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Item 1A. Risk Factors

2021-03-16 compared with 2020-03-05 · 249 added, 98 removed, 122 unchanged (74% of the section changed)

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The following risk factors are not necessarily presented in order of relative importance and should not be considered to represent a complete set of all potential risks that could affect our business, financial condition or results of operation.

Future economic and financial conditions could adversely impact our financial condition and results.

Advertising, marketing and communications expenditures are sensitive to global, national and regional macroeconomic conditions, as well as specific budgeting levels and buying patterns.

Adverse developments including heightened economic uncertainty could reduce the demand for our services, which could have a material adverse effect on our revenue, results of operations, cash flows and financial position.

As a marketing services company, our revenues are highly susceptible to declines as a result of unfavorable economic conditions.

Global economic conditions affect the advertising and marketing services industry more severely than other industries.

In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses.

This pattern may recur in the future.

Decreases in our revenue would negatively affect our financial results, including a reduction of our estimates of free cash flow from operations.

If our clients experience financial distress, their weakened financial position could negatively affect our own financial position and results.

We have a diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business.

Unfavorable economic and financial conditions in the global economy could increase client financial difficulties resulting in reduced demand for our services, reduced revenues, delayed payments by clients, and increased write offs of accounts receivable.

Conditions in the credit markets could adversely impact our results of operations and financial position.

Turmoil in the credit markets or a contraction in the availability of credit would make it more difficult for businesses to meet their capital requirements and could lead clients to change their financial relationship with their vendors, including us.

If that were to occur, it could materially adversely impact our results of operations and financial position.

Our financial condition and results of operations for fiscal 2020 may be adversely affected by the recent coronavirus outbreak .

In December 2019, a novel strain of coronavirus surfaced in Wuhan, China.

The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

Risks Relating to Our Business and Operations

MDC competes for clients in highly competitive industries.

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To the extent that the Company fails to maintain existing clients or attract new clients, MDC’s business, financial condition, operating results, and cash flows may be affected in a materially adverse manner.

If our available liquidity is insufficient, our financial condition could be adversely affected and we may be unable to fund contingent deferred acquisition liabilities, and any put options if exercised.

MDC maintains a committed $250 million senior secured revolving credit agreements due May 3, 2021 (the “Credit Agreement”), together with cash flow from operations, to fund its working capital needs and to fund the exercise of put option

obligations and contingent deferred acquisition payments.

If credit were unavailable or insufficient under the Credit Agreement, MDC’s liquidity could be adversely affected and MDC’s ability to fund its working capital needs and any contingent obligations with respect to put options or contingent deferred acquisition payments could be adversely affected.

MDC has made acquisitions for which it has deferred payment of a portion of the purchase price, with the deferred acquisition consideration generally payable based on achievement of certain thresholds of future earnings of the acquired company.

In addition, a noncontrolling shareholder in an acquired business often has the right to require MDC to purchase all or part of its interest, either at specified dates or upon the termination of such shareholder’s employment with the subsidiary or death (put rights).

Payments to be made by the Company in respect of deferred acquisition consideration and noncontrolling shareholder put rights may be significantly higher than the amounts estimated by MDC because the actual obligation adjusts based on the performance of the acquired businesses over time.

If available liquidity is insufficient, MDC may be unable to fund contingent deferred acquisition payments.

MDC may not realize the benefits it expects from past acquisitions or acquisitions or other strategic transactions MDC may make in the future.

MDC’s business strategy includes ongoing efforts to engage in acquisitions of ownership interests in entities in the marketing communications services industry and other strategic transactions.

The success of acquisitions or strategic investments depends on the effective integration of newly acquired businesses into MDC’s current operations.

Such integration is subject to risks and uncertainties, including realization of anticipated synergies and cost savings, the ability to retain and attract executives and clients, the diversion of management’s attention from other business concerns, and undisclosed or potential legal liabilities of the acquired company.

MDC’s failure to address these risks or other problems encountered in connection with our past or future acquisitions and other strategic transactions could cause MDC to fail to realize their anticipated benefits, incur unanticipated liabilities and harm MDC’s business generally.

MDC’s acquisitions and other strategic transactions could also result in dilutive issuances of the Company’s equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm its financial condition or operating results.

Furthermore, the anticipated benefits or value of MDC’s acquisitions and other strategic transactions may not materialize.

MDC’s business could be adversely affected if it loses key clients.

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The loss of one or more clients could materially affect the results of the individual agencies and MDC as a whole.

The loss of several of our largest clients could have a material adverse effect on our business, results of operations, cash flows and financial position.

Our ten largest clients (measured by revenue generated) accounted for 23% of our revenue for the three-year period ended December 31, 2019 .

Our ten largest clients (measured by revenue generated) accounted for approximately 21% of our revenue for the three-year period ended December 31, 2020.

A significant reduction in spending on our services by our largest clients, or the loss of several of our largest clients, could have a material adverse effect on our business, results of operations and financial position.

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To the extent MDC cannot generate new business from new and existing clients due to these limitations, MDC’s ability to grow its business and to increase its revenues will be limited.

MDC’s business could be adversely affected if it loses or fails to attract key executives or employees.

Management succession at our operating units is very important to the ongoing results of MDC because, as in any service business, the success of a particular agency is dependent upon the leadership of key executives and management.

If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.

MDC’s business and results of operations have been adversely affected and could in the future be materially adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic is adversely impacting, and is expected to continue to adversely impact, our business and results of operations.

As part of efforts to contain the spread of COVID-19, governmental authorities have imposed various restrictions, such as travel bans, stay-at-home orders and quarantines, social distancing measures and temporary business closures.

COVID-19 and the actions taken by governments, businesses and individuals in response to the pandemic have resulted in, and are expected to continue to result in, a substantial curtailment of business activities, weakened economic conditions, and significant economic uncertainty.

Many clients have responded to weak economic and financial conditions by reducing their marketing budgets, thereby decreasing the market and demand for our services.

This is adversely impacting and is expected to continue to adversely impact our business and results of operations.

We are also facing increased operational challenges as we take measures to support and protect employee health and safety, including limiting employee travel, closing offices, and implementing work-from-home policies for employees.

In particular, our remote work arrangements, coupled with stay-at-home orders and quarantines, pose new challenges for our employees and our IT systems and extended periods of remote work arrangements could strain our business continuity plans and introduce operational risk, including but not limited to cybersecurity and IT systems management risks.

The effects of the COVID-19 pandemic may also limit the resources afforded to or delay the implementation of our strategic initiatives and make it more difficult to develop and market innovative services.

If our strategic initiatives are delayed or otherwise modified, such initiatives may not achieve some or all of the expected benefits, which could adversely impact our competitive position, business, results of operations and financial condition.

MDC’s business could be adversely affected if it loses or fails to attract or retain key executives or employees.

Employees, including creative, research, analytics, media, technology development, account and practice group specialists, and their skills and relationships with clients, are among MDC’s most important assets.

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If MDC fails to hire and retain a sufficient number of these key employees, it may not be able to compete effectively.

If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.

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Such a loss could have a material adverse effect on our results of operations, cash flows and financial position.

MDC’s results of operations are subject to currency fluctuation risks.

Although MDC’s financial results are reported in U.S.

dollars, a portion of its revenues and operating costs are denominated in currencies other than the U.S.

As a result, fluctuations in the exchange rate between the U.S.

dollar and other currencies, particularly the Canadian dollar, may affect MDC’s financial results and competitive position.

Goodwill, intangible assets and right-of-use assets may become impaired.

We have recorded a significant amount of goodwill and intangible assets in our consolidated financial statements in accordance with GAAP resulting from our acquisition activities, which principally represents the specialized know-how of the workforce at the agencies we have acquired.

We test, at least annually, the carrying value of goodwill for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein.

The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows.

If MDC concludes that any intangible asset and goodwill values are impaired, any resulting non-cash impairment charge could have a material adverse effect on our results of operations and financial position.

See Note 8 of the Notes to the Consolidated Financial Statements for details on goodwill impairment recorded for the twelve months ended December 31, 2019.

In addition, we have recorded a significant amount of right-of-use assets in our consolidated financial statements in accordance with GAAP as a result of the adoption of Accounting Standards Codification, Leases (“ASC 842”).

Upon a triggering event, we test the right-of-use assets for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein.

If a right-of-use asset is impaired, the resulting non-cash impairment charge could have a material adverse effect on our results of operations and financial position.

See Note 10 of the Notes to the Consolidated Financial Statements for details on lease impairments recorded related to right-of-use assets.

MDC is subject to regulations and litigation risk that could restrict our activities or negatively impact our revenues.

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While we have taken steps to comply with data privacy laws, we cannot guarantee that our efforts will meet the evolving standards imposed by data protection authorities.

In the event that we are found to have violated data privacy laws, we may be subject to additional potential private consumer, business

partner or securities litigation, regulatory inquiries, governmental investigations and proceedings and we may incur damage to our reputation.

In the event that we are found to have violated data privacy laws, we may be subject to additional potential private consumer, business partner or securities litigation, regulatory inquiries, governmental investigations and proceedings and we may incur damage to our reputation.

Any such developments may subject us to material fines and other monetary penalties and damages, divert management’s time and attention, and lead to enhanced regulatory oversight all of which could have a material adverse effect on our business and results of operations.

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Any breakdown or breach in our systems or data-protection policies, or those of our third-party service providers, could adversely affect our reputation or business.

MDC is consolidating its real estate footprint and may incur significant costs in doing so.

In 2020, MDC consolidated the real estate occupancy of its advertising and marketing agencies in New York City, in order to lower our leasing costs and improve collaboration among our agencies.

In consolidation, many of MDC’s legacy properties will be or have been subleased or abandoned.

In 2020, MDC incurred a charge of $22.7 million associated with the impairment of right-of-use lease assets and related leasehold improvements and the acceleration of variable lease expenses relating to these and similar actions.

In addition, MDC is exploring opportunities for real estate consolidation in other markets.

MDC may not be able to sublease its vacated office spaces on expected terms or at all.

If we fail to sublet on expected terms the vacated leased offices, there could be a material adverse effect on our cash flows, financial condition and results of operations.

Risks Relating to Our Financial Condition and Results

Future economic and financial conditions could adversely impact our financial condition and results.

Advertising, marketing and communications expenditures are sensitive to global, national and regional macroeconomic conditions, as well as specific budgeting levels and buying patterns.

As a marketing services company, our revenues are highly susceptible to declines as a result of unfavorable economic conditions.

Global economic conditions affect the advertising and marketing services industry more severely than other industries.

This pattern may recur in the future.

Decreases in our revenue would negatively affect our financial results, including a reduction of our estimates of free cash flow from operations.

If our clients experience financial distress, their weakened financial position could negatively affect our own financial position and results.

We have a diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business.

Conditions in the credit markets could adversely impact our results of operations and financial position.

If that were to occur, it could materially adversely impact our results of operations and financial position.

MDC maintains a committed $211.5 million senior secured revolving credit agreement due February 3, 2022 (the “Credit Agreement”), together with cash flow from operations, to fund its working capital needs and to fund the exercise of put option obligations and contingent deferred acquisition payments.

If MDC is not able to renew or replace its Credit Agreement on favorable terms or at all, or if credit were otherwise unavailable or insufficient under the Credit Agreement, MDC’s liquidity could be adversely affected and MDC’s ability to fund its working capital needs and any contingent obligations with respect to put options or contingent deferred acquisition payments could be adversely affected.

MDC’s business strategy includes ongoing efforts to engage in acquisitions of ownership interests in entities in the marketing communications services industry and other strategic transactions.

The success of acquisitions or strategic investments depends on the effective integration of newly acquired businesses into MDC’s current operations.

MDC’s acquisitions and other strategic transactions could also result in dilutive issuances of the Company’s equity securities, the incurrence of debt, contingent liabilities, amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm its financial condition or operating results.

Furthermore, the anticipated benefits or value of MDC’s acquisitions and other strategic transactions may not materialize.

MDC’s results of operations are subject to currency fluctuation risks.

Although MDC’s financial results are reported in U.S.

dollars, a portion of its revenues and operating costs are denominated in currencies other than the U.S.

As a result, fluctuations in the exchange rate between the U.S.

dollar and other currencies, particularly the Canadian dollar, may affect MDC’s financial results and competitive position.

Goodwill, intangible assets and right-of-use assets may become impaired.

We have recorded a significant amount of goodwill and intangible assets in our consolidated financial statements in accordance with GAAP resulting from our acquisition activities, which principally represent the specialized know-how of the workforce at the agencies we have acquired.

We test, at least annually, the carrying value of goodwill for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein.

The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows.

See Note 8 of the Notes to the Consolidated Financial Statements for details on goodwill and intangible asset impairment recorded in the twelve months ended December 31, 2020.

Upon a triggering event, we test the right-of-use assets for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein.

If a right-of-use asset is impaired, the charge could have a material adverse effect on our results of operations and financial position.

See Note 10 of the Notes to the Consolidated Financial Statements for details on lease impairments recorded related to right-of-use assets.

We may be subject to adverse tax consequences such as those related to changes in tax laws or tax rates or their interpretations, and the related application of judgment in determining our global provision for income taxes, deferred tax assets or liabilities or other tax liabilities given the ultimate tax determination is uncertain.

We are a Canada-domiciled multinational company subject to tax in multiple U.S.

and foreign tax jurisdictions.

Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis.

While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that jurisdictional tax authorities may take a contrary view, which may have a significant impact on our global provision for income taxes.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied.

recently enacted significant tax reform, and certain provisions of the new law may adversely affect us.

In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies.

Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business.

or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

Risks Relating to Our Class A Shares

Future issuances of equity securities, which may include securities that would rank senior to our Class A shares, may cause dilution to our existing shareholders and adversely affect the market price of our Class A shares.

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On March 7, 2017, we issued 95,000 Series 4 convertible preference shares (the “Series 4 Preference Shares”) with an initial aggregate liquidation preference of $95.0 million, which will be convertible into Class A shares or our Series 5 convertible preference shares at a current conversion price of $7.42 per share.

Pursuant to the Goldman Letter Agreement, the conversion price would (subject to the closing of the Transactions) be reduced to $5.00 per share, subject to entry into definitive documentation between MDC and the holder.

On March 14, 2019, we issued 50,000 Series 6 convertible preference shares (the “Series 6 Preference Shares” and, together with the Series 4 Preference Shares, the “Preference Shares”) with an initial aggregate liquidation preference of $50.0 million, which will be convertible into Class A shares or our Series 7 convertible preference shares at an initial conversion price of $5.00 per share.

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Additionally, any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our Class A shares, and may result in dilution to owners of our Class A shares.

Because our decision to issue additional debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot

predict or estimate the amount, timing or nature of our future issuances.

Because our decision to issue additional debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances.

Also, we cannot predict the effect, if any, of future issuances of our Class A shares on the market price of our Class A shares.

The indenture governing the 6.50% Notes and the Credit Agreement governing our secured line of credit contain various covenants that limit our discretion in the operation of our business.

MDC has issued 6.50% senior notes due 2024 in the aggregate principal amount of $900 million (the “6.50% Notes”).

The indenture governing the 6.50% Notes and the Credit Agreement governing our lines of credit contain various provisions that limit our discretion in the operation of our business by restricting our ability to:

Our shares of common stock are thinly traded and our stock price may be volatile.

The market price of our Class A Shares has been subject to wide fluctuations, and this volatility may continue.

Among the factors that could affect the price of our Class A Shares are the risks described in this “Risk Factors” section and other factors, including:

• developments or announcements related to the Proposed Transactions;

• quarterly variations in our operating results compared to market expectations;

• changes in expectations as to our future financial performance;

• a lack of liquidity in the market for our Class A Shares;

• actual or expected sales of our Class A Shares by our shareholders;

• general market conditions;

• domestic and international economic, legal and regulatory factors, including the effect of COVID-19 on these factors.

Risks Relating to Our Indebtedness

The indenture governing the Senior Notes and the Credit Agreement governing our secured line of credit contain various covenants that limit our discretion in the operation of our business.

