Background
DC, a specified corporation whose shares trade on an exchange and are not taxable Canadian property, carries on Project 1 through Forcos 1 and 2. Corporation 1, whose shares are listed, is DC’s only specified shareholder. DC has completed a number of acquisitions that were not in contemplation of the proposed transactions.
DC and Corporation 1 own X% and Y% of the shares of Corporation A, a taxable Canadian corporation. Pursuant to a Plan of Arrangement and following the deemed exercise of outstanding options and warrants for their in-the-money value, and the sale by Corporation 1 of all its Corporation A shares, each Corporation A common share was deemed to be transferred to DC in exchange for DC common shares and cash.
Pursuant to a Master Purchase Agreement entered into between DC and InvestCo, cash deposited with an escrow agent by InvestCo was transferred to DC and DC securities were converted, but not so as to result in InvestCo becoming a specified shareholder of DC.
Proposed transactions
The steps below up to the last step will occur largely pursuant to a Plan of Arrangement.
- The DC Equity Incentive Plan will be amended and the SpinCo Equity Incentive Plan will come into force.
- Each holder of DC Equity Incentive Securities will dispose of such holder’s Butterfly Proportion thereof (being the ratio of the net FMV of the Distribution Property to be transferred by DC to SpinCo as per 5 below determined immediately before such transfer, to the net FMV of all property owned by DC immediately before such transfer) to SpinCo in consideration for corresponding SpinCo Equity Incentive Securities, and will dispose of the remaining portion thereof to DC in consideration for corresponding DC New Equity Incentive Securities. This will be accomplished so that the aggregate In the Money Amount (being the excess of the FMV of the subject shares over the exercise price) of the particular corresponding SpinCo Equity Incentive Securities and of the DC New Equity Incentive Securities does not exceed the In the Money Amount of the particular corresponding exchanged DC Equity Incentive Securities. To this end, the FMV of the DC Common Shares immediately before the exchange will be determined by their VWAP on the exchange for the five business days immediately prior to the Effective Date of the Arrangement, and the FMV of the DC Common Shares and the SpinCo Common Shares immediately after the exchange will be determined by their VWAP on the exchange for the five business days beginning on the Effective Date.
- Each Participant (being a DC common shareholder other than one who dissents) will exchange each DC Common Share with DC for one newly-created DC New Common Share (with the same attributes as a DC Common Share except for having two votes per share) and one newly-created non-cumulative redeemable retractable DC Preference Share and with a specific specified amount no higher than the consideration for their issue.
- Each Participant will transfer to SpinCo each of their DC Preference Shares in consideration for one SpinCo Common Share.
- DC will transfer the Distribution Property (including its indirect interest in Project 1) to SpinCo in consideration for the assumption of liabilities of DC related to the Distribution Property and the issuance of non-cumulative redeemable retractable Spinco Preference Shares, with an s. 85(1) election made.
- SpinCo and DC will each redeem their preference shares for a note, and make s. 89(14) designations regarding the resulting s. 84(3) dividends.
- Each Participant will exchange each of their DC New Common Shares with DC for one DC Common Share.
- (The DC Common Shares will continue to be listed and posted for trading on the exchange; and SpinCo will, pursuant to the definition of “public corporation” in s. 89(1), timely elect in its federal return to be a public corporation from the beginning of the year until the time that the SpinCo Common Shares are listed on a designated stock exchange.)
- Each of DC and SpinCo will satisfy its obligations under the note issued by it in 6 by transferring the note of the other to the other, such that both notes will be cancelled.
- InvestCo will acquire DC shares pursuant to its subscription agreement and exercises its warrants pursuant to its warrant certificate agreement, but not so as to result in InvestCo becoming a specified shareholder of DC.
Additional Information
54. Except as specifically described herein, no specified shareholder of DC or SpinCo will dispose of shares of DC or SpinCo, or any property 10% or more of the FMV of which is, at any time during the series, derived from shares of DC or SpinCo, as part of the series of transactions or events that include the Proposed Transactions, to an unrelated person, a partnership or a person who will cease to be related to the transferor as part of the series of transactions or events that include the Proposed Transactions.
Within three years of the exchange in 4, DC will not undertake a distribution to a corporation that is not an acquiror within the meaning of para.(b) of the definition “specified corporation” nor will undertake a distribution.
Rulings
Including re application of s. 86(1) to 3 and of s. 51 to 7, s. 55(3)(b) applying to exclude application of s. 55(2) “and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b),” application of s. 7(1.4) to the exchange in 2, and non-application of s. 80 to note cancellation.