Central Fund of Canada Ltd. will be converted into a mutual fund trust through a s. 132.2 merger with a “Newco” unit trust

Central Fund of Canada Limited (“CFCL”) is a mutual fund corporation holding gold and silver bullion that has an accrued gain of approximately Cdn.$1.7 billion. It is controlled by the Spicer family, who control its 40,000 common shares, and its 252M Class A shares (which have largely equivalent per-share economic rights to the Common Shares) are mostly held by the public. Before Sprott overtures commenced, its Class A shares had been trading on the TSX at a 7% discount to the underlying bullion value.

In order for Sprott to effectively purchase the Spicer management business and for CFCL to be converted into a mutual fund trust, it is proposed that under an Alberta Plan of Arrangement,

• the common shares will be sold to Sprott for cash consideration reflecting the value of their voting rights (there is no coattail),
• the shares of a “New Administrator” will be sold to Sprott for $85M in cash and 7M Sprott shares plus an earnout, and
• CFCL will be merged under s. 132.2 into a trust newly-formed by Sprott (Sprott Physical Gold and Silver Trust).

Under the exchange terms, the Common and Class A shares will be treated as having equal values, so that Sprott will only end up with 0.016% of the Trust units, i.e., it will have paid a 2900% premium for the common shares over what turned out to be their intrinsic value.

In addition to the Trust units being redeemable for cash equalling 95% of the lesser of their NAV and 5-day VWAP, larger blocks of units may be redeemed in specie, which is expected to largely eliminate the trading discount. Using bullion to redeem units in one’s capital is not a sale or other trading transaction, and the bullion held by the Trust should be capital property given that no significant bullion sales will occur. Gains realized on an in specie redemption will be allocated to the redeemed unitholder.

The Trust will be a PFIC.

Neal Armstrong. Summary of Central Fund of Canada Circular under Public Transactions – Internal S. 132.2/107.4 Mergers – MFC Conversion to MFT.