Shred-it TRA
Overview
Shred-it, which currently has a nominal interest in the top LP (Boost Holdings LP), will use the cash proceeds of its offering of common shares on its IPO, as well as the issuance of treasury shares, to purchase the 95% LP interest of the Birch Hill Group in Boost Holdings LP as well as part of the interest in the lower-tier LP (the Partnership) of an unrelated group (Cintas Group– which had received that position as the result of a merger transaction which was concluded in 2014) ). This will result in a step-up in the U.S. basis of the Partnership assets. 85% of the estimated tax savings resulting from that basis increase will be paid out under the terms of a Tax Receivables Agreement, or “TRA,” with Cintas Group, with Cintas Group, in turn, paying 58% (being Birch Hill Group's effective interest pre-IPO in the Partnership) of its receipts under the TRA to the Birch Hill Group under a separate agreement.
Shred-it
Shred-it was formerly Shred-it International GP Inc., which was incorporated under the OBCA on March 3, 2014. Its head and registered office is located at 2794 South Sheridan Way, Oakville, Ontario. The Birch Hill Group owns 100 Common Shares of the Shred-it, representing 100% of the issued and outstanding Common Shares. Shred-it through the Partnership (see below) is a global leader in providing secure information destruction services to over 400,000 recurring customer locations in 18 countries.
Birch Hill Group
The Birch Hill Group is comprised of Birch Hill Equity Partners Management Inc., Birch Hill SII LP, Birch Hill SI (US) LP, Birch Hill SII (Entrepreneurs) LP and the Co-Investors. The general partner of each of Birch Hill SII LP, Birch Hill SI (US) LP and Birch Hill SII (Entrepreneurs) LP is Birch Hill Equity Partners Management Inc., which is owned by Birch Hill Equity Partners Inc., which in turn is owned by the employees of Birch Hill Equity Partners Management Inc. Voting and dispositive powers with respect to the Common Shares which will be held by the Birch Hill Group (including the Co-Investors) upon completion of the Offering and the IPO Transactions will be exercised by Birch Hill Equity Partners Management Inc. pursuant to arrangements entered into among such persons.
Current structure
Boost Holdings LP/Partnership
Shred-it International Inc. (Shred-it) is the general partner of Boost Holdings LP, a limited partnership through which the Birch Hill Group and certain of the Management Shareholders hold interests in Shred-it JV LP (the "Partnership"). The Partnership and its subsidiaries operate the Shred-it business. The Birch Hill Group, the Cintas Group and the Management Shareholders are the only direct and indirect limited partners of the Partnership, and the Birch Hill Group and the Cintas Group are the only common shareholders of its general partner, Boost GP Corp. (the "General Partner").
Partners of Partnership
Boost Holdings LP and the Cintas Group hold class A and class B common units of the Partnership, representing the Birch Hill Group's approximate 58% interest in the Partnership and the Cintas Group's approximate 42% interest in the Partnership. The common shares of the General Partner are currently owned by the Birch Hill Group (58%) and the Cintas Group (42%). In connection with the Offering. Shred-it will acquire all of the common shares of the General Partner.
IPO steps
- Shred-it will issue Common Shares to the public pursuant to the Offering, for aggregate gross proceeds of approximately C$600 million.
- Shred-it will enter into the TRA (see below) with the Cintas Group, and the Birch Hill Group will enter into an arrangement with the Cintas Group, whereby the Cintas Group will agree to remit 58% of the payments received under the TRA to the Birch Hill Group.
- The Birch Hill Group will transfer all of their limited partnership units of Boost Holdings LP to Shred-it in exchange for: (i) C$n and (ii) n Common Shares.
- The Management Shareholders will transfer all of their limited partnership units of Boost Holdings LP to Shred-it in exchange for: (i) C$n and (ii) n Common Shares.
- The Cintas Group will transfer a portion of their limited partnership units of the Partnership to Shred-it in exchange for (i) C$n and (ii) n Common Shares.
- Shred-it will use C$n million of the net proceeds of the Offering to acquire n Option Shares for C$n million.
- Shred-it will acquire all of the common shares in the General Partner owned by: (i) the Birch Hill Group in exchange for n Common Shares and (ii) the Cintas Group in exchange for n Special Voting Shares.
- Shred-it will contribute C$n to Boost GP Corp. in exchange for common shares of Boost GP Corp.
- Boost GP Corp. will use C$n to acquire n limited partnership units of the Partnership from certain Management Shareholders.
Post-IPO structure
General Partner/Partnership
Following completion of the IPO Transactions, Shred-it will wholly own the General Partner, which manages and controls the business and affairs of the Partnership. In connection with the Offering, Shred-it also will have contributed its general partner interest in Boost Holdings LP to a wholly-owned subsidiary ("New GP").
Effective interests in Shred-it
On Closing, it is expected that the public (excluding the Birch Hill Group, the Cintas Group and the Management Shareholders) will have an approximate 24.1% interest in the Company through ownership of 27,906,977 Common Shares issued pursuant to the Offering (or an approximate 27.7% interest in the Company if the Over-Allotment is exercised in full and on Closing, based on an effective or. On Closing, it is expected that the Birch Hill Group will have an approximate 39.1% interest in the Company through ownership of or direction or control over n Common Shares (or an approximate 37.1% interest in the Company if the Over-Allotment is exercised in full) and that the Cintas Group will have an approximate 29.8% effective interest in the Company (subject to the Cintas Group's 19.9% maximum voting entitlement) through ownership of n Common Shares, n redeemable LP Units of the Partnership for which the redemption price may be satisfied in Common Shares or cash, at the Company's election, and n Special Voting Shares (or an approximate 28.2% effective interest in the Company if the Over-Allotment is exercised in full.
Special Voting Shares
Special Voting Shares will only be issued to the Cintas Group and are intended to provide the Cintas Group with voting rights in Shred-it proportionate to the number of LP Units held by the Cintas Group, subject to a 19.9% maximum voting entitlement of the Cintas Group. The Special Voting Shares are not transferable except within the Cintas Group. As LP Units are redeemed or exchanged for Common Shares or cash or otherwise acquired by a person that is not a member of the Cintas Group or related thereto, the corresponding number of Special Voting Shares will be cancelled for no consideration.
Shred-it Board
Shred-it will have a board of seven directors, with the Birch Hill Group entitled to nominate three directors and the Cintas Group entitled to nominate one director. In addition, the Cintas Group will be entitled to appoint one individual to act as a non-voting observer of the Board.
Tax Receivable Agreement (“TRA”)
Operation based on IRS relief
The acquisition of interests in the Partnership described above as well as future redemptions or acquisitions of LP Units are expected to produce favourable tax attributes for the Company. These tax attributes would not be available to Shred-it in the absence of those acquisitions or redemptions from the Cintas Group. Shred-it will enter into the TRA with the Cintas Group that will provide for the payment by Shred-it to the Cintas Group of 85% of the amount of tax savings, if any, that Shred-it actually realizes (or in some circumstances is deemed to realize) as a result of: (i) increases in the tax basis of assets of the Partnership resulting from such redemptions or acquisitions of LP Units; and (ii) certain other tax benefits otherwise accruing to Shred-it related to payments made under the TRA (in each case, such basis increase, the "Basis Adjustments"). Shred-it will retain the benefit of the remaining 15% of these tax savings, which may, at the discretion of the Board, be retained by the Company or distributed to shareholders. Pursuant to a separate agreement with the Birch Hill Group, the Cintas Group has agreed to pay 58% of the amount received under the TRA to the Birch Hill Group (which percentage approximates the Birch Hill Group's effective interest in the Partnership prior to the Offering). It is possible that some or all of the tax attributes anticipated to result from acquisitions or redemptions of LP Units, at the time of or subsequent to the IPO Transactions, might not be available absent certain relief from the IRS in connection with entity classification elections made for U.S. federal income tax purposes with respect to certain Subsidiaries of the Partnership. The Company and the Principal Shareholders intend to immediately seek relief from the IRS to confirm that such tax attributes will be available for the Company. If all or a portion of such tax attributes are not available, then it is expected that (i) the Company's liability for U.S. taxes in prior and future periods will increase, (ii) payments under the TRA from the Company to the Principal Shareholders will decrease, and (iii) the Company will not benefit from the remaining 15% of the tax savings attributable to the portion of tax attributes that do not comprise a payment under the TRA. No assurances can be given that the IRS will grant the requested relief and, correspondingly, no assurances can be given with respect to the availability of all or a portion of the tax attributes resulting from the acquisition or redemption of LP Units by the Company. See "Risk Factors".
Expected TRA payments
The payment obligations under the TRA are obligations of Shred-it, not the Partnership, and we expect that the payments we will be required to make under the TRA will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we expect that the tax savings associated with sales or exchanges of interests in the Partnership in connection with the Offering would aggregate to approximately $88.1 million over 16 years from the date of this offering based upon an assumed Offering Price of C$21.50 per Common Share. Under such scenario we would be required to pay the Cintas Group approximately 85% of such amount, or $74.9 million, over the 16-year period from one year following the date of this Offering. The actual amounts may materially differ from these hypothetical amounts. Our payment obligations under the TRA with respect to interests in the Partnership treated as sold for U.S. federal income tax purposes to us in connection with this Offering are expected to be calculated based on the Offering Price, net of Underwriters' Commission and other Offering related costs. Payments under the TRA are not conditional upon any continued ownership interest in either the Partnership or Shred-it by the Cintas Group. See "Risk Factors" and "Forward-Looking Statements".
Variable factors
The increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of exchanges by the holders of LP Units, the price of Common Shares at the time of the exchange, whether such exchanges are taxable, the amount and timing of the taxable income we generate in the future, the prevailing applicable tax rates and the portion of our payments under the TRA constituting imputed interest. Payments under the TRA are expected to give rise to certain additional tax benefits attributable to either further increases in basis or in the form of deductions for imputed interest, depending on the circumstances. Any such benefits are covered by the TRA and will increase the amounts due thereunder.
Timing and termination
The TRA will generally apply to each of Shred-it's taxable years, beginning with the first taxable year ending after Closing. There is no maximum term for the TRA; however, the TRA may be terminated by Shred-it pursuant to an early termination procedure that requires payment of an agreed upon amount equal to the estimated present value of the remaining payments to be made under the TRA (calculated based on certain assumptions, including regarding tax rates and utilization of the Basis Adjustments, and using a discount rate equal to the lesser of (i) LIBOR plus 200 basis points, or (ii) 5%, which may differ from Shred-it's then current cost of capital).
Anderson/Freehold
The Anderson shareholders will transfer all their common shares of Anderson under an Alberta Plan of Arrangement to a new Alberta company (New Anderson) in exchange for an equal number of New Anderson common shares. Anderson then will transfer most of its assets to New Anderson, other than shallow gas assets (which are considered to be non-core assets) in consideration for assumption of liabilities and the issuance of New Anderson common shares – which will then be distributed to New Anderson for cancellation as a stated capital distribution. New Anderson will then sell Anderson to Freehold for $35 million. It is anticipated that by virtue of a ITA s. 66.7(7)(e) successor election, New Anderson will acquire resource pools of Anderson, whereas Anderson will retain non-capital losses and undepreciated capital cost of $222 million (with the $35 million purchase price subject ot adjustment if such tax attributes are less than $222 million).
See full summary under Spin-Offs & Distributions – Taxable Spin-offs.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Public Transactions - Spin-Offs & Distributions - Taxable spin-offs | Distribution of Anderson Energy core assets to New Anderson and sale of Anderson Energy to Freehold | 657 |
Forbes/Deans
For the subsequent CRA attack, see under Spin-Offs & Distributions – Liquidations.
Overview
All the shareholders of the Corporation transferred their shares to a new holding company ("Forbes") in exchange for Forbes shares, and the Corporation transferred its assets to Forbes so that it had no assets other than substantial tax shelter. It then issued a convertible debenture for $3M to a company (Matco) which was mostly convertible into non-voting shares, presumably so that there would be no acquisition of control. Shortly thereafter and immediately after the convertible bond conversion, it issued $100M of voting common shares under a public offering (now representing most of its shares), with the proceeds used in a new corporate high-yield bond investing business. The existing shareholders at the time of the IPO (Matco under 80%, Forbes over 20%) effectively received part payment for the tax shelter through dilution of the new investors.
Prior history
Prior to the 2008 reorganization described below (the "Reorganization"), the Corporation was a TSX and NASDAQ-listed life sciences company which had accumulated investment tax credits of $7M, non-capital losses of $19.4M and undeducted SR&ED expenditures of $34.4.
2008 share exchange
On February 27, 2008, the Corporation reorganized its corporate structure pursuant to a plan of arrangement under the CBCA (the "Arrangement"). Pursuant to the Arrangement, the Corporation changed its name from "Forbes Medi-Tech Inc." to "Forbes Medi-Tech Operations Inc." and all of the Corporation's then outstanding common shares, options and warrants were exchanged for common shares, options and warrants of Forbes, a newly formed B.C. corporation. As a result of the exchange of shares, the Corporation became a wholly-owned subsidiary of Forbes and the common shares of Forbes began to trade on the TSX and NASDAQ in substitution for the common shares of the Corporation. In order to have a qualifying arrangement, the shareholders first eliminated the Corporation's deficit through a stated capital reduction of $98.5M
2008 asset disposal and convertible debenture issuance
On May 9, 2008, the Corporation completed the Reorganization pursuant to which it transferred all of its assets and operations (having a realizable value of $15.9M) to Forbes, and Forbes assumed the related liabilities. As a result the Corporation held no material assets other than the tax attributes described above. As part of the Reorganization, Matco (a private investment company of D. Alan Ross) subscribed $3M for the Convertible Debenture. The Convertible Debenture was convertible into voting common shares (the "Shares) and non-voting common shares (the "Non-Voting Shares") representing under 80% of all the issued and outstanding Common Shares prior to giving effect to the Offering described below (and representing 35% of the Shares and 100% of the Non-Voting Shares), being approximately $5.0 million of common shares based on the $10.00 per Share offering price. Matco agreed with the Corporation that it would convert the Convertible Debenture in full immediately prior to the Closing of the Offering.
2009 Offering
On February 6, 2009, the Corporation, filed articles of amendment to be renamed Deans Knight Income Corporation, to consolidate its shares on a 382-for-1 basis, to provide investment objectives and limitations, and to provide for the redemption of its shares on April 30, 2014 for a cash amount equal to 100% of the Net Asset Value per Share. It completed an initial public offering on March 17, 2009. It issued 10.04M Shares for gross proceeds of $100.4M. The net proceeds were used to invest in a portfolio of corporate bonds under the management of Deans Knight Capital Management Ltd., a B.C.-based investment firm.
Canadian tax consequences
Arrangement. The share exchange with Forbes is governed by s. 85.1, and the option and warrant exchanges occur on a taxable basis.
Offering
The Corporation will not be a mutual fund corporation. "Based in part upon representations from the Company as to certain factual maters, the Shares will not be ‘taxable preferred shares' or ‘short term preferred shares'… ."
U.S. tax consequences
The Corporation intends the Arrangement to qualify as either a tax-deferred reorganization under Code s. 368(1)(a) and/or a tax-deferred exchange under Code s. 351. The Corporation expects that it has been a PFCI for 2007 and onwards.