Americas Silver/Pershing Gold -- summary under Delaware etc. Mergers

Overview

Americas Silver, an Ontario corporation listed on inter alia the TSX and NYSE American exchanges, is proposing to acquire Pershing Gold, a listed Nevada corporation, in exchange for Americas Silver shares. The acquisition would entail the merger of Pershing Gold with a newly-formed Nevada subsidiary of Americas Silver, with Pershing Gold being the survivor and with the Americas Silver shares being issued on the merger. The former Pershing Gold common shareholders will thereby become holders of approximately 36.5% of the Americas Silver common shares.

The U.S. tax disclosure indicates that as a result of the removal, in the recently enacted Tax Cut and Jobs Act, of an exception to the application of Code s. 367(a) for the transfer of property by a U.S. person to a foreign corporation for use by such foreign corporation in the active conduct of a trade or business outside the U.S., it is unclear whether resident U.S. shareholders of Pershing Gold will receive rollover treatment for Code purposes on the merger. The anti-inversion rules in Code s. 7874 are not expected to apply given that the Pershing Gold Stockholders are expected to own less than 60% by votes and value of the Americas Silver common shares.

Pershing Gold

Pershing Gold is a Nevada corporation whose Common Stock trades on the NASDAQ, TSX and the Frankfurt Stock Exchange. It is a gold and precious metals exploration company pursuing exploration, development and mining opportunities primarily in Nevada. Barry Honig holds or controls shares of Pershing Gold Common Stock and of Series E Preferred Stock representing approximately 31% of the outstanding shares of Pershing Gold Common Stock and approximately 87% of the outstanding shares of Series E Preferred Stock (or approximately 35.7% of the aggregate voting power of the Pershing Gold Stockholders).

Americas Silver

On December 23, 2014, a merger transaction under s. 182 of Business Corporations Act (Ontario) between Scorpio Mining Corporation and U.S. Silver & Gold Inc. (“U.S. Silver”) was completed to combine their respective businesses. Following this merger, the combined company changed its name to “Americas Silver Corporation”. Americas Silver’s principal and registered office is located in Toronto. The Americas Silver Common Shares are listed on the TSX, NYSE American and Frankfurt Stock Exchanges.

Merger Sub

Merger Sub is a Nevada corporation and a wholly-owned subsidiary of Americas Silver. Merger Sub was formed solely for the purpose of effecting the proposed merger with Pershing Gold.

The merger

Americas Silver Corporation (“Americas Silver”) will acquire all of the issued and outstanding shares of Pershing Gold (the “Pershing Gold Common Stock”) and preferred stock through a transaction (the “Transaction”) pursuant to which R Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Americas Silver, will merge with Pershing Gold, with Pershing Gold being the surviving corporation and a wholly-owned subsidiary of Americas Silver. On the merger, Americas Silver will issue 0.715 common shares (“Americas Silver Common Shares”) in exchange for each share of Pershing Gold Common Stock and, at the election of the holder, will issue Americas Silver Common Shares or non-voting convertible preferred shares (the “Americas Silver Preferred Shares”) in exchange for all of the issued and outstanding shares of Pershing Gold’s Series E convertible preferred stock (“Series E Preferred Stock”). It is expected that the former holders of Pershing Gold Common Stock will own, by virtue of the exchange of their shares of Pershing Gold Common Stock for Americas Silver Common Shares, approximately 36.5% of the Americas Silver Common Shares.

Pershing preferred shares

Each share of Series E Preferred Stock will, at the election of the holder, either (i) be converted into the right to receive 461.440 Americas Silver Preferred Shares, or (ii) be converted into the right to receive such number of Americas Silver Common Shares to which the holder would be entitled if the share of Series E Preferred Stock were converted into Pershing Gold Common Stock and then exchanged for Americas Silver Common Shares using the 0.715 exchange ratio described above. The Americas Silver Preferred Shares will not be listed on any stock exchange.

Pershing options

Options to purchase shares of Pershing Gold Common Stock will be cancelled at the effective time of the merger (the “Effective Time”) and converted into the right to receive that number of Americas Silver Common Shares that they would have been entitled to in the Transaction in respect of each share of Pershing Gold Common Stock that would have been issued on a “net exercise” of such options.

Pershing RSUs

Pershing Gold restricted stock units, including performance-vested restricted stock units, will be cancelled at the Effective Time and converted into the right to receive that number of Americas Silver Common Shares that they would have been entitled to in the Transaction in respect of each share of Pershing Gold Common Stock underlying such RSUs.

Pershing warrants

Outstanding warrants to purchase shares of Pershing Gold Common Stock will (i) if allowed under the terms of the applicable warrant, be required to be exercised and, if not exercised, terminated at the Effective Time, or (ii) if such treatment is not allowed under the terms of the applicable warrant, be replaced with warrants to purchase Americas Silver Common Shares on economically equivalent terms.

Canadian tax consequences

The exchange by a resident shareholder of Pershing Gold Common Stock for Americas Silver Common Shares will occur on a taxable basis. S. 51 will apply to the conversion of Americas Silver Preferred Shares into Americas Silver Common Shares in accordance with their terms.

U.S. tax consequences

Potential applicability of Code s. 367(a)

The Transaction is intended to qualify as a reorganization under Code s. 368(a), which generally would result in no recognition of any gain or loss by holders of Pershing Gold Common Stock or Series E Preferred Stock as a result of the Transaction. However, as a result of changes made under the 2018 Tax Cuts and Jobs Act, it is uncertain whether s. 367(a) of the Code will apply to the Transaction, which, if applicable, would require a U.S. holder of shares of Pershing Gold Common Stock or Series E Preferred Stock to recognize gain (but not loss) equal to the difference between (i) the fair market value of Americas Silver Common Shares and/or Americas Silver Preferred Shares received by such U.S. holder in the Transaction, and (ii) the adjusted tax basis of such U.S. holder in such shares of Pershing Gold Common Stock or Series E Preferred Stock exchanged therefor.

Section 367(a) of the Code generally requires U.S. shareholders to recognize gain (but not loss) when stock of a U.S. corporation is exchanged for stock of a non-U.S. corporation in an exchange that would otherwise qualify for non-recognition treatment. Current U.S. Treasury regulations provide that Section 367(a) would apply if either (i) the U.S. shareholders of the acquired U.S. corporation receive more than 50% (by vote or value) of the stock of the non-U.S. corporation, or (ii) the non-U.S. corporation fails to meet the “active trade or business test”. The “active trade or business test” generally requires (I) the non-U.S. corporation to be engaged in an “active trade or business” outside of the U.S. for the 36 month period immediately before the exchange and neither the U.S. nor the non-U.S. corporation have an intention to substantially dispose of or discontinue such trade or business, and (II) the fair market value of the non-U.S. corporation to be at least equal to the fair market value of the U.S. corporation, as specifically determined for purposes of s. 367, as of the closing of the Transaction. The Transaction should not satisfy either of the requirements of the current U.S. Treasury regulations, described above, for the application of s. 367(a) to a U.S. holder’s transfer of shares of Pershing Gold Common Stock or Series E Preferred Stock to Americas Silver in exchange for Americas Silver Common Shares or Americas Silver Preferred Shares.

However, the recently enacted Tax Cut and Jobs Act removed an exception to the application of Section 367 (a) for the transfer of property by a U.S. person to a foreign corporation for use by such foreign corporation in the active conduct of a trade or business outside the United States. It is uncertain whether the repeal of this exception to Section 367(a) for the transfer of property used in the active conduct of a trade or business outside the United States has, or will have, any impact on the exception to s. 367(a) currently provided in the U.S. Treasury regulations for the transfer of stock in a U.S. corporation to a foreign corporation described above.

FIRPTA

Pershing Gold is characterized for U.S. federal income tax purposes as a United States Real Property Holding Corporation. Accordingly, non-U.S. holders of Pershing Gold Common Stock or Series E Preferred Stock may recognize gain for U.S. income tax purposes even if the Transaction qualifies as a reorganization and is not subject to Section 367(a).

Inversion rules

Code s.7874 may limit the ability of a U.S. corporation acquired by a foreign corporation, and U.S. persons related to the acquired U.S. corporation, to utilize certain U.S. tax attributes (including net operating losses and certain tax credits) to offset certain U.S. taxable income. The Pershing Gold Stockholders are expected to own less than 60% of the vote and value of Americas Silver Common Shares after the Transaction. As a result, under current law, Pershing Gold and U.S. persons related to Pershing Gold, are not expected to be subject to such limitations on the use of U.S. tax attributes.

Americas Silver PFIC status

Americas Silver believes it was not classified as a passive foreign investment company (“PFIC”) for its tax year ended December 31, 2017, and based on current business plans and financial expectations, Americas Silver expects that it will not be a PFIC for the current tax year….

Pershing Gold NOLs

As of December 31, 2017, Pershing Gold had approximately $75.7 million of net operating loss (“NOL”) carryforwards available to reduce U.S. federal taxable income in future years. The Transaction is expected to result in an ownership change under Section 382 of the Code for Pershing Gold, potentially limiting the use of Pershing Gold’s NOL carryforwards in future taxable years.