Reverse takeovers

Progressive/Waste Management

reverse takeover of Progressive Waste Solutions by Waste Management under Delaware merger

Overview

It is proposed that Waste Connections, a NYSE-listed Delaware corporation, will effect a reverse takeover of Progressive, a TSX and NYSE-listed OBCA corporation, through a merger of Waste Connections with a Delaware shell sub of Progressive, with Waste Connections as the survivor and with Waste Connections’ shareholders receiving common shares of Progressive so as to end up holding 70% of Progressive. The shares of Progressive will then be consolidated (so that the Waste Connections shareholders have the same number of shares as before) – and Progressive will be renamed Waste Connections by means of amalgamation with a shell Ontario subsidiary with that name. The obligation to effect the merger is conditional upon receipt of opinions that Code s. 7874 should not cause Progressive to be treated as a U.S. corporation. The disclosure estimates that the April 4, 2016 U.S. Treasury Department and IRS proposals, that could cause intercompany debt if it were to exceed the currently outstanding debt of Waste Connections to be treated as equity, would reduce the adjusted free cash flow expected in the first year following the Merger by less than 3%.

See full summary under Public Transactions - Other - Continuances/Migrations - Inversions.

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Tax Topics - Public Transactions - Other - Continuances/Migrations - Inversions reverse takeover of Progressive Waste Solutions by Waste Management under Delaware merger 1018

QLT/Auxilium

Merger of QLT and Auxilium in inversion transaction
Overview

To effect the combination of Auxilium and QLT, AcquireCo, an indirect wholly owned subsidiary of QLT, will be merged with and into Auxilium (the "merger"). Auxilium will be the surviving corporation and, through the merger, will become an indirect wholly owned subsidiary of QLT ("New Auxilium"). Auxilium stockholders will receive a fixed ratio of 3.1359 QLT common shares for each Auxilium common share. The equity exchange ratio may be increased by up to 0.0962 QLT common shares depending on the aggregate cash consideration (if any) received by QLT or its subsidiary at or immediately after the merger effective time in respect of any sale or licence of QLT's synthetic retinoid product in development. QLT shareholders will continue to own their existing QLT common shares after the merger. Upon the closing, current QLT shareholders and former Auxilium stockholders will own approximately 24% and 76% of the combined company on a fully diluted basis, so that it is anticipated that Code s. 7874 will not deem New Auxilium to be a U.S. corporation.

QLT

A TSX and NASDAQ listed B.C. biotech corporation engaged in the development of ocular products.

Auxilium

A NASDAQ listed Delaware specialty biopharmaceutical corporation. In negotiations with QLT it projected that it would have pre-tax non-GAAP income of $109M and $182M in 2015 and 2018, respectively.

HoldCo

A wholly-owned Delaware subsidiary of QLT formed the purpose of effecting the merger.

AcquireCo

QLT Acquisition Corp., a wholly-owned Delaware subsidiary of HoldCo.

Merger
  1. Immediately prior to the "Merger Effective Time," QLT will subscribe for a number of shares of common stock of HoldCo that is equal to the number of Auxilium Shares issued and outstanding immediately prior to the Merger Effective Time multiplied by the "Equity Exchange Ratio" (described below), for a purchase price in cash equal to the fair market value of such shares (the "Subscription Price").
  2. HoldCo will subscribe for a number of common shares of QLT that is equal to the number of Auxilium Shares issued and outstanding immediately prior to the Merger Effective Time multiplied by the Equity Exchange ratio for a purchase price in cash equal to the Subscription Price.
  3. At the Merger Effective Time:
    1. AcquireCo will be merged with and into Auxilium and the separate existence of AcquireCo will cease. Auxilium will survive the merger as an indirect wholly owned subsidiary of QLT.
    2. Each issued and outstanding common share of AcquireCo shall be converted into one fully paid share of redeemable preferred stock of the Surviving Company, such redeemable preferred stock to have an aggregate redemption amount and fair market value equal to the fair market value of converted common shares immediately prior to the Merger Effective Time.
    3. Each issued and outstanding Auxilium share shall be converted into the right to receive (from HoldCo, on behalf of AcquireCo) QLT shares based in number on the Equity Exchange Ratio.
    4. The Surviving Company, as successor to AcquireCo, shall issue such number of shares of common stock to HoldCo equal to the number of Auxilium shares issued and outstanding immediately prior to the Merger Effective Time multiplied by the Equity Exchange Ratio in consideration for HoldCo delivering (on behalf of AcquireCo) common shares of QLT to the former Auxilium Stockholders.
  4. The terms of the Auxilium stock option plan will be adjusted and QLT will assume such options.

The "Equity Exchange Ratio" reflects the right to receive, for each outstanding share of Auxilium common stock, 3.1359 QLT common shares (the "equity exchange ratio"), provided that in the event that, at or immediately after the merger effective time, QLT or its subsidiary receives aggregate cash consideration pursuant to the sale, license, sublicense or similar transaction related to its proprietary synthetic retinoid product in development known as "QLT091001", which is less than $25 million but equal to or greater than $20 million then, the equity exchange ratio shall be increased by 0.0192; and so on for further specified $5M increments as follows:

  • $20 million to $15 million: 0.0385;
  • $15 million to $10 million: 0.0577;
  • $10 million to $5 million: 0.0770;
  • or less than $5 million, or in the event that no such transaction is consummated at or immediately after the merger effective time, then the equity exchange ratio shall be increased by 0.0962.

The certificate of incorporation of AcquireCo immediately prior to the Merger Effective Time, shall be the certificate of incorporation of the surviving company. The Board of Directors of New Auxilium will consist of seven individuals designated by Auxilium and two individuals designated by QLT who are acceptable to Auxilium. Closing of the merger will occur on the earlier of December 31, 2014 and three business days after satisfaction of the stipulated conditions including approval by both companies' shareholders, regulatory approvals and lender consents. Auxilium will use commercially reasonable efforts to ensure that the Auxilium meeting will occur no more than two business days after the QLT meeting.

S. 7874 merger conditions

Auxilium's obligation to complete the merger is subject to there being no change in applicable law (whether or not yet effective) respecting Code s. 7874 of the Code or any official interpretations (other than IRS News Releases) thereof (whether or not yet effective), and there being no bills to implement such a change which have been passed by both houses of Congress and for which the time period for the President signing or vetoing such bills has not yet elapsed, in each case prior to October 31, 2014, that, once effective, in the opinion of nationally recognized U.S. tax counsel, would cause New Auxilium to be treated as a U.S. domestic corporation. Any such event after October 31, 2014 would not relieve Auxilium of its obligation to complete the merger. In addition, Auxilium's obligation to complete the merger is subject to receiving a Skadden, Arps opinion dated as of the closing date of the merger that s. 7874 should not apply so as to cause QLT to be treated as a domestic corporation from and after the closing date. Skadden's s. 7874 opinion will be based only on the tax laws in effect on or before October 31, 2014. Accordingly, in the event of such change of tax law after October 31, 2014 but before the closing date of the merger (other than as a result of bills that have been passed by both houses on or prior to October 31, 2014), Auxilium would be required to complete the merger even though New Auxilium would be treated as a U.S. domestic corporation for U.S. federal income tax purposes.

Canadian tax consequences

As of December 31, 2013 QLT had approximately $284.6 million of capital loss carryforwards and $102.9 million of non-capital loss carryforwards. QLT will be subject to a "loss restriction event" as a result of the acquisition of QLT common shares by Auxilium stockholders under the merger agreement.

U.S. tax consequences

Tax residence of New Auxilium (s. 7874). New Auxilium, including its expanded affiliated group, is not expected to have substantial business activities in Canada. However, after the merger, Auxilium stockholders are expected to be treated as holding less than 80% (by both vote and value) of the New Auxilium common shares by reason of their ownership of Auxilium common stock. The disclosure assumes that New Auxilium will not be treated as a U.S. corporation.

Offsetting of inversion gains

The Auxilium stockholders are expected to receive at least 60% (but less than 80%) of the vote and value of the New Auxilium common shares by reason of holding Auxilium common shares. Furthermore, Auxilium currently expects that the substantial business activities test will not be satisfied. As a result, Auxilium and its U.S. affiliates could be limited in their ability to utilize their U.S. tax attributes to offset any inversion gain (including gain from the transfer of shares or certain other property and income from licensing property which is transferred or licensed as part of the acquisition or to a foreign related person). However, neither Auxilium nor its U.S. affiliates expect to recognize any inversion gain as part of the proposed transaction, nor do they currently intend to engage in any transaction in the near future that would generate inversion gain. In addition, Auxilium expects that it will undergo an "ownership change" under s. 382 (see below). Nevertheless, Auxilium expects that it will be able to fully utilize its U.S. net operating losses prior to their expiration, to offset U.S. taxable income generated after the proposed transaction through ordinary business operations.

Shareholder gain recognition

Although the merger will qualify as a "reorganization" under s. 368(a), as New Auxilium should be respected as a foreign corporation the s. 367(a) rules will require U.S. holders exchanging shares of Auxilium common stock for New Auxilium common shares to recognize gain. Accordingly, a U.S. stockholder of Auxilium should recognize gain equal to any excess of the fair market value of the QLT common shares received on the merger over its adjusted tax basis in the shares of Auxilium common stock.

PFIC status

QLT believes that it may have been treated as a PFIC for U.S. federal income tax purposes for its taxable years ending December 31, 2008 through 2013. Nonetheless, New Auxilium is not currently expected to be treated as a PFIC for U.S. federal income tax purposes for the taxable year that includes the merger or for foreseeable future taxable years.

S. 382 (per Risk Factors)

As of December 31, 2013, Auxilium had approximately $135.9 million of net operating loss carryforwards. The merger is expected to result in an ownership change under Code s. 382 of the Code for Auxilium, potentially limiting the use of Auxilium's net operating loss carryforwards in future taxable years.

Intergeo/Mercator

Reverse takeover of Mercator by Intergeo with restricted board nominations rights and puts issued on s. 86 reorg
(SEDAR filing: 10 March 2014) Mercator Minerals Ltd. ("Mercator") Circular for its reverse takeover by Intergeo MMC Ltd ("Intergeo") and issuance of puts (7482 K). DuMoulin or Blakes/(Norton Rose for Intergeo)
Overview

Intergeo (a British Virgin Islands subsidiary of a BVI holding company, Daselina, of a Russian billionaire) which unsuccessfully attempted to go public two years ago, is effecting a reverse (share-for-share exchange) takeover of TSX-listed Mercator pursuant to a BCBCA Plan of Arrangement, with Daselina subscribing U.S.$100M for Mercator shares, so that Daselina will own approximately 85% of the post-reorganization Mercator (a.k.a., the Resulting Issuer) and the Resulting Issuer will own 100% of Intergeo. One Special Share will be issued to each of Daselina and another BVI company with a minor common share holding in the Resulting Issuer (Kirkland), which will provide that they have the right to nominate only three of the nine board members (but with the other six being nominated by the board itself) – but also give them veto rights on major decisions. In order to maintain the public float, Daselina presumably does not wish to buy out the existing shareholders. However, to placate them, they are to receive (under a s. 86 reorganization) the right to put their Common Shares to the Resulting Issuer for $5.00 per share (the equivalent of $0.10 per share before giving effect to a proposed 50-for-1 share consolidation) during an exercise window of 18 to 30 months following the Effective Date of the Plan of Arrangement, with $31.7M being placed into an escrow account to secure this contingent obligation.

