Thomson Reuters
Overview
On November 27, 2018, Thomson Reuters distributed US$2.3 billion to its shareholders (being a portion of the US$17 billion realized earlier in the year on an asset sale), using a s. 86 distribution. In order to avoid potentially adverse tax consequences for some shareholders in foreign jurisdictions, Thomson Reuters gave non-exempt shareholders in non-Canadian jurisdictions the right to opt out of the cash distribution so that, rather than receiving such cash, their percentage equity interest in the Corporation would increase by an appropriate amount.
To accomplish this result, the “Participating Shareholders” (i.e., those who did not elect to be “Opting Out Shareholders”) had each of their old common shares exchanged under a s. 86 reorg for US$4.45 of cash and 0.9070 of a new common share, whose attributes were the same as for an old common share, except that it was convertible on a one-for-one basis for an old common share. All their new common shares were then converted into old common shares. The Opting Out Shareholders continued to hold the same number of old common shares as before. Given the paid-up capital per old common share of C$13.36 per share, no deemed dividend arose.
This “Return of Capital Transaction” was effected pursuant to on Ontario Plan of Arrangement, whose terms effectively indicate that the Corporation is potentially willing to entertain letting Participating Shareholders elect under s. 85(1) or (2) respecting the above exchange.
Thomson Reuters
Thomson Reuters is a leading source of news and information for professional markets whose shares are listed on the TSX and NYSE. The Woodbridge Company Limited and its affiliates beneficially owned approximately 64% of the outstanding shares.
F&R Transaction
On October 1, 2018, Thomson Reuters closed the F&R Transaction in which it sold a 55% interest in the business (now known as Refinitiv) for US$17 billion and retained a 45% interest. It committed to return US$10 billion of the proceeds to its shareholders.
Issuer Bid
On August 28, 2018, it commenced our offer to purchase up to US$9 billion of its shares under a special issuer bid (“SIB”), conditional upon the closing of the F&R Transaction. On October 1, 2018, the F&R Transaction closed and the SIB expired the following day. Thomson Reuters subsequently purchased a total of approximately US$6.5 billion of shares pursuant to the SIB.
Opt-Out Right and Participating Shares
Each Shareholder who is:
(i) not a resident of Canada for Canadian income tax purposes and is subject to income tax in a jurisdiction other than Canada (and is not exempt from income tax in that jurisdiction); or
(ii) an individual who is a resident of Canada for Canadian income tax purposes and who is also subject to income tax in a jurisdiction other than Canada as a resident of that other jurisdiction (and is not exempt from income tax in that other jurisdiction);
may elect to opt out of the Arrangement by depositing with the Depositary, prior to one Business Day prior to the date of the Meeting, a duly completed election form (the “Opt-Out Right”). “Participating Shares” are Shares of those (the Participating Shareholders”) who have not so elected.
Plan of Arrangement
- The articles of the Corporation will be amended to create an unlimited number of the “New Common Shares,” whose attributes will be identical to those of the existing common shares (the “Shares,” except that they will be convertible into Shares on a one-for-one basis.
- Each outstanding Participating Share will be exchanged for (i) the Cash Distribution Per Share of US$4.45, and (ii) a portion of a New Common Share equal to the Share Consolidation Ratio, being the ratio of US$X – Cash Distribution Per Share to US$X, where X is the volume weighted average trading price of Shares on the New York Stock Exchange for the five trading days preceding the “Effective Date” (i.e., of the Arrangement);
- In connection with 2, the Corporation will deduct from the stated capital of the Shares an amount equal to the aggregate stated capital, immediately before the exchange in 2, of the Participating Shares;
- The Corporation will add to the stated capital account of the New Common Shares an amount in Canadian dollars equal to the difference between (i) the aggregate PUC of the Participating Shares immediately before such exchange, and (ii) the Aggregate Cash Distribution Amount in Canadian dollars;
- Each New Common Share will be exchanged for one Share.
- The aggregate stated capital of the New Common Shares immediately before the exchange will be deducted by the Corporation from the stated capital of the New Common Shares and the Corporation will add that amount to the stated capital of the Shares.
- The articles will be amended to delete the amendments made in 1.
Potential availability of s. 85 election
At the reasonable request of a Shareholder, based on facts and circumstances arising after the Effective Date, the Corporation will make available to all Shareholders a joint income tax election pursuant to s. 85(1) or (2) and any equivalent provincial provision with respect to the exchange of Shares for cash and New Common Shares, provided that the Corporation has determined that making such income tax election available is not unduly detrimental to the Corporation, having regard to the interests of Shareholders and other stakeholders as a whole and the purpose of the Plan of Arrangement.
Canadian tax consequences
No deemed dividend
On the exchange of shares for cash and New Common Shares pursuant to the Return of Capital Transaction, a Canadian Resident Shareholder will be deemed to have received a taxable dividend on the shares so exchanged equal to the amount, if any, by which (i) the sum of the amount of the cash received by the Canadian Resident Shareholder on the exchange and the amount of the PUC of the New Common Shares received by the Canadian Resident Shareholder on the exchange, exceeds (ii) the amount of the PUC of the shares so exchanged immediately prior to the exchange. The estimated PUC of the share at the date of this circular is C$13.36 per share. Pursuant to the Return of Capital Transaction, the aggregate PUC of the New Common Shares will be an amount that is not greater than the difference between the PUC of the shares to be exchanged and the Aggregate Cash Distribution Amount to be received in respect of the shares to be exchanged. Accordingly, based on the foregoing, Thomson Reuters does not anticipate that any deemed dividend will arise.
S. 86 exchange
A Canadian Resident Shareholder will be deemed to have acquired the New Common Shares acquired by it pursuant to the Return of Capital Transaction at a cost equal to the amount, if any, by which the adjusted cost base to such Canadian Resident Shareholder of its shares immediately prior to the exchange exceeds the amount of cash received by the Canadian Resident Shareholder for its shares pursuant to the Return of Capital Transaction. On such exchange, it will be deemed to have disposed of its shares for proceeds of disposition equal to the amount by which (i) the greater of the adjusted cost base of such shares immediately before the exchange and the amount of the cash received by the Canadian Resident Shareholder on the exchange, exceeds (ii) the amount of any taxable dividend deemed to have been received by the Canadian Resident Shareholder on such shares as described above….
Conversion of New Common Shares
Each New Common Share held by a participating shareholder will be exchanged for one share. Canadian Resident Shareholders will be deemed not to have disposed of the New Common Shares on such exchange.
U.S. tax consequences
Consequences of no opting out
If no shareholder elects to exercise the opt-out right, then the full amount of cash received by each U.S. Holder who participates in the Return of Capital Transaction will be treated as a taxable distribution to such holder. The following discussion assumes that at least some shareholders elect to opt out of the Return of Capital Transaction.
Sale or distribution
The Corporation’s redemption of shares of a U.S. Holder in the Return of Capital Transaction will be treated either as a sale of the shares or as a distribution by our company, depending upon the circumstances at the time of the Return of Capital Transaction. The redemption will be treated as a sale if (a) the redemption results in a “complete redemption” of the U.S. Holder’s equity interest in our company, (b) the receipt of cash by the U.S. Holder is “not essentially equivalent to a dividend”, or (c) as a result of the redemption there is a “substantially disproportionate” reduction in the U.S. Holder’s equity interest in our company, each within the meaning of s. 302(b) of the Code. The redemption of shares from a particular U.S. Holder will be treated as a distribution if none of the s. 302 tests is satisfied with respect to such holder.
Sale where any s. 302 test is satisfied
In applying the s. 302 tests, the constructive ownership rules of s. 318 apply. Thus, a U.S. Holder is treated as owning not only shares actually owned by the U.S. Holder but also shares actually (and in some cases constructively) owned by others. If any of the s. 302 tests is satisfied, then the holder generally will recognize taxable gain or loss equal to the difference between the amount of cash received in the Return of Capital Transaction (without reduction for withholding tax, if any) and such holder’s adjusted tax basis in the shares deemed to be redeemed.
Distribution where no s. 302 test is satisfied
If none of the s. 302 tests is satisfied, then the full amount of cash received in the Return of Capital Transaction will be treated as a distribution with respect to such holder’s shares. The tax basis of the U.S. Holder’s shares deemed to be redeemed will be added to the tax basis of such holder’s remaining shares. This distribution will be treated as a dividend to the extent paid out of our current or accumulated earnings and profits. The dividend will be includible in a U.S. Holder’s gross income without reduction for the tax basis of the redeemed shares, and no current loss will be recognized.
PFIC status
The Corporation is believed to not be a passive foreign investment company.
Treatment of opted-out shareholders
The Return of Capital Transaction is not considered to be pursuant to a plan to periodically increase any shareholder’s proportionate interest in the Corporation’s assets or earnings and profits. Assuming this is correct, shareholders (including Non-U.S. Holders) who opt out of the Return of Capital Transaction should not incur any U.S. federal income tax liability solely as a result of the consummation of the Return of Capital Transaction.