotjoy will issue one Jackpotjoy Share for each Intertain Share transferred to it or to ExchangeCo (pursuant to 2(a) or (b) above) as follows: (i) coincident with the transfer of the Non-Rollover Shares to ExchangeCo under 2(b) above, ExchangeCo will issue ExchangeCo Shares to CallCo (the number of ExchangeCo Shares to be equal to the number of Non-Rollover Shares acquired directly by ExchangeCo); (ii) coincident with the issuance of ExchangeCo Shares to CallCo under paragraph (i) above, CallCo will issue CallCo Shares to Jackpotjoy (the number of CallCo Shares to be issued to Jackpotjoy being equal to the number of ExchangeCo Shares issued to CallCo); and (iii) in consideration for the CallCo Shares acquired under 3(ii) above together with the Direct Transfer Shares acquired in 2(a) above, Jackpotjoy will issue Jackpotjoy Shares to the Non-Electing Shareholders (in an aggregate number equal to the number of Non-Rollover Shares and Direct Transfer Shares transferred to Jackpotjoy and ExchangeCo, respectively, pursuant to 2(a) and (b) above).
4. Jackpotjoy will transfer the Direct Transfer Shares to CallCo and CallCo will issue CallCo Shares to Jackpotjoy on the basis of one CallCo Share for each Direct Transfer Share.
5. CallCo will transfer the Direct Transfer Shares to ExchangeCo and ExchangeCo will issue ExchangeCo Shares to CallCo on the basis of one ExchangeCo Share for each Direct Transfer Share.
6. Each outstanding Intertain Option (granted under the Intertain stock option plan) will be exchanged for an option granted by Jackpotjoy to acquire a Jackpotjoy Share (a “Replacement Option”). Each Replacement Option will provide for an exercise price per Jackpotjoy Share in British pound sterling equal to the exercise price per Intertain Share of such Intertain Option immediately prior to the Effective Time (in Canadian dollars converted into British pound sterling using the rate of exchange quoted by the Bank of Canada for noon on the Effective Date for the exchange of Canadian dollars for British pound sterling), subject to adjustment upward, as needed, to ensure that: (a) the fair market value of the Jackpotjoy Shares to be issued on exercise of a Replacement Option less the exercise price of the Replacement Option (each as determined immediately after the exchange); does not exceed (b) the fair market value of the Intertain Shares that would have been issued on exercise of an Intertain Option less the exercise price of the Intertain Option (each as determined immediately before the exchange).
7. Intertain, Intertain Holdings and ExchangeCo will amalgamate and continue as one corporation (“AmalCo”). On the Amalgamation: (i) each Exchangeable Elected Share will become one AmalCo Class B Share (i.e., a non-voting common share); and (ii) each ExchangeCo Share (all of which are held by CallCo) will become one AmalCo Class A Share (i.e., a voting common share); and (iii) each Intertain Holding common share and each Intertain Share will be cancelled.
8. AmalCo will amend its share terms to create the Exchangeable Shares.
9. Each outstanding AmalCo Class B Share will be transferred by the holder thereof to AmalCo in exchange for one Exchangeable Share (and the Ancillary Rights).Coincident with the above share exchanges: (i) Jackpotjoy, JerseyCo, AmalCo and the Voting Trustee will execute the Voting and Exchange Trust Agreement; (ii) Jackpotjoy, CallCo and AmalCo will execute the Exchangeable Share Support Agreement; (iii) in accordance with the Voting and Exchange Trust Agreement, Jackpotjoy will issue to JerseyCo a number of Jackpotjoy Shares equal to the number of Exchangeable Shares referred to in and for the purposes described in such agreement; and (iv) Jackpotjoy, CallCo and AmalCo will execute the Call Rights Agreement.

The TSX has conditionally approved the listing of the Exchangeable Shares in substitution for the currently listed Intertain Shares effective as of the Effective Date.

Capital Reduction

It is proposed the share premium account of Jackpotjoy, 50,000 redeemable shares of £1.00 and 1 ordinary share of £0.10 in the capital of Jackpotjoy be cancelled shortly after completion of the Arrangement. The main purpose of the Capital Reduction is to: (a) create distributable reserves on the balance sheet of Jackpotjoy which will provide Jackpotjoy with flexibility to pay dividends in the future if appropriate and (b) to cancel the shares of Jackpotjoy issued in connection with its incorporation. The UK Court Hearing to confirm the Capital Reduction is expected to occur in October, 2016.

Canadian tax consequences

Exchange for Jackpotjoy Shares

An Intertain Shareholder who exchanges Intertain Shares for Jackpotjoy Shares will be considered to have disposed of such Intertain Shares for proceeds of disposition equal to the fair market value.

Amalgamation and s. 86 Exchange for AmalCo Class B Shares

An Intertain Shareholder who has elected to receive Exchangeable Shares (together with the related “Ancillary Rights”) will hold Intertain Shares at the time of the Amalgamation, and will be deemed to have disposed of its Intertain Shares for proceeds of disposition equal to their adjusted cost base.

S. 86 Exchange for AmalCo Class B Shares

An Intertain Shareholder who receives Exchangeable Shares and Ancillary Rights for AmalCo Class B Shares on the capital reorganization of AmalCo will not realize a capital gain provided the ACB of its AmalCo Class B Shares exceeds the fair market value of the Ancillary Rights received.

Grant of Retraction, Redemption and Liquidation Call Rights to CallCo

Intertain is of the view that such Call Rights have a nominal fair market value, so that the granting of the Call Rights by an Intertain Shareholder to CallCo will not result in any material adverse income tax consequences to an Intertain Shareholder.

Qualified investment

Provided the Jackpotjoy Shares and Exchangeable Shares are listed on a designated stock exchange (including the LSE and TSX, respectively), they would be qualified investments for RRSPs etc.

U.K. tax consequences

A disposal or deemed disposal of Jackpotjoy Shares by a holder who is not resident in the UK and is not is carrying on a trade in the UK through a branch or agency (or permanent establishment in the case of a corporate holder) in connection with which the Jackpotjoy Shares are used, held or acquired, will not generally be subject to UK taxation of capital gains unless the holder is an individual who has ceased to be resident for tax purposes in the UK for the purposes of double taxation arrangements ("treaty non-resident") for a period of less than five tax years of assessment and who disposes of all or part of his Jackpotjoy Shares during that period. A disposal or deemed disposal of Exchangeable Shares by a holder who is not resident in the UK for tax purposes should not generally be subject to UK taxation of capital gains subject to a similar exception.

U.S. tax consequences

Potential reorganization treatment

Assuming, as is contemplated, that certain Intertain Shareholders will receive Exchangeable Shares (and the Ancillary Rights) rather than Jackpotjoy Shares, qualification of the Arrangement as a reorganization will depend significantly upon the characterization of the Exchangeable Shares (and the Ancillary Rights) for U.S. federal income tax purposes. In particular, the Exchangeable Shares may be treated, for U.S. federal income tax purposes: (a) as shares of Jackpotjoy, on the basis that the Exchangeable Shares (and the Ancillary Rights) are in substance substantially equivalent to the Jackpotjoy Shares; or (b) as shares of AmalCo, in a manner consistent with their form. If the Exchangeable Shares are treated as shares of Jackpotjoy for U.S. federal income tax purposes, the Arrangement is expected to qualify as a reorganization.

PFIC rules

Intertain does not expect to be a PFIC for the current taxable year. Additionally, Intertain believes that it was not classified as a PFIC for the 2014 and 2015 taxable years. However, Intertain believes that it may have been a PFIC during prior years.

Overview

Intertain, which is an OBCA holding company listed on the TSX, holds most of its assets in non-resident subsidiaries and generates substantially all of its (on-line gaming) revenues in Europe through such subsidiaries. In order to effectively move its residence to the U.K., it has caused the formation of a U.K. plc (“Jackpotjoy”) which (except for those Canadian shareholders who have elected for rollover treatment) will issue its shares to the Intertain shareholders under an OBCA Plan of Arrangement in consideration for the transferring all but one of their shares to a grandchild Canadian subsidiary of Jackpotjoy (“ExchangeCo”) and for transferring the remaining common share to Jackpotjoy, for contribution down the chain to ExchangeCo. Those electing for rollover treatment instead will have their Intertain shares exchanged for Class B shares of the amalgamated corporation resulting from the amalgamation of ExchangeCo and Intertain (“AmalCo”), and then exchange those Class B shares under a s. 86 reorg for exchangeable shares. On the issuance of these exchangeable shares, Jackpotjoy will issue a corresponding number of shares to a Jersey company owned by a charitable trust, with the voting rights on those shares thereafter exercised as directed collectively by the exchangeable shareholders. When an exchangeable shareholder retracts (or AmalCo gives notice of redemption), the immediate parent of AmalCo (“CallCo”) will exercise its overriding call right, so that the exchangeable shareholder will transfer its exchangeable shares to CallCo, CallCo will issue shares to Jackpotjoy and in consideration therefor Jackpotjoy will direct the Jersey company to deliver the relevant number of Jackpotjoy Shares to the former exchangeable shareholder. The exchangeable shares are slated to mature no later than the 5th anniversary of their issuance and, in the meantime, are expected to be listed on the TSX.

See full summary under Cross-Border Acquisitions - Inbound - Exchangeable Share Acquisitions.