Alignvest/Trilogy -- summary under Subscription

Overview

Alignvest, which is a Canadian special purpose acquisition corporation listed on the TSX, is subject to a deadline of June 2017 to apply its 2015 IPO proceeds (mostly still held in escrow) to a qualifying acquisition. Although the prospectus for its IPO stated that it would target Canadian investments, it is now proposing to subscribe for what will be a 56% interest in a Washington State LLC (Trilogy) assuming that none of the shareholders of Alignvest exercise their redemption right to receive back their IPO subscription price. Essentially the only assets of Trilogy are two subsidiaries in New Zealand and Bolivia running wireless networks.

Overview of inversion consequences

Given that the existing Trilogy shareholders will continue to hold their units in Trilogy, which will now be exchangeable into common shares of Alignvest (to be renamed Trilogy International Partners Inc. on completion of the reorganization under an Ontario Plan of Arrangement), Alignvest will be treated under the inversion rules in Code s. 7874(b) as converting to a U.S. domestic corporation immediately before the Arrangement under an “F” reorg. The results include that Alignvest will be a dual tax resident subject to U.S. tax on its worldwide taxable income (with issues as to whether the IRS would grant foreign tax credits for the Canadian tax on the same income), and that Canadian shareholders will be subject to U.S. withholding tax on their dividends (for which no Canadian foreign tax credit may be available) – and that, conversely, U.S. shareholders will be subject to Canadian withholding tax on their dividends (for which no U.S. foreign tax credit may be available).

The Corporation/TIP Inc

A special purpose acquisition corporation (SPAC ) incorporated under the OBCA on May 11, 2015 which raised gross proceeds of C$258,750,000 on its June 24, 2015 initial public offering. Each subscriber for a Class A Unit of the Corporation received 1 Class A Restricted Voting Share and ½ of a warrant (an “Alignvest Warrant”) with a C$11.50 exercise price and a five-year term. In addition, Class B Units (with the Class B Shares included therein representing 20% of issued and outstanding shares) were issued to the “founders,”(including Alignvest Management Corporation (“AMC”) for C$4,700,000, but with 25% of the Class B Shares subject to forfeiture if the stock price does not exceed $13.00 in five years. As an SPAC, the Corporation’s objective is to execute a qualifying acquisition, the terms of which are determined by it to be favourable and provided that the target businesses or assets have a fair market value of at least 80% of the assets held in the escrow account holding most of the IPO proceeds. After the Arrangement, it will be named Trilogy International Partners Inc. (“TIP Inc.”).

Class A Restricted Voting Share redemption right

Holders of Class A Restricted Voting Shares can elect to redeem their shares, irrespective of whether they vote for or against the Arrangement, for an amount per share, payable in cash, equal to applicable amount on deposit in the escrow account, expected to be approximately C$10.05, net of the deferred underwriting commission.

Trilogy

Trilogy, which is a holding company formed under the laws of the State of Washington on November 21, 2005, currently provides communications services through its New Zealand and Bolivian operating subsidiaries, Two Degrees Mobile Limited (“2degrees”) and NuevaTel (PCS de Bolivia) S.A. (“NuevaTel”), held indirectly through LLC subsidiaries. 2degrees and NuevaTel provide a variety of wireless voice and data communications services, including local, international long distance, and roaming services for both customers and international visitors roaming on their networks. Trilogy will use the proceeds from the Class B Unit subscriptions (described below) from Alignvest to reduce leverage.

Post-Arrangement Trilogy structure/Trilogy LLC Agreement

The Trilogy LLC Agreement will govern, among other things, the business and affairs of Trilogy following the Arrangement. As of the Effective Date of the Arrangement, the interests in Trilogy will be divided into and represented by an unlimited number of each of three classes of units (the "Trilogy Units") as follows: (i) Trilogy Class A Units, all of which will be held by a wholly-owned Delaware subsidiary of TIP Inc. (the “Managing Member,” with complete authority to manage Trilogy), (ii) Trilogy Class B Units, all of which will be held at closing by TIP Inc. (in the same number as the number of outstanding Tip Inc. outstanding Common Shares) and will have the same economic entitlements as the Trilogy Class C Units and are expected to represent a 56.1% equity interest in Trilogy should there be no redemption of Class A Restricted Voting Shares), and (iii) Trilogy Class C Units, all of which will be held at closing by the pre-Arrangement members of Trilogy. The Trilogy Class A Units will have nominal economic rights but generally will be the only Units with voting rights. Their number will be that which ensures that the Trilogy Class A Units and the Trilogy Class B Units collectively represent more than 75% of all the outstanding Trilogy Units. Trilogy Class C Unit Holders will be entitled to exercise voting rights in TIP Inc. through a Special Voting Share to be held by TSX Trust Company under the terms of a Voting Trust Agreement.

Trilogy Class C Unit exchange right

Subsequently to the lock-up period (of up to 24 months), the Class C Units will be retractable for the equivalent number of TIP Inc. Common Shares or (at Trilogy’s option) the cash equivalent.

2degrees optionholders’ exchange right

It is expected that following the completion of the Arrangement, there will be two 2degrees minority holders and certain individuals also holding 2degrees Options. Under the Arrangement Agreement, Alignvest has agreed with Trilogy that, if requested by Trilogy, Alignvest will ensure that, following the Effective Time, an offer is made on terms and at a value acceptable to both Alignvest and Trilogy to holders of 2degrees Options to exchange any 2degrees Shares that may be issued upon exercise of 2degrees Options for TIP Inc. Common Shares.

Plan of Arrangement

Under the Ontario Plan of Arrangement:

(a) Class A Restricted Voting Shares for which AQX Shareholders have duly exercised their redemption rights will be redeemed;

(b) each Class A Restricted Voting Share of a Participating Shareholder will be converted into one Class B Share;

(c) the “Alignvest Additional Subscriptions” will become effective, pursuant to which investors will subscribe for Class B Shares at a subscription price of C$10 per share so as to result in subscription proceeds of up to an amount equal to the total of U.S.$75 million and the amounts paid to redeem shares in __ above;

(d) the “Alignvest Sponsor Equity Investment” will become effective; Alignvest Partners, which is managed by AMC (which currently holds 6,677,760 Class B Shares, representing 19.93% of all issued and outstanding AQX Shares), has agreed to subscribe for approximately US$21.2 million of new Class B shares at C$10.00 per Class B Share;

(e) the articles of Alignvest will be amended to inter alia re-designate the Class B Shares as "Common Shares", create the Special Voting Share and change the name of Alignvest from "Alignvest Acquisition Corporation" to "Trilogy International Partners Inc.";

(f) the terms of the Alignvest Warrants will be deemed to be amended to be share purchase warrants to acquire Common Shares at an exercise price of C$11.50 per share

(g) each of the Trilogy LLC Agreement, the Alignvest U.S. Subsidiary Subscription (for Trilogy Class A Units by the Managing Member owned by Alignvest at a subscription price of U.S.$10,000) and the Voting Trust Agreement will become effective and Alignvest will subscribe for, and Trilogy will issue to Alignvest, the Trilogy Class B Units and the Trilogy Warrant Rights (being the right of TIP Inc. to subscribe for Trilogy Class B Units equal in number to the TIP Inc. Common Shares issuable on exercise of the Alignvest Warrants);

(h) Alignvest will issue to, and deposit with, the Trustee the Special Voting Share;

(i) the “TINZ Participating Unit Holders Exchange” will become effective whereby minority unitholders in the LLC holding 2degrees will exchange their units for TIP Inc. Common Shares ;

(j) the “2degrees Participating Securityholder Exchange,” and described above under “2degrees optionholders’ exchange right,” will become effective;

(k) all of the directors of Alignvest will be removed as directors of Alignvest and specified individuals appointed as directors; and

(l) Alignvest will be authorized to apply for continuance from Ontario to B.C.