Overview of FAD rule application

Although the Special Shares might have the effect of causing Daselina not to be the parent of the Resulting Issuer for foreign affiliate dumping purposes, the Special Shares will not be created and issued until after the reverse takeover (which, in turn, will occur after Intergeo already has acquired control of Mercator under the U.S.$100M private placement), so that the FAD rules will apply to such investment by Mercator in Intergeo. This should be acceptable as Mercator currently has approximately $393M of paid-up capital - so that with PUC-averaging, Daselina's shares will have full PUC. The FAD rules might not apply to the investment by Mercator (as the last step in the Plan of Arrangement) of the private placement proceeds in its Delaware subsidiary, as the board nomination restrictions will then be in effect.

Resulting ownership

Upon completion of the Arrangement, Daselina, Kirkland and the Mercator will own 84.38%, 0.45% and 15.17% of the outstanding Resulting Issuer Common Shares. "Mr. Prokhorov, through Daselina, will be the Resulting Issuer's ultimate principal shareholder. Daselina will have the voting power to control the outcome of most matters to be decided at future meetings of the Resulting Issuer's shareholders."

Mercator

Mercator is a B.C. company listed on the TSX whose principal assets are its 100% owned Mineral Park mine in Arizona (held through a "grandchild" Delaware subsidiary) and its 100% owned El Pilar project in Mexico (held through a Mexican subsidiary which is owned 99.8% by an immediate Canadian subsidiary of Mercator and 0.2% by a grandchild Canadian subsidiary of Mercator). It has 315.7M Common Shares outstanding (equivalent to 6.31M post-consolidation), with a paid-up capital of $393M.

Intergeo

A private BVI corporation owned by Mr. Mikhail Prokhorov (a Russian billionaire). It owns 100% of a Cyprus holding company, which in turn owns 99.5% of a Russian holding company for Russian copper development project subsidiaries (with the other 0.5% owned by Mr. Prokhorov). It filed a preliminary long form base PREP prospectus in Canada on May 15, 2012 in connection with a proposed IPO, but withdrew the prospectus on April 12, 2013 due to market conditions. 114M Intergeo shares are outstanding.

Kirkland

A private BVI corporation whose relationship with Daselina and Mr. Prokhorov is not disclosed.

Plan of Arrangement
  1. The Mercator Shareholder Rights Plan will be terminated.
  2. The Common Shares held by dissenting Shareholders shall be deemed to have been transferred to Mercator.
  3. The Mercator articles will be amended to change the designation of the existing "Common Shares" to "Class A Common Shares" (having two votes per share), and to create "Class B Common Shares" with one vote per share subject to the rights of the Special Shares.
  4. Mercator will issue Class B Common Shares to Daselina for $100 million, adding the full amount to stated capital, with Daselina now holding approximately 72% of the Class B Common Shares.
  5. Mercator will complete the issuance of Class A Common Shares as payment in respect of each award (with two exceptions) of a RSU and DSU outstanding immediately following the Effective Time.
  6. Each Class A Common Share will be exchanged for one Class B Common Share and one Put Right (a.k.a., an Initial Put Right). Such Put Right will entitle the holder thereof to require Mercator to purchase one Class B Common Share from such holder at a price of $0.10 during the "Put Right Exercise Window" commencing on the 547th day (approximately 18 months) following the Effective Date and expiring on the 912th day (approximately 30 months). The stated capital of the Class B Common Shares will equal that of the Class A Common Shares minus the fair market value of such Put Rights.
  7. Each Intergeo Common Share will be exchanged for 8.353058 Class B Common Shares, with the fair market value of such exchanged shares being added to the stated capital of the Class B Common Shares.
  8. The issued and outstanding Class B Common Shares and Put Rights will be consolidated on a 50-for-1 basis (with the Put exercise price increasing to $5.00).
  9. Mercator's articles will be amended to change the designation of the existing "Class B Common Shares to "Common Shares" (a.k.a, New Common Shares"), create "Special Shares", limited to two shares, and change the name of Mercator to "Intergeo Mining Ltd."
  10. One Special Share will be issued to Daselina and to Kirkland.
  11. Mercator will advance US$37M in cash as an unsecured loan to the Delaware subsidiary holding the Mineral Park mine.
Special shares

