M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, August 26, 2014

Burger King opts for Canada

Earlier this month I thought perhaps that when Walgreens stepped away from the edge that we had seen the high water mark of the inversion movement.  But, I guess I was wrong (not for the first or last time).  This morning Burger King announced its acquisition of Canada's Tim Horton and its simultaneous move to Canada.  Burger King describes the transaction in the following way

Upon completion of the transaction, each outstanding common share of Tim Hortons will be converted into the right to receive C$65.50 in cash and 0.8025 of a common share of the new parent company, which is subject to the right of the holders of Tim Hortons common stock to make elections as noted above. Upon completion of the transaction, each outstanding common share of Burger King will be converted into 0.99 of a share of the parent company and 0.01 of a unit of a newly formed Ontario limited partnership controlled by the new parent company, however, holders of shares of Burger King common stock will be given the right to elect to receive only partnership units in lieu of common shares of the new parent company, subject to a limit on the maximum number of partnership units that can be issued.

Shares of the new parent company will be traded on the New York Stock Exchange and the Toronto Stock Exchange and units of the new partnership will be traded on the Toronto Stock Exchange. The partnership units will be convertible on a 1:1 basis into common shares of the new parent company, however, the units may not be exchanged for common shares for the first year following the closing of the transaction. Holders of partnership units will participate in the votes of shareholders of the new parent company on a pro-rata basis as though the units had been converted. 3G Capital has committed to elect to receive only partnership units.

The transaction is expected to be taxable, for U.S. federal income tax purposes, to the shareholders of Burger King, other than with respect to the partnership units received by them in the transaction. The transaction is expected to be taxable to shareholders of Tim Hortons in the U.S and Canada.

3G will be receiving only partnership units in the transaction.  The effect of which will be to permit 3G, the controller, to defer capital gains taxes - the inversion penalty - until a later time when the partnership units are converted to stock in the Canadian Burger King entity.  Nice trick.  Too bad most of the public stockholders aren't going to be able to do that. 

Of course, the Burger King folks say the deal isn't about taxes. It's about ... synergy.

Burger King executives say that isn’t the case, and Whopper devotees should take them at their word. Canada’s corporate tax rate is 26.5 percent, which is considerably lower than the 40 percent rate in the U.S. But Burger King only pays an estimated 27 percent. “We don’t expect our tax rate to change materially,” Burger King Chief Executive Daniel Schwartz said in a conference call today. “This transaction is not really about taxes. It’s about growth.”

OK.  So, if it's not about the taxes, can someone explain why the relocation to Canada? Elsewhere, Vic Fleischer weighs in again on the inversion issue.



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