FORM 6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE

SECURITIES EXCHANGE ACT OF 1934

For the month of January, 2007

DOMTAR INC.


395 de Maisonneuve Blvd. West, Montréal, Québec H3A 1L6


[Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.]

Form 20-F ¨         Form 40-F x

[Indicate by check mark whether the registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.] Yes ¨        No x

[If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-             .

Attached is Domtar Inc.’s Notice of Special Meeting of Domtar Securityholders and Management Information Circular regarding the plan of arrangement involving Domtar and Weyerhaeuser’s Fine Paper Business.

 


 

1


INCORPORATION BY REFERENCE

Attached as Exhibit 99.1 to this report on Form 6-K is Domtar Inc.’s Notice of Special Meeting of Domtar Securityholders and Management Information Circular regarding the plan of arrangement in accordance with Canadian law involving Domtar and the fine paper business of Weyerhaeuser Company (the “Fine Paper Business”).

The proposed combination of Domtar and Weyerhaeuser’s Fine Paper Business was initially announced by Domtar on August 23, 2006.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   
      DOMTAR INC.
      (Registrant)
     
   
Date: January 31, 2007     By   /s/    RAZVAN L. THEODORU
      Razvan L. Theodoru
Corporate Secretary

 

2


EXHIBIT INDEX

 

Exhibit No.

  

Description

99.1

   Notice of Special Meeting of Domtar Securityholders and Management Information Circular

 

3

Notice of Special Meeting of Domtar Securityholders and Management Info Circular
Table of Contents

Exhibit 99.1 

LOGO

DOMTAR INC.

 

 

 

ARRANGEMENT INVOLVING DOMTAR INC. AND

THE WEYERHAEUSER FINE PAPER BUSINESS

 

 

 

NOTICE OF SPECIAL MEETING OF DOMTAR SECURITYHOLDERS

AND

MANAGEMENT INFORMATION CIRCULAR

 

 

 

 

 

 

 

January 27, 2007

 

 


Table of Contents

Printed on FSC-certified Domtar Cornwall Coated, 8 pt. C2S cover and

Domtar Donnelley Financial Opaque text 35 lb. These papers are part of

Domtar EarthChoice®, an exciting new family of socially and

environmentally responsible papers.

 

 

 

 

LOGO


Table of Contents
LOGO   

Domtar Inc.

395 de Maisonneuve Blvd. West,

Montréal, Québec, Canada H3A 1L6 Canada

January 27, 2007

Dear Domtar shareholders and optionholders:

You are invited to the special meeting of the holders of common shares, Series A preferred shares, Series B preferred shares and options to purchase common shares of Domtar that will be held at the Centre Mont-Royal (Salon Mont-Royal), 2200 Mansfield Street, Montréal, Québec, Canada, on Monday, February 26, 2007, at 10 a.m. (Montréal time).

Enclosed are proxy materials with important facts about the proposed combination of Domtar Inc. with Weyerhaeuser Company’s fine paper business. Since the completion of the combination requires approval of Domtar shareholders and optionholders, YOUR VOTE IS IMPORTANT. We urge you to read the enclosed materials carefully and to promptly vote by following the instructions shown on the appropriate enclosed form of proxy.

Domtar entered into a transaction agreement with Weyerhaeuser Company on August 22, 2006, for the purposes of effecting the proposed combination that will create Domtar Corporation, the largest integrated manufacturer of uncoated free sheet papers in North America with an expanded geographic footprint and a wide range of well-known business and commercial printing paper brands. In addition to more than doubling Domtar’s current paper production capacity, the transaction will enhance the quality of Domtar’s asset mix with six highly efficient world-class uncoated freesheet mills that will provide two-thirds of the total capacity. Domtar Corporation will be owned approximately 55% by Weyerhaeuser shareholders or former Weyerhaeuser shareholders and approximately 45% by former holders of Domtar common shares (including through their ownership of exchangeable shares), in each case on a fully diluted basis.

We expect that process optimization resulting in lower operating costs, reductions in transportation, logistics and purchasing costs, implementation of best-in-class business practices and sales and administrative cost reductions will result in significant synergies, certain of which we anticipate to achieve within two years.

This compelling strategic and operational fit is a transformational event that we believe will make Domtar financially stronger with prominent brands, a lower cost base and the necessary scale and scope to succeed in the highly competitive global pulp and paper industry, for the benefit of its shareholders, customers, and employees.

The Board of Directors of Domtar has determined that the combination is fair to and in the best interests of the holders of each class of Domtar shares and Domtar stock options. The Board of Directors of Domtar unanimously recommends that you vote FOR the plan of arrangement to effect the combination.

We urge you to vote FOR the plan of arrangement to effect the combination by promptly submitting your proxy – by signing, dating and returning the appropriate enclosed form of proxy in the postage-paid envelope provided, or alternatively, voting by telephone or via the internet as described in the easy instructions included on your form of proxy. Returning the proxy does not deprive you of your right to attend the Domtar special meeting and to vote your shares or options in person. Thank you for your consideration of this matter and your continued support.

Sincerely,

  

/s/ Raymond Royer

Raymond Royer

  

/s/ Brian M. Levitt

Brian M. Levitt

President and Chief Executive Officer    Chairman of the Board


Table of Contents

DOMTAR INC.

395 DE MAISONNEUVE BLVD. WEST

MONTRÉAL, QUÉBEC, CANADA, H3A 1L6

 


NOTICE OF SPECIAL MEETING OF DOMTAR SECURITYHOLDERS

TO BE HELD ON FEBRUARY 26, 2007

 


A special meeting (the “Domtar special meeting”) of holders of common shares, Series A preferred shares, Series B preferred shares and options to purchase common shares (collectively, the “Domtar securityholders”) of Domtar Inc. (“Domtar”) will be held at Centre Mont-Royal (Salon Mont-Royal), 2200 Mansfield Street, Montréal, Québec, on February 26, 2007 at 10:00 a.m. (Montréal time) for the following purposes:

 

  1. To consider, pursuant to an interim order, dated January 26, 2007, of the Superior Court, District of Montréal, Province of Québec and, if deemed advisable, to pass, with or without variation, a special resolution to approve an arrangement under Section 192 of the Canada Business Corporations Act (the “Domtar securityholders resolution”) to effect the combination of Domtar and Weyerhaeuser Company’s fine paper business.

 

  2. To transact other business that may properly come before the Domtar special meeting or any adjournment or postponement of the Domtar special meeting.

The arrangement is described in the attached document, which serves as a management information circular in connection with Domtar management’s solicitation of proxies. Domtar’s notice of motion for a final order approving the arrangement and the full text of the interim order are set forth as Annex “D” to the attached document.

In accordance with the interim order referred to above, registered holders of common shares, Series A preferred shares and Series B preferred shares of Domtar may dissent from the arrangement. If the arrangement becomes effective, dissenting Domtar shareholders will be entitled to be paid the fair value of their shares. Failure to comply strictly with the applicable dissent procedures may result in the loss or unavailability of any right to dissent.

The record date for receiving notice of, and voting securities at, the Domtar special meeting is January 27, 2007. If you were a registered shareholder of Domtar or an optionholder of Domtar at the close of business on the record date, you are entitled to vote at the Domtar special meeting. If you hold Domtar shares through a broker or other intermediary, please read the instructions from your broker or other intermediary regarding how to vote your Domtar shares.

YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the Domtar special meeting in person, you are urged to complete, sign, date and return the appropriate enclosed form of proxy to Domtar or vote by telephone or via the internet as indicated in your proxy form.

By Order of the Board of Directors


/s/ Razvan L. Theodoru

Razvan L. Theodoru

Corporate Secretary

January 27, 2007


Table of Contents

TABLE OF CONTENTS

 

INFORMATION CONTAINED IN THIS DOCUMENT

   1

INFORMATION REGARDING SPINCO PRIOR TO THE ARRANGEMENT

   2

REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES

   3

INDUSTRY DATA INFORMATION

   4

EXCHANGE RATES

   5

GLOSSARY OF TERMS

   6

QUESTIONS AND ANSWERS ABOUT THE COMBINATION AND THE DOMTAR SPECIAL MEETING

   9

General Questions and Answers

   9

Specific Domtar Securityholder Questions and Answers

   13

SUMMARY

   17

The Companies

   17

The Transactions

   18

Spinco After the Transactions

   21

Recommendation of the Domtar Board

   21

Reasons for the Domtar Board Recommendation

   21

Opinions of Domtar’s Financial Advisors

   22

Board of Directors and Management of Spinco following the Transactions

   22

Corporate Offices of Spinco Following the Transactions

   22

Securities to be Issued

   22

Stock Exchange Listings

   25

Transaction Structure

   25

Dissent Rights

   27

Accounting Treatment

   27

Financing

   27

Material Canadian and U.S. Federal Income Tax Considerations for Domtar Securityholders

   28

Court Approval Will Be Required to Complete the Combination

   29

Conditions to Closing

   29

Non-Solicitation; Superior Proposal; Break-Up Fee

   30

Regulatory Matters

   30

Termination

   31

Expenses

   31

The Domtar Special Meeting

   31

Risk Factors

   32

Summary Historical and Pro Forma Financial Data

   34

RISK FACTORS

   40

Risks Related to Spinco’s Industries and Business after the Consummation of the Transactions

   40

Risks Related to Ownership of Spinco’s Common Stock and Exchangeable Shares of Newco Canada Exchangeco

   47

Risks Related to the Transactions

   50

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

   56

SPECIAL MEETING OF DOMTAR SECURITYHOLDERS

   57

Date, Time and Place of the Domtar Special Meeting

   57

Purpose of the Domtar Special Meeting

   57

Recommendation of the Domtar Board

   57

Record Date, Entitlement to Vote and Principal Holders of Domtar Securities

   57

Registered Holders of Domtar Shares

   58

 

i


Table of Contents

Holders of Domtar Stock Options

   58

Beneficial Owners of Domtar Shares

   58

Quorum and Votes Required

   58

Proxies

   59

Voting of Proxies

   59

Revocation of Proxies

   60

Solicitation of Proxies

   60

Independent Auditors

   61

Dissenting Domtar Shareholder’s Rights

   61

THE TRANSACTIONS

   62

Description of the Transactions

   62

The Contribution

   63

The Distribution

   63

The Arrangement

   64

Conditions to the Transactions

   65

Background to the Combination

   65

Reasons for the Domtar Board Recommendation

   69

Opinions of Domtar’s Financial Advisors

   71

Interests of Domtar’s Directors and Management in the Combination

   73

Court Approval of the Arrangement and Completion of the Combination

   75

Regulatory Matters

   76

Dividend Policy

   78

Structure of Spinco after the Transactions

   78

Accounting Treatment and Considerations

   79

Stock Exchange Listings

   79

Issue and Resale of Exchangeable Shares and Shares of Spinco Common Stock Received in the Arrangement

   80

Ongoing Canadian Reporting Obligations

   81

Treatment of Domtar Equity Awards

   81

Dissenting Domtar Shareholder’s Rights

   83

THE CONTRIBUTION AND DISTRIBUTION AGREEMENT

   86

General

   86

The Contribution

   86

The Spinco Financing

   87

Working Capital Adjustment

   87

Payment with respect to Shared Accounts Receivable, Shared Accounts Payable and Shared Inventory

   87

Covenants

   88

Conditions to the Contribution and the Distribution

   89

Subsequent Transfers

   89

Mutual Release; Indemnification

   89

Insurance

   90

Amendments; No Third-Party Beneficiaries

   91

Termination

   91

THE CANADIAN ASSET TRANSFER AGREEMENT

   92

THE TRANSACTION AGREEMENT

   93

General

   93

The Effective Time

   93

Arrangement Consideration

   93

Corporate Offices

   93

Related Transactions

   93

 

ii


Table of Contents

Representations and Warranties

   94

Conduct of Business Pending the Consummation of the Transactions

   94

Reasonable Best Efforts

   95

Employee Matters

   95

Non-Solicitation of Employees

   96

Treatment of Domtar Equity Awards

   96

Treatment of Weyerhaeuser Equity Awards

   97

Non-Solicitation; Superior Proposal; Break-Up Fee

   98

Directors and Officers Indemnification and Insurance

   98

Conditions to the Consummation of the Transactions

   98

Termination

   98

Indemnification

   99

Amendments; No Third-Party Beneficiaries

   100

Expenses

   100

MATERIAL INCOME TAX CONSIDERATIONS

   101

Material Canadian Federal Income Tax Considerations to Domtar Shareholders

   101

Domtar Shareholders Resident in Canada

   102

Domtar Shareholders Not Resident in Canada

   112

Eligibility for Investment

   113

Material Canadian Federal Income Tax Considerations to Domtar Optionholders

   113

Material U.S. Federal Income Tax Considerations to Domtar Securityholders

   114

ELECTIONS AVAILABLE TO DOMTAR SECURITYHOLDERS

   119

Procedures for Election and Exchange of Share Certificates and Options

   119

SPINCO’S RELATIONSHIP WITH WEYERHAEUSER AFTER THE TRANSACTIONS

   121

General

   121

Tax Sharing Agreement

   121

Intellectual Property License Agreement

   122

Transition Services Agreement

   122

Supply Agreements

   122

Site Services Agreements

   123

Joint Purchase Agreement

   123

FINANCING

   124

Financing Commitments

   124

Proposed Terms of the Senior Secured Credit Facilities

   124

SPINCO’S BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING THE TRANSACTIONS

   128

Spinco’s Board of Directors

   128

Spinco’s Management

   130

Annual Meeting

   131

Committees of the Board of Directors

   131

Compensation of Directors

   133

Executive Compensation

   133

OWNERSHIP OF SPINCO’S STOCK UPON COMPLETION OF THE TRANSACTIONS

   147

Directors and Executive Officers

   147

Beneficial Owners of More Than 5%

   148

BUSINESS OF THE COMBINED COMPANY

   149

Overview

   149

Competitive Strengths

   149

Business Strategy

   150

DESCRIPTION OF SPINCO’S CAPITAL STOCK

   152

Authorized Capital Stock

   152

 

iii


Table of Contents

Common Stock

   152

Preferred Stock

   152

Special Voting Stock

   153

CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF SPINCO’S CERTIFICATE OF INCORPORATION, BYLAWS AND RIGHTS PLAN AND OF DELAWARE LAW

   155

Certificate of Incorporation, Bylaws and Rights Plan

   155

Delaware Law

   158

LIMITATION OF LIABILITY AND INDEMNIFICATION OF SPINCO’S DIRECTORS AND OFFICERS

   160

Limitation of Liability of Directors

   160

Indemnification of Officers and Directors

   160

BUSINESS OF SPINCO BEFORE THE ARRANGEMENT

   162

History

   162

Overview

   162

Products

   162

Facilities and Properties

   163

Supply

   165

Customers

   165

Competition

   166

Employees

   166

Intellectual Property

   166

Seasonality

   167

Working Capital

   167

Environmental Matters

   167

Legal Proceedings

   168

SELECTED HISTORICAL COMBINED FINANCIAL DATA OF SPINCO

   169

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SPINCO

   170

Introduction

   170

Overview

   170

Separation of the Weyerhaeuser Fine Paper Business from Weyerhaeuser

   171

Combination with Domtar

   171

Factors Affecting Results of Operations

   172

Results of Operations

   177

Liquidity and Capital Resources

   181

Off Balance Sheet Arrangements

   184

Hedging Arrangements

   184

Dividends

   184

Contractual Obligations and Commercial Commitments

   185

Environmental Matters, Legal Proceedings and Other Contingencies

   185

Critical Accounting Policies

   186

Prospective Accounting Pronouncements

   188

Quantitative and Qualitative Disclosures About Market Risk

   188

BUSINESS OF DOMTAR

   190

SELECTED HISTORICAL FINANCIAL DATA OF DOMTAR

   191

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF SPINCO

   194

INFORMATION CONCERNING NEWCO CANADA EXCHANGECO

   205

Newco Canada Exchangeco

   205

Directors and Officers

   205

 

iv


Table of Contents

Description of Exchangeable Shares of Newco Canada Exchangeco

   205

Exchangeable Share Support Agreement

   212

Description of Certain Other Classes of Newco Canada Exchangeco Share Capital

   214

Transfer Agent

   215

Listing

   215

INFORMATION CONCERNING OFFERCO

   216

Offerco

   216

Description of Offerco Share Capital

   216

Listing

   216

INFORMATION CONCERNING NEWCO CANADA

   217

COMPARISON OF SHAREHOLDERS’ RIGHTS

   218

MARKET PRICES AND DIVIDENDS ON DOMTAR SHARES

   234

LEGAL MATTERS

   237

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (U.S.)

   238

TRANSFER AGENTS AND REGISTRARS

   239

WHERE YOU CAN FIND MORE INFORMATION

   240

APPROVAL OF DIRECTORS

   241

 

Annex A

   -    Special Resolution of Domtar Securityholders

Annex B

   -    Transaction Agreement

Annex C

   -    Contribution and Distribution Agreement

Annex D

   -    Motion for an Order Authorizing the Calling of a Special Securityholders’ Meeting and Approving the Arrangement, Interim Order, and Notice of Motion for Final Order

Annex E

   -    Plan of Arrangement, including Appendices

Annex F

   -    Form of Exchangeable Share Support Agreement

Annex G

   -    Form of Voting and Exchange Trust Agreement

Annex H

   -    Restated Certificate of Incorporation of Spinco

Annex I

   -    Restated Bylaws of Spinco

Annex J

   -    Section 190 of the Canada Business Corporations Act

Annex K

   -    Opinion of J.P. Morgan Securities Inc.

Annex L

   -    Opinion of RBC Dominion Securities Inc.

Annex M

   -   

Financial Statements of Spinco and The Weyerhaeuser Fine Paper Business

Annex N

   -   

Auditor’s Consent

Annex O

   -   

Compilation Report

 

v


Table of Contents

INFORMATION CONTAINED IN THIS DOCUMENT

The information contained in this document is given as at the date hereof, and information in documents incorporated by reference is given as of the respective dates of such documents, except as otherwise noted herein and therein. Unless defined elsewhere in this document, all capitalized words and defined terms in this document have the meaning given to them in the Glossary of Terms found in this document and in the Notice of Special Meeting of Domtar Securityholders accompanying this document. No person has been authorized to give any information or to make representations in connection with the Transactions and other matters described herein other than those contained in this document and, if given or made, any such information or representation should be considered not to have been authorized by Domtar. This document does not constitute the solicitation of an offer to purchase any securities or the solicitation of a proxy by any person in any jurisdiction in which such solicitation is not authorized or in which the person making such solicitation is not qualified to do so or to any person to whom it is unlawful to make such solicitation.

 

1


Table of Contents

INFORMATION REGARDING SPINCO PRIOR TO THE ARRANGEMENT

The information concerning the business of Spinco prior to the Arrangement contained in this document is taken from or based upon publicly available documents and records on file with the United States Securities and Exchange Commission (the “SEC”) and other public sources. Although Domtar has no knowledge that would indicate any statements contained therein relating to the business of Spinco prior to the Arrangement taken from or based upon such documents and records are untrue or incomplete, neither Domtar nor any of its officers or directors assumes any responsibility for the accuracy or completeness of the information relating to the business of Spinco prior to the Arrangement taken from or based upon such documents or records, or for any failure by Spinco to disclose events that may have occurred or may affect the significance or accuracy of any such information but which are unknown to Domtar.

 

2


Table of Contents

REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES

The financial information regarding Domtar, including Domtar’s restated consolidated financial statements and the summaries of those consolidated financial statements, contained in or incorporated by reference in this document are reported in Canadian dollars, unless otherwise indicated, and have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”), unless otherwise indicated, which differs from U.S. generally accepted accounting principles (“U.S. GAAP”) in certain significant respects. For a reconciliation to U.S. GAAP, see note 25 of Domtar’s restated consolidated financial statements for the year ended December 31, 2005 filed with the Canadian securities regulatory authorities and the SEC on December 15, 2006 and Domtar’s U.S. GAAP reconciliation for its unaudited consolidated financial statements for the nine months ended September 30, 2006 filed with the Canadian securities regulatory authorities on November 20, 2006 and with the SEC on November 22, 2006, in each case as amended by filings made by Domtar with the Canadian securities regulatory authorities and the SEC on January 26, 2007. See “Where You Can Find More Information”.

The financial information regarding Spinco, including financial information derived from the audited and unaudited combined financial statements of the Weyerhaeuser Fine Paper Business and summaries of those combined financial statements, contained in this document are reported in U.S. dollars and have been prepared in accordance with U.S. GAAP. The unaudited condensed combined pro forma financial statements of Spinco and summaries of those unaudited condensed combined pro forma financial statements contained in this document are reported in U.S. dollars and have been prepared in accordance with U.S. GAAP (including Domtar’s U.S. GAAP/U.S. dollar financial results derived from the reconciliations described in the prior paragraph). These unaudited condensed combined pro forma financial statements have not been prepared in accordance with Canadian GAAP and may not be comparable to financial statements of Canadian issuers.

In this document, unless otherwise stated, all references to “$”, “U.S. dollars” or “dollars” refer to U.S. dollars and references to “Cdn.$” are to Canadian dollars.

 

3


Table of Contents

INDUSTRY DATA INFORMATION

Unless otherwise specifically indicated, all statements regarding sales and market data for Domtar, Weyerhaeuser and the Weyerhaeuser Fine Paper Business are based on statistical data obtained from independent market research firms that make this data available to the public at prescribed rates. Domtar has not independently verified this information.

Except where otherwise noted, information with respect to “capacity” or “production capacity” assumes production 24 hours per day, 365 days per year, less days allotted for certain planned maintenance and other downtime. The method used for calculating days for maintenance and downtime may vary from company to company.

 

4


Table of Contents

EXCHANGE RATES

Exchanging Canadian Dollars.    The following table sets forth, for each period indicated, the high and low exchange rates for one Canadian dollar during that period, the average of the exchange rates during that period, and the exchange rate at the end of that period, in each case expressed in U.S. dollars, based upon the noon buying rate provided by the Bank of Canada:

 

     Year ended December 31,
     2006    2005    2004    2003    2002
     (In U.S.$ per Cdn.$1)

High

   0.9099    0.8690    0.8493    0.7738    0.6618

Low

   0.8528    0.7872    0.7159    0.6350    0.6199

Average

   0.8816    0.8255    0.7685    0.7138    0.6368

Period End

   0.8581    0.8577    0.8308    0.7738    0.6331

On August 22, 2006, the last trading day prior to the announcement of the combination, the exchange rate for one Canadian dollar expressed in U.S. dollars, based upon the noon buying rate provided by the Bank of Canada, was U.S.$0.8965. On January 22, 2007, the exchange rate for one Canadian dollar expressed in U.S. dollars, based upon the noon buying rate provided by the Bank of Canada, was U.S.$0.8504.

Exchanging U.S. Dollars.    The following table sets forth, for each period indicated, the high and low exchange rates for one U.S. dollar during that period, the average of the exchange rates during that period, and the exchange rate at the end of that period, in each case expressed in Canadian dollars, based upon the noon buying rate provided by the Bank of Canada:

 

     Year ended December 31,
     2006    2005    2004    2003    2002
     (In Cdn.$ per U.S.$1)

High

   1.1726    1.2704    1.3968    1.5747    1.6132

Low

   1.0990    1.1507    1.1774    1.2924    1.5110

Average

   1.1343    1.2114    1.3015    1.4015    1.5704

Period End

   1.1653    1.1659    1.2036    1.2924    1.5796

On August 22, 2006, the last trading day prior to the announcement of the combination, the exchange rate for one U.S. dollar expressed in Canadian dollars, based upon the noon buying rate provided by the Bank of Canada, was Cdn.$1.1154. On January 22, 2007, the exchange rate for one U.S. dollar expressed in Canadian dollars, based upon the noon buying rate provided by the Bank of Canada, was Cdn.$1.1759.

Recent Exchange Rates.    The following table sets forth, for each period indicated, the high and low exchange rates for one U.S. dollar during that period, expressed in Canadian dollars, and for one Canadian dollar during that period, expressed in U.S. dollars, respectively. The rates are based upon the noon buying rate provided by the Bank of Canada.

 

2006

   December    November    October    September    August    July    June    May
     (In U.S.$ per Cdn.$1)

High

   0.8759    0.8869    0.8966    0.9047    0.9037    0.9041    0.9099    0.9099

Low

   0.8581    0.8715    0.8783    0.8871    0.8838    0.8760    0.8893    0.8902
     (In Cdn.$ per U.S.$1)

High

   1.1653    1.1474    1.1385    1.1273    1.1315    1.1416    1.1245    1.1233

Low

   1.1417    1.1277    1.1155    1.1053    1.1066    1.1061    1.0990    1.0990

 

5


Table of Contents

GLOSSARY OF TERMS

Unless the context otherwise requires, the following terms shall have the meanings as set forth in this document. These defined terms are not always used in the financial statements included herein or in the documents incorporated by reference and may not conform exactly to the defined terms used in the Annexes to this document. When the term “combination” is used throughout this document, it means the Transactions contemplated by the Transaction Agreement and the other documents referred to in the Transaction Agreement (including the Contribution and Distribution Agreement).

“Arrangement” means an arrangement in accordance with section 192 of the Canada Business Corporations Act that will result in Spinco indirectly owning all of the outstanding Domtar common shares;

“Canadian Asset Transfer” means the transfer to Exchangeco Subsidiary of certain of Weyerhaeuser’s Canadian fine paper and related assets and the assumption by Exchangeco Subsidiary of certain of Weyerhaeuser’s Canadian fine paper and related liabilities;

“Class A common shares” means the Class A common shares in the capital of Offerco;

“Class B common shares” means the Class B common shares in the capital of Offerco;

“Combined Company” means the combined operations of Spinco, Domtar and their respective subsidiaries;

“Contribution” means the Spinco Contribution together with the Newco Contribution;

“Contribution and Distribution Agreement” means the amended and restated contribution and distribution agreement dated as of January 25, 2007 among Weyerhaeuser, Spinco and Newco;

“Distribution” means the distribution to Weyerhaeuser shareholders by Weyerhaeuser of the common stock of Spinco, whether by way of a pro rata dividend, as an offer to exchange or as a combination of both;

“Domtar” means Domtar Inc., a corporation governed by the Canada Business Corporations Act and, unless the context otherwise requires, its subsidiaries;

“Domtar common shares” means the common shares in the capital of Domtar;

“Domtar optionholders” means the holders of Domtar stock options;

“Domtar preferred shares” means the Series A preferred shares and Series B preferred shares in the capital of Domtar;

“Domtar securityholders” means the holders of Domtar shares and Domtar stock options;

“Domtar Series A preferred shares” means the Series A preferred shares in the capital of Domtar;

“Domtar Series B preferred shares” means the Series B preferred shares in the capital of Domtar;

“Domtar shareholders” means the holders of Domtar shares;

“Domtar shares” means the Domtar common shares and Domtar preferred shares;

“Domtar stock options” means the options to purchase Domtar common shares;

“Effective Date” means the date upon which the Arrangement becomes effective;

“Effective Time” means the time on the Effective Date at which the Arrangement becomes effective which shall be deemed to be immediately following the Distribution;

 

6


Table of Contents

“eligible Canadian resident” means (a) a person who is a resident of Canada for purposes of the Income Tax Act (Canada), other than a person who is exempt from tax under the Income Tax Act (Canada); or (b) a partnership any of the partners of which is a person who is a resident of Canada for purposes of the Income Tax Act (Canada), other than a person who is exempt from tax for purposes of the Income Tax Act (Canada);

“exchangeable shareholders” means the holders of exchangeable shares;

“exchangeable shares” means the exchangeable shares in the capital of Newco Canada Exchangeco;

“Exchangeco Subsidiary” means Domtar Pulp and Paper Products Inc., a corporation governed by the Canada Business Corporations Act and a wholly-owned subsidiary of Newco Canada Exchangeco;

“Newco” means Domtar Paper Company, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Weyerhaeuser;

“Newco Canada” means Domtar Pacific Papers ULC, an unlimited liability company existing under the Companies Act (Nova Scotia) and a wholly-owned subsidiary of Newco Holding;

“Newco Canada Exchangeco” means Domtar (Canada) Paper Inc., a corporation continued under the Business Corporations Act (British Columbia) and a wholly-owned subsidiary of Newco Canada;

“Newco Contribution” means the transfer by Weyerhaeuser to Newco of certain of Weyerhaeuser’s U.S. fine paper and related assets in exchange for the issuance of additional limited liability company interests of Newco to Weyerhaeuser and the assumption by Newco of certain of Weyerhaeuser’s U.S. fine paper and related liabilities;

“Newco Holding” means Domtar Delaware Holdings Inc., a Delaware corporation and a subsidiary of Newco;

“Offerco” means 4388216 Canada Inc., a corporation incorporated under the Canada Business Corporations Act and a wholly-owned subsidiary of Newco Canada Exchangeco;

“Spinco” means Domtar Corporation formerly known as Weyerhaeuser TIA, Inc, a Delaware corporation and a wholly-owned subsidiary of Weyerhaeuser, and unless the context otherwise requires, its subsidiaries;

“Spinco Contribution” means the transfer by Weyerhaeuser to Spinco of all of the issued and outstanding limited liability company interests of Newco in exchange for (a) a number of shares of Spinco common stock determined in accordance with a formula specified in the Contribution and Distribution Agreement; and (b) $1.35 billion in cash;

“tons” means short tons when used with respect to fine paper and metric tons when used with respect to pulp;

“Transaction Agreement” means the amended and restated transaction agreement dated as of January 25, 2007, among Weyerhaeuser, Spinco, Newco, Newco Holding, Domtar Pacific Papers Inc., Newco Canada, Newco Canada Exchangeco and Domtar;

“Transactions” means the Canadian Asset Transfer, the Contribution, the Distribution and the Arrangement;

“U.S.” means United States;

“unit shipments” means short tons when used with respect to fine paper and metric tons when used with respect to pulp;

 

7


Table of Contents

“Weyerhaeuser” means Weyerhaeuser Company, a Washington corporation, and, unless the context otherwise requires, its subsidiaries, other than Spinco and Newco and any of their respective subsidiaries;

“Weyerhaeuser Fine Paper Business” means the fine paper and related businesses that will be transferred by Weyerhaeuser to Newco and Exchangeco Subsidiary as part of the Contribution and the Canadian Asset Transfer;

“Weyerhaeuser shareholders” means the holders of Weyerhaeuser common shares and, unless the context otherwise requires, holders of exchangeable shares of Weyerhaeuser Company Limited, which are exchangeable for Weyerhaeuser common shares; and

“Weyerhaeuser shares” means the Weyerhaeuser common shares and, unless the context otherwise requires, exchangeable shares of Weyerhaeuser Company Limited, which are exchangeable for Weyerhaeuser common shares.

 

8


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE COMBINATION

AND THE DOMTAR SPECIAL MEETING

General Questions and Answers

 

Q: What is Domtar proposing?

 

A: Domtar is proposing to combine its business with the Weyerhaeuser Fine Paper Business. The combination will be effected through a series of transactions that are described in more detail below and elsewhere in this document. These transactions will result in the separation of the Weyerhaeuser Fine Paper Business from Weyerhaeuser’s other businesses and the creation of a new public company that owns and operates the Weyerhaeuser Fine Paper Business historically owned and operated by Weyerhaeuser and the business of Domtar. At the conclusion of these transactions:

 

  ·   Weyerhaeuser will have no ownership interest in Spinco;

 

  ·   the Weyerhaeuser Fine Paper Business historically owned by Weyerhaeuser and the business of Domtar will be owned by Spinco; and

 

  ·   approximately 45% of the outstanding Spinco common stock, on a fully diluted basis, will be held by former holders of Domtar common shares (including through their ownership of exchangeable shares), with the remainder owned by Weyerhaeuser shareholders or former Weyerhaeuser shareholders.

Each share of Spinco common stock will have attached to it one preferred stock purchase right, the principal terms of which are described under “Certain Anti-Takeover Effects of Provisions of Spinco’s Certificate of Incorporation, Bylaws and Rights Plan and of Delaware Law – Certificate of Incorporation, Bylaws and Rights Plan – Rights Plan”. Where appropriate, references in this document to Spinco common stock include these associated rights.

 

Q: How will the combination be achieved?

 

A: A step-by-step description of material events relating to the combination is set forth below:

The Canadian Asset Transfer

 

  ·   Prior to the Contribution, Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd., two Canadian subsidiaries of Weyerhaeuser, will transfer certain of their fine paper and related assets to Exchangeco Subsidiary, and Exchangeco Subsidiary will assume certain of Weyerhaeuser Company Limited’s and Weyerhaeuser Saskatchewan Ltd.’s fine paper and related liabilities.

The Newco Contribution

 

  ·   Weyerhaeuser will transfer to Newco certain of Weyerhaeuser’s U.S. fine paper and related assets in exchange for the issuance of additional limited liability company interests of Newco to Weyerhaeuser and the assumption by Newco of certain of Weyerhaeuser’s U.S. fine paper and related liabilities.

Interim Financing

 

  ·   Spinco will draw down $1.35 billion under a three-month unsecured term loan facility.

The Spinco Contribution

 

  ·   Weyerhaeuser will transfer to Spinco all of the issued and outstanding limited liability company interests of Newco in exchange for $1.35 billion in cash and a number of shares of Spinco common stock determined in accordance with a formula specified in the Contribution and Distribution Agreement.

 

9


Table of Contents

The Distribution

 

  ·   Following the Contribution, and prior to the Effective Time, Weyerhaeuser will distribute all of the issued and outstanding shares of Spinco common stock to Weyerhaeuser shareholders. The Distribution may be effected at Weyerhaeuser’s election, as a pro rata dividend, as an exchange offer or as a combination of both.

The Arrangement

 

  ·   Following the Contribution and Distribution, Spinco and Domtar will consummate the Arrangement whereby all Domtar common shares (other than such shares held by a holder exercising dissent rights) will be exchanged, on a one-for-one basis, for Class B common shares of Offerco. Immediately following the exchange of Domtar common shares for Class B common shares, all of the Class B common shares will be exchanged for either shares of common stock of Spinco and/or exchangeable shares of Newco Canada Exchangeco, as described under “What will I receive in the combination?” below.

Spinco Financing

 

  ·   The three-month unsecured term loan facility will be converted to be part of the seven-year senior secured term loan facility.

The combination will be carried out in accordance with the Transaction Agreement and the documents referred to in that agreement (including the Contribution and Distribution Agreement).

 

Q: How does the Domtar board of directors recommend that I vote?

 

A: Domtar’s board of directors unanimously recommends that Domtar securityholders vote FOR the Domtar securityholders resolution to approve the Arrangement.

 

Q: Why has the Domtar board of directors recommended that Domtar securityholders vote FOR the Arrangement?

 

A: The Domtar board of directors has consulted with Domtar management as well as Domtar’s financial advisors and outside legal advisors and considered a number of factors. The factors considered by the Domtar board include:

 

  ·   a review and analysis of the industry and the strategic options of Domtar to pursue its growth;

 

  ·   the competitive strengths resulting from the consummation of the Transactions as set forth in the section “Business of the Combined Company – Competitive Strengths”, including the Combined Company’s leading market position, efficient and cost-competitive assets, proximity to customers and experienced management team;

 

  ·   the opinions of Domtar’s financial advisors, J.P. Morgan Securities Inc. and RBC Dominion Securities Inc., that, as of the date thereof, and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio provided for in the Arrangement was fair, from a financial point of view, to the holders of Domtar common shares. See “The Transactions – Opinions of Domtar’s Financial Advisors”;

 

  ·   the ability of holders of Domtar common shares to benefit from potential synergies resulting from the combination and to continue to participate in the future earnings and growth of Spinco through their ownership of shares of Spinco common stock or exchangeable shares; and

 

  ·  

the structure of the combination, which effectively permits holders of Domtar common shares who are eligible Canadian residents to elect to receive, through a series of exchanges, exchangeable shares and

 

10


Table of Contents
 

make a valid tax election to defer Canadian income tax on any capital gain otherwise arising on their exchange of Class B common shares for exchangeable shares in the Arrangement.

See “The Transactions – Reasons for the Domtar Board Recommendation”.

 

Q: Are there risks I should consider in deciding whether to vote for the proposed combination?

 

A: Yes. The Combined Company may not achieve the expected benefits of the Transactions because of the risks and uncertainties discussed in the section titled “Risk Factors” and the section titled “Special Note Concerning Forward-Looking Statements”. Those risks include, among other things, risks relating to the uncertainty that the Weyerhaeuser Fine Paper Business will be integrated with the Domtar business successfully, uncertainties relating to the performance of the Combined Company and Spinco’s level of indebtedness following the consummation of the Transactions.

 

Q: What will I receive in the combination?

 

A: Holders of Domtar Common Shares.    A holder of Domtar common shares (other than a holder who has exercised dissent rights) will receive one Class B common share of Offerco for each Domtar common share.

Holders of Domtar common shares that are eligible Canadian residents can elect in advance (as future holders of Class B common shares of Offerco) to receive, on a one-for-one basis, exchangeable shares of Newco Canada Exchangeco (and ancillary rights), shares of common stock of Spinco or a combination thereof, in exchange for the Class B common shares of Offerco they will automatically receive in the Arrangement by completing, signing and returning the letter of transmittal and election form, together with the share certificate or certificates and other documents identified in the letter of transmittal and election form. See “Elections Available to Domtar Securityholders”.

If no letter of transmittal and election form is returned prior to the election deadline or an election is not effectively made, an election will be deemed to be made based on the address shown in the share register of Class B common shares of Offerco (which will be identical to the share register for Domtar common shares). Holders of Domtar common shares (who will automatically become holders of Class B common shares of Offerco) with a registered address in Canada will be deemed to have elected to receive only exchangeable shares of Newco Canada Exchangeco, and holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address outside of Canada will be deemed to have elected to receive only shares of common stock of Spinco.

Holders of Domtar Preferred Shares.    The Domtar preferred shares of a holder who has not exercised dissent rights will remain outstanding after completion of the combination subject to the rights, privileges and conditions applicable to such shares.

Dissenting Holders of Domtar Shares.    Holders of Domtar shares who properly exercise their dissent rights will be entitled to be paid the fair value of their shares.

Domtar Stock Options.    Domtar stock options will be exchanged for options to purchase shares of common stock of Spinco as follows:

 

  ·  

each Domtar stock option (other than a Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent)), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an option to purchase a number of shares of common stock of Spinco (rounded down to the nearest whole number) of equivalent value determined using the Black-Scholes option pricing model based on assumptions that are consistent with Domtar’s 2005 financial

 

11


Table of Contents
 

statements, and having an exercise price per share equal to the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent); and

 

  ·   each Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an option to purchase that number of shares of common stock of Spinco equal to the number of Domtar common shares subject to the Domtar stock option and the exercise price per share will be equal to the exercise price per share of such option immediately prior to the exchange.

 

Q: Why are exchangeable shares being offered to Canadian residents in the combination?

 

A: The exchangeable share structure will provide an opportunity for eligible holders of Class B common shares of Offerco (who will automatically receive such shares under the Arrangement in exchange for their previously held Domtar common shares) to make a tax election to defer Canadian income tax on any capital gain otherwise arising on the exchange of their Class B common shares for exchangeable shares of Newco Canada Exchangeco.

Each exchangeable share of Newco Canada Exchangeco is substantially the economic equivalent of a share of common stock of Spinco and is exchangeable at any time on a one-for-one basis for a share of common stock of Spinco. In addition, each holder of an exchangeable share will, through a voting and exchange trust agreement, effectively have the ability to cast votes along with holders of shares of Spinco common stock.

 

Q: What percentage of Spinco will the shareholders of Domtar own?

 

A: Immediately following the consummation of the combination, Spinco will be owned approximately 55% by Weyerhaeuser shareholders or former Weyerhaeuser shareholders and approximately 45% by former holders of Domtar common shares (including through their ownership of exchangeable shares), in each case on a fully diluted basis.

 

Q: Where will the shares of common stock of Spinco and the exchangeable shares be listed?

 

A: Spinco has been authorized to list the shares of Spinco common stock on the New York Stock Exchange. An application has been made to the Toronto Stock Exchange for the listing of the common stock of Spinco and the exchangeable shares of Newco Canada Exchangeco. The proposed stock symbols are set forth below.

 

Class of Securities

   NYSE
Symbol
   TSX
Symbol

Spinco common stock

   UFS    UFS

Exchangeable shares

   N/A    UFX

In addition, an application has been made to the Toronto Stock Exchange to list the Class B common shares of Offerco. Such shares will be listed and posted for trading on the Toronto Stock Exchange throughout the time they are issued and outstanding.

 

Q: When does Domtar expect to complete the combination?

 

A: Domtar is working to complete the combination as quickly as possible. Domtar aims to complete the combination during the first quarter of 2007. However, it is possible that factors outside Domtar’s control could require Domtar to complete the Arrangement at a later time or not complete it at all. For a discussion of the conditions to the Transactions, see “The Transactions – Conditions to the Transactions”.

 

12


Table of Contents

Specific Domtar Securityholder Questions and Answers

 

Q: On what am I being asked to vote?

 

A: Domtar shareholders and Domtar optionholders are being asked to approve the Domtar securityholders resolution relating to the Arrangement. The Domtar securityholders resolution is attached as Annex “A”.

 

Q: What vote is required to approve the Domtar securityholders resolution?

 

A: Approval of the Domtar securityholders resolution will require the affirmative votes of not less than:

 

  ·   66 2/3% of the votes cast at the Domtar special meeting by Domtar securityholders present in person or by proxy, and

 

  ·   66 2/3% of the votes cast at the Domtar special meeting by holders of Domtar common shares and Domtar preferred shares present in person or by proxy, excluding (a) holders of Domtar stock options; (b) holders of Domtar common shares that are pledged to secure loans provided pursuant to the Domtar Executive Stock Option and Share Purchase Plan; and (c) holders of Domtar common shares who also hold Domtar stock options.

Each Domtar common share, Domtar preferred share and Domtar stock option, is entitled to one vote on all matters scheduled to come before the Domtar special meeting.

 

Q: If I am a Domtar shareholder or a Domtar optionholder, how do I vote on the Domtar securityholders resolution and what do I do now?

 

A: First, please review the information contained in this document, including the Annexes. This document contains important information about Domtar, the Weyerhaeuser Fine Paper Business and the combination. It also contains important information about what the board of directors of Domtar considered in evaluating the Arrangement

Second, please submit your proxy promptly by telephone, via the internet or by signing, dating and returning the appropriate enclosed form of proxy in the postage-paid envelope provided, so that your Domtar shares or Domtar stock options can be voted at the Domtar special meeting. You may also attend in person and vote at the Domtar special meeting, even if you have already submitted a proxy.

There are four forms of Domtar proxies applicable to Domtar securityholders: a purple bar coded proxy applicable to Domtar common shares, a white bar coded proxy applicable to the Domtar Series A preferred shares, a white bar coded proxy applicable to Domtar Series B preferred shares, and a blue bar coded proxy applicable to Domtar stock options. If you hold more than one type of Domtar shares or if you hold Domtar shares and Domtar stock options, you will receive more than one form of proxy. To ensure that all your Domtar shares and Domtar stock options are represented at the Domtar special meeting, please submit a vote by telephone, via the internet or by mail for each proxy form you receive.

 

Q: If I am an eligible Canadian resident, how do I get tax-deferred treatment?

 

A: If you are an eligible Canadian resident receiving, through a series of exchanges, exchangeable shares in the combination, Domtar will send you a tax election package by mail after completion of the combination if you so elect in your letter of transmittal and election form. The tax election package will also be made available via the internet on Domtar’s website at www.domtar.com. You must provide to Newco Canada Exchangeco, at the address indicated in the tax election package, two completed and signed copies of the applicable tax election forms on or before the 90th day after the Effective Date of the Arrangement. For more information see “Material Income Tax Considerations – Material Canadian Federal Income Tax Considerations to Domtar Shareholders” and “Material Income Tax Considerations – Material Canadian Federal Income Tax Considerations to Domtar Optionholders”.

 

13


Table of Contents
Q: Do I need to send in my share certificates now?

 

A: You are not required to send your share certificates to validly cast your vote in respect of the combination or to receive exchangeable shares of Newco Canada Exchangeco if your address as shown in the share register of Class B common shares of Offerco (which will be identical to the share register for the Domtar common shares) is located in Canada. However, you must send in your share certificates representing your Domtar common shares in addition to the letter of transmittal and election form in order to receive evidence of ownership of shares of common stock of Spinco and/or exchangeable shares. If you hold Domtar common shares that are registered in the name of a broker, investment dealer, bank, trust company or other nominee, as is often the case, you should contact that nominee for instructions about how to deliver your Domtar common shares.

Holders of Domtar preferred shares will not be required to send in their share certificates as their shares will remain outstanding upon completion of the combination.

 

Q: If I want to exercise my options, what do I do?

 

A: You are under no obligation to exercise your Domtar stock options before the completion of the combination. Domtar stock options that have not been exercised prior to the Effective Time will be exchanged in the Arrangement for options to acquire shares of common stock of Spinco as discussed above, subject to passage of the Domtar securityholders resolution. If you hold exercisable Domtar stock options and wish to exercise them to acquire Domtar common shares in order to elect to ultimately receive exchangeable shares of Newco Canada Exchangeco and/or shares of common stock of Spinco pursuant to the Arrangement, then prior to 5:00 p.m. (Montréal time) on the third trading day immediately prior to the date of closing of the combination, you should exercise your options through your Solium Shareworks account at www.solium.com or by telephone at the following toll-free number: 1-877-380-7793.

 

Q: What happens if I don’t indicate how to vote on my proxy?

 

A: If you sign and send in your proxy but do not include instructions on how to vote your properly signed form, your securities will be voted FOR the Domtar securityholders resolution, and in accordance with management’s recommendation with respect to amendments or variations of the matters set forth in the Notice of Special Meeting of Domtar Securityholders or any other matters that may properly come before the Domtar special meeting.

 

Q: Can I change my vote after I have mailed my signed proxy?

 

A. Yes. You can change your vote at any time before your proxy is voted at the Domtar special meeting. If you are a registered Domtar shareholder or a holder of Domtar stock options, you can do this in one of three ways:

 

  ·   First, before the Domtar special meeting, you can deliver a signed notice of revocation of proxy to the corporate secretary of Domtar or to the offices of Computershare Trust Company of Canada at the addresses specified below at any time up to and including the last business day before the Domtar special meeting or deposit the revocation with the chairman of the Domtar special meeting.

 

  ·   Second, you can complete and submit a later-dated proxy form no later than 5:00 p.m. (Montréal time) on the last business day before the Domtar special meeting.

 

  ·   Third, you can attend the Domtar special meeting and vote in person. Your attendance at the Domtar special meeting alone will not revoke your proxy; rather you must also vote at the Domtar special meeting in order to revoke your previously submitted proxy.

 

14


Table of Contents

If you are a registered Domtar shareholder or holder of Domtar stock options and want to change your proxy directions by mail, you should send any notice of revocation or your completed new form of proxy, as the case may be, to Domtar at either of the following addresses:

 

Domtar Inc.

Corporate Secretary

395 de Maisonneuve Blvd. West

Montréal, Québec, Canada

H3A 1L6

(Fax): 514-848-5638

 

Computershare Trust Company of Canada

Stock Transfer Services

100 University Avenue, 9th Floor

Toronto, Ontario, Canada

M5J 2Y1

(Fax): 1-888-453-0330 (Outside Toronto)

416-263-9393 (Within Toronto)

You may also revoke or change your proxy by telephone or via the internet by following the instructions set forth below under “Can I submit my proxy by telephone or electronically?”

If a broker holds your Domtar shares in “street name” and you have instructed a broker to vote your Domtar shares and wish to change your vote, you must follow directions received from your broker to change those instructions.

 

Q: Can I submit my proxy by telephone or electronically?

 

A: Yes, in most cases. To vote by telephone, please call the number shown on your proxy form from a touch-tone phone and follow the easy instructions. To vote via the internet, please go to the website shown on your proxy form and follow the easy instructions on the screen.

Please note that you will need to refer to the control number indicated on your proxy form to identify yourself in the electronic voting system. Please also refer to the instructions on your proxy form for information regarding the deadline for voting your Domtar shares electronically.

 

Q: If my broker holds my Domtar shares in “street name,” will my broker vote my Domtar shares for me?

 

A: Your broker will not vote your Domtar shares unless it receives your specific instructions. After carefully reading and considering the information contained in this document, including the Annexes, please follow the directions provided by your broker with respect to voting procedures. Please ensure that your instructions are submitted to your broker in sufficient time to ensure that your votes are received by Domtar on or before 5:00 p.m. (Montréal time) on February 23, 2007.

If you have instructed a broker to vote your Domtar shares and wish to change your vote, you must follow directions received from your broker to change those instructions.

 

Q: Am I entitled to dissent or appraisal rights?

 

A: Domtar shareholders who properly exercise their dissent rights will be entitled to be paid the fair value of their Domtar shares. If you wish to dissent, you must provide to Domtar, at its address specified above, a dissent notice prior to 5:00 p.m. (Montréal time) on the business day preceding the Domtar special meeting. It is important that you strictly comply with this requirement, otherwise your dissent right may not be recognized. You must also strictly comply with the other requirements of the dissent procedure. Domtar optionholders are not entitled to dissent rights unless they exercise their Domtar stock options and submit a dissent notice prior to this deadline.

 

Q: What are the Canadian and U.S. federal income tax consequences of the combination to holders of Domtar common shares?

 

A:

Canadian Residents.    The automatic exchange of Domtar common shares for Class B common shares of Offerco, will generally not be a taxable event, but the subsequent immediate exchange of such Class B

 

15


Table of Contents
 

common shares for common stock of Spinco and/or exchangeable shares, will generally be a taxable event to a Canadian resident shareholder for Canadian income tax purposes. However, if you are an eligible Canadian resident and you exchange all or a portion of the Class B common shares you automatically receive in the Arrangement for consideration that includes exchangeable shares (and ancillary rights) and you make a valid tax election with Newco Canada Exchangeco, you may obtain a full or partial tax deferral (rollover) of any capital gain otherwise arising upon the exchange of those shares. For more information, see “Material Income Tax Considerations – Material Canadian Federal Income Tax Considerations to Domtar Shareholders” and “Elections Available to Domtar Securityholders”.

U.S. Residents.    The exchange of Domtar common shares for Class B common shares of Offerco, which will be immediately exchanged for common stock of Spinco in the combination, will be fully taxable for U.S. federal income tax purposes. For more information, see “Material Income Tax Considerations – Material U.S. Federal Income Tax Considerations to Domtar Securityholders”.

Domtar Optionholders.    The exchange of Domtar stock options for options to purchase shares of common stock of Spinco will generally not be a taxable event for a Canadian resident Domtar optionholder.

 

Q: Who can help answer my questions about the combination?

 

A: Georgeson is acting as the proxy solicitation agent for Domtar. If you have any questions about the combination or about how to vote your Domtar shares or Domtar stock options, please call Georgeson, toll free within North America at 1-866-598-9986 (English and French speakers) and collect calls outside North America and for banks and brokers at 212-440-9800.

 

Q: Are shareholder rights under Delaware law in respect of Spinco the same as under Canadian law in respect of Domtar?

 

A: Although the rights and privileges of stockholders of a Delaware corporation, such as Spinco, are in many instances comparable to those of shareholders of a corporation organized under the Canada Business Corporations Act, such as Domtar, there are certain differences. For more information, see “Comparison of Shareholders’ Rights”.

 

16


Table of Contents

SUMMARY

This summary highlights the key aspects of the matters to be considered at the Domtar special meeting but does not contain all the details concerning the Transactions, including information that may be important to you. You should carefully read this entire document and the other documents referred to herein for a more complete understanding of the matters being considered at the Domtar special meeting.

The Companies

Domtar

Based on production capacity, Domtar is the third largest integrated manufacturer of uncoated free sheet in North America and the fourth largest in the world, with four pulp and paper mills in Canada (one of which is currently not in operation) and five in the U.S. Domtar’s paper business is its most important segment and represented 62% of Domtar’s consolidated sales in 2005 (excluding 50% of Norampac Inc.’s sales, which were required to be included in Domtar’s consolidated financial statements under Canadian GAAP), or 68% when including sales of Domtar paper through its paper merchants business. In addition to its paper business, Domtar manufactures and markets lumber and wood-based value-added products and engages in the paper merchants business, which involves the purchasing, warehousing, sale and distribution of various paper products made by Domtar and by other manufacturers. Prior to December 29, 2006, Domtar also owned a 50% equity interest in Norampac Inc. (“Norampac”), a joint venture in the packaging business. On December 29, 2006, Domtar sold its interest in Norampac to Cascades Inc. for a cash consideration of Cdn.$560 million (the U.S. dollar equivalent of which is $480.6 million at an exchange rate of 1.1653 Canadian dollars per U.S. dollar, the noon buying rate of the Bank of Canada on December 29, 2006). The net after tax proceeds of the sale will be used primarily to reduce debt to be incurred by Spinco in connection with the Transactions or to repay Domtar’s existing indebtedness. See “Business of Domtar” and “Where You Can Find More Information”.

Domtar’s principal executive offices are located at 395 de Maisonneuve Blvd. West, Montréal, Québec, Canada H3A 1L6.

Spinco

Spinco (formerly known as Weyerhaeuser TIA, Inc). is currently a wholly-owned subsidiary of Weyerhaeuser and was incorporated in its current form as a Delaware corporation in August 2006 to indirectly hold the Weyerhaeuser Fine Paper Business and consummate the Arrangement. The Weyerhaeuser Fine Paper Business is currently operated by Weyerhaeuser but will be transferred to Newco and Exchangeco Subsidiary prior to the Distribution and the Arrangement. Weyerhaeuser will subsequently transfer the limited liability company interests in Newco to Spinco. This document describes Spinco as if it held the Weyerhaeuser Fine Paper Business (indirectly through Newco) for all periods and dates presented. The description of Spinco in this document does not include the business of Domtar. For information regarding Domtar and the pro forma effect of the Arrangement on Spinco, see “Selected Historical Financial Data of Domtar”, “Unaudited Pro Forma Condensed Combined Financial Information of Spinco”, “Business of the Combined Company”, “Business of Domtar” and “Where You Can Find More Information”.

Spinco principally manufactures and sells fine paper, including uncoated free sheet and coated groundwood. Based on production capacity, Spinco is the second largest integrated manufacturer of uncoated free sheet in North America and the third largest in the world, with six uncoated free sheet mills in the U.S. and two in Canada (one of which is currently not in operation) and one coated groundwood mill in the U.S.

Spinco also manufactures papergrade pulp at several of its paper mills, fluff pulp at its pulp mill in Plymouth, North Carolina and papergrade pulp and specialty pulp at its pulp mill in Kamloops, British Columbia. Fluff pulp and specialty pulp are sold to third parties. Papergrade pulp is sold to the extent Spinco produces pulp in excess of the pulp required for internal use at its paper mills.

 

17


Table of Contents

Spinco generated revenues of $3.3 billion during 2005 and $2.4 billion during the thirty-nine weeks ended September 24, 2006, of which the revenues generated by pulp and fine paper products represented approximately 94% in both periods. In addition to its pulp and fine paper business, Spinco manufactures softwood lumber products. See “Business of Spinco before the Arrangement”.

Spinco’s principal executive offices are located at 33663 Weyerhaeuser Way South, Federal Way, Washington, WA 98003.

Newco Canada Exchangeco

Newco Canada Exchangeco is a corporation continued under the Business Corporations Act (British Columbia) in January 2007 for the purpose of implementing the Transactions. Newco Canada Exchangeco’s registered office is located at 925 West Georgia St. 5th Floor, Vancouver, British Columbia V6C 3L2. See “Information Concerning Newco Canada Exchangeco”.

Offerco

Offerco is a corporation incorporated under the Canada Business Corporations Act in January 2007 for the purpose of implementing the Transactions. Offerco’s registered office is located at 395 de Maisonneuve Blvd. West, Montréal, Québec, Canada H3A 1L6. See “Information Concerning Offerco”.

The Transactions

On August 23, 2006, Domtar and Weyerhaeuser announced they entered into agreements providing for a combination of the Weyerhaeuser Fine Paper Business and Domtar. Below is a step-by-step description of the sequence of material events relating to the combination.

 

Step 1

  

The Canadian Asset Transfer:

 

Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd., two Canadian subsidiaries of Weyerhaeuser, will transfer certain of their fine paper and related assets to Exchangeco Subsidiary, and Exchangeco Subsidiary will assume certain of Weyerhaeuser Company Limited’s and Weyerhaeuser Saskatchewan Ltd.’s fine paper and related liabilities. See “The Canadian Asset Transfer Agreement”.

Step 2

  

The Newco Contribution:

 

Weyerhaeuser will transfer to Newco certain of Weyerhaeuser’s U.S. fine paper and related assets in exchange for the issuance of additional limited liability company interests of Newco to Weyerhaeuser and the assumption by Newco of certain of Weyerhaeuser’s U.S. fine paper and related liabilities. See “The Transactions – The Contribution”.

Step 3

  

The Interim Financing:

 

Spinco will draw down $1.35 billion under a three-month unsecured term loan facility. See “Financing”.

Step 4

  

Spinco Contribution:

 

Weyerhaeuser will transfer to Spinco all of the issued and outstanding limited liability company interests of Newco in exchange for (a) $1.35 billion in cash; and (b) a number of shares of Spinco common stock, determined in accordance with a formula specified in the Contribution and Distribution Agreement. See “The Transactions – The Contribution”.

 

18


Table of Contents

Step 5

  

The Listing:

 

The shares of common stock of Spinco have been authorized for listing on the New York Stock Exchange and an application has been made to the Toronto Stock Exchange to list the shares of Spinco common stock, in each case under the symbol “UFS”. An application has also been made to the Toronto Stock Exchange to list the exchangeable shares of Newco Canada Exchangeco on the Toronto Stock Exchange under the symbol “UFX”. In addition, an application has been made to the Toronto Stock Exchange to list the Class B common shares of Offerco and such shares will be listed and posted for trading on the Toronto Stock Exchange throughout the time they are issued and outstanding. See “The Transactions – Stock Exchange Listings”.

Step 6

  

The Distribution:

 

Weyerhaeuser will distribute all the issued and outstanding shares of Spinco common stock to the Weyerhaeuser shareholders. The Distribution may be effected at Weyerhaeuser’s election, as a pro rata dividend, as an exchange offer or as a combination of both. See “The Transactions – The Distribution”.

Step 7

  

The Arrangement:

 

Spinco and Domtar will consummate the Arrangement that will result in Spinco indirectly owning all of the outstanding Domtar common shares. See “The Transactions – The Arrangement”.

Step 8

  

Spinco Financing:

 

The three-month unsecured term loan facility will be converted to be part of the seven-year senior secured term loan facility. See “Financing”.

The Transaction Agreement is attached to this document as Annex “B”. Please read the Transaction Agreement, the form of plan of arrangement attached to this document as Annex “E” and the other agreements carefully (including the Contribution and Distribution Agreement attached to this document as Annex “C”), as they are the principal legal documents that govern the combination.

Holders of Domtar common shares will receive, through a series of exchanges, common stock of Spinco or exchangeable shares of Newco Canada Exchangeco

Holders of Domtar Common Shares.    A holder of Domtar common shares (other than a holder who has exercised dissent rights) will receive one Class B common share of Offerco for each Domtar common share.

Holders of Domtar common shares that are eligible Canadian residents can elect in advance (as future holders of Class B common shares of Offerco) to receive, on a one-for-one basis, exchangeable shares of Newco Canada Exchangeco, shares of common stock of Spinco or a combination thereof, in exchange for the Class B common shares of Offerco they will automatically receive in the Arrangement by completing, signing and returning the letter of transmittal and election form, together with the share certificate or certificates and other documents identified in the letter of transmittal and election form. See “Elections Available to Domtar Securityholders”.

If no letter of transmittal and election form is returned prior to the election deadline or an election is not effectively made, an election will be deemed to be made based on the address shown in the share register of Class B common shares of Offerco (which will be identical to the share register for Domtar common shares). Holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address in Canada will be deemed to have elected to receive only exchangeable shares of Newco Canada

 

19


Table of Contents

Exchangeco, and holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address outside of Canada will be deemed to have elected to receive only shares of common stock of Spinco.

Holders of Domtar Preferred Shares.    The Domtar preferred shares of a holder who has not exercised dissent rights will remain outstanding after the completion of the combination subject to the rights, privileges and conditions applicable to such shares.

Dissenting Holders of Domtar Shares.    Holders of Domtar shares who properly exercise their dissent rights will be entitled to be paid the fair value of their Domtar shares. For more information see “The Transactions – Dissenting Domtar Shareholder’s Rights”.

Holders of Domtar common shares who are eligible Canadian residents may elect to receive, through a series of exchanges, exchangeable shares

Holders of Domtar common shares who are eligible Canadian residents may elect to receive, through a series of exchanges, an equivalent number of exchangeable shares of Newco Canada Exchangeco (and ancillary rights) in lieu of shares of common stock of Spinco. Exchangeable shares will be exchangeable at the option of the holder at any time on a one-for-one basis for shares of common stock of Spinco. Holders of the exchangeable shares will be entitled to dividends and other rights that are substantially economically equivalent to those of holders of shares of common stock of Spinco. Through a voting and exchange trust arrangement, holders of the exchangeable shares will effectively have the ability to cast votes along with holders of shares of common stock of Spinco. See “Elections Available to Domtar Securityholders” and “Information Concerning Newco Canada Exchangeco”.

The exchangeable share structure, which is frequently used in transactions between U.S. and Canadian companies, provides the opportunity for eligible holders of Class B common shares (who will automatically receive such shares under the Arrangement in exchange for their previously held Domtar common shares) to make a valid tax election to defer Canadian income tax on any capital gain that would otherwise arise on the exchange of their Class B common shares for exchangeable shares.

Domtar stock options to be exchanged for options of Spinco

Domtar stock options will be exchanged for options to purchase shares of shares of common stock of Spinco as follows:

 

  ·   each Domtar stock option (other than a Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent)), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an option to purchase a number of shares of common stock of Spinco (rounded down to the nearest whole number) of equivalent value determined using the Black-Scholes option pricing model based on assumptions that are consistent with Domtar’s 2005 financial statements, and having an exercise price per share equal to the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent); and

 

  ·  

each Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an

 

20


Table of Contents
 

option to purchase that number of shares of common stock of Spinco equal to the number of Domtar common shares subject to the Domtar stock option and the exercise price per share will be equal to the exercise price per share of such option immediately prior to the exchange.

Spinco After the Transactions

Immediately following the consummation of the Transactions, Spinco will be an independent public company, owned approximately 55% by Weyerhaeuser shareholders or former Weyerhaeuser shareholders and approximately 45% by former holders of Domtar common shares (including through their ownership of exchangeable shares), in each case on a fully diluted basis. Spinco will be a holding company that will, directly or indirectly, own and operate the Weyerhaeuser Fine Paper Business and the Domtar business.

In connection with the Transactions, Weyerhaeuser, Spinco and/or their respective subsidiaries will also enter into a tax sharing agreement, an intellectual property license agreement, a transition services agreement, a Plymouth pine chip supply agreement, a Plymouth hog fuel supply agreement, a Columbus pine chip supply agreement, Canadian fibre supply agreements, a slush pulp sales agreement and site services agreements. The site services agreements will relate to facilities in Columbus, Mississippi; Plymouth, North Carolina and Kamloops, British Columbia shared with Weyerhaeuser, Weyerhaeuser Company Limited or Weyerhaeuser Saskatchewan Ltd. In addition, Spinco expects to enter into a joint purchase agreement with Weyerhaeuser. See “Spinco’s Relationship With Weyerhaeuser After the Transactions”.

Recommendation of the Domtar Board

Domtar’s board of directors believes that the terms of the Arrangement are fair to, and in the best interests of, Domtar securityholders. The Domtar board of directors unanimously recommends that Domtar securityholders vote “FOR” the Domtar securityholders resolution to approve the Arrangement at the Domtar special meeting.

Reasons for the Domtar Board Recommendation

The Domtar board of directors has consulted with Domtar management as well as Domtar’s financial advisors and outside legal advisors and considered a number of factors. The factors considered by the Domtar board include:

 

  ·   a review and analysis of the industry and the strategic options of Domtar to pursue its growth;

 

  ·   the competitive strengths resulting from the consummation of the Transactions as set forth in the section “Business of the Combined Company – Competitive Strengths”, including the Combined Company’s leading market position, efficient and cost-competitive assets, proximity to customers and experienced management team;

 

  ·   the opinions of Domtar’s financial advisors, J.P. Morgan Securities Inc. and RBC Dominion Securities Inc., that, as of the date thereof, and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio, provided for in the combination was fair, from a financial point of view, to the holders of Domtar common shares. See “The Transactions – Opinions of Domtar’s Financial Advisors”;

 

  ·   the ability of holders of Domtar common shares to benefit from potential synergies from the combination and to continue to participate in the future earnings and growth of the Combined Company through their ownership of shares of Spinco common stock or exchangeable shares; and

 

  ·   the structure of the combination, which effectively permits holders of Domtar common shares who are eligible Canadian residents to elect to receive, through a series of exchanges, exchangeable shares and make a valid tax election to defer Canadian income tax on any capital gain otherwise arising on their exchange of Class B common shares for exchangeable shares in the Arrangement.

See “The Transactions – Reasons for the Domtar Board Recommendation”.

 

21


Table of Contents

Opinions of Domtar’s Financial Advisors

In connection with the combination, the Domtar board of directors received the following separate written opinions:

 

  ·   the opinion of J.P. Morgan Securities Inc., dated August 22, 2006, the full text of which is attached to this document as Annex “K”, to the effect that, as of the date of the opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio provided for in the Arrangement was fair, from a financial point of view, to holders of Domtar common shares; and

 

  ·   the opinion of RBC Dominion Securities Inc., dated August 22, 2006, the full text of which is attached as Annex “L”, to the effect that, as of the date of the opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio provided for in the Arrangement was fair, from a financial point of view, to holders of Domtar common shares.

You should read these opinions carefully and in their entirety for a description of the assumptions made, procedures followed, matters considered and qualifications and limitations on the reviews undertaken. The opinions were provided to the Domtar board of directors in connection with the Domtar board’s evaluation of the exchange ratio, do not address any other aspect of the combination or any related transaction and do not constitute a recommendation to any Domtar shareholder as to how such shareholder should vote or act on any matters relating to the combination. See “The Transactions – Opinions of Domtar’s Financial Advisors”.

Board of Directors and Management of Spinco following the Transactions

It is currently expected that, following the consummation of the Transactions, Spinco will initially have a board of 13 directors, consisting of seven designees of Weyerhaeuser, including Mr. Harold H. MacKay, formerly an international advisor to Weyerhaeuser’s board of directors and Mr. Marvin D. Cooper, formerly senior vice president, cellulose fibre, white papers and containerboard manufacturing and engineering of Weyerhaeuser, and six designees of Domtar, including Mr. Brian M. Levitt, currently the chairman of the board of directors of Domtar, and Mr. Raymond Royer, currently the president and chief executive officer of Domtar.

Mr. MacKay is expected to be the non-executive chairman of Spinco’s board of directors. Mr. Royer is expected to be the president and chief executive officer of Spinco. Mr. Cooper is expected to be the chief operating officer of Spinco and Mr. Barker, currently senior vice president of pulp and paper sales and marketing of Domtar, is expected to be Spinco’s senior executive in charge of marketing. Mr. Buron, currently the chief financial officer of Domtar, is expected to be the chief financial officer of Spinco and Mr. Edwards, currently vice president of paper manufacturing of Weyerhaeuser, is expected to be Spinco’s senior executive in charge of pulp and paper manufacturing. Mr. Thomas, currently vice president of fine papers of Weyerhaeuser, is expected to be Spinco’s senior executive in charge of sales. See “Spinco’s Board of Directors and Management Following the Transactions”.

Corporate Offices of Spinco Following the Transactions

From and after the Effective Time, Spinco’s head office will be located in Montréal, Québec, Canada, and the operational headquarters of Spinco and its non-Canadian subsidiaries will be located in Fort Mill, South Carolina.

Securities to be Issued

The Class B Common Shares

Each Domtar common share not held by a holder who has exercised dissent rights will automatically be exchanged for one Class B common share of Offerco. Following this exchange, each Class B common share will be immediately exchanged for one share of common stock of Spinco or one exchangeable share of Newco Canada Exchangeco (and ancillary rights).

 

22


Table of Contents

Holders of Domtar common shares that are eligible Canadian residents can elect in advance (as future holders of Class B common shares) to receive, on a one-for-one basis, exchangeable shares, shares of common stock of Spinco or a combination thereof, in exchange for the Class B common shares of Offerco they will automatically receive in the Arrangement by completing, signing and returning the letter of transmittal and election form, together with the share certificate or certificates and other documents identified in the letter of transmittal and election form. See “Elections Available to Domtar Securityholders”.

If no letter of transmittal and election form is returned prior to the election deadline or an election is not effectively made, an election will be deemed to be made based on the address shown in the share register of Class B common shares of Offerco (which will be identical to the share register for Domtar common shares). Holders of Domtar common shares (who will automatically become holders of Class B common shares of Offerco) with a registered address in Canada will be deemed to have elected to receive only exchangeable shares of Newco Canada Exchangeco, and holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address outside of Canada will be deemed to have elected to receive only shares of common stock of Spinco.

For a more complete description of the Class B common shares, see “Information Concerning Offerco – Description of Offerco Share Capital”.

Spinco Common Stock

Immediately following the consummation of the Transactions, Spinco’s authorized capital will consist of 2,000,000,000 shares of common stock, par value $0.01 per share and one share of special voting stock, par value $0.01 per share. Based on approximately 231,000,000 Domtar common shares that are expected to be outstanding on the last trading day immediately prior to the day of the Contribution (on a fully diluted basis) and 7,126,885 shares of Spinco common stock subject to Spinco equity awards that are expected to be issuable to Weyerhaeuser employees that validly elect to roll-over their Weyerhaeuser equity awards into Spinco equity awards, approximately 512,000,000 shares of Spinco common stock will be outstanding immediately following the consummation of the Transactions. All of the outstanding shares of Spinco common stock will be validly issued, fully paid and non-assessable.

Except as otherwise provided by law, by the certificate of incorporation of Spinco or by any resolution adopted by Spinco’s board of directors designating any series of preferred stock, the common stock of Spinco will have the exclusive right to vote for the election of the members of Spinco’s board of directors and for all other purposes. Holders of common stock of Spinco will be entitled to one vote for each share of common stock held of record on all matters on which stockholders are generally entitled to vote, subject to certain exceptions. See “Description of Spinco’s Capital Stock”.

In connection with the Arrangement, Spinco will issue to the trustee under the voting and exchange trust agreement one share of the special voting stock to be held for the benefit of the holders of the exchangeable shares (other than Spinco or any subsidiary thereof). The trustee holder of the share of special voting stock will be entitled to vote on each matter on which holders of common stock of Spinco are entitled to vote. The trustee holder of the share of special voting stock will be entitled to cast on each such matter a number of votes equal to the number of the Spinco common stock into which the exchangeable shares outstanding on the record date for holders of shares of Spinco common stock entitled to vote on any such matter are then exchangeable (other than those held by Spinco or any subsidiary), for which the trustee holder has received voting instructions from holders of exchangeable shares pursuant to the voting and exchange trust agreement. The trustee holder of the share of special voting stock will vote together as one class with the holders of common stock of Spinco for the election of directors of Spinco and all other matters submitted to a vote of stockholders of Spinco. See “Description of Spinco’s Capital Stock” and “Information Concerning Newco Canada Exchangeco – Description of Exchangeable Shares of Newco Canada Exchangeco”.

 

23


Table of Contents

Each share of Spinco common stock will have attached to it one preferred stock purchase right, the principal terms of which are described under “Certain Anti-Takeover Effects of Provisions of Spinco’s Certificate of Incorporation, Bylaws and Rights Plan and of Delaware Law – Certificate of Incorporation, Bylaws and Rights Plan – Rights Plan”.

Exchangeable Shares

Exchangeable shares will be securities of Newco Canada Exchangeco that, together with the ancillary rights described in this document, are substantially economically equivalent to shares of common stock of Spinco. The holders of exchangeable shares will have the following rights:

 

  ·   the right to exchange those shares at any time, at the holders’ option, for shares of common stock of Spinco on a one-for-one basis;

 

  ·   the right to receive dividends, on a per share basis, in amounts (or property in the case of non-cash dividends), which are the same as, or economically equivalent to, and which are payable at the same time as, dividends declared on the common stock of Spinco;

 

  ·   the right to vote, through the trustee holder of the one share of special voting stock of Spinco, at all stockholder meetings at which holders of common stock of Spinco are generally entitled to vote; and

 

  ·   the right to participate on a pro rata basis with the common stock of Spinco in the distribution of assets of Spinco upon specified events relating to the voluntary or involuntary liquidation, dissolution, winding-up or other distribution of the assets of Spinco through the mandatory exchange of exchangeable shares for shares of common stock of Spinco.

Holders of exchangeable shares will be entitled generally to require Newco Canada Exchangeco to redeem any of their exchangeable shares for a purchase price per share of one share of common stock of Spinco and (provided the holder holds the exchangeable share on the applicable dividend record date) an amount in cash equal to any declared and unpaid dividends on that exchangeable share. However, if a holder of exchangeable shares delivers notice of exercise of such retraction, Newco Canada will have the overriding right to purchase, in lieu of Newco Canada Exchangeco redeeming, the holder’s shares on payment of the redemption price.

Subject to applicable law, the purchase right described above and certain other transactions, if (a) there are fewer than 5,000,000 of the exchangeable shares that are outstanding as a result of the Arrangement (other than exchangeable shares held by Spinco and its subsidiaries); and (b) no exchangeable shares remain deposited with Computershare Trust Company of Canada (successor to Montréal Trust Company of Canada), as depositary, or any other successor depositary, in connection with the trust indenture between George Weston Limited and Montréal Trust Company of Canada, the board of directors of Newco Canada Exchangeco may elect to have Newco Canada Exchangeco redeem the exchangeable shares for a redemption price per share of one share of common stock of Spinco and (provided the holder holds the exchangeable share on the applicable dividend record date) an amount in cash equal to any declared and unpaid dividends on that exchangeable share.

Subject to applicable law, the purchase right described above and certain other transactions, on a date on or after July 31, 2023, as established by Newco Canada Exchangeco’s board of directors, all of the outstanding exchangeable shares (other than those held by Spinco and its subsidiaries) will be redeemed by Newco Canada Exchangeco for a redemption price per share of one share of common stock of Spinco and (provided the holder holds the exchangeable share on the applicable dividend record date) an amount in cash equal to any declared and unpaid dividends on that exchangeable share.

For a more complete description of the exchangeable shares, see “Information Concerning Newco Canada Exchangeco – Description of Exchangeable Shares of Newco Canada Exchangeco”.

 

24


Table of Contents

Stock Exchange Listings

Spinco has been authorized to list the shares of Spinco common stock on the New York Stock Exchange. An application has been made to the Toronto Stock Exchange for listing of the common stock of Spinco, the exchangeable shares and the Class B common shares of Offerco. The Class B common shares will be listed and posted for trading on the Toronto Stock Exchange throughout the time they are issued and outstanding. Such shares, upon their issuance, will be immediately exchanged for exchangeable shares or shares of common stock of Spinco under the Arrangement. The proposed stock symbols for Spinco common stock and exchangeable shares are set forth below.

 

Class of Securities

   NYSE Symbol    TSX Symbol

Spinco common stock

   UFS    UFS

Exchangeable shares

   N/A    UFX

Transaction Structure

The following diagrams illustrate the current structure of Domtar and Weyerhaeuser and their respective shareholders and the structure of Spinco and its subsidiaries following the combination (disregarding, in certain cases, intermediate subsidiaries). For a more complete description of the combination, please see “The Transactions”.

Current Structure of Weyerhaeuser and Domtar

LOGO

 

25


Table of Contents

Structure of Spinco and its subsidiaries following the Combination*

LOGO

 


* Immediately following the consummation of the combination, Spinco will be owned approximately 55% by Weyerhaeuser shareholders or former Weyerhaeuser shareholders and approximately 45% by former holders of Domtar common shares (including through their ownership of exchangeable shares), in each case on a fully diluted basis.

 

26


Table of Contents

Dissent Rights

Holders of Domtar shares have the right to dissent from the Domtar securityholders resolution to be voted upon at the Domtar special meeting. Registered holders of Domtar common shares and Domtar preferred shares who properly exercise their dissent rights under the interim order issued by the Superior Court of Québec will be entitled to be paid the fair value of their Domtar shares. The dissent procedures require that a registered holder of Domtar shares who wishes to dissent must provide Domtar a dissent notice prior to 5:00 p.m. (Montréal time) on the business day preceding the Domtar special meeting. It is important that holders of Domtar shares strictly comply with this requirement, which is different from the statutory dissent provisions of the Canada Business Corporations Act, which would permit a dissent notice to be provided at or prior to the Domtar special meeting. Holders of Domtar shares who wish to dissent must also strictly comply with the other requirements of the dissent procedure. Domtar optionholders are not entitled to dissent rights unless they exercise their options and submit a dissent notice prior to this deadline. See “The Transactions – Dissenting Domtar Shareholder’s Rights”.

Accounting Treatment

The Contribution and Distribution

Spinco will record assets and liabilities received from Weyerhaeuser, Weyerhaeuser Company Limited or Weyerhaeuser Saskatchewan Ltd. at the amount that the assets and liabilities are carried on Weyerhaeuser’s consolidated financial statements. Neither the exchange of shares of Weyerhaeuser common stock for Spinco’s common stock in an exchange offer nor the distribution of Spinco’s common stock in a pro rata distribution, in and of themselves, will affect the financial condition or results of operations of Spinco.

The Arrangement

Spinco will account for the Arrangement using the purchase method of accounting, with Spinco being treated as the acquiring entity for accounting purposes. As a result, the assets and liabilities of Domtar will be recorded at their estimated fair values as of the date that the Arrangement occurs. The total purchase price is currently estimated based on the average market price of Domtar common shares and the average number of Domtar common shares that were outstanding for the five trading days beginning August 21, 2006 and ended August 25, 2006, plus other costs directly related to the Arrangement.

General

The estimate of the total purchase price for Domtar is for accounting purposes only and is not indicative of the price at which Spinco common stock will trade immediately after the consummation of the Arrangement or the value of Spinco common stock to be received by holders of Domtar common shares in connection with the Arrangement.

See “Unaudited Pro Forma Condensed Combined Financial Information of Spinco”, “Where You Can Find More Information” and the financial statements of Spinco and the Weyerhaeuser Fine Paper Business and the notes thereto included elsewhere in this document.

Financing

On August 22, 2006, Spinco, Domtar, J.P. Morgan Securities Inc., JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc. entered into a commitment letter. The financing commitments provided for by the commitment letter are subject to customary conditions, including the absence of any state of facts, change, effect, condition, development, event or occurrence that has been or would reasonably be likely to be material and adverse to (a) the business, assets, properties, condition (financial or otherwise) or results of operations of Domtar and its subsidiaries or of Newco and its subsidiaries, in each case taken as a whole, or of their respective

 

27


Table of Contents

business, operations and affairs, subject to certain exceptions; or to (b) the ability of any of Domtar, Weyerhaeuser or Newco to perform their respective obligations under the Transaction Agreement or related documents or to consummate the Transactions. Spinco has agreed to pay J.P. Morgan Securities Inc., JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc. certain fees in connection with the transactions contemplated by the commitment letter and has agreed to indemnify J.P. Morgan Securities Inc., JPMorgan Chase Bank, N.A., Morgan Stanley Senior Funding, Inc. and their respective affiliates against certain liabilities.

The commitment letter provides for a financing commitment of an aggregate amount of up to $2.775 billion, consisting of the following:

 

  ·   a five-year senior secured revolving credit facility to be available to Spinco, Newco and Domtar in a principal amount of $750 million, up to $350 million (or the Canadian dollar equivalent thereof) of which may be borrowed by Domtar; and

 

  ·   a three-month unsecured term loan facility to be available to Spinco in a principal amount of $1.35 billion, which, upon consummation of the Transactions, will be refinanced, in part, by a new seven-year senior secured term loan facility to be available to Spinco in an aggregate amount up to $1.7 billion, which may be increased at the option of Spinco by incremental loans to be available to Spinco and Domtar of up to $325 million to the extent necessary to refinance the existing accounts receivable securitization of Domtar and/or to redeem notes if tendered pursuant to a change of control offer with respect to Domtar’s $125 million 9.5% Debentures due August 2016.

Immediately prior to the Spinco Contribution, Spinco will draw down the three-month unsecured term loan facility to finance the $1.35 billion cash payment by Spinco to Weyerhaeuser as partial consideration for the Spinco Contribution. In connection with the consummation of the Transactions, the $1.35 billion three-month unsecured term loan facility will be refinanced by Spinco with (a) a portion of the net proceeds of a seven-year senior secured term loan facility, which is expected to be in a principal amount of approximately $800 million; and (b) cash on hand, including the net proceeds from the sale by Domtar in December, 2006 of its 50% interest in Norampac. The proceeds of the seven-year senior secured term loan facility will also be used to finance a portion of the Transactions, including fees, expenses and obligations related to or triggered by the Transactions. The five-year senior secured revolving credit facility, which is expected to provide for borrowings up to $750 million (up to $150 million (or the Canadian dollar equivalent thereof) of which will be made available to Domtar) may be used by Spinco, Newco and Domtar for working capital needs and for general corporate purposes, and a portion will be available for letters of credit and swingline loans. The seven-year senior secured term loan facility and the five-year senior secured revolving credit facility are referred to herein as “senior secured credit facilities.” See “Financing”.

Material Canadian and U.S. Federal Income Tax Considerations for Domtar Securityholders

Canada

Ogilvy Renault LLP has opined on the accuracy of the summary of certain material Canadian federal income tax considerations under the Income Tax Act (Canada) contained in this document.

Exchange of Domtar Shares.    The exchange of Domtar common shares for Class B common shares of Offerco will not generally be a taxable event, but the immediate exchange of such Class B common shares for exchangeable shares of Newco Canada Exchangeco (and ancillary rights) and/or common stock of Spinco, will generally be a taxable event to a Canadian resident shareholder. However, an eligible Canadian resident of Domtar common shares who exchanges the Class B common shares it receives in the Arrangement for consideration that includes exchangeable shares (and ancillary rights) and who makes a valid tax election with Newco Canada Exchangeco, may obtain a full or partial tax deferral (rollover) of any capital gain otherwise arising upon the exchange of those shares. A non-resident shareholder for which Domtar common shares and the

 

28


Table of Contents

Class B common shares of Offerco are not “taxable Canadian property” will not be subject to tax under the Income Tax Act (Canada) on the disposition of those shares.

For more information, see “Material Income Tax Considerations – Material Canadian Federal Income Tax Considerations to Domtar Shareholders”.

Eligibility for Investment.    Provided that they are each listed on a prescribed stock exchange for the purposes of the Income Tax Act (Canada) (which currently includes the Toronto Stock Exchange and the New York Stock Exchange) at the time they are acquired, the Class B common shares, the exchangeable shares and shares of common stock of Spinco will be “qualified investments” for deferred income plans (such as registered retired savings plans, registered retirement income funds and deferred profit sharing plans) for Canadian income tax purposes.

Exchange of Domtar Stock Options

The exchange of Domtar stock options for options to acquire shares of common stock of Spinco will generally not be a taxable event to a Canadian resident holder of Domtar stock options who acquired such options in respect of employment.

For more information, see “Material Income Tax Considerations – Material Canadian Federal Income Tax Considerations to Domtar Optionholders”.

U.S.

The exchange of Domtar common shares pursuant to the Arrangement will generally be a taxable event for U.S. federal income tax purposes.

For more information, see “Material Income Tax Considerations – Material U.S. Federal Income Tax Considerations to Domtar Securityholders”.

Court Approval Will Be Required to Complete the Combination

Under the Canada Business Corporations Act, a Canadian court must approve the Arrangement set forth in the form of plan of arrangement. Prior to the mailing of this document, Domtar obtained an interim order from the Superior Court, District of Montréal, Province of Québec providing for the calling and holding of the Domtar special meeting and other procedural matters. Subject to the approval of the Domtar securityholders resolution at the Domtar special meeting, the hearing in respect of a final order approving the Arrangement is expected to take place on or about February 27, 2007, at 9:15 a.m. (Montréal time) in room 16.12 at the Montréal courthouse at 1 Notre Dame Street East, Montréal, Québec, Canada. The court will consider, among other things, the fairness and reasonableness of the Arrangement. The court may approve the Arrangement in any manner the court may direct, subject to compliance with such terms and conditions, if any, as the court deems fit.

For more information, see “The Transactions – Court Approval of the Arrangement and Completion of the Combination”.

Conditions to Closing

In addition to the approval of the Arrangement by Domtar securityholders, consummation of the Transactions is subject to customary closing conditions, including, among others:

 

  ·  

the receipt of governmental approvals with respect to or the expiration or termination of any required waiting periods under (a) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), with respect to which the waiting period has already been terminated, (b) the Competition

 

29


Table of Contents
 

Act (Canada), with respect to which a “no action” letter has been received from the Commissioner of Competition; and (c) the Investment Canada Act;

 

  ·   the effectiveness of certain filings with the SEC;

 

  ·   the final approval of the Arrangement by the Superior Court of Québec;

 

  ·   the receipt by Weyerhaeuser of a favourable ruling from the U.S. Internal Revenue Service (the “IRS”);

 

  ·   the receipt by Weyerhaeuser of a tax opinion from Cravath, Swaine & Moore LLP, Weyerhaeuser’s outside counsel;

 

  ·   entry into the credit facilities described under “Financing” and the receipt of the proceeds of a three-month unsecured term loan facility in a principal amount of $1.35 billion;

 

  ·   the approval for listing of the shares of common stock of Spinco on the New York Stock Exchange, which approval has been received;

 

  ·   the approval for listing of the exchangeable shares of Newco Canada Exchangeco on the Toronto Stock Exchange and the acceptance by the Toronto Stock Exchange that the Class B common shares of Offerco will, upon issuance, be listed and posted for trading;

 

  ·   the absence of any condition or event that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on Domtar or the Weyerhaeuser Fine Paper Business;

 

  ·   the representations and warranties of each of Weyerhaeuser and Domtar that are qualified as to materiality or material adverse effect being true and correct and those not so qualified being true and correct in all material respects, as of the date of the Transaction Agreement and as of the closing; and

 

  ·   the parties having performed in all material respects their respective obligations under the Transaction Agreement.

For more information, see “The Transactions – Conditions to the Transactions” and “The Transaction Agreement – Conditions to the Consummation of the Transactions”.

Non-Solicitation; Superior Proposal; Break-Up Fee

Subject to certain exceptions, Domtar has agreed in the Transaction Agreement that it will not solicit offers by any third parties to effect a business combination with any third party. The Transaction Agreement also provides for certain procedures regarding any acquisition proposals that may be made by third parties and for the payment by Domtar of a $62 million break-up fee to Weyerhaeuser in the event the combination is not completed under certain circumstances. See “The Transaction Agreement – Non-Solicitation; Superior Proposal; Break-Up Fee”.

Regulatory Matters

With respect to antitrust review of the Transactions, on October 18, 2006 the U.S. Department of Justice granted early termination of the waiting period under the HSR Act. In Canada, the applicable statutory waiting period under the Competition Act (Canada) ended November 1, 2006, and on December 29, 2006, the Commissioner of Competition provided clearance in the form of a “no action” letter indicating that there were no grounds to challenge the combination at this time.

An application for review under the Investment Canada Act was filed on November 10, 2006 and review of the transaction in terms of its net benefit to Canada is ongoing by the Investment Review Division of Industry Canada.

For more information, see “The Transactions – Regulatory Matters”.

 

30


Table of Contents

Termination

The Transaction Agreement may be terminated by the mutual written consent of each party thereto. Additionally, either Weyerhaeuser or Domtar may terminate the Transaction Agreement in the following circumstances:

 

  ·   if the Transactions have not been consummated on or before August 21, 2007, unless the failure to consummate the Transactions is the result of a material breach of the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby by the party seeking to terminate the Transaction Agreement;

 

  ·   if Domtar has failed to obtain the required vote at the Domtar special meeting;

 

  ·   if any law has been passed that makes consummation of the Transactions illegal or otherwise prohibited or if any injunction, order or decree enjoining Weyerhaeuser or Domtar from consummating the Transactions has been entered that has become final and non-appealable; or

 

  ·   if any condition to the obligation of such party to consummate the Transactions has become incapable of satisfaction prior to August 21, 2007, unless the failure of that condition is the result of a breach of the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby by the party seeking to terminate the Transaction Agreement.

In addition, Domtar and Weyerhaeuser can terminate the Transaction Agreement in specified circumstances prior to the Effective Time, including Domtar’s ability to terminate the Transaction Agreement in order to enter into a definitive written agreement with respect to a superior proposal, subject to certain conditions, including paying to Weyerhaeuser the break-up fee described above under “ – Non-Solicitation; Superior Proposal; Break-Up Fee”. For more information, see “The Transaction Agreement – Termination”.

Expenses

The Transaction Agreement provides that all fees and expenses incurred in connection with the Transactions will be paid by the party incurring such fees or expenses, provided, that in the event the Transactions are consummated, Spinco will reimburse Weyerhaeuser for (a) all fees and expenses incurred in connection with the financing described above under “– Financing”; (b) up to 50% of all fees and expenses incurred in connection with the separation of certain facilities that will be owned in part by Weyerhaeuser or its subsidiaries and in part by Spinco or its subsidiaries after the Effective Time; and (c) up to an amount of $28 million of all fees and expenses incurred in connection with the Transactions. The Transaction Agreement also provides that Weyerhaeuser and Spinco will each be responsible for 50% of the capital expenditures and one-time start-up expenses incurred by either party in connection with the actions required to separate certain facilities. In addition, the tax sharing agreement provides that all transfer taxes incurred in connection with the Transactions will be paid by Spinco. See “The Transaction Agreement – Expenses”.

The Domtar Special Meeting

Domtar will hold a special meeting of Domtar securityholders on February 26, 2007, at 10:00 a.m. (Montréal time) at Centre Mont-Royal (Salon Mont-Royal) 2200 Mansfield Street, Montréal, Québec. At the Domtar special meeting, in accordance with an interim order of the Superior Court of Québec dated January 26, 2007, Domtar securityholders will be asked to consider and vote upon the Domtar securityholders resolution to approve the Arrangement under section 192 of the Canada Business Corporations Act to effect the combination of Domtar and Weyerhaeuser Fine Paper Business. See “Special Meeting of Domtar Securityholders”.

 

31


Table of Contents

Domtar securityholder approvals will be required to complete the combination

Each holder of Domtar shares and Domtar stock options as of the close of business on January 27, 2007 is entitled to one vote per Domtar share and one vote per Domtar stock option on any matter to be considered at the Domtar special meeting. The required approvals for the Domtar securityholders resolution to approve the Arrangement are (a) 66 2/3% of the votes cast at the Domtar special meeting by Domtar securityholders present in person or by proxy; and (b) 66 2/3% of the votes cast at the Domtar special meeting by holders of Domtar common shares and Domtar preferred shares present in person or by proxy, excluding: (i) holders of Domtar stock options; (ii) holders of Domtar common shares that are pledged to secure loans provided pursuant to the Domtar Executive Stock Option and Share Purchase Plan; and (iii) holders of Domtar common shares who also hold Domtar stock options.

Ownership of Securities of Directors and Executive Officers of Domtar

As of January 22, 2007, directors and executive officers of Domtar and their affiliates beneficially owned (or exercised control over) and had the right to vote:

 

  ·   651,832 Domtar common shares, representing approximately 0.28% of such shares outstanding on such date; and

 

  ·   1,696,396 Domtar stock options representing approximately 39% of the Domtar stock options outstanding on such date.

See “Special Meeting of Domtar Securityholders – Record Date, Entitlement to Vote and Principal Holders of Domtar Securities”.

Risk Factors

There are certain risks that should be considered by Domtar securityholders in evaluating whether to approve the combination. Some of these risks relate principally to Spinco’s business and the industry in which it will operate, while others relate principally to the Transactions and the combination. The remaining risks relate principally to the securities markets generally and the ownership of common stock of Spinco and exchangeable shares of Newco Canada Exchangeco. These risks include:

 

  ·   the pulp, paper and wood product industries are highly cyclical. Fluctuations in the prices of and the demand for the Combined Company’s products could result in smaller profit margins and lower sales volumes;

 

  ·   some of the Combined Company’s products are vulnerable to long-term declines in demand due to competing technologies or materials;

 

  ·   the Combined Company will face intense competition in its markets, and the failure to compete effectively would have a material adverse effect on its business, financial condition and results of operations;

 

  ·   the Combined Company’s manufacturing businesses may have difficulty obtaining wood fibre at favourable prices, or at all;

 

  ·   an increase in the cost of the Combined Company’s purchased energy or chemicals would lead to higher manufacturing costs, thereby reducing its margins;

 

  ·   the Combined Company could experience disruptions in operations and/or increased labour costs due to labour disputes;

 

  ·  

the Combined Company will rely heavily on a small number of significant customers, including one customer that represented approximately 12% of the Combined Company’s pro forma fiscal 2005 sales

 

32


Table of Contents
 

revenues. A loss of any of these significant customers could materially adversely affect the Combined Company’s business, financial condition or results of operations;

 

  ·   a material disruption at one of the Combined Company’s manufacturing facilities could prevent it from meeting customer demand, reduce its sales and/or negatively impact its net income;

 

  ·   the Combined Company’s operations require substantial capital, and it may not have adequate capital resources to provide for all of its capital requirements. On a pro forma basis, it is estimated that the Combined Company spent approximately $135 million on capital expenditures during 2006, and such expenditures could increase in the future;

 

  ·   the Combined Company could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations. On a pro forma basis, it is estimated that the Combined Company incurred approximately $51 million in expenditures in connection with environmental compliance and remediation during 2005, and such expenditures could increase in the future;

 

  ·   the Combined Company will be affected by changes in currency exchange rates;

 

  ·   the Combined Company may be required to pay significant lumber export taxes and/or countervailing and antidumping duties;

 

  ·   the Combined Company will depend on third parties for transportation services;

 

  ·   the transition services to be provided by Weyerhaeuser may be difficult for the Combined Company to replace without operational problems and additional costs;

 

  ·   following its separation from Weyerhaeuser, Spinco may experience increased costs resulting from decreased purchasing power, which could decrease its overall profitability;

 

  ·   the Combined Company has net liabilities with respect to its pension plans and the actual cost of its pension plan obligations could exceed current provisions. On a pro forma basis, as of September 24, 2006, the Combined Company’s defined benefit plans were underfunded by an aggregate of $251 million on a going concern basis;

 

  ·   the price of Spinco’s common stock and exchangeable shares of Newco Canada Exchangeco may be volatile;

 

  ·   you will not receive dividends for the foreseeable future;

 

  ·   dividends paid with respect to exchangeable shares of Newco Canada Exchangeco may be subject to U.S. withholding tax notwithstanding the fact that the exchangeable shares are issued by a Canadian corporation;

 

  ·   Delaware law, Spinco’s charter documents, Spinco’s rights agreement and the indemnity provisions under Spinco’s tax sharing agreement may impede or discourage a takeover of Spinco that you may consider favourable;

 

  ·   the requirements associated with Spinco being a public company in the U.S. will require significant company resources and management attention;

 

  ·   Spinco may not realize the anticipated synergies, cost savings and growth opportunities from the Transactions;

 

  ·   the integration of the Weyerhaeuser Fine Paper Business and the Domtar business following the Transactions may present significant challenges to the Combined Company’s management which could cause its management to fail to respond effectively to the increasing forms of competition facing the Combined Company’s business;

 

33


Table of Contents
  ·   Spinco expects that Spinco and Domtar will incur significant costs related to the Transactions that could have a material adverse effect on Spinco’s cash flows and operating results;

 

  ·   Spinco may not be able to generate sufficient cash flows to meet its debt service obligations;

 

  ·   Spinco’s substantial indebtedness, which would have been approximately $2.6 billion on a pro forma basis as of September 24, 2006, could adversely affect its financial condition and impair its ability to operate its business;

 

  ·   the terms of Spinco’s senior secured credit facilities and Domtar’s existing indebtedness will restrict Spinco’s ability to pursue its business strategies and operate its business;

 

  ·   the historical financial information of the Weyerhaeuser Fine Paper Business may not be representative of its results if it had been operated independently of Weyerhaeuser and, as a result, may not be a reliable indicator of its future results;

 

  ·   sales of Spinco’s common stock after the Transactions may negatively affect the market price of Spinco’s common stock and the exchangeable shares of Newco Canada Exchangeco;

 

  ·   regulatory agencies may delay or impose conditions on approval of the Transactions, which may diminish the anticipated benefits of the Transactions;

 

  ·   aboriginal interests may delay or result in challenges to the transfer of certain forest licences and forest management agreements;

 

  ·   Spinco may be affected by significant restrictions following the Transactions in order to avoid significant tax-related liabilities;

 

  ·   a third party may seek an increase in consideration from Domtar under an existing contract in connection with the Transactions;

 

  ·   the trading prices of the exchangeable shares of Newco Canada Exchangeco and common stock of Spinco may not reflect equivalent values; and

 

  ·   former Domtar shareholders who receive exchangeable shares of Newco Canada Exchangeco will experience a delay in receiving shares of common stock of Spinco from the date that they request an exchange, which may affect the value of the shares the holder receives in an exchange.

See “Risk Factors” for more information.

Summary Historical and Pro Forma Financial Data

The following summary financial information concerns Spinco and Domtar. This information is derived from the audited and unaudited financial statements of the Weyerhaeuser Fine Paper Business and Domtar for the periods presented. This information is only a summary and you should read it in conjunction with the financial information included in this document or filed by Domtar with the Canadian securities regulatory authorities and the SEC. See “Where You Can Find More Information”, “Selected Historical Combined Financial Data of Spinco”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Spinco”, “Unaudited Pro Forma Condensed Combined Financial Information of Spinco” and the financial statements of Spinco and the Weyerhaeuser Fine Paper Business and the notes thereto included elsewhere in this document.

 

34


Table of Contents

Summary Historical Combined Financial Data of Spinco

Spinco is a newly formed holding company organized for the sole purpose of indirectly holding the Weyerhaeuser Fine Paper Business and consummating the Arrangement with Domtar. This document describes Spinco as if it held the Weyerhaeuser Fine Paper Business (indirectly through Newco) for all periods and dates presented but not as if it held the Domtar business. The following combined balance sheet data of Spinco as of the last Sunday of December 2005 and 2004 and the combined statement of operations data for each of the fiscal years ended the last Sunday of December 2005, 2004 and 2003 have been derived from the audited financial statements of the Weyerhaeuser Fine Paper Business. The combined balance sheet data of Spinco as of the last Sunday of December 2003, 2002 and 2001 and the combined statement of operations data for the fiscal years ended the last Sunday of December 2002 and 2001 have not been audited. The combined balance sheet data of Spinco as of the last Sunday of September 2006 and 2005 and the combined statement of operations data for the thirty-nine week periods then ended have been derived from the Weyerhaeuser Fine Paper Business’ unaudited financial statements. This information is only a summary and you should read the table below in conjunction with “Selected Historical Combined Financial Data of Spinco”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Spinco” and the financial statements of Spinco and the Weyerhaeuser Fine Paper Business and the notes thereto included elsewhere in this document.

 

    Thirty-Nine Weeks Ended,   Year Ended,  

U.S. GAAP/U.S. dollar

  September 24,
2006
    September 25,
2005
  December 25,
2005
    December 26,
2004
    December 28,
2003
    December 29,
2002
  December 30,
2001
 
(Dollars in millions)   (Unaudited)     (Unaudited)                     (Unaudited)   (Unaudited)  

Combined Statement of Operations Data:

             

Sales

  $ 2,433     $ 2,456   $ 3,267     $ 3,026     $ 2,854     $ 2,801   $ 1,525  

Charges for restructuring, closure of facilities, and goodwill impairment

    766       4     538       17       24            

Operating income (loss)

    (711 )     7     (578 )     (41 )     (96 )     69     (34 )

Net income (loss)

    (718 )     9     (478 )     (17 )     (67 )     57     (17 )
    September 24,
2006
    September 25,
2005
  December 25,
2005
    December 26,
2004
    December 28,
2003
    December 29,
2002
  December 30,
2001
 
    (Unaudited)     (Unaudited)               (Unaudited)     (Unaudited)   (Unaudited)  

Combined Balance Sheet Data:

             

Total assets

  $ 4,073     $ 5,549   $ 4,970     $ 5,565     $ 5,649     $ 5,590   $ 2,426  

Long-term obligations

    30       24     22       27       32       37      

Business Unit equity

    2,957       4,194     3,773       4,261       4,316       4,303     1,257  

Summary Selected Historical Financial Data of Domtar

The following summary historical financial information of Domtar for each of the fiscal years in the five year period ended December 31, 2005 and the financial data as of September 30, 2006 and 2005 and for the nine-month periods then ended has been derived from the consolidated financial statements of Domtar. This information is only a summary and should be read in conjunction with the restated financial statements of Domtar and the notes thereto and the Management’s Discussion and Analysis for the year ended December 31, 2005 filed with the Canadian securities regulatory authorities and the SEC on December 15, 2006 and for the period ended September 30, 2006 filed with the Canadian securities regulatory authorities and the SEC on October 31, 2006, in each case as amended by filings made by Domtar with the Canadian securities regulatory authorities and the SEC on January 26, 2007. See “Where You Can Find More Information”.

 

35


Table of Contents

Effective in the second quarter of 2006, Domtar has presented its Vancouver paper mill as a discontinued operation and as assets held for sale in its consolidated financial statements pursuant to the Canadian Institute of Chartered Accountants (CICA) Handbook, Section 3475, Disposal of Long-lived Assets and Discontinued Operations under Canadian accounting rules and to Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS No. 144”) under U.S. accounting rules. In accordance with the relevant accounting and SEC requirements, Domtar has restated its historical financial statements for each of the fiscal years in the five year period ended December 31, 2005 and the related Management’s Discussion and Analysis for each of the fiscal years ended December 31, 2005, December 31, 2004 and December 31, 2003 to present the Vancouver paper mill as a discontinued operation. This reclassification has no effect on Domtar’s reported net earnings; “Earnings (loss) from continuing operations” and “Loss from discontinued operations” are presented as new lines in the statement of earnings and “Assets held for sale” is presented as a new line item on the balance sheet. Domtar’s restated financial statements for the fiscal years ended December 31, 2002 and 2001 are not audited. See “Where You Can Find More Information”.

Domtar’s historical financial information reflects Domtar’s ownership of a 50% equity interest in Norampac. Under Canadian GAAP, Domtar’s financial statements include 50% of each item in Norampac’s financial statements and present Norampac as a separate segment. Under US GAAP, Domtar’s financial statements present this interest as an equity investment. On December 29, 2006, Domtar sold its interest in Norampac to Cascades Inc., for a cash consideration of Cdn.$560 million (the U.S. dollar equivalent of which is $480.6 million at an exchange rate of 1.1653 Canadian dollars per U.S. dollar, the noon buying rate of the Bank of Canada on December 29, 2006). See “Business of Domtar” and “Where You can Find More Information”.

 

CANADIAN GAAP/ Cdn.$   Nine Months Ended
September 30,
    Year Ended December 31,
    2006   2005     2005     2004     2003     2002   2001
(Dollars in millions, except per share data)   (Unaudited)   (Unaudited)     (Restated)     (Restated)     (Restated)    

(Unaudited/

Restated)

 

(Unaudited/

Restated)

Consolidated Statement of Earnings Data:

             

Sales

  $ 3,527   $ 3,743     $ 4,880     $ 5,029     $ 5,039     $ 5,792   $ 4,569

Net earnings (loss) from continuing operations

    13     (29 )     (307 )     (24 )     (158 )     138     148

Net earnings (loss)

    5     (40 )     (388 )     (42 )     (193 )     141     140

Net earnings (loss) per share from continuing operations – basic and diluted

    0.05     (0.13 )     (1.34 )     (0.10 )     (0.70 )     0.60     0.76

Net earnings (loss) per share – basic

    0.02     (0.18 )     (1.69 )     (0.19 )     (0.86 )     0.62     0.72

Net earnings (loss) per share – diluted

    0.02     (0.18 )     (1.69 )     (0.19 )     (0.86 )     0.61     0.72
    As at September 30,     As at December 31,
    2006   2005     2005     2004     2003     2002   2001
    (Unaudited)   (Unaudited)     (Restated)     (Restated)     (Unaudited/
Restated)
   

(Unaudited/

Restated)

 

(Unaudited/

Restated)

Consolidated Balance Sheet Data:

             

Total assets

  $ 4,881   $ 5,519     $ 5,192     $ 5,681     $ 5,848     $ 6,847   $ 7,055

Total long-term debt (including current portion, excluding capital leases)

    2,080     2,060       2,248       2,023       2,048       2,503     2,910

Shareholders’ equity

    1,596     1,951       1,609       2,046       2,168       2,554     2,426

Domtar’s consolidated financial statements are prepared in accordance with Canadian GAAP, unless otherwise indicated, which differs from U.S. GAAP in certain significant respects. The following provides Domtar’s consolidated financial information as reconciled to U.S. GAAP and translated from Canadian dollars to U.S. dollars for the periods presented. This information should be read in connection with the discussion of the principal differences between Canadian GAAP and U.S. GAAP as well as the reconciliation and other financial information provided in note 25 to Domtar’s restated consolidated financial statements for the year ended December 31, 2005 filed with the Canadian securities regulatory authorities and the SEC on December 15, 2006

 

36


Table of Contents

and Domtar’s U.S. GAAP reconciliation for the nine months ended September 30, 2006 filed with the Canadian securities regulatory authorities on November 20, 2006 and with the SEC on November 22, 2006, in each case as amended by filings made by Domtar with the Canadian securities regulatory authorities and the SEC on January 26, 2007.

The consolidated earnings and consolidated balance sheets are expressed in Canadian dollars and, solely for the convenience of the reader, the consolidated earnings and consolidated balance sheet for each of the fiscal years in the five year period ended December 31, 2005, the financial data as of September 30, 2006 and 2005 and for the nine-month periods then ended and the tables of certain related notes, have been translated into U.S. dollars using the period end rate for the balance sheet and the average of the monthly average rates during the period for the statement of earnings, as set forth in the note to the table below. This translation should not be construed as an application of the recommendations relating to the accounting for foreign currency translation, but rather as supplemental information for the reader. The pro forma financial information with respect to the Combined Company contained in this document was prepared using Domtar’s U.S. GAAP/U.S. dollar results as derived by the reconciliations and transactions described above.

 

U.S. GAAP/ U.S. dollar(1)   Nine Months Ended
September 30,
    Year Ended December 31,
    2006     2005     2005     2004     2003     2002   2001
(Dollars in millions, except per share data)   (Unaudited)     (Unaudited)     (Restated)     (Restated)     (Restated)     (Unaudited/
Restated)
  (Unaudited/
Restated)

Consolidated Statement of Earnings Data:

             

Sales

  $ 2,672     $ 2,657     $ 3,498     $ 3,372     $ 3,183     $ 3,237   $ 2,563

Net earnings (loss) from continuing operations

    (4 )     (33 )     (332 )     (45 )     (86 )     166     61

Net earnings (loss)

    (11 )     (41 )     (414 )     (58 )     (109 )     139     54

Net earnings (loss) per share from continuing operations – basic and diluted

    (0.03 )     (0.15 )     (1.44 )     (0.19 )     (0.38 )     0.73     0.32

Net earnings (loss) per share – basic

    (0.05 )     (0.18 )     (1.81 )     (0.26 )     (0.49 )     0.61     0.28

Net earnings (loss) per share – diluted

    (0.05 )     (0.18 )     (1.81 )     (0.26 )     (0.49 )     0.60     0.28
    As at September 30,     As at December 31,
    2006     2005     2005     2004     2003     2002   2001
    (Unaudited)     (Unaudited)     (Restated)     (Restated)     (Unaudited/
Restated)
    (Unaudited/
Restated)
  (Unaudited/
Restated)

Consolidated Balance Sheet Data:

             

Total assets

  $ 4,070     $ 4,644     $ 4,172     $ 4,554     $ 4,384     $ 4,202   $ 4,279

Total long-term debt (including current portion, excluding capital leases)

    1,691       1,621       1,741       1,534       1,437       1,452     1,702

Shareholders’ equity

    1,389       1,771       1,348       1,849       1,801       1,690     1,570

(1) The following table sets forth, for each period indicated, for one U.S. dollar expressed in Canadian dollars, the exchange rate at the end of the period and the average of the monthly average rates during the period, based on the Bank of Canada noon rate:

 

     Nine Months Ended
September 30,
   Year Ended December 31,
       2006        2005      2005    2004    2003    2002    2001

Period end

   1.1153    1.1611    1.1659    1.2036    1.2924    1.5796    1.5926

Average

   1.1327    1.2241    1.2114    1.3015    1.4015    1.5704    1.5485

 

37


Table of Contents

Summary Unaudited Condensed Combined Pro Forma Financial Data and Pro Forma Per Share Data of Spinco

The summary below sets forth summary unaudited condensed combined pro forma financial data for Spinco after giving effect to the Transactions, including the Arrangement with Domtar and Domtar’s disposition of its equity interest in Norampac, for the periods indicated. The unaudited pro forma combined per share data for Spinco presented below for the fiscal year ended December 25, 2005 and for the thirty-nine weeks ended September 24, 2006 combines certain per share financial data of Spinco and Domtar. Because holders of Domtar common shares will own, immediately following the Arrangement, one share of common stock of Spinco (or one exchangeable share of Newco Canada Exchangeco, which is exchangeable for one share of common stock of Spinco) for each Domtar common share they owned immediately prior to the Arrangement, the pro forma equivalent data for Domtar will be the same as the corresponding pro forma combined per share data for Spinco. The following pro forma financial data was prepared using Domtar’s U.S. GAAP/U.S. dollar results as described above under “– Summary Selected Historical Financial Data of Domtar”. The following table should be read together with the financial statements and accompanying notes of Spinco, the Weyerhaeuser Fine Paper Business and Domtar included in this document or in the documents described under “Where You Can Find More Information” and the unaudited pro forma condensed combined financial information and accompanying notes set forth under the heading “Unaudited Pro Forma Condensed Combined Financial Information of Spinco” in this document. The pro forma amounts in the table below are presented for illustrative purposes only and do not indicate what the financial position or the results of operations of Spinco and the Weyerhaeuser Fine Paper Business would have been had the Transactions and the Norampac disposition occurred as of the dates or for the periods presented. The pro forma amounts also do not indicate what the financial position or future results of operations of Spinco and the Weyerhaeuser Fine Paper Business will be. No adjustment has been included in the pro forma amounts for any anticipated cost savings or other synergies. See “Unaudited Pro Forma Condensed Combined Financial Information of Spinco”.

    

Thirty-Nine

Weeks Ended

September 24,

2006

   

Year Ended

December 25,

2005

 
(Dollars in millions, except per share data)    (Unaudited)     (Unaudited)  

Sales

   $ 5,076     $ 6,714  

Net loss from continuing operations

     (785 )     (723 )

Net loss from continuing operations per share – basic and diluted

     (1.54 )     (1.42 )

Book value per share

     5.96       N/A  

Dividends per share

            

Total assets

     7,719       N/A  

Total long-term debt

     2,560       N/A  

Shareholders’ equity

     3,035       N/A  

 

38


Table of Contents

Historical Per Share Data, Market Price and Dividend Data

The pro forma per share data of Spinco is included above in “– Summary Unaudited Condensed Combined Pro Forma Financial Data and Pro Forma Per Share Data of Spinco”. Historical per share data and market price data for Spinco has not been presented as the Weyerhaeuser Fine Paper Business is currently operated by Weyerhaeuser and there is no established trading market in Spinco common stock. Shares of Spinco common stock do not currently trade separately from Weyerhaeuser common shares.

Domtar common shares currently trade on the Toronto Stock Exchange and the New York Stock Exchange under the symbol “DTC”. On August 22, 2006, the last trading day before the announcement of the combination, the last sale price of Domtar common shares reported by the Toronto Stock Exchange was Cdn.$7.65. On January 22, 2007, the last sale price of Domtar common shares reported by the Toronto Stock Exchange was Cdn.$9.53. Because holders of Domtar common shares will own, immediately following the Arrangement, one share of Spinco common stock (or one exchangeable share of Newco Canada Exchangeco, which is exchangeable for one share of Spinco common stock) for each Domtar common share they owned immediately prior to the Arrangement, Spinco expects but cannot assure that the market price data for Spinco immediately after the consummation of the Transactions will be substantially similar to the market price data for Domtar immediately prior to the consummation of the Transactions. The following table sets forth the high and low closing sale prices of Domtar common shares for the periods indicated. The quotations are as reported in published financial sources. For current price information, Domtar shareholders are urged to consult publicly available sources.

 

     Domtar Inc.
Common Stock
     High    Low
(Canadian Dollars)          

Calendar Year Ended December 31, 2004

     

First Quarter

   $ 16.80    $ 14.50

Second Quarter

     17.70      15.28

Third Quarter

     17.43      15.20

Fourth Quarter

     15.99      13.80

Calendar Year Ended December 31, 2005

     

First Quarter

     14.52      9.90

Second Quarter

     10.75      8.90

Third Quarter

     9.50      7.46

Fourth Quarter

     7.73      4.75

Calendar Year Ended December 31, 2006

     

First Quarter

     8.30      5.50

Second Quarter

     8.70      6.35

Third Quarter

     7.85      6.42

Fourth Quarter

     9.85      6.70

Calendar Year Ended December 31, 2007

     

First Quarter (through January 22, 2007)

     10.00      9.28

Domtar has not paid a dividend on its common shares since October 2005, and Spinco does not intend to pay a dividend on the shares of Spinco common stock for the foreseeable future. See “The Transactions – Dividend Policy”.

 

39


Table of Contents

RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained in this document. Some of the risks described below relate principally to Spinco’s business and the industry in which it will operate, while others relate principally to the Transactions, including Spinco’s separation from Weyerhaeuser and the combination of Spinco’s business with Domtar. The remaining risks relate principally to the securities markets generally and ownership of common stock of Spinco and exchangeable shares of Newco Canada Exchangeco. By voting in favour of the Arrangement, holders of Domtar common shares and Domtar stock options will be choosing to invest in Spinco common stock or in exchangeable shares of Newco Canada Exchangeco, which are exchangeable for Spinco common stock.

Risks Related to Spinco’s Industries and Business after the Consummation of the Transactions

The pulp, paper and wood product industries are highly cyclical. Fluctuations in the prices of and the demand for the Combined Company’s products could result in smaller profit margins and lower sales volumes.

The pulp, paper and wood product industries are highly cyclical. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for the Combined Company products. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of industry capacity. Most of the Combined Company’s paper products will be commodities that are widely available from other producers. Even the Combined Company’s non-commodity products, such as value-added papers, are susceptible to commodity dynamics. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand.

The overall levels of demand for the products the Combined Company will manufacture and distribute, and consequently its sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general macroeconomic conditions in North America and worldwide, as well as competition from electronic substitution. See “– Some of the Combined Company’s products are vulnerable to long-term declines in demand due to competing technologies or materials”. For example, demand for cut-size office paper may fluctuate with levels of white-collar employment. Demand for many of such products was materially and negatively impacted by the global economic downturn, among other things, in the early part of this decade, and it is expected that the Combined Company will be sensitive to such downturns in the future.

Industry supply of pulp, paper and wood products is also subject to fluctuation, as changing industry conditions can influence producers to idle or permanently close individual machines or entire mills. In addition, to avoid substantial cash costs in connection with idling or closing a mill, some producers will choose to continue to operate at a loss, sometimes even a cash loss, which could prolong weak pricing environments due to oversupply. Over-supply can also result from producers introducing new capacity in response to favourable short-term pricing trends.

Industry supply of pulp, paper and wood products is also influenced by overseas production capacity, which has grown in recent years and is expected to continue to grow. While the weakness of the U.S. dollar has mitigated the levels of imports in recent years, imports of pulp, paper and wood products from overseas may increase putting downward pressure on prices.

As a result, prices for all of the Combined Company’s products are driven by many factors outside of its control, and it will have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond the Combined Company’s control determine the prices for its commodity products, the price for any one or more of these products may fall below its cash production costs, requiring it to

 

40


Table of Contents

either incur cash losses on product sales or cease production at one or more of its manufacturing facilities. Therefore, the Combined Company’s profitability with respect to these products depends on managing its cost structure, particularly wood fibre, chemical and energy costs, which represent the largest components of its operating costs and can fluctuate based upon factors beyond its control, as described below. If the prices of or demand for its products decline, or if its wood fibre, chemical or energy costs increase, or both, its sales and profitability could be materially and adversely affected.

Some of the Combined Company’s products are vulnerable to long-term declines in demand due to competing technologies or materials.

The Combined Company’s business will compete with electronic transmission and document storage alternatives, as well as with paper grades it will not produce, such as uncoated groundwood. As a result of such competition, both the Weyerhaeuser Fine Paper Business and Domtar have experienced decreased demand for some of their existing pulp and paper products. As the use of these alternatives grows, demand for pulp and paper products is likely to further decline. Moreover, demand for some of the Combined Company’s wood products may decline if customers purchase alternatives from other sources.

The Combined Company will face intense competition in its markets, and the failure to compete effectively would have a material adverse effect on its business, financial condition and results of operations.

The Combined Company will compete with both U.S. and Canadian paper producers and, for many of its product lines, global producers, some of which may have greater financial resources and lower production costs than the Combined Company. The principal basis for competition is selling price. The Combined Company’s ability to maintain satisfactory margins depends in large part on its ability to control costs. There can be no assurance that the Combined Company will be able to compete effectively and maintain current levels of sales and profitability. If the Combined Company is unable to compete effectively, such failure would have a material adverse effect on its business, financial condition and results of operations.

The Combined Company’s manufacturing businesses may have difficulty obtaining wood fibre at favourable prices, or at all.

Wood fibre will be the principal raw material used by the Combined Company, comprising, on a pro forma basis, approximately 20% of the aggregate amount of materials, labour and other operating expenses and fibre costs for its business during 2005. Wood fibre is a commodity, and prices historically have been cyclical. The primary source for wood fibre is timber. Environmental litigation and regulatory developments have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in the U.S. and Canada. In addition, future domestic or foreign legislation and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest health and the response to and prevention of catastrophic wildfires could also affect timber supplies. Availability of harvested timber may further be limited by fire, insect infestation, disease, ice storms, wind storms, flooding and other natural and man made causes, thereby reducing supply and increasing prices. Wood fibre pricing is subject to regional market influences, and the Combined Company’s cost of wood fibre may increase in particular regions due to market shifts in those regions. Any sustained increase in wood fibre prices would increase the Combined Company’s operating costs, and the Combined Company may be unable to increase prices for its products in response to increased wood fibre costs due to additional factors affecting the demand or supply of these products.

The Province of Québec adopted legislation, which became effective April 1, 2005, that reduced allowable wood-harvesting volumes by an average of 20% on public lands and 25% on territories covered by an agreement between the Government of Québec and the Cree First Nations. As a result, the amount of fibre, primarily softwood fibre, the Combined Company is permitted to harvest annually, under its existing licenses from the Québec government, was reduced by approximately 500,000 cubic meters or 21%. This affects the supply of fibre for the Combined Company’s Northern Québec softwood sawmill and market pulp operations. Spinco is

 

41


Table of Contents

currently working on finding solutions such as obtaining alternate sources of fibre. The reduction in harvest volume results in a corresponding increase in the unit cost of wood delivered to the sawmills. As a result of the impact of the strength of the Canadian dollar against the U.S. dollar, low lumber prices and other factors, these operations have been shut down and the facilities relating to such operations have been closed indefinitely. There is no assurance that access to fibre will continue at the same levels achieved in the past. The cost of softwood fibre and the availability of wood chips may be affected.

Historically, Weyerhaeuser provided, on average, approximately 50% of the wood fibre requirements for the Weyerhaeuser Fine Paper Business, which would be approximately 19% of the Combined Company’s wood fibre requirements. The Combined Company expects to obtain its future wood fibre requirements in part by harvesting timber pursuant to its forest licenses and forest management agreements, in part by purchasing wood fibre from Weyerhaeuser pursuant to the fibre and pulp supply agreements to be entered into in connection with the Transactions and in part by purchasing wood fibre from third parties. If the Combined Company’s cutting rights pursuant to its forest licenses or forest management agreements are reduced or if Weyerhaeuser or any third-party supplier of wood fibre stops selling or is unable to sell wood fibre to the Combined Company, its financial condition and operating results would suffer. See “Spinco’s Relationship With Weyerhaeuser After the Transactions – Supply Agreements”. See also “– Risks Related to the Transactions – Aboriginal interests may delay or result in challenges to the transfer of certain forest licenses and forest management agreements”.

An increase in the cost of the Combined Company’s purchased energy or chemicals would lead to higher manufacturing costs, thereby reducing its margins.

The Combined Company’s operations will consume substantial amounts of energy such as electricity, natural gas, fuel oil, coal and hog fuel (wood waste). Energy comprised, on a pro forma basis, approximately 7% of the aggregate amount of materials, labour and other operating expenses and fibre costs for the Combined Company’s business during 2005. Energy prices, particularly for electricity, natural gas and fuel oil, have been volatile in recent years and currently exceed historical averages. Moreover, following the Distribution, the Weyerhaeuser Fine Paper Business will no longer benefit from Weyerhaeuser’s company-wide hedging program for energy prices. As a result, fluctuations in energy prices will impact the Combined Company’s manufacturing costs and contribute to earnings volatility. While the Combined Company will purchase substantial portions of its energy under supply contracts, many of these contracts will be based on market pricing.

Other raw materials the Combined Company will use include various chemical compounds, such as precipitated calcium carbonate, sodium chlorate and sodium hydroxide, dyes, resins and adhesives. Purchases of chemicals comprised, on a pro forma basis, approximately 10% of the aggregate amount of materials, labour and other operating costs and fibre costs for the Combined Company’s business during 2005. The costs of these chemicals have been volatile historically, and are influenced by capacity utilization, energy prices and other factors beyond the Combined Company’s control.

For the Combined Company’s commodity products, the relationship between industry supply and demand for these products, rather than changes in the cost of raw materials, will determine its ability to increase prices. Consequently, the Combined Company may be unable to pass increases in its operating costs to its customers. Any sustained increase in chemical or energy prices without any corresponding increase in product pricing would reduce its operating margins and potentially require it to limit or cease operations of one or more of its machines.

The Combined Company could experience disruptions in operations and/or increased labour costs due to labour disputes.

Employees at 44 of the Combined Company’s facilities are covered by collective bargaining agreements, generally on a facility-by-facility basis, which will need to be renegotiated from time to time. As is the case with any negotiation, the Combined Company may not be able to negotiate acceptable new collective bargaining agreements, which could result in strikes or work stoppages by affected workers. Renewal of collective

 

42


Table of Contents

bargaining agreements could also result in higher wages or benefits paid to union members. Therefore, the Combined Company could experience a disruption of its operations or higher ongoing labour costs, which could have a material adverse effect on its business, financial results and financial condition.

The Combined Company will rely heavily on a small number of significant customers, including one customer that represented approximately 12% of the Combined Company’s pro forma fiscal 2005 sales revenues. A loss of any of these significant customers could materially adversely affect the Combined Company’s business, financial condition or results of operations.

On a pro forma basis, the Combined Company will heavily rely on a small number of significant customers. The Combined Company’s largest customer, Unisource, an independent marketer and distributor of commercial printing and business imaging papers in North America, represented approximately 12% of its sales revenues in the fiscal year ended December 25, 2005.

The Combined Company’s customer base will include customers who were previously customers of both Weyerhaeuser and Domtar. This overlap may lead some of those customers to switch to other vendors in order to diversify their fine paper purchasing. A significant reduction in sales to any of its key customers (which could be due to factors outside its control, such as purchasing diversification) or financial difficulties experienced by these customers could materially adversely affect the Combined Company’s business, financial condition or results of operations.

A material disruption at one of the Combined Company’s manufacturing facilities could prevent it from meeting customer demand, reduce its sales and/or negatively impact its net income.

Any of the Combined Company’s paper or pulp manufacturing facilities, or any of its machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:

 

  ·   unscheduled maintenance outages;

 

  ·   prolonged power failures;

 

  ·   an equipment failure;

 

  ·   a chemical spill or release;

 

  ·   explosion of a boiler;

 

  ·   the effect of a drought or reduced rainfall on its water supply;

 

  ·   labour difficulties;

 

  ·   disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels;

 

  ·   fires, floods, earthquakes, hurricanes or other catastrophes;

 

  ·   terrorism or threats of terrorism; or

 

  ·   other operational problems.

Events such as those listed above have resulted in operating losses in the past. In the second quarter of 2002, for example, a recovery boiler at facilities of the Weyerhaeuser Fine Paper Business in Plymouth, North Carolina exploded, causing operations at these facilities to be shut down for repairs for a period of 107 days from May 8, 2002 to August 23, 2002. Spinco estimates that the repair costs, business disruption and increased operating costs associated with the recovery boiler explosion negatively impacted operating income of the Weyerhaeuser Fine Paper Business by approximately $70 million (before insurance recovery) during the second and third quarters of 2002. Also, in May 2006, facilities of the Weyerhaeuser Fine Paper Business in Plymouth, North Carolina experienced a disruption in their power supply, causing damage to a turbine generator necessary to convert high pressure steam to medium and low pressure steam used by the various mill processes. As a result of this damage, various mill operations at Plymouth, North Carolina facilities of the Weyerhaeuser Fine Paper Business were

 

43


Table of Contents

shut down for repairs for up to eleven days. Spinco estimates the total financial impact of this incident on operating income of the Weyerhaeuser Fine Paper Business to be $11 million including repair costs, the opportunity value of lost production and increased operating costs. Future events may cause similar shutdowns, which may result in additional downtime and/or cause additional damage to the Combined Company’s facilities. Any such downtime or facility damage could prevent the Combined Company from meeting customer demand for its products and/or require it to make unplanned capital expenditures. If one of these machines or facilities were to incur significant downtime, the Combined Company’s ability to meet its production targets and satisfy customer requirements would be impaired, resulting in lower sales and income.

The Combined Company’s operations require substantial capital, and it may not have adequate capital resources to provide for all of its capital requirements. On a pro forma basis, it is estimated that the Combined Company spent approximately $135 million on capital expenditures during 2006, and such expenditures could increase in the future.

The Combined Company’s businesses are capital intensive and require that it regularly incur capital expenditures in order to maintain its equipment, increase its operating efficiency and comply with environmental laws. On a pro forma basis, the Combined Company’s total capital expenditures, were approximately $224 million during 2005, including approximately $207 million for maintenance capital and approximately $17 million for environmental expenditures. It is estimated that the Combined Company, on a pro forma basis, spent approximately $135 million on capital expenditures during 2006, including approximately $127 million for maintenance capital and approximately $8 million for environmental expenditures. If the Combined Company’s available cash resources and cash generated from operations are not sufficient to fund its operating needs and capital expenditures, the Combined Company would have to obtain additional funds from borrowings or other available sources or reduce or delay its capital expenditures. The Combined Company may not be able to obtain additional funds on favourable terms, or at all. In addition, the Combined Company’s debt service obligations will reduce its available cash flows. If the Combined Company cannot maintain or upgrade its equipment as it requires or ensure environmental compliance, it could be required to cease or curtail some of its manufacturing operations, or it may become unable to manufacture products that compete effectively in one or more of its product lines. For example, the air permit of the Weyerhaeuser Fine Paper Business for the Kamloops, British Columbia pulp manufacturing facility requires that the facility reduce air emissions of particulate matter by December 31, 2007. Compliance with the permit requirements is likely to require significant capital expenditures. Spinco is currently evaluating its options and is in discussions with the Province of British Columbia to extend the deadline for compliance. If the deadline is not extended or if the Combined Company does not have sufficient resources to make necessary capital expenditures, the facility may not be able to operate after 2007 without significantly curtailing output, which would increase the Combined Company’s production costs.

The Combined Company could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations. On a pro forma basis, it is estimated that the Combined Company incurred approximately $51 million in expenditures in connection with environmental compliance and remediation during 2005, and such expenditures could increase in the future.

The Combined Company will be subject, in both the U.S. and Canada, to a wide range of general and industry-specific laws and regulations relating to the protection of the environment, including those governing air emissions, wastewater discharges, harvesting, silvicultural activities, the storage, management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, landfill operation and closure obligations, forestry operations and endangered species habitat, and health and safety matters.

In particular, the pulp and paper industry in the U.S. is subject to Cluster Rules and Boiler Maximum Achievable Control Technology Rules that further regulate effluent and air emissions. These laws and regulations will require the Combined Company to obtain authorizations from and comply with the authorization requirements of the appropriate governmental authorities, which have considerable discretion over the terms and timing of permits.

 

44


Table of Contents

Weyerhaeuser and Domtar have incurred, and it is expected that the Combined Company will continue to incur, significant capital, operating and other expenditures complying with applicable environmental laws and regulations and as a result of remedial obligations. On a pro forma basis, the Combined Company incurred $51 million of expenditures in connection with environmental compliance and remediation during 2005. As of September 24, 2006, the Combined Company has, on a pro forma basis, a provision of $56 million for these environmental expenditures. In addition, during the first quarter of 2006, Weyerhaeuser closed its pulp and paper mill in Prince Albert, Saskatchewan and the Big River Sawmill in Saskatchewan. It has not been determined whether either of these facilities will be reopened, sold or permanently closed. In the event the facilities are permanently closed, the Province of Saskatchewan may require active decommissioning and reclamation at one or both facilities, which would likely include investigation and remedial action for areas of significant environmental impacts. The Province of Saskatchewan has required certain facilities located in the Province to submit preliminary decommissioning and reclamation plans and to include in such plans estimates of costs associated with decommissioning and reclamation activities. Weyerhaeuser submitted such a plan for its pulp and paper facility in Prince Albert, Saskatchewan. In its preliminary decommissioning and reclamation plan, Weyerhaeuser has included a preliminary, generalized estimate of costs ranging from Cdn.$20 to Cdn.$25 million. Weyerhaeuser has advised the Province of Saskatchewan that it was not providing a detailed delineation of costs at this time because such costs will depend on site specific factors, the professional judgments of environmental specialists and experts, further detailed environmental site assessments, and, most fundamentally, a decision about the future use or closure of the site. The estimate referred to above does not take into account the equipment resale value or scrap material value which is considered to be significant, nor does it include the cost of completing a phase II environmental site assessment or the cost of any remediation required based on such assessment.

The Combined Company also could incur substantial costs, such as civil or criminal fines, sanctions and enforcement actions (including orders limiting its operations or requiring corrective measures, installation of pollution control equipment or other remedial actions), cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws and regulations.

As the owner and operator of real estate, the Combined Company may be liable under environmental laws for cleanup, closure and other damages resulting from the presence and release of hazardous substances, including asbestos, on or from its properties or operations. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, the Combined Company’s liability may exceed forecasted amounts or the value of the property itself. The discovery of additional contamination or the imposition of additional cleanup obligations at the Combined Company’s or third-party sites may result in significant additional costs. Any material liability the Combined Company incurs could adversely impact its financial condition or preclude it from making capital expenditures that would otherwise benefit its business.

Enactment of new environmental laws or regulations or changes in existing laws or regulations, or interpretation thereof, might require significant expenditures.

The Combined Company may be unable to generate funds or other sources of liquidity and capital to fund environmental liabilities or expenditures.

The Combined Company will be affected by changes in currency exchange rates.

The Combined Company will manufacture a significant amount of pulp and paper in Canada. Sales of pulp and paper products by the Combined Company’s Canadian mills will be invoiced in U.S. dollars or in Canadian dollars linked to U.S. pricing but most of the costs relating to these products will be incurred in Canadian dollars. As a result, any decrease in the value of the U.S. dollar relative to the Canadian dollar will reduce the Combined Company’s profitability.

Exchange rate fluctuations are beyond the Combined Company’s control. Since January 1, 2002, the Canadian dollar has appreciated more than 40% relative to the U.S. dollar. This has had a material adverse effect

 

45


Table of Contents

on the sales and profitability of the Canadian operations of both the Weyerhaeuser Fine Paper Business and Domtar and may continue to have an adverse effect on the Combined Company’s business, financial results and financial condition.

The Combined Company may be required to pay significant lumber export taxes and/or countervailing and antidumping duties.

The Combined Company may experience reduced revenues and margins on its softwood lumber business as a result of lumber export taxes and/or countervailing and antidumping duty applications.

In April 2001, the Coalition for Fair Lumber Imports (the “Coalition”) filed two petitions with the U.S. Department of Commerce (the “Department”) and the International Trade Commission (the “ITC”) claiming that production of softwood lumber in Canada was being subsidized by Canada and that imports from Canada were being “dumped” into the U.S. market (sold at less than fair value). The Coalition asked that countervailing duty (“CVD”) and anti-dumping (“AD”) tariffs be imposed on softwood lumber imported from Canada.

In July 2006, the Canadian and U.S. governments announced a final settlement to this long-standing dispute. The provisions of the settlement include repayment of approximately 81% of the deposits, imposition of export measures in Canada, and measures to address long-term policy reform. On September 19, 2006, the Canadian Parliament voted 172-116 on a motion that empowered it to collect the export taxes provided for in the settlement. Legislation to implement the settlement became effective on December 14, 2006.

On October 12, 2006, Canada and the U.S. announced amendments that allow the settlement to be implemented as of this date. The amendments include a process that allows the U.S. to proceed with the revocation of CVD and AD orders.

It is possible that the CVD and AD tariffs or tariffs similar to the CVD and AD tariffs may again be imposed on the Combined Company, in the future.

Under the settlement agreement, Canadian softwood lumber exporters will pay an export tax when the price of lumber is at or below a threshold price. Under present market conditions, Canadian softwood lumber exports are subject to a 15% export charge which may rise to 22.5% in the event a province exceeds its total allotted export share.

Domtar is currently experiencing, and the Combined Company may continue to experience, reduced revenues and margins in the softwood lumber business as a result of the application of the settlement agreement. The settlement agreement could have a material adverse effect on our business, financial results and financial condition, including, but not limited to, facility closures or impairment of assets.

The Combined Company will depend on third parties for transportation services.

The Combined Company will rely primarily on third parties for transportation of the products it manufactures and/or distributes, as well as delivery of its raw materials. In particular, a significant portion of the goods it manufactures and raw materials it uses are transported by railroad or trucks, which are highly regulated. If any of its third-party transportation providers were to fail to deliver the goods it manufactures or distributes in a timely manner, the Combined Company may be unable to sell those products at full value, or at all. Similarly, if any of these providers were to fail to deliver raw materials to the Combined Company in a timely manner, it may be unable to manufacture its products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with the Combined Company, it may be unable to replace them at reasonable cost. Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm the Combined Company’s reputation, negatively impact its customer relationships and have a material adverse effect on its financial condition and operating results.

 

46


Table of Contents

The transition services to be provided by Weyerhaeuser may be difficult for the Combined Company to replace without operational problems and additional costs.

Newco and Exchangeco Subsidiary will enter into a transition services agreement with Weyerhaeuser pursuant to which Weyerhaeuser will provide us certain transition services for a period of time following the Distribution. These services will include, among others, certain services relating to finance and administration, human resources, payroll and information technology. If, after the expiration of the agreement, Spinco is unable to perform these services or replace them in a timely manner or on terms and conditions as favourable as those Spinco expects to receive from Weyerhaeuser, Spinco may experience operational problems and an increase in its costs. In addition, the costs for such services may be higher than the costs for such services when the Weyerhaeuser Fine Paper Business was operated as part of Weyerhaeuser. See “Spinco’s Relationship With Weyerhaeuser After the Transactions – Transition Services Agreement”, and “– Risks Related to the Transactions – The historical financial information of the Weyerhaeuser Fine Paper Business may not be representative of its results if it had been operated independently of Weyerhaeuser and, as a result, may not be a reliable indicator of its future results”.

Following separation from Weyerhaeuser, Spinco may experience increased costs resulting from decreased purchasing power, which could decrease its overall profitability.

Prior to separation from Weyerhaeuser, Spinco was able to take advantage of Weyerhaeuser’s size and reputation in procuring raw materials and other goods and services used both for its business and Weyerhaeuser’s other businesses. As a separate, stand-alone entity, the Combined Company may be unable to obtain similar goods, services and technology at prices or on terms as favourable as those obtained prior to the separation. Spinco expects to enter into a joint purchase agreement with Weyerhaeuser but cannot assure that it will obtain bulk purchase benefits from its suppliers.

The Combined Company has net liabilities with respect to its pension plans and the actual cost of its pension plan obligations could exceed current provisions. On a pro forma basis, as of September 24, 2006, the Combined Company’s defined benefit plans were underfunded by an aggregate of $251 million on a going concern basis.

As of September 24, 2006, the Combined Company’s defined benefit plans were, on a pro forma basis, underfunded by an aggregate of $251 million on a going concern basis. Its future funding obligations for the defined benefit pension plans depend upon changes to the level of benefits provided by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine minimum funding levels, actuarial data and experience, and any changes in government laws and regulations. Any adverse change to any of these factors may require the Combined Company to increase its cash contributions to the pension plans, and those added contributions could have a material adverse effect on its cash flows and results of operations.

Risks Related to Ownership of Spinco’s Common Stock and Exchangeable Shares of Newco Canada Exchangeco

The price of shares of common stock of Spinco and exchangeable shares of Newco Canada Exchangeco may be volatile.

The market price of Spinco’s common stock may be influenced by many factors, some of which are beyond its control, including those described above under “– Risks Related to Spinco’s Industries and Business after the Consummation of the Transactions” and the following:

 

  ·   actual or anticipated fluctuations in the Combined Company or its competitors’ operating results;

 

  ·   announcements by the Combined Company and its competitors of new products, capacity changes, significant contracts, acquisitions or strategic investments;

 

47


Table of Contents
  ·   the Combined Company and its competitors’ growth rates;

 

  ·   the financial market and general economic conditions;

 

  ·   changes in stock market analyst recommendations regarding the Combined Company, its competitors or the paper products industry generally, or lack of analyst coverage of its common stock;

 

  ·   sales of Combined Company common stock by our executive officers, directors and significant stockholders or sales of substantial amounts of common stock; and

 

  ·   changes in accounting principles.

In addition, there has been significant volatility in the market price and trading volume of securities of companies operating in the paper products industry, which has often been unrelated to the operating performance of particular companies.

Some companies that have had volatile market prices for their securities have had securities litigation brought against them. If litigation of this type is brought against Spinco, it could result in substantial costs and would divert management’s attention and resources.

As the exchangeable shares of Newco Canada Exchangeco will be substantially economically equivalent to and exchangeable for shares of common stock of Spinco, the exchangeable shares may also be influenced by the above factors.

You will not receive dividends for the foreseeable future.

Spinco does not intend to pay dividends for the foreseeable future. Certain institutional investors may invest only in dividend-paying equity securities or may operate under other restrictions which would prohibit or limit their ability to invest in Spinco’s common stock.

Spinco’s ability to pay dividends will be restricted by current and future agreements governing Spinco and its subsidiaries’ debt, including the senior secured credit facilities, as well as Delaware law and state regulatory authorities. See “Financing – Proposed Terms of the Senior Secured Credit Facilities”. Under Delaware law, Spinco’s board of directors may not authorize payment of a dividend unless it is either paid out of Spinco’s surplus, as calculated in accordance with the Delaware General Corporation Law, or, if Spinco does not have a surplus, it is paid out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. To the extent Spinco does not have adequate surplus or net profits, it will be prohibited from paying dividends.

Spinco’s ability to pay dividends will also depend on other factors, including the following:

 

  ·   the state of the Combined Company’s business, the environment in which it operates and the various risks it faces, including competition, changes in its industry and other risks summarized in this document;

 

  ·   the results of operations of Spinco’s subsidiaries and their ability to transfer funds to Spinco, as Spinco is a holding company and its principal assets are the equity interests it holds in its subsidiaries; and

 

  ·   Spinco’s future results of operations, financial condition, liquidity needs and capital resources.

As the dividend rights of the exchangeable shares are substantially economically equivalent to the dividend rights of Spinco common stock, the above is also applicable to the exchangeable shares.

Dividends paid with respect to the exchangeable shares may be subject to U.S. withholding tax notwithstanding the fact that the exchangeable shares are issued by a Canadian corporation.

No statutory, judicial or administrative authority exists that directly addresses the U.S. federal income tax treatment of the exchangeable shares and, therefore, such treatment is subject to some uncertainty. Spinco and

 

48


Table of Contents

Newco Canada Exchangeco currently intend to treat dividends (if any) received by non-U.S. holders of exchangeable shares as dividends distributed by Newco Canada Exchangeco and, therefore, not subject to U.S. withholding tax. If, contrary to this position, the IRS were to prevail in a possible claim that the exchangeable shares should be treated as shares of Spinco, non-U.S. holders of exchangeable shares would likely be subject to U.S. withholding tax on dividends at a rate of 30%, or a lower rate specified by an applicable income tax treaty between the U.S. and the country of residence of the non-U.S. holder. Furthermore, Spinco and Newco Canada Exchangeco may, whether as a result of a change in law, regulation, administrative practice or otherwise, decide to withhold U.S. tax on dividends paid on the exchangeable shares. See “Material Income Tax Considerations – Material U.S. Federal Income Tax Considerations to Domtar Securityholders”.

Delaware law, Spinco’s charter documents, Spinco’s rights agreement and the indemnity provisions under Spinco’s tax sharing agreement may impede or discourage a takeover of Spinco that you may consider favourable.

The anti-takeover provisions of the Delaware General Corporation Law impose various impediments on the ability of a third party to acquire control of Spinco, even if a change in control would be beneficial to its stockholders. For example, Spinco will be afforded the protections of Section 203 of the Delaware General Corporation Law, which will prevent it from engaging in a business combination with a person who acquires at least 15% of Spinco’s common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval was obtained. See “Certain Anti-Takeover Effects of Provisions of Spinco’s Certificate of Incorporation, Bylaws and Rights Plan and of Delaware Law”.

Spinco’s certificate of incorporation and bylaws will contain a number of provisions that could make the acquisition of Spinco by means of a tender offer, proxy contest or otherwise more difficult. For example, Spinco’s certificate of incorporation provides for a classified board, provides special majority requirements for the removal of directors and the filling of director vacancies, authorizes the issuance of preferred stock and does not permit stockholder action by written consent, and Spinco’s bylaws require advance notice of stockholder nominations and proposals. In addition, Spinco’s rights agreement will have the effect of inhibiting the acquisition of 10% or more of Spinco’s voting stock without the prior approval of its board of directors. See “Certain Anti-Takeover Effects of Provisions of Spinco’s Certificate of Incorporation, Bylaws and Rights Plan and of Delaware Law”.

Pursuant to the indemnity provisions of the tax sharing agreement between Weyerhaeuser and Spinco, an acquisition or further issuance of Spinco’s equity securities that triggers the application of certain gain recognition rules in the U.S. may require Spinco to indemnify Weyerhaeuser for the resulting tax. See “– Risks Related to the Transactions – Spinco may be affected by significant restrictions following the Transactions in order to avoid significant tax-related liabilities”.

These provisions could have the effect of delaying, deferring or preventing a change in control of Spinco, discourage others from making tender offers for its shares, lower the market price of its stock or impede the ability of its stockholders to change its management, even if such changes would be beneficial to Spinco’s stockholders.

The requirements associated with Spinco being a U.S. public company will require significant company resources and management attention.

Following the consummation of the Transactions, Spinco will become subject to the reporting requirements of the U.S. Securities and Exchange Act of 1934 (as amended) (the “U.S. Exchange Act”) and the Sarbanes-Oxley Act of 2002. The U.S. Exchange Act requires that Spinco file annual, quarterly and current reports with respect to the Combined Company’s business and financial condition. The Sarbanes-Oxley Act of 2002 requires, among other things, that Spinco maintain effective disclosure controls and procedures and internal controls for financial reporting. Spinco is a new company, and has not fully established the procedures and practices that it will be required to have as a public company. To establish these procedures and practices, Spinco will need to

 

49


Table of Contents

integrate the procedures and practices it will inherit from Weyerhaeuser (with respect to the Weyerhaeuser Fine Paper Business) and from Domtar (with respect to the Domtar business). In addition, any procedures and practices that exist with respect to the Domtar business may need to be amended to reflect the fact that Spinco is a U.S. company and, as such, subject to different U.S. disclosure requirements than Domtar, which was a Canadian company subject to the multijurisdictional disclosure system. As a result, Spinco may incur significant legal, accounting and other expenses. Further, the need to establish the corporate infrastructure demanded of a U.S. public company may divert management’s attention from integrating the two businesses and implementing the Combined Company’s growth strategy, which could prevent the Combined Company from growing sales and improving its financial condition. Spinco will also be a reporting issuer (or the equivalent) upon the consummation of the Transactions, in several Canadian provinces and territories. See “The Transactions – Ongoing Canadian Reporting Obligations”.

Risks Related to the Transactions

Spinco may not realize the anticipated synergies, cost savings and growth opportunities from the Transactions.

The success of the Transactions will depend, in part, on Spinco’s ability to realize the anticipated synergies, cost savings and growth opportunities from integrating the Weyerhaeuser Fine Paper Business with the Domtar business. Spinco’s success in realizing these synergies, cost savings and growth opportunities, and the timing of this realization, depends on the successful integration of such businesses and operations. Even if Spinco is able to integrate such businesses and operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings and growth opportunities that Weyerhaeuser and Domtar currently expect from this integration or that these benefits will be achieved within the anticipated time frame. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Transactions may be offset by the loss of Weyerhaeuser’s purchasing power, the costs incurred in integrating the businesses and operations and adverse conditions imposed by regulatory authorities on the combined business in connection with granting approval for the Transactions.

The integration of the Weyerhaeuser Fine Paper Business and the Domtar business following the Transactions may present significant challenges to Spinco’s management which could cause Spinco’s management to fail to respond effectively to the increasing forms of competition facing the Combined Company’s business.

There is a significant degree of difficulty and management distraction inherent in the process of separating from Weyerhaeuser and integrating the Weyerhaeuser Fine Paper Business and Domtar business. These difficulties include:

 

  ·   carrying on the ongoing business operations while separating the Weyerhaeuser Fine Paper Business from Weyerhaeuser and integrating the Weyerhaeuser Fine Paper Business with Domtar;

 

  ·   preserving customer, distribution, supplier and other important relationships of the Combined Company;

 

  ·   consolidating an organization with its executive head office located in Montréal, Canada and its operational headquarters located in Fort Mill, South Carolina;

 

  ·   integrating the business cultures of Weyerhaeuser and Domtar;

 

  ·   integrating information, purchasing, accounting, finance, sales, billing, payroll and regulatory compliance systems;

 

  ·   expanding the scope of the Combined Company’s operational and financial systems, which will increase its operating complexity;

 

  ·   incurring contingent obligations that were unforeseen; and

 

  ·   retaining key officers and personnel and successfully implementing succession planning.

 

50


Table of Contents

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the Combined Company’s business. Following the consummation of the Transactions, our new senior management team, which will be put into place by virtue of the Transactions, may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage the business of the Combined Company, service existing customers, attract new customers and develop new products or strategies. One potential consequence of such distractions could be the failure of management to realize opportunities to respond to the increasing sources and forms of competition that the Combined Company’s business will face. If Spinco’s senior management is not able to manage the integration process effectively, or if any significant business activities are interrupted as a result of the integration process (including as a result of a failure to implement the agreement for transition services by Weyerhaeuser), the Combined Company’s business could suffer.

There can be no assurance that Spinco will successfully or cost-effectively integrate the Weyerhaeuser Fine Paper Business and the Domtar business.

The failure to do so could have a material adverse effect on Spinco’s financial condition and results of operations and the Combined Company’s business following consummation of the Transactions.

Spinco expects that Spinco and Domtar will incur significant costs related to the Transactions that could have a material adverse effect on Spinco’s cash flows and operating results.

Spinco and Domtar will incur financial, legal and accounting costs that Spinco estimates will be approximately $90 million in connection with the Transactions. In addition, Spinco estimates that they will incur costs such as sales taxes, transfer taxes and information technology costs of approximately $50 million in connection with the separation of the Weyerhaeuser Fine Paper Business from Weyerhaeuser. Spinco also anticipates that they will incur significant costs in connection with the integration of the Weyerhaeuser Fine Paper Business and the Domtar business, including, among other things, costs relating to information technology integration, severance costs and the potential write-down of assets, which cannot be reasonably estimated at this time. These costs may have a material adverse effect on Spinco’s cash flows and operating results

Spinco may not be able to generate sufficient cash flows to meet its debt service obligations.

Spinco’s ability to make payments on and to refinance its indebtedness and to fund planned capital expenditures depends on the Combined Company’s ability to generate cash from its future operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond Spinco’s control. The Combined Company’s business may not generate sufficient cash flow from operations, or future borrowings under its senior secured credit facilities or from other sources may not be available in an amount sufficient to enable Spinco to repay its indebtedness or to fund its other liquidity needs, including capital expenditure requirements. Spinco may not be able to refinance any of its indebtedness on commercially reasonable terms, or at all. If Spinco cannot service its indebtedness, it may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of the business strategy for the Combined Company or prevent Spinco from entering into transactions that would otherwise benefit its business. Additionally, Spinco may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all. The restrictions on Spinco’s ability to issue equity securities or convertible debt securities during a two year period following the date of the Distribution without jeopardizing the intended tax consequences of the Transactions may make it difficult for Spinco to raise equity capital if needed to service its indebtedness.

Spinco’s substantial indebtedness, which would have been approximately $2.6 billion on a pro forma basis as of September 24, 2006, could adversely affect its financial condition and impair its ability to operate its business.

Upon consummation of the Transactions, Spinco will be a highly leveraged company. As of September 24, 2006, on a pro forma basis, Spinco would have had $2.6 billion of outstanding indebtedness, including $0.9 billion of indebtedness under its senior secured credit facilities (excluding unused availability under the

 

51


Table of Contents

revolving credit facility and outstanding and undrawn letters of credit) and $1.7 billion of indebtedness under Domtar’s existing debt agreements. In connection with this indebtedness, on a pro forma basis, Spinco would have approximately $200 million of annual interest payments and Spinco’s aggregate annual debt service obligations would have been approximately $210 million in each year from 2007 through 2010. This level of indebtedness could have important consequences to its financial condition and operating results and the Combined Company’s business.

Spinco’s substantial degree of indebtedness could have important consequences, including the following:

 

  ·   it may limit Spinco’s ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes;

 

  ·   a substantial portion of Spinco’s cash flows from operations will be dedicated to payments on its indebtedness and will not be available for other purposes, including its operations, capital expenditures and future business opportunities;

 

  ·   the debt service requirements of Spinco’s indebtedness could make it more difficult for Spinco to satisfy its other obligations;

 

  ·   Spinco’s borrowings under its senior secured credit facilities are at variable rates of interest, exposing it to the risk of increased interest rates;

 

  ·   it may limit Spinco’s ability to adjust to changing market conditions and place it at a competitive disadvantage compared to its competitors that have less debt; and

 

  ·   it may increase Spinco’s vulnerability to a downturn in general economic conditions or in its business, and may make it unable to carry out capital spending that is important to Spinco’s growth.

The terms of Spinco’s senior secured credit facilities and Domtar’s existing indebtedness will restrict Spinco’s ability to pursue its business strategies and operate the Combined Company’s business.

Domtar’s existing indebtedness contains, Spinco’s senior secured credit facilities will contain, and any of Spinco’s future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on Spinco. For example, its senior secured credit facilities will limit Spinco’s ability and the ability of its subsidiaries to make capital expenditures and will place restrictions on other matters customarily restricted in senior secured loan agreements, including restrictions on indebtedness, liens (including sale and leasebacks and guarantee obligations), fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, hedge agreements, dividends and other payments in respect of capital stock, changes in fiscal periods, environmental activity, payments and modifications of other material debt instruments, negative pledge clauses and clauses restricting subsidiary distributions, changes in lines of business, and amendments to the documents related to the Transactions to the extent that any such amendment would be materially adverse to the interests of the lenders.

Spinco’s senior secured credit facilities will also require it to achieve specified financial and operating results and maintain compliance with specified financial ratios. Spinco’s ability to comply with these ratios may be affected by events beyond its control. See “Financing – Proposed Terms of the Senior Secured Credit Facilities”.

The restrictions contained in Domtar’s existing indebtedness and Spinco’s senior secured credit facilities could:

 

  ·   limit Spinco’s ability to plan for or react to market conditions or meet capital needs or otherwise restrict its activities or business plans; and

 

  ·   adversely affect Spinco’s ability to finance the Combined Company’s operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in its interest.

 

52


Table of Contents

The historical financial information of the Weyerhaeuser Fine Paper Business may not be representative of its results if it had been operated independently of Weyerhaeuser and, as a result, may not be a reliable indicator of its future results.

The Weyerhaeuser Fine Paper Business is currently a fully integrated business unit of Weyerhaeuser. Consequently, the financial information of the Weyerhaeuser Fine Paper Business included in this document has been derived from the consolidated financial statements and accounting records of Weyerhaeuser and reflects assumptions and allocations made by Weyerhaeuser. The financial position, results of operations and cash flows of the Weyerhaeuser Fine Paper Business presented may be different from those that would have resulted had the Weyerhaeuser Fine Paper Business been operated independently. For example, in preparing the Weyerhaeuser Fine Paper Business financial statements, Weyerhaeuser has made an appropriate allocation of costs and expenses that are attributable to the Weyerhaeuser Fine Paper Business. However, these costs and expenses reflect the costs and expenses attributable to the Weyerhaeuser Fine Paper Business operated as part of a larger organization and do not reflect costs and expenses that would be incurred by this business had it been operated independently. As a result, the historical financial information of the Weyerhaeuser Fine Paper Business may not be a reliable indicator of future results.

Sales of Spinco’s common stock after the Transactions may negatively affect the market price of Spinco’s common stock and exchangeable shares of Newco Canada Exchangeco.

The market price of Spinco’s common stock could decline as a result of sales of a large number of shares of its common stock in the market after the Transactions or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for Spinco to sell equity securities in the future at a time and at a price that it deems appropriate.

Immediately following the consummation of the Transactions, Spinco will be owned approximately 55% by Weyerhaeuser shareholders or former Weyerhaeuser shareholders and approximately 45% by former holders of Domtar common shares (including through their ownership of exchangeable shares), in each case on a fully diluted basis. Currently, Weyerhaeuser and Domtar shareholders include index funds that have performance tied to the Standard & Poor’s 500 Index or other stock indices, and institutional investors subject to various investing guidelines.

Because Spinco may not be included in these indices following consummation of the Transactions or may not meet the investing guidelines of some of these institutional investors, these index funds and institutional investors may be required to sell Spinco common stock that they receive in the Transactions. In addition, the investment fiduciary of Weyerhaeuser’s defined contribution plans may decide to sell any Spinco common stock that the trust receives in the Transactions, or not participate in the exchange offer, in response to fiduciary obligations under applicable law. These sales may cause Spinco’s stock price to fall.

As the exchangeable shares of Newco Canada Exchangeco are substantially equivalent to the shares of common stock of Spinco the above may also negatively affect the market price of the exchangeable shares.

Regulatory agencies may delay or impose conditions on approval of the Transactions, which may diminish the anticipated benefits of the Transactions.

Consummation of the Transactions is conditioned upon the receipt of all material governmental consents, approvals, orders and authorizations, including the receipt of (a) the approval of Canadian authorities under the Investment Canada Act; (b) the final approval of the Arrangement by the Superior Court of Québec; and (c) a ruling from the IRS regarding the tax-free nature of the Contribution and Distribution. While Domtar intends to pursue vigorously all required governmental approvals and do not know of any reason why Domtar would not be able to obtain the necessary approvals in a timely manner, the requirement to receive these approvals before the Transactions are consummated could delay the consummation of the Transactions. In addition, these governmental agencies may condition their approval of the Transactions on the imposition of conditions that could adversely affect the Combined Company’s operating results or the value of common stock of Spinco. Any

 

53


Table of Contents

delay in the consummation of the Transactions or the imposition of conditions could diminish the anticipated benefits of the Transactions or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the Transactions. Any uncertainty over the ability of the companies to complete the Transactions could make it more difficult to retain key employees or to pursue the business strategies of the Combined Company.

Aboriginal interests may delay or result in challenges to the transfer of certain forest licences and forest management agreements.

Under applicable forestry legislation in the Provinces of Ontario and Saskatchewan, Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd. must obtain consent from the governments of Ontario and Saskatchewan with respect to the transfer of certain timber rights in Ontario and Saskatchewan. To the extent the Transactions constitute a change of control under Domtar’s forest licenses and forest management agreements, Domtar must obtain consent to the change of control from the government in Ontario with respect to certain timber rights in Ontario. In this event, Domtar must also provide notice to the government of Québec, which has the right to change the amount of allocated wood and territories under Domtar’s forest licenses. However, recent Supreme Court of Canada decisions have confirmed that the federal and provincial governments in Canada have a duty to consult with, and in certain circumstances, seek to accommodate aboriginal groups whenever there is a reasonable prospect that a government’s decision may adversely affect an aboriginal group’s interests in relevant land and resources that are the subject of the decision. Spinco expects that the governments of Ontario and Saskatchewan and, possibly, Québec may consult with relevant aboriginal groups in each province in connection with these consent approvals. This consultation process could result in delays, constrain access to the timber or give rise to additional costs. In addition, if the governments do not adequately discharge their obligations this could result in litigation. It is not possible at present to predict the risks associated with such litigation.

Spinco may be affected by significant restrictions following the Transactions in order to avoid significant tax-related liabilities.

Even if the Distribution otherwise qualifies as a tax-free reorganization in the U.S., the Distribution may not qualify as a transaction that is tax-free to Weyerhaeuser if 50% or more (by vote or value) of the equity securities of Weyerhaeuser or the equity securities of Spinco are acquired by persons other than Weyerhaeuser shareholders as part of a “plan” that includes the Distribution.

The tax sharing agreement requires that Spinco, its subsidiaries and certain affiliates of Spinco, for a two year period, avoid taking certain actions that might cause the Distribution to be treated as part of a plan pursuant to which 50% or more of Spinco’s equity securities are acquired. Certain of these actions subject to restrictions include:

 

  ·   redemption, recapitalization, repurchase or acquisition by Spinco of its capital stock;

 

  ·   issuance by Spinco of capital stock or convertible debt;

 

  ·   liquidation of Spinco;

 

  ·   discontinuance of the operations of the Weyerhaeuser Fine Paper Business contributed by Weyerhaeuser to Newco;

 

  ·   sale or disposition of (other than in the ordinary course of business) all or a substantial part of the Weyerhaeuser Fine Paper Business; or

 

  ·   other actions, omissions to act or transactions that could jeopardize the tax-free status of the Distribution.

To the extent that the tax-free status of the Distribution is lost because of an act or omission by Spinco after the date of the Distribution, Spinco generally will be required to indemnify, defend and hold harmless

 

54


Table of Contents

Weyerhaeuser from and against any and all resulting tax-related losses incurred by Weyerhaeuser and/or Weyerhaeuser shareholders, without regard to whether Weyerhaeuser has given Spinco prior written consent to the specific action taken by Spinco.

Because of these restrictions, Spinco may be limited in its ability to pursue strategic transactions or equity or convertible debt financing or engage in new business or other transactions that may maximize the value of its business.

A third party may seek an increase in consideration from Domtar under an existing contract in connection with the Transactions.

In 1998, Domtar acquired all of the issued and outstanding shares of E.B. Eddy Limited and E.B. Eddy Paper, Inc., an integrated producer of specialty paper and wood products. The purchase agreement relating to this acquisition includes a purchase price adjustment whereby, in the event of the acquisition by a third party of more than 50% of the shares of Domtar in specified circumstances, Domtar may be required to pay an increase in consideration of up to a maximum of Cdn.$120 million. This amount gradually declines over a 25-year period and as at December 31, 2006, the maximum amount of the purchase price adjustment was Cdn.$110 million.

Domtar does not believe that the consummation of the Transactions will trigger an obligation to pay an increase in consideration under the purchase price adjustment and intends to defend itself vigorously against any claims with respect thereto. However, Domtar (or, after the Arrangement, Spinco) may not be successful in its defence of such claims, if any, and, if it is ultimately required to pay an increase in consideration, such payment may have a material adverse effect on the Combined Company’s liquidity, results of operations and financial condition.

The trading prices of the exchangeable shares of Newco Canada Exchangeco and the common stock of Spinco may not reflect equivalent values.

Holders of exchangeable shares will have dividend, liquidation and voting rights that are substantially economically equivalent to the rights of holders of shares of common stock of Spinco. Spinco has been authorized to list its common stock on the New York Stock Exchange. An application has been made to the Toronto Stock Exchange for the listing of the common stock of Spinco and the exchangeable shares.

Because there will be separate listings on different exchanges, the trading prices of the exchangeable shares on the Toronto Stock Exchange and the common stock of Spinco on the New York Stock Exchange and the Toronto Stock Exchange may not reflect equivalent values after taking into account the exchange rate between the Canadian dollar and U.S. dollar. This may result in you having to exchange your exchangeable shares for common stock of Spinco in order to maximize the value of your investment prior to a sale.

Former Domtar shareholders who receive exchangeable shares of Newco Canada Exchangeco will experience a delay in receiving shares of common stock of Spinco from the date that they request an exchange, which may affect the value of the shares the holder receives in an exchange.

Former holders of Domtar common shares who ultimately receive exchangeable shares in the Arrangement and later request to receive common stock of Spinco in exchange for their exchangeable shares will not receive common stock of Spinco for 10 to 15 business days after the applicable request is received. During this 10 to 15 business day period, the market price of common stock of Spinco may increase or decrease. Any such increase or decrease would affect the value of the consideration to be received by the holder of exchangeable shares on the effective date of the exchange.

 

55


Table of Contents

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document and other materials Domtar has filed or will file with the Canadian securities regulatory authorities (as well as information included in Domtar’s other written or oral statements) contain, or will contain, disclosures which are “forward-looking statements”. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may”, “believe”, “will”, “expect”, “project”, “estimate”, “anticipate”, “plan”, “continue” or similar expressions. These forward-looking statements address, among other things, the anticipated effects of the Transactions. These forward-looking statements are based on the current plans and expectations of Domtar’s and Spinco’s management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any of them occurs, what effect they will have on the Combined Company’s results of operations or financial condition. These factors include, but are not limited to:

 

  ·   the effect of general economic conditions, particularly in the U.S. and Canada;

 

  ·   market demand for the Combined Company’s products, which may be tied to the relative strength of various U.S. and/or Canadian business segments;

 

  ·   energy prices;

 

  ·   raw material prices;

 

  ·   chemical prices;

 

  ·   performance of the Combined Company’s manufacturing operations including unexpected maintenance requirements;

 

  ·   the successful integration of the Weyerhaeuser Fine Paper Business with Domtar and the execution of internal performance plans;

 

  ·   the level of competition from domestic and foreign producers;

 

  ·   the effect of forestry, land use, environmental and other governmental regulations, and changes in accounting regulations;

 

  ·   the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters;

 

  ·   transportation costs;

 

  ·   the loss of current customers or the inability to obtain new customers;

 

  ·   legal proceedings;

 

  ·   changes in asset valuations, including writedowns of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons;

 

  ·   changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar;

 

  ·   the effect of timing of retirements and changes in the market price of Spinco common stock on charges for stock-based compensation;

 

  ·   performance of pension fund investments and related derivatives; and

 

  ·   the other factors described under “Risk Factors”.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this document. Domtar and Spinco assume no obligation to update or revise these forward-looking statements to reflect new events or circumstances.

 

56


Table of Contents

SPECIAL MEETING OF DOMTAR SECURITYHOLDERS

The accompanying Domtar proxy is solicited on behalf of Domtar’s management for use at the Domtar special meeting.

Date, Time and Place of the Domtar Special Meeting

The Domtar special meeting is scheduled to be held as follows:

 

Date:    February 26, 2007
Time:    10:00 a.m. (Montréal time)
Place:   

Centre Mont-Royal (Salon Mont-Royal)

2200 Mansfield Street

Montréal, Québec

Purpose of the Domtar Special Meeting

At the Domtar special meeting, Domtar securityholders will be asked to:

 

  1. Consider, pursuant to an interim order, dated January 26, 2007, of the Superior Court, District of Montréal, Province of Québec and, if deemed advisable, to pass, with or without variation, the Domtar securityholders resolution set out in Annex “A” attached to this document to approve the Arrangement to effect the combination of Domtar and the Weyerhaeuser Fine Paper Business; and

 

  2. Transact other business that may properly come before the Domtar special meeting or any adjournment or postponement of the Domtar special meeting.

The Transaction Agreement is attached as Annex “B” to this document. Other documents referred to in the Transaction Agreement (including the form of plan of arrangement and Contribution and Distribution Agreement) also are attached as Annexes to this document. Domtar securityholders are encouraged to read the Transaction Agreement in its entirety and the other information contained in this document, including the Annexes, carefully before deciding to vote.

Recommendation of the Domtar Board

Domtar’s board of directors unanimously recommends that Domtar securityholders vote FOR the approval of the Domtar securityholders resolution set out in Annex “A” attached to this document to approve the Arrangement under the Canada Business Corporations Act.

Record Date, Entitlement to Vote and Principal Holders of Domtar Securities

The Domtar board of directors has fixed the close of business on January 27, 2007 as the record date for determining Domtar securityholders entitled to notice of, and to vote at, the Domtar special meeting. As of January 22, 2007, there were (a) 231,605,809 Domtar common shares; (b) 67,476 Domtar Series A preferred shares; (c) 1,230,000 Domtar Series B preferred shares; and (d) 4,401,757 Domtar stock options outstanding and entitled to vote at the Domtar special meeting.

The only Domtar shareholder that, to the knowledge of Domtar management, as of January 22, 2007, owned beneficially, or exercised control or direction over more than 10% of the total outstanding Domtar common shares was CDP Capital, Inc. which, as of January 22, 2007, controlled 35,692,933 Domtar common shares or 15.41% of the total outstanding Domtar common shares as of that date.

To the knowledge of Domtar management, as of January 22, 2007, there were no Domtar shareholders who owned beneficially, or exercised control or direction over more than 10% of the total outstanding Domtar Series A preferred shares or the Domtar Series B preferred shares.

 

57


Table of Contents

As of January 22, 2007, directors and executive officers of Domtar and their affiliates collectively beneficially owned and had the right to vote 651,832 Domtar common shares, representing approximately 0.28% of such shares outstanding as of January 22, 2007, and 1,696,396 Domtar stock options, representing approximately 39% of the Domtar stock options outstanding as of that date.

Domtar will prepare, within 10 days after the record date, a list of the holders of Domtar common shares and Domtar preferred shares entitled to vote at the Domtar special meeting. The list of Domtar shareholders will be available for inspection at the offices of Computershare Trust Company of Canada, Domtar’s registrar and transfer agent, at 100 University Avenue, 9th Floor, Toronto, Ontario, Canada M5J 2Y1 during usual business hours.

Registered Holders of Domtar Shares

If you are a registered holder of Domtar shares at the close of business (Montréal time) on the record date, you are entitled to attend the Domtar special meeting in person or by proxy and to cast one vote for each Domtar share held by you on the record date.

Holders of Domtar Stock Options

If you are a holder of Domtar stock options at the close of business (Montréal time) on the record date, you are entitled to attend the Domtar special meeting in person or by proxy and to cast one vote for each Domtar stock option held by you on the record date, regardless of whether the Domtar stock options are currently exercisable.

Beneficial Owners of Domtar Shares

The names of the Domtar shareholders whose Domtar shares are held in the name of a broker or another intermediary will not appear on the list of Domtar shareholders. If you are not a registered Domtar shareholder, in order to vote you must obtain the materials relating to the Domtar special meeting from your broker or other intermediary, complete the request for voting instructions sent by the broker or other intermediary and follow the directions of the broker or other intermediary with respect to voting procedures.

In accordance with National Instrument 54-101 – Communication with Beneficial Owners of Securities of a Reporting Issuer, adopted by the Canadian securities regulatory authorities, Domtar is distributing copies of the materials related to the Domtar special meeting to the clearing agencies and intermediaries for distribution to beneficial owners of Domtar shares. Intermediaries must forward the materials related to the Domtar special meeting to beneficial owners of Domtar shares and often use a service company (such as ADP Investor Communications in Canada) to permit you, if you are not a registered Domtar shareholder, to direct the voting of the Domtar shares which you beneficially own. If you are a beneficial Domtar shareholder, you may revoke voting instructions which have been given to an intermediary at any time by written notice to the intermediary. If you are a beneficial Domtar shareholder, please submit your voting instructions to your intermediary or broker in sufficient time to ensure that your votes are received by Domtar on or before 5:00 p.m., Montréal time, on February 23, 2007.

Quorum and Votes Required

Attendance in person or by proxy by holders of Domtar shares representing not less than 25% of the votes which the holders of all the outstanding Domtar shares carrying voting rights at the Domtar special meeting are entitled to cast, will constitute a quorum for the transaction of business at the Domtar special meeting. If a quorum is not present, the Domtar special meeting may be adjourned to allow additional time for obtaining additional proxies or votes. At any subsequent reconvening of the Domtar special meeting, all proxies will be voted in the same manner as the proxies would have been voted at the original convening of the Domtar special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the subsequent meeting.

 

58


Table of Contents

In accordance with the interim order of the Superior Court, District of Montréal, Province of Québec:

 

  ·   The requisite approval for the Domtar securityholders resolution will be:

 

  ·   66 2/3% of the votes cast at the Domtar special meeting by Domtar securityholders present in person or by proxy; and

 

  ·   66 2/3% of the votes cast at the Domtar special meeting by holders of Domtar common shares and Domtar preferred shares present in person or by proxy, excluding (a) holders of Domtar stock options; (b) holders of Domtar common shares, which are pledged to secure loans provided pursuant to the Domtar Executive Stock Option and Share Purchase Plan; and (c) holders of Domtar common shares who also hold Domtar stock options.

Any spoiled votes, illegible votes and defective votes will be considered not to be votes cast.

Proxies

Your vote is very important. Whether or not you plan to attend the Domtar special meeting, Domtar urges you to vote promptly to ensure that your Domtar shares and Domtar stock options are represented at the Domtar special meeting. You may vote by mail by dating and signing the enclosed form of proxy and promptly returning it in the postage-paid envelope provided. For a proxy to be valid, you (or your attorney, who must be authorized in writing) must sign and date it, and must either return it in the envelope provided or deposit it at the offices of Computershare Trust Company of Canada, Stock Transfer Services, 100 University Avenue, 9th Floor, Toronto, Ontario M5J 2Y1 not later than 5:00 p.m. (Montréal time) on February 23, 2007 or, if the Domtar special meeting is adjourned or postponed, before 5:00 p.m. (Montréal time) on the second business day before the date the adjourned or postponed Domtar special meeting is to be reconvened. An undated but executed proxy will be deemed to be dated as of the date of this document.

You may also cast your vote by proxy via the internet at the website indicated on your proxy form or by telephone by calling the toll-free number shown on your proxy form and following the instructions. You must do so not later than 5:00 p.m. (Montréal time) on February 23, 2007 or, if the Domtar special meeting is adjourned or postponed, before 5:00 p.m. (Montréal time) on the second business day before the date the Domtar special meeting is to be reconvened. You will also need your control number located on the front of your proxy form to identify yourself to the system. If you submit your proxy via the internet or by telephone, please do not return a signed form of proxy. A signed and completed form of proxy or properly submitted telephone or internet proxies received by Domtar prior to or at the Domtar special meeting will be voted as instructed.

There are four forms of proxy applicable to Domtar shares: a purple bar coded proxy applicable to holders of Domtar common shares, a white bar coded proxy applicable to holders of Domtar Series A preferred shares, a white bar coded proxy applicable to holders of Domtar Series B preferred shares and, if you also hold Domtar stock options, you should have received a blue bar coded form of proxy to be used in connection with the Domtar special meeting. Please be sure to execute a vote – by telephone, internet or mail – with regard to each form of proxy you receive.

If you need an additional form of proxy, please contact Domtar’s proxy solicitor, Georgeson, toll free within North America at 1-866-598-9986 (English and French speakers) and collect calls outside North America and for Banks and Brokers at 212-440-9800.

If your broker or other nominee holds your Domtar shares in its name, carefully follow the instructions given to you by your broker or other intermediary to ensure that your Domtar shares are properly voted.

Voting of Proxies

The individuals named in the enclosed form of proxy will vote the Domtar shares and Domtar stock options represented by proxy in accordance with the instructions of the Domtar securityholder who appointed them

 

59


Table of Contents

(including on any ballot that may be called for). If you submit a validly executed proxy without providing instructions, the Domtar shares and Domtar stock options represented by the proxy will be voted “FOR” the Domtar securityholders resolution. The enclosed form of proxy, when properly completed and signed, confers discretionary authority on the appointed individuals to vote as they see fit on any amendment or variation to any of the matters identified in the Notice of Special Meeting of Domtar Securityholders and on any other matter that may properly be brought before the Domtar special meeting. At the date of this document, neither the Domtar board of directors nor management of Domtar is aware of any variation, amendment or other matter to be presented for a vote at the Domtar special meeting.

Revocation of Proxies

If you are a holder of Domtar stock options or a registered holder of Domtar shares, you may revoke a proxy at any time before the Domtar special meeting:

 

  ·   by executing, or having your attorney (who must be authorized in writing) execute, a valid form of revocation of proxy and delivering it to the corporate secretary of Domtar or the offices of Computershare Trust Company of Canada at the addresses referred to above, at any time up to and including the last business day preceding the day of the Domtar special meeting or any adjournment or postponement of the Domtar special meeting, or to the chairman of the Domtar special meeting at any time before the Domtar special meeting or any adjournment or postponement of the Domtar special meeting;

 

  ·   by completing and submitting, or having your attorney (who must be authorized in writing) complete and submit, a later-dated proxy form no later than 5:00 pm (Montréal time) on the last business day before the Domtar special meeting; or

 

  ·   by attending the Domtar special meeting and voting in person. Your attendance at the Domtar special meeting alone will not revoke your proxy. You must also vote at the Domtar special meeting in order to revoke a previously submitted proxy.

You may also revoke a proxy via the internet at the website indicated on your proxy form or by telephone by calling the toll-free number shown on your proxy form and following the instructions.

If a broker holds Domtar shares in “street name” and you have instructed a broker to vote your Domtar shares and wish to change your vote, you must follow directions received from your broker to change those instructions.

Solicitation of Proxies

The management of Domtar is soliciting proxies for use at the Domtar special meeting and has designated the individuals listed on the enclosed form of proxy as persons whom Domtar securityholders may appoint as their proxyholders. If you are a Domtar shareholder or Domtar optionholder and wish to appoint an individual not listed on the enclosed form of proxy to represent you at the Domtar special meeting, you may do so either by crossing out the names on the enclosed form of proxy and inserting the name of that other individual in the blank space provided on the enclosed form of proxy or by completing another acceptable form of proxy. A proxy nominee need not be a Domtar shareholder or Domtar optionholder. If the Domtar shareholder or Domtar optionholder is a corporation, it must execute the proxy by an officer or properly appointed attorney.

Domtar will bear the expenses in connection with the solicitation of proxies from Domtar shareholders. Domtar has retained Georgeson, a proxy solicitation agent, for assistance in connection with the solicitation of proxies in Canada and the U.S. and anticipates paying a fee not exceeding Cdn.$85,000 plus additional charges related to telephone calls and other services.

 

60


Table of Contents

Solicitation of proxies may also be made by mail, in person, or by telephone, email, internet, facsimile, telegram or other means of communication, by Domtar’s directors, officers and employees. These people will receive no additional compensation for these services, but will be reimbursed for any transaction expenses incurred by them in connection with these services.

Independent Auditors

Representatives of PricewaterhouseCoopers LLP, Domtar’s independent auditors, plan to attend the Domtar special meeting and will be available to answer questions. PricewaterhouseCoopers LLP’s representatives will also have an opportunity to make a statement at the Domtar special meeting if they so desire.

Dissenting Domtar Shareholder’s Rights

Under the provisions of the interim order, registered holders of Domtar common shares and Domtar preferred shares will have the right to dissent in the manner set forth in Section 190 of the Canada Business Corporations Act and the Arrangement with respect to the Domtar securityholders resolution. If the Arrangement becomes effective, a registered Domtar shareholder who properly dissents will be entitled to be paid the fair value of its Domtar shares by Domtar. This right to dissent is described in this document and in the Arrangement which is attached to this document as Annex “E”. If you want to dissent in respect of the Domtar securityholders resolution, you must provide a written dissent notice to Domtar’s corporate secretary at Domtar Inc., 395 de Maisonneuve Blvd. West, Montréal, Québec, Canada H3A 1L6, Attention: Corporate Secretary, facsimile number 514-848-6850, not later than 5:00 p.m. (Montréal time) on the business day immediately preceding the Domtar special meeting (or any adjournment or postponement of the Domtar special meeting). If you do not strictly comply with this requirement, you could lose your right to dissent. This requirement is different from the statutory dissent procedures of the Canada Business Corporations Act that would permit a dissent notice to be provided at or prior to the Domtar special meeting.

Holders of Domtar stock options do not have the right of dissent unless they exercise their options and submit a dissent notice prior to this deadline.

 

61


Table of Contents

THE TRANSACTIONS

The discussion in this document of the Canadian Asset Transfer, the Contribution, the Distribution and the Arrangement is subject to, and qualified by reference to, the Transaction Agreement, the Contribution and Distribution Agreement and the form of plan of arrangement, which are attached hereto as Annex “B”, “C”, and “E” respectively.

Description of the Transactions

On August 23, 2006, Domtar and Weyerhaeuser announced that they had entered into agreements providing for a combination of the Weyerhaeuser Fine Paper Business and Domtar. This combination will be effected in the steps described below.

 

Step 1

  

The Canadian Asset Transfer:

 

Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd., two Canadian subsidiaries of Weyerhaeuser, will transfer certain of their fine paper and related assets to Exchangeco Subsidiary, and Exchangeco Subsidiary will assume certain of Weyerhaeuser Company Limited’s and Weyerhaeuser Saskatchewan Ltd.’s fine paper and related liabilities. See “The Canadian Asset Transfer Agreement”.

Step 2

  

The Newco Contribution:

 

Weyerhaeuser will transfer to Newco certain of Weyerhaeuser’s U.S. fine paper and related assets in exchange for the issuance of additional limited liability company interests of Newco to Weyerhaeuser and the assumption by Newco of certain of Weyerhaeuser’s U.S. fine paper and related liabilities. See “– The Contribution”.

Step 3

  

The Interim Financing:

 

Spinco will draw down $1.35 billion under a three-month unsecured term loan facility. See “Financing”.

Step 4

  

The Spinco Contribution:

 

Weyerhaeuser will transfer to Spinco all of the issued and outstanding limited liability company interests of Newco in exchange for (a) $1.35 billion in cash; and (b) a number of shares of Spinco common stock, determined in accordance with a formula specified in the Contribution and Distribution Agreement. See “– The Contribution”.

Step 5

  

The Listing:

 

The shares of common stock of Spinco have been authorized for listing on the New York Stock Exchange and an application has been made to the Toronto Stock Exchange to list the shares of Spinco common stock, in each case under the symbol “UFS”. An application has been made to the Toronto Stock Exchange to list the exchangeable shares of Newco Canada Exchangeco under the symbol “UFX”. In addition, an application has been made to the Toronto Stock Exchange to list the Class B common shares of Offerco. The Class B common shares will be listed and posted for trading on the Toronto Stock Exchange throughout the time they are issued and outstanding. See “– Stock Exchange Listings”.

Step 6

  

The Distribution:

 

Weyerhaeuser will distribute all the issued and outstanding shares of Spinco common stock to Weyerhaeuser shareholders. The Distribution may be effected, at Weyerhaeuser’s election, as a pro rata dividend, as an exchange offer or as a combination of both.

 

62


Table of Contents

Step 7

  

The Arrangement:

 

Spinco and Domtar will consummate the Arrangement that will result in Spinco indirectly owning all of the outstanding Domtar common shares. See “– The Arrangement”.

Step 8

  

Spinco Financing:

 

The three-month unsecured term loan facility will be converted to be part of the seven-year senior secured term loan facility. See “Financing”.

The Contribution

General

The Contribution and Distribution Agreement provides for the Contribution of Weyerhaeuser’s fine paper assets to subsidiaries of Spinco to occur as described under Steps 1 and 3 of “– Description of the Transactions”.

In connection with the Transactions, Weyerhaeuser, Spinco and/or their respective subsidiaries will also enter into other agreements relating to, among other things, the license of certain intellectual property, the provision of certain transition services during a transition period following the consummation of the Transactions, the supply of fibre and pulp to certain mills and the provision of certain site services at facilities that will be owned in part by Weyerhaeuser or its subsidiaries and in part by Spinco or its subsidiaries after the consummation of the Transactions. In addition, Newco expects to enter into a joint purchase agreement with Weyerhaeuser. See “Spinco’s Relationship With Weyerhaeuser After the Transactions”.

Determination of Number of Shares of Spinco Common Stock to be Issued to Weyerhaeuser

The Contribution and Distribution Agreement provides that Spinco will issue to Weyerhaeuser, as part of the consideration for the Spinco Contribution, a number of shares of Spinco common stock equal to (a) the product of (i) the number of Domtar common shares outstanding on a fully diluted basis on the “measurement date”, which will be, in the case of a pro rata dividend, the last business day immediately prior to the date of the Contribution or, in the case of an exchange offer, the business day determined by Weyerhaeuser that is at least 10 business days after the commencement of such exchange offer but not more than 20 business days prior to the date of the consummation of such exchange offer; and (ii) 11/9, minus (b) the sum of (i) the aggregate number of shares of Spinco common stock issuable pursuant to equity awards that will be issued to Spinco employees who are former Weyerhaeuser employees and who elect to roll-over their Weyerhaeuser equity awards into Spinco equity awards; and (ii) the number of shares of Spinco common stock outstanding prior to the Contribution. The product of this formula is referred to as the “Total Spinco Shares to Weyerhaeuser”.

The Distribution

The Contribution and Distribution Agreement provides that Weyerhaeuser will distribute all the issued and outstanding shares of Spinco common stock to Weyerhaeuser shareholders. Weyerhaeuser may effect the Distribution at Weyerhaeuser’s election, as a pro rata dividend, as of an exchange offer or as a combination of both.

If Weyerhaeuser elects to effect the Distribution in whole as a pro rata dividend, the Weyerhaeuser shareholders will have the right to receive for each Weyerhaeuser share they own on the record date a number of shares of Spinco common stock equal to the Total Spinco Shares to Weyerhaeuser, divided by the total number of Weyerhaeuser shares outstanding on the record date.

If Weyerhaeuser elects to effect the Distribution in whole as an exchange offer, Weyerhaeuser will determine the terms of the exchange offer, including the maximum number of Weyerhaeuser shares that will be accepted for exchange in the exchange offer and the number of shares of Spinco common stock that will be offered in exchange for each validly tendered Weyerhaeuser share.

 

63


Table of Contents

Weyerhaeuser shareholders that otherwise would be entitled to receive a fraction of a share of Spinco common stock in an exchange offer or a pro rata dividend will be entitled to receive the net proceeds, after deducting any required withholding taxes and brokerage charges, commissions and transfer taxes, of the sale of this fractional share on their behalf by the exchange agent or the transfer agent on the open market or otherwise.

The Arrangement

Following the Contribution and the Distribution, Spinco and Domtar will consummate the Arrangement whereby all Domtar common shares (other than any shares held by a holder exercising dissent rights) will automatically be exchanged, on a one-for-one basis, for Class B common shares of Offerco. Following the exchange of Domtar common shares for Class B common shares of Offerco, each Class B common share will be immediately transferred by the holder thereof to Newco Canada Exchangeco in exchange for (a) one fully paid and non-assessable share of Spinco common stock; or (b) one fully paid and non-assessable exchangeable share of Newco Canada Exchangeco (and ancillary rights).

If you are a holder of Domtar common shares, you should complete, sign and return the letter of transmittal and election form, together with your share certificate or certificates for your Domtar common shares and all other documents identified in the letter of transmittal and election form to the exchange agent at the address specified on the last page of the form by no later than 5:00 p.m. (Montréal time) on February 23, 2007, or, if the Domtar special meeting is adjourned, before 5:00 p.m. (Montréal time) on the second business day before the date the adjourned or postponed Domtar special meeting is to be reconvened. This will enable you to elect in advance (as a future holder of Class B common shares) to receive one exchangeable share of Newco Canada Exchangeco (and ancillary rights) or one share of Spinco common stock for each Class B common share you will automatically receive in the Arrangement.

Only holders of Domtar common shares that are eligible Canadian residents may elect in advance to receive exchangeable shares for the Class B common shares they automatically receive in the Arrangement. A holder may exercise this right with respect to all or any portion of the Class B common shares that it automatically receives in the Arrangement in exchange for such holder’s Domtar common shares.

If no letter of transmittal and election form is returned prior to the election deadline or an election is not effectively made, an election will be made based on the address shown in the share register of Class B common shares of Offerco (which will be identical to the share register for Domtar common shares). Holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address in Canada will be deemed to have elected to receive one exchangeable share for each Class B common share received in the Arrangement, and holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address outside of Canada will be deemed to have elected to receive one share of Spinco common stock for each Class B common share received in the Arrangement.

The Arrangement will also provide for the exchange of Domtar stock options and rights to purchase Domtar common shares for stock options or rights to purchase a number of shares of Spinco common stock. Under the terms of the Arrangement, Domtar will forgive, subject to certain conditions, loans outstanding to employees under Domtar’s Executive Stock Option and Share Purchase Plan and, in connection therewith, cancel the Domtar common shares pledged to secure these loans. Domtar will also cancel the forward purchase contracts entered into between employees and Domtar under Domtar’s Executive Stock Option and Share Purchase Plan. See “The Transaction Agreement – Treatment of Domtar Equity Awards”.

 

64


Table of Contents

Conditions to the Transactions

In addition to the approval of the Arrangement by Domtar securityholders, consummation of the Transactions is subject to customary closing conditions, including, among others:

 

  ·   the receipt of governmental approvals with respect to or the expiration or termination of any required waiting periods under (a) the HSR Act, with respect to which the waiting period has already been terminated; (b) the Competition Act (Canada), with respect to which a no-action letter has been received from the Commissioner of Competition; and (c) the Investment Canada Act;

 

  ·   the effectiveness of certain filings with the SEC;

 

  ·   the final approval of the Arrangement by the Superior Court of Québec;

 

  ·   the receipt by Weyerhaeuser of a favourable ruling from the IRS;

 

  ·   the receipt by Weyerhaeuser of a tax opinion from Cravath, Swaine & Moore LLP, Weyerhaeuser’s outside counsel;

 

  ·   entry into the credit facilities described under “Financing” and the receipt of the proceeds of a three-month unsecured term loan facility in principal amount of $1.35 billion;

 

  ·   the approval for listing of the shares of Spinco common stock on the New York Stock Exchange, which approval has been received;

 

  ·   the approval for listing of the exchangeable shares of Newco Canada Exchangeco on the Toronto Stock Exchange and the acceptance by the Toronto Stock Exchange that the Class B common shares of Offerco will, upon issuance, be listed and posted for trading;

 

  ·   the absence of any condition or event that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on Domtar or the Weyerhaeuser Fine Paper Business;

 

  ·   the representations and warranties of each of Weyerhaeuser and Domtar that are qualified as to materiality or material adverse effect being true and correct and those not so qualified being true and correct in all material respects, as of the date of the Transaction Agreement and as of the closing; and

 

  ·   the parties having performed in all material respects their respective obligations under the Transaction Agreement.

Background to the Combination

Since 1996, Domtar has been focused on its strategic objective of becoming a leader in the design, manufacturing, marketing and distribution of uncoated free sheet papers in North America. Through a combination of both organic growth and acquisitions, Domtar has become the third largest producer of fine papers in North America.

In recent years, the strengthening of the Canadian dollar started impacting both profitability and financial strength, while other challenges including the weakness in demand for fine papers and the growing threat of imports from low-cost regions, were observed.

In order to meet these challenges, Domtar developed and implemented a series of measures in 2003, 2004, and 2005, including its restructuring and rationalization of its operations, and strategic initiatives. In 2005, the board of directors of Domtar retained RBC Dominion Securities Inc. to conduct a review of Domtar’s strategic alternatives in collaboration with Domtar’s management and other external advisors. Meanwhile, Domtar developed and announced, in November 2005, a series of targeted measures aimed at returning Domtar to profitability which included focusing on:

 

  ·   the manufacturing, sale and distribution of communication papers and technical and specialty papers;

 

65


Table of Contents
  ·   leveraging Domtar’s supply chain management with a wide range of papers to provide additional competitive advantages to its distribution network; and

 

  ·   being a participant in the consolidation of the uncoated free sheet market.

On February 3, 2005, Domtar’s President and CEO, Raymond Royer, met with Weyerhaeuser’s Chairman, President and CEO, Steve Rogel in Washington, D.C., and initiated an exploratory discussion about the coated groundwood mill in Columbus, Mississippi. Mr Rogel answered that the paper mill was linked to a core pulp mill but asked if the discussion could be extended to other paper assets.

On February 25, 2005, an initial organized meeting was held with representatives of both Domtar and Weyerhaeuser where Weyerhaeuser asked if Domtar would consider trading its Ashdown, Arkansas mill for some of Weyerhaeuser’s mills. Domtar’s answer was that the Ashdown mill was a core asset but that a more global transaction involving all paper assets from both companies could be considered.

On July 19, 2005, Mr. Rogel contacted Mr. Royer to tell him that Weyerhaeuser was willing to explore opportunities with Domtar in the white paper and market pulp businesses using a transaction structure commonly referred to as a “reverse Morris trust”. Mr. Royer then created a Committee made up of the Chief Operating Officer, the Chief Financial Officer and the Chief Legal Officer with the mandate to carry on the negotiations with the assistance of Domtar’s legal and financial advisors.

On July 21, 2005, Mr. Royer confirmed to Mr. Rogel that Domtar’s chairman of the board of directors and himself would be prepared to discuss such an opportunity.

On August 8, 2005, Domtar and Weyerhaeuser executed a confidentiality agreement with a view to allowing exploratory discussions.

On August 18, 2005, the board of directors of Domtar held a meeting at which the engagement of financial advisors was discussed.

On September 13, 2005, Domtar formally engaged J.P. Morgan Securities Inc. and RBC Dominion Securities Inc. to act, respectively, as its U.S. and Canadian financial advisors in connection with the potential combination.

On September 23, 2005, senior management from Domtar and Weyerhaeuser met to evaluate potential synergies.

On October 11, 2005, Weyerhaeuser’s financial advisors provided Domtar with a letter inviting Domtar to submit a preliminary indication of interest for the acquisition of the Weyerhaeuser Fine Paper Business and outlining the procedural steps and conditions for submitting an indicative, non binding offer.

Between August 8, 2005, and November 3, 2005, Domtar conducted a preliminary due diligence investigation of the Weyerhaeuser Fine Paper Business. Concurrently, discussions took place between senior management of Domtar and Weyerhaeuser and their respective legal and financial advisors regarding the structure of a potential combination and various other strategic considerations.

On November 3, 2005, Domtar submitted an initial non-binding indication of interest for the combination. Conceptually, the proposal provided for a “reverse Morris Trust” transaction structure pursuant to which (a) the Weyerhaeuser Fine Paper Business would be spun off to Weyerhaeuser’s shareholders on a tax deferred basis, and (b) the Weyerhaeuser Fine Paper Business would be combined with Domtar pursuant to a plan of arrangement under Canadian law, utilizing an exchangeable share structure that would provide certain of

 

66


Table of Contents

Domtar’s Canadian resident shareholders the ability to receive tax deferred treatment. The proposal also contemplated a cash payment to Weyerhaeuser to be provided through borrowings of Spinco.

Between November 2005 and February 2006, discussions continued between the financial advisors of Domtar and Weyerhaeuser.

On February 3, 2006, Domtar submitted a revised non-binding indication of interest for the combination of the Weyerhaeuser Fine Paper Business with Domtar.

On February 21, 2006, Mr. Rogel called Mr. Royer to advise him that Domtar would be part of a process involving other bidders for the Weyerhaeuser white paper assets.

During February and March 2006, the parties and their respective advisors discussed the structure and mechanics of a potential combination, including the form of the transaction to be pursued, the tax treatment of the transaction to the shareholders of both companies, the cash component to be received by Weyerhaeuser and the capital structure of Spinco.

In mid-March 2006, access to data rooms on both sides was initiated, and the parties commenced reciprocal confirmatory legal, financial and operational due diligence, which continued until the execution of definitive agreements. During this period, Domtar and Weyerhaeuser provided each other and their respective financial, accounting and legal advisors with access to their data room.

On March 17, 2006, the board of directors of Domtar held a meeting, at which the financial advisors of Domtar made presentations on various strategic issues. A range of strategic scenarios were discussed at the meeting. The consensus from both financial advisors was that the contemplated combination was the best strategic alternative.

On March 21, 2006, Domtar received a letter from Weyerhaeuser requesting a binding proposal. On March 25, 2006, Weyerhaeuser’s legal advisors provided to Domtar’s legal advisors initial drafts of the proposed transaction agreements.

From time to time throughout late March and early April 2006, a number of meetings were held among Domtar’s directors, senior management and advisors regarding the status of the proposed combination and the proposal to be made by Domtar. Items discussed at these meetings included the value of the synergies anticipated by management and the potential costs arising from the combination of the Weyerhaeuser Fine Paper Business and Domtar, other due diligence issues, Weyerhaeuser’s letter to Domtar inviting it to submit a binding offer, and proposed governance arrangements, including the proposed name of Spinco, management and board composition, and head office and the location of the operational headquarters.

Concurrently, in the course of this period, the parties discussed the terms of the potential transaction agreements and their financial advisors also had further discussions regarding the appropriate method for determining the exchange ratio, the cash component to be paid to Weyerhaeuser for the proposed transaction and the capital structure of Spinco.

On April 3, 2006, Domtar submitted a revised indication of interest for the combination of the Weyerhaeuser Fine Paper Business with Domtar, which was subject to further due diligence.

During the week of April 10, 2006, negotiations took place between Domtar and Weyerhaeuser’s respective legal and financial advisors regarding the terms of the non binding indication of interest submitted by Domtar on April 3, 2006.

On April 18, 2006, the board of directors of Domtar held a meeting, at which the negotiations of the prior week with Weyerhaeuser were discussed with Domtar’s senior management and legal and financial advisors.

 

67


Table of Contents

Domtar’s directors approved a letter to Weyerhaeuser addressing the open issues between the parties. This letter was sent on the same day to Weyerhaeuser.

On April 21, 2006, Weyerhaeuser’s financial advisors contacted Domtar’s financial advisors to provide an update on Weyerhaeuser’s April 20, 2006 board meeting. Weyerhaeuser’s financial advisors noted that the process continued to be a competitive one, that Weyerhaeuser expected to be able to share additional financial information within a period of weeks, and in the meantime it would like to proceed with site visits and other due diligence while legal advisors continue work on the transaction documents.

On April 26, 2006, Weyerhaeuser issued a press release announcing that, as a part of its strategic review, it was considering alternatives for its fine paper business, and was in discussions with several parties.

On May 16, 2006, Weyerhaeuser provided Domtar with initial draft unaudited financial statements for the Weyerhaeuser Fine Paper Business, which were periodically revised and updated prior to the execution of definitive agreements.

From May 8 to May 17, 2006, representatives of Domtar visited the key facilities of the Weyerhaeuser Fine Paper Business and conducted due diligence. From May 30 to June 5, 2006, representatives of Weyerhaeuser visited Domtar’s key facilities and conducted due diligence.

On June 9, 2006, Weyerhaeuser’s legal advisors contacted Domtar’s legal advisors to inform Domtar that Weyerhaeuser would like to receive a more detailed proposal from Domtar, on the basis of which Weyerhaeuser would determine whether to proceed to negotiate definitive agreements with Domtar.

On June 12, 2006, representatives of Weyerhaeuser’s and Domtar’s legal advisors discussed key elements of the transaction structure and reviewed their respective positions on key issues in the transaction documents.

On June 12, 2006, an initial discussion was held between Mr. Rogel and Mr. Royer on governance issues.

On June 13, 2006, the board of directors of Domtar held a meeting, also attended by Domtar’s senior management and legal and financial advisors, at which various financial aspects and strategic considerations relating to the possible combination were discussed. Among other things, the Domtar board of directors was briefed on the status of discussions to date, including the proposed governance and other terms of the transaction, and presented with further financial analysis regarding the combination. The Domtar board of directors authorized further discussions, and on the following day, Domtar submitted a further revised non-binding indication of interest for the combination.

On June 16, 2006, a senior executive of Weyerhaeuser contacted a senior executive of Domtar by telephone. Weyerhaeuser’s representative stated that Weyerhaeuser would like to continue discussions with Domtar, and the representatives considered next steps for completion of due diligence and the negotiation of definitive agreements.

On June 22, 2006, a meeting was held between Mr. Rogel and Mr. Royer to review concerns raised by both parties on a series of topics including Norampac, debt documents, loan agreements and results from phase I environmental assessments.

On June 22 and 23, 2006, Domtar and Weyerhaeuser senior management and their respective legal advisors met to discuss the possible integration of Domtar and Weyerhaeuser Fine Paper Assets and the transaction agreements.

On June 26, 28 and July 5, 2006, there were three phone call discussions between Mr. Rogel and Mr. Royer on governance issues including officers of Spinco, board composition and work locations.

 

68


Table of Contents

On June 28 and 29, 2006 and on July 12 and 13, 2006, Domtar and Weyerhaeuser representatives met to discuss each business’ systems and processes as well as the integration thereof in order to determine the transitional services and related costs that would be required in the event of a combination.

On July 6 and 7, 2006, Domtar and Weyerhaeuser representatives met to discuss financial due diligence matters, including draft unaudited financial statements for the Weyerhaeuser Fine Paper Business.

From July 16, 2006 through July 19, 2006, Domtar and Weyerhaeuser senior managers, together with their respective legal advisors, met to discuss business, operational and integration issues in connection with the proposed combination, and to discuss issues related to the transaction agreements. Legal discussions continued on July 20, 2006. On July 26, 2006, Domtar and Weyerhaeuser’s legal advisors met to continue discussions regarding the transaction agreements. The senior managers of both parties met again on July 27, 2006, in order to discuss outstanding issues affecting the combination.

On July 31, 2006 the board of directors of Domtar held a meeting, which Domtar’s senior management and legal and financial advisors attended. Management of Domtar reported the results to date of the confirmatory due diligence. Domtar’s financial advisors presented additional financial information relevant to the proposed transaction. Following a discussion of the structure, proposed terms, strategic implications and potential benefits and risks of the proposed combination, the Domtar board of directors authorized management to continue its negotiations.

On August 10, 2006, Domtar received a letter from Weyerhaeuser containing proposals attempting to address the remaining unresolved issues between the parties. On August 15, 2006, Domtar sent a response letter to Weyerhaeuser.

Between August 15, 2006 and August 22, 2006, the parties negotiated and reached agreement on the terms of the definitive transaction agreements.

On August 22, 2006, at a meeting of the Domtar board of directors attended by Domtar’s senior management and legal and financial advisors, the directors of Domtar were presented with a review of the key features of the combination and the definitive transaction agreements. Domtar’s financial advisors presented the Domtar board with their final financial analysis and their opinion as to the fairness of the exchange ratio under the Arrangement for the Domtar securityholders. After these presentations and further discussion and deliberation, the Domtar board of directors determined the terms of the Arrangement to be fair to and in the best interests of Domtar securityholders. Accordingly, the Domtar board authorized Domtar to enter into the combination and proceeded to recommend that the Domtar securityholders vote in favour of the Arrangement to effect the combination. These definitive transaction agreements were executed by the parties later that day and, immediately thereafter, on August 23, 2006, the combination between Domtar and Weyerhaeuser was publicly announced.

On December 29, 2006, Domtar announced the closing of the sale of its 50% interest in Norampac as part of its strategic plan to focus on fine paper business.

In January 2007, management of Domtar proposed certain structural changes to maximize the tax efficiencies of the transaction structure. These structural changes do not impact the economic interest of Domtar securityholders under the Arrangement. On January 25, 2007, the Transaction Agreement and the Contribution and Distribution Agreement were executed by the parties to give effect to these structural changes.

Reasons for the Domtar Board Recommendation

In arriving at its recommendation, the board of directors of Domtar, after receiving advice from its financial advisors and outside legal advisors, carefully considered all aspects of the combination. In making its recommendation, the board of directors of Domtar considered a number of factors, including:

 

  ·   a review and analysis of the industry and strategic options of Domtar to pursue its growth;

 

69


Table of Contents
  ·   the competitive strengths resulting from the consummation of the Transactions as set forth in the section “Business of the Combined Company – Competitive Strengths”, including the fact that:

 

  (a) the Combined Company will be the largest integrated manufacturer of uncoated free sheet in North America and the second largest in the world based on production capacity, which will provide the Combined Company key competitive advantages, including economies of scale, wider sales and marketing coverage and broad product offerings;

 

  (b) the Combined Company’s fine paper business will encompass a mix of assets allowing it to be a low-cost producer of high volume papers and an efficient producer of value-added specialty papers;

 

  (c) the Combined Company will have broad geographic coverage with a strong manufacturing presence in eastern North America complemented by service locations throughout North America, which will provide opportunities for enhanced customer service and minimization of freight distance, response time and delivery costs;

 

  (d) the management of the Combined Company will have significant experience, and a record of success in the North American paper industry, including with respect to business integration issues;

 

  ·   the fairness opinions provided by J.P. Morgan Securities Inc. and RBC Dominion Securities Inc. on August 22, 2006 to the effect that, as of the date of the opinions and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio provided for in the Arrangement was fair, from a financial point of view, to holders of Domtar common shares;

 

  ·   the ability of the holders of Domtar common shares to benefit from the potential synergies from the combination and to continue to participate in the future earnings and growth of the Combined Company after completion of the Transactions through their ownership of shares of Spinco common stock or exchangeable shares; and

 

  ·   the structure of the combination, which effectively permits holders of Domtar common shares who are eligible Canadian residents to elect to receive, through a series of exchanges, exchangeable shares and make a valid tax election to defer Canadian income tax on any capital gain otherwise arising on their exchange of Class B common shares for exchangeable shares that they receive in the Arrangement.

In reaching its determination, the board of directors of Domtar also considered and evaluated, among other things: (a) information concerning the business, operations, property, assets, financial condition, operating results and prospects of Domtar and the Weyerhaeuser Fine Paper Business; (b) the results and scope of the due diligence review conducted by Domtar’s management and financial and outside legal advisors with respect to the Weyerhaeuser Fine Paper Business; (c) current industry, economic and market conditions and trends and its informed expectations of the future of the pulp, fine paper, uncoated freesheet and paper industry; (d) historical market prices and trading information with respect to Domtar common shares and Weyerhaeuser common shares; (e) the expected likelihood of receiving regulatory clearance for the combination; (f) the expected tax effect of the Arrangement on Domtar securityholders; and (g) the terms of certain contractual arrangements to which Domtar is a party.

The board of directors of Domtar also considered a variety of risks and uncertainties associated with the combination, including those set forth under the section titled “Risk Factors” and the section titled ‘Special Note Concerning Forward-Looking Statements”. These risks include, among other things, risks relating to the uncertainty of being able to integrate the Weyerhaeuser Fine Paper Business with the Domtar business successfully, uncertainties relating to the performance of Spinco and its level of indebtedness following the consummation of the Transactions.

 

70


Table of Contents

This discussion of the information and factors considered by the board of directors of Domtar is not intended to be exhaustive but addresses the major information and factors considered by the Domtar board in its consideration of the combination. In reaching its conclusion, the Domtar board did not find it practical to assign, and did not assign, any relative or specific weight to the different factors that were considered and individual members of Domtar’s board may have given different weight to different factors.

Opinions of Domtar’s Financial Advisors

In this section of the document, references to the Transaction Agreement and the Contribution and Distribution Agreement means each of the Transaction Agreement and the Contribution and Distribution Agreement prior to their amendment and restatement. It should be noted that such amendment and restatement did not affect the economic interest of Domtar securityholders under the Arrangement.

J.P. Morgan Securities Inc. Fairness Opinion

On August 22, 2006, J.P. Morgan Securities Inc. delivered a written opinion to Domtar’s board of directors, the full text of which is attached to this document as Annex “K” to the effect that, as of the date of the opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio provided for in the Arrangement was fair, from a financial point of view, to the holders of Domtar common shares.

You should read the opinion of J.P. Morgan Securities Inc. carefully and in its entirety for a description of the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken. J.P. Morgan Securities Inc.’s opinion was provided to the Domtar board of directors in connection with the Domtar board’s evaluation of the exchange ratio, does not address any other aspect of the Arrangement or any related transaction and does not constitute a recommendation to any Domtar shareholder as to how such shareholder should vote or act on any matters relating to the Arrangement.

J.P. Morgan Securities Inc.’s opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to it as of, the date of its opinion. It should be understood that subsequent developments may affect J.P. Morgan Securities Inc.’s opinion and J.P. Morgan Securities Inc. does not have an obligation to update, revise or reaffirm its opinion.

J.P. Morgan Securities Inc. acted as financial advisor to Domtar in connection with the Arrangement and will receive a fee from Domtar for its services, a substantial portion of which will become payable only if the Arrangement is consummated. In addition, Domtar has agreed to indemnify J.P. Morgan Securities Inc. for certain liabilities arising out of its engagement. J.P. Morgan Securities Inc. and its commercial bank affiliate entered into commitment and engagement letters with Domtar and Spinco regarding the indebtedness that will be incurred by Spinco immediately prior to the Contribution and permanent indebtedness that will be incurred by the Spinco upon closing of the Arrangement. J.P. Morgan Securities Inc. and its affiliates have, in the past, provided investment banking, commercial banking and other services from time to time to Domtar, Weyerhaeuser and their respective affiliates, some of which are described in its opinion. In addition, in the ordinary course of its business, J.P. Morgan Securities Inc. and its affiliates may actively trade the debt and equity securities of Domtar and Weyerhaeuser, for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in those securities.

RBC Dominion Securities Inc. Opinion

RBC Dominion Securities Inc. has been retained by Domtar to act as one of its financial advisors in connection with the Arrangement. In connection with this engagement, Domtar requested that RBC Dominion Securities Inc. evaluate the fairness, from a financial point of view, of the exchange ratio provided for in the Arrangement. On August 22, 2006, at a meeting of the Domtar board of directors held to evaluate the proposed

 

71


Table of Contents

combination, RBC Dominion Securities Inc. delivered to the Domtar board of directors a written opinion dated August 22, 2006 to the effect that, as of that date and based on the assumptions, limitations and qualifications set forth therein, the exchange ratio provided for in the Arrangement was fair, from a financial point of view, to the holders of Domtar common shares.

The full text of RBC Dominion Securities Inc.’s written opinion dated August 22, 2006, which describes the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken, is attached to this document as Annex “L” and is incorporated into this document by reference. RBC Dominion Securities Inc.’s opinion was provided to the Domtar board of directors in connection with its evaluation of the exchange ratio and relates only to the fairness of the exchange ratio from a financial point of view and does not constitute a recommendation to any Domtar shareholder as to whether to vote in favour of the Domtar securityholders resolution. You are encouraged to read RBC Dominion Securities Inc.’s opinion dated August 22, 2006 in its entirety.

In arriving at its opinion, RBC Dominion Securities Inc. reviewed and relied upon or carried out, among other things, the following:

 

  ·   the most recent drafts of the Transaction Agreement and the Contribution and Distribution Agreement each dated August 22, 2006;

 

  ·   audited financial statements of Domtar for each of the five years ended December 31, 2005;

 

  ·   the unaudited interim reports of Domtar for the quarters ended June 30, 2006;

 

  ·   annual reports, management information circulars and annual information forms of Domtar for each of the three years ended December 31, 2005;

 

  ·   historical segmented financial statements of Domtar by division for each of the four years ended December 31, 2005;

 

  ·   internal management budget of Domtar on a consolidated basis and segmented by division for the year ended December 31, 2006;

 

  ·   unaudited financial statements of the Weyerhaeuser Fine Paper Business (excluding three sawmill assets and related cutting rights) for the three years ended December 25, 2005 and for the 13 week period ended March 26, 2006;

 

  ·   unaudited financial results of the Weyerhaeuser Fine Paper Business (excluding three sawmill assets and related cutting rights) for the 26 week period ended June 25, 2006;

 

  ·   historical segmented financial results of the Weyerhaeuser Fine Paper Business (excluding three sawmill assets and related cutting rights) by mill for each of the three years ended December 31, 2005;

 

  ·   audited financial statements, annual reports and management information circulars of Weyerhaeuser for each of the three years ended December 25, 2005;

 

  ·   unaudited interim reports of Weyerhaeuser for the quarters ended June 30, 2006;

 

  ·   discussions with senior management, legal counsel and other consultants of Domtar;

 

  ·   access to data room materials related to the Weyerhaeuser Fine Paper Business, including, but not limited to, management presentations, detailed information on operations and facilities, segmented historical financials, material contracts, legal and environmental documents;

 

  ·   discussions with senior management of Weyerhaeuser and its financial advisor;

 

  ·   site visits to certain of Weyerhaeuser Fine Paper Business’ facilities;

 

  ·   public information relating to the business, operations, financial performance and stock trading history of Domtar, Weyerhaeuser and other selected public companies considered by RBC Dominion Securities Inc. to be relevant;

 

72


Table of Contents
  ·   public information with respect to other transactions of a comparable nature considered by RBC Dominion Securities Inc. to be relevant; and

 

  ·   such other corporate, industry and financial market information, investigations and analyses as RBC Dominion Securities Inc. considered necessary or appropriate in the circumstances.

RBC Dominion Securities Inc. was not, to the best of its knowledge, denied access by Domtar or Weyerhaeuser to any information requested by it. In giving its opinion, RBC Dominion Securities Inc. has relied upon the completeness, accuracy and fair presentation of all the financial and other information, data, advice, opinions or representations obtained by it from public sources, senior management of Domtar and Weyerhaeuser, and their respective consultants and advisors (collectively, the “Information”). The opinion is conditional upon such completeness, accuracy and fair presentation of such Information. Subject to the exercise of professional judgment and except as expressly described herein, RBC Dominion Securities Inc. has not attempted to verify independently the completeness, accuracy or fair presentation of any of the Information, and has also assumed that since the dates on which the Information was provided to RBC Dominion Securities Inc., except as disclosed in writing to RBC Dominion Securities Inc., there has been no material change, financial or otherwise, in the financial condition, assets, liabilities (contingent or otherwise), business, operations or prospects of Domtar, Spinco, Weyerhaeuser Fine Paper Business or any of their subsidiaries and no material change has occurred in the Information or any part thereof which would have or which would reasonably be expected to have a material effect on the opinion of RBC Dominion Securities Inc.

RBC Dominion Securities Inc. received a fee in connection with the delivery of its opinion and is also entitled to other fees in connection with the Arrangement, some of which are contingent on the completion of the Arrangement or certain other events. In addition, Domtar has agreed to reimburse RBC Dominion Securities Inc. for its reasonable out-of-pocket expenses and to indemnify RBC Dominion Securities Inc. in certain circumstances.

RBC Dominion Securities Inc. has not been engaged to provide any financial advisory services nor has it participated in any financing involving Domtar, Weyerhaeuser or any of their respective associates or affiliates within the past two years other than this engagement and as described in its opinion. RBC Dominion Securities Inc. may, in the future, in the ordinary course of business, perform financial advisory or investment banking services for Domtar, Spinco, Weyerhaeuser or any of their respective associates or affiliates. An affiliate of RBC Dominion Securities Inc. provides banking services to Domtar and Weyerhaeuser in the normal course of business.

RBC Dominion Securities Inc. acts as a trader and dealer, both as principal and agent, in major financial markets and, as such, may have had and may in the future have positions in the securities in Domtar, Weyerhaeuser or any of their respective associates or affiliates and, from time to time, may have executed or may execute transactions on behalf of such companies or clients for which it received or may receive compensation. As an investment dealer, RBC Dominion Securities Inc. conducts research on securities and may, in the ordinary course of its business, provide research reports and investment advice to its clients on investment matters, including with respect to Domtar, Weyerhaeuser or the combination.

Interests of Domtar’s Directors and Management in the Combination

Employment Contract

Domtar has an existing employment contract and termination of employment arrangement with Raymond Royer, president and chief executive officer. Spinco expects that this agreement and arrangement will remain in effect upon consummation of the Transactions. Upon termination at any time of Mr. Royer’s employment for reasons other than those specifically enumerated therein, he will be entitled to receive an amount equal to two times the sum of his annual base salary and target annual bonus plus one month of his base salary and one-twelfth of his target annual bonus for each year of service with Domtar, up to a maximum of 2.5 times the sum of his annual base salary and target bonus.

 

73


Table of Contents

Termination of Employment Arrangements

Domtar has a policy pursuant to which executive officers of Domtar will be compensated in the event of termination of their employment for reasons other than cause, resignation, death or uninterrupted continuous employment with a successor corporation. Pursuant to this policy, Messrs. Barker and Buron would be entitled to receive an amount equal to two times the amount of their respective annual base salaries.

In August 2006, the board of directors of Domtar adopted a retention plan to retain key employees through the implementation of the restructuring plan announced in November 2005 and the consummation of the Transactions. Domtar’s retention plan guarantees a minimum bonus for 2007 equivalent to the greater of (a) 1.5 times the participant’s 2007 target bonus under Domtar’s short-term incentive plan, and (b) the amount payable under the incentive program to be established by Spinco. Mr. Royer will not participate in the retention plan’s minimum bonus for 2007. Each other former Domtar employee who is a member of Spinco’s management committee will not participate in the retention plan’s minimum bonus for 2007 unless his or her position is eliminated as further described below.

If a participant’s position is eliminated on or prior to December 31, 2007, he or she will be paid a guaranteed minimum 2007 bonus as if his or her job had continued through the end of 2007 and any unvested options, deferred share units and shares of restricted stock that the participant holds will vest, subject to consummation of the Transactions. The aggregate amount of the retention bonuses payable to current members of Domtar’s management committee will not exceed the aggregate amount of the minimum bonuses for 2007 of those members by more than Cdn.$600,000.

In recognition of their significant contribution and additional efforts with respect to the implementation of the restructuring plan announced in November 2005 and the successful negotiation of the Transactions in August 2006, the Domtar board of directors approved special performance bonuses under the plan for members of Domtar’s management committee, including Cdn.$1,267,500, $322,920, $313,200 and Cdn.$249,600 for Messrs. Royer, Brear, Barker and Buron, respectively. These special performance bonuses are to be paid instead of any bonus for 2006 to which the executives would otherwise be entitled under Domtar’s short-term incentive plan. These special bonuses will be paid following consummation of the Transactions or, if the Transactions are not consummated, following termination of the Transaction Agreement, in either case so long as the executive officer remains employed through that date.

Treatment of Domtar Stock Options and Other Domtar Equity Awards

The Arrangement provides for the exchange of Domtar stock options and rights to purchase Domtar common shares for stock options or rights to purchase a number of shares of Spinco common stock. The Arrangement also provides that Domtar will forgive, subject to certain conditions, loans outstanding to employees under Domtar’s Executive Stock Option and Share Purchase Plan and, in connection therewith, cancel the Domtar common shares pledged to secure these loans. Domtar will also cancel the forward purchase contracts entered into between employees and Domtar under Domtar’s Executive Stock Option and Share Purchase Plan. See the “The Transaction Agreement – Treatment of Domtar Equity Awards” and “Spinco’s Board of Directors and Management Following the Transactions – Executive Compensation – Employment Contracts and Termination of Employment Arrangements”.

If you hold exercisable Domtar stock options and wish to exercise them to acquire Domtar common shares in order to elect to ultimately receive exchangeable shares and/or Spinco common stock as part of the Arrangement, then prior to 5:00 p.m. (Montréal time) on the third trading day immediately prior to the date of closing of the combination, you should exercise your options through your Solium Shareworks account at www.solium.com or by telephone at the following toll-free number: 1-877-380-7793. See “Elections Available to Domtar Securityholders”.

 

74


Table of Contents

Board and Management Arrangements

As described under “Spinco’s Board of Directors and Management Following the Transactions”, the Transaction Agreement and related documents provide for arrangements regarding the composition of the board of directors and senior management of Spinco. Those arrangements provide that some of the current directors and officers of Domtar will have director and/or management positions with Spinco.

Indemnification and Insurance of Directors and Officers

As described under “The Transaction Agreement – Indemnification”, the Transaction Agreement provides that:

 

  ·   for a period of six years following the Transaction, Spinco will indemnify and hold harmless, and provide advancement of expenses to, all past and present directors or officers of Domtar, and its subsidiaries, and each individual who prior to the Effective Time becomes a director or officer of Domtar, and its subsidiaries, to the maximum extent allowed under applicable law in respect of acts or omissions that occurred at or prior to the Effective Time; and

 

  ·   for six years following the Effective Time, subject to certain limitations, Spinco will maintain in effect, for the same persons as referenced above, policies of directors’ and officers’ liability insurance of at least the same coverage and containing terms and conditions which are, in the aggregate, no less advantageous to the insured as the current policies maintained by Domtar, with respect to claims arising from acts or omissions that occurred at or prior to the Effective Time and, in the case of directors and officers of Newco, related to the business of Newco or in connection with the Transactions.

Regulation Q-27

The treatment of the Domtar stock options and other Domtar equity awards (as described above) of certain senior executives of Domtar, including the forgiveness, subject to certain conditions, of loans outstanding to them under Domtar’s Executive Stock Option and Share Purchase Plan may constitute “related party transactions” under Regulation Q-27 – Respecting Protection of Minority Securityholders in the Course of Certain Transactions (“Regulation Q-27”) of the Autorité des marchés financiers du Québec. If such is the case, Regulation Q-27 would require, among other things, that Domtar, subject to certain exemptions, prepare a formal valuation with respect to the subject matter of these transactions and obtain “minority approval” from holders of affected securities of Domtar with respect to these transactions. If these transactions constitute related party transactions under Regulation Q-27, Domtar would be exempt from obtaining a formal valuation and “minority approval” in respect thereof as the fair market value of all of these transactions is less than 25% of Domtar’s market capitalization.

Court Approval of the Arrangement and Completion of the Combination

Under the Canada Business Corporations Act, a Canadian court must approve the Arrangement set forth in the form of plan of arrangement. Prior to the mailing of this document, Domtar obtained an interim order from the Superior Court, District of Montréal, Province of Québec providing for the calling and holding of the Domtar special meeting and other procedural matters.

Subject to the approval of the Domtar securityholders resolution at the Domtar special meeting, the hearing in respect of a final order approving the Arrangement is expected to take place on or about February 27, 2007, at 9:15 a.m. (Montréal time) in room 16.12 at the Montréal courthouse at 1 Notre Dame Street East, Montréal, Québec, Canada. The court will consider, among other things, the fairness and reasonableness of the Arrangement.

The hearing regarding a final order is open to all Domtar securityholders and if you are a Domtar securityholder who wishes to appear or be represented and to present evidence or arguments at such hearing, you

 

75


Table of Contents

must serve and file a notice of appearance as set forth in the notice of application for the final order and satisfy any other requirements of the court. The court will consider, among other things, the fairness and reasonableness of the Arrangement. The court may approve the Arrangement in any manner the court may direct, subject to compliance with any terms and conditions the court deems fit.

Assuming the final order is granted and the other conditions to closing contained in the Transaction Agreement are satisfied or waived, the following is anticipated to occur:

 

  ·   the Canadian Asset Transfer will be completed;

 

  ·   the Newco Contribution will be completed;

 

  ·   Spinco will draw down $1.35 billion under its three-month unsecured term loan facility;

 

  ·   the Spinco Contribution will be completed;

 

  ·   the Distribution will occur;

 

  ·   articles of arrangement for Domtar will be filed with the director under the Canada Business Corporations Act and a certificate of arrangement issued to give effect to the Arrangement as at the Effective Time;

 

  ·   the exchangeable share support agreement and voting and exchange trust agreement (attached as Annexes “F” and “G”, respectively) will be executed and delivered;

 

  ·   Spinco’s three month unsecured term loan facility will be refinanced by the seven-year senior secured term loan facility; and

 

  ·   the various other documents necessary to complete the Transactions contemplated under the Transaction Agreement and the Contribution and Distribution Agreement will be executed and delivered.

The closing date of the Arrangement and the Distribution will be the date that is two business days after the satisfaction or waiver of the conditions precedent to the Arrangement and the Distribution or such other date as agreed between Weyerhaeuser and Domtar. See “– Conditions to the Transactions”.

Regulatory Matters

Under the Transaction Agreement, each of Domtar and Weyerhaeuser (and the other parties to the Transaction Agreement) have agreed to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with each other in doing, all things necessary, proper or advisable to consummate and make effective the Transactions, including applying for and obtaining the following regulatory approvals.

U.S. Antitrust Filing

Under the HSR Act, the combination may not be completed until notifications have been given and required information and materials have been furnished to and reviewed by the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission and the required waiting period has expired or terminated. Under the HSR Act, the combination may not be completed until 30 days after the initial filings (unless early termination of this waiting period is granted) or, if the Antitrust Division of the Department of Justice or the Federal Trade Commission issues a request for additional information, 30 days after Spinco and Domtar have complied with that request for additional information (unless this period is shortened by a grant of early termination).

It is a condition to the completion of the combination that the applicable waiting period under the HSR Act has expired or been terminated. Spinco and Domtar each filed a Pre-Merger Notification and Report Form under

 

76


Table of Contents

the HSR Act with the U.S. Department of Justice and the Federal Trade Commission on September 18, 2006 and September 15, 2006, respectively. Spinco and Domtar received notification of early termination of the HSR waiting period from the U.S. Department of Justice on October 18, 2006.

After the statutory waiting periods, and even after the completion of the combination, U.S. federal or state governmental authorities could seek to challenge the combination as they deem necessary or desirable in the public interest.

Holders of Domtar common shares who will hold, as a result of the Transactions, through a series of exchanges, common stock of Spinco or exchangeable shares valued in excess of U.S.$59.8 million may be required to comply with the requirements of the HSR Act prior to receipt of those shares.

The Competition Act (Canada)

Part IX of the Competition Act (Canada) requires that parties to certain merger transactions that exceed specified financial thresholds (“Notifiable Transactions”) provide to the Commissioner of Competition (the “Commissioner”) appointed under the Competition Act (Canada) prior notice of, and information relating to, such merger transactions. The combination qualifies as a type of merger transaction that is covered under Part IX, and the thresholds for review are exceeded. Accordingly, the combination qualifies as a Notifiable Transaction under Part IX of the Competition Act (Canada).

The parties to a Notifiable Transaction must submit, at their election, either a short-form notification (in respect of which there is a 14-day statutory waiting period from the date of filing a completed notification) or a long-form notification (in respect of which there is a 42-day statutory waiting period from the date of filing a completed notification), although when they submit a short-form notification, the Commissioner may require the filing of a long-form notification at any time prior to the expiration of the waiting period applicable to a short-form notification. If the Commissioner requires additional time to complete her substantive review, she can apply to the Competition Tribunal for an interim order seeking to prevent closing of a transaction for up to 60 additional days. The Competition Tribunal is a specialized tribunal established to deal with certain matters under the Competition Act (Canada), including mergers, and to which the Commissioner may apply to challenge a merger on an interim and/or permanent basis if her substantive review raises competition concerns which are not addressed on a consent basis.

Every merger is subject to the substantive provisions under Part VIII of the Competition Act (Canada) pursuant to which a merger can be challenged only where it is likely to result in a substantial prevention or lessening of competition in a market (“SPLC”). The time required by the Commissioner to complete her substantive review of a merger may extend beyond the end of the statutory waiting period under Part IX of the Competition Act (Canada). In the case of a Notifiable Transaction where the parties have submitted a request for an advance ruling certificate (an “ARC”), upon completion of the Commissioner’s substantive review, the Commissioner may decide to: (a) issue an ARC, whereby the Commissioner is thereafter precluded from challenging the merger on substantially the same grounds upon which the ARC was granted; (b) issue a “no action” letter, stating that the Commissioner does not intend to challenge the Notifiable Transaction at that time but retains the authority to do so for three years after the completion of the Notifiable Transaction; (c) allow the merger to proceed after the merging parties have agreed to remedies that remove the SPLC, in which case the remedies can be registered with, and have the same force and effect as an order of, the Competition Tribunal; or (d) challenge the Notifiable Transaction before the Competition Tribunal, if the Commissioner concludes that it is likely to result in a SPLC in a market.

It is a condition of the Transaction Agreement that the parties either (a) receive an ARC; or (b) (i) the applicable statutory waiting period must have expired, or been terminated early, or the obligation to file a pre-merger notification must have been waived; and (ii) the parties must have received a “no action” letter from the Commissioner.

 

77


Table of Contents

Domtar and Spinco each filed a long-form notification with the Commissioner on September 20, 2006 and jointly filed a request for an ARC or “no action letter” on October 20, 2006. The 42-day statutory waiting period applicable to a long-form notification expired on November 1, 2006. Domtar received a “no-action” letter from the Commissioner on December 29, 2006.

Investment Canada Act

The Investment Canada Act applies to every acquisition or establishment of a Canadian business by a non-Canadian. A direct acquisition of control of a Canadian business by a non-Canadian where the book value of the assets of the Canadian business exceeds a prescribed monetary threshold is reviewable and subject to approval by the federal Minister responsible for the Investment Canada Act. Approval is to be granted when the Minister is satisfied that the acquisition is likely to be of net benefit to Canada in accordance with the enumerated assessment factors (the “Net Benefit to Canada Determination”). When making this determination, the Minister can consider any proposed undertakings offered by the investor in connection with the Minister’s review under the Investment Canada Act.

The Minister has 45 days from the date of receipt by the Investment Review Division of a completed application to decide whether the acquisition is of Net Benefit to Canada. This 45-day period may be further extended 30 days by the Minister (or such longer period as may be agreed upon by Spinco and the Minister). If no notice is sent within the 45-day review period or the extended period, as the case may be, the acquisition is deemed to be approved. The combination cannot be completed until Spinco has received, or is deemed to have received, the responsible Minister’s Net Benefit to Canada Determination.

The combination is reviewable under the Investment Canada Act. It cannot be completed until Spinco has received, or is deemed to have received, the responsible Minister’s Net Benefit to Canada Determination. Spinco filed an application for review on November 10, 2006. The initial 45-day period has expired and the Minister, by letter dated December 27, 2006, extended the review period a further 30 days. Any extension beyond this time would need to be consented to by both Spinco and the Minister.

Dividend Policy

Spinco does not intend to pay dividends for the foreseeable future. In addition, Spinco’s ability to pay dividends will be restricted by current and future agreements¸ governing Spinco and its subsidiaries’ debt, including its senior secured credit facilities. See “Risk Factors – Risks Related to Ownership of Spinco Common Stock and Exchangeable Shares of Newco Canada Exchangeco – You will not receive dividends for the foreseeable future” and “Financing – Proposed Terms of the Senior Secured Credit Facilities”.

Structure of Spinco after the Transactions

Immediately following the consummation of the Transactions, Spinco will be an independent public company, owned approximately 55% by Weyerhaeuser shareholders or former Weyerhaeuser shareholders and approximately 45% by former holders of Domtar common shares (including through their ownership of exchangeable shares), in each case on a fully diluted basis. Spinco will be a holding company and will directly or indirectly own all shares or other equity interests in Newco (which will hold and operate the U.S. Weyerhaeuser Fine Paper Business), in Newco Canada Exchangeco (which will directly or indirectly hold and operate the Canadian Weyerhaeuser Fine Paper Business) and in Domtar (which holds and operates the Domtar business) other than Domtar preferred shares, which will remain outstanding, and other than the indirect interest in Domtar represented by the exchangeable shares issued by Newco Canada Exchangeco.

 

78


Table of Contents

Accounting Treatment and Considerations

The Contribution and Distribution

Spinco will record assets and liabilities received from Weyerhaeuser, Weyerhaeuser Company Limited or Weyerhaeuser Saskatchewan Ltd. at the amount that the assets and liabilities are carried on Weyerhaeuser’s consolidated financial statements. Neither the exchange of shares of Weyerhaeuser common stock for Spinco’s common stock in an exchange offer nor the distribution of Spinco’s common stock in a pro rata distribution, in and of themselves, will affect the financial condition or results of operations of Spinco.

The Arrangement

Spinco will account for the Arrangement using the purchase method of accounting with Spinco being treated as the acquiring entity for accounting purposes. As a result, the assets and liabilities of Domtar will be recorded at their estimated fair values as of the date that the Arrangement occurs. The total purchase price is currently estimated based on the average market price of Domtar common shares and the average number of Domtar common shares that were outstanding for the five trading days beginning August 21, 2006 and ended August 25, 2006, plus other costs directly related to the Arrangement.

General

The estimate of the total purchase price for Domtar is for accounting purposes only and is not indicative of the price at which Spinco common stock will trade immediately after the consummation of the Arrangement or the value of Spinco common stock to be received by holders of Domtar common shares in connection with the Arrangement.

See “Unaudited Pro Forma Condensed Combined Financial Information of Spinco”, “Where You Can Find More Information” and the financial statements of Spinco and the Weyerhaeuser Fine Paper Business and the notes thereto included elsewhere in this document.

Stock Exchange Listings

Weyerhaeuser, Domtar and Spinco have agreed to use their respective reasonable best efforts to:

 

  ·   cause the shares of Spinco common stock to be issued in the Transactions to be approved for listing on the New York Stock Exchange and the Toronto Stock Exchange before the closing of the Transactions, subject to official notice of issuance;

 

  ·   cause the shares of Spinco common stock to be issued upon exchange of the exchangeable shares and upon exercise of options to purchase shares of Spinco common stock (to be received under the Arrangement in exchange for Domtar stock options) to be approved for listing on the New York Stock Exchange and the Toronto Stock Exchange before the closing of the Transactions, subject to official notice of issuance; and

 

  ·   cause the exchangeable shares of Newco Canada Exchangeco to be approved for listing on the Toronto Stock Exchange before the closing of the Transactions.

Spinco has been authorized to list its common stock on the New York Stock Exchange. An application has been made to the Toronto Stock Exchange for listing of the Spinco common stock and exchangeable shares. The proposed stock symbols are set forth below.

 

Class of Securities

   NYSE Symbol    TSX Symbol

Spinco common stock

   UFS    UFS

Exchangeable shares

   N/A    UFX

 

79


Table of Contents

Spinco and Newco Canada Exchangeco do not intend to list these shares on any other stock exchange. Domtar has agreed to use its reasonable best efforts to cause the Class B common shares of Offerco to be listed and posted for trading on the Toronto Stock Exchange. An application has been made to the Toronto Stock Exchange to list the Class B common shares of Offerco. Such shares will be listed and posted for trading throughout the time that they are issued and outstanding. Such shares, upon their issuance, will be immediately exchanged for Spinco common stock or exchangeable shares under the Arrangement.

The Domtar Series A preferred shares and Domtar Series B preferred shares will remain listed on the Toronto Stock Exchange upon completion of the combination under the symbols “DTC.PR.A” and “DTC.PR.B”, respectively.

Issue and Resale of Exchangeable Shares and Shares of Spinco Common Stock Received in the Arrangement

U.S.

The issuance of Class B common shares of Offerco to holders of Domtar common shares, and the issuance of shares of Spinco common stock and exchangeable shares of Newco Canada Exchangeco to holders of Class B common shares under the Arrangement, will not be registered under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”). The Class B common shares, the shares of Spinco common stock and the exchangeable shares issued in connection with the Arrangement will be issued in reliance upon the exemption from registration available under Section 3(a)(10) of the U.S. Securities Act. Section 3(a)(10) exempts securities issued in exchange for one or more bona fide outstanding securities from the general requirement of registration where the terms and conditions of the issuance and exchange of the securities have been approved by any court or authorized governmental authority, after a hearing upon the fairness of the terms and conditions of exchange at which all persons to whom the securities will be issued have the right to appear. The court is authorized to conduct a hearing to determine the fairness of the terms and conditions of the Arrangement, including the proposed issuance of securities in exchange for other outstanding securities. On January 26, 2007, the Superior Court, District of Montréal, Province of Québec issued the interim order and, subject to the approval of the Arrangement by the Domtar securityholders, a hearing for the court’s final order approving the Arrangement will be held on or about February 27, 2007 by the Superior Court District of Montréal, Province of Québec.

The shares of Spinco common stock and the exchangeable shares issued in the Arrangement will be freely transferable under U.S. federal securities laws, except by persons who are deemed to be “affiliates” (as that term is defined under the U.S. Securities Act) of Domtar prior to the combination or persons who are affiliates of Spinco after the combination. Shares held by affiliates of Domtar or Spinco may be resold only in transactions made in compliance with Rule 903 or Rule 904 of Regulation S under the U.S. Securities Act, the resale provisions of Rule 145(d)(1), (2) or (3) under the U.S. Securities Act or as otherwise permitted under the U.S. Securities Act. Rule 145(d)(1) generally provides that “affiliates” of Domtar may not sell securities of Spinco received in the combination unless the sale is effected by use of an effective registration statement or in compliance with the volume, current public information, manner of sale and timing limitations set forth in paragraphs (c), (e), (f) and (g) of Rule 144 under the U.S. Securities Act. These limitations generally permit sales made by an affiliate in any three-month period that do not exceed the greater of 1% of the outstanding shares of Spinco common stock or the average weekly reported trading volume in those securities over the four calendar weeks preceding the placement of the sell order, provided the sales are made in unsolicited, open market “broker transactions” and that current public information on Spinco is available. Persons who may be deemed to be affiliates of an issuer generally include individuals or entities that directly or indirectly control, are controlled by, or are under common control with, that issuer and may include officers and directors of the issuer as well as beneficial owners of 10% or more of any class of capital stock of the issuer. Rules 145(d)(2) and (3) generally provide that these limitations lapse for non-affiliates of Spinco (who were affiliates of Domtar prior to exchange of shares in the Arrangement) after a period of one or two years, depending upon whether specified currently available information continues to be publicly available with respect to the Spinco.

 

80


Table of Contents

This document does not cover any resales of shares of Spinco common stock received in the Arrangement by any person who may be deemed an affiliate of Spinco after the combination.

Canada

The issuance of Class B common shares of Offerco to holders of Domtar common shares, the issuance of exchangeable shares of Newco Canada Exchangeco and shares of Spinco common stock to holders of Class B common shares, in each case, under the Arrangement and the issuance of shares of Spinco common stock to holders of exchangeable shares as contemplated under “Information Concerning Newco Canada Exchangeco – Description of Exchangeable Shares of Newco Canada Exchangeco” will be exempt from the prospectus and registration requirements (and the rights and protections otherwise afforded under these requirements). The resale of the exchangeable shares of Newco Canada Exchangeco and shares of Spinco common stock received in connection with the Arrangement will be “freely tradable” (subject to customary restrictions).

Ongoing Canadian Reporting Obligations

Spinco, upon completion of the Arrangement, will be a reporting issuer (or equivalent status) in several Canadian provinces and territories. It is intended that an application will be made to the Canadian securities regulatory authorities to permit Spinco to satisfy its Canadian statutory and financial reporting obligations, including in respect of insider reporting, by complying with applicable U.S. securities laws. This exemption is expected to be conditional on Spinco filing with the relevant Canadian securities regulatory authorities copies of its reports and other materials filed with the SEC. Newco Canada Exchangeco, upon completion of the Arrangement, is expected to become a reporting issuer (or equivalent status) in several Canadian provinces and territories. It is intended that an application will be made to the Canadian securities regulatory authorities to exempt Newco Canada Exchangeco from Canadian statutory financial and reporting requirements, including in respect of insider reporting. This exemption is expected to be conditional on Spinco filing with the relevant Canadian securities regulatory authorities copies of certain of Spinco’s reports filed with the SEC and that holders of exchangeable shares receive certain materials that are sent to holders of Spinco common stock, including annual and interim financial statements of Spinco and stockholder meeting materials. Domtar will remain a reporting issuer in all provinces and territories of Canada upon completion of the combination as the Domtar preferred shares will remain listed on the Toronto Stock Exchange. Offerco, upon completion of the Arrangement, will be a reporting issuer (or equivalent status) in several Canadian provinces and territories. Offerco intends to apply to the Canadian securities regulatory authorities to cease to be a reporting issuer upon completion of the combination.

Treatment of Domtar Equity Awards

As of January 22, 2007, there were outstanding Domtar stock options to purchase Domtar common shares which, when vested, would be exercisable to acquire a total of 4,401,757 Domtar common shares at prices between Cdn.$6.23 to Cdn.$16.52 with various expiration dates from March 2007 to February 2016.

The Transaction Agreement provides that, and the Arrangement (when consummated) will provide that:

 

  ·  

each Domtar stock option (other than a Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent)), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an option to purchase a number of shares of common stock of Spinco (rounded down to the nearest whole number) of equivalent value determined using the Black-Scholes option pricing model based on assumptions that are consistent with Domtar’s 2005 financial statements, and having an exercise price per share equal to the volume-weighted average (rounded to

 

81


Table of Contents
 

the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent);

 

  ·   each Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an option to purchase that number of shares of common stock of Spinco equal to the number of Domtar common shares subject to the Domtar stock option and the exercise price per share will be equal to the exercise price per share of such option immediately prior to the exchange;

 

  ·   each outstanding right to be granted bonus Domtar common shares under the Domtar Executive Stock Option and Share Purchase Plan (except those cancelled as described below) will be exchanged, on a one-for-one basis, for a right to be granted bonus shares of Spinco common stock;

 

  ·   each outstanding award of restricted Domtar common shares will be exchanged for Class B common shares of Offerco, which will then be exchanged, on a one-for-one basis, on the same terms and conditions as applied to the Domtar restricted share awards, for awards of restricted shares of Spinco common stock (or awards of restricted exchangeable shares of Newco Canada Exchangeco, as the case may be); and

 

  ·   each outstanding grant of deferred share units and each outstanding grant of performance share units (if any) with respect to Domtar common shares will be exchanged on a one-for-one basis, on the same terms and conditions as applied to the Domtar deferred share unit or the performance share unit (with appropriate adjustments to the performance criteria applicable to any performance share unit to give effect to the Transactions), for deferred share units or performance share units, as applicable, with respect to shares of Spinco common stock.

The Transaction Agreement also provides that, and the Arrangement (when consummated) will provide that, subject to and upon consummation of the Transactions, Domtar will forgive the balance of any loan extended to a current or former employee under the Domtar Executive Stock Option and Share Purchase Plan in connection with the exercise of rights to purchase Domtar common shares thereunder in an amount equal to the excess of the loan amount (plus any outstanding interest) over the fair value of the Domtar common shares pledged as security for the loan. Each current or former employee with an outstanding loan will be required to return the pledged shares to Domtar for cancellation in repayment of the remaining portion of his or her loan and any rights to receive bonus common shares granted in connection with his or her exercise of rights to purchase Domtar common shares under the plan will be extinguished. Any outstanding forward purchase contracts for Domtar common shares entered into between Domtar and a current or former employee under the Domtar Executive Stock Option and Share Purchase Plan will also be cancelled as of the date of the consummation of the Transactions. Any rights to receive bonus common shares granted in connection with those contracts will also be cancelled. Domtar will also provide the employees an amount sufficient to cover any taxes payable by the employees in connection with any loan forgiveness and/or cancellation of any share purchase contract pursuant to the Arrangement.

If you hold exercisable Domtar stock options and wish to exercise them to acquire Domtar common shares in order to elect to ultimately receive exchangeable shares and/or shares of Spinco common stock, then prior to 5:00 p.m. (Montréal time) on the third trading day prior to the date of closing of the Transactions you should exercise your options through your Solium Shareworks account at www.solium.com or by telephone at the following toll-free number: 1-877-380-7793. Domtar optionholders are under no obligation to exercise their Domtar stock options before the Effective Time. If the Domtar securityholders resolution is passed, Domtar stock options not executed prior to the Effective Time will be exchanged for options to purchase Spinco common stock as set forth above.

 

82


Table of Contents

Dissenting Domtar Shareholder’s Rights

If you are a registered holder of Domtar common shares or Domtar preferred shares, in accordance with the interim order issued by the Superior Court, District of Montréal, Province of Québec, you will have the right to dissent from the Domtar securityholders resolution. If the Arrangement becomes effective and you properly dissent from the Domtar securityholders resolution in compliance with Section 190 of the Canada Business Corporations Act, you will be entitled to be paid by Domtar, the fair value of the Domtar common shares (which payment will be made on behalf of Offerco) or the Domtar preferred shares you hold, determined as of the Effective Time of the Arrangement.

If you want to dissent, you must dissent with respect to all your Domtar shares of a class held by you on behalf of any one beneficial owner and registered in your name. As a consequence, you may only exercise the right to dissent in respect of the Domtar shares that are registered in your name.

In many cases, people beneficially own shares that are registered either:

 

  ·   in the name of an intermediary, such as a bank, trust company, securities dealer, broker, trustee or administrator of “registered retirement savings plans,” “registered retirement income funds”, “registered educational savings plans” and similar plans and their nominees, as these terms are defined under the Income Tax Act (Canada); or

 

  ·   in the name of a clearing agency in which the intermediary participates, such as The Canadian Depositary for Securities Limited or The Depository Trust Company.

If you want to dissent and your Domtar shares are registered in someone else’s name, you must contact your intermediary and either:

 

  ·   instruct your intermediary to exercise the dissent rights on your behalf (which, if the Domtar shares are registered in the name of a clearing agency, will require that the Domtar shares first be re-registered in your intermediary’s name); or

 

  ·   instruct your intermediary to re-register the Domtar shares in your name, in which case you will have to exercise your dissent rights directly.

In other words, if your Domtar shares are registered in someone else’s name, you will not be able to exercise your dissent rights directly unless the shares are re-registered in your name.

If you want to dissent in respect of the Domtar securityholders resolution, you must provide a written dissent notice to Domtar’s corporate secretary at Domtar Inc., 395 de Maisonneuve Blvd. West, Montréal, Québec, Canada H3A 1L6, Attention: Corporate Secretary, facsimile number 514-848-6850, not later than 5:00 p.m. (Montréal time) on the business day immediately preceding the Domtar special meeting (or any adjournment or postponement of the Domtar special meeting). If you do not strictly comply with this requirement, you could lose your right to dissent. This requirement is different from the statutory dissent procedures of the Canada Business Corporations Act, which would permit a dissent notice to be provided at or prior to the Domtar special meeting.

If you send a dissent notice, you still have the right to vote at the Domtar special meeting. However, under the Canada Business Corporations Act if you send a dissent notice and then vote in favour of the Domtar securityholders resolution, you will no longer be considered a dissenting Domtar shareholder with respect to that class of Domtar shares voted in favour of the Domtar securityholders resolution. You must either vote against the Domtar securityholders resolution or abstain to dissent.

The Canada Business Corporations Act does not provide (and Domtar will not assume) that a vote against the Domtar securityholders resolution or an abstention constitutes a dissent notice. Similarly, if you give

 

83


Table of Contents

someone a proxy to vote for the Domtar securityholders resolution and then revoke the proxy, your revocation does not constitute a dissent notice. However, if you want to dissent, you should revoke any proxy that instructs the proxy holder to vote for the Domtar securityholders resolution to prevent the proxy holder from voting your Domtar shares in favour of the Domtar securityholders resolution and causing you to forfeit your dissent rights. For instructions on revoking a proxy, see “Special Meeting of Domtar Securityholders – Revocation of Proxies”.

If you dissent, Domtar is required to notify you that the Domtar securityholders resolution has been adopted within 10 days after Domtar’s securityholders adopt the resolution. Domtar is not required to send you a notice if you vote for the Domtar securityholders resolution or withdraw your dissent notice.

If you dissent, you must send Domtar (to its corporate secretary at the address above) a written demand for payment within 20 days after you receive Domtar’s notice that the Domtar securityholders resolution has been adopted. If you do not receive that notice, you must send a written demand for payment of the fair value of your Domtar shares within 20 days after you learn that the Domtar securityholders resolution has been adopted. Your demand for payment of the fair value of your Domtar shares must contain:

 

  ·   your name and address;

 

  ·   the number of Domtar common shares or Domtar preferred shares, or both, for which you are dissenting; and

 

  ·   a demand for payment of the fair value of such shares.

Within 30 days of sending a demand for payment, you must send Domtar (to its corporate secretary at the address above) the share certificates representing your dissenting Domtar shares. If you do not send in your share certificates, you forfeit your right to dissent. The Domtar transfer agent will endorse on your share certificates a notice that you are a dissenting Domtar shareholder and will then send the share certificates back to you.

After you send your demand for payment, you will no longer have any rights as a Domtar shareholder other than the right to be paid the fair value of your shares unless:

 

  ·   you withdraw your demand for payment before Domtar makes a written offer to pay;

 

  ·   Domtar does not make you a timely written offer to pay and you withdraw your demand for payment; or

 

  ·   Domtar’s board of directors revokes the Domtar securityholders resolution.

In all three cases described above, your rights as a Domtar shareholder will be reinstated, and in the first two cases, your Domtar shares will be subject to the Arrangement if it has been completed.

Under the Arrangement, if you duly exercise your dissent rights and are ultimately determined to have the right to be paid the fair value of your Domtar shares, you will be deemed to have transferred your Domtar shares to Offerco, in the case of the Domtar common shares, and transferred your Domtar shares to Domtar for cancellation, in the case of the Domtar preferred shares in each case, at the Effective Time of the Arrangement. If you exercise your dissent rights but are ultimately determined for any reason not to have the right to be paid the fair value of your Domtar shares, you will be deemed to have participated in the Arrangement like any non-dissenting Domtar shareholder and you will receive one Class B common share of Offerco for each Domtar common share held by you and you will be deemed, under the Arrangement, to have elected to receive exchangeable shares or Spinco common stock, in accordance with the Arrangement. If your address, as shown in the Offerco share register (which will be identical to the share register for the Domtar common shares) is in Canada, you will receive exchangeable shares in exchange for the Class B common shares you received in the Arrangement. If your address, as shown in the Offerco share register (which will be identical to the share register for the Domtar common shares) is not in Canada, you will receive shares of Spinco common stock in exchange

 

84


Table of Contents

for the Class B common shares you received in the Arrangement. If you are a holder of Domtar preferred shares, you will continue to hold the Domtar preferred shares upon completion of the Arrangement.

If you properly dissent, within seven days after the later of the Effective Date of the Arrangement and the date when Domtar receives your demand for payment, Domtar is required to send you an offer to pay for your Domtar shares. That offer must be in an amount that Domtar’s board of directors considers, as the case may be, to be the fair value of the Domtar shares. Domtar must also send you a statement with the offer to pay showing how the fair value was determined. Every offer to pay for a dissenting Domtar shareholder’s shares must be on the same terms for Domtar shares of the same class. Domtar must pay for your Domtar shares within 10 days after you accept the offer to pay, but the offer of Domtar to pay you will lapse if your acceptance is not received within 30 days after it has made the offer to pay.

If you do not accept the offer or if Domtar fails to make you an offer to pay after you have sent your demand for payment, Domtar may apply to a court in the Province of Québec to fix a fair value for the Domtar shares of all dissenting Domtar shareholders. If Domtar decides to apply to a court to fix the fair value, it must do so within 50 days after the Effective Date of the Arrangement or within any longer period that the court allows. If Domtar fails to apply to a court, you may apply to a court in Québec for the same purpose within a further period of 20 days or within any longer period that the court allows. You are not required to give security for the costs of applying to a court.

If Domtar, you or another dissenting Domtar shareholder applies to a court, all dissenting Domtar shareholders whose Domtar shares have not been purchased by Domtar or Offerco will be joined as parties and will be bound by the court’s decision. Domtar will be required to notify each affected dissenting Domtar shareholder of the date, place and consequences of the application and of such shareholder’s right to appear and be heard in person or by counsel. The court may determine whether any person is a dissenting Domtar shareholder who should be joined as a party, and the court will then fix a fair value for the Domtar shares of all dissenting Domtar shareholders. The court will render a final order against Domtar in favour of each dissenting Domtar shareholder and for the amount of the fair value of the dissenting Domtar shareholder’s shares. The court may, in its discretion, allow a reasonable rate of interest on the amount payable to each Domtar dissenting shareholder from the Effective Date of the Arrangement until the date of payment.

This is a summary of the dissenting Domtar shareholder provisions of the Arrangement and the Canada Business Corporations Act, which are technical and complex. Complete copies of the Arrangement and Section 190 of the Canada Business Corporations Act are attached as Annexes “E” and “J”, respectively. If you want to dissent, Domtar recommends that you seek legal advice because, if you fail to comply strictly with the provisions of the Arrangement and the Canada Business Corporations Act, you could forfeit your dissent rights.

The Canadian federal income tax consequences to a holder of Domtar common shares or Domtar preferred shares who exercises dissent rights and who receives fair value for the holder’s shares from Domtar may be different from the consequences to a holder who participates in the Arrangement. For more information see “Material Income Tax Considerations – Material Canadian Federal Income Tax Considerations to Domtar Shareholders”.

 

85


Table of Contents

THE CONTRIBUTION AND DISTRIBUTION AGREEMENT

The following is a summary of material provisions of the Contribution and Distribution Agreement. This summary is qualified by reference to the Contribution and Distribution Agreement, which is attached as Annex “C”. Domtar urges you to read the Contribution and Distribution Agreement in its entirety.

The provisions of the Contribution and Distribution Agreement are qualified by information in confidential disclosure schedules.

General

The Contribution and Distribution Agreement between Weyerhaeuser, Spinco and Newco provides for, among other things, the principal corporate transactions required to effect the Contribution and the Distribution and certain other terms governing the relationship between Weyerhaeuser, Spinco and Newco.

The Contribution

The Newco Contribution

Pursuant to the Contribution and Distribution Agreement, Weyerhaeuser will transfer to Newco certain of its fine paper and related assets to Newco, which include, subject to certain exceptions, the business, properties, assets, goodwill and rights (including lease, license and other contractual rights) of whatever kind and nature, real or personal, tangible or intangible, that are owned by Weyerhaeuser or its subsidiaries immediately prior to the Contribution and used or held for use primarily in the operation or conduct of the Weyerhaeuser Fine Paper Business.

Also pursuant to the Contribution and Distribution Agreement, Newco will assume certain of Weyerhaeuser’s fine paper and related liabilities, which include, subject to certain exceptions, all obligations, liabilities and commitments of any nature of Weyerhaeuser or its subsidiaries arising out of or primarily relating to the assets that are being transferred by Weyerhaeuser to Newco, the Weyerhaeuser Fine Paper Business or the operation or conduct of the Weyerhaeuser Fine Paper Business prior to, on or after the date of the Contribution.

The Contribution and Distribution Agreement defines the Weyerhaeuser Fine Paper Business to include, subject to certain exceptions, the following operations:

 

  ·   the uncoated free sheet and papergrade pulp operations conducted at Weyerhaeuser’s facilities in Hawesville, Kentucky; Marlboro, South Carolina; Kingsport, Tennessee; Johnsonburg, Pennsylvania; Rothschild, Wisconsin; Dryden, Ontario and Prince Albert, Saskatchewan (currently not in operation);

 

  ·   the chip mill, uncoated free sheet, papergrade pulp and fluff pulp operations conducted at Weyerhaeuser’s facility in Plymouth, North Carolina;

 

  ·   the papergrade and specialty pulp operations conducted at Weyerhaeuser Company Limited’s facilities in Kamloops, British Columbia;

 

  ·   the uncoated free sheet converting operations conducted at certain specified facilities of Weyerhaeuser;

 

  ·   the forms operations conducted at Weyerhaeuser’s facilities in Dallas, Texas; Indianapolis, Indiana; Langhorne, Pennsylvania; Rock Hill, South Carolina and Cerritos, California;

 

  ·   the coated groundwood and thermo-mechanical pulping operations conducted at Weyerhaeuser’s facility in Columbus, Mississippi;

 

  ·   the chip mill operations conducted at certain specified facilities of Weyerhaeuser;

 

  ·   the operations conducted at Weyerhaeuser’s facilities in Fort Mill, South Carolina;

 

86


Table of Contents
  ·   the logging and forest management operations conducted pursuant to certain specified forest licenses;

 

  ·   the sawmill operations conducted at Weyerhaeuser’s facilities in Ear Falls, Ontario and in Big River, Saskatchewan; and

 

  ·   the operations conducted at Weyerhaeuser’s regional replenishment centers, warehouses and sales offices used in connection with any of the other operations referred to above.

The assets transferred and the liabilities assumed pursuant to the Contribution and Distribution Agreement exclude all assets and liabilities of Weyerhaeuser’s Canadian subsidiaries relating to the Weyerhaeuser Fine Paper Business, which will be transferred and assumed pursuant to a separate agreement among Weyerhaeuser’s Canadian subsidiaries and a Canadian subsidiary of Newco. See “The Canadian Asset Transfer Agreement”.

For a more detailed description of the assets and properties to be transferred to Newco, see “Business of Spinco Before the Arrangement – Facilities and Properties”.

The Spinco Contribution

Prior to the Distribution and the Arrangement, Weyerhaeuser will contribute all the issued and outstanding limited liability company interests of Newco to Spinco in exchange for:

 

  ·   $1.35 billion in cash; and

 

  ·   the issuance to Weyerhaeuser of a number of shares of Spinco common stock determined as set forth under “The Transactions – The Contribution – Determination of Number of Shares of Spinco Common Stock to be Issued to Weyerhaeuser”.

The Spinco Financing

The Contribution and Distribution Agreement provides that, prior to the Spinco Contribution, Spinco will enter into a three-month unsecured term loan facility under which it will borrow a principal amount of $1.35 billion. This three-month unsecured term loan facility will be converted immediately following the consummation of the Transactions to be part of a new seven-year senior secured credit facility of Spinco. Spinco also intends to enter into a five-year senior secured revolving credit facility upon completion of the Transactions. See “Financing”.

Working Capital Adjustment

The Contribution and Distribution Agreement provides for an adjustment following the consummation of the Transactions to be paid by Weyerhaeuser or Spinco, as the case may be, if the closing working capital of Spinco falls outside certain parameters. If the closing working capital of Spinco is less than $500 million, Weyerhaeuser will pay to Spinco the amount by which the closing working capital is less than $500 million. If the closing working capital exceeds $600 million, Spinco will pay to Weyerhaeuser the amount by which closing working capital exceeds $600 million. Subject to certain limitations, any disagreement between the parties as to the amount, if any, of the adjustment will be determined through arbitration by an independent accounting firm.

Payment with respect to Shared Accounts Receivable, Shared Accounts Payable and Shared Inventory

The Contribution and Distribution Agreement provides for a payment by Weyerhaeuser to Spinco following the consummation of the Transactions in an amount equal to the sum of the amount of shared accounts receivable and the amount of shared inventory, minus the amount of shared accounts payable, in each case as reflected on Spinco’s balance sheet as of the date of the consummation of the Transactions.

“Shared accounts receivable” refers to certain accounts receivable pursuant to which a payment is owed by a third party to the Weyerhaeuser Fine Paper Business and Weyerhaeuser’s other businesses, and “shared accounts payable” refers to certain accounts payable pursuant to which a payment is owed collectively by the

 

87


Table of Contents

Weyerhaeuser Fine Paper Business and any of Weyerhaeuser’s other businesses to a third party. “Shared inventory”, refers to certain finished pulp manufactured at facilities that are part of the Weyerhaeuser Fine Paper Business but that, on the date of the Contribution, is located at Weyerhaeuser facilities that are part of Weyerhaeuser’s other businesses.

The amount of this payment may be subject to certain adjustments. Subject to certain limitations, any disputes among the parties shall be resolved as a part of the arbitration by an independent accounting firm applicable to disputes with respect to the closing working capital statement.

Covenants

Weyerhaeuser, Spinco and Newco have agreed to take and to refrain from taking certain actions following the consummation of the Transactions. These actions include:

 

  ·   Weyerhaeuser will not, and will not permit any of its subsidiaries to, waive or amend any confidentiality agreement between Weyerhaeuser or any of its subsidiaries and any third party to the extent such waiver or amendment adversely affects the confidentiality of information related to the Weyerhaeuser Fine Paper Business and, subject to certain conditions, Weyerhaeuser will, and will cause each of its subsidiaries to, enforce in accordance with its terms any such confidentiality agreement;

 

  ·   following the Distribution, if Spinco negotiates any changes in benefit levels or cost sharing that increase the retiree benefits under a collective bargaining agreement for Canadian employees that are intended to be transferred to Newco or any subsidiary of Newco, Spinco will ensure that such changes will not apply to any persons who retired prior to the date of the Distribution. In the event that, notwithstanding this limitation, Spinco negotiates any changes in benefit levels or cost sharing that increase the retiree benefits under a collective bargaining agreement for Canadian employees that were intended to be transferred to Newco or any subsidiary of Newco but who are not actually transferred to Newco or any subsidiary of Newco and who retired prior to the date of the Distribution, Spinco will promptly reimburse Weyerhaeuser for all costs, expenses or liabilities resulting from such increase and will indemnify and hold harmless Weyerhaeuser and its affiliates for any liabilities arising in connection therewith;

 

  ·   within specified time periods after the consummation of the Transactions, Newco will make all necessary filings and take all other necessary actions to discontinue any references to certain trade names owned by Weyerhaeuser that are not being transferred to Newco;

 

  ·   Newco will allow Weyerhaeuser to have reasonable access to the facility located in Plymouth, North Carolina for the purpose of removing a containerboard machine and related assets. Weyerhaeuser will complete this asset removal within one year of the date of the Distribution;

 

  ·   subject to certain exceptions, for a period of three years after the date of the Distribution, Weyerhaeuser and its subsidiaries will not, directly or indirectly, engage in activities or businesses, or establish any new businesses, within North America that are substantially in competition with the uncoated free sheet operations (including uncoated free sheet converting operations) and the forms operations included in the Weyerhaeuser Fine Paper Business as conducted on the date of the Distribution; and

 

  ·  

following the Distribution, Weyerhaeuser will cooperate, and will request its independent accountants to cooperate, with Spinco in providing information for the preparation of any reports that are required to be filed by Spinco with the SEC pursuant to Section 13 or 15(d) of the U.S. Exchange Act, with respect to any fiscal quarter up to and including the fourth complete fiscal quarter following the date of the Distribution. Spinco and Newco, jointly and severally, will indemnify, defend and hold harmless Weyerhaeuser from and against any and all losses, under the U.S. Exchange Act or otherwise, in

 

88


Table of Contents
 

connection with these quarterly reports except to the extent arising or resulting from information provided by Weyerhaeuser for inclusion in these reports that is inaccurate or incomplete in any material respect.

Conditions to the Contribution and the Distribution

The obligations of Weyerhaeuser pursuant to the Contribution and Distribution Agreement to effect the Contribution and the Distribution are subject to the fulfillment (or waiver by Weyerhaeuser), at or prior to the date of the Contribution, of the condition that each of the parties to the Transaction Agreement has irrevocably confirmed to each other that each condition in the Transaction Agreement to such party’s respective obligations to effect the transactions contemplated thereby have been fulfilled or will be fulfilled at the time the Arrangement becomes effective or are waived. See “The Transactions – Conditions to the Transactions”.

Subsequent Transfers

The Contribution and Distribution Agreement provides that Weyerhaeuser will not be obligated to transfer to Newco, and Newco will not be obligated to accept or assume, any asset or liability intended to be transferred, assigned or assumed pursuant to the Contribution and Distribution Agreement until the time that all legal impediments are removed and/or all consents and/or governmental approvals necessary for the legal transfer and/or assumption thereof are obtained. If and when the legal impediments, consents or governmental approvals, the failure to remove or the absence of which caused the deferral of the transfer or assumption of the asset or liability, are removed or obtained, the transfer and assumption of the asset or liability will be promptly effected in accordance with the terms of the Contribution and Distribution Agreement, without the payment of additional consideration.

The Contribution and Distribution Agreement also requires that if, at any time following the date of the Contribution, Weyerhaeuser, Spinco or Newco, will receive or otherwise possess any asset that is allocated to any other party pursuant to the agreement, Weyerhaeuser, Spinco or Newco will promptly transfer this asset to the party so entitled thereto.

Mutual Release; Indemnification

Mutual Release of Pre-Closing Claims

Weyerhaeuser, on the one hand, and Spinco and Newco, on the other hand, have each agreed to release the other from any and all claims that they may have which arise from any acts or events occurring or failing to occur or any conditions existing on or before the date of the Distribution. The mutual release is subject to specified exceptions set forth in the Contribution and Distribution Agreement. These exceptions include:

 

  ·   any liability assumed, transferred, assigned or allocated to Weyerhaeuser, Spinco or Newco in accordance with, or any other liability of Weyerhaeuser, Spinco or Newco under the Contribution and Distribution Agreement or any other agreement contemplated thereby;

 

  ·   any liability that the parties may have with respect to indemnification pursuant to the Contribution and Distribution Agreement for claims brought against the parties by third parties; and

 

  ·   any liability the release of which would result in the release of any third party.

Indemnification by Spinco and Newco

Spinco and Newco are obligated to indemnify, defend and hold harmless Weyerhaeuser, its subsidiaries, and each of their affiliates, officers, directors, employees and shareholders from and against all losses arising out of:

 

  ·   any liability assumed by Newco in connection with the Contribution;

 

  ·  

any liabilities (including third-party claims) imposed on, sustained, incurred or suffered by any of the Weyerhaeuser indemnified parties arising out of or relating primarily to the Weyerhaeuser Fine Paper

 

89


Table of Contents
 

Business, the assets transferred to Newco in connection with the Contribution or the failure by Newco to pay, perform or otherwise promptly discharge any liabilities that are assumed by Newco in connection with the Contribution;

 

  ·   any claim that any action or omission by Spinco or Newco after the date of the consummation of the Transactions gives rise to any severance or other similar benefits with respect to, or constitutes an actual or constructive termination or severance of employment of, any employee who is transferred to Newco;

 

  ·   any discontinuance, suspension or modification by Spinco or Newco on or after the date of the Distribution of any employee benefit plan, program, arrangement or policy; and

 

  ·   any liabilities in respect of the financing described under “Financing” and all agreements relating to such financing.

Indemnification by Weyerhaeuser

Weyerhaeuser is obligated to indemnify, defend and hold harmless Spinco, its subsidiaries and each of their affiliates, officers, directors, employees and shareholders from and against all losses arising out of:

 

  ·   any liability retained by Weyerhaeuser after the Contribution;

 

  ·   all liabilities (including third-party claims) imposed on, sustained, incurred or suffered by any of Spinco indemnified parties arising out of or relating primarily to the Weyerhaeuser business (other than the Weyerhaeuser Fine Paper Business), the assets retained by Weyerhaeuser after the Contribution or the failure by Weyerhaeuser to pay, perform or otherwise promptly discharge any liabilities retained by Weyerhaeuser after the Contribution;

 

  ·   any fees, expenses or other payments incurred or owed by Weyerhaeuser to any agent, broker, investment banker or other firm employed by it in connection with the Transactions after Spinco has paid the portion of such expenses for which it is responsible under the Transaction Agreement; and

 

  ·   any claim that certain actions taken prior to or on the date of the consummation of the Transactions give rise to any severance or other similar benefits with respect to, or constitute an actual or constructive termination or severance of employment of, any employee who is transferred to Newco or any employee of Weyerhaeuser who is not transferred to Newco.

The Contribution and Distribution Agreement provides that substantially similar indemnification provisions will apply to the parties to the Canadian Asset Transfer Agreement.

The indemnification provisions set forth in the Contribution and Distribution Agreement do not apply to any indemnification or other claims relating to taxes. Instead, these indemnification obligations are covered in the tax sharing agreement. See “Spinco’s Relationship With Weyerhaeuser After the Transactions – Tax Sharing Agreement”.

Insurance

Following the Distribution, Spinco will be responsible for obtaining and maintaining its own insurance coverage and will no longer be an insured party under Weyerhaeuser’s insurance policies. If any damage, destruction or other casualty loss occurs after March 25, 2006, but prior to the date of the Distribution or any liability arises prior to the date of the Distribution that is to be assumed by Newco pursuant to the Contribution and Distribution Agreement, Weyerhaeuser will assert a claim under its insurance policies, and surrender to Newco after the date of the Distribution any insurance proceeds received by Weyerhaeuser under its insurance policies with respect to such damage, destruction, liability or loss, less any amount of cash or proceeds applied by Weyerhaeuser to the physical restoration of that asset or payment of that liability. The amount of the insurance proceeds to be so surrendered to Newco will also be reduced by the amount of any applicable

 

90


Table of Contents

deductibles and co-payment provisions or any payment, reinsurance or reimbursement obligations of Weyerhaeuser in respect thereof. The Contribution and Distribution Agreement provides that, during the three years following the date of the Distribution (or, if later, until the final resolution of any relevant claim relating to the Weyerhaeuser Fine Paper Business), Weyerhaeuser and its subsidiaries will not amend, terminate, buy-out, extinguish or otherwise modify their liability under any insurance policy in a manner that would adversely affect Newco’s rights as described above. The foregoing will, however, not require Weyerhaeuser to renew or keep from lapsing any insurance policy.

Amendments; No Third-Party Beneficiaries

The Contribution and Distribution Agreement may not be waived or amended by any party, unless the waiver or amendment is in writing and signed by both (a) the person against whom it is sought to enforce such waiver or amendment; and (b) if such waiver or amendment occurs prior to the Effective Time, Domtar. Except for the provisions that provide for the consent of Domtar, which are for the benefit of Domtar, and certain other limited exceptions, nothing in the Contribution and Distribution Agreement is intended to or confers upon any person (other than the parties) any legal or equitable right, benefit or remedy of any nature whatsoever and no person (other than as so specified) will be a third-party beneficiary under or by reason of the Contribution and Distribution Agreement.

Termination

The Contribution and Distribution Agreement may be terminated by Weyerhaeuser prior to the date of the Distribution at any time following the termination of the Transaction Agreement. The Contribution and Distribution Agreement may otherwise only be terminated with the consent of Weyerhaeuser, Spinco, Newco and, prior to the date of the Distribution, Domtar.

 

91


Table of Contents

THE CANADIAN ASSET TRANSFER AGREEMENT

Prior to or on the date of the Contribution, Weyerhaeuser will cause Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd., two Canadian subsidiaries of Weyerhaeuser, to enter into an agreement with Exchangeco Subsidiary (the “Canadian Asset Transfer Agreement”). Pursuant to the Canadian Asset Transfer Agreement, Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd. will transfer certain of their fine paper and related assets to Exchangeco Subsidiary, and Exchangeco Subsidiary will assume certain of Weyerhaeuser Company Limited’s and Weyerhaeuser Saskatchewan Ltd.’s fine paper and related liabilities. The transfer and assumption of these Canadian assets and liabilities pursuant to the Canadian Asset Transfer Agreement will occur on substantially the same terms and conditions as set forth in the Contribution and Distribution Agreement. See “The Contribution and Distribution Agreement”.

 

92


Table of Contents

THE TRANSACTION AGREEMENT

The following is a summary of material provisions of the Transaction Agreement. This summary is qualified by reference to the Transaction Agreement, which is attached hereto as Annex “B”. Domtar urges you to read the Transaction Agreement in its entirety.

The provisions in the Transaction Agreement are qualified by information in confidential disclosure letters that Weyerhaeuser and Domtar have exchanged in connection with signing the Transaction Agreement. Domtar does not believe that the disclosure letters contain information that applicable securities laws requires Domtar to publicly disclose other than information that has already been so disclosed.

General

Spinco and Domtar will consummate the Arrangement that will result in Spinco indirectly owning all of the outstanding Domtar common shares.

The Effective Time

The Arrangement will become effective on the date that the certificate of arrangement is issued under Section 192 of the Canada Business Corporations Act giving effect to the Arrangement. The Distribution is expected to occur immediately prior to the Effective Time. The closing date of the Arrangement and the Distribution will be the date that is two business days after the satisfaction or waiver of the conditions precedent to the Arrangement and the Distribution or such other date as agreed between Weyerhaeuser and Domtar. See “The Transactions – Conditions to the Transactions”.

Arrangement Consideration

The Transaction Agreement provides that each Domtar common share that is not held by a holder who exercised its dissent rights will be exchanged, on a one-for-one basis, for one Class B common share of Offerco. Immediately following the exchange of Domtar common shares for Class B common shares of Offerco, each Class B common share of Offerco will be transferred to Newco Canada Exchangeco for one share of Spinco common stock or one exchangeable share of Newco Canada Exchangeco. Each exchangeable share will be exchangeable at any time at the option of the holder for a share of Spinco common stock. See “Information Concerning Newco Canada Exchangeco – Description of Exchangeable Shares of Newco Canada Exchangeco” and “The Transaction Agreement – Treatment of Domtar Equity Awards” for a description of other arrangements affecting the consideration received by holders of Domtar common shares and equity awards as part of the Arrangement.

Corporate Offices

From and after the Effective Time, the head office of Spinco will be located in Montréal, Canada, and the operational headquarters of Spinco and its non-Canadian subsidiaries will be located in Fort Mill, South Carolina.

Related Transactions

The Transaction Agreement provides that, as a condition precedent to the Arrangement, Weyerhaeuser and Spinco will consummate and effect, or cause to be consummated and effected, the Canadian Asset Transfer in accordance with the Canadian Asset Transfer Agreement and the Contribution and the Distribution in accordance with the terms of the Contribution and Distribution Agreement. Also, under the terms of the Transaction Agreement, Weyerhaeuser, Spinco and/or their respective subsidiaries agreed to each execute at or prior to the consummation of the Transactions a tax sharing agreement, an intellectual property license agreement, a transition services agreement, certain supply agreements and certain site services agreements. In addition, Weyerhaeuser and Newco agreed to negotiate in good faith and use commercially reasonable efforts to enter into a joint purchase agreement. See “Spinco’s Relationship With Weyerhaeuser After the Transactions”.

 

93


Table of Contents

Representations and Warranties

The Transaction Agreement contains customary representations and warranties between Weyerhaeuser and Spinco, on the one hand, and Domtar, on the other hand, which are substantially reciprocal. These representations and warranties relate to, among other things:

 

  ·   due organization, good standing and power;

 

  ·   subsidiaries and equity interests;

 

  ·   capital structure;

 

  ·   authority to enter into and perform the Transaction Agreement and the other agreements executed in connection therewith as well as the execution, delivery and enforceability of such agreements;

 

  ·   no conflicts, consents and governmental approvals;

 

  ·   securities law filings, financial statements and absence of undisclosed liabilities;

 

  ·   accuracy of information supplied;

 

  ·   absence of certain changes or events;

 

  ·   taxes;

 

  ·   benefit plans;

 

  ·   employment agreements and ERISA compliance;

 

  ·   labour matters;

 

  ·   litigation;

 

  ·   compliance with applicable laws;

 

  ·   brokers;

 

  ·   compliance with environmental laws;

 

  ·   title to properties;

 

  ·   intellectual property matters;

 

  ·   insurance;

 

  ·   material agreements;

 

  ·   opinion of financial advisors; and

 

  ·   real estate.

In addition, the Transaction Agreement also contains representations and warranties by Weyerhaeuser and Spinco with respect to affiliate transactions and sufficiency of assets.

Many of the representations and warranties contained in the Transaction Agreement are subject to materiality qualifications, knowledge qualifications, or both, and none of the representations and warranties survive the Effective Time.

Conduct of Business Pending the Consummation of the Transactions

Each of Weyerhaeuser, Spinco and Domtar have agreed to restrictions on its activities until the Effective Time. In general, each of Weyerhaeuser, Spinco and Domtar (in the case of Weyerhaeuser, subject to certain exceptions, with respect to the Weyerhaeuser Fine Paper Business only) is required to conduct its business in the usual, regular and ordinary course in substantially the same manner as previously conducted and, to the extent consistent therewith, use all reasonable efforts to preserve intact its current business organization, maintain its material rights, licenses and permits, keep available the services of its current officers and employees and keep its relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with them to the end that its goodwill and ongoing business will be unimpaired in any material respect at the Effective Time.

 

94


Table of Contents

In addition, Weyerhaeuser, Spinco and Domtar have agreed to restrictions on certain activities and have undertaken certain obligations, in each case, after the Effective Time. For examples, see “– Non-Solicitation of Employees”, “– Directors and Officers Indemnification and Insurance”, “– Indemnification”, and “Spinco’s Relationship With Weyerhaeuser After the Transactions – Tax Sharing Agreement”.

Reasonable Best Efforts

The Transaction Agreement provides that each of the parties will use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Transactions. Such actions include, without limitation:

 

  ·   the obtaining of all necessary or advisable actions or non-actions, waivers, consents, and approvals;

 

  ·   the making of all necessary registrations and filings pursuant to the HSR Act, the Competition Act (Canada) and the Investment Canada Act;

 

  ·   the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any governmental authority; and

 

  ·   the defending of any lawsuits or other legal proceedings.

The Transaction Agreement, however, does not require any of the parties to dispose of any of its assets or to limit its freedom of action with respect to any of its businesses, or to agree to such disposition or limitation, in order to obtain any consents, authorizations, permits or approvals or to remove any impediments to the Transactions relating to the HSR Act, the Competition Act (Canada) and the Investment Canada Act or to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any suit or proceeding relating to such legislation, other than dispositions, consents, commitments, or limitations that individually or in the aggregate, have not had and would not reasonably be expected to have a material adverse effect on the Weyerhaeuser Fine Paper Business and the Domtar business, taken as a whole.

Employee Matters

The Transaction Agreement provides that Weyerhaeuser will transfer employees of the Weyerhaeuser Fine Paper Business to Newco. No employee who is not employed in the Weyerhaeuser Fine Paper Business will be transferred. Employees of the Weyerhaeuser Fine Paper Business who are on short or long term disability (other than certain Canadian union employees) and U.S. employees on workers compensation will not be transferred until such time as they are determined to be no longer eligible for short or long term disability or workers compensation benefits and will then be offered comparable employment by Newco. With respect to employees that are employed in both the Weyerhaeuser Fine Paper Business and Weyerhaeuser’s other businesses, Weyerhaeuser and Domtar will cooperate to determine which employees or new hires are needed to operate the Weyerhaeuser Fine Paper Business.

Newco and Exchangeco Subsidiary will generally assume pre-closing employment and employee benefit plan liabilities relating to employees of the Weyerhaeuser Fine Paper Business other than liabilities under Weyerhaeuser’s stock plans, U.S. pension liabilities, Canadian pension liabilities with respect to non-union employees and pre-closing liabilities under applicable health and welfare plans, which will, subject to certain exceptions, be retained by Weyerhaeuser, Weyerhaeuser Company Limited or Weyerhaeuser Saskatchewan Ltd. Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd. will transfer and Exchangeco Subsidiary will assume certain Canadian pension plans relating to the Weyerhaeuser Fine Paper Business.

As of the Effective Time, employees that are transferred to Newco will no longer participate in Weyerhaeuser’s compensation and benefit plans but will participate in compensation and benefit plans of Newco or its subsidiaries that are substantially as favourable in the aggregate as Weyerhaeuser’s compensation and benefit plans were, except that certain disabled Canadian union employees will continue to participate in the Weyerhaeuser disability plans until they are no longer eligible for such benefits. Newco will reimburse Weyerhaeuser for costs associated with the continued participation by these employees in Weyerhaeuser’s disability plans. All prior service with Weyerhaeuser and its subsidiaries and any predecessor companies, and all

 

95


Table of Contents

participant elections, pre-existing conditions, co-payments and deductibles recognized, covered or credited under Weyerhaeuser’s benefit plans will be recognized, covered and credited under benefit plans of Newco and its subsidiaries other than for purposes of benefit accrual under any defined benefit pension plans.

Non-Solicitation of Employees

Under the terms of the Transaction Agreement, Weyerhaeuser and Domtar each agree not to, and not to permit their respective affiliates to, directly or indirectly, employ or attempt to employ any employee of Weyerhaeuser or any subsidiary of Weyerhaeuser (in the case of Domtar) or any employee of Newco or any subsidiary of Newco (in the case of Weyerhaeuser) for a period of two years after the Effective Time. These restrictions do not apply to the placement of “help wanted” advertisements, postings on internet job sites and searches by employment search companies that are not specifically targeting employees of Weyerhaeuser, any subsidiary of Weyerhaeuser, Newco or any subsidiary of Newco.

Treatment of Domtar Equity Awards

The Transaction Agreement provides that, and the Arrangement (when consummated) will provide that:

 

  ·   each Domtar stock option (other than a Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent)), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an option to purchase a number of shares of common stock of Spinco (rounded down to the nearest whole number) of equivalent value determined using the Black-Scholes option pricing model based on assumptions that are consistent with Domtar’s 2005 financial statements, and having an exercise price per share equal to the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent);

 

  ·   each Domtar stock option that has an exercise price equal to or less than the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of the Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the Distribution (rounded up to the nearest whole cent), whether vested or unvested, will be exchanged, on the same terms and conditions as were applicable under the Domtar stock option, for an option to purchase that number of shares of common stock of Spinco equal to the number of Domtar common shares subject to the Domtar stock option and the exercise price per share will be equal to the exercise price per share of such option immediately prior to the exchange;

 

  ·   each outstanding right to be granted bonus Domtar common shares under the Domtar Executive Stock Option and Share Purchase Plan (except those cancelled as described below) will be exchanged, on a one-for-one basis, for a right to be granted bonus shares of Spinco common stock;

 

  ·   each outstanding award of restricted Domtar common shares will be exchanged for Class B common shares of Offerco, which will then be exchanged, on a one-for-one basis, on the same terms and conditions as applied to the Domtar restricted share awards, for awards of restricted shares of Spinco common stock (or awards of restricted exchangeable shares of Newco Canada Exchangeco, as the case may be); and

 

  ·  

each outstanding grant of deferred share units and each outstanding grant of performance share units (if any) with respect to Domtar common shares will be exchanged on a one-for-one basis, on the same

 

96


Table of Contents
 

terms and conditions as applied to the Domtar deferred share unit or the performance share unit (with appropriate adjustments to the performance criteria applicable to any performance share unit to give effect to the Transactions), for deferred share units or performance share units, as applicable, with respect to shares of Spinco common stock.

The Transaction Agreement also provides that, and the Arrangement (when consummated) will provide that, subject to and upon consummation of the Transactions, Domtar will forgive the balance of any loan extended to a current or former employee under the Domtar Executive Stock Option and Share Purchase Plan in connection with the exercise of rights to purchase Domtar common shares thereunder in an amount equal to the excess of the loan amount (plus any outstanding interest) over the fair value of the Domtar common shares pledged as security for the loan. Each current or former employee with an outstanding loan will be required to return the pledged shares to Domtar for cancellation in repayment of the remaining portion of his or her loan and any rights to receive bonus common shares granted in connection with his or her exercise of rights to purchase Domtar common shares under the plan will be extinguished. Any outstanding forward purchase contracts for Domtar common shares entered into between Domtar and a current or former employee under the Domtar Executive Stock Option and Share Purchase Plan will also be cancelled as of the date of the consummation of the Transactions. Any rights to receive bonus common shares granted in connection with those contracts will also be cancelled. Domtar will also provide the employees an amount sufficient to cover any taxes payable by the employees in connection with any loan forgiveness and/or cancellation of any share purchase contract pursuant to the Arrangement.

Treatment of Weyerhaeuser Equity Awards

The Transaction Agreement provides that each employee of Weyerhaeuser who will become an employee of Spinco and holds one or more Weyerhaeuser stock options, stock appreciation rights and/or restricted stock units will be given the opportunity to elect to either continue to hold all of his or her Weyerhaeuser stock options, stock appreciation rights and/or restricted stock units in accordance with their terms or surrender all of his or her Weyerhaeuser stock options, stock appreciation rights and/or restricted stock units in exchange for stock options, stock appreciation rights and/or restricted stock units (as appropriate) to be granted by Spinco. With respect to those Weyerhaeuser employees who will become employees of Spinco and who elect to exchange their Weyerhaeuser stock options, stock appreciation rights and/or restricted stock units for stock options, stock appreciation rights and/or restricted stock units (as appropriate) to be granted by Spinco immediately prior to the Distribution:

 

  ·   each outstanding Weyerhaeuser stock option (whether vested or unvested) will be surrendered to Weyerhaeuser in exchange for an option granted by Spinco to acquire, on the same terms and conditions as were applicable to the Weyerhaeuser stock option, a number of shares of Spinco common stock (rounded down to the nearest whole share), determined by multiplying the number of Weyerhaeuser common shares subject to the Weyerhaeuser stock option by a fraction, the numerator of which is the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of Weyerhaeuser common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the date on which the Weyerhaeuser common shares begin to trade ex-dividend with respect to the Distribution (if the Distribution is effected as a pro-rata dividend) or the date of the Distribution (if the Distribution is effected in whole or in part as an exchange offer) and the denominator of which is the volume-weighted average (rounded to the nearest 1/10,000) of the trading prices of Domtar common shares on the New York Stock Exchange as reported by Bloomberg Financial Markets for the last trading day immediately prior to the date of the Distribution (this fraction is referred to as the “exchange ratio”);

 

  ·   each outstanding Weyerhaeuser stock appreciation right (whether vested or unvested) will be surrendered to Weyerhaeuser in exchange for a stock appreciation right granted by Spinco with respect to a number of shares of Spinco common stock (rounded down to the nearest whole share) determined by multiplying the number of shares of Weyerhaeuser common stock subject to the Weyerhaeuser stock appreciation right by the exchange ratio;

 

97


Table of Contents
  ·   each outstanding Weyerhaeuser restricted stock unit will be surrendered to Weyerhaeuser in exchange for a restricted stock unit granted by Spinco with respect to a number of shares of Spinco common stock determined by multiplying the number of shares of Weyerhaeuser common stock subject to the Weyerhaeuser restricted stock unit by the exchange ratio; and

 

  ·   each Spinco stock option and each Spinco stock appreciation right so granted will have an exercise price (rounded up to the nearest whole cent) determined by dividing the per share exercise price of the corresponding Weyerhaeuser option or stock appreciation right by the exchange ratio.

Non-Solicitation; Superior Proposal; Break-Up Fee

Subject to certain exceptions, Domtar has agreed in the Transaction Agreement that it will not solicit offers by any third parties to effect a business combination with any third party. The Transaction Agreement also provides for certain procedures regarding any acquisition proposals that may be made by third parties and for the payment by Domtar of a $62 million break-up fee to Weyerhaeuser in the event the combination is not completed under certain circumstances.

Directors and Officers Indemnification and Insurance

Under the terms of the Transaction Agreement, the parties have agreed that for a period of six years following the Transactions, Spinco will indemnify and hold harmless, and provide advancement of expenses to, all past and present directors or officers of Domtar, Newco and their respective subsidiaries, and each individual who prior to the Effective Time becomes a director or officer of Domtar, Newco and their respective subsidiaries, to the maximum extent allowed under applicable law in respect of acts or omissions that occurred at or prior to the Effective Time and, in the case of directors and officers of Newco, related to the Newco Business or in connection with the Transactions.

The Transaction Agreement further requires that, for six years following the Effective Time, subject to certain limitations, Spinco will maintain in effect, for the same persons as referenced in the preceding paragraph, policies of directors’ and officers’ liability insurance of at least the same coverage and containing terms and conditions which are, in the aggregate, no less advantageous to the insured as the current policies maintained by Domtar or Weyerhaeuser, with respect to claims arising from acts or omissions that occurred at or prior to the Effective Time and, in the case of directors and officers of Newco, related to the business of Newco or in connection with the Transactions.

Conditions to the Consummation of the Transactions

The respective obligations of Weyerhaeuser, Spinco and Domtar to consummate the Transactions are subject to the satisfaction or waiver of various conditions. For more information on these conditions, see “The Transactions – Conditions to the Transactions”.

Termination

The Transaction Agreement may be terminated by the mutual written consent of each party thereto. Additionally, either Weyerhaeuser or Domtar may terminate the Transaction Agreement in the following circumstances:

 

  ·   if the Transactions have not been consummated on or before August 21, 2007, unless the failure to consummate the Transactions is the result of a material breach of the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby by the party seeking to terminate the Transaction Agreement;

 

  ·   if Domtar has failed to obtain the required vote at the Domtar special meeting;

 

  ·   if any law has been passed that makes consummation of the Transactions illegal or otherwise prohibited or if any injunction, order or decree enjoining Weyerhaeuser or Domtar from consummating the Transactions has been entered that has become final and non-appealable; or

 

98


Table of Contents
  ·   if any condition to the obligation of such party to consummate the Transactions has become incapable of satisfaction prior to August 21, 2007, unless the failure of that condition is the result of a breach of the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby by the party seeking to terminate the Transaction Agreement.

Weyerhaeuser may terminate the Transaction Agreement at any time prior to the Effective Time in the following circumstances:

 

  ·   if Domtar breaches or fails to perform in any respect any of its representations, warranties or covenants contained in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby, resulting in a failure of a condition to Weyerhaeuser’s obligation to effect the Transactions, and such breach cannot be or has not been cured within 30 days after the giving of written notice to Domtar of such breach (provided that Weyerhaeuser or Newco is not then in material breach of any representation, warranty or covenant contained in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby); or

 

  ·   if the board of directors of Domtar has failed to recommend, withdrawn, modified or changed in a manner adverse to Weyerhaeuser its approval or recommendation of the Transaction Agreement or the Arrangement or has recommended an acquisition proposal by a third party.

Domtar may terminate the Transaction Agreement at any time prior to the Effective Time in the following circumstances:

 

  ·   if Weyerhaeuser or Spinco breaches or fails to perform in any respect of any of its representations, warranties or covenants contained in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby, resulting in a failure of a condition to Domtar’s obligation to effect the Transactions, and such breach cannot be or has not been cured within 30 days after the giving of written notice to Weyerhaeuser of such breach (provided that Domtar is not then in material breach of any representation, warranty or covenant contained in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby); or

 

  ·   in order to enter into a definitive written agreement with respect to a superior proposal, provided that Domtar notifies Weyerhaeuser of the acquisition proposal in accordance with the Transaction Agreement and, unless an event has occurred and is continuing that has a material adverse effect on the Weyerhaeuser Fine Paper Business, pays to Weyerhaeuser the break-up fee described under “– Non-Solicitation; Superior Proposal; Break-Up Fee”.

Indemnification

Under the Transaction Agreement, Domtar and Spinco are obligated to jointly and severally indemnify Weyerhaeuser and its affiliates and each of their respective officers, directors, employees, shareholders and representatives against all losses and expenses to the extent arising out of or resulting from any of the following:

 

  ·   any breach by Domtar of the representation that none of the information supplied or to be supplied by Domtar for inclusion or incorporation by reference in this document or certain Weyerhaeuser or Spinco SEC filings will, at the time each such document is filed with the securities regulatory authorities in Canada or the SEC, as applicable, at any time it is amended or supplemented or at the time it becomes effective under applicable Canadian securities legislation, the U.S. Securities Act or the U.S. Exchange Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading;

 

  ·   any violation of the U.S. Securities Act, the U.S. Exchange Act, any applicable Canadian securities legislation, any applicable corporate laws with respect to the Arrangement or the approval of the Transactions by the Domtar shareholders, except to the extent such violation results from a breach by Weyerhaeuser of any of its representations and warranties or covenants set forth in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby;

 

99


Table of Contents
  ·   any claim brought by third parties alleging that the consummation of the Transactions violated any agreement, Arrangement, commitment or understanding (including any debt instrument) to which Domtar or any affiliate of Domtar is or was a party; and

 

  ·   any claim brought by shareholders or former shareholders of Domtar in their capacity as shareholder or former shareholder, except to the extent such claim results from a breach by Weyerhaeuser of any of its representations and warranties or covenants set forth in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby.

Under the Transaction Agreement, Weyerhaeuser is obligated to indemnify Domtar, its affiliates and each of their respective officers, directors, employees or shareholders against all losses and expenses to the extent arising out of or resulting from any of the following:

 

  ·   any breach by Weyerhaeuser of the representation that none of the information supplied or to be supplied by Weyerhaeuser or Spinco for inclusion or incorporation by reference in this document or certain Weyerhaeuser or Spinco SEC filings will, at the time each such document is filed with the securities regulatory authorities in Canada or the SEC, as applicable, at any time it is amended or supplemented or at the time it becomes effective under applicable Canadian securities legislation, the U.S. Securities Act or the U.S. Exchange Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading;

 

  ·   any violation of the U.S. Securities Act, the U.S. Exchange Act or any applicable corporate laws with respect to the Distribution, except to the extent such violation results from a breach by Domtar of any of its representations and warranties or covenants set forth in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby;

 

  ·   any claim brought by third parties alleging that the consummation of the Transactions violated any agreement, Arrangement, commitment or understanding (including any debt instrument) to which Weyerhaeuser or any affiliate of Weyerhaeuser is or was a party; and

 

  ·   any claim brought by shareholders or former shareholders of Weyerhaeuser in their capacity as shareholder or former shareholder, except to the extent such claim results from a breach by Domtar of any of its representations and warranties or covenants set forth in the Transaction Agreement, the Contribution and Distribution Agreement or certain other agreements contemplated thereby.

Amendments; No Third-Party Beneficiaries

The Transaction Agreement may be amended by the parties thereto at any time, provided, that after the Transactions, no amendment is permitted that by law requires further approval by the stockholders of Spinco or Domtar without the further approval of these stockholders. The Transaction Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties thereto. The Transaction Agreement is not intended to confer upon any person other than the parties thereto any rights or remedies.

Expenses

The Transaction Agreement provides that all fees and expenses incurred in connection with the Transactions will be paid by the party incurring such fees or expenses, provided, that in the event the Transactions are consummated, Spinco will reimburse Weyerhaeuser for (a) all fees and expenses incurred in connection with the financing described under “Financing”; (b) up to 50% of all fees and expenses incurred in connection with the separation of certain facilities that will be owned in part by Weyerhaeuser or its subsidiaries and in part by Spinco or its subsidiaries after the Effective Time; and (c) up to an amount of $28 million of all fees and expenses incurred in connection with the Transactions. The Transaction Agreement also provides that Weyerhaeuser and Spinco will each be responsible for 50% of the capital expenditures and one-time start-up expenses incurred by either party in connection with the actions required to separate certain facilities. In addition, the tax sharing agreement provides that all transfer taxes incurred in connection with the Transactions will be paid by Spinco.

 

100


Table of Contents

MATERIAL INCOME TAX CONSIDERATIONS

Material Canadian Federal Income Tax Considerations to Domtar Shareholders

In the opinion of Ogilvy Renault LLP, Canadian counsel for Domtar, the following is a summary of the material Canadian federal income tax considerations under the Income Tax Act (Canada) generally applicable to Domtar shareholders who, for purposes of the Income Tax Act (Canada) and at all relevant times, hold their Domtar common shares and/or Domtar preferred shares and will hold their Class B common shares of Offerco and exchangeable shares of Newco Canada Exchangeco and/or shares of common stock of Spinco as capital property and deal at arm’s length with, and are not and will not be affiliated with any of Domtar, Spinco, Newco Canada Exchangeco, Offerco or Newco Canada. This summary does not apply to a Domtar shareholder with respect to whom Spinco is or will be a foreign affiliate within the meaning of the Income Tax Act (Canada).

Domtar common shares, Domtar preferred shares, Class B common shares of Offerco, exchangeable shares and shares of common stock of Spinco will generally be considered to be capital property to a Domtar shareholder unless such shares are held in the course of carrying on a business of trading or dealing in securities, acquired in a transaction considered to be an adventure in the nature of trade or considered to be “mark-to-market property” for purposes of the Income Tax Act (Canada). Certain holders of Domtar common shares who are residents of Canada for purposes of the Income Tax Act (Canada) and whose Domtar common shares might not otherwise qualify as capital property, may be entitled to make an irrevocable election in accordance with subsection 39(4) of the Income Tax Act (Canada) to have their Domtar common shares and every “Canadian security” (as defined in the Income Tax Act (Canada)) owned by such Domtar shareholder in the taxation year of the election and in all subsequent taxation years deemed to be capital property. Where a holder of Domtar common shares makes an election with Newco Canada Exchangeco under section 85 of the Income Tax Act (Canada) in respect of Class B common shares as described below, the exchangeable shares received under the Arrangement in exchange for such shares will not be Canadian securities to such holder for this purpose and therefore will not be deemed to be capital property under subsection 39(4) of the Income Tax Act (Canada). Holders of Domtar common shares who do not hold their Domtar common shares as capital property or who will not hold their Class B common shares, exchangeable shares and/or shares of common stock of Spinco as capital property should consult their own tax advisors regarding their particular circumstances.

This summary does not take into account the mark-to-market rules in the Income Tax Act (Canada) applicable to securities held by financial institutions, special rules in the Income Tax Act (Canada) applicable to insurers carrying on business in Canada and elsewhere that are not Canadian residents for the purpose of the Income Tax Act (Canada) or the Income Tax Application Rules applicable to Domtar shareholders who have held their Domtar shares continuously since December 31, 1971 (or are deemed to have done so under those rules). Holders to which these rules apply should consult their own tax advisors.

This summary is based on the facts set out in this document, the current provisions of the Income Tax Act (Canada) and the regulations thereunder and counsel’s understanding of the published administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”) publicly available prior to the date of this document. This summary takes into account all proposed amendments to the Income Tax Act (Canada) and the regulations thereunder that have been publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (“Proposed Amendments”) and assumes that such Proposed Amendments will be enacted substantially as proposed. However, no assurance can be given that such Proposed Amendments will be enacted in the form proposed, or at all. This summary does not take into account or anticipate any other changes in law or any changes in CRA’s administrative policies and assessing practices, whether by judicial, governmental or legislative action or decision, nor does it take into account other federal or any provincial, territorial or foreign tax legislation or considerations, which may differ from the material Canadian federal income tax considerations described herein. No advance income tax ruling has been sought or obtained from the CRA to confirm the tax consequences of any of the transactions described herein and accordingly no assurance can be given that the CRA will not assert a position contrary to one or more positions reflected in the summary below.

 

101


Table of Contents

This summary assumes that at all relevant times, the Domtar Shares, the shares of common stock of Spinco, the Class B common shares and the exchangeable shares will be listed on a prescribed stock exchange for purposes of the Income Tax Act (Canada).

This summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any particular Domtar shareholder. Domtar shareholders should consult their own tax advisors regarding the particular tax consequences of the Arrangement to them.

For purposes of the Income Tax Act (Canada), all amounts relating to the acquisition, holding or disposition of securities (including dividends, adjusted cost base and proceeds of disposition) must be expressed in Canadian dollars. Amounts denominated in U.S. dollars must be converted into Canadian dollars based on the prevailing U.S. dollar exchange rate generally at the time such amounts arise.

Domtar Shareholders Resident in Canada

The following section of the summary is applicable to a holder of Domtar common shares or Domtar preferred shares who, for purpose of the Income Tax Act (Canada) and any applicable income tax treaty, is or is deemed to be a resident of Canada at all relevant times.

Exchange of Domtar Common Shares for Class B Common Shares of Offerco

As described under the heading “The Transactions – The Arrangement”, the first step of the Arrangement is that each holder of Domtar common shares (other than a holder who exercises its dissent rights) will transfer its Domtar common shares to Offerco in exchange for Class B common shares, on a one-for-one basis.

A holder of Domtar common shares may choose to exchange its Domtar common shares for Class B common shares on either a tax-deferred basis or on a taxable basis. A holder who wishes to exchange its Domtar common shares on a tax-deferred basis will be deemed to have disposed of the Domtar common shares for proceeds of disposition equal to the aggregate adjusted cost base of those Domtar common shares immediately before the exchange and to have acquired the Class B common shares at a cost equal to such adjusted cost base. To achieve this tax deferral, the holder is not required to take any further action, however, the holder must not report any capital gain or capital loss in connection with this exchange in its income tax return for the year in which the exchange occurs.

If a holder reports any portion of the capital gain or capital loss in connection with the exchange of its Domtar common shares for Class B common shares in its income tax return for the year in which the exchange occurs, the holder will not be eligible for any tax deferral on this exchange. In that case, the holder will be considered to have disposed of its Domtar common shares for proceeds of disposition equal to the fair market value at that time of the Class B common shares acquired in exchange for such shares. The holder will realize a capital gain (or capital loss) to the extent that the fair market value at that time of the Class B common shares acquired on the exchange, net of any reasonable costs of disposition, exceeds (or is less than) the adjusted cost base of such Domtar common shares. The cost to a holder of the Class B common shares acquired on this exchange will be equal to the fair market value at the time of the exchange of such Class B common shares.

For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below.

Exchange of Class B Common Shares for Shares of Common Stock of Spinco or Exchangeable Shares (and Ancillary Rights)

As described under the heading “The Transactions – The Arrangement”, following the exchange of Domtar common shares for Class B common shares, each Class B common share will be transferred to Newco Canada Exchangeco in exchange for (a) one share of common stock of Spinco; or (b) one exchangeable share of Newco Canada Exchangeco (and ancillary rights). Only holders of Domtar common shares that are eligible Canadian

 

102


Table of Contents

residents can elect in advance (as future holders of Class B common shares) to transfer the Class B common shares they will automatically receive in the Arrangement for exchangeable shares (and ancillary rights), shares of common stock of Spinco or a combination thereof. If no election is completed or it is not effectively made, an election will be deemed to be made based on the address shown in the share register of Class B common shares of Offerco (which will be identical to the share register for Domtar common shares). Holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address in Canada will be deemed to have elected to receive only exchangeable shares, and holders of Domtar common shares (who will automatically become holders of Class B common shares) with a registered address outside of Canada will be deemed to have elected to receive only shares of common stock of Spinco. This part of the summary describes the tax consequences of these transfers to a holder of Class B common shares.

Exchange of Class B Common Shares for Shares of Common Stock of Spinco

This portion of the summary applies to a holder of Class B common shares who (as contemplated above) (a) has elected to receive shares of common stock of Spinco in exchange for such Class B common shares; (b) has elected to receive exchangeable shares (and ancillary rights) but is not an eligible holder (as described below); or (c) has not elected or has not made an effective election to transfer its Class B common shares and such holder’s address is shown in the share register for the Class B common shares as not in Canada.

The exchange of Class B common shares by a holder for shares of common stock of Spinco will generally be a taxable event to such holder. At the Effective Time of the exchange, such holder will be considered to have disposed of such Class B common shares for proceeds of disposition equal to the fair market value at that time of the shares of common stock of Spinco acquired in exchange therefor. The holder will realize a capital gain (or capital loss) to the extent that the fair market value at that time of the shares of common stock of Spinco acquired on the exchange, net of any reasonable costs of disposition, exceeds (or is less than) the adjusted cost base of such Class B common shares. The cost to a holder of the shares of common stock of Spinco acquired on this exchange will be equal to the fair market value at the time of the exchange of such common stock of Spinco.

For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below.

Exchange of Class B Common Shares for Exchangeable Shares (and Ancillary Rights)

This portion of the summary applies to a holder of Class B common shares who (as contemplated above) (a) has elected or is deemed to have elected to receive exchangeable shares (and ancillary rights) in exchange for such Class B common shares; (b) is eligible to make the rollover election (as described below); and (c) makes a valid rollover election with Newco Canada Exchangeco in respect of any such Class B common shares. If a holder of Class B common shares has not elected or has not made an effective election (as contemplated above) to transfer its Class B common shares and such holder’s address is shown in the share register for the Class B common shares as in Canada, then such holder will be deemed to have elected to receive exchangeable shares (and ancillary rights).

A holder of Class B common shares who has elected or is deemed to have elected (as contemplated above) to receive exchangeable shares (and ancillary rights) in exchange for such Class B common shares and makes a valid rollover election with Newco Canada Exchangeco in respect of any such Class B common shares, may obtain a full or partial tax deferral (a “rollover”) of any capital gain otherwise arising on the exchange of such Class B common shares, depending on the adjusted cost base to such eligible holder of the Class B common shares at the time of the exchange, the fair market value of the ancillary rights received in exchange for such Class B common shares and the amount elected by such eligible holder to be the proceeds of disposition of such Class B common shares.

 

103


Table of Contents

Rollover Election

Newco Canada Exchangeco will make a joint election under subsection 85(1) or subsection 85(2), as applicable, of the Income Tax Act (Canada) (and the corresponding provisions of any applicable provincial or territorial tax legislation) (“rollover election”) in respect of particular Class B common shares with an eligible Canadian resident beneficial owner of such shares who has elected or is deemed to have elected (or for whom the registered holder of such shares has elected on such beneficial owner’s behalf), at the time it was a holder of Domtar common shares (as referred to above) to receive as consideration exchangeable shares (and ancillary rights) and at the amounts elected by such beneficial owner of Class B common shares, subject to the limitations under the Income Tax Act (Canada) and in the Arrangement. For further information respecting the rollover elections, see Interpretation Bulletin IT-291R3 “Transfer of Property to a Corporation under Subsection 85(1)” (January 12, 2004) and Information Circular IC 76-19R3 “Transfer of Property to a Corporation under Section 85” (June 17, 1996) issued by the CRA. The comments made herein with respect to such elections are provided for general assistance only. The law in this area is complex and contains numerous technical requirements. Eligible holders wishing to make the rollover elections should consult their own tax advisors.

Eligible Holders.    Newco Canada Exchangeco will only make a rollover election with an eligible holder. For this purpose, an eligible holder must (a) be an eligible Canadian resident; (b) be the beneficial owner of Class B common shares; and (c) have represented in the letter of transmittal and election form that such holder will meet the conditions set out in (a) and (b) at the time it receives the Class B common shares under the Arrangement.

Elected Amount.    An eligible holder may elect an amount which, subject to certain limitations contained in the Income Tax Act (Canada), will be treated as the proceeds of disposition of such eligible holder’s Class B common shares. The limitations imposed by the Income Tax Act (Canada) in respect of the amount elected are that such amount may not be:

 

  ·   less than the fair market value of the ancillary rights received on the particular exchange;

 

  ·   less than the lesser of (a) the aggregate adjusted cost base to the eligible holder of the Class B common shares; and (b) the fair market value of the Class B common shares; and

 

  ·   greater than the fair market value of the Class B common shares;

in each case, determined at the Effective Time of the exchange. If the amount elected in the tax election is greater than the permissible maximum amount or is less than the permissible minimum amount, the elected amount is deemed to be such permissible maximum or minimum amount. The amount elected by an eligible holder, as modified by such limitations, is referred to herein as the “elected amount”. See the discussion regarding the value of ancillary rights under the heading “– Receipt of Ancillary Rights”.

Tax Treatment to Holders of Class B Common Shares.    Where an eligible holder and Newco Canada Exchangeco make a valid rollover election in respect of the holder’s Class B common shares, the tax treatment to such holder will generally be as follows:

 

  ·   the holder will be deemed to have disposed of the Class B common shares for proceeds of disposition equal to the elected amount;

 

  ·   such holder will not realize a capital gain (or a capital loss), provided that the elected amount is equal to the sum of (a) the aggregate adjusted cost base to such holder of its Class B common shares immediately before the exchange; and (b) any reasonable costs of disposition;

 

  ·   a capital gain (or a capital loss) will be realized, however, to the extent that the elected amount exceeds (or is less than) the sum of (a) the aggregate adjusted cost base to such holder of its Class B common shares immediately prior to the exchange; and (b) any reasonable costs of disposition. For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below;

 

104


Table of Contents
  ·   the cost to such holder of the exchangeable shares received in exchange for the Class B common shares will be equal to the elected amount, minus the fair market value at the Effective Time of the exchange of the ancillary rights acquired on the exchange; and

 

  ·   the cost to such holder of any ancillary rights received in exchange for the Class B common shares will be equal to their fair market value at the Effective Time of the exchange.

Procedure for Making an Election.    To make a rollover election, the eligible holder must provide in the tax election package (which may be obtained by mail from Domtar and is also available via the internet on Domtar’s website at www.domtar.com), two signed copies of the applicable tax election forms within 90 days following the Effective Date of the Arrangement, duly completed with (a) the details of the number of Class B common shares transferred in respect of which the eligible Canadian holder is making a rollover election; and (b) the applicable elected amounts for such shares.

An eligible Canadian resident interested in making the rollover election in respect of the Class B common shares it receives in the Arrangement should so indicate on the letter of transmittal and election form that is enclosed with this document and a tax election package, consisting of the relevant CRA and Québec tax election forms and a letter of instructions, will be sent by mail to such holder if the holder so elects. A tax election package may also be obtained by mail from Domtar or via the internet on Domtar’s website at www.domtar.com. The relevant federal tax election form is form T2057 (or, in the event that the Class B common shares are held as partnership property, form T2058). For an eligible holder subject to Québec income tax, the Québec tax election form is form TP-518 (or, in the event that the Class B common shares are held as partnership property, form TP-529).

Joint Ownership.    Where the Class B common shares are held in joint ownership and two or more of the co-owners wish to make a tax election, a co-owner designated for such purpose should file a copy of the federal election form T2057 (and any other relevant provincial or territorial forms) for each co-owner. Such election forms must be accompanied by a list of the names, addresses and social insurance numbers or tax account numbers of each of the co-owners, along with the letter signed by each of the co-owners authorizing the designated co-owner to complete and file the forms.

Partnerships.    Where the Class B common shares are held as partnership property and the partnership wishes to make the tax election, a partner designated by the partnership must file a copy of the federal election form T2058 (and any other relevant provincial or territorial forms) on behalf of all members of the partnership. Such election forms must be accompanied by a list of the names, addresses, social insurance numbers or tax account numbers of each of the partners, along with the letter signed by each partner authorizing the designated partner to complete and file the forms.

Additional Provincial or Territorial Election Forms.    Certain provincial or territorial jurisdictions may require that a separate joint election be filed for provincial or territorial income tax purposes. Newco Canada Exchangeco will also make a joint election with an eligible holder under the provisions of the relevant provincial or territorial income tax law with similar effect to section 85 of the Income Tax Act (Canada), subject to the same limitations as described herein. Eligible holders should consult their own tax advisors to determine whether separate election forms must be filed with any provincial or territorial taxing authority and to determine the procedure for filing any such separate election form. It will be the sole responsibility of each eligible holder who wishes to make such an election to obtain the appropriate provincial or territorial election forms (including Québec) and to submit such forms to Newco Canada Exchangeco for its execution at the same time as the federal election forms.

Execution by Newco Canada Exchangeco of Election Form.    Subject to the election forms complying with the provisions of the applicable income tax law and the Arrangement, Newco Canada Exchangeco will sign the tax election forms received from an eligible holder within 90 days following the Effective Date of the Arrangement that appear correct and complete, and return them to the eligible holder within 30 days of their receipt. Newco Canada Exchangeco, in its sole discretion, may choose to sign and return an election form even if

 

105


Table of Contents

such form is received more than 90 days following the Effective Date of the Arrangement, but Newco Canada Exchangeco will have no obligation to do so. With the exception of signing and returning the properly completed election forms it receives, Newco Canada Exchangeco assumes no responsibility for making any tax election, and compliance with the requirements for a valid election will be the sole responsibility of the eligible holder making the election. Neither Newco Canada Exchangeco nor the exchange agent will be responsible for the proper completion or filing of any election form, except for Newco Canada Exchangeco’s obligation to sign and return properly completed election forms which are received by Newco Canada Exchangeco within 90 days following the Effective Date of the Arrangement, within 30 days of receipt by Newco Canada Exchangeco. Neither Domtar, Spinco nor Newco Canada Exchangeco will be responsible or liable for any taxes, interest, penalties, damages or expenses resulting from the failure by anyone to properly complete or file an election form in the form and manner and within the time prescribed by the Income Tax Act (Canada) (or the corresponding provisions of any applicable provincial or territorial tax legislation).

Filing of Election Forms.    For the CRA or any provincial or territorial tax authority to accept a tax election form without a late filing penalty being paid by an eligible holder, the election forms, duly completed and executed by both the eligible holder and Newco Canada Exchangeco must be received by the appropriate tax authorities on or before the earliest due date for the filing of either Newco Canada Exchangeco’s or the eligible holder’s income tax return for the taxation year in which the exchange takes place. The tax election form generally must, in the case of an eligible holder who is an individual (other than a trust), be received by the tax authorities by April 30, 2008 (being generally the deadline when such individuals are required to file tax returns for the 2007 taxation year). Eligible holders are strongly advised to consult their own tax advisors as soon as possible respecting the deadlines applicable to their own particular circumstances. However, regardless of such deadlines, properly completed tax election forms must be received by Newco Canada Exchangeco at the address set out in the tax election package (which may be obtained by mail from Domtar and is also available via the internet on Domtar’s website at www.domtar.com) within 90 days following the Effective Date of the Arrangement. Any eligible holder who does not ensure that Newco Canada Exchangeco has received the properly completed tax election forms within 90 days following the Effective Date of the Arrangement may not be able to benefit from the rollover provisions of the Income Tax Act (Canada) and any applicable provincial or territorial tax legislation.

Failure to File Valid Election Form

An eligible holder of Class B common shares of Offerco who has elected or is deemed to have elected, to receive exchangeable shares (as described above) but does not file a valid election (as described above) will be considered to have disposed of his or her Class B common shares for an amount equal to the fair market value of the exchangeable shares and ancillary rights received. The holder will realize a capital gain (or capital loss) to the extent the fair market value at that time of the exchangeable shares so received, net of any reasonable costs of disposition, exceeds (or is less than) the adjusted cost base of such Class B common shares. The cost to the holder of the exchangeable shares acquired in these circumstances will be equal to the fair market value at the time of the exchange of such exchangeable shares. For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below.

Receipt of Ancillary Rights

A holder of Class B common shares of Offerco who receives exchangeable shares under the Arrangement will also receive the ancillary rights connected to such shares (e.g., the voting rights and exchange rights described under “Information Concerning Newco Canada Exchangeco – Description of Exchangeable Shares of Newco Canada Exchangeco”). A holder of Class B common shares will be required to account for the ancillary rights in determining the proceeds of disposition of such holder’s Class B common shares and the cost of exchangeable shares received in consideration therefor. Domtar is of the view that the ancillary rights have nominal fair market value. This determination of value is not binding on the CRA and it is possible that the CRA could take a contrary view.

 

106


Table of Contents

Call Rights

Domtar is of the view that the liquidation call rights, retraction call rights and redemption call rights granted to Newco Canada by holders of the exchangeable shares have only a nominal fair market value and accordingly no amount should be allocated to such call rights. This determination of value is not binding on the CRA and it is possible that the CRA could take a contrary view. Provided that this view with respect to the value of such call rights is correct, the granting of the call rights will not result in any material adverse income tax consequences to a holder of Class B common shares who acquires exchangeable shares. However, should the CRA challenge this view and ultimately succeed in establishing that the call rights have a fair market value in excess of a nominal amount, holders of Class B common shares who acquire exchangeable shares will realize a capital gain in an amount equal to the fair market value of the call rights. For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below.

Cost Averaging of Identical Property

The Income Tax Act (Canada) provides for a cost averaging rule for “identical properties”, such as shares issued by a company that are of the same class or series. Generally, when a person acquires a property that is identical to one or more other properties already held by the person, the person’s adjusted cost base of each identical property will be equal to the quotient obtained when the aggregate of the adjusted cost bases of all the identical properties previously held by the person and the cost of the newly acquired identical property is divided by the number of all such identical properties held at that time. Accordingly, at any time, the cost to a holder of an exchangeable share, share of common stock of Spinco, or an ancillary right connected to an exchangeable share, as the case may be, will be averaged with the adjusted cost bases of any other properties identical to such property held by such person as capital property at that time.

Dividends on Exchangeable Shares and Shares of Common Stock of Spinco

Dividends on Exchangeable Shares

Individuals.    In the case of a holder of exchangeable shares who is an individual (including most trusts), dividends received or deemed to be received on exchangeable shares by the holder will be required to be included in computing the individual’s income for the taxation year in which such dividends are received and are subject to the gross-up and dividend tax credit rules generally applicable to taxable dividends received from taxable Canadian corporations. Under certain Proposed Amendments, a holder who is an individual resident in Canada may be entitled to an enhanced dividend tax credit. Should such enhanced dividend tax credit be available in respect of a particular dividend, holders will be so advised by Newco Canada Exchangeco.

Corporations.    In the case of a holder of exchangeable shares that is a corporation (other than a specified financial institution as defined in the Income Tax Act (Canada)), dividends received or deemed to be received on the exchangeable shares will be required to be included in computing the corporation’s income for the taxation year in which such dividends are received and, subject to the special rules and limitations described below, such dividends will generally be deductible in computing the corporation’s taxable income.

In the case of a holder of exchangeable shares that is a private corporation (as defined in the Income Tax Act (Canada)) or any other corporation controlled or deemed to be controlled by or for the benefit of an individual (other than a trust) or a related group of individuals (other than trusts), such holder will generally be liable to pay a refundable tax under Part IV of the Income Tax Act (Canada) of 33 1/3% on dividends received (or deemed to be received) on the exchangeable shares, to the extent such dividends are deductible in computing such holder’s taxable income. A Canadian-controlled private corporation (as defined in the Income Tax Act (Canada)) may be liable to pay an additional refundable tax of 6 2/3% on dividends received or deemed to be received on the exchangeable shares if such dividends are not deductible in computing taxable income.

 

107


Table of Contents

In the case of a corporate holder of exchangeable shares that is a specified financial institution, dividends on such shares will not be deductible in computing the holder’s taxable income unless either: (a) such holder did not acquire the exchangeable shares in the ordinary course of the business carried on by it; or (b) at the time the dividend is received or deemed to be received, the exchangeable shares are listed on a prescribed stock exchange in Canada (which currently includes the Toronto Stock Exchange) and such holder, either alone or together with persons with whom such holder does not deal at arm’s length and, in certain cases, either directly or through a trust or partnership of which such holder or other person is a beneficiary or member, respectively, does not receive (and is not deemed to receive) dividends in respect of more than 10% of the issued and outstanding shares of that class.

If Spinco, Newco Canada Exchangeco or any other person with whom Spinco does not deal at arm’s length is a specified financial institution for purposes of the Income Tax Act (Canada) at the time that a dividend is paid on an exchangeable share, subject to the exception described below, dividends received or deemed to be received by a holder of exchangeable shares that is a corporation will not be deductible in computing such holder’s taxable income but will be fully includable in taxable income under Part I of the Income Tax Act (Canada). In any event, this denial of the dividend deduction for a holder of Newco Canada Exchangeco that is a corporation will not apply if, at the time a dividend is received or deemed to be received, the exchangeable shares held by the corporation are listed on a prescribed stock exchange (which currently includes the Toronto Stock Exchange), Spinco is related to Newco Canada Exchangeco for the purposes of the Income Tax Act (Canada), and the recipient, either alone or together with persons with whom the recipient does not deal at arm’s length or any partnership or trust of which the recipient or such person is a member or beneficiary, respectively, does not receive (and is not deemed to receive) dividends in respect of more than 10% of the issued and outstanding shares of that class.

The exchangeable shares will be taxable preferred shares and short-term preferred shares for the purpose of the Income Tax Act (Canada). Accordingly, Newco Canada Exchangeco will be subject to the 66 2/3% tax under Part VI.1 of the Income Tax Act (Canada) on dividends paid or deemed to be paid on the exchangeable shares and will be entitled to deduct 9/4 of the tax payable in computing its taxable income under Part I of the Income Tax Act (Canada). Proposed Amendments released July 18, 2005 will reduce the tax rate to 50% for dividends paid in 2003 and subsequent years and will increase the amount of the deduction to three times the tax paid.

A holder of exchangeable shares who receives or is deemed to receive dividends on such shares will not be subject to the 10% tax under Part IV.1 of the Income Tax Act (Canada).

Dividends on Shares of Common Stock of the Spinco

Individuals.    In the case of a holder of shares of common stock of Spinco who is an individual, dividends received or deemed to be received by the holder on such shares will be required to be included in computing the holder’s income for the taxation year in which such dividends are received and will not be subject to the gross-up and dividend tax credit rules in the Income Tax Act (Canada).

Corporations.    In the case of a holder of shares of common stock of Spinco that is a corporation, dividends received or deemed to be received by the holder on such shares will be required to be included in computing the holder’s income for the taxation year in which such dividends are received and generally will not be deductible in computing the holder’s taxable income. A holder that is a Canadian-controlled private corporation (as defined in the Income Tax Act (Canada)) may be liable to pay an additional refundable tax of 6 2/3% on such dividends.

Any United-States non-resident withholding tax on such dividends generally will be eligible to be credited against the holder’s income tax or deducted from income subject to certain limitations under the Income Tax Act (Canada).

 

108


Table of Contents

Redemption, Exchange and Disposition of Exchangeable Shares

A holder will be considered to have disposed of exchangeable shares (a) on a redemption (including pursuant to a retraction request) of such exchangeable shares by Newco Canada Exchangeco; and (b) on an acquisition of such exchangeable shares by Newco Canada. However, the Canadian federal income tax consequences of the disposition for the holder will be quite different depending on whether the event giving rise to the disposition is a redemption or an acquisition. A holder who exercises the right to require redemption of an exchangeable share by giving a retraction request cannot control whether the exchangeable share will be acquired by Newco Canada under the retraction call right or redeemed by Newco Canada Exchangeco; however, the holder will be notified if Newco Canada will not exercise the retraction call right. A holder may cancel the retraction request in writing and retain the exchangeable share at any time prior to the close of business of one business day before the contemplated date of retraction.

Redemption or Retraction by Newco Canada Exchangeco

On a redemption (including pursuant to a retraction request) of an exchangeable share by Newco Canada Exchangeco, a holder will generally be deemed to receive a dividend equal to the amount by which the “redemption proceeds” exceed the paid-up capital (for purposes of the Income Tax Act (Canada)) of the exchangeable share so redeemed. On the redemption, the holder of an exchangeable share will be considered to have disposed of the exchangeable share for proceeds of disposition equal to the “redemption proceeds” less the amount of the deemed dividend. A holder will realize a capital loss (or a capital gain) equal to the amount by which the sum of (a) the adjusted cost base to the holder of the exchangeable share; and (b) any reasonable costs of disposition, exceeds (or is less than) the proceeds of disposition. For this purpose, the “redemption proceeds” of an exchangeable share will be equal to the sum of (a) the fair market value at the time of the redemption of the share of common stock of Spinco received by the holder; and (b) the amount of all declared but unpaid dividends, if any, on the exchangeable share.

The deemed dividend will be subject to the tax treatment described above under the heading “– Dividends on Exchangeable Shares and Shares of Common Stock of Spinco – Dividends on Exchangeable Shares”. For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below.

In the case of a holder of exchangeable shares that is a corporation, it is possible that in some circumstances all or part of the deemed dividend arising on the redemption may be treated as proceeds of disposition and not as a dividend.

Purchase by Newco Canada or Other Disposition

On the acquisition of an exchangeable share by Newco Canada for a share of common stock of Spinco or on any other disposition or deemed disposition of an exchangeable share by a holder, other than a redemption (including pursuant to a retraction request), a holder will generally be considered to realize a capital gain (or a capital loss) equal to the amount by which the proceeds of disposition exceed (or are less than) the total of (a) the adjusted cost base of the exchangeable share to the holder; and (b) any reasonable costs of disposition. For this purpose, the proceeds of disposition in respect of an acquisition of an exchangeable share by Newco Canada will be equal to the sum of (a) the fair market value at the time of the exchange of the share of common stock of Spinco; and (b) the amount of all declared but unpaid dividends on the exchangeable share. The acquisition of an exchangeable share by Newco Canada will not result in a deemed dividend. For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below.

The cost of a share of common stock of Spinco received by a holder of exchangeable shares on the redemption or retraction of an exchangeable share by Newco Canada Exchangeco or on the acquisition of an exchangeable share by Newco Canada will be equal to the fair market value of such share of common stock of Spinco at the time of such event.

 

109


Table of Contents

On October 18, 2000, the Minister of Finance (Canada) announced that the Department of Finance would consider future amendments to the Income Tax Act (Canada) to allow holders of shares of a Canadian corporation to exchange such shares for shares of a non-Canadian corporation on a tax-deferred basis. It is possible that, in certain circumstances, these contemplated amendments, if enacted into law, could in the future allow a holder of exchangeable shares to exchange such shares for shares of common stock of Spinco on a tax-deferred basis. No specifics have been announced regarding these contemplated amendments and in particular with respect to the various requirements that would have to be satisfied in order to permit a holder of exchangeable shares to exchange such shares on a tax deferred basis or whether these requirements could be satisfied in the circumstances.

Disposition of Shares of Common Stock of Spinco

The disposition or deemed disposition of shares of common stock of Spinco will generally be a taxable event to a holder. On such disposition, a holder will be considered to realize a capital gain (or capital loss) to the extent that the proceeds of disposition of such shares exceed (or are less than) the sum of (a) the adjusted cost base to the holder of the shares of common stock of Spinco immediately prior to the disposition; and (b) any reasonable costs of disposition. For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” below.

Taxation of Capital Gain or Capital Loss

Generally, a holder is required to include in computing its income for a taxation year 50% of the amount of any capital gain (the taxable capital gain). A holder may deduct 50% of the amount of any capital loss (the allowable capital loss) realized in a taxation year from taxable capital gains realized by the holder in such year, subject to and in accordance with rules contained in the Income Tax Act (Canada). Any allowable capital losses in excess of taxable capital gains for the year of disposition generally may be carried back up to three taxation years or carried forward indefinitely and deducted against taxable capital gains in such other years to the extent and under the circumstances described in the Income Tax Act (Canada).

Capital gains realized by a holder who is an individual or trust, other than certain specified trusts, may give rise to alternative minimum tax under the Income Tax Act (Canada).

A holder that is a Canadian-controlled private corporation (as defined in the Income Tax Act (Canada)) may be liable to pay an additional refundable tax of 6 2/3% on taxable capital gains.

If the holder of a Class B common share, an exchangeable share, a share of Domtar common stock or Domtar preferred share is a corporation, the amount of any capital loss realized on a disposition or deemed disposition of such share may be reduced by the amount of dividends received or deemed to have been received by it on such share (and in certain circumstances a share exchanged for such share) to the extent and under circumstances prescribed by the Income Tax Act (Canada). Similar rules may apply where a corporation is a member of a partnership or a beneficiary of a trust that owns such shares or where a trust or partnership of which a corporation is a beneficiary or a member is a member of a partnership or a beneficiary of a trust that owns any such shares. Holders to whom these rules may be relevant should consult their own tax advisors.

Foreign Investment Entity Draft Legislation

Revised draft legislation regarding the taxation of investments in “foreign investment entities” was released on November 9, 2006. In general, where the draft legislation applies, a holder of an interest in a foreign investment entity will generally be required to include in income annually, an imputed return at the prescribed rate on the “designated cost” of such interest unless such holder can qualify for certain alternative methods of taxation. A corporation is not a foreign investment entity if (a) the “carrying value” of all of its “investment property” is not greater than one-half of the “carrying value” of all of its property; or (b) if its principal business is not an “investment business” within the meaning of those terms in the draft legislation. In any event, in

 

110


Table of Contents

general, the proposed rules will not apply to the shares of common stock of Spinco so long as such shares qualify as an “arm’s length interest” under the proposed rules, are listed on a prescribed stock exchange (which includes the New York Stock Exchange and the Toronto Stock Exchange) and it is reasonable to conclude that the holder has no tax avoidance motive in respect of the shares. The proposed rules generally will not apply to the exchangeable shares provided that the proposed rules do not apply to the shares of common stock of Spinco. No assurance can be given that the shares of common stock of Spinco or the exchangeable shares will qualify for these exemptions and holders should consult their own tax advisors in this respect.

Foreign Property Information Reporting

In general, a “specified Canadian entity” for a taxation year or fiscal period whose total cost amount of “specified foreign property” (both as defined in the Income Tax Act (Canada)) at any time in the year or fiscal period exceeds Cdn.$100,000, is required to file an information return for the year or period disclosing prescribed information, including the cost amount, any dividends received in the year, and any gains or losses realized in the year in respect of such property. With some exceptions, a holder resident in Canada in the year will be a specified Canadian entity. Exchangeable shares, ancillary rights, shares of common stock of Spinco and options to acquire shares of common stock of Spinco will constitute specified foreign property to a holder. Accordingly, holders of exchangeable shares, shares of common stock of Spinco and such options should consult their own tax advisors regarding compliance with these rules.

Holders of Domtar Preferred Shares

Provided holders of Domtar preferred shares do not exercise their dissent rights, these shares will remain outstanding after the Arrangement and the Arrangement will not be a taxable event for such holders with respect to their Domtar preferred shares.

Dissenting Domtar Shareholders

A dissenting holder of Domtar shares may be entitled, if the Arrangement becomes effective, to be paid by Domtar the fair value of the Domtar shares held by such dissenting Domtar shareholder. (In the case of payments to a dissenting shareholder of Domtar common shares, the payment by Domtar will be made on behalf of Offerco.) For a description of the dissent rights of a Domtar shareholder, see “The Transactions – Dissenting Domtar Shareholder’s Rights”.

Upon the receipt of a payment by Domtar (made on behalf of Offerco) (other than in respect of interest awarded by the court), a dissenting holder of Domtar common shares will realize a capital gain (or capital loss) to the extent such payment exceeds (or is less than) the sum of (a) the adjusted cost base to the holder of the Domtar common shares; and (b) any reasonable costs of disposition.

For a description of the tax treatment of capital gains and losses, see “– Taxation of Capital Gain or Capital Loss” above.

Upon the receipt of a payment by Domtar, a dissenting holder of Domtar preferred shares will be deemed to receive a taxable dividend equal to the amount by which the amount paid by Domtar (other than in respect of interest awarded by the court) exceeds the paid-up capital (for purposes of the Income Tax Act (Canada)) of such holder’s Domtar shares. Such dissenting holder will also be considered to have disposed of the Domtar preferred shares for proceeds of disposition equal to the amount received by such holder from Domtar, less the amount of the deemed dividend and interest awarded by a court. As a result, such dissenting holder will also realize a capital loss (or a capital gain) equal to the amount by which the sum of (a) the adjusted cost base to the securityholder of the Domtar shares; and (b) any reasonable costs of disposition, exceeds (or is less than) such proceeds of disposition. The deemed dividend is subject to the same tax treatment as other dividends received previously by the holder from Domtar except that, in the case of a holder of Domtar shares that is a corporation, it is possible that in some circumstances all or part of the deemed dividend may be treated as proceeds of disposition and not as a dividend.

 

111


Table of Contents

Any interest awarded to a dissenting Domtar shareholder by the court will be includable in such securityholder’s income for purposes of the Income Tax Act (Canada).

Domtar Shareholders Not Resident in Canada

The following section of the summary is applicable to a holder of Domtar common shares or Domtar preferred shares who, for the purposes of the Income Tax Act (Canada) and any applicable income tax treaty and at all relevant times, is not, and is not deemed to be, a resident of Canada and does not, and is not deemed to, use or hold Domtar common shares, Class B common shares of Offerco and shares of common stock of Spinco received pursuant to the Arrangement or Domtar preferred shares, as the case may be, in or in the course of, carrying on a business in Canada. Such a shareholder is hereinafter referred to as a “non-resident shareholder”.

Dispositions of Domtar Shares, Class B Common Shares and Shares of Common Stock of Spinco

A non-resident shareholder for whom shares of Domtar, Offerco, or Spinco are not taxable Canadian property (as defined in the Income Tax Act (Canada)) will not be subject to tax under the Income Tax Act (Canada) on the disposition of such shares. Generally, Domtar shares, Class B common shares of Offerco and shares of common stock of Spinco will not be “taxable Canadian property” to a non-resident shareholder at a particular time provided that (a) the shares are listed on a prescribed stock exchange (which includes the Toronto Stock Exchange and the New York Stock Exchange) at that time; (b) the non-resident shareholder, persons not dealing at arm’s length with the non-resident shareholder or the non-resident shareholder together with such persons have not owned 25% or more of the shares of any class of shares of Domtar, Offerco or Spinco at any time during the 60-month period ending at the particular time; and (c) such shares are not deemed to be taxable Canadian property to the non-resident shareholder under the provisions of the Income Tax Act (Canada).

Holders of Domtar Preferred Shares

Provided that non-resident shareholders who hold Domtar preferred shares do not exercise their dissent rights, these shares will remain outstanding after the Arrangement and the Arrangement will not be at taxable event for such shareholders with respect to their Domtar preferred shares.

Dissenting Non-Resident Shareholders

A dissenting non-resident shareholder of Domtar common shares may be entitled, if the Arrangement becomes effective, to be paid by Domtar the fair value of the Domtar common shares held by the dissenting non-resident shareholder. (In the case of payments to a dissenting non-resident shareholder of Domtar common shares, the payment by Domtar will be made on behalf of Offerco.) For a description of the dissent rights of a Domtar shareholder, see “The Transactions – Dissenting Domtar Shareholder’s Rights”.

Upon the receipt of a payment by Domtar (other than in respect of interest awarded by the court), a dissenting non-resident shareholder of Domtar common shares will realize a capital gain (or capital loss) to the extent such payment exceeds (or is less than) the sum of (a) the adjusted cost base to the holder of the Domtar common shares; and (b) any reasonable costs of disposition. A dissenting non-resident shareholder for whom the Domtar common shares are not taxable Canadian property (as defined in the Income Tax Act (Canada)) will not be subject to tax under the Income Tax Act (Canada) on the disposition of such shares. See “– Dispositions of Domtar Shares, Class B Common Shares and Shares of Common Stock of Spinco”.

Upon the receipt of a payment by Domtar (other than in respect of interest awarded by the court), a dissenting non-resident shareholder of Domtar preferred shares will be deemed to receive a dividend and to realize a capital gain (or capital loss) as described above under the heading “– Domtar Shareholders Resident in Canada – Dissenting Domtar Shareholders” above. Any deemed dividends (and any interest) paid to such a non-resident shareholder will be subject to Canadian withholding tax at the rate of 25%, unless the rate is

 

112


Table of Contents

reduced under the provisions of an applicable income tax treaty. For example, under the Canada-United States Income Tax Convention (1980) (the “Canada-U.S. Treaty”), the withholding tax rate is generally reduced to 15% in respect of a dividend paid to a person who is the beneficial owner of the dividend and who is resident in the U.S. for purposes of the Canada-U.S. Treaty.

An amount paid in respect of interest awarded by the court to a non-resident shareholder will be subject to Canadian withholding tax at the rate of 25%, unless the rate is reduced under the provisions of an applicable income tax treaty. For example, under the Canada-U.S. Treaty, the withholding tax rate is generally reduced to 10% in respect of interest paid to a person who is the beneficial owner of the interest and who is resident in the U.S. for purposes of the Canada-U.S. Treaty.

Eligibility for Investment

The Class B common shares of Offerco, the exchangeable shares and the shares of common stock of Spinco will be qualified investments under the Income Tax Act (Canada) for trusts governed by registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), deferred profit sharing plans (DPSPs) or registered education savings plans (RESPs), as defined in the Income Tax Act (Canada), provided that such shares are listed on a prescribed stock exchange (which includes the Toronto Stock Exchange and the New York Stock Exchange).

Ancillary rights received by holders of exchangeable shares will not be qualified investments for trusts governed by RRSPs, RRIFs, RESPs or DPSPs. As described above, Domtar is of the view that the ancillary rights have only nominal value. This determination of value is not binding on the CRA and it is possible that the CRA could take a contrary view. On the basis that the fair market value of the ancillary rights is nominal, there should be no material adverse tax consequences to trusts governed by RRSPs, RRIFs or DPSPs as a result of acquiring or holding such ancillary rights. However, RESPs holding such ancillary rights may realize material adverse consequences and should consult their own tax advisors on this matter.

Material Canadian Federal Income Tax Considerations to Domtar Optionholders

Subject to the qualifications and assumptions contained herein, the following portion of this summary is applicable to holders of Domtar stock options who at all relevant times (a) are resident or deemed to be resident in Canada for the purpose of the Income Tax Act (Canada); (b) deal at arm’s length with, and are not and will not be affiliated with, any of Domtar, Newco Canada Exchangeco, Offerco, Newco Canada or Spinco; (c) are current or former employees or directors of Domtar (or any subsidiary); and (d) received their Domtar stock options in respect of, in the course of, or by virtue of, such employment or in consideration for the services performed by them as directors, as the case may be, at a time when Domtar was not a Canadian-controlled private corporation within the meaning of the Income Tax Act (Canada).

Exercise of Options to Acquire Domtar Common Shares

Domtar optionholders who exercise their options to acquire Domtar common shares prior to the Effective Time of the Arrangement will be subject to income tax consequences arising on such exercise which are not addressed in this summary and which may be relevant to a Domtar optionholder’s decision as to whether to exercise his or her Domtar stock options prior to such time. Domtar optionholders who are considering the exercise of their options should consult their own tax advisors to determine the tax consequences to them of such exercise.

Exchange of Options to Acquire Domtar Common Shares for Options to Acquire Shares of Common Stock of the Spinco

The terms of the Arrangement provide that Domtar stock options that are not exercised prior to the Effective Time of the Arrangement will be exchanged for options to acquire shares of common stock of Spinco. A holder of a Domtar stock option who exchanges such option for an option to acquire shares of common stock of Spinco will not be considered to have disposed of the Domtar stock option and the option to acquire shares of common

 

113


Table of Contents

stock of Spinco will be deemed to be the same as, and a continuation of, the Domtar stock option, provided that the only consi