Prepaid Share Purchase

Overview

Unit

The initial public offering by GFL will entail not only an offering of subordinate voting common shares, but also a concurrent offering of units (at US$50) per unit. Each unit will consist of:

• a prepaid contract for the purchase of subordinate voting shares of GFL, to be delivered (subject to earlier termination or acceleration) on March 15, 2023; and
• an amortizing note bearing interest of 4% on the principal (initially, of US$8.5143) and that is repaid through cash quarterly payments of US$0.75 per note, so that each quarterly payment includes an interest component and is a principal repayment as to the rest, with the final instalment being received on the targeted settlement date for the above prepaid purchase contract.

Purchase Contract

The number of subordinate voting shares to be delivered will vary such that their computed value (based on their 20-day VWAP on the NYSE) will be US$50 per contract if the computed value of a subordinate voting share at that time is between the price at which the subordinate voting shares were offered in the concurrent offering of those shares (US$19 per share) and a 20% premium above that price (US$22.80 per share). A fixed number of subordinate voting shares will be delivered if the computed value of a subordinate voting share at the delivery date is higher than US$22.80 per share, and a lower fixed number will be delivered if such value lower than US$19 per share, so that the purchaser is fully exposed to market movements outside the US$19 to US$22.80 range.

Allocation

Each purchaser is stated to have agreed to treat the purchase price for a purchase contract as the difference between the US$50 unit price, and the US$8.5143 initial amortizing note principal.

DFA rules

The Canadian tax disclosure diffidently suggests that since the fair market value of the subordinate voting shares delivered on settlement of the purchase contract can be considered to be determined solely by reference to a change in the fair market value of the subordinate voting shares over the term of the agreement, the derivative forward agreement rules should not apply to the settlement of the purchase agreement so as to require the inclusion of all or a portion of the amount by which the fair market value of the subordinate voting shares received under the purchase contract exceeds the purchase price for the purchase contract.

Characterization as 2 instruments

The US tax disclosure indicates that GFL will take the position that each unit will be treated as consisting of two separate instruments for Code purposes – and that if the unit were instead treated as a single instrument, a US holder could be required to recognize the entire amount of each instalment payment on the amortizing notes, rather than merely the portion of such payment denominated as interest, as income. (The two-instrument treatment and recognition of interest only at the 4% rate also is expected for ITA purposes.).

GFL

GFL will result from the amalgamation of Holdings and its subsidiary. The GFL group is the fourth largest diversified environmental services company in North America, with operations throughout Canada and in 23 states in the United States.

Holdings

GFL Environmental Holdings Inc., the parent of GFL Environmental Inc. It currently has a single class of common shares.

Concurrent subordinate voting share offering

Concurrently under a separate prospectus, GFL is making an initial public offering of its 73,361,842 subordinate voting shares (or up to 84,611,842 with the greenshoe) and the selling shareholder is offering 1,638,158 subordinate voting shares, for net proceeds of US$1,336.3 million (or US$1,543.1 million with the greenshoe).

Proposed multiple/subordinate voting common share structure

Two classes of common shares will arise on the amalgamation to form GFL GFL’s multiple voting shares will have 10 votes per share and its subordinate voting shares will have one vote per share. Collectively, Patrick Dovigi, Josaud Holdings Inc., Josaud II Holdings Inc., Sejosa Holdings Inc. and Sejosa II Holdings Inc. (the ‘‘Dovigi Group’’) will hold all of GFL’s issued and outstanding multiple voting shares, being approximately 3.7% of GFL’s total issued and outstanding shares and approximately 27.7% of the voting power attached to all of the shares (or approximately 3.6% and 27.0%, respectively, if the greenshoe is exercised under the Concurrent Offering). Each of Sejosa Holdings Inc., Sejosa II Holdings Inc., Josaud Holdings Inc. and Josaud II Holdings Inc. is owned directly or indirectly by Patrick Dovigi, his family members and discretionary trusts settled by family members of Patrick Dovigi.

Units/mandatory settlement date

Each Unit (which is offered for a price of US$50) consists of:

• a prepaid stock purchase contract (a ‘‘purchase contract’’); and
• a senior amortizing note issued (an ‘‘amortizing note’’).

Each Unit may be separated by a holder into its constituent purchase contract and amortizing note.

Amortizing notes

Each amortizing note will have an initial principal amount of US$8.5143, will bear interest at the rate of 4.00% per annum and will have a final instalment payment date of March 15, 2023. On each March 15, June 15, September 15 and December 15, commencing on June 15, 2020, GFL will pay equal quarterly cash instalments of US$0.7500 per amortizing note (except for the June 15, 2020 instalment payment, which will be US$0.8333 per amortizing note), which cash payment in the aggregate per year will be equivalent to 6.00% per year with respect to each US$50.00 stated amount of Units. Each instalment payment will constitute a payment of interest and a partial repayment of principal.

Purchase contracts

Unless settled earlier at the holder’s or our option, each purchase contract will, subject to postponement in certain limited circumstances, automatically settle on March 15, 2023 (generally, the ‘‘mandatory settlement date’’).

If the “applicable market value” (being the 20-day VWAP) prior to March 15, 2023) is greater than the ‘‘threshold appreciation price’’ (which is initially about US$22.80, being a 20% premium over the offering price for subordinate voting shares in the Concurrent Offering of US$19.00, and is calculated by dividing US$50.00 by the then applicable “minimum settlement rate” (generally of 2.1930 subordinate voting shares per purchase contract), the holder of the contract will receive such shares at the minimum settlement rate.

If the applicable market value is less than the ‘‘reference price’’ (which is initially such offering price, and is calculated by dividing US$50.00 by the then applicable “maximum settlement rate,” generally of 2.6316 subordinate voting shares per purchase contract) the holder will receive shares at the maximum settlement rate.

If the applicable market value is in between, the number of shares received equals US$50 divided by the applicable market value.

Purchase contracts can be settled by the purchaser early so that shares are received based on 100% of the minimum settlement rate (or 95% if settled prior to 5:00 p.m. EST on September 4, 2020).

Table of value of shares received

The following table illustrates the settlement rate per purchase contract and the value of our subordinate voting shares issuable upon settlement on the mandatory settlement date, determined using the applicable market value shown, subject to adjustment.

Early settlement
Preliminary steps

In connection with, and prior to, the closing of the Concurrent Offering, Holdings will amalgamate with GFL, a wholly owned subsidiary of Holdings, and continue as GFL Environmental Inc. In connection with such amalgamation:

• Certain of the shareholders will subscribe for additional shares of Holdings at the offering price in the Concurrent Offering (using, in part, the proceeds of a margin loan made by dealer affiliates), the proceeds of which, together with a loan from the Dovigi Group for $29 million, payable in equal semi-annual instalments over five years and bearing market interest, will be used to repay in full the PIK Notes of $1B owing by Holdings;
• the shares being sold by the selling shareholder in the Concurrent Offering will be acquired as a result of such subscriptions;
• the share capital will be amended such that it will be composed of an unlimited number of multiple voting shares, an unlimited number of subordinate voting shares and an unlimited number of preferred shares, issuable in series;
• in connection with his resignation as an officer of GFL, Ven Poole will receive a separation payment of 73,947 subordinate voting shares issued at the initial public offering price in the amount of approximately US$1.4 million;
• the outstanding options will vest and convert into an aggregate of 3,202,956 subordinate voting shares; and
• all of the issued and outstanding shares of Holdings will be exchanged for subordinate voting shares and multiple voting shares based on an exchange ratio of 20.363259-for-one, other than the Class F shares of Holdings which will be exchanged for multiple voting shares, based on an exchange ratio of 26.343032-for-one. Immediately following such exchange the Dovigi Group will hold all issued and outstanding multiple voting shares.

Canadian tax consequences

Interest recognition

A resident individual will be required to recognize all interest on the amortizing notes on a received or receivable basis, except that if at any time an amortizing note should become an ‘‘investment contract,’’ recognition of interest on ‘‘anniversary days’’ will be required. In the event the amortizing notes are issued at a discount from their face value (as may be the case if the portion of the stated amount of the Units that is allocated to the amortizing notes is less than the stated principal amount of the amortizing notes), the amortizing notes will be issued with original issue discount for ITA purposes and a Resident Holder may be required to include an additional amount in computing income, either in accordance with the prescribed debt obligation rules contained in the Tax Act or in the taxation year in which the discount is received or receivable by the Resident Holder.

Allocation

Each purchaser is stated to have agreed to treat the purchase price for a purchase contract as the difference between the US$50 unit price, and the US$8.5143 initial amortizing note principal.

Settlement of purchase contract

The settlement of a purchase contract by delivery of subordinate voting shares to a Resident Holder will not constitute a disposition of that purchase contract and, accordingly, a Resident Holder will not realize a gain or loss on such settlement.

Derivative forward agreement (DFA) rules

If the fair market value of the subordinate voting shares delivered on settlement of the purchase contract is determined solely by reference to a change in the fair market value of the subordinate voting shares over the term of the agreement, the DFA Rules should not apply to the settlement of the purchase agreement. However, the application of the DFA Rules to the purchase contract is subject to significant uncertainty, and CRA may take the position that the DFA Rules apply to include all or a portion of the amount by which the fair market value of the subordinate voting shares received under the purchase contract exceeds the purchase price of the purchase contract (which GFL intends to treat as being the difference between the US$50 unit price, and the US$8.5143 initial amortizing note principal). Generally speaking, if the DFA rules were to apply to the settlement of a purchase contract, counsel is of the view that the Resident Holder’s income inclusion under the DFA Rules should not exceed the aggregate amount of the principal payments that have been or could be received by the Resident Holder from the Company under the amortizing note.

US tax consequences

GFL will take the position that each Unit will be treated as an investment unit composed of two separate instruments for Code purposes: (i) a prepaid purchase contract to acquire subordinate voting shares and (ii) an amortizing note that is indebtedness. Under this treatment, a holder of Units will be treated as if it held each component of the Units for such purposes. By acquiring a Unit, a purchaser will agree to treat (i) a Unit as an investment unit composed of two separate instruments in accordance with its form and (ii) the amortizing notes as indebtedness of GFL for such purposes. If, however, the components of a Unit were treated as a single instrument, a US holder could be required to recognize the entire amount of each instalment payment on the amortizing notes, rather than merely the portion of such payment denominated as interest, as income. Even if the components of a Unit are respected as separate instruments for Code purposes, (i) the amortizing notes could be recharacterized as equity for such purposes, and (ii) the purchase contracts could be treated as GFL stock on the date of issuance.