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Message: Royalty Preferred Shares

We are probably ahead of ourselves but since the topic came up, it did expose some questions. In looking into it, I didn’t find any surprises. The Royalty Preferred Shares (RPS) are just Preferred Shares that pay royalties rather than dividends. Zenith shareholders do not own RPS individually rather Zenith Capital Corp. (ZCC) owns them collectively. Each shareholder obtains their proportionate value of them by their proportionate ZCC share ownership. In the quotes copied below, it states that a purchaser has the same options in handling them as the original (RVX) issuer. As far as I know, there is no redemption or liquidation format in place and since not trading, no fair market value available there so this is what I believe. Purchasing pharma could leave them in place and pay royalties to ZCC just as RVX would have. Net revenues would have to be split from other pharma revenue but that is normal. We have to do things like that for the HL royalty calculations. Alternatively, if pharma wants to end the royalties, since we don’t think there is any format in place, a value would have to be negotiated that pharma and ZCC agree on.

If there was a deal to take out both companies, since they are separate legal entities, it would really be two separate deals. One is not a wholly owned subsidiary of the other. There are different shareholders. An agreeable value would have to be arrived at between pharma and ZCC again to redeem them. As ZCC owns the RPS, it could just be incorporated into the overall Zenith purchase price. You can break these two main deals into any other scenarios you want for partial sales of either company. Individual shareholders get their say on whether it is fair or not when they vote to accept or not accept the complete deal for ZCC.

“As preferred shares are generally not voting shares, it is not necessary that the purchaser redeem or buy them out when taking over a company. The buyer has the same options as the original owner in dealing with the preferred shares.

“Most preferred shares will have a stated redemption or liquidation value. A company that issues preferred shares may not want to keep paying dividends indefinitely, so it will have the option of buying back the shares at a fixed price. This is different from a redemption of common shares, where the price depends upon the value of the company. When contemplating a buyout, the purchaser may consider a redemption of all preferred shares as a part of the purchase price of the company. This may be quite expensive, so the purchaser could decide to simply continue paying the dividend and leaving the preferred shares in place.

Just replace dividend with royalty above.

This is being posted on both RVX and Zenith Boards.

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