Under the terms of the Special Shares (which are not entitled to dividends),for so long as the Daselina Group (i.e., including affiliates and associates) and the Kirkland Group collectively hold at least 30% of the outstanding Resulting Issuer Common Shares, they shall be entitled to nominate two nominees of the Daselina Group and one nominee of the Kirkland Group to the board of directors, which such terms specify shall be composed of nine directors, with the remaining six directors (other than the CEO, if such a nominee) to be independent directors "and with such remaining nominees being nominated for election or appointment by a resolution of the board of directors." The Special Shares also provide that, for so long as the Daselina Group and the Kirkland Group collectively hold at least 33% of the outstanding Resulting Issuer Common Shares, the Resulting Issuer shall not make specified major decisions (including any: share or option issuances; significant (over US$10M) share transfers or acquisition by any group company; incurring of a significant encumbrance; making of any significant loan other than intercompany loans; incurring any significant borrowing or guarantee; or entering into of any significant contract), without the approval of a majority of the Board and with any nominee director(s) of the Daselina Group Share Holder not voting against the decision. Listed actions can be taken only by board resolution.

Put right escrow fund

Daselina will, as of the Effective Date, deposit cash in the amount of approximately C$31.7 million (the "Escrowed Funds") with the Put Right Trustee to be available to support the Resulting Issuer's payment obligation in relation to the Initial Put Rights, but not the "Additional Put Rights" (issued on any exercise of Warrants or vesting of DSUs).

Draw-down

In the event that any Escrowed Funds are drawndown by the Resulting Issuer, Daselina will have the right to elect (when there no longer are any Put Rights outstanding) to convert the unpaid Escrow repayment amount into Resulting Issuer Common Shares at a subscription price of C$6.50 per share, or (if this does not create insolvency issues) into an unsecured promissory note of the Resulting Issuer bearing interest at 10% per annum.

Kirkland Option

Daselina will grant to Kirkland an option to purchase 2,886,162 Resulting Issuer Common Shares representing 6.9% of the issued and outstanding Resulting Issuer Common Shares.

Canadian tax consequences

S. 86 generally will apply to the exchange of Class A Common Shares for Class B Common Shares and Put Rights. Given that the (pre-consolidation) paid-up capital of the current (pre-consolidation) Common Shares is estimated at over $1.25 per share ($393M), no deemed dividend is anticipated.

U.S. tax consequences

Exchange. The exchange by Mercator Shareholders of Mercator Shares for Resulting Issuer Common Shares and Initial Put Rights should qualify as a tax-deferred "recapitalization" within the meaning of Code s. 368(1). Assuming the Arrangement is treated as a tax-deferred recapitalization then, subject to PFIC considerations, the U.S. holders who receive Resulting Issuer Common Shares and Initial Put Rights will recognize gain (but not loss) to the extent of the lesser of (1) the excess of the fair market value of the Resulting Issuer Common Shares and the fair market value of the Initial Put Rights received on the date of receipt over the adjusted tax basis of the Mercator Shares surrendered, and (2) the fair market value of the Initial Put Rights on the date of receipt.

PFIC considerations

Mercator does not believe that it was a passive foreign investment company during 2004 to 2012. Mercator has not made a determination regarding its PFIC status for 2013.

Russian tax issues

Due to an uncertainty in the interpretation of the "beneficial ownership" concept in Russia, a risk exists that Intergeo Cyprus may not be recognized as the "beneficial owner" of income and may be denied benefits under the Cyprus-Russia Tax Treaty. Russian courts have recently used a "conduit company" concept in the context of the Russian thin-capitalization rules. Accordingly, the Russian tax authorities may seek to assert that Intergeo Cyprus should be considered to be a "conduit company" and be denied benefits under the Cyprus-Russia Tax Treaty, resulting in 15% Russian withholding tax.

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Tax Topics - Public Transactions - Spin-Offs & Distributions - S. 86 spin-offs - S. 86 non-business spin-offs Reverse takeover of Mercator by Intergeo with restricted board nominations rights and puts issued on s. 86 reorg 240