MDC has Senior Notes due 2024 outstanding in the aggregate principal amount of $870.3 million.

The indenture governing the Senior Notes and the Credit Agreement governing our lines of credit contain various provisions that limit our discretion in the operation of our business by restricting our ability to:

• sell assets;

• pay dividends and make other distributions;

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These restrictions on our ability to operate our business in our discretion could seriously harm our business by, among other things, limiting our ability to take advantage of financing, mergers and acquisitions and other corporate opportunities.

The Credit Agreement is subject to various additional covenants, including a senior leverage ratio, a total leverage ratio, a fixed charge coverage ratio, and a minimum EBITDA level (as defined).

The Credit Agreement is subject to various additional covenants, including a senior leverage ratio, a total leverage ratio, a fixed charge coverage ratio, and a minimum EBITDA level (as defined per the Credit Agreement).

Events beyond our control could affect our ability to meet these financial tests, and we cannot assure you that they will be met.

Our substantial indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations, including the 6.50% Notes.

As of December 31, 2019 , MDC had $887.6 million , net of debt issuance costs, of indebtedness.

Our substantial indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations, including the Senior Notes.

The net carrying value of MDC’s indebtedness was $843.2 million, net of debt issuance costs, as of December 31, 2020.

In addition, we expect to make additional drawings under the Credit Agreement from time to time.

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For example, it could:

make it more difficult for us to satisfy our obligations with respect to the 6.50% Notes;

• make it more difficult for us to satisfy our obligations with respect to the Senior Notes;

• make it difficult for us to meet our obligations with respect to our contingent deferred acquisition payments;

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If we or our subsidiaries incur additional indebtedness, the related risks that we face could increase.

We are a Canada-domiciled multinational company subject to tax in multiple U.S.

and foreign tax jurisdictions.

Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied.

recently enacted significant tax reform, and certain provisions of the new law may adversely affect us.

In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies.

or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

We are a holding company dependent on our subsidiaries for our ability to service our debt.

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In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.

MDC may not be able to meet our performance targets and milestones.

MDC communicates to the public certain targets and milestones for our financial and operating performance.

These targets and milestones are not predictions or guidance, and investors should not place undue reliance on them.

MDC may fail to meet such targets and milestones because of the inherent risk and uncertainty of operating our business and executing on our strategic and other plans.

MDC is launching alliances among its agencies to improve collaboration and client service .

MDC is in the midst of transforming how its advertising and marketing agencies collaborate and work together in order to improve MDC’s ability to attract and retain clients, and expand the amount and variety of services provided to clients.

There can be no guarantee that the structures and incentives we have put in place to improve collaboration among our agencies will be successful, or will lead to attracting or retaining clients, or expanding the amount and variety of services provided to clients.

If our agency collaboration initiatives are unsuccessful, there could be a material adverse effect on our business, financial condition and results of operations and cash flows.

MDC is consolidating and densifying its real estate occupancy in New York.

MDC is in the midst of consolidating the real estate occupancy of its advertising and marketing agencies, in order to lower MDC’s leasing costs and improve collaboration among our agencies.

MDC contemplates that in New York City its advertising and marketing agencies will colocate in a single location.

MDC may not be able to sublease existing spaces to be vacated on expected terms or at all.

Our anticipated savings from consolidating and densifying our real estate occupancy is subject to timely completing construction, and construction could be delayed.

If we fail to sublet on expected terms the existing leased offices to be vacated, or construction of our consolidated leased space is delayed, there could be a material adverse effect on our business, financial condition and results of operations.

Our shares of common stock are thinly traded and our stock price may be volatile.

Because MDC’s Class A shares are thinly traded, their market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on NASDAQ or another stock exchange.

Our Class A shares may be less liquid than the stock of companies with broader public ownership, and as a result, the trading price for our Class A shares may be more volatile.

Among other things, trading of a relatively small volume of our Class A shares may have a greater impact on the trading price for our stock than would be the case if our public float were larger.

The Company has identified a material weakness in our internal control over financial reporting for income taxes.

If we are unable to remediate the material weakness and otherwise maintain an effective system of internal control over financial reporting, it could result in us not preventing or detecting on a timely basis a material misstatement of the Company's financial statements.

Management identified a material weakness in the Company’s internal control over financial reporting for income taxes as of December 31, 2019, as described in Part II, Item 9A of this Form 10-K.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Although we intend to implement a plan to remediate this material weakness, we cannot be certain of the success of the plan.

If our remedial measures are insufficient to address the material weakness, or if one or more additional material weaknesses or significant deficiencies in our disclosure controls and procedures or internal control over financial reporting are discovered or occur in the future, we may not be able to prevent or identify irregularities or ensure the fair and accurate presentation of our financial statements included in our periodic reports filed with the U.S.

Securities and Exchange Commission.

Risks Relating to the Proposed Transactions

The Proposed Transactions may give rise to taxable income in the United States for the Company and its subsidiaries, and there can be no assurances that material adverse tax consequences will not result from the Proposed Transactions or related transactions in Canada, the U.S., or other jurisdictions.

Any such adverse tax consequences could adversely affect the Combined Company or its share price, following completion of the Proposed Transactions.

The Redomiciliation should qualify as a “reorganization” under section 368(a) of the Internal Revenue Code.