Canadian tax consequences

Redemption

Those whose Class A Restricted Voting Shares are redeemed by the Corporation will be deemed to have received a dividend equal to the amount, if any, by which the aggregate Class A Restricted Voting Share redemption price paid exceeds the shares’ paid-up capital, and will be considered to have disposed of such shares for proceeds of disposition equal to the aggregate redemption price paid to such Resident Holder, less the amount of any such deemed dividend.

Conversion

The automatic conversion of Class A Restricted Voting Shares into Class B Shares will be deemed not to constitute a disposition.

U.S. tax consequences

Conversion to U.S. corp

Pursuant to Code s. 7874(b), the Corporation will be treated as converting to a U.S. domestic corporation at the end of the day immediately preceding the Effective Date of the Arrangement under a Code s. 368(a)(1)(F) reorganization. The Corporation should not recognize any gain or loss as a result of this deemed conversion. As a result, the Corporation generally will be subject to U.S. federal income tax on its worldwide taxable income. It is unclear how the Code foreign tax credit rules will operate in certain circumstances, so that the Corporation may be subject to double taxation.

No significant all E&P Amount

Notwithstanding qualification of the Arrangement as an “F” tax-deferred reorganization, under Code s. 367(b). U.S. Holders who own, directly or indirectly under certain stock attribution rules, 10% or more of the combined voting power of the Corporation will be required to recognize as dividend income a proportionate share of the Corporation's "all earnings and profits amount" ("All E&P Amount"), if any, as determined under applicable Treasury Regulations. However, the Corporation anticipates that it will have a nominal all earnings and profits amount through to the Effective Date.

Treatment of Canadian withholding tax

Dividends received by on Common Shares by U.S. Holders will be subject to Canadian withholding tax. As the dividends paid by the Corporation will be characterized as U.S. source income for purposes of the foreign tax credit rules under the Code, U.S. Holders generally would not be able to claim a credit for any Canadian tax withheld unless they have other foreign source income that is subject to a low or zero rate of foreign tax and certain other conditions are met.

Dividend withholding to Canadian shareholders

Dividends received by holders of Common Shares who are residents of Canada for purposes of the Tax Act will be subject to U.S. withholding tax. A foreign tax credit under the Tax Act in respect of such U.S. withholding taxes may not be available to such holder.

PFIC rules

The Corporation believes that it was a PFIC during its initial tax year ended April 30, 2016, and based on its income, assets and activities during its current tax year, the Corporation expects that it should be a PFIC for its current tax year. Under proposed Treasury Regulations, if the Corporation was classified as a PFIC for any tax year during which a U.S. Holder held Class A Restricted Voting Shares, special rules, set forth in the proposed Treasury Regulations, may increase such U.S. Holder's U.S. federal income tax liability with respect to the Conversion. Such proposed Treasury Regulations generally would require gain recognition by “Non-Electing Shareholders” as a result of the conversion.

Conversion

The conversion of Class A Restricted Voting Shares into Class B Shares should qualify as a tax-deferred "recapitalization" under of s. 368(a)(1)(E) (a "Recapitalization") and/or a tax-deferred exchange under s. 1036(a).

Re-designation

The re-designation of Class B Shares as Common Shares should qualify as a tax-deferred Recapitalization and/or a tax-deferred exchange under Code Section 1036(a)….

Redemption

The treatment of U.S. Holders whose Class A Restricted Voting Shares are redeemed will depend on whether the redemption qualifies as a sale of the Class A Restricted Voting Shares under s. 302. If the redemption so qualifies, it will be treated as a disposition. If it does not so qualify, the U.S. Holder will be treated as receiving a corporate distribution. Whether the redemption qualifies for sale treatment will depend largely on the percentage of the shares of the Corporation's outstanding stock treated as held by the U.S. Holder (including any stock constructively owned by the U.S. Holder, for example, as a result of owning Alignvest Warrants) both before and after the redemption.