Pan American/Tahoe -- summary under Shares for CVRs, and Shares or Cash

Overview

Under the proposed acquisition of Tahoe Resources by Pan American Silver pursuant to a B.C. Plan of Arrangement, Tahoe shareholders would be provided with a choice between, for each Tahoe share held, US$3.40 in cash or 0.2403 of a Pan American common share, subject to proration based on a maximum cash and share consideration of US$275M and 56M Pan American share, respectively. In addition, Tahoe shareholders will receive, for each Tahoe Share, one contingent value right (a “CVR”), that will represent the right to the automatic delivery of 0.0497 of a Pan American treasury share payable upon first commercial shipment of concentrate following restart of operations at Tahoe’s Escobal mine in Guatemala, provided this occurs within 10 years. Each CVR has an implied value of US$0.70 (US$221M in total). Tahoe Shareholders will own approximately 27% of Pan American or 32% upon delivery under the CVRs.

Taxable resident shareholders are permitted to elect under s. 85. Because the right to receive Pan American shares under the CVRs is not absolute, the CVRs are considered to represent “boot” rather than share consideration for s. 85 election purposes. The cost of a Pan American share received under a CVR is considered to be equal to the FMV of a CVR received under the Plan of Arrangement.

Pan American will drop all of its Tahoe shares into a Newco as part of the Plan of Arrangement, and then Tahoe will be merged into Newco under the Plan of Arrangement with the same effect as an amalgamation except that Newco will be the sole survivor of the amalgamation (see 2006-0178571R3). The U.S. tax disclosure treats the Arrangement as a “D” reorg, The CVRs are likely just deferred share consideration.

Tahoe

Tahoe is a B.C. corporation that operates the Escobal Mine in southeastern Guatemala, the La Arena and Shahuindo Mines in northwestern Peru and the Bell Creek and Timmins West Mines in Timmins, Ontario. Its Tahoe common shares (“Tahoe Shares”) are listed on the TSX and NYSE. As of November 29, 2018, there were 313,313,670 outstanding, of which Van Eck Associates Corp. held 13.1%.

Pan American

Pan American is a B.C. corporation that owns and operates primarily silver mines in Argentina, Bolivia, Mexico and Peru. Its shares are traded on the TSX and Nasdaq.

Subco

0799714 B.C. Ltd, a wholly-owned subsidiary of Pan American.

Consideration

Holders of Tahoe Shares may elect to receive in exchange for each Tahoe Share held, either US$3.40 in cash (the “Cash Consideration”) or 0.2403 of a common share (each whole common share, a “Pan American Share”) in the capital of Pan American (the “Share Consideration”), subject in each case to proration based on a maximum cash consideration of US$275 million and a maximum of 56,074,675 Pan American Shares to be issued. In addition, Tahoe Shareholders will receive for each Tahoe Share one contingent value right (a “CVR”), that will be exchanged for 0.0497 of a Pan American Share, payable upon first commercial shipment of concentrate following restart of operations at Tahoe’s Escobal mine. The CVRs were valued at approximately US$221 million with each CVR having an implied value of US$0.70. The total consideration including CVRs has an implied value of US$4.10 per Tahoe Share. Each Registered Tahoe Shareholder will have the right prior to the Election Deadline (shortly before the meeting) to elect to receive in exchange for each Tahoe Share held, either the Cash Consideration or the Share Consideration, subject in each case to proration.

CVRs (contingent value rights)

The CVRs are a form of contingent consideration entitling Tahoe Shareholders to receive 0.0497 of a Pan American Share for each Tahoe Share (the CVR “Payment”), payable upon first commercial shipment of concentrate following restart of operations at the Escobal Mine (the CVR “Payment Condition”). The CVRs will be transferable and have a term of 10 years. If the Payment Condition is met before the termination date (or an earlier change of control event), the CVR holder will receive the shares without any further action on its part. The shares in question will be reserved for issuance by Pan American, and executed treasury orders directing Pan American’s transfer agent to issue certificates for the Payment shares will be held by the rights agent on behalf of the CVR holders. If the CVR Payment Condition occurs during the CVR Term, the rights agent will release from escrow and deliver to Pan American’s transfer agent al treasury orders and such Pan American Shares will be registered in the name of the CVR Holders. If the CVR Payment Condition does not occur during the CVR Term and Pan American has complied in all material respects with its obligations under the Rights Indenture, the escrow agent will return the certificate representing the Pan American Shares and the treasury directions to Pan American for cancellation.