Specifically, the Redomiciliation should be treated, for U.S.

federal income tax purposes, as if the Company (i) transferred all of its assets and liabilities to a new U.S.

corporation (MDC Delaware) in exchange for all of the outstanding stock of MDC Delaware and (ii) then distributed the stock of MDC Delaware that the Company received in the transaction to the Company’s shareholders in liquidation of the Company.

Additionally, the Company expects the Business Combination to be treated as a deemed transfer by New MDC of its assets to OpCo and an assumption of New MDC’s liabilities by OpCo in a transaction intended to qualify as a contribution to OpCo in exchange for OpCo Common Units or OpCo Preferred Units under section 721 of the Internal Revenue Code of 1986, as amended, and any successor provision of U.S.

federal law (the “Code”), and that Stagwell’s contributions of its businesses to OpCo is similarly intended to be subject to section 721 of the Code.

Certain elements of the structure can be expected to give rise to corporate taxable income for the Combined Company.

Additionally, because setting up the Up-C structure in the Business Combination involves a contribution by New MDC of its assets to OpCo, and an assumption by OpCo of New MDC’s liabilities, the flexibility of the Company, MDC Delaware, New MDC and OpCo to incur certain liabilities or fund certain expenses outside of the ordinary course of their businesses prior to effecting the Proposed Transactions will be significantly limited, including certain liabilities incurred in connection with implementing the Proposed Transactions, as such liabilities could trigger unanticipated tax costs for New MDC in connection with the implementation of the Proposed Transactions.

To the extent that liabilities assumed by OpCo as part of the Proposed Transactions are viewed as non-ordinary course liabilities, such assumption may give rise to U.S.

corporate taxable income for New MDC resulting from the assumption.

Additionally, to the extent OpCo is treated as assuming such a liability, under relevant U.S.

tax rules a portion of OpCo’s other liabilities may also be recharacterized and give rise to additional corporate taxable income for New MDC.

There can be no assurances that material additional adverse U.S.

tax consequences will not result from the Proposed Transactions, and there can be no assurance that the Internal Revenue Service will agree with or not otherwise challenge the Company’s position on the tax treatment of the Proposed Transactions or of internal restructuring transactions undertaken prior

to, after, or in connection with the Proposed Transactions, which could result in higher U.S.

federal tax costs for the Combined Company than currently anticipated, including a reduction in the net operating loss carryforwards of Maxxcom Inc.

(which will become tax attributes of the Combined Company as a result of the Proposed Transactions).

The Company has not applied for a ruling related to the Proposed Transactions and does not intend to do so.

Any adverse tax consequences resulting from the Proposed Transactions or the operations of the Combined Company after the Proposed Transactions could adversely affect the Combined Company or its share price following the completion of the Proposed Transactions.

Moreover, U.S.

tax laws significantly limit the Combined Company’s ability to redomicile outside of the U.S.

once the Proposed Transactions are complete.

The Redomiciliation may give rise to significant Canadian corporate tax.

As a result of the Redomiciliation, the Company expects to incur Canadian corporate tax liability in the amount of approximately $21 million.

However, such amount is only an estimate and the actual amount of Canadian corporate tax liability may be significantly higher than the Company’s estimate.

For purposes of the Canadian Tax Act, the Company’s taxation year will be deemed to have ended immediately prior to it ceasing to be a resident of Canada as a result of the Redomiciliation.

Immediately prior to the time of this deemed year end, the Company will be deemed to have disposed of each of its properties for proceeds of disposition equal to the fair market value of such properties at that time and will be deemed to have reacquired such properties for a cost amount equal to that fair market value.

The Company will be subject to income tax under Part I of the Canadian Tax Act on any income and net taxable capital gains which arise as a result of this deemed disposition (after the utilization of any available capital losses or non-capital losses).

The Company will also be subject to “emigration tax” under Part XIV of the Canadian Tax Act on the amount by which the fair market value, immediately before the Company’s deemed year end, of all of its properties exceeds the total of certain of its liabilities and the paid-up capital, determined for purposes of that emigration tax, of all the issued and outstanding shares of the Company immediately before such deemed year end.

The quantum of Canadian federal income tax payable by the Company as a result of the Redomiciliation will depend upon a number of considerations including the fair market value of its properties, the amount of its liabilities, the Canada-U.S.

dollar exchange rate, its shareholder composition, as well as certain Canadian tax attributes, accounts and balances of the Company, each as of the time the Redomiciliation becomes effective on the Redomiciliation Effective Date (the “Redomiciliation Effective Time”).

Prior to the Redomiciliation Effective Time, there is no certainty that the fair market value of the properties of the Company will not increase, and there is no certainty that the estimated fair market value of the properties of the Company or the amounts of its relevant tax attributes will be accepted by Canadian federal tax authorities, which may result in additional taxes payable as a result of the Redomiciliation.

The Company has not applied to the Canadian federal tax authorities for an advance tax ruling relating to the Redomiciliation and does not intend to do so.

Additionally, it is possible that valuations and implied valuations of the Company’s property are made available which may be relevant in assessing the potential Canadian tax costs of the Redomiciliation.

As a result, the quantum of Canadian tax payable by the Company may significantly exceed the Company’s estimates that are reflected in the Form S-4.

Any such adverse tax consequences could adversely affect the Combined Company and its share price.

If the IRS does not agree with the Company’s determination of the “all earnings and profits amount” attributable to the Company’s shares, certain U.S.

Holders may owe a higher than anticipated amount of U.S.

federal income taxes as a result of the Proposed Transactions (and specifically, the Redomiciliation).

Subject to the potential application of the passive foreign investment company (as defined under Section 1297 of the Code) rules, certain beneficial owners of the Company’s Class A Shares or Class B Shares that are, for U.S.

federal income tax purposes, (i) individual citizens or residents of the United States;

(ii) corporations created or organized in the United States or in any state thereof;

(iii) estates the income of which is subject to United States federal income tax regardless of its source;

or (iv) trusts if (a) a court within the United States can exercise primary supervision over the administration of the trust or (b) they have a valid election in place to be treated as a United States person and one or more United States persons has authority to control all substantial decisions of the trust (each such person, a “U.S.

Holder”) that, at the time of the Redomiciliation, (i) own shares of the Company with a fair market value of $50,000 or more and (ii) would otherwise recognize taxable gain for U.S.

federal income tax purposes with respect to their shares of the Company in connection with the Proposed Transactions (and specifically, the Redomiciliation), may make the “all earnings and profits” election with respect to their shares of the Company in lieu of recognizing such taxable gain.

Holder that validly makes such “all earnings and profits” election will be required to include in income, as a deemed dividend, the “all earnings and profits amount” (as defined under applicable Treasury Regulations) that is attributable, under U.S.

tax principles, to such U.S.

Holder’s shares of the Company.

Additionally, U.S.

persons that own directly, indirectly or constructively (under specified attribution rules), 10% or more of the total combined voting power or of the total value of all classes of the Company’s equity (each such person, a “10% U.S.

Shareholder”) may be subject to special rules which depend on the Company’s calculation of its earnings and profits.

The Company is currently in the process of determining its historical earnings and profits and also expects to determine its earnings and profits for the taxable year of the Redomiciliation ending with the date of the closing of the Redomiciliation (the “Redomiciliation Effective Date”).

Although the Company will not complete this determination until after completion of the Proposed Transactions, the Company currently expects to have a significant amount of earnings and profits for the taxable year of the Redomiciliation.

The calculation of “all earnings and profits” depends on the applicable shareholder’s period of ownership and the outcome may differ based on the particular shareholder.

At this stage, there can be no assurances regarding the “all earnings and profits amount.” In general, the “all earnings and profits amount” attributable to the shares of the Company held by a particular U.S.

Holder should depend on the Company’s accumulated earnings and profits from the date that the shares of the Company were acquired by such U.S.

Holder through the Redomiciliation Effective Date.

The determination of the Company’s earnings and profits is a complex determination and may be impacted by numerous factors.

Accordingly, there can be no assurance that the IRS will agree with the Company’s determination of such earnings and profits.

If the IRS does not agree with the Company’s determination of the amount, timing or source of its earnings and profits, the earnings and profits of the Company may be greater than anticipated, and the effect of such earnings and profits on shareholder taxation may be greater than anticipated.

In such case, a U.S.

Holder that makes an “all earnings and profits” election or a 10% U.S.

Shareholder could have a greater than anticipated “all earnings and profits amount” in respect of such U.S.

Holder’s MDC shares and thereby recognize greater taxable income.

In addition, MDC shareholders who receive “all earnings and profits” data from the Company may bring suit against the Company if such data is successfully disputed by the IRS.

Holders are strongly urged to consult their own tax advisors regarding the U.S.

federal income tax consequences of the Proposed Transactions to them in their particular circumstances, including whether they would be considered 10% U.S.

Shareholders, whether to make the “all earnings and profits” election where applicable, and the appropriate filing requirements with respect to this election

Additionally, special rules apply to 10% U.S.

Shareholders.

Shareholders should consult their own tax advisors regarding the U.S.

federal and other applicable tax consequences of the Proposed Transactions to them in light of their particular circumstances.

Completion of the Proposed Transactions may affect the timing of audit or reassessments by tax authorities.

The determination of income and other tax liabilities of the Company and its subsidiaries requires interpretation of complex domestic and foreign laws and regulations that are subject to change.

The Company’s interpretation of taxation law may differ from the interpretation of the tax authorities.

There are tax matters under review for which the timing of resolution is uncertain.

While the Company believes that the provision for income taxes is adequate, completion of the Proposed Transactions may affect the timing of audit and reassessment of taxes by certain tax authorities, which reassessments may be without technical merit and possibly material.

The Company will allocate time and resources to effecting the Proposed Transactions and incur non-recurring costs related to the Proposed Transactions.

The Company and its management have allocated and will continue to be required to allocate time and resources to effecting the completion of the Proposed Transactions and related and incidental activities, including preparing the “all earnings and profits amount” attributable to the shares of the Company, which data certain U.S.

Holders may request.

There is a risk that the challenges associated with managing these various initiatives may have a business impact and that consequently the underlying businesses will not perform in line with expectations.

This could have an adverse effect on the reputation, business, financial condition or results of operations of the Combined Company.

In addition, the Company expects to incur a number of non-recurring costs associated with the Proposed Transactions, including taxes, legal fees, advisor fees, proxy solicitor fees, filing fees, mailing expenses, financial printing expenses and other fees.

There can be no assurance that the actual costs will not exceed those estimated and the actual completion of the Proposed Transactions may result in additional and unforeseen expenses.

Many of these costs will be payable whether or not the Proposed Transactions are completed.

While it is expected that benefits of the Proposed Transactions achieved by the Combined Company will offset these transaction costs over time, this net benefit may not be achieved in the short-term or at all, particularly if the Proposed Transactions are delayed or do not happen at all.

These combined factors could adversely affect the business, results of operations or financial condition of the Combined Company.

The calculation of the number of Stagwell OpCo Units and the Stagwell Class C Shares to be issued will not be adjusted if there is a change in the value of Stagwell or its assets or the value of MDC before the Proposed Transactions are completed.

The calculation of the number of the Stagwell OpCo Units and the Stagwell Class C Shares to be issued to Stagwell in the Proposed Transactions will not be adjusted (i) if the value of the business or assets of Stagwell increases prior to the consummation of the Proposed Transactions or the value of MDC decreases prior to the Proposed Transactions, or (ii) if the value of the business or assets of Stagwell declines prior to the consummation of the Proposed Transactions or the value of MDC

increases prior to the Proposed Transactions.

MDC may not be permitted to terminate the Transaction Agreement because of changes in the value of Stagwell’s assets.

The Proposed Transactions may not be completed on the terms or timeline currently contemplated, or at all, as MDC and Stagwell may be unable to satisfy the conditions or obtain the approvals required to complete the Proposed Transactions or such approvals may contain material restrictions or conditions.

Completion of the Proposed Transactions is subject to numerous conditions, including the occurrence of, among other things, receipt of approvals and the satisfaction of other conditions, including (i) the receipt of the required shareholder approvals, and (ii) with respect to the Redomiciliation, authorization of the director duly appointed (the “Director”) under Section 260 of the Canada Business Corporations Act (the “CBCA”).

Although the Company is diligently applying its efforts to take, or cause to be taken, all actions to do, or cause to be done, all things necessary, proper or advisable to obtain the requisite approvals, there can be no assurance that these conditions will be fulfilled or that the Proposed Transactions will be completed on the terms or timeline currently contemplated, or at all.

MDC has and will continue to expend time and resources and incur expenses related to the Proposed Transactions.

Many of these expenses must be paid regardless of whether the Proposed Transactions are consummated.

Governmental agencies may not approve the Proposed Transactions, may impose conditions to the approval of the Proposed Transactions or require changes to the terms of the Proposed Transactions.

Any such conditions or changes could have the effect of delaying completion of the Proposed Transactions, imposing costs on or limiting the revenues of the Combined Company following the Proposed Transactions or otherwise reducing the anticipated benefits of the Proposed Transactions.

Completion of the Proposed Transactions may trigger certain provisions in agreements to which the Company or a Stagwell Entity is a party.

The completion of the Proposed Transactions may trigger certain change in control, right of first offer, notice, consent, assignment or other provisions in agreements to which the Company or its subsidiaries are a party.

In addition, while the Proposed Transactions will not result in an effective change of control of any Stagwell Entity, the completion of the Proposed Transactions may trigger certain technical provisions in agreements to which a Stagwell Entity is a party.

If such Stagwell Entity is unable to assert that such provisions should not apply, or the Company or such Stagwell Entity are unable to comply with or negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, including potentially terminating such agreements or seeking monetary damages.

Even if the Company or the applicable Stagwell Entity is able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the Combined Company.

Failure to complete the Proposed Transactions could adversely affect the market price of the Company’s Class A Shares as well as its business, financial condition and results of operations.

If the Proposed Transactions are not completed for any reason, the price of the Class A Shares may decline, or MDC’s business, financial condition and results of operations may be impacted to the extent that the market price of MDC’s shares reflects positive market assumptions that the Proposed Transactions will be completed and the related expected benefits will be realized;

based on significant expenses, such as legal, advisory and financial services which generally must be paid regardless of whether the Proposed Transactions are completed;

based on potential disruption of the business of MDC and distraction of its workforce and management team;

and the requirement in the Transaction Agreement that, under certain limited circumstances, MDC must pay Stagwell a termination fee of $5,855,000.

Investors holding the Company’s shares prior to the completion of the Proposed Transactions will, in the aggregate, have a significantly reduced ownership and voting interest in the Combined Company after the Proposed Transactions and will exercise less influence over management.

Investors holding the Company’s shares prior to the completion of the Proposed Transactions will, in the aggregate, own a significantly smaller percentage of the Combined Company after the completion of the Proposed Transactions.

On a pro forma basis (and (i) without giving effect to the conversion of any Combined Company Preferred Shares and (ii) including unvested restricted stock and restricted stock units of MDC), following the completion of the Proposed Transactions, it is anticipated that the existing holders of Class A Shares (including Stagwell) and Class B Shares will receive Combined Company Class A Common Shares and Combined Company Class B Common Shares equal to approximately 26% of the common equity of the Combined Company and Stagwell would be issued an amount of Combined Company Class C Common Shares equivalent to approximately 74% of the voting rights of the Combined Company and exchangeable, together with Stagwell OpCo Units, for Combined Company Class A Common Shares on a one-for-one basis at Stagwell’s election following a six-month holding period.

Consequently, the Company’s shareholders, collectively, will be able to exercise less influence over the management and policies of the Combined Company than they will be able to exercise over the Company’s management and policies prior to the completion of the Proposed Transactions.

However, the number of Stagwell OpCo Units, the number of Stagwell Class C Shares and the percentage of the Combined Company that Stagwell will hold following the consummation of the Proposed Transactions

will each be reduced, and the percentage of the Combined Company that existing Company shareholders will hold will be proportionally increased, if Stagwell is unable to effect the certain restructuring transactions prior to the closing of the Proposed Transactions.

The announcement and pendency of the Proposed Transactions could have an adverse effect on the stock price of the Class A Shares as well as the business, financial condition, results of operations or business prospects of MDC and Stagwell.

The announcement and pendency of the Proposed Transactions could disrupt MDC’s and Stagwell’s businesses in negative ways.

For example, customers and other third-party business partners of MDC or Stagwell may seek to terminate and/or renegotiate their relationships with MDC or Stagwell as a result of the Proposed Transactions, whether pursuant to the terms of their existing agreements with MDC and/or Stagwell or otherwise.

In addition, current and prospective employees of MDC and Stagwell may experience uncertainty regarding their future roles with the Combined Company, which might adversely affect MDC’s and Stagwell’s ability to retain, recruit and motivate key personnel.

Should they occur, any of these events could adversely affect the stock price of the Class A Shares, or harm the financial condition, results of operations or business prospects of, MDC or Stagwell.

Some of MDC’s directors and executive officers have interests in seeing the Proposed Transactions completed that may be different from, or in addition to, those of other MDC Canada Shareholders.

Certain of MDC’s directors and executive officers have interests in the Proposed Transactions that may differ from, or be in addition to, those of the Company’s shareholders generally.

These interests may present such executive officers and directors with actual or potential conflicts of interest.

These interests include, but are not limited to, the continued service of certain directors of MDC as directors of the Combined Company following the Proposed Transactions, the continued employment of all of MDC’s current executive officers by the Combined Company following the Proposed Transactions, the treatment in the Proposed Transactions of equity awards, and with respect to Mark Penn, potential receipt of distributions as a result of the Proposed Transactions and the ownership of interests in Stagwell.

The members of the MDC Special Committee and the MDC Board of Directors (with the interested directors abstaining) were aware of these interests and considered them, among others, in their approval and adoption of the Transaction Agreement and the Proposed Transactions and their recommendation that the Company’s shareholders adopt the Transaction Agreement and approve the Proposed Transactions.

MDC and Stagwell may have difficulty attracting, motivating and retaining executives and other employees in light of the Proposed Transactions.

Uncertainty about the effect of the Proposed Transactions on the employees of MDC and Stagwell may have an adverse effect on MDC and Stagwell.

This uncertainty may impair MDC’s and Stagwell’s ability to attract, retain and motivate personnel until the Proposed Transactions are completed.

Employee retention may be particularly challenging during the pendency of the Proposed Transactions, as employees may feel uncertain about their future roles with MDC or Stagwell after their combination.

If employees of MDC or Stagwell depart because of issues relating to the uncertainty or perceived difficulties of integration or a desire not to become employees of MDC after the Proposed Transactions are consummated, MDC’s ability to realize the anticipated benefits of the Proposed Transactions could be reduced.

Litigation relating to the Transactions could result in an injunction preventing the completion of the Transactions and/or substantial costs to MDC.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements like the Transaction Agreement.

Following the filing of our registration statement on Form S-4, dated February 8, 2021, three securities lawsuits have been filed against us and our directors relating to alleged omissions of material information in the Form S-4 with respect to the Transaction.

Defending against these and any additional claims can result in substantial costs and divert management time and resources.

An adverse judgment in any current or future claim could result in monetary damages, which could have a negative impact on MDC's liquidity and financial condition.

The lawsuits that have been filed to date seek, and any additional lawsuits could also seek, among other things, injunctive relief or other equitable relief, including a request enjoin the parties from consummating the Proposed Transactions.

One of the conditions to the closing of the Proposed Transaction is that no injunction by any governmental entity having jurisdiction over MDC has been entered and continues to be in effect and no law has been adopted, in either case that prohibits the closing of the Proposed Transactions.

Consequently, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Proposed Transactions, that injunction may delay or prevent the mergers from being completed within the expected time frame or at all, which may adversely affect MDC's business, financial position and results of operations.

There can be no assurance that any of the defendants will be successful in the outcome of the existing or any potential future lawsuits.

The defense or settlement of any lawsuit or claim that remains unresolved at the time the mergers are completed may adversely affect MDC's business, financial condition, results of operations and cash flows.

The COVID-19 pandemic triggered an economic crisis which may delay or prevent the consummation of the Proposed Transactions.

In March 2020, the World Health Organization declared the COVID-19 coronavirus outbreak a pandemic.

The coronavirus has spread throughout the world and has resulted in unprecedented restrictions and limitations on operations of many businesses, educational institutions and governmental entities, including in the United States and Canada.

Given the ongoing and dynamic nature of the COVID-19 crisis, it is difficult to predict the impact on the business of MDC and Stagwell, and there is no guarantee that efforts by MDC and Stagwell to address any adverse impact of COVID-19 will be effective.

If MDC or Stagwell is unable to recover from a business disruption on a timely basis, the Proposed Transactions and the Combined Company’s business and financial conditions and results of operations following the completion of the Proposed Transactions would be adversely affected.

The Proposed Transactions may also be delayed and adversely affected by the coronavirus outbreak, and become more costly.

Each of MDC and Stagwell may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect its financial condition and results of operations.

If the Proposed Transactions are consummated, the Combined Company will be subject to certain risks, including tax-related risks.

As more fully discussed in the Company’s Registration Statement on Form S-4 filed with the SEC on February 8, 2021 (the “Form S-4”), the Combined Company will be subject to certain risks, including risks related to the proposed Up-C structure, tax-related risks, risks that the expected benefits of the Proposed Transactions may not be realized, and risks related to the business of the Combined Company.

Unresolved Staff Comments

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors