Metro/PJC -- summary under Triangular Amalgamations

Summary Under
Tax Topics - Public Transactions - Mergers & Acquisitions - Amalgamations - Triangular Amalgamations
triangular amalgamation for issuance of redeemable prefs or Metro shares and with safe income dividends to electing PJC shareholders

Overview

Under the proposed acquisition of PJC by Metro Inc. under a triangular amalgamation involving a subsidiary of Metro, PJC shareholders will be given a choice of cash or Metro shares (at an Exchange Ratio resulting in the receipt of 0.61006 Metro Shares per PJC share), subject to proration to accommodate the intended global allocation of cash of approximately $3.377 billion and Metro shares valued at approximately $1.126 billion. Cash (of $24.50 per PJC "Share") will be paid through the issuance of redeemable prefs of Amalco (having a paid-up capital of $24.50 per share, some of which might be derived from Metro Subco shares) which will be immediately and automatically redeemed. As an exception to this basic mechanic, a resident taxable PJC shareholder is given the option of rolling its PJC shares into a new single-purpose Quebec holding company, with that Holdco then being included in the amalgamation and with its shares effectively converted into Metro shares or cash in the same way. The extensive stated limitations on what a “Qualifying Holdco” is permitted to do permit various types of safe income dividends to be paid by the Qualifying Holdco. Similar planning occurred in the AIP acquisition of Canam. Stock options with in-the-money value are cashed out by PJC immediately before the amalgamation.

PJC

The Corporation is listed on the TSX and governed by the Business Corporations Act (Québec) (“QBCA”). It specializes in the distribution and retailing of pharmaceutical, healthcare, hygiene, beauty and other products. As at October 24, 2017, 80,292,561 Class A Shares and 103,500,000 Class B Shares were issued and outstanding. Class A Shares represented 7.20% and Class B Shares represented 7.20% and 92.80% of the total voting rights, respectively. Mr. Jean Coutu, controlled (alone or together with family member) 4,025,960 Class A Shares, representing 5.01% of the issued and outstanding Class A Shares, and 103,500,000 Class B Shares, representing 100% of the issued and outstanding Class B Shares, and together, representing 58.50% of the issued and outstanding Shares and 93.16% of the total voting rights.

Metro

Metro is a QBCA corporation listed on the TSX that is a leading Canadian food and pharmaceutical retailer and distributor with operations concentrated in Québec and Ontario.

Proration of cash and share consideration

Proration will be effected such that Shareholders will receive, in the aggregate, cash in respect of 75% of the issued and outstanding Shares (or approximately $3.377 billion) and Metro Shares in respect of 25% of the issued and outstanding Shares (or a value of approximately $1.126 billion).

Options, deferred share units and performance-based shares

Immediately prior to the Amalgamation, each Option, whether or not vested, if it has an exercise price less than $24.50, will be surrendered to PJC for a cash payment by PJC equalling the difference, and otherwise will be cancelled. Each DSU and PBS, whether or not vested, will be surrendered to PJC for cancellation in exchange for a cash payment by PJC.

Amalgamation

At the Effective Time on the Effective Date, PJC, Metro Subco and each Qualifying Holdco (described below) will be amalgamated under the QBCA to continue as Amalco, whose authorized share capital will consist of an unlimited number of Amalco Common Shares and Amalco Redeemable Shares. Upon the Amalgamation becoming effective the Shares (other than Shares held by Dissenting Shareholders and Shares held by Qualifying Holdcos) and the Qualifying Holdco Shares whose Qualifying Holdco Shareholder has elected the Holdco Alternative will either be:

  • converted into the same number of Amalco Redeemable Shares, to be redeemed by Amalco in accordance with their share terms for $24.50 per share in cash; or
  • cancelled, with the holder receiving in exchange such number of Metro Shares determined in accordance with the (0.61006) Exchange Ratio.

