PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressee and authorized personnel identified herein. Any dissemination, distribution, or copying of this memorandum without prior written authorization is strictly prohibited.
CALDERWOOD & HARKNESS LLP 900 Third Avenue, 28th Floor New York, NY 10022
MEMORANDUM
TO: Beatrice Holloway, Partner, Mergers & Acquisitions
FROM: Derek Okonkwo, Lead Associate, Mergers & Acquisitions Tiffany Rosenthal, Associate, Mergers & Acquisitions
DATE: March 20, 2024
RE: Deal Structure and Tax Analysis — Proposed Cash Tender Offer by Torchlight Mining Corp. for All Outstanding Common Shares of Ridgeline Cobalt Inc.
CLIENT: Torchlight Mining Corp.
MATTER NO.: 1039-00004
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I. Executive Summary
This memorandum analyzes the proposed two-step acquisition structure by which Torchlight Mining Corp. ("Torchlight" or "TMC"), a corporation organized under the laws of British Columbia, Canada, listed on the Toronto Stock Exchange (TMC.TO) and the New York Stock Exchange (TMC), will acquire all outstanding shares of common stock of Ridgeline Cobalt Inc. ("Ridgeline" or "RCI"), a corporation incorporated in the State of Delaware and listed on the NYSE American exchange (RCI). The proposed transaction represents a significant strategic acquisition in the critical minerals space and raises a number of important structural, tax, and regulatory considerations that are addressed in detail herein.
The proposed structure consists of two integrated steps: (1) a cash tender offer conducted under Section 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), at a price of $2.50 per share in cash for all 18,000,000 outstanding shares of RCI common stock, representing aggregate consideration of $45,000,000, followed by (2) a short-form merger under Section 253 of the Delaware General Corporation Law ("DGCL") if Torchlight acquires 90% or more of the outstanding shares in the tender offer, or, alternatively, a long-form merger under DGCL § 251 if Torchlight acquires shares representing at least the minimum condition threshold but fewer than 90% of the outstanding shares.
The $2.50 per share offer price represents a premium of approximately 38.89% over the undisturbed closing price of $1.80 per share on March 13, 2024, the last trading day prior to the public announcement of the proposed transaction, and a premium of approximately 45.35% over the 30-day volume-weighted average price ("VWAP") of $1.72 per share. We believe this premium is within the range of premiums observed in comparable transactions involving junior mining companies with development-stage assets, although we defer to the financial advisors on the adequacy of the offer price.
The strategic rationale for the transaction is compelling. Torchlight seeks to secure a domestic North American cobalt feedstock supply to service its new battery-grade cobalt sulfate refinery currently under construction in Sudbury, Ontario, Canada, with commissioning expected in the first quarter of 2025. Ridgeline's principal asset, the Hawk Ridge Project located in the Timiskaming District of Ontario, holds a National Instrument 43-101 compliant indicated mineral resource of 28,600 tonnes of contained cobalt equivalent across 12,400 hectares of mining claims. The integration of the Hawk Ridge Project into Torchlight's downstream processing operations is expected to provide significant cost advantages, supply chain security, and operational synergies, particularly in light of the growing global demand for battery-grade cobalt and the increasing geopolitical emphasis on securing critical mineral supply chains within North America.
The transaction has an important cross-border dimension. Torchlight is a Canadian corporation that qualifies as a "foreign private issuer" under the rules of the Securities and Exchange Commission ("SEC"), while Ridgeline is a Delaware corporation with mining operations in both Ontario, Canada, and Michigan, United States. This cross-border structure gives rise to both U.S. and Canadian federal and provincial or state tax considerations, which are analyzed in detail in Sections VIII, IX, and X of this memorandum.
This memorandum addresses the following principal topics: (a) the identities, corporate details, and relevant financial metrics of the parties; (b) the fully diluted capitalization of Ridgeline and the calculation of the minimum condition; (c) the mechanics and legal framework of the two-step tender offer and back-end merger structure; (d) the treatment of Ridgeline's $7,800,000 in outstanding convertible notes held by Pinnacle Venture Resources Fund II, LP ("Pinnacle"); (e) the financing of the transaction and covenant compliance considerations; (f) the indemnification framework and representations and warranties insurance; (g) an analysis of whether a Section 338 election under the Internal Revenue Code of 1986, as amended (the "Code"), should be made; (h) the U.S. federal income tax consequences to tendering shareholders, including FIRPTA considerations; and (i) Canadian tax implications, including foreign affiliate rules, treaty considerations, and transfer pricing matters.
We note that certain regulatory matters, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") clearance and the Investment Canada Act review, are addressed in a separate Regulatory Analysis Memorandum being prepared concurrently by the firm's Antitrust and Government Affairs practice groups. This memorandum cross-references regulatory matters where relevant to the deal structure and tax analysis but does not purport to constitute a comprehensive regulatory review.
II. Parties and Transaction Overview
A. The Acquirer — Torchlight Mining Corp.
Torchlight Mining Corp. is a corporation organized and existing under the laws of the Province of British Columbia, Canada, pursuant to the Business Corporations Act (British Columbia). Torchlight is a diversified mining and specialty chemicals company with principal executive offices located at 1200 – 885 West Georgia Street, Vancouver, British Columbia V6C 3E8, Canada. For purposes of service of process and its Delaware registration, Torchlight has designated Capitol Registered Agents, Inc., 850 New Burton Road, Suite 201, Dover, Delaware 19904, as its registered agent in the State of Delaware.
Torchlight's common shares are dually listed on the Toronto Stock Exchange under the ticker symbol "TMC.TO" and on the New York Stock Exchange under the ticker symbol "TMC." As a Canadian-incorporated company with a majority of its operations and assets outside the United States, Torchlight qualifies as a "foreign private issuer" as defined in Rule 3b-4 under the Exchange Act and files annual reports on Form 20-F and current reports on Form 6-K with the SEC.
As of March 2024, Torchlight's market capitalization is approximately C$3.1 billion. For its fiscal year ended December 31, 2023, Torchlight reported consolidated revenue of approximately C$1.87 billion, of which approximately 68% was attributable to its mining segment (primarily gold, copper, and cobalt production) and approximately 32% was attributable to its specialty chemicals segment (including cobalt sulfate, nickel sulfate, and other battery-grade chemical products). Torchlight's U.S. Employer Identification Number ("EIN") is 98-0743218.
Torchlight's senior management team includes Henrik Aldermann, Chief Executive Officer; Marguerite Soo-Chan, Chief Financial Officer; Nils Brenner, Senior Vice President, Corporate Development; and Patricia Edevane, General Counsel and Corporate Secretary. Mr. Brenner is leading Torchlight's transaction team and serves as the primary point of contact for Calderwood & Harkness in connection with the proposed acquisition.
Torchlight currently operates seven producing mines (extracting gold, copper, and cobalt) located across Canada, Chile, and Zambia, as well as two specialty chemical processing facilities. The Sudbury refinery under construction represents a significant capital investment of approximately C$420 million and, upon commissioning, will be one of the few facilities in North America capable of producing battery-grade cobalt sulfate meeting the stringent specifications required by electric vehicle battery manufacturers. The Hawk Ridge Project, if successfully developed, is expected to provide a significant portion of the feedstock requirements for this facility.
Significantly, for purposes of the transaction structure, Torchlight will make the tender offer directly in its own name rather than through a newly formed merger subsidiary. The rationale for this structural choice is discussed in greater detail in Section IV.A.3 below.
B. The Target — Ridgeline Cobalt Inc.
Ridgeline Cobalt Inc. is a corporation incorporated in the State of Delaware and headquartered at 44 Lakeshore Drive, Suite 300, Marquette, Michigan 49855. Ridgeline's registered agent in Delaware is National Corporate Filing Services, Inc., 1209 Orange Street, Wilmington, Delaware 19801. Ridgeline's shares of common stock are listed on the NYSE American exchange under the ticker symbol "RCI." Ridgeline's EIN is 83-2196504.
Ridgeline is a junior mining company in the exploration and early development stage. As of March 13, 2024, the last trading day before the announcement of Torchlight's proposed offer, Ridgeline's shares closed at $1.80 per share, giving Ridgeline a pre-announcement market capitalization of approximately $32.4 million based on 18,000,000 shares of common stock outstanding. The 30-day VWAP as of the same date was $1.72 per share.
For its fiscal year ended December 31, 2023, Ridgeline reported total revenue of approximately $1.2 million, derived principally from toll-processing arrangements and pilot production activities at the Hawk Ridge Project. As of December 31, 2023, Ridgeline reported cash and cash equivalents of approximately $4.6 million and total indebtedness of approximately $7.8 million, consisting entirely of convertible notes held by Pinnacle Venture Resources Fund II, LP (discussed in detail in Section V below).
Ridgeline's senior management includes Gordon McTavish, Chief Executive Officer; Elaine Bricker, Chief Financial Officer; and Dr. Luisa Ferrante, who serves as Chairman of the Board of Directors.
Ridgeline's principal assets consist of two mining projects:
(a) Hawk Ridge Project. The Hawk Ridge Project is located in the Timiskaming District of Ontario, Canada, and comprises approximately 12,400 hectares held under Ontario Mining Claims Nos. 4271883 through 4271947, totaling 65 claims. An NI 43-101 compliant technical report prepared by an independent qualified person indicates an indicated mineral resource of 28,600 tonnes of contained cobalt equivalent. The Hawk Ridge Project is the primary asset driving the strategic rationale for the acquisition.
(b) Iron Lake Project. The Iron Lake Project is located in Baraga County, Michigan, and comprises approximately 3,200 hectares held under Michigan Department of Environment, Great Lakes, and Energy ("EGLE," formerly the "DEQ") Mineral Lease Nos. ML-2021-0334 and ML-2021-0335. The Iron Lake Project is in an earlier stage of exploration than Hawk Ridge, and no NI 43-101 compliant resource estimate has been published.
The relative values of these two projects and their tax characterizations are relevant to the FIRPTA analysis discussed in Section VIII.F and the Section 338 election analysis discussed in Section VIII.C.
C. Key Third Parties
The following third parties are involved in the transaction and are relevant to the deal structure and tax analysis:
(a) Target's Legal Counsel. Galbraith Haver & Steele LLP, with Martin Galbraith as the lead partner on the matter, serves as counsel to Ridgeline's Board of Directors in connection with the proposed transaction.
(b) Acquirer's Financial Advisor. Blackford Ames Securities LLC, with Richard Capewell, Managing Director, serving as the lead advisor, is providing financial advisory services to Torchlight in connection with the acquisition.
(c) Target's Financial Advisor. Whitfield Partners LLC, with Joanna Whitfield, Managing Director, serving as the lead advisor, is providing financial advisory services to Ridgeline's Board of Directors and is expected to deliver a fairness opinion in connection with the Board's recommendation to shareholders.
(d) Significant Shareholder and Noteholder — Pinnacle Venture Resources Fund II, LP. Pinnacle Venture Resources Fund II, LP is a limited partnership organized under the laws of the State of Delaware, with its principal offices at 75 Ashbury Asset Advisors, Suite 1400, Boston, Massachusetts 02109 (EIN: 84-3317629). Its general partner is Pinnacle Venture Resources GP II, LLC, of which Theodore "Ted" Vanderhoek is the Managing Partner. Pinnacle is Ridgeline's largest shareholder, holding 3,600,000 shares of common stock (representing 20.0% of the outstanding shares), and is the sole holder of Ridgeline's $7,800,000 in outstanding 6.5% senior secured convertible notes. Pinnacle's combined common stock and convertible note positions give it a potential ownership stake of approximately 32.6% of Ridgeline's fully diluted share count, making its participation in the tender offer critical to satisfaction of the minimum condition. Pinnacle is expected to enter into a Tender and Support Agreement (the "Support Agreement") with Torchlight on or about April 8, 2024, pursuant to which Pinnacle will agree to tender all of its 3,600,000 common shares in the offer.
(e) Depositary and Paying Agent. Hargrove Depositary Services, Inc., 55 Water Street, New York, New York 10041, will serve as the depositary and paying agent for the tender offer.
