Taxable dividends-in-kind

Overview

Pengrowth owes over $0.7B to secured debtholders. A private purchaser (the “Purchaser”) has agreed, under an Alberta Plan of Arrangement, to pay off the secured debt and to acquire all the Pengrowth common shares for $0.05 per share ($28 million in aggregate).

The Circular discloses an agreement of Pengrowth with the purchaser that, in the event that the Plan of Arrangement does not proceed, they would seek to finalize an alternative proceeding (likely under the CCAA) which would proceed on similar terms, but under which “Shareholders may receive the nominal value of $0.001 per Share.”

Initial steps in the proposed Plan of Arrangement entail first the settling by Pengrowth of a litigation trust by assigning its claim in an action in the Court of Queen’s Bench of Alberta together with a contribution of funds (and a commitment to potentially provide further funds) for the costs of the action, and then a dividend in kind by it of the interests in that litigation trust to its shareholders. The Circular does not disclose how that dividend will be valued regarding T3 information reporting. Although unclear, withholding tax on the dividend may be funded out of sale proceeds otherwise payable to a non-resident shareholder for their shares.

Pengrowth

Pengrowth is an ABCA corporation (whose 560,113,864 Shares are listed on the TSX and traded over-the-counter in the U.S. on the OTCQX) focused on development and production of oil and gas in Western Canada from its Lindbergh thermal oil property and its Groundbirch Montney gas property. In 2014, Pengrowth completed the largest capital project in its history (the successful construction and start-up of its Lindbergh thermal oil project) shortly before a precipitous drop-off in oil prices. In 2015, it eliminated its dividend and started an asset disposition program. The proceeds from the asset dispositions, together with free cash flow generated, were used to repay indebtedness of approximately $1.3 billion during 2017.

WEF and the Purchaser

WEF is a private limited partnership existing under the laws of the Province of Alberta whose business is the investment in oil and gas companies. WEF holds all of the issued and outstanding common shares in the capital of the Purchaser, a corporation incorporated under the laws of the Province of Alberta. The Purchaser is a heavy oil producer in southwest Saskatchewan.

Litigation Trust

A trust to be established on the Effective Date of the Arrangement pursuant to a “Litigation Trust Agreement” with a person to be determined by Pengrowth prior to that time. The trust will acquire the claim in Alberta Court of Queen’s Bench Action No. 1701-11469 (the “Litigation Trust Claim”) and be funded with the “Litigation Funding Amount.”

Plan of Arrangement

1. Each outstanding stock option shall be cancelled.
2. Each of the Shares held by dissenting shareholders shall be transferred to the Purchaser.
3. Each of the outstanding “Incentives” (DEUs, DSUs, PSUs and RSUs) shall be surrendered to Pengrowth and each Incentiveholder whose Incentives are so surrendered and transferred shall be entitled to receive from Pengrowth that number of Shares that are deliverable to such Incentiveholder as set forth in the LTIP Schedule.
4. Pengrowth shall: (i) transfer to the Litigation Trustee its interest in the Litigation Trust Claim, (ii) contribute in cash the Initial Litigation Funding Amount to the Litigation Trustee, and (iii) agree to further contribute, from time to time, such cash amounts as are required in accordance with the Litigation Trust Agreement; in consideration for the issuance to Pengrowth of all the Litigation Trust Interests.
5. Pengrowth shall distribute to each Shareholder pro-rata interests in the Litigation Trust as a dividend-in-kind.
6. All of the letters of credit obligations under the Credit Agreement and all swap indebtedness shall be assumed by the Purchaser.
7. Each Secured Debtholder shall be entitled to receive its applicable share of the Secured Debtholder Consideration (being a cash payment in U.S. dollars equal to the sum of U.S.$366.3 million, $196.5 million and £12.1 million (as adjusted for post-October 31, 2019 changes) Credit Agreement fee amounts and certain interest amounts, and with the obligations of Pengrowth in relation thereto being extinguished.
8. Each outstanding Share shall be transferred to the Purchaser and each Shareholder shall be entitled to receive from the Purchaser $0.05 in cash per Share.

WEF Guarantee

WEF has unconditionally and irrevocably guaranteed in favour of Pengrowth the performance by the Purchaser of each of the Purchaser’s covenants and obligations under the Arrangement Agreement.

Alternative Transactions

Concurrently with the Arrangement Agreement, the Corporation has entered into the Alternative Transaction Agreement with the Purchaser and WEF, pursuant to which, in the event that: (i) the Arrangement Agreement is terminated by the parties due to inability to receive the Shareholder Approval or the Secured Debtholder Approval; and (ii) the Purchaser and WEF so request, the parties agreed to negotiate in good faith to enter into a definitive agreement providing for an alternative implementation structure in order to complete the acquisition of Pengrowth by the Purchaser. The definitive agreement shall provide for the acquisition by the Purchaser of all of the outstanding Shares or all of the assets, obligations and liabilities of Pengrowth. The alternative implementation structure includes, but is not limited to, a proceeding under the CCAA.

The Alternative Transaction Agreement contemplates a proceeding, including a proceeding under the CCAA, pursuant to which Shareholders may receive the nominal value of $0.001 per Share and the Secured Debtholders will receive, subject to the Purchaser and WEF agreeing with the Corporation otherwise, the same consideration available to them under the Arrangement. The Alternative Transaction Agreement also contemplates that a definitive agreement will be entered between Pengrowth, the Purchaser and WEF containing substantially similar provisions relating to the payment of the Purchaser Termination Fee of $45 million.

Canadian tax consequences

Dividend of Litigation Trusts interests

A Resident Holder will be required to include the dividend-in-kind in computing its income. Each Holder that receives the Dividend will be the beneficial owner of Litigation Trust Interests. There may be certain Canadian tax consequences with respect to holding such Litigation Trust Interests, including an income inclusion upon the distribution of proceeds by the Litigation Trust pursuant to the Litigation Trust Agreement. Holders should consult their own tax advisors.

Share disposition

Resident Holders will realize a capital gain (or a capital loss) equal to the amount by which the Cash Consideration exceeds (or is less than) the aggregate of the adjusted cost base to the Resident Holder of such Shares immediately prior to the disposition and any reasonable costs of disposition.

Non-Residents

A dividend, such as the Dividend, paid or credited or deemed to be paid or credited to a Non-Resident Holder will be subject to Canadian withholding tax at the rate of 25%, subject to any reduction in the rate of withholding to which the Non-Resident Holder is entitled under any applicable income tax convention.

Overview

LREIT used all of the net cash proceeds of a property sale to pay down debt. In order to distribute its resulting capital gain of $29.6 million, it will make a special distribution on all its units on December 31, 2015 to be paid by the issuance of units – except that the amount of the special distribution will be reduced to take into account LREIT's operating loss for 2015 and a 2014 non-capital loss. The number of outstanding units then will be consolidated so that each unitholder will end up with the same number of units as before.

Sale transaction

Lanesborough Real Estate Investment Trust ( LREIT ) announced that it has completed the sale of Colony Square in downtown Winnipeg, MB for $70.25 million, subject to customary closing adjustments. The three tower complex, consisting of 428 apartment suites, approximately 83,300 square feet of commercial space and a 270-stall underground parkade, was acquired by LREIT in 2008 for $38 million. The sale resulted in net cash proceeds to LREIT (net of mortgage debt, selling costs and $1.54 million to be placed in escrow) of approximately $28 million. The net cash proceeds were used to repay operating loans and advances.

Special distribution

The sale of Colony Square will result in a capital gain for Canadian income tax purposes of approximately $29.6 million. LREIT intends to declare a special distribution equal to the capital gain (being approximately $1.46156 per trust unit based on the number of trust units outstanding as of the date of the press release) in order to reduce LREIT s taxable income for the 2015 taxation year to nil. There being no cash available for the payment of the special distribution, payment of the whole amount will be made, in accordance with paragraph 9.3 of LREIT's Declaration of Trust, by the issuance of additional trust units based on the closing market price of the trust units on December 31, 2015. Immediately following the special distribution, the number of outstanding trust units will be consolidated so that each Unitholder will hold exactly the same number of trust units after the consolidation as each Unitholder held immediately prior to the special distribution. The non-cash distribution will be declared payable on December 31, 2015 to the Unitholders of record on December 31, 2015. The special distribution will be reduced by the application of LREIT s operating losses for the 2015 taxation year and non-capital losses carried forward from the 2014 taxation year which are available to offset the taxable portion of the capital gain.

Canadian tax consequences

A Canadian-resident Unitholder on the record date of the special distribution will be required to include in computing its income for Canadian income tax purposes for its taxation year that includes December 31, 2015, its proportionate share of LREIT's net taxable capital gains for the 2015 taxation year (estimated to be $14.8 million or approximately $0.73078 per trust unit) less losses which are available to offset those net taxable capital gains. The adjusted cost base of its trust units immediately after the special distribution will be increased by the Unitholder's proportionate share of the special distribution.

Overview

Brookfield Asset Management is proposing to transfer subsidiaries, carrying on a Canadian, U.S. and international insurance business, to a newly-incorporated Ontario subsidiary (Trisura Group), and then distribute its shares of Trisura Group to the Brookfield shareholders as a taxable dividend. For non-Canadian beneficial shareholders, the Part XIII tax withholding tax obligations “will be satisfied in the ordinary course through arrangements with their broker or other intermediary.” The dividend is expected to occur as a tax-free distribution for Code purposes.

Trisura Group

Trisura Group, was incorporated on January 27, 2017 and issued 40 Common Shares to Brookfield Asset Management for $1,000. Through the subsidiaries, described below, to be acquired by it, it will operate as an international specialty insurance provider in the surety, risk solutions, corporate insurance and reinsurance niche segments of the market.

TGI/TG Holdco

Trisura Guarantee Insurance Company (“TGI” or “Trisura Guarantee”) is a Canadian niche P&C insurance company with a primary focus on the Canadian surety, professional and executive liability and warranty markets, which currently is wholly-owned by 6436978 Canada Limited (“TG Holdco”). TG Holdco is a Canadian federal company which is owned 60% by an indirect wholly-owned subsidiary of Brookfield Asset Management and 40% by TG Management Group, whose shareholders include the founding shareholders of TGI.

Trisura US

Trisura US, a new Oklahoma subsidiary that will focus on the risk solutions segment, is expected to be incorporated.

Trisura International Insurance

Trisura International Insurance is a Barbados-regulated entity which focuses on the reinsurance segment of the international market, and is held through Imagine Group Holding Limited (“Trisura International Holdco”), also a Bermuda company.

Brookfield Asset Management

A global alternative asset manager listed on the NYSE and TSX.

Proposed transactions

1. Brookfield Asset Management will subscribe for approximately 5,799,960 Common Shares of Trisura Group in exchange for approximately $144.9 million;
2. Brookfield Asset Management will exchange its interest in Trisura International Holdco for approximately $51.8 million with Trisura Group;
3. After approval by the federal Minister of Finance, Brookfield Asset Management will exchange its 60.0% interest in TG Holdco for approximately $51.8 million with Trisura Group. Trisura Group’s share capital following these transactions will total approximately $144.9 million or approximately $25.00 per Common Share representing its approximate fair value as of that date.
4. Brookfield Asset Management will make a special dividend to holders of its Class A Shares and Class B Shares of all of the Common Shares of Trisura Group. As a result of the special dividend, holders of Class A Shares and Class B Shares will be entitled to receive one Common Share for every 188 Class A Shares or Class B Shares held as of the Record Date for the special dividend, provided that the special dividend will be subject to any applicable withholding tax and no holder will be entitled to receive any fractional interests in the Common Shares. Holders who would otherwise be entitled to a fractional Common Share will receive a cash payment.

Payment of Canadian withholding tax

To satisfy the withholding tax liabilities of non-Canadian registered shareholders, Brookfield Asset Management will withhold a portion of the Common Shares, and a portion of any cash distribution in lieu of fractional Common Shares, otherwise distributable. Brookfield Asset Management will purchase these withheld Common Shares and the proceeds of this sale, together with the amount of any cash withheld from any cash distribution in lieu of fractional Common Shares, will be remitted to the Canadian federal government in satisfaction of Canadian withholding tax liabilities. For non-Canadian beneficial shareholders, these withholding tax obligations will be satisfied in the ordinary course through arrangements with their broker or other intermediary.

Canadian tax consequences

Resident Holders who receive Common Shares pursuant to the spin-off will be considered to have received a taxable dividend equal to the aggregate fair market value of the Common Shares so received plus the amount of any cash received in lieu of fractional Common Shares. The adjusted cost base to a Resident Holder of the Common Shares received pursuant to the spin-off will be equal to the fair market value of the Common Shares so received.

U.S. tax consequences

For U.S. federal income tax purposes, Trisura Group and Brookfield Asset Management intend to treat the distribution as a tax-free distribution to U.S. Holders. If, contrary to expectation, the distribution is determined not to qualify as a tax-free distribution, then each U.S. Holder who receives Common Shares in the distribution generally is expected to be treated as receiving a taxable dividend.

Overview. Brookfield Asset Management, which is a Canadian-resident corporation listed on the NYSE, NYSE Euronext and TSX, will distribute the (non-voting) LP units of BBP LP to its shareholders as a special dividend, with such distribution being referred to as the spin-off. Brookfield Asset Management will retain an approximate 70% economic interest in the business by virtue of holding approximately 45% of the units of BBP LP directly and by virtue of holding an approximate 45% partnership interest in Holding LP, which will be the subsidiary LP of BBP LP. Holding LP will be Brookfield's primary vehicle for business services and industrial operations, with most of those businesses held (indirectly) outside Canada. BBP LP will apply for TSX and NYSE listings.

Special dividend. Brookfield Asset Management will declare a special dividend, to holders of its Class A limited voting shares and Class B limited voting shares, comprising approximately 55% of the units of Holding LP on the basis of one unit for every 100 Class A or B shares. Holders who otherwise would be entitled to receive a fractional unit will receive a cash payment.

Withholding on special dividend. To satisfy withholding tax liabilities in respect of registered shareholders, Brookfield Asset Management will withhold a portion of the BBP LP units which otherwise would be distributed (plus a portion of the cash distribution), and purchase the withheld units at a price equal to the fair market value of the unit determined by reference to the five day VWAP of the BBP LP units following closing of the spin-off. For non-Canadian beneficial owners, the withholding tax obligations will be satisfied in the ordinary course through arrangements with their brokers or other intermediaries.

BBP LP. BBP LP is a Bermuda exempted limited partnership. It will hold managing general partner units of Holding LP representing an approximate 55% interest therein. The general partner of BBP LP (holding a 0.2% GP interest) is a Bermuda company ("BBP GP") which is a wholly-owned subsidiary of Brookfield Asset Management. It will have sole authority for the management and control of BBP LP. Income allocations will be made on a quarterly basis.

Holding LP. Brookfield Asset Management will hold non-voting units (the "Redemption-Exchange Units"), representing a 45% interest in Holding LP. The Redemption-Exchange Units will be redeemable for cash within two years of the closing, subject to a right of BBP LP to acquire such units in exchange for units of BBP LP. In addition, Brookfield Asset Management will hold Special LP units of Holding LP, entitled to incentive distributions (see below).

Holding Entities. The Holding Entities are three corporations incorporated in Bermuda, Ontario and Delaware held by Holding LP. Brookfield will subscribe for $15 million of preferred shares of each subsidiary. The preferred shares are entitled to receive a cumulative preferential cash dividend equal to 5% of their redemption value as and when declared by the board of the directors of the applicable entity and are redeemable at the option of the applicable entity at any time after the 20^th anniversary of their issuance. Each class of preferred shares is entitled to 1% of the total votes of the applicable subsidiary.

Distributions. Anticipated to be approximately $0.25 per unit on an annualized basis, initially representing an estimated distribution yield of approximately 1% of expected initial value per unit of $25.00 upon spin-off. The level of distributions is not intended to grow.

Fees and incentive distributions. BBP LP will pay a quarterly base management fee to Brookfield affiliates equal to a 0.3125% (1.25% annually) of the total capitalization of BBP LP. As a result of holding Special LP Units, Brookfield will be entitled to receive from Holding LP incentive distributions calculated as (a) 20% of the growth in the market value of the BBP LP units quarter-over-quarter (but only after the market value exceeds the "Incentive Distribution Threshold" being initially $25.00 and adjusted at the beginning of each quarter to be equal to the greater of (i) the unit's market value for the previous quarter and (ii) the Incentive Distribution Threshold at the end of the previous quarter) multiplied by (b) the number of units outstanding at the end of the quarter (assuming full conversion of the Redemption Exchange Units into units).

Canadian tax consequences. Dividend. The reported amount of the dividend will be based on the fair market value of the unit BBP LP units determined by reference to the five day VWAP of the BBP LP units following closing of the spin-off.

Partnership taxation/SIFT tax. BBP LP would be considered to be "Canadian resident partnership" and, therefore taxable as a SIFT partnerships, if its central management and control were in Canada. In such event, Holding LP would be an excluded subsidiary entity. BPY GP expects that its central management and control will be outside Canada, so that the SIFT partnership rules will not apply to BBP LP or Holding LP, and also intends to manage their affairs so that they do not carry on business in Canada. BBP LP will include its share of FAPI of Holding LP in computing its income.

Withholding tax. The Holding Entities intend to withhold on a reduced (look-through) basis taking into account the treaty-residence of the ultimate partners of Holding LP , including that of the unitholders of BBP LP.

TCP. It is not expected that the BBP LP units will be taxable Canadian property.

U.S. tax consequences. Entity classification. BBP LP and Holding LP will make protective elections to be classified as partnerships for Code purposes. Their affairs will be managed so that they meet the Qualifying Income Exception (so as to not be deemed to be corporations under rules otherwise applicable to publicly-traded partnerships).

Distribution. The distribution will be treated as a dividend to the extent of current and accumulated earnings and profits of Brookfield Asset Management, which it does not calculate. Brookfield Asset Management does not believe it was a PFIC in the current or preceding taxable year, so that such dividend should qualify as a qualified dividend subject to exceptions.

Partnership taxation. BBP LP and Holding LP intend to make the Code s. 754 election (to step up or down inside basis respecting a transferee of units based on outside basis). BBP LP's functional currency will be the U.S. dollar. BBP LP may allocate items of income, gain, loss, and deduction using a monthly convention, whereby any such items recognized in a given month by it are allocated to unitholders as of a specified date of such month.

UBTI. BBP LP and Holding LP are not expected to dirctly incur debt to acquire property and are not expected to generate UBTI attributable to debt-financed proeprty.

Non-resident unitholders. BBP LP is unlikely to earn effectively connected income, so that non-US holders who are not otherwise engaged in a U.S. trade of business should not be subject to U.S. tax return filing requirements. However, there will be U.S. withholding tax on the gross amount of certain U.S. source income.

Bermuda taxes. In Bermuda there are no taxes on profits, income or dividends, nor is there any capital gains tax, estate duty or death duty. Profits can be accumulated and it is not obligatory to pay dividends. As "exempted undertakings", exempted partnerships and overseas partnerships are entitled to apply for (and will ordinarily receive) an assurance pursuant to the Exempted Undertakings Tax Protection Act 1966 that, in the event that legislation introducing taxes computed on profits or income, or computed on any capital asset, gain or appreciation, is enacted, such taxes shall not be applicable to our company or any of its operations until March 31, 2015. Exempted partnerships and overseas partnerships fall within the definition of "international businesses" for the purposes of the Stamp Duties (International Businesses Relief) Act 1990, which means that instruments executed by or in relation to an exempted partnership or an overseas partnership are exempt from stamp duties.

Overview

Brookfield Asset Management Inc. ("Brookfield Asset Management"), which is listed on the NYSE and TSX, will distribute the LP units of BPP LP to its shareholders as a special dividend, with such distribution being referred to as the spin-off. BPP LP will hold an approximate 10% economic interest in the Property Partnership, which will indirectly acquire substantially all of the commercial real estate portfolio of Brookfield Asset Management, including its office (56%), retail (39%), multi-family and industrial assets – with a geographic distribution of 63%-U.S., 15%-Australia, 10%-Europe, 9%-Canada, and 3%-Brazil. The other economic interest of approximately 90% in the Property Partnership will be held by Brookfield Asset Management directly or through the GP. BPP LP will apply for TSX and NYSE listings.

See Foreign Asset Income Funds and LPs for a detailed summary.