Is the acquisition a taxable event to U.S. shareholders of Atwood common stock, and if so, what is the fair market value?

Specific Tax Considerations for U.S. Atwood Shareholders

Was the transaction taxable to U.S. Atwood shareholders?

Yes, the transaction was taxable to U.S. Atwood shareholders. Exchanges of property, such as shares, are generally taxable for U.S. federal income tax purposes. In certain cases, a transaction can be structured in such a way that it qualifies for an exception from this general rule, in which case gain or loss on the exchange is deferred. Here, no such exception applies, and the exchange was taxable to U.S. Atwood shareholders.

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How will a U.S. Atwood shareholder calculate its tax?

It depends on the U.S. Atwood shareholder’s particular circumstances. For U.S. federal income tax purposes, the transaction may be treated as a redemption (with possible dividend consequences) rather than as an exchange. In many cases, a redemption is taxed as an exchange. Specifically, the U.S. Internal Revenue Service has indicated that the redemption of a minority stockholder is taxed as an exchange if the stockholder (1) has a minimal percentage stock interest, (2) exercises no control over corporate affairs and (3) experiences any reduction in its percentage stock interest as a result of the redemption. In some cases, however, the redemption may instead be taxable as a distribution to U.S. Atwood shareholders.

Every U.S. Atwood shareholder that is a registered holder of Atwood common stock should have received either a “Form of Certification of Treatment of Merger Consideration for Certified U.S. Registered Holders” or a “Form of Certification of Treatment of Merger Consideration for Uncertified Registered Holders” with the Letter of Transmittal they received from the Exchange Agent. Certain DTC participants may have received a “Sample Form of Certification of Treatment of Merger Consideration for DTC Participants.” Completing this certification will help U.S. Atwood shareholders determine whether the redemption is properly taxed to them as an exchange or as a distribution (with possible dividend consequences) based on their particular circumstances.

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If the transaction is taxed to a U.S. Atwood shareholder as an exchange, how will that shareholder calculate its tax?

The U.S. Atwood shareholder would generally recognize taxable capital gain or loss equal to the difference between (1) the fair market value of the merger consideration received in the transaction and (2) the U.S. Atwood shareholder’s adjusted tax basis in the shares of Atwood common stock surrendered in the exchange. A U.S. Atwood shareholder’s adjusted tax basis in its Atwood common stock would generally have been the amount paid to purchase those shares plus certain acquisition costs (e.g., brokerage commissions).

The capital gain or loss recognized in the transaction would be long-term capital gain or loss if the U.S. Atwood shareholder held the Atwood common stock surrendered in the exchange for more than one year as of the date of the exchange. Long-term capital gain of a non-corporate U.S. Atwood shareholder currently is subject to a maximum U.S. federal income tax rate of 20%. If a non-corporate U.S. Atwood shareholder does not qualify for long-term capital gain treatment, that gain is currently subject to a maximum U.S. federal income tax rate of 39.6%. Note that the deductibility of capital losses is subject to limitations.

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If the transaction is instead taxed to a U.S. Atwood shareholder as a distribution, how will that shareholder calculate its tax?

A deemed distribution to a U.S. Atwood shareholder would be taxable as a dividend to that U.S. Atwood shareholder to the extent of its allocable share of the relevant current or accumulated earnings and profits. The portion of the deemed distribution not paid out of the relevant current or accumulated earnings and profits is applied against the U.S. Atwood shareholder’s adjusted tax basis in its shares of Atwood common stock and thereafter will be treated as gain from the sale of the Atwood common stock.

A U.S. Atwood shareholder’s allocable share of the relevant current or accumulated earnings and profits may equal the fair market value of the merger consideration received, which would mean that the entire value of the merger consideration in the transaction would be taxable as a dividend.

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Specific Tax Considerations for Non-U.S. Rowan Shareholders

Is the Transaction taxable to non-U.S. Rowan shareholders?

Rowan received a written opinion from its counsel to the effect that for U.S. federal income tax purposes, the Transaction would be treated as a “reorganization” within the meaning of Section 368(a) of the Code. Provided that the Transaction qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, it is expected that holders that exchange Rowan Class A ordinary shares for Ensco Class A ordinary shares and cash in lieu of fractional shares in the Transaction will generally not recognize gain or loss, although certain non-U.S. holders who are otherwise subject to U.S. tax may be subject to U.S. tax on cash. For further discussion, please see the discussion under the heading “Material United States Federal Income Tax Consequences of the Transaction” in the joint proxy statement available at this link.

ALL HOLDERS OF ROWAN CLASS A ORDINARY SHARES SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION IN LIGHT OF THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAW OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
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General Tax Considerations for All Atwood Shareholders

What are the consequences to an Atwood shareholder who does not return a properly completed “Form of Certification of Treatment of Merger Consideration for Certified U.S. Registered Holders,” “Form of Certification of Treatment of Merger Consideration for Uncertified Registered Holders” or a “Sample Form of Certification of Treatment of Merger Consideration for DTC Participants” in a timely manner?

Merger consideration received by a non-U.S. Atwood shareholder who is a registered holder of Atwood common stock and who fails to timely return a properly completed “Form of Certification of Treatment of Merger Consideration for Uncertified Registered Holders” will be treated as a distribution to that non-U.S. Atwood shareholder. This distribution may be treated in whole or in part as a dividend subject to U.S. federal withholding tax at the rate of 30% (or such lower rate specified by an applicable tax treaty).

Merger consideration received by a U.S. Atwood shareholder who is a registered holder of Atwood common stock and who fails to timely return a properly completed “Form of Certification of Treatment of Merger Consideration for Certified U.S. Registered Holders” or “Form of Certification of Treatment of Merger Consideration for Uncertified Registered Holders” may be treated as gross proceeds received in an exchange or as a distribution subject to U.S. federal withholding tax or, potentially, back-up withholding tax depending on what information, if any, Computershare has on file with respect to such U.S. Atwood Shareholder. Atwood shareholders who received a “Sample Form of Certification of Treatment of Merger Consideration for DTC Participants” and have not received a similar certification from their broker should contact their broker to determine whether the broker will provide a similar certification or will otherwise accept a form substantially similar to the “Sample Form of Certification of Treatment of Merger Consideration for DTC Participants.”

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Can a withholding agent withhold from the merger consideration payable to a non-U.S. Atwood shareholder who properly certifies that the merger consideration should be treated as gross proceeds received in an exchange rather than as a distribution?

Yes. The applicable withholding agent, generally Computershare in the case of a registered holder of shares of Atwood common stock and otherwise the Atwood shareholder’s broker, will make an independent judgement as to whether the merger consideration is properly treated as a distribution or as gross proceeds received in an exchange with respect to the Atwood shareholder. If an Atwood shareholder has concerns regarding withholding, it should consult its own tax advisor and contact the applicable withholding agent.

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What is an Atwood shareholder’s tax basis in the Ensco Class A ordinary shares received as merger consideration?

For U.S. federal tax purposes, for those Atwood shareholders for whom the transaction was an exchange, their tax basis in the Ensco Class A ordinary shares received should be equal to the aggregate fair market value of those shares upon receipt. For those Atwood shareholders for whom the transaction was treated as a distribution, their tax basis in the Ensco Class A ordinary shares received as a distribution should be equal to the fair market value of those shares upon receipt; in addition, those Atwood shareholders should add to the tax basis of all of their Ensco Class A ordinary shares owned at the time of the transaction a pro rata portion of the unrecovered basis of their shares of Atwood common stock subsequent to the distribution. Shareholders are encouraged to consult their own tax advisors with respect to the application of distribution and basis rules in light of their particular circumstances.

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What was the fair market value of the merger consideration received in the transaction?

For purposes of determining the amount of gain recognized in an exchange, the amount treated as a dividend or the tax basis in the merger consideration received in the transaction, the per share fair market value of the Ensco Class A ordinary shares issued to Atwood shareholders as consideration in the transaction was equal to the average of the high and low trading prices on October 5, 2017, the date the shareholders approved the merger, of $5.98.

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