2002 Ruling 2002-0177163 - Subsection 87(4) - S/H Rights Plan

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a right under a shareholder rights plan, obtained by the Target shareholders on a triangular amalgamation in connection with the acquisition of a common share of Parent, will constitute "consideration" other than a share for the purposes of subsection 87(4)

Position: No

Reasons: The rights will not be received as consideration by the Target shareholders in the context of the facts described in the ruling. The following facts were pertinent to reaching this conclusion: (a) the amalgamation agreement stipulates that the Target shareholders will only receive the shares of Parent and Amalco, (b) the parties will proceed with the amalgamation irrespective of whether the shareholder rights plan is in effect at the time of the amalgamation, (c) Parent may terminate the shareholder rights plan at any time in accordance with its terms, (d) the rights have little or no value, (e) it is unlikely that Securities regulators would permit the rights to be exercised, and (f) the rights may be redeemed by Parent at any time for nominal consideration. In summary, it is our view that the rights under the shareholder rights plan, if received by the Target shareholders, will not constitute consideration for the purposes of subsection 87(4) because, in this particular case, the rights are not something that were bargained for by the Target shareholders and Parent is not promising to provide them to the Target shareholders.

XXXXXXXXXX 2002-017716

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income ruling on behalf of various taxpayers. We acknowledge your letters of XXXXXXXXXX and the information provided during our telephone conversations in connection with your request.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues discussed in this ruling request is:

(a) in an earlier return of the taxpayers or a related person;

(b) being considered by a Tax Services Office or a Taxation Centre in connection with a previously filed tax return of any of the taxpayers or a related person;

(c) under objection by any of the taxpayers or a related person;

(d) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or a related person; or

(e) before the courts.

DEFINITIONS

In this letter, unless otherwise noted, (i) all statutory references are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (the "Act"), and (ii) all references to monetary amounts are in Canadian dollars.

In this letter:

(a) "Amalco" means the corporation to be formed as a result of the triangular amalgamation of Target and Subco, as described in paragraph 12 below;

(b) "arm's length" has the meaning assigned by section 251;

(c) "CBCA" means the Canada Business Corporations Act;

(d) "capital property" has the meaning assigned by section 54;

(e) "Common Shares" means the common shares of Parent;

(f) XXXXXXXXXX;

(g) "Parent" means XXXXXXXXXX;

(h) "Plan" means the shareholder rights plan between Parent and XXXXXXXXXX;

(i) "public corporation" has the meaning assigned by subsection 89(1);

(j) "Right" means a right granted under the Plan to a registered holder of a Common Share;

(k) "Subco" means the corporation to be incorporated by Parent, as described in paragraph 9 below;

(l) "Target" means XXXXXXXXXX; and

(m) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:

FACTS

1. Parent is a taxable Canadian corporation and a public corporation, which was incorporated under the XXXXXXXXXX. One or more of the subsidiaries of Parent carry on business that is similar to that carried on indirectly by Target.

Parent's address is XXXXXXXXXX Parent's business number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Taxation Centre.

2. Target is a taxable Canadian corporation and a public corporation, which was incorporated under the CBCA. XXXXXXXXXX. The common shares of Target are listed on XXXXXXXXXX.

3. Parent and Target deal with each other at arm's length.

4. The Common Shares are listed on the XXXXXXXXXX Stock Exchange. Since XXXXXXXXXX, the articles of Parent have contained the following paragraph in the share conditions attached to the Common Shares (there are several other classes of shares as well):

XXXXXXXXXX.

5. Parent entered into the Plan by agreement made as of XXXXXXXXXX. The purpose of the Plan, as stated in the first recital of the Plan, is to ensure that all shareholders of Parent are treated fairly in connection with any takeover offer for Parent.

6. The Plan provides each registered holder of a Common Share with one Right per Common Share. Each Right entitles the holder to purchase from Parent, after the "Separation Time" (as defined in the Plan and as further described below) and prior to the "Expiration Time" (as defined in the Plan), one Common Share at a price of $XXXXXXXXXX per Common Share, subject to certain conditions and exemptions (but see below regarding the discounted exercise price on a "Flip-in Event" as defined in the Plan). Until the Separation Time, no Right may be exercised and each Right will be represented by the share certificate representing the associated Common Share and will be transferable only together with, and will be transferred by a transfer of, such associated Common Share.

The Separation Time is the close of business on the XXXXXXXXXX business day (or such later date as is determined by the directors of Parent) after the earlier of:

(a) the first date of the public announcement that a person (an "Acquiring Person", which term excludes certain specified persons) has become the beneficial owner of XXXXXXXXXX % or more of the Common Shares, or, if already the beneficial owner of XXXXXXXXXX % or more of the Common Shares, becomes the beneficial owner of more than an additional XXXXXXXXXX% of the Common Shares (such acquisition being a Flip-in Event and the date of such public announcement being the "Stock Acquisition Date");

(b) the date of commencement of, or the first public announcement of the intent of any person (other than certain specified persons) to commence, a takeover bid (other than a takeover bid which is or becomes a "Permitted Bid" (as defined in the Plan) or a "Competing Permitted Bid" (as defined in the Plan) or a takeover bid in respect of which the directors of Parent have determined to waive the application of the Plan); and

(c) the date upon which a Permitted Bid ceases to be a Permitted Bid.

The Plan provides that on a Flip-in Event, the Rights (other than Rights that are beneficially owned by the Acquiring Person) will, at the Separation Time, constitute the right to purchase at the $XXXXXXXXXX exercise price, Common Shares having an aggregate "Market Price" (as defined in the Plan) equal to $XXXXXXXXXX (that is, XXXXXXXXXX the exercise price). Rights beneficially owned by the Acquiring Person will become void upon the occurrence of a Flip-in Event.

Under the Plan, a Permitted Bid is:

(a) a takeover bid made by means of a takeover bid circular by a person who beneficially owns, and has owned within the prior XXXXXXXXXX months, XXXXXXXXXX % or less of the Common Shares;

(b) a bid for all the outstanding Common Shares which is open for acceptance for not less than XXXXXXXXXX days; and

(c) one which provides that more than XXXXXXXXXX% of the Common Shares held by "Independent Shareholders" (as defined in the Plan) must be deposited to the takeover bid and not be withdrawn and that the offeror will make a public announcement of that fact and the takeover bid will then remain open for deposits of Common Shares for not less than XXXXXXXXXX business days from the date of such public announcement.

The directors of Parent are entitled to waive the application of the Plan to a particular transaction or takeover bid and to delay or waive the Separation Time with respect to a particular Flip-in Event. Parent, at its discretion, before or after the Separation Time, may redeem the Rights at a stipulated redemption price (subject to adjustment) of $XXXXXXXXXX per Right.

The Plan and all Rights will terminate on XXXXXXXXXX, unless the Plan is further extended as confirmed by a majority of the votes cast in respect thereof by Independent Shareholders.

7. In creating the Plan, the directors of Parent did not intend that the Rights would become exercisable or be exercised. Rather, the Plan was adopted to prevent a hostile bidder from acquiring the shares of Parent without permitting Parent sufficient time to permit other bidders to make competing takeover bids for Parent so that the shareholders could obtain the highest value for their shares. The position of the securities regulators in Canada is that shareholder rights plans may stay in place for only a limited period of time to permit other bids but that when that period of time has elapsed, the rights under the shareholder rights plan must expire unexercised. It is highly unlikely that the securities regulators would permit the Rights to be exercised.

8. In view of the fact that the Rights are not currently exercisable or separately transferable, and the expectation that they will never be exercised, the Rights have no or nominal value.

PROPOSED TRANSACTIONS

9. Parent will incorporate Subco under the CBCA and will subscribe for common shares of Subco. Subco will be a taxable Canadian corporation and Parent will own all of the issued shares of Subco immediately prior to the amalgamation described in paragraph 12 below.

10. Parent, Subco and Target will enter into an agreement (the "Merger Agreement") dealing with the amalgamation described in paragraph 12 below and setting out the contents of the agreement governing the amalgamation (the "Amalgamation Agreement"). The Merger Agreement will provide that the parties will cooperate in proceeding to the amalgamation whether or not the Plan is in effect at the time of the amalgamation.

11. It is expected that a proxy circular describing the proposed triangular amalgamation will be sent to the shareholders of Target in XXXXXXXXXX and a meeting of the shareholders of Target to approve the triangular amalgamation will take place in XXXXXXXXXX.

12. If certain conditions are met, including obtaining the required approval of the shareholders of Target, Subco and Target will amalgamate pursuant to the CBCA to form Amalco in such a manner that:

(a) all of the property of Subco and Target immediately before the amalgamation will become property of Amalco by virtue of the amalgamation;

(b) all of the liabilities of Subco and Target immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation; and

(c) all the shareholders who owned shares of the capital stock of either Subco or Target immediately before the amalgamation will receive shares of Parent or Amalco by virtue of the amalgamation.

13. On the amalgamation as described in paragraph 12 above, a shareholder of Target will receive:

(a) Common Shares;

(b) at the option of the shareholder, either Series A Preferred Shares of Parent or Series B Preferred Shares of Parent; and

(c) preferred shares of Amalco that will be redeemed for cash on the XXXXXXXXXX business day following the amalgamation.

The Amalgamation Agreement will provide that the shares of Parent and Amalco, as described in this paragraph, will be the sole consideration for the exchange. It will not be a condition to the amalgamation that the Plan be in effect at the time of the amalgamation; instead, Parent will reserve the right to terminate the Plan in accordance with its terms before the amalgamation.

14. On the amalgamation as described in paragraph 12 above, Parent will receive common shares of Amalco in exchange for its common shares of Subco and in consideration for issuing its own shares to the former shareholders of Target. Parent will control Amalco immediately after the amalgamation and will own all the shares of Amalco following the redemption of the preferred shares of Amalco, as described in paragraph 13(c) above.

PURPOSE OF THE PROPOSED TRANSACTIONS

The boards of directors of Parent and Target desire to effect the triangular amalgamation for commercial reasons.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions, and the purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our ruling is as follows:

A. The application of subsection 87(4) to the exchange by a shareholder of Target of common shares of Target for shares of Parent and Amalco, as described in paragraph 13 above, will not be denied merely because the shareholder of Target obtains a Right for each Common Share so received.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued on May 17, 2002 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to those facts and proposed transactions described herein other than those specifically described in the ruling given above.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch