Canada: Whopper Of A Deal With A Double-Double Take On The Canadian Exchangeable Share Structure

The most talked about Canadian deal of 2014 was Burger King's acquisition of Tim Hortons. This deal made headlines because of its size, its iconic players and the mark that the combined Canadian company, Restaurant Brands International (now commonly referred to by its ticker symbol QSR), would make in the global quick-service restaurant industry. Much of the buzz centred on the complexity and novelty of the structure. To make the structure work, the Burger King deal team reinvented the conventional exchangeable share structure.

The Exchangeable "Up-C" Combo: A Fresh Look at the Traditional Canadian Structure

Under the merger agreement, Burger King's stockholders could elect to exchange their stock for exchangeable units of Restaurant Brands International Partnership (Partnership), a publicly traded Canadian Partnership, rather than taking common shares of QSR, its public parent. Exchanging their stock for Partnership units afforded these holders a tax deferral of U.S. capital gains they would have otherwise triggered in exchanging stock for QSR shares. A similar tax deferral is achieved by Canadian shareholders in a conventional exchangeable share structure. However, in this case, it was the U.S., not the Canadian, shareholders who required a rollover.

To accomplish the rollover, the QSR structure combined elements of a conventional Canadian exchangeable share structure with a U.S. Up-C structure – a structure that has been used frequently in the United States, in the initial public offering of companies that have historically operated as partnerships or LLCs. In the Up-C structure, a new corporation that issues shares to the public is created above the partnership and controls the partnership. The historical owners retain their partnership interests and receive special voting shares in the public corporation, which gives them voting control proportionate to their economic interest in the partnership. By preserving the partnership under the public corporation, income can continue to be passed through to the historical partners and taxed directly to the partners. Corporate tax at the public corporation level is limited to the corporation's proportionate interest in the partnership.

Consistent with a conventional Canadian structure, an exchangeable unit of the Partnership affords its holders voting rights equivalent to those they would have had holding a QSR common share. Such voting rights are achieved through a special voting share of QSR (held by a trustee) and a voting trust agreement. The exchangeable units are also entitled to distributions from the Partnership in an amount equal to, and at the same time as, dividends and other distributions declared on QSR common shares.

However, there are some differences in the economic rights of exchangeable units and QSR common shares that are not present in a conventional exchangeable structure. Some of these differences are a function of U.S. tax law imperatives that are reflected in the U.S. Up-C structure.

The following are the key differences:

  • While a typical Canadian exchangeable share issuer is a "shell" company, the Partnership is instead a direct subsidiary of QSR, indirectly holding all the assets and business of the consolidated enterprise.
  • In a Canadian structure, the exchangeable share is immediately exchangeable for common shares; here the exchange right is not exercisable during the first year.
  • Unlike a Canadian exchangeable share, the exchangeable units are not automatically exchangeable for QSR shares upon a dissolution or winding up of the Partnership or QSR.
  • QSR has the ability to settle the exchangeable units in cash instead of in QSR shares.

Thinking Outside the Box

As a result of these differences, a considered approach was therefore needed to impose structural limits on the potential for meaningful economic differences between an exchangeable unit and the QSR shares and provide exchangeable unit holders with economic rights that were substantially equivalent to those afforded to holders of QSR common shares. Central to this approach were distribution features that guard against disproportionate assets or liabilities at QSR relative to the Partnership, such as the requirement that QSR contribute its net proceeds from any equity issuance to the Partnership. In addition, the Partnership is permitted to make distributions to QSR for only two purposes: to fund distributions on the QSR common shares (for which the Partnership will make equivalent distributions on the exchangeable units) and the QSR preferred shares and to fund QSR expenses incurred to manage the Partnership and its businesses. Further, on any dissolution of the Partnership, those QSR expenses would be funded prior to any common equity distributions at the Partnership or QSR.

In addition to these structural limits, the QSR structure also improves on the conventional exchangeable share structure in several ways. For example, it confers contractually on exchangeable unit holders a number of the additional statutory rights they would have had as a QSR shareholder that are missing in a conventional structure. Such statutory rights complement a shareholder's voting rights, such as the right to call a shareholders' meeting, make a shareholder proposal or request a shareholders list.

Getting Novel Regulatory Relief

Under section 13.3 of National Instrument 51-102, typical exchangeable issuers are afforded exemptions from most of their continuous disclosure and reporting obligations under Canadian securities law on the basis that the reports filed by their parent companies provide sufficient disclosure. However, these exemptions are premised on a conventional exchangeable structure in which the exchangeable security provides its holder with "economic and voting rights which are, as nearly as possible except for tax implications, equivalent to the underlying securities". As a result of the differences noted above, the Partnership did not qualify for these exemptions. In order to obtain equivalent relief, it was necessary to demonstrate to Commission staff that, due to the aforementioned structural limits, the consolidated financial positions of the Partnership and QSR will remain identical in all material respects, and QSR will not have any business other than through its interest in the Partnership.

In the course of the application process, the regulators raised numerous novel issues such as whether both the QSR common shares and the exchangeable units should have "coattail provisions"; whether the issuance of voting preferred shares by QSR would result in the QSR common shares being characterized as "restricted securities"; and whether coattail provisions should attach to the QSR common shares and the Partnership's exchangeable units in the event of an acquisition of the voting preferred shares. Although all these issues were ultimately resolved, as reflected in the decision granted on October 31, 2014 (a copy of which can be viewed in the OSC Bulletin (Volume 37, Issue 46), the next issuer to come to market with exchangeable shares, conventional or otherwise, or voting preferred shares can expect to confront the same issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions