GFL Environmental issued prepaid forward purchase contracts for variable numbers of treasury shares, coupled with amortizing notes

The IPO of GFL Environmental entailed not only an offering of subordinate voting common shares, but also a concurrent offering of units (at US$50) per unit. Each unit consisted of:

  • a prepaid contract for the purchase of subordinate voting shares of GFL, to be delivered (subject to earlier termination or acceleration) on March 15, 2023; and
  • an amortizing note bearing interest of 4% on the principal (initially, of US$8.5143) and that is repaid through cash quarterly payments of US$0.75 per note, so that each quarterly payment includes an interest component and is a principal repayment as to the rest, with the final instalment being received on the targeted settlement date for the above prepaid purchase contract.

The number of subordinate voting shares to be delivered will vary such that their computed value (based on their 20-day VWAP on the NYSE) will be US$50 per contract if the computed value of a subordinate voting share at that time is between the price at which the subordinate voting shares were offered in the concurrent offering of those shares (US$19 per share) and a 20% premium above that price (US$22.80 per share). A fixed number of subordinate voting shares will be delivered if the computed value of a subordinate voting share at the delivery date is higher than US$22.80 per share, and a lower fixed number will be delivered if such value lower than US$19 per share, so that the purchaser is fully exposed to market movements outside the US$19 to US$22.80 range.

Each purchaser is stated to have agreed to treat the purchase price for a purchase contract as the difference between the US$50 unit price, and the US$8.5143 initial amortizing note principal.

The Canadian tax disclosure diffidently suggests that since the fair market value of the subordinate voting shares delivered on settlement of the purchase contract can be considered to be determined solely by reference to a change in the fair market value of the subordinate voting shares over the term of the agreement, the derivative forward agreement rules should not apply to the settlement of the purchase agreement so as to require the inclusion of all or a portion of the amount by which the fair market value of the subordinate voting shares received under the purchase contract exceeds the purchase price for the purchase contract.

The US tax disclosure indicates that GFL will take the position that each unit will be treated as consisting of two separate instruments for Code purposes – and that if the unit were instead treated as a single instrument, a US holder could be required to recognize the entire amount of each instalment payment on the amortizing notes, rather than merely the portion of such payment denominated as interest, as income. (The two-instrument treatment and recognition of interest only at the 4% rate also is expected for ITA purposes.)

Neal Armstrong. Summary of 4 March 2020 Supplemented Prep Prospectus of GFL Environmental Inc. under Offerings – Prepaid Share Purchase.