Plan of Arrangement

1. Each Tahoe PSA (performance share award) and DSA (deferred share award) will immediately vest and will be settled by Tahoe issuing one Tahoe Share, and each Tahoe RSA (restricted share award) will immediately vest.
2. The Dissent Shares of each Dissenting Tahoe Shareholder will be transferred to Pan American.
3. Each Tahoe Shareholder (other than Pan American) will transfer to Pan American each whole Tahoe Share held in exchange for one CVR and (a) in the case of a Tahoe Share for which the Tahoe Shareholder elects to receive Cash Consideration, the Cash Consideration, or (b) in the case of a Tahoe Share for which the Tahoe Shareholder elects or is deemed to have elected to receive Share Consideration, the Share Consideration.
4. Each Tahoe Option will be exchanged for a replacement option from Pan American. It is intended that the provisions of s. 7(1.4) of the Tax Act apply to any such exchange.
5. Each Tahoe Share held by Pan American will be transferred to Subco in consideration for one common share of Subco.
6. Tahoe and Subco will merge to form one corporate entity with the same effect as if they had amalgamated under s. 269 of the BCBCA except that the separate legal existence of Subco will not cease (and that of Tahoe will cease) and Subco will survive the Merger, and Pan American will receive on the Merger one common share of the Merged Company in exchange for each Subco common share previously held.

Canadian tax consequences

S. 85 election

A Tahoe Shareholder who is an Eligible Holder (generally, a non-exempt resident Canadian (or a partnership with such a partner) or non-resident holding Tahoe Shares as (non-treaty protected) taxable Canadian property) should generally be able to exchange Tahoe Shares for Share Consideration and CVRs or a combination of cash, Share Consideration and CVRs under the Arrangement on a fully or partially tax-deferred rollover basis by making an appropriate s. 85 election with Pan American. I]n general, the elected amount may not be less than the aggregate of the cash, if any, and the fair market value of the CVRs received by the Eligible Holder on the exchange. To make the election, an Eligible Holder must provide two signed copies of the necessary joint election forms to an appointed representative, as directed by Pan American in the Tax Instruction Letter, within 60 days after the Effective Date, duly completed.

CVRs

Generally, no gain or loss should be realized by a Resident Holder who receives a payment in Pan American Shares pursuant to the Rights Indenture in respect of a CVR. The Resident Holder’s cost of a Pan American Share acquired thereby will be equal to the Resident Holder’s adjusted cost base of the CVR. Such cost will be equal to the fair market value of the CVR at the time of the exchange of the Tahoe Shares.

U.S. tax consequences

“D” reorg treatment

The Arrangement is intended to qualify as a reorganization under Code s. 368(a)(2)(D) and the individual steps of the Arrangement are intended to be treated as a single integrated transaction involving a statutory merger or consolidation of Tahoe into Subco for U.S. federal income tax purposes. Assuming the Arrangement qualifies as a reorganization, and subject to special rules applicable to interests in a PFIC, U.S. Holders should not recognize gain or loss on the exchange of Tahoe Shares for CVRs and Pan American Shares.

CVRs

The CVRs are intended to be treated as additional Share Consideration received by the Tahoe Shareholders in exchange for such shareholders’ Tahoe Shares. Although it is not entirely clear, and not expected, it is possible that any additional Pan American Shares received pursuant to the CVRs may constitute imputed interest income taxable as ordinary income under Section 483 of the Code.

PFIC status

Based on current business plans and financial expectations, Tahoe expects that it will not be classified as a PFIC during its tax year which includes the Effective Date, and believes it has not been a PFIC in prior tax years.