Anglo American announced it plans to acquire Teck Resources, a deal that would create one of the world’s largest copper producers.CHRIS HELGREN/Reuters
Billions of dollars in Canadian capital gains taxes from the proposed sale of Teck Resources Ltd. TECK-B-T to Anglo American PLC NGLOY could be deferred for up to 15 years because of how the deal is being structured.
London-based Anglo has announced plans to acquire Vancouver-based Teck in an entirely stock-based transaction that would create one of the world’s largest copper producers, with a market value of roughly US$50-billion.
Instead of receiving shares of the British parent company, however, Canadian shareholders of Teck can opt to receive shares in a new Canadian subsidiary that will trade on the Toronto Stock Exchange.
The option has a clear tax benefit. Even though the combined company – set to be called Anglo Teck – will be headquartered in Canada, its primary public listing will be on the London Stock Exchange. If Teck’s Canadian shareholders were to exchange their TSX-traded shares in Teck directly for LSE-traded shares of the new company, Canadian federal rules would consider that a sale, which is immediately subject to capital gains tax.
If shareholders instead receive shares in a Canadian-based company, capital gains taxes are not immediately triggered, which means shareholders don’t have to find the cash to pay taxes on shares they haven’t even sold yet.
“If they didn’t put in place this Canadian intermediary, that would be creating a cash call,” Tara Benham, national tax leader at Doane Grant Thornton LLP, said in an interview. “That is billions of dollars, and they wouldn’t have any cash because they took back shares of Anglo.”
“That is a problem and it probably would have precluded the whole deal,” Ms. Benham said.
Investors who take the exchangeable shares will have 15 years until they will be required to swap them out, though Ms. Benham said most Canadian shareholders of Teck will likely sell before that deadline.
“But for those who just hold out, they will have a triggering event and I would say it is likely at the end of the 15 years,” she said.
Teck chief executive officer Jonathan Price, who will be deputy CEO of the new company, said on a Tuesday morning conference call the “exchangeable share structure will be implemented for the benefit of Teck’s Canadian shareholders.”
The company declined to comment further on the rationale behind the share structure, though its statement announcing the deal said the exchangeable shares will have the same economic and voting rights as ordinary Anglo Teck shares and are expected to trade on the TSX.
“The advantage of the structure is instead of getting non-Canadian shares, Canadians will instead effectively get Canadian mirror shares,” Shaira Nanji, a tax law partner at KPMG Law LLP, said in an interview. “We normally refer to this type of tax deferral as a tax-free rollover.”
In what’s shaping up to be the world’s biggest mining deal of the past decade, Vancouver-based Teck Resources Ltd. and London-headquartered Anglo American PLC have agreed to join together, creating a copper-focused giant worth about $70-billion.
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Exchangeable share structures are often used in acquisitions that involve private equity buyers, according to a 2021 report from law firm Osler, Hoskin & Harcourt LLP.
They are relatively common in cross-border transactions, Ms. Nanji said. While they are more popular in private transactions, there is some precedent for their use in large public acquisitions.
When Vail Resorts Inc. bought Whistler Blackcomb Holdings Inc. for $1.4-billion in 2016, Canadian investors were also offered exchangeable shares of a Canadian subsidiary instead of shares in the U.S. parent.
Another example was Adolph Coors Co.’s purchase of Canadian beer giant Molson Inc. in 2004, in which Canadian investors were offered shares in a TSX-listed subsidiary for tax deferral purposes. That deal also included a 15-year sunset clause that expired in 2020, though shares of Molson Coors Canada Inc. continue to trade on the TSX to this day.