ADT 2012 Annual Report Download - page 118

interests of our company and our shareholders but certain shareholders believe that such a transaction would be
beneficial to our company and our shareholders, such shareholders may elect to sell their shares in our company
and the trading price of our common stock could decrease.
Risks Relating to our Separation from Tyco
We share responsibility for certain income tax liabilities of ADT, Tyco and Pentair Ltd., formerly Tyco
Flow Control International Ltd. (“Pentair”) for tax periods prior to and including September 28, 2012,
and such liabilities may include a portion of Tyco’s obligations under its tax sharing agreement with
Covidien Ltd. (“Covidien”) and TE Connectivity Ltd. (“TE Connectivity”) for tax liabilities for tax
periods prior to and including June 29, 2007.
In connection with the 2007 distributions of Covidien and TE Connectivity by Tyco (the “2007
Separation”), Tyco entered into a tax sharing agreement (the “2007 Tax Sharing Agreement”) that governs the
rights and obligations of each party with respect to certain pre-2007 Separation tax liabilities and certain tax
liabilities arising in connection with the 2007 Separation. More specifically, Tyco, Covidien and TE Connectivity
share 27%, 42% and 31%, respectively, of income tax liabilities that arise from adjustments made by tax
authorities to Tyco’s, Covidien’s and TE Connectivity’s U.S. and certain non-U.S. income tax returns and certain
taxes attributable to internal transactions undertaken in anticipation of the 2007 Separation. In addition, in the
event the 2007 Separation or certain related transactions is determined to be taxable as a result of actions taken
after the 2007 Separation by Tyco, Covidien or TE Connectivity, the party responsible for such failure would be
responsible for all taxes imposed on Tyco, Covidien or TE Connectivity as a result thereof. If none of the
companies is responsible for such failure, then Tyco, Covidien and TE Connectivity would be responsible for
such taxes, in the same manner and in the same proportions as other shared tax liabilities under the 2007 Tax
Sharing Agreement. Costs and expenses associated with the management of these shared tax liabilities are
generally shared equally among the parties.
With respect to years prior to and including the 2007 Separation, tax authorities have raised issues and
proposed tax adjustments that are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement
and which may require Tyco to make a payment to a taxing authority, Covidien or TE Connectivity. Although
Tyco has advised us that it has resolved a substantial number of these adjustments, a few significant items raised
by the IRS remain open with respect to the audit of the 1997 through 2004 years. As of the date hereof, it is
unlikely that Tyco will be able to resolve all the open items, which primarily involve the treatment of certain
intercompany debt transactions during the period, through the IRS appeals process. As a result, Tyco has advised
us that it expects to litigate these matters once it receives the requisite statutory notices from the IRS, which is
expected to occur during fiscal year 2013. Tyco has advised us that it has determined that its recorded liability is
sufficient to cover the indemnifications Tyco made under the 2007 Tax Sharing Agreement. However, the
ultimate resolution of these matters is uncertain and could result in Tyco being responsible for a greater amount
than it expects under the 2007 Tax Sharing Agreement.
In connection with the Separation, we have entered into the 2012 Tax Sharing Agreement with Tyco and
Pentair that is separate from the 2007 Tax Sharing Agreement and which governs the rights and obligations of
ADT, Tyco and Pentair for certain pre-separation tax liabilities, including Tyco’s obligations under the 2007 Tax
Sharing Agreement. Under the 2012 Tax Sharing Agreement, ADT, Tyco and Pentair share (i) certain
pre-separation income tax liabilities that arise from adjustments made by tax authorities to ADT’s, Tyco’s and
Pentair’s U.S. income tax returns, and (ii) payments required to be made by Tyco in respect to the 2007 Tax
Sharing Agreement (collectively, “Shared Tax Liabilities”). Tyco will be responsible for the first $500 million of
Shared Tax Liabilities. ADT and Pentair will share 58% and 42%, respectively, of the next $225 million of
Shared Tax Liabilities. ADT, Tyco and Pentair will share 27.5%, 52.5% and 20.0%, respectively, of Shared Tax
Liabilities above $725 million.
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