The shares of Metro in Metro Subco are converted on the amalgamation on a one-for-one basis into common shares of Amalco. The aggregate paid-up capital of the shares in the amalgamating corporations (other than shares of dissenters) will be allocated first to give full PUC to the Amalco Redeemable Shares, with the balance being allocated to the Amalco common shares.

Qualifying Holdco Alternative

Metro will permit each registered owner (a "Qualifying Holdco Shareholder") that is resident in Canada, is not exempt under Part I of the Tax Act (including a partnership if all of the members of the partnership are resident in Canada), transfers all of its Shares to the Qualifying Holdco and elects in respect of such Shares to include in the Amalgamation a corporation (a "Qualifying Holdco") that meets conditions including those described below (the "Holdco Alternative"):

  • the Qualifying Holdco was incorporated under the QBCA not earlier than January 15, 2018, unless written consent is obtained from Metro;
  • such Qualifying Holdco will not be comprised of more than three classes of shares, two classes of common shares and one class of preferred shares, the terms and conditions of which will be determined in consultation with Metro;
  • such Qualifying Holdco is a single purpose corporation that has not carried on any business, has no employees, never holds any assets other than Shares and nominal cash, has never entered into any transaction other than under the Holdco Alternative except as consented to by Metro;
  • such Qualifying Holdco has no liabilities;
  • such Qualifying Holdco will not have unpaid declared dividends and will not have paid any dividends or other distributions, other than an increase in stated capital, a stock dividend, a cash dividend financed with a daylight loan or a dividend paid through the issuance of a promissory note with a determined principal amount and any such promissory note issued in relation to the payment of any such dividend will have been capitalized into such Qualifying Holdco and no longer be outstanding as of the Effective Time;
  • without written Metro consent, such Qualifying Holdco will not have made any election or designation under the Tax Act other than eligible dividend designations and any s. 85 election;
  • such Qualifying Holdco will have no shares outstanding other than shares held by such Qualifying Holdco Shareholder or its Qualifying Holdco Shareholder Subsidiary;
  • such Qualifying Holdco will have not more than three directors and three officers;
  • such Qualifying Holdco Shareholder will at its cost and in a timely manner prepare and file all income tax returns of such Qualifying Holdco in respect of the taxation year of such Qualifying Holdco ending immediately prior to the Amalgamation, subject to Metro's right to approve all such returns as to form and substance;
  • such Qualifying Holdco Shareholder will indemnify PJC and Metro, and any successor thereof, for any and all liabilities of such Qualifying Holdco in a form satisfactory to Metro acting reasonably;
  • access to the books and records of such Qualifying Holdco will have been provided;
  • the terms and conditions of such Holdco Alternative must be satisfactory to Metro and PJC; and
  • such Qualifying Holdco Shareholder will be required to pay all reasonable out-of-pocket expenses incurred by Metro or PJC in connection with the Holdco Alternative
Canadian tax consequences

A Resident Holder whose Shares are converted into Amalco Redeemable Shares and/or Metro Shares on the Amalgamation will not realize any capital gain or capital loss as a result of the conversion. The Amalgamation Agreement provides that the paid-up capital of an Amalco Redeemable Share will be equal to the Cash Consideration and, as a result, a deemed dividend will not arise from the redemption by Amalco of the Amalco Redeemable Shares owned by a Resident Holder. As a result, a Resident Holder will generally realize a capital gain (or a capital loss) to the extent such proceeds of disposition exceed (or are exceeded by) the aggregate of the adjusted cost base of the Amalco Redeemable Shares to such Resident Holder and any reasonable costs of disposition.

U.S. tax consequences

The exchange of Shares for the Cash Consideration, the Share Consideration, or a combination thereof pursuant to the Amalgamation will be a taxable transaction for U.S. federal income tax purposes. Accordingly, a U.S. Holder of Shares will recognize gain or loss on the exchange of its Shares for cash, Metro Shares or a combination thereof equal to the difference between the sum of the amount of the U.S. dollar value of any cash and the fair market value of any Metro Shares received and the U.S. Holder's adjusted basis in the Shares surrendered.