ADT 2007 Annual Report Download - page 116

We might not be able to engage in desirable strategic transactions and equity issuances following the
Separation because of restrictions relating to U.S. federal income tax requirements for tax-free
distributions.
Our ability to engage in significant equity transactions could be limited or restricted after
Separation in order to preserve for U.S. federal income tax purposes the tax-free nature of the
distribution. In addition, similar limitations and restrictions will apply to Covidien and Tyco Electronics.
The distribution of common shares of Covidien and Tyco Electronics to our shareholders may result in
corporate level taxable gain to us under Section 355(e) of the Code if 50% or more, by vote or value,
of our common shares, Covidien’s common shares or Tyco Electronics’ common shares are acquired or
issued as part of a plan or series of related transactions that includes the distribution. For this purpose,
any acquisitions or issuances of our common shares within two years before the distribution, and any
acquisitions or issuances of our common shares, Covidien’s common shares or Tyco Electronics’
common shares within two years after the distribution, generally are presumed to be part of such a
plan, although we, Covidien or Tyco Electronics may be able to rebut that presumption. We are not
aware of any such acquisitions or issuances of our common shares within the two years before the
distribution. If an acquisition or issuance of our common shares, Covidien’s common shares or Tyco
Electronics’ common shares triggers the application of Section 355(e) of the Code, we would recognize
taxable gain as described above, but such gain generally would not be subject to U.S. federal income
tax. However, certain subsidiaries of Covidien or Tyco Electronics or subsidiaries of ours would incur
significant U.S. federal income tax liabilities as a result of the application of Section 355(e) of the
Code.
Under the Tax Sharing Agreement, there are restrictions on our ability to take actions that could
cause the distribution or certain internal transactions undertaken in connection with the Separation to
fail to qualify as tax-free or tax-favored transactions, as the case maybe, including entering into,
approving or allowing any transaction that results in a change in ownership of more than 35% of our
common shares, a redemption of equity securities, a sale or other disposition of a substantial portion of
our assets, an acquisition of a business or assets with equity securities to the extent one or more
persons would acquire 35% or more of our common shares, or engaging in certain internal
transactions. These restrictions apply for the two-year period after the distributions, unless we obtain
the consent of the other parties or we obtain a private letter ruling from the Internal Revenue Service
or an unqualified opinion of a nationally recognized law firm that such action will not cause the
distribution or the internal transactions undertaken in connection with the Separation to fail to qualify
as tax-favored transactions and such letter ruling or opinion, as the case may be, is acceptable to the
parties. Covidien and Tyco Electronics are subject to similar restrictions under the Tax Sharing
Agreement. Moreover, the Tax Sharing Agreement generally provides that a party thereto is responsible
for any taxes imposed on any other party thereto as a result of the failure of the distribution or certain
internal transactions to qualify as tax-favored transactions under the Code if such failure is attributable
to certain post-distribution actions taken by or in respect of the responsible party or its shareholders,
regardless of whether the actions occur more than two years after the distribution, the other parties
consent to such actions or the responsible party obtains a favorable letter ruling or opinion of tax
counsel as described above. For example, we would be responsible for a third party’s acquisition of us
at a time and in a manner that would cause such failure. These restrictions may prevent us from
entering into transactions which might be advantageous to our shareholders and noteholders.
24 2007 Financials