Legal & Tax Guide for U.S. Issuers

5 Any U.S. company that considers reincorporating to qualify as a Foreign Private Issuer should analyze the U.S. tax consequences of the transaction. Many U.S. companies have concluded that the cost and complexity of reincorporating outside the U.S. outweigh the benefits and have chosen to remain U.S. Domestic Issuers when they list in Canada. This is particularly true when the company plans to list in the U.S. concurrently or relatively soon after listing in Canada, so that it would need to comply with U.S. Exchange Act and Sarbanes-Oxley requirements in the relatively near future, in any event. You should consult your U.S. legal advisor for additional guidance. U.S. tax considerations A company, whether a U.S. Domestic Issuer or a Foreign Private Issuer, can generally raise capital by issuing shares or other securities without adverse tax consequences. However, a U.S. Domestic Issuer that elects to reincorporate into a foreign jurisdiction to become a Foreign Private Issuer may subject itself and its shareholders to significant and adverse U.S. federal income tax consequences. Certain of these adverse U.S. tax consequences may be avoided if the foreign corporation is treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the U.S. Internal Revenue Code (Code). Generally, the exchange of a U.S. corporation’s securities for securities of a foreign corporation will be a taxable transaction for U.S. taxpayers. However, such tax consequences can be mitigated or avoided in some cases. Cross-border acquisition rules of Section 367 – Under Section 367 of the Code a reincorporation of a U.S. corporation or partnership may trigger a taxable event for U.S. holders and potentially trigger a taxable event for the U.S. corporation or partnership. Certain exceptions may apply to avoid tax under Section 367 if a U.S. corporation is acquired by a larger Canadian company that has had an active trade or business in Canada for three years prior to the acquisition. A transaction that satisfies the requirements of Section 367 may provide tax-free “roll-over” for a U.S. corporation and its U.S. shareholders. The “anti-inversion” rules of Section 7874 – If a U.S. corporation or partnership reincorporates in a foreign jurisdiction, or is acquired by a foreign corporation, it may trigger the “anti-inversion” rules of Section 7874 of the Code. If these rules apply, it would result in adverse tax consequences, including the loss of tax attributes or the newly reincorporated foreign corporation (or the acquiring foreign corporation) being treated by the U.S. Internal Revenue Service as a U.S. corporation. An inversion transaction is generally deemed to occur when the following three conditions are met: 1. a foreign corporation makes a “direct or indirect” acquisition of substantially all of the assets held directly or indirectly by a U.S. corporation; 2. after the acquisition, the former shareholders of the U.S. corporation own at least 60% of the acquiring foreign corporation “by reason of” their previous interest in the U.S. corporation; and 3. after the acquisition the affiliated group to which the acquiring foreign corporation belongs does not conduct “substantial business activities” in the foreign country under which the acquiring corporation was organized, when compared to the total business activities of the “expanded affiliated group.” Where these conditions are satisfied, the taxable income of the domestic target for the year of the transaction and for the ten subsequent years attributable to corporate transfers associated with the inversion (the “inversion gain”) may not be offset by current losses or loss carryovers and the resulting tax may not be offset by credits (including foreign tax credits). Where former target shareholders own at least 80% (instead of just 60%) of the acquiring foreign corporation after the transaction (and the other two conditions are satisfied), Section 7874 goes further by simply treating the acquiring foreign corporation as a U.S. domestic corporation. In order to facilitate the 80% or more of the stock (by vote or value) ownership requirements under Section 7874 and to qualify as “foreign private issuer”, some transactions are structured so that U.S. shareholders receive a portion of their securities in the surviving public foreign corporation in the form of non-voting stock that is exchangeable into voting stock upon satisfaction of predetermined conditions or holding periods. Due to the nature of public companies, often holding less than 50% of a public company’s voting securities is sufficient to maintain control of the entity.