(f) Transfer Agent. Dominion Transfer & Trust Co., 1100 Centre Street, Suite 600, Wilmington, Delaware 19805, serves as the transfer agent and registrar for Ridgeline's common stock.
III. Capitalization of Ridgeline Cobalt Inc.
An accurate and comprehensive understanding of Ridgeline's capitalization is essential to the proper structuring of the tender offer and the calculation of the minimum condition. The following capitalization analysis is based on Ridgeline's most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023, supplemented by information provided by Ridgeline's management and counsel during preliminary due diligence. We note that the capitalization analysis is subject to confirmation through the due diligence process and may be updated as additional information becomes available.
A. Common Shares Outstanding
Ridgeline has 18,000,000 shares of common stock, par value $0.001 per share, issued and outstanding as of the date of this memorandum. The shares are listed on the NYSE American exchange under the ticker symbol "RCI." The pre-announcement closing price was $1.80 per share as of March 13, 2024, and the 30-day VWAP as of the same date was $1.72 per share.
As of the date of this memorandum, Torchlight does not own, directly or indirectly, any shares of Ridgeline common stock. Accordingly, Torchlight's pre-offer ownership is zero shares, representing 0.0% of the outstanding shares.
B. Convertible Notes
Ridgeline has outstanding $7,800,000 in aggregate principal amount of 6.5% senior secured convertible notes due June 30, 2026 (the "Convertible Notes" or the "Notes"), issued under an indenture dated June 30, 2022 (the "Indenture"). The Notes are held in their entirety by Pinnacle Venture Resources Fund II, LP.
The Notes are convertible at the holder's option into shares of Ridgeline common stock at a conversion price of $2.00 per share, which would result in the issuance of 3,900,000 shares upon full conversion ($7,800,000 ÷ $2.00 = 3,900,000). The Notes bear interest at a rate of 6.5% per annum, payable semi-annually, with the most recent interest payment having been made on December 31, 2023. The Notes are senior secured obligations of Ridgeline, with a security interest in substantially all of Ridgeline's assets.
The treatment of the Convertible Notes at closing is a critical structural consideration and is addressed in detail in Section V of this memorandum.
C. Options and Warrants
Ridgeline has outstanding options and warrants to purchase an aggregate of 1,100,000 shares of common stock. The specific exercise prices, vesting schedules, and expiration dates applicable to these options and warrants have not yet been fully confirmed in due diligence. We understand that a portion of these instruments were granted under Ridgeline's 2021 Equity Incentive Plan, and certain warrants may have been issued in connection with prior financing transactions. It will be necessary to obtain a complete schedule of all outstanding equity awards and warrants, including the specific terms of each grant, to determine the appropriate treatment at closing and to complete the Section 280G analysis referenced in Section VIII.E.
D. Fully Diluted Share Count
The fully diluted share count of Ridgeline, taking into account all outstanding shares, shares issuable upon conversion of the Convertible Notes, and shares issuable upon exercise of all outstanding options and warrants, is as follows:
The fully diluted share count of 23,000,000 is the denominator used for purposes of calculating the minimum condition for the tender offer, as discussed in Section IV.A.3 below.
E. Pinnacle Holdings Summary
Given Pinnacle's significance as both the largest shareholder and the sole holder of the Convertible Notes, the following summary of Pinnacle's aggregate holdings is provided:
Pinnacle's commitment to tender all 3,600,000 of its common shares under the Support Agreement will provide a substantial base toward satisfying the minimum condition and is an important element of transaction certainty. The decision not to convert the Notes (with repayment at par plus accrued interest instead) is discussed in Section V.
IV. Two-Step Transaction Structure
A. Step One: Cash Tender Offer
1. Legal Framework. The tender offer will be conducted under Section 14(d) of the Exchange Act and Rules 14d-1 through 14d-11 promulgated thereunder. Section 14(d) governs tender offers for equity securities of issuers registered under Section 12 of the Exchange Act and requires, among other things, that the offer remain open for a minimum of 20 business days from the date of commencement, that all tendering shareholders receive the same consideration, and that the bidder comply with certain disclosure requirements.
Torchlight commenced the offer on March 14, 2024, by filing a Schedule TO with the SEC (SEC Accession No. 0001193125-24-072841), which included the Offer to Purchase and the related Letter of Transmittal. The Torchlight Board of Directors formally approved the commencement of the offer at a meeting held on March 14, 2024. In accordance with Rule 14d-9, Ridgeline's Board of Directors will file a Solicitation/Recommendation Statement on Schedule 14D-9 within ten business days of the commencement of the offer, setting forth the Board's recommendation to shareholders with respect to the offer. Based on preliminary discussions between counsel, we expect the Ridgeline Board to recommend that shareholders accept the offer and tender their shares, subject to the delivery of a fairness opinion by Whitfield Partners LLC.
As a foreign private issuer making a tender offer for shares of a U.S.-registered target, Torchlight is not eligible for the Tier I exemptions available under Rule 14d-1(c) (which require that U.S. holders hold no more than 10% of the target's securities). Given that Ridgeline's shareholder base is predominantly U.S.-based, the offer must comply in all material respects with the U.S. tender offer rules, including the all-holders and best-price requirements of Rule 14d-10.
2. Offer Terms. The material terms of the tender offer are as follows:
(a) Offer Price. $2.50 per share of Ridgeline common stock, payable in cash, without interest and less any applicable withholding taxes. The offer price was determined through arm's-length negotiations between Torchlight and Ridgeline, with the assistance of their respective financial advisors.
(b) Aggregate Consideration. Based on 18,000,000 shares of common stock outstanding, the aggregate consideration payable in the tender offer is $45,000,000 (18,000,000 × $2.50). This amount does not include the Convertible Note payoff (discussed in Section V) or transaction expenses (discussed in Section VI).
(c) No Proration. The offer is for all outstanding shares of Ridgeline common stock. There is no proration provision, and all shares validly tendered and not withdrawn prior to the expiration of the offer will be accepted and purchased.
(d) No Financing Contingency. The offer is not subject to any financing contingency. Torchlight has sufficient funds available from cash on hand and its existing revolving credit facility to fund the full amount of the consideration payable in the offer, the Convertible Note payoff, and all associated transaction costs. The absence of a financing contingency enhances the certainty of the offer and is expected to be viewed favorably by Ridgeline's Board and shareholders.
(e) Depositary and Paying Agent. Hargrove Depositary Services, Inc. will serve as the depositary and paying agent for the offer. Shareholders wishing to tender their shares will be required to deliver a properly completed Letter of Transmittal, together with their share certificates (or arrange for book-entry transfer through the Depository Trust Company), to Hargrove in accordance with the procedures set forth in the Offer to Purchase.
3. Minimum Condition. The tender offer is subject to a minimum tender condition. Specifically, shares of Ridgeline common stock validly tendered and not withdrawn in the offer, together with any shares of Ridgeline common stock owned by Torchlight at the time of expiration (currently zero shares), must represent at least a majority of the total number of shares of Ridgeline common stock then outstanding on a fully diluted basis.
Based on the fully diluted share count of 23,000,000 (as set forth in Section III.D), the minimum condition requires the tender of at least 11,500,001 shares (i.e., 23,000,000 ÷ 2 + 1). The use of the fully diluted share count as the denominator, rather than the basic shares outstanding count of 18,000,000, is a more conservative measure that accounts for the potential dilutive effect of the Convertible Notes and outstanding options and warrants. This approach is customary in transactions where significant convertible securities or other dilutive instruments are outstanding.
Pinnacle's commitment under the Support Agreement to tender all 3,600,000 of its common shares provides a significant base toward satisfying the minimum condition. Assuming Pinnacle tenders as agreed, Torchlight would need an additional 7,900,001 shares to be tendered by other shareholders to reach the 11,500,001-share threshold, representing approximately 54.9% of the 14,400,000 non-Pinnacle shares outstanding. Based on our experience with comparable transactions involving junior mining companies at significant premiums, we believe this acceptance rate is achievable, although there can be no assurance.
4. Offer Timeline. The key dates in the anticipated offer timeline are as follows:
The initial expiration date of June 14, 2024 provides approximately three months from commencement, which should be sufficient to obtain HSR Act clearance (assuming early termination of the waiting period or expiration of the initial 30-day waiting period without a request for additional information) and Investment Canada Act clearance. The offer may be extended by Torchlight in accordance with its terms if any conditions remain unsatisfied as of the initial expiration date.
The HSR Act filing fee applicable to this transaction is $111,000, which falls within the Tier 1 fee range applicable to transactions with an aggregate value exceeding $111.4 million but less than $500 million. The HSR notification was filed on March 21, 2024. The Investment Canada Act notification was filed on March 25, 2024. A detailed analysis of the regulatory approval process is contained in the separate Regulatory Analysis Memorandum.
5. Additional Conditions. In addition to the minimum condition described above, the obligation of Torchlight to accept for payment and pay for shares tendered in the offer is subject to the satisfaction or waiver of the following conditions:
(a) The representations and warranties of Ridgeline set forth in the Tender Offer Agreement (the "Agreement") shall be true and correct in all material respects (or, with respect to representations and warranties qualified by materiality, in all respects) as of the date of the Agreement and as of the expiration date of the offer.
(b) There shall not have occurred any event, change, effect, development, condition, or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, results of operations, condition (financial or otherwise), properties, assets, liabilities, or prospects of Ridgeline and its subsidiaries, taken as a whole (a "Material Adverse Effect"), subject to customary carve-outs to be negotiated.
(c) All required regulatory approvals, including clearance under the HSR Act and the Investment Canada Act, shall have been obtained or the applicable waiting periods shall have expired or been terminated.
(d) No governmental authority shall have enacted, issued, promulgated, enforced, or entered any law, rule, regulation, judgment, injunction, order, or decree that is in effect and that has the effect of making illegal, prohibiting, or otherwise preventing or restraining the consummation of the offer or the merger.
(e) The Ridgeline Board of Directors shall not have withdrawn, modified, or amended its recommendation that Ridgeline shareholders accept the offer and tender their shares, or recommended an alternative transaction.
These conditions are typical for a transaction of this nature and are subject to ongoing negotiation between the parties and their respective counsel.
6. Non-Solicitation; Termination Fees. The Agreement will contain customary non-solicitation provisions restricting Ridgeline and its representatives from soliciting, initiating, or knowingly encouraging or facilitating any competing acquisition proposal. The non-solicitation covenant will be subject to a customary "fiduciary out" permitting the Ridgeline Board of Directors to engage with a party that makes an unsolicited bona fide acquisition proposal that the Board determines in good faith (after consultation with its financial advisor and outside legal counsel) constitutes or could reasonably be expected to result in a "Superior Proposal," as that term will be defined in the Agreement.
The Agreement will provide for the following termination fees:
(a) Company Termination Fee. If the Agreement is terminated as a result of the Ridgeline Board's withdrawal or adverse modification of its recommendation to shareholders, or if Ridgeline accepts a Superior Proposal, Ridgeline shall pay to Torchlight a termination fee equal to 3.5% of the aggregate deal value, or $1,575,000 ($45,000,000 × 3.5%). This termination fee is within the range typically observed in transactions of this size, where termination fees of 3.0% to 4.0% of equity value are customary.
(b) Reverse Termination Fee. If the Agreement is terminated as a result of Torchlight's failure to obtain required regulatory approvals (including HSR Act clearance or Investment Canada Act clearance), Torchlight shall pay to Ridgeline a reverse termination fee equal to 5.0% of the aggregate deal value, or $2,250,000 ($45,000,000 × 5.0%). The reverse termination fee provides Ridgeline with compensation for the opportunity cost and disruption associated with pursuing the transaction if regulatory clearance cannot be obtained. The higher percentage for the reverse termination fee relative to the company termination fee reflects the allocation of regulatory risk to the acquirer, which is the party best positioned to assess and mitigate such risk.
B. Step Two: Back-End Merger
1. Short-Form Merger — DGCL § 253. If, upon expiration of the tender offer, Torchlight has acquired 90% or more of the outstanding shares of Ridgeline common stock, Torchlight intends to promptly effect a short-form merger under DGCL § 253. Under Section 253 of the DGCL, a parent corporation that owns at least 90% of the outstanding shares of each class of stock of a Delaware subsidiary may merge the subsidiary into itself (or merge itself into the subsidiary) without a vote of the subsidiary's stockholders and without the approval of the subsidiary's board of directors.
The 90% threshold is calculated based on the 18,000,000 shares of common stock outstanding, requiring Torchlight to hold at least 16,200,000 shares (18,000,000 × 90%) following the tender offer. It is important to note that the 90% threshold for the short-form merger is measured against the outstanding share count (not the fully diluted share count), because DGCL § 253 refers to ownership of "at least 90% of the outstanding shares of each class of the stock of the corporation."
We recommend that the tender offer be structured to maximize shareholder participation above the 90% threshold, making the short-form merger the expected path to completion. The short-form merger offers several significant advantages over the long-form merger alternative:
(a) It eliminates the need for a stockholder meeting, thereby avoiding the time and expense associated with the preparation, filing, and SEC review of a proxy statement or information statement.
(b) It eliminates the need for a stockholder vote, which introduces uncertainty and requires coordination with the transfer agent and proxy solicitor.
(c) It significantly reduces the overall timeline to completion, as the short-form merger can be effectuated by the filing of a certificate of merger with the Delaware Secretary of State on the same day as the closing of the tender offer.
(d) While minority stockholders retain appraisal rights under DGCL § 262 in a short-form merger, the absence of a stockholder vote eliminates certain procedural complexities that arise in connection with appraisal demands in long-form mergers.
2. Long-Form Merger — DGCL § 251 (Fallback). In the event that Torchlight acquires at least a majority of the fully diluted shares (11,500,001 shares, satisfying the minimum condition) but fewer than 90% of the outstanding shares (fewer than 16,200,000 shares) in the tender offer, a short-form merger would not be available, and a long-form merger under DGCL § 251 would be required to acquire the remaining outstanding shares.
A long-form merger under DGCL § 251 requires approval by the board of directors of each constituent corporation and the affirmative vote of a majority of the outstanding shares of each constituent corporation entitled to vote on the merger. Because Torchlight would already hold a majority of the outstanding shares following the tender offer, stockholder approval would be assured. However, the long-form merger process would still require:
(a) Preparation and filing with the SEC of a proxy statement (or, if Torchlight holds a sufficient majority to act by written consent, an information statement under Rule 14c-2, which requires a 20-calendar-day waiting period before the merger can become effective).
(b) If a stockholder meeting is held, the mailing of the proxy statement and the holding of a special meeting of Ridgeline stockholders, with all attendant logistical and timeline considerations.
(c) Compliance with DGCL § 262 regarding appraisal rights, including the provision of notices required to dissenting stockholders.
The long-form merger alternative could add approximately 45 to 90 days to the overall transaction timeline, depending on the SEC review process and the scheduling of a stockholder meeting. This additional time period is undesirable given Torchlight's strategic imperative to complete the acquisition in advance of the Sudbury refinery commissioning.
We note that the probability of achieving the 90% short-form merger threshold is enhanced by Pinnacle's commitment to tender its 3,600,000 shares under the Support Agreement. With Pinnacle's shares tendered, Torchlight would need to acquire an additional 12,600,000 shares from the remaining 14,400,000 non-Pinnacle shares outstanding to reach the 16,200,000-share threshold, representing an acceptance rate of approximately 87.5% among non-Pinnacle shareholders. If adjusted for shares held in "street name" by nominee holders (which tend to have higher participation rates due to broker-dealer forwarding requirements), an overall acceptance rate in this range is achievable, particularly given the significant premium offered.
We also note that Rule 14d-11 permits Torchlight to provide a "subsequent offering period" of three to 20 business days following expiration of the initial offer period, during which additional shares may be tendered but not withdrawn. A subsequent offering period may be useful if the 90% threshold is not reached during the initial offer period, as it provides an additional opportunity for remaining shareholders to tender their shares without the risk of withdrawal that exists during the initial offer period.
3. Rationale for Direct Tender Offer (No Merger Sub). In many two-step acquisition structures, the acquirer forms a wholly owned merger subsidiary — typically a Delaware corporation or limited liability company — to serve as the entity that commences the tender offer and into which the target is merged (or which merges into the target) in the second step. In the present transaction, Torchlight has elected to make the tender offer directly, without the formation and interposition of a merger subsidiary. The rationale for this approach is as follows:
(a) Structural Simplicity. The use of a direct tender offer by Torchlight avoids the administrative steps and costs associated with the formation, capitalization, and subsequent dissolution of a merger subsidiary. While these steps are generally straightforward, eliminating them reduces transactional complexity and the potential for administrative error.
(b) Short-Form Merger Mechanics. At the back-end merger stage, Ridgeline will merge with and into Torchlight, with Torchlight as the surviving entity. Ridgeline will cease to exist as a separate legal entity upon the effectiveness of the merger. Under DGCL § 253, a short-form merger may be effected by a parent corporation with its subsidiary, and Delaware law permits a foreign corporation (here, Torchlight, a British Columbia corporation registered to do business in Delaware) to be the surviving entity in such a merger.
(c) Canadian Tax Considerations. The absence of a merger subsidiary simplifies the Canadian tax analysis, as there is no U.S. subsidiary interposed between Torchlight and Ridgeline's assets. Upon completion of the short-form merger, Ridgeline's assets will be held directly by Torchlight, minimizing the period during which Ridgeline could be treated as a controlled foreign affiliate for Canadian tax purposes.
C. Comparison with One-Step Merger Structure
For completeness, we have considered whether a one-step statutory merger (rather than a two-step tender offer followed by a back-end merger) would be a preferable acquisition structure. A one-step merger would require:
(a) Negotiation and execution of a merger agreement.
(b) Preparation and filing with the SEC of a proxy statement on Schedule 14A, followed by SEC review and comment, which typically involves one or more rounds of comments and revisions.
(c) Mailing of the definitive proxy statement to Ridgeline stockholders.
(d) Holding of a special meeting of Ridgeline stockholders to vote on the merger.
(e) Compliance with DGCL § 262 regarding appraisal rights for dissenting stockholders.
The SEC review process alone typically requires 30 to 60 days, and the notice period for the stockholder meeting adds additional time. In total, a one-step merger process would typically require 60 to 120 days from the filing of the preliminary proxy statement to the closing of the merger, compared to the minimum 20-business-day offer period for a tender offer followed by an immediate short-form merger.
Given the strategic urgency of completing the acquisition in advance of the Sudbury refinery commissioning (expected Q1 2025) and the availability of the short-form merger as a means of promptly acquiring 100% of Ridgeline's shares following a successful tender offer, the two-step tender offer / short-form merger structure is clearly the preferred approach. The two-step structure also provides greater deal certainty because, once the tender offer is completed and the 90% threshold is met, the back-end merger can be effected as a matter of right by Torchlight without any further action by Ridgeline's stockholders or board of directors.
Conclusion: We recommend proceeding with the two-step cash tender offer / short-form merger structure as described herein.
V. Treatment of Pinnacle Convertible Notes
A. Terms of the Notes
As described in Section III.B, Ridgeline has outstanding $7,800,000 in aggregate principal amount of 6.5% senior secured convertible notes due June 30, 2026, issued under the Indenture dated June 30, 2022. The Notes are held in their entirety by Pinnacle Venture Resources Fund II, LP. The material terms of the Notes are summarized as follows:
B. Analysis of Conversion vs. Repayment
A central structural question in the transaction is whether the Convertible Notes should be (a) converted into shares of Ridgeline common stock by Pinnacle, with the resulting shares then tendered in the tender offer, or (b) repaid at par plus accrued interest at closing, without conversion.
If Pinnacle were to convert the Notes in full, Pinnacle would receive 3,900,000 shares of Ridgeline common stock. At the $2.50 per share offer price, tendering these 3,900,000 additional shares would yield $9,750,000 in proceeds to Pinnacle. By comparison, if the Notes are repaid at par plus accrued interest, Pinnacle would receive $8,075,014 (as calculated in Section V.C below). Thus, conversion followed by tender would yield approximately $1,674,986 more to Pinnacle than repayment at par plus accrued interest.
However, conversion introduces several complications and risks from Torchlight's perspective:
(a) Dilution. Conversion would increase the outstanding share count from 18,000,000 to 21,900,000, increasing the aggregate tender offer consideration from $45,000,000 to $54,750,000 (an increase of $9,750,000). The net additional cost to Torchlight from permitting conversion would be the difference between the tender offer consideration for the conversion shares ($9,750,000) and the note payoff amount ($8,075,014), or approximately $1,674,986.
(b) Fully Diluted Share Count Impact. If the Notes are converted prior to the record date for the tender offer, the fully diluted share count would decrease from 23,000,000 to 19,100,000 (because the 3,900,000 conversion shares would now be counted as outstanding shares rather than potential dilutive shares, and the Notes would no longer be in the calculation). However, the actual share count used for the minimum condition would increase, potentially complicating the analysis.
(c) Timing and Mechanical Complexity. Conversion of the Notes requires compliance with the conversion procedures set forth in the Indenture, including delivery of a conversion notice and the issuance of shares by Ridgeline. This introduces additional mechanical steps and potential timing risks that could complicate closing.
(d) Security Interest. Conversion would extinguish the Notes and, with them, the security interest in Ridgeline's assets. While this is also accomplished by repayment, the timing and mechanics of the security interest release are more straightforward in the repayment context.
After careful consideration, and following discussions between Torchlight's and Pinnacle's respective advisors, the parties have agreed to the following approach, which will be memorialized in the Support Agreement to be executed on or about April 8, 2024:
(i) The Notes will not be converted. Instead, the Notes will be repaid in full at par plus accrued interest at closing.
(ii) Pinnacle will tender all 3,600,000 of its common shares in the tender offer separately.
This approach eliminates dilution risk, simplifies the closing mechanics, and preserves the integrity of the fully diluted share count calculation. While Pinnacle receives approximately $1.67 million less under this approach than it would under conversion-and-tender, the difference is a matter for negotiation between Pinnacle and Torchlight and may be addressed through other economic terms of the Support Agreement.
C. Accrued Interest Calculation
Interest on the Notes accrues at a rate of 6.5% per annum on the outstanding principal balance of $7,800,000. The most recent interest payment was made on December 31, 2023. Assuming a closing date of July 16, 2024, the accrued and unpaid interest from December 31, 2023 through July 16, 2024 (a period of 198 days) is calculated as follows:
Accrued Interest = Principal × Rate × (Days / 365)
Accrued Interest = $7,800,000 × 6.5% × (198 / 365)
Accrued Interest = $7,800,000 × 0.065 × 0.54247
Accrued Interest = $507,000 × 0.54247
Accrued Interest = $275,013.70
Rounded: $275,014
Accordingly, the total payoff amount for the Convertible Notes at closing will be:
We note that this calculation is based on the assumption of a July 16, 2024 closing date. If the closing date changes, the accrued interest will be recalculated on a per diem basis of approximately $1,389.04 per day ($507,000 ÷ 365).
D. Security Interest Release
Because the Notes are senior secured obligations of Ridgeline, with a first-priority security interest in substantially all of Ridgeline's assets, the security interests must be released at closing in connection with the note payoff. The security interests were likely perfected by the filing of UCC-1 financing statements with the Delaware Secretary of State and, to the extent Ridgeline's assets include real property or mining-related assets, by the recording of mortgages, deeds of trust, or other instruments with the appropriate state, provincial, or local recording offices.
Calderwood & Harkness will coordinate with Galbraith Haver & Steele LLP (Ridgeline's counsel) and Pinnacle's counsel to obtain and deliver the following at or prior to closing:
(a) UCC-3 termination statements terminating all UCC financing statements filed against Ridgeline in favor of Pinnacle.
(b) Releases or satisfactions of any recorded mortgages, deeds of trust, or similar instruments encumbering Ridgeline's real property or mining claims in favor of Pinnacle.
(c) Any other lien release documentation required under the Indenture or the related security agreements to evidence the full release and discharge of all security interests upon repayment of the Notes in full.
These release documents should be in form and substance satisfactory to Torchlight and its counsel, and their delivery should be a condition to the disbursement of the note payoff amount at closing.
VI. Financing
A. Sources of Funds
The tender offer will be funded entirely from two sources: (i) Torchlight's existing cash reserves and (ii) a draw on Torchlight's existing revolving credit facility. Torchlight has confirmed that it has sufficient available funds from these sources to pay the aggregate tender offer consideration, the Convertible Note payoff, and all associated transaction costs, without the need for any new financing commitments or arrangements.
The absence of a financing contingency in the tender offer is a critical element of the transaction structure. By committing to fund the offer from available resources, Torchlight provides a high degree of certainty to Ridgeline's shareholders and Board that the offer will be consummated if the conditions are satisfied. This "certain funds" approach is also consistent with the expectations of the Canadian and U.S. regulatory authorities in reviewing the transaction.
B. Revolving Credit Facility
Torchlight's primary source of acquisition financing is a draw on its existing revolving credit facility, the material terms of which are as follows:
Torchlight anticipates drawing approximately C$40,000,000 on the revolving credit facility at closing, which at the prevailing spot exchange rate of C$1.00 = US$0.73 translates to approximately US$29.2 million. The balance of the funds required to complete the transaction (approximately US$25.8 million to US$26.0 million) will be funded from Torchlight's treasury cash.
C. Total Cash Required at Closing
The total cash outlay required by Torchlight at closing is estimated as follows:
For planning purposes, we estimate total cash requirements of approximately $55.0 million to $55.2 million. This estimate is subject to adjustment based on actual closing date (affecting accrued interest), final negotiation of fee arrangements, and actual closing costs.
D. Revolver Covenant Considerations
Prior to making the draw on the revolving credit facility, Torchlight must confirm that the draw and the acquisition, taken together, will not trigger any financial covenant defaults or other events of default under the credit agreement. In particular, Calderwood & Harkness should review the following provisions of the credit agreement:
(a) Financial Covenants. Confirm that the draw, when added to Torchlight's existing indebtedness, will not cause a breach of any leverage ratio, interest coverage ratio, or other financial covenants.
(b) Change-of-Control Provisions. Confirm that the acquisition of Ridgeline does not constitute a "change of control" of Torchlight that would trigger acceleration or other remedies under the credit agreement.
(c) Negative Pledge Covenants. Confirm that the assumption of Ridgeline's existing liens and encumbrances (which will be released upon payoff of the Convertible Notes) does not violate any negative pledge or lien-restriction covenants.
(d) Permitted Acquisition Baskets. Confirm that the acquisition falls within any "permitted acquisitions" basket under the credit agreement, including any limitations on the aggregate consideration payable in acquisitions during any given period.
(e) Required Consents or Notices. Determine whether any advance notice to, or consent from, the administrative agent or the lender syndicate is required prior to consummation of the acquisition.
Calderwood & Harkness will obtain and review a copy of the credit agreement (as amended) and provide a separate analysis if any covenant compliance issues are identified.
VII. Indemnification and Risk Allocation
A. Indemnification Framework
The Agreement will contain a customary post-closing indemnification framework under which the former shareholders of Ridgeline (acting through a shareholder representative, to be designated) will indemnify Torchlight for losses arising from breaches of representations and warranties, covenants, and certain specified matters. The key parameters of the indemnification framework, as currently contemplated, are as follows:
(a) General Indemnification Cap. The aggregate liability of the former shareholders of Ridgeline for indemnification claims relating to breaches of non-fundamental representations and warranties shall not exceed 20% of the aggregate deal value, or $9,000,000 ($45,000,000 × 20%). This cap is within the range of 15% to 25% of deal value that is customary in transactions of this size.
(b) Tipping Basket (Deductible). No indemnification shall be payable until the aggregate amount of indemnifiable losses exceeds 1% of the aggregate deal value, or $450,000 ($45,000,000 × 1%). Once the tipping basket is exceeded, the former shareholders' indemnification obligation shall apply from the first dollar of losses (i.e., the basket operates as a "tipping" or "first dollar" basket rather than a true deductible). The tipping basket provides a threshold that filters out de minimis or immaterial claims while preserving the buyer's right to recover the full amount of losses once the threshold is crossed.
(c) De Minimis Per-Claim Threshold. Individual claims for indemnifiable losses of less than $25,000 shall be disregarded for all purposes, including for purposes of determining whether the tipping basket has been exceeded. This de minimis threshold prevents the aggregation of trivial claims to reach the basket threshold.
(d) Fundamental Representations Cap. The aggregate liability of the former shareholders of Ridgeline for indemnification claims relating to breaches of "fundamental" representations and warranties (including representations regarding organization, authorization, capitalization, title to properties, and tax matters) shall be capped at 100% of the aggregate deal value, or $45,000,000. Fundamental representations shall survive for a period of 36 months from the closing date (i.e., until July 16, 2027, assuming a July 16, 2024 closing). This extended survival period and higher cap reflect the heightened significance of fundamental representations, which go to the core of the transaction.
(e) General Survival Period. Non-fundamental representations and warranties shall survive for a period of 18 months from the closing date (i.e., until January 16, 2026, assuming a July 16, 2024 closing).
B. Escrow. To provide a source of funds for indemnification claims, a portion of the aggregate tender offer consideration will be deposited into an escrow account at closing. The escrow arrangement is structured as follows:
The $9,000,000 escrow amount represents 20% of the aggregate deal value and is equal to the general indemnification cap. This alignment between the escrow amount and the cap is customary and ensures that the full amount of the buyer's potential recovery under the general cap is backed by cash on deposit. Upon expiration of the escrow period, any amounts remaining in the escrow fund (net of pending or resolved claims) will be released to the former shareholders of Ridgeline on a pro rata basis.
C. Representations & Warranties Insurance
In addition to the escrow, Torchlight will obtain a representations and warranties insurance ("R&W insurance") policy to provide additional coverage for losses arising from breaches of Ridgeline's representations and warranties. R&W insurance has become a standard feature of mid-market acquisition transactions, as it provides the buyer with an additional source of recovery beyond the seller's direct indemnification obligation and the escrow fund, while also providing certainty and finality to the sellers.
The material terms of the R&W insurance policy are as follows:
The R&W insurance policy is structured as an excess policy, meaning that the insurer's obligation to pay is triggered only after the $9,000,000 retention (which is satisfied by the escrow) has been exhausted. The total available coverage for breaches of representations and warranties is therefore $18,000,000 (consisting of $9,000,000 in escrow funds plus the $9,000,000 policy limit), representing approximately 40% of the aggregate deal value.
The 3.5% premium rate reflects the underwriter's assessment of the risk profile of the transaction, taking into account the nature of Ridgeline's business (junior mining), the quality of the due diligence process, and the scope of the representations and warranties. The equal split of the premium between Torchlight and the former shareholders is a negotiated allocation that reflects the shared benefit of the insurance coverage to both parties.
We note that R&W insurance policies typically contain certain standard exclusions, including exclusions for known liabilities, fraud, environmental remediation costs (which may be relevant given the mining context), and certain tax-related losses. The specific scope of coverage and any negotiated modifications to the standard exclusions will be addressed during the underwriting process.
VIII. U.S. Federal Income Tax Analysis
The following analysis addresses the U.S. federal income tax consequences of the proposed transaction to the principal parties involved. This analysis is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations thereunder, published rulings and administrative pronouncements of the Internal Revenue Service, and judicial decisions, all as in effect on the date of this memorandum and all of which are subject to change (possibly with retroactive effect). This analysis does not address state, local, or non-U.S. tax consequences, except as specifically noted. State and local tax considerations are addressed separately in Section X, and Canadian tax implications are addressed in Section IX.
A. Classification of the Transaction — Tender Offer
The cash tender offer is a taxable transaction for U.S. federal income tax purposes. No provision of the Code or the Treasury Regulations provides for tax-free treatment of a cash tender offer, because the exchange of shares for cash consideration does not qualify as a tax-free reorganization under Section 368 of the Code (which generally requires that a substantial portion of the consideration consist of stock of the acquiring corporation or its parent).
Treatment of U.S. Shareholders. Each U.S. shareholder who tenders shares of Ridgeline common stock in the tender offer will recognize capital gain or loss equal to the difference between (i) the $2.50 per share cash consideration received and (ii) the shareholder's adjusted tax basis in the tendered shares. The capital gain or loss will be long-term capital gain or loss if the shareholder's holding period for the tendered shares exceeded one year as of the date of the tender, and short-term capital gain or loss if the holding period was one year or less. For individual taxpayers, long-term capital gains are currently subject to U.S. federal income tax at preferential rates (0%, 15%, or 20%, depending on the taxpayer's taxable income), while short-term capital gains are taxed at ordinary income rates. In addition, certain high-income individuals may be subject to the 3.8% net investment income tax under Section 1411 of the Code.
Treatment of Non-U.S. Shareholders. For shareholders who are non-U.S. persons (as defined in Section 7701(b) of the Code), the U.S. federal income tax consequences of tendering shares in the offer will depend on whether the gain, if any, is treated as effectively connected with the conduct of a U.S. trade or business and, importantly, on whether Ridgeline is classified as a "United States real property holding corporation" ("USRPHC") under Section 897 of the Code (the "FIRPTA" provisions). The FIRPTA analysis is discussed in detail in Section VIII.F below.
B. Classification of the Transaction — Back-End Merger
The short-form merger under DGCL § 253 (or, if applicable, the long-form merger under DGCL § 251) will also constitute a taxable transaction for U.S. federal income tax purposes. Shareholders whose shares are cancelled in the merger in exchange for the right to receive $2.50 per share in cash will be treated in the same manner as tendering shareholders in the tender offer — i.e., they will recognize capital gain or loss measured by the difference between the $2.50 per share merger consideration and their adjusted tax basis in the cancelled shares.
No reorganization treatment is available for the back-end merger because the consideration payable to shareholders consists entirely of cash. Section 368(a)(1)(A) of the Code (which governs statutory mergers that may qualify for tax-free treatment) requires that the shareholders of the target receive a meaningful amount of stock of the acquiring corporation (or its parent) as part of the merger consideration. Because no Torchlight stock is being offered to Ridgeline shareholders, the continuity of interest requirement for tax-free reorganization treatment is not satisfied, and the merger will be fully taxable.
C. Section 338 Election Analysis
1. Overview of Section 338. Section 338 of the Code provides an elective mechanism by which a purchasing corporation that makes a "qualified stock purchase" ("QSP") of a target may elect to treat the stock purchase as if it were an asset purchase for U.S. federal income tax purposes. A QSP is defined under Section 338(d)(3) as a transaction or series of transactions in which a corporation acquires by purchase, within a 12-month acquisition period, stock of another corporation meeting the requirements of Section 1504(a)(2) of the Code — i.e., stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total value of all outstanding shares of stock.
Based on current modeling and the Pinnacle commitment, Torchlight expects to acquire approximately 93% of Ridgeline's outstanding shares in the tender offer, well in excess of the 80% QSP threshold. Accordingly, the tender offer will constitute a QSP, and Torchlight will have the option of making a Section 338 election.
Two forms of Section 338 election exist: the Section 338(g) election and the Section 338(h)(10) election. Each is analyzed below.
2. Section 338(g) Election. A Section 338(g) election may be made unilaterally by the purchasing corporation within a prescribed time period following the acquisition date. If made, the election causes the target (referred to as "old target") to be treated as having sold all of its assets to an unrelated person at fair market value on the acquisition date and then as having repurchased those assets at the same fair market value. The "old target" is deemed to have been liquidated, and a "new target" is treated as a new corporation that has purchased all of the assets at fair market value. The new target takes a fair market value basis in all of its assets (the "stepped-up basis").
The principal tax consequence of a Section 338(g) election is that the old target recognizes gain (or loss) on the deemed asset sale, and the resulting tax liability is borne by the target — which, following the acquisition, is owned by the purchaser. In effect, the purchaser pays for the step-up in basis through the target-level tax on the deemed sale. The question is whether the present value of future tax benefits from the stepped-up basis (through increased depreciation, depletion, or amortization deductions) exceeds the immediate cost of the deemed sale tax.
Application to Ridgeline. Ridgeline's assets consist principally of: