424B3 1 d803939d424b3.htm 424B3 424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-199443

 

December 22, 2014

 

LOGO

   LOGO

MERGER PROPOSAL—YOUR VOTE IS VERY IMPORTANT

Dear Reynolds American Inc. and Lorillard, Inc. Shareholders:

Reynolds American Inc., referred to as RAI, and Lorillard, Inc., referred to as Lorillard, have entered into an Agreement and Plan of Merger, dated as of July 15, 2014, referred to as the merger agreement, under which a wholly owned subsidiary of RAI will be merged with and into Lorillard, and Lorillard will continue as the surviving corporation in the merger and a wholly owned subsidiary of RAI, referred to as the merger. If the merger is completed, Lorillard shareholders will receive, in exchange for each share of Lorillard common stock owned immediately prior to the merger, (1) 0.2909 of a share of RAI common stock plus (2) $50.50 in cash. Based on the number of shares of Lorillard common stock outstanding as of December 8, 2014, and the number of shares of RAI common stock outstanding as of December 20, 2014, it is expected that, immediately after completion of the merger and the related transactions described in the accompanying joint proxy statement/prospectus, former Lorillard shareholders will own approximately 15% of the outstanding shares of RAI common stock. The shares of RAI common stock are listed on the New York Stock Exchange, referred to as the NYSE, under the trading symbol “RAI,” and the shares of Lorillard common stock are listed on the NYSE under the trading symbol “LO.”

Each of RAI and Lorillard will hold a special meeting of its shareholders to vote on certain matters in connection with the proposed merger. Attendance at the special meetings will be limited as more fully described in the accompanying joint proxy statement/prospectus. Admittance tickets will be required for both special meetings.

RAI shareholders are cordially invited to attend the special meeting of RAI shareholders. The RAI special meeting will be held at 9:00 a.m. (Eastern Time), on January 28, 2015, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina 27101. At the RAI special meeting, RAI shareholders will be asked to approve the issuance of shares of RAI common stock to (1) Lorillard shareholders as consideration in the merger and (2) British American Tobacco p.l.c., referred to as BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to a Subscription and Support Agreement, dated as of July 15, 2014, referred to as the subscription agreement. The share issuance to Lorillard is referred to as the Lorillard share issuance, and the share issuance to BAT is referred to as the BAT share issuance. Collectively, the Lorillard share issuance and the BAT share issuance are referred to as the share issuance.

Lorillard shareholders are cordially invited to attend the special meeting of Lorillard shareholders. The Lorillard special meeting will be held at 10:00 a.m. (Eastern Time), on January 28, 2015, at The Ballantyne Hotel, 10000 Ballantyne Commons Parkway, Charlotte, North Carolina 28277. At the Lorillard special meeting, Lorillard shareholders will be asked to adopt the merger agreement. In addition, Lorillard shareholders will be asked to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and to approve the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

The exchange of the merger consideration for Lorillard common stock in the merger generally will be a taxable transaction for U.S. federal income tax purposes and may also be taxable under state, local and non-U.S. income and other tax laws. We encourage Lorillard shareholders to carefully review the information under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Certain U.S. Federal Income Tax Consequences of the Merger” beginning on page 161 of this joint proxy statement/prospectus for a description of certain U.S. federal income tax consequences of the merger.

We cannot complete the merger without the approval of both the Lorillard share issuance and the BAT share issuance by RAI shareholders and adoption of the merger agreement by Lorillard shareholders. It is important that your shares be represented and voted regardless of the size of your holdings. Whether or not you plan to attend the RAI special meeting or the Lorillard special meeting, we urge you to submit a proxy to have your shares voted in advance of the RAI special meeting or the Lorillard special meeting by using one of the methods described in the accompanying joint proxy statement/prospectus.

The RAI board of directors unanimously recommends that RAI shareholders vote “FOR” the issuance of shares of RAI common stock to Lorillard shareholders as consideration in the merger and “FOR” the issuance of shares of RAI common stock to BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the subscription agreement. The Lorillard board of directors unanimously recommends that Lorillard shareholders vote “FOR” the adoption of the merger agreement, “FOR” the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and “FOR” the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

The accompanying joint proxy statement/prospectus provides important information regarding the special meetings and a detailed description of the merger agreement, the merger, a number of related transactions and agreements, and the matters to be presented at the special meetings. We urge you to read the accompanying joint proxy statement/prospectus (and any documents incorporated by reference into the accompanying joint proxy statement/prospectus) carefully and in its entirety. Please pay particular attention to “Risk Factors” beginning on page 57 of the accompanying joint proxy statement/prospectus.

We hope to see you at the special meetings and look forward to the successful completion of the merger.

Sincerely,

 

LOGO

   LOGO

Thomas C. Wajnert

   Murray S. Kessler

Chairman of the Board

   Chairman, President and CEO

Reynolds American Inc.

   Lorillard, Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the transactions described in the accompanying joint proxy statement/prospectus or determined that the accompanying joint proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

The accompanying joint proxy statement/prospectus is dated December 22, 2014, and is first being mailed to RAI and Lorillard shareholders on or about December 22, 2014.


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LOGO

REYNOLDS AMERICAN INC.

401 North Main Street

P.O. Box 2990

Winston-Salem, North Carolina 27102-2990

 

 

Notice of Special Meeting of Shareholders

To be Held on January 28, 2015

 

 

December 22, 2014

To the Shareholders of Reynolds American Inc.:

A special meeting of shareholders of Reynolds American Inc., a North Carolina corporation, referred to as RAI, will be held at 9:00 a.m. (Eastern Time), on January 28, 2015, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina 27101. At the special meeting, shareholders will be asked to take action:

 

    to approve the issuance of RAI common stock, par value $0.0001 per share, to Lorillard, Inc. shareholders as consideration in the merger contemplated by the Agreement and Plan of Merger, dated as of July 15, 2014, as it may be amended from time to time, among Lorillard, Inc., a Delaware corporation, RAI and Lantern Acquisition Co., a Delaware corporation and wholly owned subsidiary of RAI (a copy of which is attached as Annex A to the accompanying joint proxy statement/prospectus), referred to as the merger agreement; and

 

    to approve the issuance of RAI common stock, par value $0.0001 per share, to British American Tobacco p.l.c., a public limited company incorporated under the laws of England and Wales, referred to as BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the Subscription and Support Agreement, dated as of July 15, 2014, as it may be amended from time to time, among BAT, RAI and Brown & Williamson Holdings, Inc., a Delaware corporation and wholly owned subsidiary of BAT (a copy of which is attached as Annex B to the accompanying joint proxy statement/prospectus), referred to as the subscription agreement.

We refer to the share issuance to Lorillard as the Lorillard share issuance and the share issuance to BAT as the BAT share issuance. Collectively, we refer to the Lorillard share issuance and the BAT share issuance as the share issuance. Approval of both the Lorillard share issuance and the BAT share issuance by RAI shareholders is a condition to the obligations of RAI and Lorillard to complete the merger.

RAI will transact no other business at the special meeting except such business as may properly be brought before the special meeting or any adjournment or postponement thereof. Please refer to the accompanying joint proxy statement/prospectus for further information with respect to the business to be transacted at the special meeting.

The RAI board of directors has fixed the close of business on December 20, 2014 as the record date for the special meeting. Only holders of record of RAI common stock as of the record date are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof.

Attendance at the special meeting will be limited to RAI shareholders as of the record date and to guests of RAI, as more fully described under “RAI Special Meeting—Date, Time and Location” beginning on page 76 of the accompanying joint proxy statement/prospectus. Admittance tickets will be required. If you are a shareholder and plan to attend, you MUST pre-register for the special meeting and request an admittance ticket no later than January 20, 2015, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-


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Salem, North Carolina 27102-2990. If your shares are not registered in your own name, evidence of your stock ownership as of December 20, 2014, must accompany your letter. You can obtain this evidence from your broker, bank, trust company or other nominee or intermediary, referred to as a nominee or intermediary, typically in the form of your most recent monthly statement. An admittance ticket will be held in your name at the registration desk, not mailed to you in advance of the special meeting. Proper identification will be required to obtain your admittance ticket at the special meeting.

We anticipate that a large number of shareholders will attend the special meeting. Seating is limited, so we suggest that you arrive early. The auditorium will open at 8:30 a.m. (Eastern Time).

Approval of the share issuance requires the affirmative vote, in person or by proxy, of a majority of the votes cast at the special meeting.

The RAI board of directors unanimously recommends that RAI shareholders vote “FOR” the issuance of shares of RAI common stock to Lorillard shareholders as consideration in the merger and “FOR” the issuance of shares of RAI common stock to BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the subscription agreement. Approval of both proposals by RAI shareholders is a condition to the obligations of RAI and Lorillard to complete the merger. BAT has committed to vote, or cause to be voted, all shares of RAI common stock beneficially owned by it to approve the share issuance and agreed, directly or indirectly through one or more of its wholly owned subsidiaries, to subscribe for and purchase a number of shares of RAI common stock such that BAT will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger.

Your vote is very important. Whether or not you expect to attend the special meeting in person, we urge you to submit a proxy as promptly as possible by (1) accessing the Internet website specified on your proxy card, (2) calling the toll-free number specified on your proxy card or (3) marking, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided, so that your shares may be represented and voted at the special meeting. If your shares are held in the name of a nominee or intermediary, please follow the instructions on the voting instruction card furnished by the record holder. For participants in RAI’s benefit plans, the proxy card will serve as voting instructions for the trustee or custodian of the relevant benefit plan.

We urge you to read the accompanying joint proxy statement/prospectus, including all documents incorporated by reference into the accompanying joint proxy statement/prospectus, and its annexes carefully and in their entirety. In particular, see “Risk Factors” beginning on page 57 of the accompanying joint proxy statement/prospectus. If you have any questions concerning the merger, the merger agreement, the share issuance, the special meeting or the accompanying joint proxy statement/prospectus, would like additional copies of the accompanying joint proxy statement/prospectus or need help submitting a proxy to have your shares of RAI common stock voted, please contact RAI’s proxy solicitor:

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

Telephone Toll-Free: (800) 322-2885

Telephone Call Collect: (212) 929-5500

Email: proxy@mackenziepartners.com

By Order of the Board of Directors,

LOGO

McDara P. Folan, III

Secretary


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LOGO

LORILLARD, INC.

714 Green Valley Road

Greensboro, North Carolina 27408

 

 

Notice of Special Meeting of Shareholders

To be Held on January 28, 2015

 

 

December 22, 2014

To the Shareholders of Lorillard, Inc.:

A special meeting of shareholders of Lorillard, Inc., a Delaware corporation, referred to as Lorillard, will be held at 10:00 a.m. (Eastern Time), on January 28, 2015, at The Ballantyne Hotel, 10000 Ballantyne Commons Parkway, Charlotte, North Carolina 28277. At the special meeting, shareholders will be asked to take action:

 

    to adopt the Agreement and Plan of Merger, dated as of July 15, 2014, as it may be amended from time to time, referred to as the merger agreement, among Lorillard, Reynolds American Inc., a North Carolina corporation, referred to as RAI, and Lantern Acquisition Co., a Delaware corporation and wholly owned subsidiary of RAI, pursuant to which Lantern Acquisition Co. will be merged with and into Lorillard, and Lorillard will continue as the surviving corporation in the merger and a wholly owned subsidiary of RAI (which transaction is referred to as the merger) (a copy of the merger agreement is attached as Annex A to the accompanying joint proxy statement/prospectus);

 

    to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger; and

 

    to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

Lorillard will transact no other business at the special meeting except such business as may properly be brought before the special meeting or any adjournment or postponement thereof. Please refer to the accompanying joint proxy statement/prospectus for further information with respect to the business to be transacted at the special meeting.

The Lorillard board of directors has fixed the close of business on December 8, 2014 as the record date for the special meeting. Only shareholders of record as of the record date are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof.

Admission to the special meeting will be by ticket only. If you are a registered shareholder planning to attend the special meeting, please check the appropriate box on the proxy card and retain the bottom portion of the card as your admission ticket. If your shares are held through an intermediary, such as a broker, bank, trust company or other nominee or intermediary, referred to as a nominee or intermediary, please follow the instructions under “Lorillard Special Meeting—Date, Time and Location” beginning on page 83 of the accompanying joint proxy statement/prospectus to obtain a ticket.

Adoption of the merger agreement requires the affirmative vote, in person or by proxy, of holders of a majority of the outstanding shares of Lorillard common stock entitled to vote as of the record date for the special meeting. The approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger, and the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement, each require the affirmative vote, in person or by proxy, of holders of a majority of the shares of Lorillard common stock represented at the special meeting and entitled to vote thereon.


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The Lorillard board of directors unanimously recommends that Lorillard shareholders vote “FOR” the adoption of the merger agreement, “FOR” the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and “FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

Your vote is very important. Whether or not you expect to attend the special meeting in person, we urge you to submit a proxy as promptly as possible by (1) accessing the Internet website specified on your proxy card, (2) calling the toll-free number specified on your proxy card or (3) marking, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided, so that your shares may be represented and voted at the special meeting. If your shares are held in the name of a nominee or intermediary, please follow the instructions on the voting instruction card furnished by the record holder.

We urge you to read the accompanying joint proxy statement/prospectus, including all documents incorporated by reference into the accompanying joint proxy statement/prospectus, and its annexes carefully and in their entirety. In particular, see “Risk Factors” beginning on page 57 of the accompanying joint proxy statement/prospectus. If you have any questions concerning the merger, the merger agreement, the non-binding, advisory vote on the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger, the special meeting or the accompanying joint proxy statement/prospectus, would like additional copies of the accompanying joint proxy statement/prospectus or need help submitting a proxy to have your shares of Lorillard common stock voted, please contact Lorillard’s proxy solicitor:

Georgeson Inc.

480 Washington Blvd., 26th Floor,

Jersey City, New Jersey 07310

Telephone Toll-Free: (800) 279-6913

Email: lorillard@georgeson.com

By Order of the Board of Directors,

LOGO

Ronald S. Milstein

Executive Vice President, Legal and External Affairs,

General Counsel and Secretary


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ADDITIONAL INFORMATION

The accompanying joint proxy statement/prospectus incorporates important business and financial information about RAI and Lorillard from documents that are not included in or delivered with the accompanying joint proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain documents incorporated by reference into the accompanying joint proxy statement/prospectus (other than certain exhibits or schedules to these documents) by requesting them in writing, by email or telephone, from RAI or Lorillard at the following addresses and telephone numbers:

 

Reynolds American Inc.

P.O. Box 2990

Winston-Salem, North Carolina 27102-2990

Attention: Investor Relations

Email: raiinvestorrelations@reynoldsamerican.com

Telephone: (336) 741-2000

  

Lorillard, Inc.

P.O. Box 10529

Greensboro, North Carolina 27408-0529

Attention: Investor Relations

Email: investorrelations@lortobco.com

Telephone: (336) 335-7000

In addition, if you have questions about the merger or the accompanying joint proxy statement/prospectus, would like additional copies of the accompanying joint proxy statement/prospectus or need to obtain proxy cards or other information related to the proxy solicitation, please contact MacKenzie Partners, Inc., RAI’s proxy solicitor, toll-free at (800) 322-2885 or collect at (212) 929-5500, or Georgeson Inc., Lorillard’s proxy solicitor, toll-free at (800) 279-6913. You will not be charged for any of these documents.

If you would like to request documents, please do so no later than five business days before the date of the RAI special meeting of shareholders or the Lorillard special meeting of shareholders (which is January 21, 2015), to receive them before the respective special meeting.

See “Where You Can Find More Information” beginning on page 260 of the accompanying joint proxy statement/prospectus for further information.


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ABOUT THIS JOINT PROXY STATEMENT/PROSPECTUS

This joint proxy statement/prospectus, which forms part of a registration statement on Form S-4 filed by RAI with the U.S. Securities and Exchange Commission, constitutes a prospectus of RAI under Section 5 of the Securities Act of 1933, as amended, with respect to the shares of RAI common stock to be issued to Lorillard shareholders as consideration in the merger and to BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the subscription agreement. This joint proxy statement/prospectus also constitutes a joint proxy statement for both RAI and Lorillard under Section 14(a) of the Securities Exchange Act of 1934, as amended. In addition, it constitutes a notice of meeting with respect to the special meeting of RAI shareholders and a notice of meeting with respect to the special meeting of Lorillard shareholders.

You should rely only on the information contained in or incorporated by reference into this joint proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated December 22, 2014. You should not assume that the information contained in this joint proxy statement/prospectus is accurate as of any date other than that date. You should not assume that the information incorporated by reference into this joint proxy statement/prospectus is accurate as of any date other than the date of such information. Neither our mailing of this joint proxy statement/prospectus to RAI shareholders or Lorillard shareholders nor the issuance by RAI of shares of RAI common stock pursuant to the share issuance will create any implication to the contrary.

This joint proxy statement/prospectus shall not constitute an offer to sell, or the solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation. Information contained in this joint proxy statement/prospectus regarding RAI has been provided by RAI and information contained in this joint proxy statement/prospectus regarding Lorillard has been provided by Lorillard.

Unless otherwise indicated or as the context otherwise requires, all references in this joint proxy statement/prospectus to:

 

    “asset purchase agreement” refer to the Asset Purchase Agreement, dated as of July 15, 2014, as it may be amended from time to time, among RAI, Imperial Sub and Imperial, a copy of which is filed as an exhibit to the registration statement of which this joint proxy statement/prospectus forms a part and is incorporated herein by reference;

 

    “assignment and assumption agreement” refer to the Assignment and Assumption Agreement, in customary form, to be entered into at the closing of the divestiture by RAI (and certain of its affiliates), Lorillard (and certain of its affiliates) and Imperial Sub (or an affiliate);

 

    “B&W” refer to Brown & Williamson Holdings, Inc., a Delaware corporation and wholly owned subsidiary of BAT;

 

    “Barclays” refer to Barclays Capital Inc.;

 

    “BAT” refer to British American Tobacco p.l.c., a public limited company incorporated under the laws of England and Wales;

 

    “BAT share issuance” refer to the issuance of RAI common stock to BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the subscription agreement;

 

    “bridge facility” refer to the Bridge Credit Agreement, dated as September 23, 2014, among RAI, certain of RAI’s subsidiaries as guarantors, JPMorgan Chase Bank, N.A., Citibank, N.A. and the other lenders and financial institutions party thereto, providing for a 364-day senior unsecured term loan bridge facility in an aggregate principal amount of up to $9 billion available for financing part of the cash portion of the merger consideration, and fees and expenses in connection with the transactions contemplated by the merger agreement;


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    “commitment letter” refer to the Commitment Letter, dated July 15, 2014, among RAI, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and Citigroup Global Markets Inc., relating to the commitment to provide the bridge facility;

 

    “Centerview” refer to Centerview Partners LLC;

 

    “divestiture” refer to the transactions contemplated by the asset purchase agreement and the transfer agreement, pursuant to which the transferred assets will be acquired by Imperial Sub for an aggregate purchase price of approximately $7.1 billion;

 

    “DGCL” refer to the General Corporation Law of the State of Delaware;

 

    “DOJ” refer to the U.S. Department of Justice;

 

    “equity award consideration” refer to the sum of (1) the cash portion of the merger consideration and (2) an amount equal to the product of (a) the stock portion of the merger consideration and (b) the volume weighted average of the per share price of RAI common stock on the NYSE (as reported by Bloomberg L.P. or, if not reported therein, in another authoritative source mutually selected by RAI and Lorillard) for the five consecutive trading days ending on the third business day prior to the date of the effective time of the merger;

 

    “Exchange Act” refer to the Securities Exchange Act of 1934, as amended;

 

    “exchange agent” refer to Computershare Inc. and its subsidiary Computer Share Trust Company, N.A.;

 

    “FDA” refer to the U.S. Food and Drug Administration;

 

    “FTC” refer to the U.S. Federal Trade Commission;

 

    “GAAP” refer to U.S. Generally Accepted Accounting Principles;

 

    “governance agreement” refer to the governance agreement, dated as of July 30, 2004, as amended, among RAI, BAT and B&W;

 

    “HSR” or “HSR Act” refer to the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;

 

    “Imperial” refer to Imperial Tobacco Group PLC, a public limited company incorporated under the laws of England and Wales;

 

    “Imperial Sub” refer to Lignum-2, L.L.C., a Texas limited liability company and wholly owned subsidiary of Imperial;

 

    “intellectual property license agreement” refer to the Intellectual Property License Agreement to be entered into at the closing of the divestiture by RAI (or an affiliate) and Imperial Sub (or an affiliate), pursuant to which RAI and its affiliates will license from Imperial Sub and its affiliates certain intellectual property following the closing of the divestiture;

 

    “Lazard” refer to Lazard Frères & Co. LLC;

 

    “Lorillard” refer to Lorillard, Inc., a Delaware corporation;

 

    “Lorillard by-laws” refer to the Lorillard Amended and Restated By-Laws, amended and effective as of May 14, 2013;

 

    “Lorillard certificate of incorporation” refer to the Amended and Restated Certificate of Incorporation of Lorillard, amended and effective as of May 14, 2013;

 

    “Lorillard common stock” refer to Lorillard common stock, par value $0.01 per share;

 

    “Lorillard record date” refer, as to the Lorillard shareholders entitled to receive notice of, and to vote at, the Lorillard special meeting, the close of business on December 8, 2014;


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    “Lorillard share issuance” refer to the issuance of RAI common stock to Lorillard shareholders as consideration in the merger;

 

    “Lorillard transferred assets” refer to certain assets currently owned by Lorillard subsidiaries, related to the “e-vapor” brand blu (including SKYCIG) and the cigarette brand Maverick, as well as Lorillard’s owned and leased real property, including its manufacturing, research and development facilities and headquarters in Greensboro, North Carolina and the tobacco receiving and storage facilities in Danville, Virginia, and the transferred employees;

 

    “menthol regulatory action” refer to any law, judgment or action enacted, promulgated, proposed or threatened by the FDA or any other governmental entity that could have the effect of banning or materially restricting the use of menthol in any product sold or distributed by RAI or Lorillard or their respective subsidiaries;

 

    “merger” refer to the merger of Merger Sub with and into Lorillard; as a result of the merger, the separate corporate existence of Merger Sub will cease, and Lorillard will continue as the surviving corporation in the merger and a wholly owned subsidiary of RAI. At the effective time of the merger, all of the property, rights, privileges, immunities, powers and franchises of Lorillard and Merger Sub will vest in Lorillard as the surviving corporation, and all debts, liabilities and duties of Lorillard and Merger Sub will become the debts, liabilities and duties of Lorillard as the surviving corporation;

 

    “merger agreement” refer to the Agreement and Plan of Merger, dated as of July 15, 2014, as it may be amended from time to time, among Lorillard, RAI and Merger Sub, a copy of which is attached as Annex A to this joint proxy statement/prospectus;

 

    “merger consideration” refer to the consideration, per share of Lorillard common stock, to be received by Lorillard shareholders in the merger, consisting of:

 

    0.2909 of a fully paid and nonassessable share of RAI common stock, plus

 

    $50.50 in cash;

 

    “Merger Sub” refer to Lantern Acquisition Co., a Delaware corporation and wholly owned subsidiary of RAI;

 

    “MSA” refer to the Master Settlement Agreement, dated as of November 23, 1998, among 46 U.S. states, the District of Columbia and five U.S. territories listed on the signature pages thereto, Phillip Morris Incorporated, RJR Tobacco, B&W, Lorillard Tobacco Company and various subsequent participating manufacturers listed on the National Association of Attorneys General’s list of “Participating Manufacturers,” as amended, supplemented or replaced;

 

    “NCBCA” refer to the North Carolina Business Corporation Act;

 

    “NYSE” refer to the New York Stock Exchange;

 

    “RAI” refer to Reynolds American Inc., a North Carolina corporation;

 

    “RAI articles of incorporation” refer to the Amended and Restated Articles of Incorporation of RAI, as amended through May 3, 2012;

 

    “RAI bylaws” refer to the RAI Amended and Restated Bylaws, dated December 5, 2013;

 

    “RAI common stock” refer to RAI common stock, par value $0.0001 per share;

 

    “RAI record date” refer, as to the RAI shareholders entitled to receive notice of, and to vote at, the RAI special meeting, the close of business on December 20, 2014;

 

    “RAI’s subsidiaries’ Puerto Rico business” refer to the distribution, marketing, advertising, sale and service, by certain RAI subsidiaries, in Puerto Rico of the WINSTON, KOOL and SALEM cigarette brands;


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    “RAI transferred assets” refer to certain assets currently owned by RAI subsidiaries, related to the cigarette brands WINSTON, KOOL and SALEM (and under certain circumstances, DORAL) and certain assets related to RAI’s subsidiaries’ Puerto Rico business;

 

    “reciprocal manufacturing agreement” refer to the Reciprocal Manufacturing Agreement to be entered into at the closing of the divestiture by RJR Tobacco and Imperial Sub, a copy of which is attached as Exhibit G to the asset purchase agreement;

 

    “retained Lorillard employees” refer to those Lorillard employees whom RAI and Imperial Sub mutually agree shall be retained by RAI or its subsidiaries following the completion of the merger, and will not be offered employment at Imperial Sub;

 

    “RJR Tobacco” refer to R. J. Reynolds Tobacco Company, a North Carolina corporation and wholly owned subsidiary of RAI;

 

    “route to market agreement” refer to the Route to Market Agreement, dated as of July 15, 2014, as it may be amended from time to time, between RAI and Imperial Sub, a copy of which is attached as Exhibit C to the asset purchase agreement;

 

    “SEC” refer to the U.S. Securities and Exchange Commission;

 

    “Securities Act” refer to the Securities Act of 1933, as amended;

 

    “share issuance” refer to the issuance of RAI common stock pursuant to the Lorillard share issuance and the BAT share issuance;

 

    “share purchase” refer to the subscription and purchase by BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the subscription agreement of a number of shares of RAI common stock such that BAT will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger;

 

    “state settlement agreements” refer to (1) the MSA and (2) the other settlement agreements entered into prior to the MSA between major U.S. cigarette manufacturers and the states of Mississippi, Florida, Texas and Minnesota;

 

    “subscription agreement” refer to the Subscription and Support Agreement, dated as of July 15, 2014, as it may be amended from time to time, among BAT, RAI and B&W, a copy of which is attached as Annex B to this joint proxy statement/prospectus;

 

    “transfer agreement” refer to the Transfer Agreement, dated as of July 15, 2014, as it may be amended from time to time, between Lorillard and Imperial Sub, a copy of which is attached as Exhibit I to the asset purchase agreement;

 

    “transferred assets” refer to the RAI transferred assets and Lorillard transferred assets;

 

    “transferred employees” refer to the Lorillard employees, other than the retained Lorillard employees, and the employees employed in connection with RAI’s subsidiaries’ Puerto Rico business, who accept the offers of employment made to them by Imperial Sub or one of its affiliates prior to the closing of the merger; and

 

    “transition services agreement” refer to the Transition Services Agreement to be entered into at the closing of the divestiture by RAI (or an affiliate) and Imperial Sub (or an affiliate), pursuant to which RAI and Imperial Sub and their respective affiliates will provide certain agreed upon transitional services to the other party and its affiliates following the closing of the divestiture.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Questions and Answers

     1   

Summary

     18   

The Companies

     18   

RAI Special Meeting

     19   

Lorillard Special Meeting

     21   

The Merger and the Merger Agreement

     22   

What Lorillard Shareholders Will Receive in the Merger

     23   

RAI’s Reasons for the Merger; Recommendations of the RAI Board of Directors

     23   

Lorillard’s Reasons for the Merger; Recommendations of the Lorillard Board of Directors

     23   

Opinion of RAI’s Financial Advisor

     24   

Opinions of Lorillard’s Financial Advisors

     24   

Financing of the Merger

     26   

Interests of Certain RAI Directors and Officers

     26   

Interests of Certain Lorillard Directors and Officers

     27   

Board of Directors Following the Merger

     29   

Regulatory Approvals Required for the Merger

     29   

Certain U.S. Federal Income Tax Consequences of the Merger

     30   

Accounting Treatment

     30   

Treatment of Lorillard Equity Awards

     30   

Listing of Shares of RAI Common Stock and Delisting and Deregistration of Lorillard Common Stock

     31   

Litigation Relating to the Merger

     31   

No Solicitation of Alternative Proposals

     31   

Completion of the Merger is Subject to Certain Conditions

     32   

Termination of the Merger Agreement

     33   

The Share Purchase and the Subscription Agreement

     34   

The Divestiture and the Asset Purchase Agreement and Transfer Agreement

     36   

Termination Fees

     40   

Comparison of Shareholder Rights

     41   

Appraisal Rights

     41   

Organizational Structure of RAI Following Completion of the Merger and Divestiture

     42   

Selected Historical Consolidated Financial Data of RAI

     43   

Selected Historical Consolidated Financial Data of Lorillard

     46   

 

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TABLE OF CONTENTS—(Continued)

 

     Page  

Selected RAI Unaudited Pro Forma Condensed Combined Financial Data

     49   

Comparative Historical and Unaudited Pro Forma Per Share Data

     50   

Comparative Per Share Market Price and Dividend Information

     52   

Cautionary Information Regarding Forward-Looking Statements

     55   

Risk Factors

     57   

Risk Factors Relating to the Merger and Divestiture

     57   

Risk Factors Relating to the Combined Company

     68   

Risk Factors Relating to RAI and Lorillard

     73   

The Companies

     74   

RAI Special Meeting

     76   

Date, Time and Location

     76   

Purpose

     77   

Recommendations of the RAI Board of Directors

     77   

RAI Record Date; Outstanding Shares; Shareholders Entitled to Vote

     77   

Quorum

     77   

Required Vote

     78   

Share Ownership of and Voting by RAI Directors and Executive Officers

     78   

Voting of Shares

     79   

Revocability of Proxies; Changing Your Vote

     80   

Solicitation of Proxies; Expenses of Solicitation

     80   

Householding

     80   

Adjournment

     81   

Tabulation of Votes; Results

     81   

Confidentiality

     81   

Other Information

     81   

Assistance

     82   

Lorillard Special Meeting

     83   

Date, Time and Location

     83   

Purpose

     83   

Recommendations of the Lorillard Board of Directors

     84   

Lorillard Record Date; Outstanding Shares; Shareholders Entitled to Vote

     84   

Quorum

     84   

Required Vote

     85   

 

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TABLE OF CONTENTS—(Continued)

 

     Page  

Share Ownership of and Voting by Lorillard Directors and Executive Officers

     85   

Voting of Shares

     85   

Revocability of Proxies; Changing Your Vote

     87   

Solicitation of Proxies; Expenses of Solicitation

     87   

Householding

     87   

Adjournment

     87   

Tabulation of Votes; Results

     88   

Other Information

     88   

Assistance

     88   

RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement

     89   

General

     89   

Background of the Merger

     90   

RAI’s Reasons for the Merger; Recommendations of the RAI Board of Directors

     114   

Lorillard’s Reasons for the Merger; Recommendation of the Lorillard Board of Directors

     117   

Opinion of RAI’s Financial Advisor

     123   

Opinions of Lorillard’s Financial Advisors

     131   

RAI Unaudited Prospective Financial Information

     145   

Lorillard Unaudited Prospective Financial Information

     146   

Financing of the Merger

     149   

Interests of Certain RAI Directors and Officers

     151   

Interests of Certain Lorillard Directors and Officers

     151   

Certain Relationships between RAI and Lorillard

     158   

Board of Directors Following the Merger

     159   

Regulatory Approvals Required for the Merger

     159   

Certain U.S. Federal Income Tax Consequences of the Merger

     161   

Accounting Treatment

     164   

Exchange of Shares in the Merger

     164   

Treatment of Lorillard Equity Awards

     165   

Dividends and Share Repurchases

     166   

Listing of Shares of RAI Common Stock and Delisting and Deregistration of Lorillard Common Stock

     166   

Appraisal Rights

     166   

Combined Company Headquarters

     167   

 

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TABLE OF CONTENTS—(Continued)

 

     Page  

Litigation Relating to the Merger

     167   

The Merger Agreement

     168   

Terms of the Merger

     168   

Closing of the Merger

     168   

Merger Consideration

     169   

Representations and Warranties

     169   

Material Adverse Effect

     171   

Conduct of Business

     173   

No Solicitation of Alternative Proposals

     176   

Recommendations of the RAI Board of Directors

     178   

Recommendation of the Lorillard Board of Directors

     179   

Efforts to Obtain Required Shareholder Votes

     181   

Efforts to Complete the Merger

     181   

Indemnification and Insurance

     184   

Financing

     184   

Employee Matters

     184   

RAI Board of Directors Following the Merger

     185   

Termination Fee under the Asset Purchase Agreement

     185   

Matters Relating to the Asset Purchase Agreement

     185   

Other Covenants and Agreements

     186   

Conditions to the Merger

     186   

Termination of the Merger Agreement

     187   

Expenses and Termination Fees

     188   

Governance Agreement

     189   

Amendments, Extensions and Waivers

     189   

No Third Party Beneficiaries

     190   

Specific Performance

     190   

Governing Law

     190   

The Subscription Agreement

     191   

Share Purchase Commitment

     191   

Representations and Warranties

     192   

Covenants

     192   

BAT Voting Commitment

     193   

 

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TABLE OF CONTENTS—(Continued)

 

     Page  

Amendments to the Asset Purchase Agreement and Merger Agreement

     193   

Conditions to Closing the Share Purchase

     193   

Termination of the Subscription Agreement

     194   

Lorillard Rights Under the Subscription Agreement

     195   

Amendments, Extensions and Waivers

     195   

No Third Party Beneficiaries

     195   

Specific Performance

     195   

Governing Law

     196   

The Divestiture

     197   

The Asset Purchase Agreement and Transfer Agreement

     197   

The Route to Market Agreement

     211   

The Reciprocal Manufacturing Agreement

     211   

Lorillard Proposal II: Non-Binding, Advisory Vote on Compensation

     213   

Lorillard Proposal III: Adjournment of Lorillard Special Meeting

     214   

RAI Unaudited Pro Forma Condensed Combined Financial Statements

     215   

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

     221   

Description of RAI Capital Stock

     230   

Comparison of Shareholder Rights

     235   

Governance Agreement

     248   

Appraisal Rights

     253   

Legal Matters

     258   

Experts

     258   

Future Shareholder Proposals

     259   

Where You Can Find More Information

     260   
ANNEXES   
Annex A: Merger Agreement      A-1   
Annex B: Subscription Agreement      B-1   
Annex C: Opinion of Lazard      C-1   
Annex D: Opinion of Barclays      D-1   
Annex E: Opinion of Centerview      E-1   
Annex F: DGCL Section 262      F-1   

 

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QUESTIONS AND ANSWERS

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, share issuance and matters to be addressed at the special meetings. These questions and answers may not address all questions that may be important to RAI and Lorillard shareholders. To better understand these matters, and for a description of the legal terms governing the merger and share issuance, you should carefully read this entire joint proxy statement/prospectus, including the attached annexes, as well as the documents that have been incorporated by reference into this joint proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 260 of this joint proxy statement/prospectus.

 

Q: Why am I receiving this joint proxy statement/prospectus?

 

A: RAI and Lorillard have agreed to a merger, pursuant to which Lorillard will become a wholly owned subsidiary of RAI and will no longer be a publicly held corporation. If the merger is completed, each share of Lorillard common stock (other than treasury shares held by Lorillard and any shares of Lorillard common stock owned by any Lorillard subsidiary, RAI or Merger Sub or shares of Lorillard common stock owned by Lorillard shareholders who have properly made and not withdrawn a demand for appraisal rights pursuant to Section 262 of the DGCL) automatically will be converted into the right to receive the merger consideration, consisting of (1) 0.2909 of a fully paid and nonassessable share of RAI common stock plus (2) $50.50 in cash. In order to complete the merger, RAI shareholders must approve the share issuance, consisting of the issuance of shares of RAI common stock to (a) Lorillard shareholders as consideration in the merger, referred to as the Lorillard share issuance, and (b) BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the subscription agreement, referred to as the BAT share issuance, and Lorillard shareholders must adopt the merger agreement.

RAI is holding a special meeting of shareholders to obtain the shareholder approval necessary to approve the share issuance, which will require the approval of both the Lorillard share issuance and the BAT share issuance.

Lorillard is holding a special meeting of shareholders to obtain the shareholder approval necessary to adopt the merger agreement. In addition, Lorillard shareholders will also be asked to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and to approve the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement. Lorillard’s named executive officers are identified under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Interests of Certain Lorillard Directors and Officers” beginning on page 151 of this joint proxy statement/prospectus.

This joint proxy statement/prospectus serves as both a joint proxy statement of RAI and Lorillard and a prospectus of RAI in connection with the merger.

Your vote is very important. We encourage you to submit a proxy to have your shares of RAI or Lorillard common stock voted as soon as possible.

 

Q: What will Lorillard shareholders receive in the merger?

 

A: If the merger is completed, each share of Lorillard common stock (other than treasury shares held by Lorillard and any shares of Lorillard common stock owned by any Lorillard subsidiary, RAI or Merger Sub or shares of Lorillard common stock owned by Lorillard shareholders who have properly made and not withdrawn a demand for appraisal rights pursuant to Section 262 of the DGCL) automatically will be converted into the right to receive the merger consideration, consisting of (1) 0.2909 of a fully paid and nonassessable share of RAI common stock plus (2) $50.50 in cash. No fractional shares of RAI common stock will be issued in the merger, and Lorillard shareholders will receive cash in lieu of any fractional shares.

 

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Based on the closing price of a share of RAI common stock on the NYSE on July 14, 2014, the last trading day before the public announcement of the merger agreement, the merger consideration represented approximately $68.88 in value per share of Lorillard common stock. Based on the closing price of a share of RAI common stock on the NYSE on December 18, 2014, the most recent practicable trading day prior to the date of this joint proxy statement/prospectus, the merger consideration represented approximately $69.53 in value for each share of Lorillard common stock. Because RAI will issue a fixed number of shares of RAI common stock in exchange for each share of Lorillard common stock, the value of the merger consideration that Lorillard shareholders will receive in the merger will depend on the market price of shares of RAI common stock at the time the merger is completed. As a result, the value of the merger consideration that Lorillard shareholders will receive upon completion of the merger could be greater than, less than or the same as the value of the merger consideration on the date of this joint proxy statement/prospectus or at the time of the RAI or Lorillard special meetings.

 

Q: What happens if the merger is not completed?

 

A: If the merger is not completed for any reason, Lorillard shareholders will not receive any consideration for their shares of Lorillard common stock, and Lorillard will remain an independent public company with Lorillard common stock being traded on the NYSE.

 

Q: If I am a Lorillard shareholder, how will I receive the merger consideration to which I am entitled?

 

A: After receiving the proper documentation from you, following the effective time of the merger, the exchange agent will forward to you the RAI common stock, the cash portion of the merger consideration and any cash in lieu of fractional shares to which you are entitled. For additional information about the exchange of shares of Lorillard common stock for shares of RAI common stock and cash, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Exchange of Shares in the Merger” beginning on page 164 of this joint proxy statement/prospectus.

 

Q: When and where will the special meetings be held?

 

A: The RAI special meeting will be held at 9:00 a.m. (Eastern Time), on January 28, 2015, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina 27101.

The Lorillard special meeting will be held at 10:00 a.m. (Eastern Time), on January 28, 2015, at The Ballantyne Hotel, 10000 Ballantyne Commons Parkway, Charlotte, North Carolina 28277.

 

Q: Who is entitled to vote at the special meetings?

 

A: Only holders of record of RAI common stock as of the RAI record date, the close of business on December 20, 2014, are entitled to receive notice of, and to vote at, the RAI special meeting and any adjournment or postponement thereof. As of the RAI record date, there were 531,283,513 shares of RAI common stock outstanding. Each outstanding share of RAI common stock is entitled to one vote.

Only holders of record of Lorillard common stock as of the Lorillard record date, the close of business on December 8, 2014, are entitled to vote at the Lorillard special meeting and any adjournment or postponement thereof. As of the Lorillard record date, there were 360,028,072 shares of Lorillard common stock outstanding. Each outstanding share of Lorillard common stock is entitled to one vote.

 

Q: Who may attend the RAI special meeting?

 

A:

Attendance at the RAI special meeting will be limited to RAI shareholders as of the RAI record date and to pre-approved guests of RAI. All shareholder guests must be pre-approved by RAI and will be limited to

 

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  spouses, persons required for medical assistance and properly authorized representatives of RAI shareholders as of the RAI record date. Admittance tickets will be required to attend the RAI special meeting. If you are a shareholder and plan to attend, you MUST pre-register and request an admittance ticket for you (and any guest for whom you are requesting pre-approval) no later than January 20, 2015, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990.

If your shares are not registered in your own name, evidence of your stock ownership as of the RAI record date must accompany your letter. You can obtain this evidence from your broker, bank, trust company or other nominee or intermediary, referred to as a nominee or intermediary, typically in the form of your most recent monthly statement. An admittance ticket will be held in your name at the registration desk—not mailed to you in advance of the RAI special meeting. Proper identification will be required to obtain your admittance ticket at the RAI special meeting.

The RAI special meeting is a private business meeting. In accordance with the RAI bylaws and North Carolina law, RAI’s chairman of the board of directors has the right and authority to adjourn or postpone the RAI special meeting and to determine and maintain the rules, regulations and procedures for the conduct of the RAI special meeting, including, but not limited to, maintaining order and the safety of those in attendance, dismissing business not properly submitted, opening and closing the polls for voting and limiting time allowed for discussion of the business at the RAI special meeting. Failure to abide by the RAI special meeting rules will not be tolerated and may result in expulsion from the RAI special meeting. A copy of the RAI special meeting rules will be provided to all properly pre-registered shareholders and guests with their admittance ticket. Cameras, recording devices and other electronic devices will not be permitted at the RAI special meeting.

RAI anticipates that a large number of shareholders will attend the RAI special meeting. Seating is limited, so RAI suggests you arrive early. The auditorium will open at 8:30 a.m. (Eastern Time).

If you have a disability, RAI can provide reasonable assistance to help you participate in the RAI special meeting. If you plan to attend the RAI special meeting and require assistance, please write or call RAI’s Office of the Secretary no later than January 27, 2015, at P.O. Box 2990, Winston-Salem, North Carolina 27102-2990, telephone number (336) 741-2000.

 

Q: Who may attend the Lorillard special meeting?

 

A: Attendance at the Lorillard special meeting will be limited to Lorillard shareholders as of the Lorillard record date, their authorized representatives and Lorillard guests. Registration and seating for the Lorillard special meeting on January 28, 2015 will begin at 9:00 a.m. (Eastern Time). Admission will be by ticket only. For registered shareholders, the bottom portion of the proxy card enclosed with this joint proxy statement/prospectus is the Lorillard special meeting ticket. If you are a beneficial owner of Lorillard common stock and hold your shares in “street name,” or through a nominee or intermediary, you should request tickets in writing from Lorillard, Inc., Attention: Investor Relations, 714 Green Valley Road, Greensboro, North Carolina 27408, and include proof of ownership, such as a bank or brokerage firm account statement or letter from the nominee or intermediary holding your stock, confirming your beneficial ownership. Lorillard shareholders who do not obtain tickets in advance may obtain them on the Lorillard special meeting date at the registration desk upon verifying their stock ownership as of the record date. In accordance with Lorillard’s security procedures, all persons attending the Lorillard special meeting must present a picture identification, such as a driver’s license or passport, along with their admission ticket or proof of beneficial ownership in order to gain admission. Admission to the Lorillard special meeting will be expedited if tickets are obtained in advance. Tickets may be issued to others at Lorillard’s discretion. Cameras, recording devices and other electronic devices will not be permitted at the Lorillard special meeting.

 

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Q: What are RAI shareholders being asked to vote on?

 

A: RAI shareholders are being asked to approve the share issuance, specifically to vote on the following two proposals:

 

    to approve the Lorillard share issuance; and

 

    to approve the BAT share issuance.

Approval of both the Lorillard share issuance and the BAT share issuance by RAI shareholders is a condition to the obligations of RAI and Lorillard to complete the merger.

Under North Carolina law, the sale or disposition of all, or substantially all, of a corporation’s property otherwise than in the usual and regular course of business requires the approval of such corporation’s shareholders. The property to be sold in the divestiture does not constitute all, or substantially all, of RAI’s property. As a result, RAI shareholders are not entitled to vote on the divestiture, and no vote with respect to the divestiture is being solicited by RAI.

 

Q: What are Lorillard shareholders being asked to vote on?

 

A: Lorillard shareholders are being asked to vote on the following proposals:

 

    to adopt the merger agreement, pursuant to which Merger Sub will be merged with and into Lorillard; as a result of the merger, the separate corporate existence of Merger Sub will cease, and Lorillard will continue as the surviving corporation in the merger and a wholly owned subsidiary of RAI;

 

    to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger; and

 

    to approve the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

The adoption of the merger agreement by Lorillard shareholders is a condition to the obligations of RAI and Lorillard to complete the merger. The approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger is not a condition to the obligations of RAI or Lorillard to complete the merger. The approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement also is not a condition to the obligations of RAI or Lorillard to complete the merger.

Lorillard shareholders are not entitled to vote on the divestiture, and no vote with respect to the divestiture is being solicited by Lorillard.

 

Q: Are there any important risks about the merger or RAI’s business of which I should be aware?

 

A: Yes, there are important risks involved. Before making any decision on whether and how to vote, RAI and Lorillard urge you to read carefully and in its entirety “Risk Factors” beginning on page 57 of this joint proxy statement/prospectus.

 

Q: What uncertainties and risks did the RAI board of directors consider in connection with the merger?

 

A: The RAI board of directors considered a number of uncertainties and risks in its deliberations concerning the merger and the other transactions contemplated by the merger agreement, including the following (not necessarily in order of relative importance):

 

    the fact that the merger agreement provides for a fixed exchange ratio and that no adjustment will be made with respect to the merger consideration to be received by Lorillard shareholders in the merger as a result of a possible increase in the trading price of RAI’s common stock following the announcement of the entry into the merger agreement;

 

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    the risk that the merger might not be completed in a timely manner or that the closing of the merger might not occur despite the companies’ efforts;

 

    the fact that RAI will incur substantial additional indebtedness in connection with the merger;

 

    the potential length of the regulatory approval process and the related period of time during which RAI will be subject to the restrictions in the merger agreement;

 

    the possibility that regulatory or governmental authorities might seek to impose burdensome conditions in connection with granting approval or clearance of the merger or may otherwise seek to prevent or delay the merger;

 

    that following completion of the merger a substantial portion of RAI’s sales will be attributable to products that contain menthol and the risk that any action could be taken by the FDA or other governmental authority that could have the effect of banning or materially restricting the use of menthol in tobacco products;

 

    the impact of the divestiture on the brands and assets to be divested to Imperial Sub pursuant to the asset purchase agreement;

 

    the fact that the DORAL brand may be required to be included as part of the divestiture under certain circumstances;

 

    the ownership dilution to current RAI shareholders as a result of the share issuance;

 

    the risks relating to uncertainties and inefficiencies that might result from reconfigurations to RAI’s subsidiaries’ portfolio of brands;

 

    the scope of RAI’s commitments to take certain actions and agree to certain conditions to obtain required regulatory approvals;

 

    the risk that Imperial shareholder approval is not obtained and an alternative divestiture partner is required;

 

    the risk of diverting management focus and resources from other strategic opportunities and operational matters, and potential disruption of management of RAI and its subsidiaries associated with the merger and integrating the companies;

 

    the fact that the merger agreement places certain restrictions on the conduct of the businesses of RAI and its subsidiaries prior to completion of the merger, which may prevent RAI from making certain acquisitions or otherwise pursuing certain business opportunities;

 

    the risk that certain key employees of RAI or Lorillard and their respective subsidiaries might choose not to remain with the combined company or its subsidiaries or affiliates;

 

    the potential impact of the merger and the other transactions contemplated by the merger agreement on the dividends expected to be paid to RAI’s shareholders in the future; and

 

    various other risks associated with the merger and the businesses of RAI, Lorillard, their respective subsidiaries and the combined company described under “Risk Factors,” beginning on page 57 of this joint proxy statement/prospectus.

For a more detailed discussion of the factors, including the uncertainties and risks, that the RAI board of directors considered in connection with the merger, please see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—RAI’s Reasons for the Merger; Recommendations of the RAI Board of Directors” beginning on page 114 of this joint proxy statement/prospectus.

 

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Q: What material negative factors did the Lorillard board of directors consider in connection with the merger?

 

A: The Lorillard board of directors considered certain potentially negative factors in its deliberations concerning the merger, including the following:

 

    Fixed Stock Portion of Merger Consideration. The fact that because the stock portion of the merger consideration is a fixed exchange ratio of shares of RAI common stock to Lorillard common stock, Lorillard shareholders could be adversely affected by a decrease in the trading price of RAI common stock during the pendency of the merger, and the fact that the merger agreement does not provide Lorillard with a price-based termination right or other similar protection.

 

    Possible Failure to Achieve Synergies. The risk that the potential benefits and synergies sought in the merger will not be realized or will not be realized within the expected time period, and the risk associated with the integration by RAI of Lorillard.

 

    Smaller Ongoing Equity Participation in the Combined Company by Lorillard Shareholders. The fact that because only a limited portion of the merger consideration will be in the form of RAI common stock, Lorillard shareholders will have a smaller ongoing equity participation in the combined company (and, as a result, a smaller opportunity to participate in any future earnings or growth of the combined company and future appreciation in the value of RAI common stock following the merger) than they have in Lorillard.

 

    Regulatory Risk. The risk that necessary antitrust approval may be delayed, conditioned or denied, including the fact that no termination fee would be payable by RAI if the merger agreement were terminated because the required antitrust approval was not obtained.

 

    Risk of Non-Completion of Divestiture. The possibility that the transactions contemplated by the asset purchase agreement with Imperial Sub and Imperial might not be completed, including as a result of the failure to obtain the requisite approval of Imperial shareholders, that the asset purchase agreement with Imperial Sub and Imperial and the transactions contemplated thereby cannot be replaced by RAI and the effect that the failure to complete or replace the divestiture would have on the proposed merger between RAI and Lorillard.

 

    Terms of RAI’s Financing Commitments. The fact that the financing commitment letters obtained by RAI contain closing conditions similar to those found in the merger agreement, including (1) the absence of a material adverse effect on RAI and (2) the absence of a material adverse effect on Lorillard.

 

    Risk of Non-Completion. The possibility that the merger might not be completed, including as a result of the failure of Lorillard shareholders to adopt the merger agreement or the failure of RAI shareholders to approve the share issuance, and the effect the resulting public announcement of the termination of the merger agreement may have on:

 

    the trading price of Lorillard’s common stock; and

 

    Lorillard’s operating results, particularly in light of the costs incurred in connection with the transaction.

 

    Possible Deterrence of Competing Offers. The risk that various provisions of the merger agreement, including the requirement that Lorillard must pay to RAI a termination fee of $740 million, if the merger agreement is terminated under certain circumstances, may discourage other parties potentially interested in an acquisition of, or combination with, Lorillard from pursuing that opportunity.

 

    Possible Disruption of the Business and Costs and Expenses. The possible disruption to Lorillard’s business that may result from the merger, the resulting distraction of the attention to Lorillard’s management and potential attrition of Lorillard employees, as well as the costs and expenses associated with completing the merger.

 

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    Restrictions on Operation of Lorillard’s Business. The requirement that Lorillard conduct its business only in the ordinary course in all material respects prior to completion of the merger and subject to specified restrictions on the conduct of Lorillard’s business without RAI’s prior consent (which consent may not be unreasonably withheld, delayed or conditioned), which might delay or prevent Lorillard from undertaking certain business opportunities that might arise pending completion of the merger.

 

    Merger Consideration Taxable. The fact that any gains arising from the receipt of the merger consideration would be taxable to Lorillard shareholders for U.S. federal income tax purposes.

 

    Other Risks. The risks described under “Risk Factors” beginning on page 57 of this joint proxy statement/prospectus.

For a more detailed discussion of the factors, including the negative factors, that the Lorillard board of directors considered in its deliberations concerning the merger, please see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Lorillard’s Reasons for the Merger; Recommendation of the Lorillard Board of Directors” beginning on page 117 of this joint proxy statement/prospectus.

 

Q: Why are the merger agreement and the merger not being considered and voted upon by RAI shareholders?

 

A: Under North Carolina law, RAI shareholders are not required to approve the merger or adopt the merger agreement. Under the NYSE rules, shareholder approval is required prior to the issuance of common stock if the number of shares of common stock to be issued in a transaction equals 20% or more of the number of shares of common stock outstanding before the issuance. The share issuance will result in the issuance of a number of shares of RAI common stock equal to approximately 34.5% of the shares of RAI common stock outstanding prior to the merger. Accordingly, RAI shareholders are being asked to consider and vote on the Lorillard share issuance and the BAT share issuance only.

 

Q: How does the RAI board of directors recommend that RAI shareholders vote?

 

A: The RAI board of directors unanimously determined that the share issuance is in the best interests of RAI and RAI shareholders, and unanimously approved and declared advisable the merger agreement, subscription agreement, asset purchase agreement, merger, share issuance and divestiture.

The RAI board of directors unanimously recommends that RAI shareholders vote “FOR” the Lorillard share issuance and “FOR” the BAT share issuance. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—RAI’s Reasons for the Merger; Recommendations of the RAI Board of Directors” beginning on page 114 of this joint proxy statement/prospectus.

 

Q: How does the Lorillard board of directors recommend that Lorillard shareholders vote?

 

A: The Lorillard board of directors unanimously determined that the merger agreement and the transactions contemplated thereby, including the proposed merger, are fair to, and in the best interests of, Lorillard and its shareholders, and unanimously resolved to approve and declare advisable the merger agreement and the transactions contemplated thereby, including the proposed merger.

The Lorillard board of directors unanimously recommends that Lorillard shareholders vote “FOR” the adoption of the merger agreement, “FOR” the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and “FOR” the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share

 

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Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Lorillard’s Reasons for the Merger; Recommendation of the Lorillard Board of Directors,” “Lorillard Proposal II: Non-Binding, Advisory Vote on Compensation” and “Lorillard Proposal III: Adjournment of Lorillard Special Meeting” beginning on pages 117, 213 and 214, respectively, of this joint proxy statement/prospectus.

 

Q: How do I vote?

 

A: You may vote in person at the RAI special meeting or the Lorillard special meeting or you may designate another person—your proxy—to vote your shares of RAI common stock or Lorillard common stock. The written document used to designate someone as your proxy also is called a proxy or proxy card. We urge you to submit a proxy to have your shares voted even if you plan to attend the RAI special meeting or the Lorillard special meeting. You can always change your vote at the applicable special meeting.

If you are a shareholder of record for the RAI special meeting or the Lorillard special meeting, then you can have your shares voted at the applicable special meeting in person or by submitting a proxy over the Internet, by mail or by telephone by following the instructions on your proxy card. The deadline for voting by proxy over the Internet or by telephone for both the RAI special meeting and the Lorillard special meeting is 11:59 p.m. (Eastern Time) on January 27, 2015.

If you are a beneficial owner and hold your shares in street name, or through a nominee or intermediary, such as a bank or broker, you will receive separate instructions from such nominee or intermediary describing how to vote your shares. The availability of Internet or telephonic voting will depend on the intermediary’s voting process. Please check with your nominee or intermediary and follow the voting instructions provided by your nominee or intermediary with these materials.

 

Q: How do I vote shares held in RAI employee benefit plans?

 

A: If you participate in the RAI 401k Savings Plan, referred to as the RAI Savings Plan, or in the Puerto Rico Savings & Investment Plan, referred to as the Puerto Rico SIP, then your proxy card will serve as voting instructions for the trustee of the RAI Savings Plan or the custodian of the Puerto Rico SIP for shares of RAI common stock allocated to your account under the RAI Savings Plan or the Puerto Rico SIP. Shares for which no instructions are received will be voted by the trustee of the RAI Savings Plan and the custodian of the Puerto Rico SIP in the same proportion as the shares for which instructions are received by each of them.

 

Q: What is a “broker non-vote”?

 

A A “broker non-vote” occurs on an item when a nominee or intermediary is not permitted to vote without instructions from the beneficial owner of the shares and the beneficial owner fails to provide the nominee or intermediary with such instructions.

 

Q What RAI shareholder vote is required for the approval of the Lorillard share issuance and the BAT share issuance at the RAI special meeting, and what happens if I abstain?

 

A: The affirmative vote, in person or by proxy, of a majority of the votes cast at the RAI special meeting by RAI shareholders is required, in each case, to approve the Lorillard share issuance and to approve the BAT share issuance. An abstention will have, in each case, the same effect as a vote “AGAINST” the approval of the Lorillard share issuance and the BAT share issuance. Broker non-votes will, in each case, have no effect on the approval of the Lorillard share issuance and the BAT share issuance.

As described further in this joint proxy statement/prospectus, RAI and BAT entered into the subscription agreement for the share purchase, pursuant to which BAT has agreed, directly or indirectly through one or more of its wholly owned subsidiaries, to subscribe for and purchase, simultaneously with the completion of the merger, a number of shares of RAI common stock such that BAT will maintain its approximately 42%

 

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beneficial ownership interest in RAI immediately following completion of the merger. Pursuant to the subscription agreement, BAT also agreed that at any meeting of RAI shareholders (or with respect to any written consent of RAI shareholders) held to approve the share issuance, it will and will cause its subsidiaries to appear at the meeting in person or by proxy (or otherwise cause all the shares of RAI common stock beneficially owned by it as of the record date to be counted as present for purposes of calculating a quorum at the meeting and respond to each request by RAI for written consent, if any) and vote all shares of RAI common stock beneficially owned by BAT and its subsidiaries to approve the Lorillard share issuance and the BAT share issuance. BAT has further agreed to vote and cause its applicable subsidiaries to vote (including by written consent) against any action or agreement that would reasonably be expected to materially impede, interfere with or prevent the share issuance and the other transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement and transfer agreement. Thus, approximately 42% of RAI’s outstanding shares already are committed to voting “FOR” the Lorillard share issuance and “FOR” the BAT share issuance.

 

Q: Is approval of both the Lorillard share issuance and the BAT share issuance a condition to the obligations of RAI and Lorillard to complete the merger?

 

A: Yes. Approval of both the Lorillard share issuance and the BAT share issuance is a condition to the obligations of RAI and Lorillard to complete the merger.

 

Q: What Lorillard shareholder vote is required for the adoption of the merger agreement, the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement, and what happens if I abstain?

 

A: The following are the vote requirements:

 

    Adoption of the Merger Agreement: The affirmative vote, in person or by proxy, of holders of a majority of the outstanding shares of Lorillard common stock entitled to vote as of the record date for the special meeting is required to adopt the merger agreement. Accordingly, an abstention or a broker non-vote will have the same effect as a vote “AGAINST” the adoption of the merger agreement.

 

    Non-Binding, Advisory Approval of Compensation Payments: The affirmative vote, in person or by proxy, of holders of a majority of the shares of Lorillard common stock represented at the Lorillard special meeting and entitled to vote thereon is required to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger. An abstention will have the same effect as a vote “AGAINST” the proposal. Broker non-votes will have no effect on the proposal.

 

    Adjournment of Lorillard Special Meeting: The affirmative vote, in person or by proxy, of holders of a majority of the shares of Lorillard common stock represented at the Lorillard special meeting and entitled to vote thereon is required to approve the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement. An abstention will have the same effect as a vote “AGAINST” the proposal. Broker non-votes will have no effect on the proposal.

 

Q: What constitutes a quorum for the RAI special meeting?

 

A:

A quorum of shareholders is necessary to hold a valid meeting. The holders of record, present in person or by proxy at the RAI special meeting, of a majority of the shares of RAI common stock entitled to vote constitute a quorum. Abstentions and broker non-votes will be counted in determining the existence of a quorum. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or

 

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  must be set for that adjourned meeting (which must be done if the new meeting date is more than 120 days after the date of the original meeting). Subject to the provisions of the NCBCA, at any adjourned meeting any business may be transacted that might have been transacted at the original meeting if a quorum exists with respect to the matter proposed.

 

Q: What constitutes a quorum for the Lorillard special meeting?

 

A: A majority of the outstanding shares of Lorillard common stock entitled to vote must be present, in person or represented by proxy, to constitute a quorum at the Lorillard special meeting. Abstentions and broker non-votes will be counted as present in determining the existence of a quorum.

 

Q: If my shares are held in street name, will my nominee or intermediary automatically vote my shares for me?

 

A: No. If your shares of RAI or Lorillard common stock are held in street name, you must instruct your nominee or intermediary how to vote your shares. Your nominee or intermediary will vote your shares only if you provide instructions on how to vote by filling out the voting instruction form sent to you by your nominee or intermediary with this joint proxy statement/prospectus.

 

Q: What will happen if I return my proxy card without indicating how to vote?

 

A: If you return your signed and dated proxy card without indicating how to vote your shares on any particular proposal, the RAI common stock or Lorillard common stock represented by your proxy will be voted in accordance with the recommendation of the respective board of directors.

 

Q: What if I hold shares in both RAI and Lorillard?

 

A: If you are both a RAI shareholder and a Lorillard shareholder, you will receive separate packages of proxy materials from each company. A vote as a RAI shareholder to approve the Lorillard share issuance or the BAT share issuance will not constitute a vote as a Lorillard shareholder for the adoption of the merger agreement, or vice versa. Therefore, please sign, date, mark and return all proxy cards and/or voting instructions that you receive from both RAI and Lorillard, or submit them over the Internet or by telephone.

 

Q: Is my vote important?

 

A: Yes, your vote is very important. The merger cannot be completed without the approval of the share issuance by RAI shareholders and the adoption of the merger agreement by Lorillard shareholders.

The RAI board of directors unanimously recommends that RAI shareholders vote “FOR” the Lorillard share issuance and “FOR” the BAT share issuance, and the Lorillard board of directors unanimously recommends that Lorillard shareholders vote “FOR” the adoption of the merger agreement.

 

Q. Can I revoke my proxy or change my voting instructions?

 

A: Yes. You may revoke your proxy or change your vote at any time before your shares are voted at the applicable special meeting.

If you are a holder of record as of the applicable record date, you can revoke your proxy or change your vote by:

 

    sending a signed, written notice stating that you revoke your proxy:

 

    if you are a RAI shareholder, to the Office of the Secretary, at Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990; or

 

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    if you are a Lorillard shareholder, to the Corporate Secretary, at Lorillard’s offices at 714 Green Valley Road, Greensboro, North Carolina 27408-7018, Attention: Corporate Secretary;

in each case, that bears a date later than the date of the proxy you want to revoke and is received by the RAI Office of the Secretary or the Lorillard Corporate Secretary, as appropriate, prior to the applicable special meeting;

 

    submitting a valid, later-dated proxy via the Internet or by telephone before 11:59 p.m. (Eastern Time) on January 27, 2015, or by mailing a later-dated, new proxy card that is received by Broadridge Financial Solutions, Inc., for RAI shareholders, or Computershare Limited, for Lorillard shareholders, prior to the applicable special meeting; or

 

    attending the applicable special meeting (or, if the applicable special meeting is adjourned or postponed, attending the adjourned or postponed meeting) and voting in person, which will automatically cancel any proxy previously given, or revoking your proxy in person, but your attendance alone will not constitute a vote or revoke any proxy previously given.

If you hold your shares in street name, you must contact your nominee or intermediary to change your vote or obtain a legal proxy to vote your shares if you wish to cast your vote in person at the applicable special meeting.

 

Q: What happens if I transfer my shares of RAI or Lorillard common stock before the applicable special meeting?

 

A: The RAI record date and Lorillard record date are earlier than both the date of the special meetings and the date that the merger is expected to be completed. If you transfer your shares of RAI or Lorillard common stock after the applicable record date but before the applicable special meeting, you will retain your right to vote at the applicable special meeting. However, if you are a Lorillard shareholder, you will have transferred the right to receive the merger consideration in the merger. In order to receive the merger consideration, you must hold your shares of Lorillard common stock through the effective time of the merger.

 

Q: What do I do if I receive more than one set of voting materials?

 

A: You may receive more than one set of voting materials, including multiple copies of this joint proxy statement/prospectus, the proxy card or the voting instruction form. This can occur if you hold your shares in more than one brokerage account, if you hold shares directly as a holder of record and also in street name, or otherwise through another holder of record, and in certain other circumstances. In addition, if you are a holder of record of shares of both RAI common stock and Lorillard common stock, you will receive one or more separate proxy cards or voting instruction cards for each company. If you receive more than one set of voting materials, please vote or return each set separately in order to ensure that all of your shares are voted.

 

Q: How do I obtain the voting results from the RAI and Lorillard special meetings?

 

A: Preliminary voting results will be announced at the RAI and Lorillard special meetings, and will be set forth in press releases that RAI and Lorillard intend to issue after each respective special meeting. The respective press releases will be available on the RAI website at www.reynoldsamerican.com and the Lorillard website at www.lorillard.com. Final voting results for each special meeting are expected to be published in a Current Report on Form 8-K filed with the SEC within four business days after the respective special meeting. A copy of these Current Reports on Form 8-K will be available after filing with the SEC on the RAI and Lorillard websites, respectively.

 

Q: What will happen if all of the proposals to be considered at the special meetings are not approved?

 

A: As a condition to completion of the merger, RAI shareholders must approve the share issuance and Lorillard shareholders must adopt the merger agreement. Thus, both the Lorillard share issuance and the BAT share issuance must be approved by RAI shareholders to satisfy this condition to completion of the merger.

 

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Completion of the merger is not conditioned or dependent upon the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger, or the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

 

Q: Are Lorillard shareholders entitled to seek appraisal rights if they do not vote in favor of the adoption of the merger agreement?

 

A: Yes. Under Delaware law, record holders of Lorillard common stock who do not vote in favor of the adoption of the merger agreement and who continuously hold their shares of Lorillard common stock through the effective time of the merger and who otherwise comply precisely with the applicable requirements of Section 262 of the DGCL, will be entitled to seek appraisal rights in connection with the merger, and if the merger is completed, obtain payment in cash of the fair value of their shares of Lorillard common stock as determined by the Delaware Court of Chancery, instead of the merger consideration. To exercise appraisal rights, Lorillard shareholders must strictly follow the procedures prescribed by Delaware law. These procedures are summarized under “Appraisal Rights” beginning on page 253 of this joint proxy statement/prospectus. In addition, the text of the applicable provisions of Delaware law is included as Annex F to this joint proxy statement/prospectus. Failure to strictly comply with these provisions will result in a loss of the right of appraisal.

 

Q: Why are Lorillard shareholders being asked to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger?

 

A: The SEC has adopted rules that require Lorillard to seek a non-binding, advisory vote on the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger.

 

Q: What happens if the proposal to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger is not approved?

 

A: Approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger is not a condition to completion of the merger. The vote is a non-binding, advisory vote. If the merger is completed, Lorillard may be obligated to pay all or a portion of this compensation to its named executive officers in connection with the completion of the merger or certain terminations of employment following the merger, even if Lorillard shareholders fail to approve this proposal.

 

Q: Is the transaction expected to be taxable to Lorillard shareholders?

 

A: The exchange of the merger consideration for Lorillard common stock in the merger generally will be a taxable transaction for U.S. federal income tax purposes under the U.S. Internal Revenue Code of 1986, as amended, referred to as the IRC, and may also be taxable under state, local and non-U.S. income and other tax laws. Please carefully review the information under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Certain U.S. Federal Income Tax Consequences of the Merger” beginning on page 161 of this joint proxy statement/prospectus for a description of certain U.S. federal income tax consequences of the merger to U.S. holders (as defined in that section). The tax consequences to you will depend on your own situation. We urge you to consult your tax advisors as to the specific tax consequences to you of the merger and your receipt of the merger consideration, including the applicability and effect of U.S. federal, state, local and non-U.S. income and other tax laws in light of your particular circumstances.

 

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Q: Is the obligation of each of RAI and Lorillard to complete the merger subject to any conditions?

 

A: Yes. The obligation of each of RAI and Lorillard to complete the merger is subject to a number of closing conditions, including, among other things, (1) the adoption of the merger agreement by Lorillard shareholders; (2) the approval by RAI shareholders of the share issuance, specifically, approval of both the Lorillard share issuance and the BAT share issuance; (3) the expiration or termination of the applicable waiting period under the HSR Act; (4) the absence of legal restraints that prohibit the completion of the merger; and (5) the approval for listing on the NYSE of the RAI common stock to be issued in the share issuance. The obligation of each party to complete the merger is also conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions), the other party having performed in all material respects its obligations under the merger agreement and the other party not having suffered a material adverse effect, as defined in the merger agreement. RAI’s obligation to complete the merger is also subject to the condition that no legal restraint be in effect that would result in a substantial detriment, as defined under “The Merger Agreement—Efforts to Complete the Merger” beginning on page 181 of this joint proxy statement/prospectus, to RAI’s post-merger ownership, control or operation of its business. For a more complete summary of the conditions that must be satisfied (or, to the extent permitted by applicable law, waived) prior to completion of the merger, see “The Merger Agreement—Conditions to the Merger” beginning on page 186 of this joint proxy statement/prospectus.

 

Q: When do you expect to complete the merger?

 

A: As of the date of this joint proxy statement/prospectus, it is not possible to accurately estimate the closing date for the merger because the merger is subject to the satisfaction (or, to the extent permitted by applicable law, waiver) of the conditions to RAI’s and Lorillard’s obligations to complete the merger; however, RAI and Lorillard expect the merger to close in the first half of 2015. Due to the governmental approvals and other conditions to the merger, no assurance can be given as to when, or if, the merger will be completed. Though an end date of July 15, 2015, has been set for the closing of the merger, this end date will automatically be extended by six months if, on July 15, 2015, the only conditions under the merger agreement that have not been satisfied or waived relate to antitrust regulatory matters.

 

Q: What will happen to outstanding Lorillard equity awards in the merger?

 

A: Under the terms of the merger agreement, upon the completion of the merger, each outstanding Lorillard stock option and stock appreciation right will be cancelled in exchange for a cash payment equal to the excess, if any, of the equity award consideration over the exercise price, and each outstanding Lorillard restricted stock unit and share of restricted stock will vest and be converted into the right to receive the merger consideration. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Treatment of Lorillard Equity Awards” beginning on page 165 of this joint proxy statement/prospectus.

 

Q: What do I need to do now?

 

A: After carefully reading and considering the information contained in and incorporated by reference into this joint proxy statement/prospectus, including its annexes, please submit your proxy as promptly as possible, so that your shares may be represented and voted at the applicable special meeting. To vote your shares of RAI common stock or Lorillard common stock, as applicable, do so by:

 

    signing, dating, marking and returning the enclosed proxy card in the accompanying postage-paid return envelope;

 

    submitting your proxy via the Internet or by telephone by following the instructions included on your proxy card; or

 

    attending the applicable special meeting and voting by ballot in person.

 

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If you hold shares in street name, please instruct your nominee or intermediary to vote your shares by following the instructions that the nominee or intermediary provides to you with these materials. Your nominee or intermediary will vote your shares of RAI or Lorillard common stock for you only if you provide instructions to it on how to vote. Please refer to the voting instruction card used by your nominee or intermediary to see if you may submit voting instructions using the telephone or Internet.

 

Q: Should I send in my Lorillard stock certificates now?

 

A: No. Lorillard shareholders should not send in their stock certificates at this time. After completion of the merger, RAI’s exchange agent will send you a letter of transmittal and instructions for exchanging your shares of Lorillard common stock for the merger consideration. The shares of RAI common stock you receive in the merger will be issued in book-entry form and physical certificates will not be issued. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Exchange of Shares in the Merger” beginning on page 164 of this joint proxy statement/prospectus.

 

Q: How will the merger be financed?

 

A: RAI currently intends to finance the cash portion of the merger consideration and related fees and expenses with available cash, up to $500 million in borrowings under its existing revolving credit facility, proceeds from the issuance of debt securities, proceeds from the divestiture and share purchase and, to the extent necessary, borrowings under the bridge facility. There is no guarantee that replacement or supplemental financing will be available to RAI at all or on acceptable terms. RAI’s ability to obtain financing to replace or supplement the bridge facility will be subject to various factors, including market conditions, operating performance and credit ratings, and may be subject to restrictions in the agreements relating to RAI’s outstanding debt.

 

Q: Is the completion of the merger subject to a financing condition?

 

A: No. The receipt of financing by RAI is not a condition to completion of the merger and, accordingly, RAI will be required to complete the merger (assuming that all of the conditions to its obligations to complete the merger under the merger agreement are satisfied) whether or not debt financing or other financing is available at all or on acceptable terms.

 

Q: Is the merger conditioned on the absence of adverse developments with respect to menthol products?

 

A: No. Under the terms of the merger agreement, RAI and Lorillard expressly agreed that any menthol regulatory action would not be considered in determining whether a material adverse effect, as defined in the merger agreement, on a party had occurred. In addition, under the terms of the merger agreement, neither the RAI board of directors nor the Lorillard board of directors may change its recommendation to its shareholders in connection with the merger based on any menthol regulatory action.

 

Q: Will the RAI common stock issued to Lorillard shareholders at the time of completion of the merger be traded on an exchange?

 

A: Yes. It is a condition to the closing of the merger that the shares of RAI common stock to be issued to Lorillard shareholders in the merger be approved for listing on the NYSE, subject to official notice of issuance.

 

Q: Will current RAI shareholders be affected by the merger and the share purchase?

 

A:

Upon completion of the merger and the share purchase, each RAI shareholder other than BAT will hold the same number of shares of RAI common stock that such shareholder held immediately prior to completion of

 

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  the merger and the share purchase. As a result of the merger, RAI shareholders will own shares in a larger company with more assets. However, because (1) in connection with the merger, RAI will be issuing shares of RAI common stock to Lorillard shareholders in exchange for their shares of Lorillard common stock and (2) in connection with the share purchase, RAI will be issuing shares of RAI common stock to BAT, directly or indirectly through one or more of its wholly owned subsidiaries, each outstanding share of RAI common stock immediately prior to the merger will represent a smaller percentage of the aggregate number of shares of RAI common stock outstanding after the merger and the BAT share issuance.

 

Q: What are the terms of BAT’s agreement to purchase shares of RAI common stock?

 

A: Under the terms of the subscription agreement, BAT has agreed, directly or indirectly through one or more of its wholly owned subsidiaries, to subscribe for and purchase, simultaneously with the completion of the merger, a number of shares of RAI common stock such that BAT, directly or indirectly through its affiliates, will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger for an aggregate purchase price of approximately $4.7 billion, which price corresponds to the per share reference price used to determine the number of shares of RAI common stock to which Lorillard shareholders will be entitled at the closing of the merger. The subscription agreement requires RAI to use the proceeds from the share purchase to fund the merger, and permits RAI to use the proceeds to pay costs and expenses relating to the merger. In addition, RAI has agreed that it will not make certain amendments to the merger agreement or the asset purchase agreement without BAT’s approval.

 

Q: Has BAT agreed to vote its shares of RAI common stock for the share issuance?

 

A: Yes. Pursuant to the subscription agreement, BAT has agreed that at any meeting of RAI shareholders (or with respect to any written consent of RAI shareholders) held to approve the share issuance, all shares of RAI common stock beneficially owned by BAT as of the RAI record date, representing approximately 42% of the shares of RAI common stock currently outstanding, will be voted to approve both the Lorillard share issuance and the BAT share issuance. BAT has further agreed to vote and cause its applicable subsidiaries to vote (including by written consent) against any action or agreement that would reasonably be expected to materially impede, interfere with or prevent the share issuance and the other transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement and transfer agreement.

 

Q: What is the divestiture, and am I being asked to vote on it?

 

A:

On July 15, 2014, RAI entered into the asset purchase agreement and Lorillard entered into the transfer agreement, in each case with Imperial Sub, and, for certain limited purposes of the asset purchase agreement, Imperial, pursuant to which, subject to the closing of the merger, Imperial Sub will acquire, (1) the RAI transferred assets, consisting of certain assets owned by RAI subsidiaries or affiliates, related to the cigarette brands WINSTON, KOOL and SALEM (and under certain circumstances, DORAL) and related to RAI’s subsidiaries’ Puerto Rico business, and (2) the Lorillard transferred assets, consisting of certain assets currently owned by Lorillard subsidiaries or affiliates, related to the “e-vapor” brand blu (including SKYCIG) and the cigarette brand Maverick, as well as Lorillard’s owned and leased real property, including its manufacturing, research and development facilities and headquarters in Greensboro, North Carolina and tobacco receiving and storage facilities in Danville, Virginia, and the transferred employees, together with certain associated liabilities. Pursuant to the transfer agreement, certain Lorillard transferred assets, including Lorillard’s Greensboro facility, Lorillard’s Danville facility, collective bargaining agreements that Lorillard is a party to and the related pension plan and certain liabilities will be transferred by Lorillard subsidiaries to Imperial Sub immediately prior to the closing of the merger. The remaining transferred assets, including all of the RAI transferred assets, and certain related assumed liabilities, will be transferred to Imperial Sub by RAI subsidiaries or affiliates immediately after the closing of the merger. The transactions contemplated by the asset purchase agreement and the transfer agreement are collectively referred to as the divestiture throughout this joint proxy statement/prospectus. The closing

 

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  of the divestiture is subject to completion of the merger (although the transactions contemplated by the transfer agreement will occur immediately prior to the merger) and to certain other conditions, including the approval of the divestiture by Imperial shareholders. The divestiture has been approved by the RAI board of directors. See “The Divestiture” beginning on page 197 of this joint proxy statement/prospectus.

Neither RAI shareholders nor Lorillard shareholders are entitled to vote on the divestiture, and no vote with respect thereto is being solicited by RAI or Lorillard. Accordingly, no action is required on the part of RAI shareholders or Lorillard shareholders in connection with the divestiture.

 

Q: Why are RAI shareholders not entitled to vote on the divestiture?

 

A: Under North Carolina law, the sale or disposition of all, or substantially all, of a corporation’s property otherwise than in the usual and regular course of business requires the approval of such corporation’s shareholders. The property to be sold in the divestiture does not constitute all, or substantially all, of RAI’s property; accordingly, no RAI shareholder approval is necessary.

 

Q: Under what circumstances could the terms of the divestiture change?

 

A: Under the asset purchase agreement, RAI will cause its subsidiaries, including RJR Tobacco, to sell to Imperial Sub the WINSTON, KOOL and SALEM brands. In the event that the aggregate market share for these brands is less than 4.9% for the three months ended prior to the month in which closing of the merger occurs, the asset purchase agreement provides that RJR Tobacco’s DORAL brand also will be sold to Imperial Sub. The DORAL brand represented approximately $278 million of RAI’s net sales, approximately $114 million of RAI’s operating income and approximately $70 million of RAI’s net income in fiscal year 2013. RAI will not receive any additional purchase price in the event its DORAL brand is included in the divestiture. If the DORAL brand is required to be included as part of the divestiture, RAI’s pro forma financial information set forth in this joint proxy statement/prospectus will be adversely impacted.

 

Q: What happens if the divestiture is not completed?

 

A: The merger is not conditioned upon completion of the divestiture, though the divestiture is conditioned upon the completion of the merger. The merger and the divestiture are subject to separate conditions, and the merger may be completed whether or not the divestiture is ultimately completed, although approval of the merger under the HSR Act should not be expected without the divestiture. In addition, RAI is obligated under the merger agreement to complete the sale, divestiture or disposition of any businesses, assets, equity interests, product lines, properties or services of RAI and Lorillard or any of their respective subsidiaries necessary to obtain required governmental authorizations, provided that the divestiture must not reduce the aggregate net benefits (including synergies) of the transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement and transfer agreement to RAI by $250 million or more (the determination of which amount does not take into account any adverse effect on RAI arising from the divestiture of the DORAL brand), and RAI will not be obligated to sell, divest or dispose of any brands or product lines other than WINSTON, SALEM, KOOL, DORAL, Maverick and the “e-vapor” brand blu (including SKYCIG). As a result, if the divestiture is not completed, in order to complete the merger, RAI, through one or more of its affiliates or subsidiaries, may sell the brands and other assets currently expected to be divested or which otherwise might be divested on terms that are different from and less favorable to RAI than those contemplated by the divestiture. However, any ability to so sell or divest is subject to RAI’s binding obligations set forth in the asset purchase agreement regarding completion of the divestiture. Neither RAI shareholders nor Lorillard shareholders would be entitled to vote on any alternate divestiture transaction, and no vote with respect thereto is being solicited by RAI or Lorillard. In addition, if the divestiture is not completed and the other conditions to the merger have been satisfied, RAI would need to obtain additional financing in order to complete the merger.

 

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Q: If I am a RAI shareholder, whom should I call with questions?

 

A: If you have any questions about the merger or the RAI special meeting, or desire additional copies of this joint proxy statement/prospectus, proxy cards or voting instruction forms, you should contact:

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

Telephone Toll-Free: (800) 322-2885

Telephone Call Collect: (212) 929-5500

Email: proxy@mackenziepartners.com

or

Reynolds American Inc.

Attention: Investor Relations

P.O. Box 2990

Winston-Salem, North Carolina 27102-2990

Telephone: (336) 741-2000

 

Q: If I am a Lorillard shareholder, whom should I call with questions?

 

A: If you have any questions about the merger or the Lorillard special meeting, or desire additional copies of this joint proxy statement/prospectus, proxy cards or voting instruction forms, you should contact:

Georgeson Inc.

480 Washington Blvd., 26th Floor,

Jersey City, New Jersey 07310

Telephone Toll-Free: (800) 279-6913

Email: lorillard@georgeson.com

or

Lorillard, Inc.

Attention: Investor Relations

714 Green Valley Road

Greensboro, North Carolina 27408-7018

Telephone: (336) 335-7000

Email: investorrelations@lortobco.com

 

Q: Where can I find more information about RAI and Lorillard?

 

A: You can find more information about RAI and Lorillard from the various sources described under “Where You Can Find More Information” beginning on page 260 of this joint proxy statement/prospectus.

 

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SUMMARY

This summary highlights selected information from this joint proxy statement/prospectus. It may not contain all of the information that is important to you. You are urged to read this entire joint proxy statement/prospectus and the other documents referred to or incorporated by reference into this joint proxy statement/prospectus in order to fully understand the merger, the merger agreement and the other related transactions and agreements. See “Where You Can Find More Information” beginning on page 260 of this joint proxy statement/prospectus. Each item in this summary refers to the beginning page of this joint proxy statement/prospectus on which that subject is discussed in more detail.

The Companies (See page 74)

Reynolds American Inc.

RAI is a holding company whose operating subsidiaries include the second largest cigarette manufacturer in the United States, R. J. Reynolds Tobacco Company; the second largest smokeless tobacco products manufacturer in the United States, American Snuff Company, LLC, referred to as American Snuff Co.; the manufacturer of the leading super-premium cigarette brand, Santa Fe Natural Tobacco Company, Inc., referred to as SFNTC; Niconovum AB and Niconovum USA, Inc., marketers of nicotine replacement therapy products in Sweden and the United States, respectively; and R. J. Reynolds Vapor Company, referred to as RJR Vapor, a manufacturer and distributor of digital vapor cigarettes in the United States.

RAI’s reportable operating segments are the RJR Tobacco segment, the American Snuff segment, the Santa Fe segment and the All Other segment:

 

    The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company and includes two of the best-selling cigarettes in the United States: CAMEL and PALL MALL. These brands, and RJR Tobacco’s other brands, including WINSTON, KOOL, DORAL, SALEM, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. R. J. Reynolds Tobacco Company also manages contract manufacturing of cigarettes and tobacco products through arrangements with BAT affiliates, and manages the export of tobacco products to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases. R. J. Reynolds Tobacco Company manages the super-premium cigarette brands, DUNHILL and STATE EXPRESS 555, which are licensed from BAT.

 

    The American Snuff segment consists of the primary operations of American Snuff Co. and, prior to its sale, Lane, Limited. The American Snuff segment includes American Snuff Co.’s largest selling moist snuff brands, GRIZZLY, in the price-value category, and KODIAK, in the premium category.

 

    The Santa Fe segment consists of the primary operations of SFNTC and includes cigarettes and other tobacco products manufactured and marketed under the NATURAL AMERICAN SPIRIT brand.

 

    Niconovum AB, Niconovum USA, Inc. and RJR Vapor, among other RAI subsidiaries, are included in the All Other segment.

RAI was incorporated in the state of North Carolina on January 2, 2004, and its common stock is listed on the NYSE under the trading symbol “RAI.” On July 30, 2004, the U.S. assets, liabilities and operations of BAT’s wholly owned subsidiary, B&W, then known as Brown & Williamson Tobacco Corporation, were combined with RJR Tobacco. As a result of this business combination, BAT beneficially owns approximately 42% of RAI’s outstanding common stock. RAI’s principal executive offices are located at 401 North Main Street, Winston-Salem, North Carolina 27101, and its telephone number is (336) 741-2000. RAI’s website address is www.reynoldsamerican.com. RAI’s website and the information contained therein or connected thereto are not intended to be incorporated into this joint proxy statement/prospectus.

 

 

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Lantern Acquisition Co.

Lantern Acquisition Co., referred to as Merger Sub, is a Delaware corporation and wholly owned subsidiary of RAI. Merger Sub was incorporated on July 9, 2014, solely for the purpose of effecting the merger. It has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the merger agreement. Merger Sub’s principal executive offices are located at 401 North Main Street, Winston-Salem, North Carolina 27101, and its telephone number is (336) 741-2000.

Lorillard, Inc.

Lorillard, including its subsidiaries and affiliates, is the third largest manufacturer of cigarettes in the United States. Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the United States. Newport, Lorillard’s flagship premium cigarette brand, is the top selling menthol and second largest selling cigarette brand overall in the United States based on gross units sold in 2013. The Newport brand, which includes both menthol and non-menthol product offerings, accounted for approximately 85.4% of Lorillard’s consolidated net sales for the fiscal year ended December 31, 2013. In addition to the Newport brand, Lorillard’s product line has four additional brand families marketed under the Kent, True, Maverick, and Old Gold brand names. These five brands include 43 different product offerings which vary in price, taste, flavor, length and packaging. In 2013, Lorillard shipped 39.9 billion cigarettes, all of which were sold in the United States and certain U.S. possessions and territories. Lorillard, through its other subsidiaries, is also a leading global electronic cigarette company, with products marketed under the blu eCigs and SKYCIG brands. Newport, Kent, True, Maverick, Old Gold, blu eCigs and SKYCIG are the registered trademarks of Lorillard and its subsidiaries. Lorillard sold substantially all of its major cigarette trademarks outside of the United States in 1977. Lorillard maintains its headquarters and manufactures all of its traditional cigarette products in Greensboro, North Carolina.

Lorillard produces cigarettes for both the premium and discount segments of the domestic cigarette market. Lorillard does not compete in a subcategory of the discount segment that it identifies as the deep discount segment. Premium brands are well known, established brands marketed at higher retail prices. Discount brands are generally less well recognized brands marketed at lower retail prices. Lorillard defines the deep discount subcategory to include brands sold at the lowest retail prices. Deep discount cigarettes are typically manufactured by smaller companies, relative to Lorillard and other major U.S. manufacturers, many of which have no, or significantly lower, payment obligations under the state settlement agreements.

Lorillard common stock is listed on the NYSE under the trading symbol “LO.” Lorillard’s principal executive offices are located at 714 Green Valley Road, Greensboro, NC 27408, its telephone number is (336) 335-7000, and its website is www.lorillard.com. The information contained in, or that can be accessed through, Lorillard’s website is not intended to be incorporated into this joint proxy statement/prospectus.

RAI Special Meeting (See page 76)

General

The RAI special meeting will be held at 9:00 a.m. (Eastern Time), on January 28, 2015, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina 27101. At the RAI special meeting, RAI shareholders will vote upon the Lorillard share issuance and the BAT share issuance. The approval of the share issuance by RAI shareholders is a condition to the obligations of RAI and Lorillard to complete the merger.

Record Date

The RAI board of directors has fixed the close of business on December 20, 2014, as the RAI record date, for determination of the RAI shareholders entitled to vote at the RAI special meeting and any adjournment or

 

 

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postponement thereof. Only RAI shareholders of record on the RAI record date are entitled to receive notice of, and to vote at, the RAI special meeting or any adjournment or postponement thereof.

As of the RAI record date, there were 531,283,513 shares of RAI common stock outstanding and entitled to vote at the RAI special meeting, held by approximately 13,050 holders of record. Each outstanding share of RAI common stock is entitled to one vote. The number of shares you own is reflected on your proxy card.

Quorum

A quorum of shareholders is necessary to hold a valid meeting. The holders of record, present in person or by proxy at the RAI special meeting, of a majority of the shares of RAI common stock entitled to vote constitute a quorum. Abstentions and broker non-votes will be counted in determining the existence of a quorum.

Required Vote

 

Item

       

Vote Necessary*

RAI Proposal I

   Approval of the Lorillard Share Issuance    Approval requires the affirmative vote, in person or by proxy, of a majority of the votes cast at the RAI special meeting.(1)

RAI Proposal II

   Approval of the BAT Share Issuance    Approval requires the affirmative vote, in person or by proxy, of a majority of the votes cast at the RAI special meeting.(1)

 

* Under the rules of the NYSE, if you hold your shares of RAI common stock in street name, your nominee or intermediary may not vote your shares without instructions from you. Without your voting instructions, a broker non-vote will occur on RAI Proposal I and RAI Proposal II. Abstentions from voting will have the same effect as a vote “AGAINST” RAI Proposal I and RAI Proposal II. Broker non-votes will have no effect on RAI Proposal I and RAI Proposal II.
(1) As described further in this joint proxy statement/prospectus, RAI and BAT entered into the subscription agreement, pursuant to which BAT has agreed, directly or indirectly through one or more of its wholly owned subsidiaries, to subscribe for and purchase, simultaneously with the completion of the merger, a number of shares of RAI common stock such that BAT will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger. Pursuant to the subscription agreement, BAT also agreed that at any meeting of RAI shareholders (or with respect to any written consent of RAI shareholders) held to approve the share issuance, it will and will cause its subsidiaries to appear at the meeting in person or by proxy (or otherwise cause all the shares of RAI common stock beneficially owned by it as of the record date to be counted as present for purposes of calculating a quorum at the meeting and respond to each request by RAI for written consent, if any) and vote all shares of RAI common stock beneficially owned by BAT and its subsidiaries to approve both the Lorillard share issuance and the BAT share issuance. BAT has further agreed to vote and cause its applicable subsidiaries to vote (including by written consent) against any action or agreement that would reasonably be expected to materially impede, interfere with or prevent the share issuance and the other transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement and transfer agreement. Thus, approximately 42% of RAI’s outstanding shares already are committed to voting “FOR” the Lorillard share issuance and “FOR” the BAT share issuance.

Share Ownership of and Voting by RAI Directors and Executive Officers

At the RAI record date, RAI’s directors and executive officers and their affiliates beneficially owned and had the right to vote 529,596 shares of RAI common stock at the RAI special meeting, which represents less than 1.00% of the shares of RAI common stock entitled to vote at the RAI special meeting.

 

 

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It is expected that RAI’s directors and executive officers will vote their shares “FOR” the Lorillard share issuance and “FOR” the BAT share issuance. In addition, under the terms of the subscription agreement, BAT has agreed that at any meeting of RAI shareholders or in any circumstance upon which votes with respect to the share issuance are sought, BAT will vote, or cause to be voted, all shares of RAI common stock beneficially owned by it to approve both the Lorillard share issuance and the BAT share issuance. These BAT shares represent, as of the RAI record date, an aggregate of approximately 42% of the outstanding shares of RAI common stock.

Lorillard Special Meeting (See page 83)

General

The Lorillard special meeting will be held at 10:00 a.m. (Eastern Time), on January 28, 2015, at The Ballantyne Hotel, 10000 Ballantyne Commons Parkway, Charlotte, North Carolina 28277. At the Lorillard special meeting, Lorillard shareholders will vote on:

 

    the adoption of the merger agreement;

 

    the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger; and

 

    the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

The adoption of the merger agreement by Lorillard shareholders is a condition to the obligations of RAI and Lorillard to complete the merger.

Record Date

The Lorillard board of directors has fixed the close of business on December 8, 2014, as the Lorillard record date, for determination of the Lorillard shareholders entitled to vote at the Lorillard special meeting or any adjournment or postponement thereof. Only Lorillard shareholders of record on the Lorillard record date are entitled to receive notice of, and to vote at, the Lorillard special meeting or any adjournment or postponement thereof.

As of the Lorillard record date, there were 360,028,072 shares of Lorillard common stock outstanding and entitled to vote at the Lorillard special meeting, held by approximately 80 holders of record. Each outstanding share of Lorillard common stock is entitled to one vote. The number of shares you own is reflected on your proxy card.

Quorum

A majority of the outstanding shares of Lorillard common stock entitled to vote must be present, in person or represented by proxy, to constitute a quorum at the Lorillard special meeting. Abstentions and broker non-votes will be counted as present in determining the existence of a quorum.

Required Vote

The required number of votes for the matters to be voted upon at the Lorillard special meeting depends on the particular item to be voted upon:

 

Item

       

Vote Necessary*

Lorillard Proposal I

   Adoption of the Merger Agreement    Approval requires the affirmative vote, in person or by proxy, of holders of a majority of the outstanding shares of Lorillard common stock entitled to vote as of the Lorillard record date.

 

 

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Item

       

Vote Necessary*

Lorillard Proposal II

   Non-Binding, Advisory Vote on Compensation    Approval requires the affirmative vote, in person or by proxy, of holders of a majority of the shares of Lorillard common stock represented at the Lorillard special meeting and entitled to vote thereon.

Lorillard Proposal III

   Adjournment of Lorillard Special Meeting    Approval requires the affirmative vote, in person or by proxy, of holders of a majority of the shares of Lorillard common stock represented at the Lorillard special meeting and entitled to vote thereon.

 

* Under the rules of the NYSE, if you hold your shares of Lorillard common stock in street name, your nominee or intermediary may not vote your shares without instructions from you. Without your voting instructions, a broker non-vote will occur on Lorillard Proposal I, Lorillard Proposal II and Lorillard Proposal III. Abstentions from voting will have the same effect as a vote “AGAINST” Lorillard Proposal I, Lorillard Proposal II and Lorillard Proposal III. Broker non-votes will have the same effect as a vote “AGAINST” Lorillard Proposal I and will have no effect on Lorillard Proposal II and Lorillard Proposal III.

Share Ownership of and Voting by Lorillard Directors and Executive Officers

At the Lorillard record date, Lorillard’s directors and executive officers and their affiliates beneficially owned and had the right to vote 1,697,458 shares of Lorillard common stock at the Lorillard special meeting, which represents less than 1.00% of the shares of Lorillard common stock entitled to vote at the Lorillard special meeting.

It is expected that Lorillard’s directors and executive officers will vote their shares “FOR” the adoption of the merger agreement, “FOR” the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and “FOR” the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

The Merger and the Merger Agreement (See pages 89 and 168)

The merger agreement provides that, on the terms and subject to the conditions in the merger agreement, and in accordance with the DGCL, at the effective time of the merger, Merger Sub will merge with and into Lorillard. As a result of the merger, the separate corporate existence of Merger Sub will cease, and Lorillard will continue as the surviving corporation in the merger and a wholly owned subsidiary of RAI. The merger will not be completed without the approval of the share issuance by RAI shareholders and the adoption of the merger agreement by Lorillard shareholders.

A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus. You are urged to read the merger agreement in its entirety because it is the legal document that governs the merger. For more information on the merger and the merger agreement, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement” and “The Merger Agreement” beginning on pages 89 and 168, respectively, of this joint proxy statement/prospectus.

As of the date of this joint proxy statement/prospectus, it is not possible to accurately estimate the closing date for the merger because the merger is subject to the satisfaction (or, to the extent permitted by applicable law, waiver) of the conditions to RAI’s and Lorillard’s obligations to complete the merger; however, RAI and

 

 

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Lorillard expect the merger to close in the first half of 2015. Due to the governmental approvals and other conditions to the merger, no assurance can be given as to when, or if, the merger will be completed. Though an end date of July 15, 2015, has been set for the closing of the merger, this end date will automatically be extended by six months if, on July 15, 2015, the only conditions under the merger agreement that have not been satisfied or waived relate to antitrust regulatory matters.

What Lorillard Shareholders Will Receive in the Merger (See page 89)

If the merger is completed, each share of Lorillard common stock (other than treasury shares held by Lorillard and any shares of Lorillard common stock owned by any Lorillard subsidiary, RAI or Merger Sub or shares of Lorillard common stock owned by Lorillard shareholders who have properly made and not withdrawn a demand for appraisal rights pursuant to Section 262 of the DGCL) automatically will be converted into the right to receive the merger consideration, consisting of (1) 0.2909 of a fully paid and nonassessable share of RAI common stock plus (2) $50.50 in cash. No fractional shares of RAI common stock will be issued in the merger, and Lorillard shareholders will receive cash in lieu of any fractional shares.

Based on the closing price of a share of RAI common stock on the NYSE on July 14, 2014, the last trading day before the public announcement of the merger agreement, the merger consideration represented approximately $68.88 in value per share of Lorillard common stock. Based on the closing price of a share of RAI common stock on the NYSE on December 18, 2014, the most recent practicable trading day prior to the date of this joint proxy statement/prospectus, the merger consideration represented approximately $69.53 in value for each share of Lorillard common stock. Because RAI will issue a fixed number of shares of RAI common stock in exchange for each share of Lorillard common stock, the value of the merger consideration that Lorillard shareholders will receive in the merger will depend on the market price of shares of RAI common stock at the time the merger is completed. As a result, the value of the merger consideration that Lorillard shareholders will receive upon completion of the merger could be greater than, less than or the same as the value of the merger consideration on the date of this joint proxy statement/prospectus or at the time of the RAI or Lorillard special meetings.

RAI’s Reasons for the Merger; Recommendations of the RAI Board of Directors (See page 114)

After consideration and consultation with its advisors, the RAI board of directors unanimously determined that the share issuance is in the best interests of RAI and RAI shareholders, and unanimously approved and declared advisable the merger agreement, subscription agreement, asset purchase agreement, merger, share issuance and divestiture.

The RAI board of directors unanimously recommends that RAI shareholders vote “FOR” the Lorillard share issuance and “FOR” the BAT share issuance. Approval of both the Lorillard share issuance and the BAT share issuance by RAI shareholders is a condition to the obligations of RAI and Lorillard to complete the merger. For the factors considered by the RAI board of directors in reaching this decision, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—RAI’s Reasons for the Merger; Recommendations of the RAI Board of Directors” beginning on page 114 of this joint proxy statement/prospectus.

Lorillard’s Reasons for the Merger; Recommendations of the Lorillard Board of Directors (See page 117)

After consideration and consultation with its advisors, the Lorillard board of directors unanimously determined that the merger agreement and the transactions contemplated thereby, including the proposed merger, are fair to, and in the best interests of, Lorillard and its shareholders, and unanimously resolved to approve and declare advisable the merger agreement and the transactions contemplated thereby, including the proposed merger.

 

 

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The Lorillard board of directors unanimously recommends that Lorillard shareholders vote “FOR” the adoption of the merger agreement. For the factors considered by the Lorillard board of directors in reaching this decision, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Lorillard’s Reasons for the Merger; Recommendation of the Lorillard Board of Directors” beginning on page 117 of this joint proxy statement/prospectus.

In addition, the Lorillard board of directors unanimously recommends that Lorillard shareholders vote “FOR” the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and “FOR” the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement. See “Lorillard Proposal II: Non-Binding, Advisory Vote on Compensation” and “Lorillard Proposal III: Adjournment of Lorillard Special Meeting” beginning on pages 213 and 214, respectively, of this joint proxy statement/prospectus for a more detailed discussion of the recommendation.

Opinion of RAI’s Financial Advisor (See page 123)

On July 14, 2014, Lazard, RAI’s financial advisor in connection with the merger and the transactions pursuant to the subscription agreement, asset purchase agreement and transfer agreement, rendered to the RAI board of directors an oral opinion, which was confirmed by delivery of a written opinion dated July 15, 2014, to the effect that, as of the date of the opinion and based upon and subject to the matters described in its opinion, the merger consideration to be paid by RAI in the merger (after giving effect to the transactions pursuant to the subscription agreement, asset purchase agreement and transfer agreement) was fair, from a financial point of view, to RAI and to RAI shareholders other than BAT.

The full text of Lazard’s written opinion, dated July 15, 2014, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken by Lazard in connection with its opinion, is attached to this proxy statement/prospectus as Annex C and is incorporated by reference herein in its entirety. The summary of Lazard’s opinion included in the section entitled “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinion of RAI’s Financial Advisor” is qualified in its entirety by reference to the full text of the opinion. You are encouraged to read Lazard’s opinion and that section carefully and in their entirety. Lazard’s opinion was for the benefit of the RAI board of directors (in its capacity as such) and Lazard’s opinion was rendered to the RAI board of directors in connection with its evaluation of the merger. Lazard’s opinion was not intended to and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with respect to the merger (or, for the avoidance of doubt, the transactions pursuant to the subscription agreement, asset purchase agreement and transfer agreement) or any matter relating thereto.

Opinions of Lorillard’s Financial Advisors (See page 131)

Barclays and Centerview were retained by Lorillard as financial advisors to the Lorillard board of directors in connection with the proposed merger and the other transactions contemplated by the merger agreement, collectively referred to as the proposed transaction throughout this section and the summaries of Barclays’ and Centerview’s opinions set forth in this joint proxy statement/prospectus under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinions of Lorillard’s Financial Advisors.” Barclays and Centerview are sometimes collectively referred to in this joint proxy statement/prospectus as Lorillard’s financial advisors. In connection with this engagement, the Lorillard board of directors requested that Lorillard’s financial advisors

 

 

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evaluate the fairness, from a financial point of view, to the holders of shares of Lorillard common stock (other than shares of Lorillard common stock (1) held by Lorillard as treasury stock or owned by a subsidiary of Lorillard, RAI or Merger Sub immediately prior to the effective time of the merger or (2) owned by shareholders who have properly made and not withdrawn a demand for appraisal rights pursuant to Section 262 of the DGCL, which are, together with any shares of Lorillard common stock held by any affiliate of RAI, collectively referred to as the excluded shares throughout this section and the summaries of Barclays’ and Centerview’s opinions set forth in this joint proxy statement/prospectus under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinions of Lorillard’s Financial Advisors”) of the merger consideration to be paid to such holders pursuant to the merger agreement.

Opinion of Barclays

On July 14, 2014, Barclays rendered its oral opinion (which was subsequently confirmed in writing) to the Lorillard board of directors to the effect that, as of such date and based upon and subject to the assumptions, matters considered, qualifications and limitations described in its written opinion, the merger consideration to be paid to Lorillard shareholders (other than holders of excluded shares) in the proposed transaction was fair, from a financial point of view, to such holders.

The full text of Barclays’ written opinion, dated as of July 14, 2014, which describes the assumptions made, procedures followed, matters considered, qualifications and limitations upon the review undertaken by Barclays in connection with its opinion, is attached as Annex D to this joint proxy statement/prospectus and is incorporated herein by reference. The summary of Barclays’ opinion set forth in this joint proxy statement/prospectus under the caption “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinions of Lorillard’s Financial Advisors—Opinion of Barclays” is qualified in its entirety by reference to the full text of Barclays’ written opinion. Barclays’ opinion was provided for the use and benefit of the Lorillard board of directors and was rendered to the Lorillard board of directors in connection with its consideration of the proposed transaction. Barclays’ opinion was limited to and addressed only the fairness, from a financial point of view, to Lorillard shareholders (other than holders of excluded shares) of the merger consideration to be paid to such shareholders in the proposed transaction and did not address any other term or aspect of the merger agreement or the proposed transaction. Barclays’ opinion does not constitute a recommendation to any Lorillard shareholder as to how such shareholder should vote or act with respect to the proposed transaction.

The full text of Barclays’ written opinion should be read carefully in its entirety for a description of the assumptions made, procedures followed, matters considered, qualifications and limitations upon the review undertaken by Barclays in connection with its opinion.

Opinion of Centerview

On July 14, 2014, Centerview delivered to the Lorillard board of directors its oral opinion, subsequently confirmed in a written opinion dated as of July 14, 2014, to the effect that, as of such date and based upon and subject to the assumptions, procedures followed, matters considered, qualifications and limitations described in its written opinion, the merger consideration to be paid to the holders of shares of Lorillard common stock (other than excluded shares) pursuant to the merger agreement was fair, from a financial point of view, to such holders.

The full text of Centerview’s written opinion, dated as of July 14, 2014, which describes the assumptions made, procedures followed, matters considered, qualifications and limitations upon the review undertaken by Centerview in connection with its opinion, is attached as Annex E to this joint proxy statement/prospectus and is incorporated herein by reference. The summary of Centerview’s opinion set

 

 

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forth in this joint proxy statement/prospectus under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinions of Lorillard’s Financial Advisors—Opinion of Centerview” is qualified in its entirety by reference to the full text of Centerview’s written opinion. Centerview’s financial advisory services and opinion were provided for the information and assistance of the Lorillard board of directors (in their capacity as directors and not in any other capacity) in connection with and for purposes of its consideration of the proposed transaction and Centerview’s opinion only addressed the fairness, from a financial point of view, as of the date thereof, to the holders of shares of Lorillard common stock (other than excluded shares) of the merger consideration to be paid to such holders pursuant to the merger agreement and did not address any other term or aspect of the merger agreement or the proposed transaction. Centerview’s opinion does not constitute a recommendation to any Lorillard shareholder or any other person as to how such shareholder or other person should vote with respect to the merger or otherwise act with respect to the proposed transaction or any other matter.

The full text of Centerview’s written opinion should be read carefully in its entirety for a description of the assumptions made, procedures followed, matters considered, qualifications and limitations upon the review undertaken by Centerview in connection with its opinion.

Financing of the Merger (See page 149)

RAI currently intends to finance the cash portion of the merger consideration and related fees and expenses with available cash, up to $500 million in borrowings under its existing revolving credit facility, proceeds from the issuance of debt securities, the proceeds of the divestiture and the share purchase and, only to the extent necessary, borrowings under the bridge facility. RAI has announced its intention to pursue financing that would replace or supplement financing available under the bridge facility. There can be no assurance that any replacement or supplemental financing will be available at all or on acceptable terms.

On September 23, 2014, pursuant to the commitment letter, RAI, and certain of its subsidiaries as guarantors, entered into the bridge facility with the agents and lenders party thereto. Under the bridge facility, the lenders are providing a 364-day senior unsecured term loan bridge facility in an aggregate principal amount of up to $9 billion, available for the purpose of financing part of the cash portion of the merger consideration and fees and expenses in connection with the transactions contemplated by the merger agreement. The bridge facility may be drawn only in a single drawing upon the closing of the merger, and not thereafter, matures 364 days after being drawn and may be prepaid (but not reborrowed) without premium or penalty. The amount of the bridge facility available at closing is subject to reduction in accordance with the terms of the bridge facility, including but not limited to reduction upon the contemplated issuance of debt securities expected to be the primary source of the cash consideration to finance the cash portion of the merger consideration and related fees and expenses.

For more information on the financing of the merger, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Financing of the Merger” beginning on page 149 of this joint proxy statement/prospectus.

Interests of Certain RAI Directors and Officers (See page 151)

When considering the recommendation of the RAI board of directors that RAI shareholders approve the share issuance, specifically, that RAI shareholders approve both the Lorillard share issuance and the BAT share issuance, you should be aware that some of RAI’s directors and executive officers may have interests in the merger that are different from, or in addition to, those of RAI shareholders generally. The two B&W nominated directors of RAI who are present or former BAT executives may have interests that are different from, or in addition to, those of RAI shareholders generally as a result of the share purchase, pursuant to which BAT (directly or through one or more of its wholly owned subsidiaries) will subscribe for and purchase a number of shares of RAI common stock necessary to maintain its approximately 42% beneficial ownership interest in RAI

 

 

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immediately following completion of the merger. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—General” beginning on page 89 of this joint proxy statement/prospectus. These interests may present such directors and executive officers with actual or potential conflicts of interest. The RAI board of directors was aware of and considered these potential interests, among other matters, in evaluating and negotiating the merger agreement and the merger, in approving the merger agreement, subscription agreement, asset purchase agreement, merger, share issuance and divestiture, and in deciding to recommend that RAI shareholders approve the Lorillard share issuance and the BAT share issuance at the RAI special meeting. RAI’s directors and executive officers will not receive any special compensation the payment of which is contingent upon completion of the merger, share issuance or divestiture.

Interests of Certain Lorillard Directors and Officers (See page 151)

When considering the recommendation of the Lorillard board of directors that Lorillard shareholders adopt the merger agreement, you should be aware that some of Lorillard’s directors and executive officers may have interests in the merger and divestiture that are different from, or in addition to, those of Lorillard shareholders generally. These interests may present such directors and executive officers with actual or potential conflicts of interest. The Lorillard board of directors was aware of these interests during its deliberations on the merits of the merger and divestiture and in deciding to recommend that Lorillard shareholders vote to adopt the merger agreement at the Lorillard special meeting. These interests include:

 

    Treatment of Equity Awards. Lorillard’s executive officers and directors have previously been granted stock options, stock appreciation rights, restricted stock, and/or restricted stock units under Lorillard’s Amended and Restated 2008 Incentive Compensation Plan, referred to as the 2008 Plan. The awards granted under the 2008 Plan have generally been granted with terms which provide that in the event of a change in control (which includes the closing of the merger and divestiture), any such award, to the extent then outstanding, will automatically become fully vested and/or exercisable solely as a result of the closing of the merger and divestiture (and, in the case of performance-based awards, vesting will be based on the performance conditions being deemed achieved at the target levels). Under the terms of the merger agreement, upon the completion of the merger, each outstanding Lorillard restricted stock unit and share of restricted stock will vest and be converted into the right to receive the merger consideration, and each outstanding Lorillard stock option and stock appreciation right will be cancelled in exchange for a cash payment equal to the excess, if any, of the equity award consideration over the exercise price, in each case, less applicable withholding taxes.

 

    Treatment of Bonuses under Annual Incentive Plan. Lorillard’s executive officers are eligible to receive bonuses under the annual incentive plan established under the 2008 Plan. Under the terms of the merger agreement, if the closing of the merger and divestiture occurs (1) prior to the end of fiscal year 2014, then the fiscal year 2014 annual bonus will be paid out based on performance achieved through the closing date measured against the applicable performance goals which will be pro rated based on the number of completed months that have elapsed through the closing date or (2) after the end of fiscal year 2014 but prior to the end of fiscal year 2015, then a pro rated portion of the fiscal year 2015 annual bonus will be paid out at target level performance, with such pro ration based on the number of days that have elapsed in fiscal year 2015 through the closing date.

 

   

Treatment of Executive Insurance Program. Certain of Lorillard’s executive officers participate in the Lorillard Tobacco Company Executive Insurance Program, referred to as the EIP. In the event of the executive’s involuntary termination without “cause” or, during the one-year period following a change in control transaction, a termination by the executive of the executive’s employment for “good reason,” the restrictions on the executive’s life insurance policy under the EIP (including the executive’s obligation to transfer the full cash surrender value of the policy to Lorillard) will lapse and the benefits accrued to such executive under the Lorillard Tobacco Company Deferred Compensation Plan and/or

 

 

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the Lorillard Tobacco Company Benefit Equalization Plan will be reduced by an amount equal to 85% of the cash surrender value of such policy.

 

    Change in Control and Termination Benefits. The change in control severance agreements entered into with certain of Lorillard’s executive officers provide severance benefits such that in the event of the executive officer’s involuntary termination without “cause” or termination for “good reason” (each as defined in the change in control severance agreement), in each case, within two years following a change in control (which includes the closing of the merger and divestiture) or, in certain circumstances, prior to the closing of a change in control transaction, certain of Lorillard’s executive officers would receive certain compensation and benefits paid or provided by Lorillard under their respective change in control severance agreements, including:

 

    all vested and accrued, but unpaid, salary and benefits earned through the termination date;

 

    a lump-sum cash severance payment equal to three times the sum of (1) the executive officer’s annual base salary and (2) the executive officer’s target annual bonus for the fiscal year in which the date of the termination of employment occurs;

 

    an additional cash payment equal to the executive officer’s prorated target annual bonus amount for the fiscal year in which the date of termination of employment occurs;

 

    a lump-sum cash payment equal to the value of three years of additional service credit under the Retirement Plan for Employees of Lorillard Tobacco Company and the Lorillard Tobacco Company Benefit Equalization Plan as well as three years of additional matching contributions under the Lorillard Tobacco Company Employee Savings Plan;

 

    continuation of life, accident and health insurance benefits for 36 months at no greater after-tax cost to the executive officer than the cost prior to termination;

 

    post-retirement health and life insurance for executive officers who would have become eligible for such insurance within 36 months following termination;

 

    reimbursement of legal fees in the event of a termination dispute or a tax audit; and

 

    $25,000 in outplacement services for one year.

 

    Appointment of Murray S. Kessler to the RAI Board of Directors. Pursuant to the merger agreement, RAI has agreed that it will appoint Murray S. Kessler, the current chairman and president and chief executive officer of Lorillard (or, if Mr. Kessler is no longer a member of the Lorillard board of directors upon completion of the merger, or is otherwise unable to serve on the RAI board of directors, such other member of the Lorillard board of directors as may be designated by Lorillard who is reasonably acceptable to the RAI board of directors) to the RAI board of directors upon completion of the merger.

 

    Indemnification and Insurance. Under the terms of the merger agreement, RAI has agreed to indemnify each former and present director and officer of Lorillard or any Lorillard subsidiary, and all fiduciaries under any Lorillard employee benefit plan to the fullest extent permitted by applicable law against costs, expenses, judgments, fines, losses, claims, damages or liabilities to the extent related to any claim or action arising out of or pertaining to the fact that the indemnified party is or was an officer or director of Lorillard or a Lorillard subsidiary or a fiduciary under any Lorillard employee plan or is or was serving at the request of Lorillard or a Lorillard subsidiary as a director or officer of any business or non-profit enterprise, and to advance expenses to such indemnified parties. RAI has also agreed to maintain directors’ and officers’ liability insurance coverage at certain levels for a period of six years following the completion of the merger.

 

   

Offers of Employment from Imperial Sub. Under the terms of the asset purchase agreement, Imperial Sub has agreed to make offers of employment to all Lorillard employees (other than any retained

 

 

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Lorillard employees) effective as of the closing of the merger and divestiture, which may include Imperial Sub making offers of employment to a substantial number of Lorillard’s executive officers. For more information on the terms of Imperial Sub’s offers of employment, see “The Divestiture—The Asset Purchase Agreement and Transfer Agreement—Employee Matters” beginning on page 203 of this joint proxy statement/prospectus.

 

    Terms of Employment for Retained Lorillard Employees. Under the terms of the merger agreement, for one year from and after the effective time of the merger, RAI will provide retained Lorillard employees with compensation that is no less favorable that what was provided immediately before the effective time of the merger and benefits that are substantially similar in the aggregate to those provided to similarly situated RAI employees. Some of Lorillard’s executive officers may be retained Lorillard employees.

Assuming the closing of the merger and divestiture was completed on October 31, 2014 and all of Lorillard’s executive officers experienced a qualifying termination on such date, (i) the total compensation potentially payable to Messrs. Kessler, Taylor, Spell, Milstein and Hennighausen is $44,910,758, $13,393,708, $12,651,364, $10,668,590 and $8,106,600, respectively, and (ii) the total value that each of Lorillard’s non-employee directors would potentially receive through the acceleration of the vesting of unvested shares of restricted stock held by each such non-employee director is $199,542 (other than Mr. Levin, who would potentially receive $140,286). For more information on the potential payments and benefits to Lorillard’s executive officers and directors, including the individual components of and the assumptions underlying such payments and benefits, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement — Interests of Certain Lorillard Directors and Officers” on page 151 of this joint proxy statement/prospectus.

Board of Directors Following the Merger (See page 159)

Pursuant to the merger agreement, at the closing of the merger, Murray S. Kessler, the current chairman and president and chief executive officer of Lorillard, will be appointed to the RAI board of directors. If for any reason Mr. Kessler is no longer a member of the Lorillard board of directors as of the effective time of the merger or is otherwise unable to serve on the RAI board of directors, Lorillard will designate another individual serving on the Lorillard board of directors who is reasonably acceptable to the RAI board of directors to be appointed to the RAI board of directors.

Regulatory Approvals Required for the Merger (See page 159)

Completion of the merger is conditioned upon the receipt of certain governmental clearances or approvals, including the expiration or termination of the waiting period relating to the merger under the HSR Act.

As of the date of this joint proxy statement/prospectus, the parties have made all requisite filings for regulatory approval of the merger. Specifically, on July 29, 2014, RAI and Lorillard made filings with the FTC to initiate the merger review process. Since making those filings, RAI’s and Lorillard’s respective outside counsel have met with FTC officials to provide additional details regarding the merger and to answer questions posed by agency staff members.

The process for obtaining the requisite regulatory approvals for the merger is ongoing. Under the FTC’s merger review process, the parties expect to remain in regular contact with FTC officials to assist their review of the parties’ submissions to the agency and answer questions and provide clarification regarding the merger. Each of RAI and Lorillard has received a Request for Additional Information and Documentary Material from the FTC, which extends the waiting period under the HSR Act until 30 days after both parties have substantially complied with the request for additional information, unless the waiting period is terminated earlier, or there is an agreed extension of time.

 

 

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The regulatory filings described above relate to approvals for the merger only. We expect the FTC will consider the subscription agreement and the divestiture in relation to the merger. The parties believe that the divestiture will facilitate regulatory approval of the merger, and have generally requested that regulators review the merger and the divestiture on the same timeline.

There can be no assurances that any of the regulatory approvals described above will be obtained and, if obtained, there can be no assurance as to the timing of such approvals, the ability to obtain such approvals on satisfactory terms or the absence of any litigation challenging such approvals.

For more information on the regulatory approvals required for the merger, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Regulatory Approvals Required for the Merger” beginning on page 159 of this joint proxy statement/prospectus.

Certain U.S. Federal Income Tax Consequences of the Merger (See page 161)

The receipt of RAI common stock and cash in exchange for Lorillard common stock in the merger generally will be a taxable transaction for U.S. federal income tax purposes. A U.S. holder of Lorillard common stock who receives RAI common stock and cash in the merger generally will recognize capital gain or loss equal to the difference, if any, between (1) the sum of the fair market value of RAI common stock and cash, including any cash received in lieu of fractional shares of RAI common stock received in the merger, and (2) such holder’s adjusted tax basis in its Lorillard common stock exchanged therefor. The determination of the actual tax consequences of the merger to a holder of Lorillard common stock will depend on the holder’s specific situation. Holders of Lorillard common stock should consult their own tax advisors as to the tax consequences of the merger in their particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and of changes in those laws. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Certain U.S. Federal Income Tax Consequences of the Merger” beginning on page 161 of this joint proxy statement/prospectus.

Accounting Treatment (See page 164)

The merger will be accounted for using the acquisition method of accounting with RAI considered the acquirer of Lorillard. RAI will record assets acquired, including identifiable intangible assets, and liabilities assumed from Lorillard at their respective fair values at the date of completion of the merger. Any excess of the purchase price over the net fair value of such assets and liabilities will be recorded as goodwill. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Accounting Treatment” beginning on page 164 of this joint proxy statement/prospectus.

Treatment of Lorillard Equity Awards (See page 165)

Under the terms of the merger agreement, upon completion of the merger, each outstanding Lorillard stock option and stock appreciation right will be cancelled in exchange for a cash payment equal to the excess, if any, of the equity award consideration over the exercise price, and each outstanding Lorillard restricted stock unit and share of restricted stock will vest and be converted into the right to receive the merger consideration. For more information on the treatment of Lorillard equity awards in connection with the merger, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Treatment of Lorillard Equity Awards” beginning on page 165 of this joint proxy statement/prospectus.

 

 

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Listing of Shares of RAI Common Stock and Delisting and Deregistration of Lorillard Common Stock (See page 166)

Under the terms of the merger agreement, RAI is required to use its reasonable best efforts to cause the shares of RAI common stock to be issued in the share issuance to be approved for listing on the NYSE, subject to official notice of issuance, prior to the closing of the merger. It is a condition to both parties’ obligations to complete the merger that such approval is obtained, subject to official notice of issuance. Accordingly, application will be made to have the shares of RAI common stock to be issued in the share issuance approved for listing on the NYSE, where shares of RAI common stock are currently traded.

If the merger is completed, there will no longer be any publicly held shares of Lorillard common stock. Accordingly, Lorillard common stock will no longer be listed on the NYSE and will be deregistered under the Exchange Act.

Litigation Relating to the Merger (See page 167)

RAI, the members of the RAI board of directors and BAT have been named as defendants in a putative class action lawsuit brought in North Carolina state court on behalf of a purported class of RAI shareholders seeking to enjoin the proposed merger with Lorillard. The complaint generally alleges, among other things, that the members of the RAI board of directors breached their fiduciary duties to RAI shareholders by approving the share purchase and the sharing of technology with BAT. The complaint also alleges that there were various conflicts of interest in the transaction. On December 8, 2014, defendants filed motions to dismiss the complaint and motions to stay discovery.

In addition, Lorillard, the members of the Lorillard board of directors, RAI and BAT have been named as defendants in putative class action lawsuits brought in the Delaware Court of Chancery by Lorillard shareholders challenging the proposed merger with RAI. The complaints generally allege, among other things, that the members of the Lorillard board of directors breached their fiduciary duties to Lorillard shareholders by authorizing the proposed merger of Lorillard with RAI. The complaints also allege that RAI and BAT aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Lorillard board of directors. On November 25, 2014, the court granted a motion for consolidation and appointment of lead plaintiffs and lead counsel. On December 11, 2014, lead plaintiffs filed a motion for a preliminary injunction and a motion to expedite.

The shareholder actions seek injunctive relief enjoining the merger, damages and reimbursement of costs, among other remedies. Additional lawsuits may be filed against RAI, Lorillard, the directors of either company and/or BAT in connection with the merger.

No Solicitation of Alternative Proposals (See page 176)

Lorillard has agreed, from the date of the merger agreement until the earlier of the completion of the merger or the termination of the merger agreement, except as otherwise provided in the merger agreement, not to, and not to authorize or permit any of its subsidiaries or any of its or their respective directors, officers, employees or representatives to, directly or indirectly:

 

    solicit or initiate, or knowingly encourage, induce, facilitate or cooperate with, any Lorillard takeover proposal, as defined under “The Merger Agreement—No Solicitation of Alternative Proposals” beginning on page 176 of this joint proxy statement/prospectus, or an inquiry or proposal that would reasonably be expected to lead to a Lorillard takeover proposal; or

 

    participate in any substantive discussions or negotiations with any person regarding, or furnish to any person any non-public information relating to, Lorillard or any of its subsidiaries with respect to any Lorillard takeover proposal or an inquiry or proposal that would reasonably be expected to lead to a Lorillard takeover proposal.

Additionally, except as permitted by the merger agreement and described below, Lorillard agreed to (1) immediately cease and cause to be terminated all existing discussions or negotiations with any person

 

 

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conducted prior to the execution of the merger agreement with respect to a Lorillard takeover proposal or an inquiry or proposal that would reasonably be expected to lead to a Lorillard takeover proposal, (2) request prompt return or destruction of all confidential information previously furnished to any such person or its representatives and (3) immediately terminate all physical and electronic data room access previously granted to any such person or its representatives.

Notwithstanding these restrictions, the merger agreement provides that if at any time prior to Lorillard shareholders adopting the merger agreement, Lorillard receives a written Lorillard takeover proposal that the Lorillard board of directors determines in good faith (after consultation with its outside counsel and financial advisor) is bona fide and constitutes or is reasonably expected to result in or lead to a superior proposal, as defined under “The Merger Agreement—No Solicitation of Alternative Proposals” beginning on page 176 of this joint proxy statement/prospectus, and which did not result from a breach of the non-solicitation obligations set forth in the merger agreement, then Lorillard, and its subsidiaries and its and their representatives at the request of Lorillard, may, subject to compliance in all material respects with the provisions of the merger agreement described in the following paragraph, (1) provide access to its and its subsidiaries’ properties, books and records and furnish information with respect to itself and its subsidiaries to the person making such Lorillard takeover proposal (and its representatives) pursuant to an acceptable confidentiality agreement (provided that any material non-public information that has not previously been provided to RAI must have been provided to RAI prior to or substantially concurrent with the time that it is provided to such person) and (2) participate in discussions regarding the terms of such Lorillard takeover proposal and negotiate such terms with the person making such Lorillard takeover proposal.

The merger agreement also requires Lorillard to (1) within 24 hours of obtaining knowledge of a Lorillard takeover proposal or any inquiry or proposal that would reasonably be expected to lead to a Lorillard takeover proposal, advise RAI in writing of such Lorillard takeover proposal or inquiry or proposal, the material terms of any such Lorillard takeover proposal (including any changes thereto) and the identity of the person making such Lorillard takeover proposal, (2) keep RAI reasonably informed in all material respects on a reasonably current basis of the status and developments of any Lorillard takeover proposal and (3) provide to RAI, within 24 hours after receipt, all drafts of agreements relating to a Lorillard takeover proposal and any written proposals containing material terms of and counterproposals to a Lorillard takeover proposal that are exchanged with the person making the Lorillard takeover proposal or any of its affiliates or representatives.

Completion of the Merger is Subject to Certain Conditions (See page 186)

The obligations of each of RAI and Lorillard to effect the merger are subject to the satisfaction or waiver of the following conditions:

 

    the adoption by Lorillard shareholders of the merger agreement;

 

    the approval by RAI shareholders of the share issuance, specifically of both the Lorillard share issuance and the BAT share issuance;

 

    the approval for listing by the NYSE, subject to official notice of issuance, of the RAI common stock issuable to Lorillard shareholders in the merger;

 

    the termination or expiration of any applicable waiting period under the HSR Act;

 

    the absence of any law, order, judgment or other legal restraint by a court or other governmental entity that prevents, makes illegal or prohibits the closing of the merger;

 

    the SEC having declared effective the registration statement of which this joint proxy statement/prospectus forms a part;

 

   

the representations and warranties of the other party relating to organization, standing, corporate power, capital structure, authority, execution and delivery, enforceability and brokers’ fees and

 

 

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expenses being true and correct in all material respects as of the date of the merger agreement and as of the date of the closing of the merger (except to the extent expressly made as of an earlier date, in which case, as of such earlier date);

 

    each other representation and warranty of the other party being true and correct (without giving effect to any limitations as to “materiality” or “material adverse effect”) as of the date of the merger agreement and as of the date of the closing of the merger (except to the extent expressly made as of an earlier date, in which case, as of such earlier date), except where the failure of such representations and warranties to be so true and correct, individually and in the aggregate, has not had and would not reasonably be expected to have a material adverse effect;

 

    the other party having performed in all material respects all obligations required to be performed by it under the merger agreement at or prior to the closing;

 

    the absence of a material adverse effect on the other party since the date of the merger agreement; and

 

    the receipt of an officer’s certificate executed by an executive officer of the other party certifying that the four preceding conditions have been satisfied.

In addition, the obligations of RAI and Merger Sub to effect the merger are conditioned on the absence of any legal restraint issued or promulgated by a U.S. governmental entity under any antitrust laws (as a result of the merger and other than those that may be reflective of the merger agreement, subscription agreement, asset purchase agreement or transfer agreement) that would result in a requirement to dispose of or hold separate, or any prohibition or limitation on the ownership, operation or control of, any business, properties or assets of Lorillard, RAI or any of their respective subsidiaries, which, individually or in the aggregate, would reasonably be expected to result in a substantial detriment.

Termination of the Merger Agreement (See page 187)

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after the receipt of the requisite shareholder approvals, under the following circumstances:

 

    by mutual written consent of RAI and Lorillard;

 

    by either RAI or Lorillard:

 

    if the merger is not completed by July 15, 2015, referred to as the end date; provided that no party may terminate the merger agreement if the merger is not completed by the end date if such party has failed to perform its covenants under the merger agreement; provided, further, that the end date will automatically extend by six months if, on the initial end date, the only conditions under the merger agreement that have not been satisfied or waived relate to antitrust regulatory matters; provided, further, that in the event all conditions precedent to the merger have been satisfied but the end date, by its terms, would occur before the ten business days contemplated in the merger agreement (related to the completion of the financing of the merger, as described below), the end date will be extended by the number of days necessary to provide RAI with the ten business days contemplated thereby;

 

    if a governmental entity has issued a law or final and nonappealable judgment making the completion of the merger illegal or otherwise preventing the merger or the share issuance; provided that no party may terminate the merger agreement due to such a law or judgment if such party has failed, in any material respect, to perform its covenants under the merger agreement to prevent, oppose or remove such law or judgment;

 

    if RAI shareholders vote on and fail to approve the share issuance at the RAI special meeting;

 

    if Lorillard shareholders vote on and fail to adopt the merger agreement at the Lorillard special meeting;

 

 

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    if the other party breaches or fails to perform any of its covenants or agreements in the merger agreement, or if the other party’s representations or warranties fail to be true and correct, in either case, such that the conditions to the terminating party’s obligations to complete the merger would not then be satisfied and such breach is not capable of being cured by the end date; provided that no party may terminate the merger agreement for such reason if such party is then in material breach of its covenants under the merger agreement; or

 

    if (1) prior to obtaining the approval of the other party’s shareholders required to complete the merger, the board of directors of the other party withdraws, modifies (in a manner adverse to the terminating party) or proposes publicly to withdraw or modify (in a manner adverse to the terminating party), its recommendation of the approval of the share issuance or the adoption of the merger agreement, as applicable, and such change in its recommendation has not been withdrawn, or (2) the other party fails to include its recommendation of the approval of the share issuance or the adoption of the merger agreement, as applicable, in this joint proxy statement/prospectus, and such failure has not been remedied; or

 

    by Lorillard, if permitted by and in compliance with the terms of the merger agreement, prior to obtaining its shareholder approval, to enter into a binding agreement providing for a superior proposal.

If the merger agreement is validly terminated, the agreement will become void and have no effect, without any liability or obligation on the part of any party, except in the case of fraud or intentional breach of a covenant or agreement contained in the merger agreement, and except that certain provisions of the merger agreement, including those relating to fees and expenses, effects of termination, governing law, jurisdiction, waiver of jury trial and specific performance, as well as confidentiality, will continue in effect notwithstanding termination of the merger agreement.

The Share Purchase and the Subscription Agreement (See page 191)

Concurrently with the execution of the merger agreement, RAI entered into the subscription agreement with BAT and B&W. Under the terms of the subscription agreement, BAT has agreed, directly or indirectly through one or more of its wholly owned subsidiaries, to subscribe for and purchase, simultaneously with the completion of the merger, a number of shares of RAI common stock such that BAT, directly or indirectly through its affiliates, will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger for an aggregate purchase price of approximately $4.7 billion, which price corresponds to the per share reference price used to determine the number of shares of RAI common stock to which Lorillard shareholders will be entitled at the closing of the merger. The subscription agreement requires RAI to use the proceeds from the share purchase to fund the merger consideration, and permits RAI to use the proceeds to pay costs and expenses relating to the merger. In addition, RAI has agreed that it will not make certain amendments to the merger agreement or the asset purchase agreement without BAT’s approval.

Further, BAT has agreed that at any meeting of RAI shareholders (or with respect to any written consent of RAI shareholders) held to approve the share issuance, all shares of RAI common stock beneficially owned by BAT as of the RAI record date, representing approximately 42% of the shares of RAI common stock currently outstanding, will be voted to approve both the Lorillard share issuance and the BAT share issuance. BAT has further agreed to vote and cause its applicable subsidiaries to vote (including by written consent) against any action or agreement that would reasonably be expected to materially impede, interfere with or prevent the share issuance and the other transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement and transfer agreement.

A copy of the subscription agreement is attached as Annex B to this joint proxy statement/prospectus. For more information on the share purchase and the subscription agreement, see “The Subscription Agreement” beginning on page 191 of this joint proxy statement/prospectus.

 

 

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Conditions to Closing the Share Purchase

The obligations of each of RAI and BAT to effect the share purchase are subject to the satisfaction or waiver of the following conditions:

 

    the satisfaction or waiver of all conditions to the closing of the merger;

 

    the preceding or simultaneous closing of the merger;

 

    the termination of any applicable waiting period under the HSR Act;

 

    each representation and warranty of the other party relating to organization and standing, authority to enter into the subscription agreement and, in the case of RAI’s representations, capitalization, being true and correct in all respects as of the date of the subscription agreement and as of the date of the closing of the share purchase as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date);

 

    all other representations and warranties of the other party qualified by “materiality” being true and correct in all respects as so qualified as of the date of the subscription agreement and as of the date of the closing of the share purchase as if made at and as of such time, and all other representations of the other party not so qualified by “materiality” being true and correct in all material respects as of the date of the subscription agreement and as of the date of the closing of the share purchase as if made at and as of such time;

 

    the performance by the other party in all material respects of its obligations under the subscription agreement at or prior to the closing of the share purchase; and

 

    the delivery by such party of a certificate signed on behalf of such party by an executive officer of such party certifying the aforementioned representations and warranties and performance of the aforementioned obligations.

In addition, as a condition to BAT’s obligation to effect the share purchase, RAI must have performed in all respects its obligations under the covenants relating to amendment by RAI of the merger agreement, asset purchase agreement or other agreements related to the divestiture.

Termination of the Subscription Agreement

The subscription agreement may be terminated at any time prior to the closing of the share purchase under the following circumstances:

 

    upon the termination of the merger agreement (in which case the subscription agreement will automatically terminate);

 

    by BAT, if:

 

    RAI breaches or fails to perform any of its covenants related to amending the merger agreement, asset purchase agreement or any other agreement related to the divestiture; or

 

    RAI breaches or fails to perform any of its other covenants or agreements in the subscription agreement, or if RAI’s representations or warranties fail to be true and correct, in either case, such that (1) a condition to BAT’s obligations to complete the share purchase would not be satisfied and, (2) such failure or breach is not capable of being cured;

 

    by RAI, if:

 

    BAT materially breaches or fails to perform any of its covenants or agreements contained in the subscription agreement, which breach or failure is not capable of being cured; or

 

 

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    BAT’s representations or warranties fail to be true and correct, such that a condition to RAI’s obligations to complete the share purchase would not be satisfied and such failure is not capable of being cured.

In addition, BAT may terminate the subscription agreement if RAI breaches or fails to perform its obligations under the covenants relating to amendment by RAI of the merger agreement, asset purchase agreement or other agreements related to the divestiture, whether or not such failure is capable of being cured.

Lorillard Rights Under the Subscription Agreement

Lorillard is an express third party beneficiary of the subscription agreement, with the right to enforce the provisions of the agreement with respect to BAT’s obligations:

 

    to complete the share purchase;

 

    to vote its shares of RAI common stock beneficially owned in favor of the share issuance and vote against any action that would reasonably be expected to materially impede, interfere with or prevent the share issuance and the other transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement and transfer agreement; and

 

    not to transfer its shares of RAI common stock beneficially owned or grant proxies or enter into voting arrangements in respect of RAI common stock beneficially owned by BAT, in each case prior to the earlier of the closing of the share purchase and the termination of the subscription agreement,

in each case subject to the terms and conditions of the subscription agreement.

The sections of the subscription agreement providing for the foregoing obligations may not be amended, modified or waived without Lorillard’s prior written consent. In addition, without Lorillard’s prior written consent, the subscription agreement may not be terminated by mutual written consent of RAI and BAT, and no other amendment, modification or waiver, or grant of consent or extension may be granted under the subscription agreement that is inconsistent with the foregoing.

The Divestiture and the Asset Purchase Agreement and Transfer Agreement (See page 197)

In connection with entry into the merger agreement, on July 15, 2014, RAI entered into the asset purchase agreement and Lorillard entered into the transfer agreement, in each case with Imperial Sub, and, for certain limited purposes of the asset purchase agreement, Imperial, pursuant to which, subject to the closing of the merger, Imperial Sub will acquire, (1) the RAI transferred assets, consisting of certain assets owned by RAI subsidiaries or affiliates, related to the cigarette brands WINSTON, KOOL and SALEM (and under certain circumstances, DORAL) and related to RAI’s subsidiaries’ Puerto Rico business, and (2) the Lorillard transferred assets, consisting of certain assets currently owned by Lorillard subsidiaries or affiliates, related to the “e-vapor” brand blu (including SKYCIG) and the cigarette brand Maverick, as well as Lorillard’s owned and leased real property, including its manufacturing, research and development facilities and headquarters in Greensboro, North Carolina and tobacco receiving and storage facilities in Danville, Virginia, and the transferred employees, together with certain associated liabilities. Pursuant to the transfer agreement, certain Lorillard transferred assets, including Lorillard’s Greensboro facility, Lorillard’s Danville facility, collective bargaining agreements that Lorillard is a party to and the related pension plan and certain liabilities will be transferred by Lorillard subsidiaries to Imperial Sub immediately prior to the closing of the merger. The remaining transferred assets, including all of the RAI transferred assets, and certain related assumed liabilities, will be transferred to Imperial Sub by RAI subsidiaries or affiliates immediately after the closing of the merger. The transactions contemplated by the asset purchase agreement and the transfer agreement are collectively referred to as the divestiture

 

 

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throughout this joint proxy statement/prospectus. The closing of the divestiture is subject to completion of the merger (although the transactions contemplated by the transfer agreement will occur immediately prior to the merger) and to certain other conditions, including the approval of the divestiture by Imperial shareholders.

The aggregate cash purchase price for the transferred assets is an amount equal to $7,056,202,000, together with the assumption of certain liabilities. The cigarette brands that form part of the transferred assets will be acquired by Imperial Sub without historic product liabilities.

The parties also have entered or will enter into a series of agreements, detailed below, that govern certain pre- and post-divestiture transactions and arrangements, including regarding marketing, manufacturing, intellectual property, transition services and specified settlement obligations. These agreements include the route to market agreement, reciprocal manufacturing agreement, assignment and assumption agreement, intellectual property license agreement, and transition services agreement. Certain activities discussed in this joint proxy statement/prospectus to be conducted by RJR Tobacco or Imperial Sub, as applicable, may be conducted by one of more of their respective affiliates.

A copy of the asset purchase agreement is filed as an exhibit to the registration statement of which this joint proxy statement/prospectus forms a part and is incorporated herein by reference. For more information on the divestiture and the asset purchase agreement, transfer agreement and other agreements entered or to be entered into in connection with the divestiture, see “The Divestiture” beginning on page 197 of this joint proxy statement/prospectus.

Neither RAI shareholders nor Lorillard shareholders are entitled to vote on the divestiture, and no vote with respect thereto is being solicited by RAI or Lorillard. Accordingly, no action is required on the part of RAI shareholders or Lorillard shareholders in connection with the divestiture.

No Solicitation of Alternative Proposals

Except as may be permitted by the merger agreement, the asset purchase agreement requires that RAI not (1) solicit, initiate, entertain, consider, encourage or accept the submission of any proposal or offer from any third party relating to the acquisition of all or substantially all or any significant part of the “business,” as described under “The Divestiture—The Asset Purchase Agreement and Transfer Agreement—Representations and Warranties” on page 199 of this joint proxy statement/prospectus, or (2) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in any effort or attempt by any third party to do or seek any of the foregoing.

Recommendation of the Imperial Board of Directors; Imperial Shareholder Vote

The asset purchase agreement requires Imperial to call and hold a special shareholder meeting and, subject to certain exceptions related to intervening events, requires the Imperial board of directors to recommend that Imperial shareholders approve the transactions contemplated by the asset purchase agreement.

Conditions to Closing of the Divestiture

The obligations of each of RAI and Imperial Sub to close the divestiture are subject to the satisfaction or waiver of the following conditions:

 

    the absence of legal restraints in effect that would prohibit the divestiture, including HSR clearance;

 

    the absence of any law, order, judgment or other legal restraint by a court or other governmental entity that prohibits or materially restrains the divestiture or the other transactions contemplated by the asset purchase agreement;

 

 

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    the approval of the divestiture by Imperial shareholders;

 

    the entering of the order in the case filed in 1999 by the DOJ against the major U.S. cigarette manufacturers, including RJR Tobacco and Lorillard, subjecting Imperial Sub to a final judgment and a remedial order related to certain of the transferred assets, specifically the WINSTON, SALEM, KOOL and Maverick (and, under certain circumstances, DORAL) brands; and

 

    the satisfaction of the conditions precedent to the closing of the merger.

The obligations of Imperial Sub to close the divestiture are further subject to the satisfaction or waiver of the following conditions:

 

    certain fundamental representations and warranties of RAI being true and correct in all material respects as of the date of the agreement and as of the closing date;

 

    each of the other representations and warranties of RAI being true and correct as of the closing date, which condition will be deemed satisfied unless the effect of such representations and warranties not being so true and correct (without giving effect to any materiality or material adverse effect or similar qualification contained in such representations or warranties), taken together, has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect;

 

    RAI complying in all material respects with all of its pre-closing covenants;

 

    Imperial Sub having received an officer’s certificate from RAI certifying that the conditions described in the three preceding bullets have been met;

 

    no written notice having been received from the National Association of Attorneys General indicating that it will not change, on or after closing, the cigarette brands listing with respect to certain brands included among the transferred assets;

 

    no state having provided written notice that it intends to de-list or not recertify any of the cigarette brands included among the transferred assets, where such de-listing or non-recertification would be reasonably likely to result in the inability of Imperial Sub to sell any or all of the acquired brands in certain states;

 

    no written objection being received from certain third-parties regarding the treatment (agreed upon by RAI, Lorillard and Imperial Sub) to be given the cigarette brands included in the transferred assets under the state settlement agreements; and

 

    Imperial Sub having received certifications regarding RAI’s non-foreign status.

The obligations of RAI to close the divestiture are further subject to the satisfaction or waiver of the following conditions:

 

    certain fundamental representations and warranties of Imperial Sub being true and correct in all material respects as of the date of the asset purchase agreement and as of the closing date;

 

    each of the other representations and warranties of Imperial Sub being true and correct as of the closing date, which condition will be deemed satisfied unless the effect of such representations and warranties not being so true and correct (without giving effect to any materiality or material adverse effect or similar qualification contained in such representations or warranties), taken together, would materially impair the ability of Imperial Sub to complete the transactions contemplated by, or perform its obligations under, the transaction agreements (consisting of the asset purchase agreement, route to market agreement, assignment and assumption agreement, intellectual property license agreement, reciprocal manufacturing agreement and the transition services agreement);

 

    Imperial Sub complying in all material respects with all of its pre-closing covenants; and

 

 

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    RAI having received an officer’s certificate from Imperial Sub certifying that the conditions described in the three preceding bullets have been met.

Termination of the Asset Purchase Agreement

The asset purchase agreement may be terminated at any time prior to the closing of the divestiture under the following circumstances:

 

    by mutual written consent of RAI and Imperial Sub;

 

    by either RAI or Imperial Sub:

 

    if the other party (and, in the case of RAI, if Imperial or Imperial Sub) breaches any representation or warranty or fails to perform any of its covenants or agreements in the asset purchase agreement, in either case, such that the conditions to the terminating party’s obligations to close the divestiture would not then be satisfied and such breach is not capable of being cured by the end date; provided that no party may terminate the asset purchase agreement for such reason if such party is in material breach under the asset purchase agreement;

 

    if the closing of the transactions contemplated by the asset purchase agreement has not occurred by the end date; provided that no party may terminate the asset purchase agreement if the divestiture is not closed by the end date if such party has failed to perform its covenants under the asset purchase agreement; provided that the end date will automatically extend by six months if, on the initial end date, the only conditions under the asset purchase agreement that have not been satisfied or waived relate to certain regulatory matters;

 

    if there has been a final, nonappealable governmental order issued restraining or prohibiting the sale or transfer of the transferred assets;

 

    if the Imperial shareholders vote on and fail to approve the divestiture at the Imperial special meeting; or

 

    if the merger agreement is terminated; provided, however, that RAI may terminate the asset purchase agreement under this clause only if, at the time the merger agreement is terminated, it has no intent to enter into a new definitive acquisition agreement with Lorillard or its affiliates.

Additionally, the asset purchase agreement may be terminated by RAI, if (1) the Imperial board of directors withholds, withdraws or proposes publicly to withhold or withdraw the recommendation that the Imperial shareholders vote in favor of the transactions contemplated by the asset purchase agreement, and such change in its recommendation has not been withdrawn, (2) Imperial fails to include such recommendation in its shareholder circular, or (3) where the end date is extended, the HSR Act condition to the merger agreement has not been satisfied and the FTC has informed the parties that the completion of the divestiture will not result in the satisfaction of the HSR Act condition, provided that RAI is not in material breach of certain obligations under the merger agreement.

Transfer Agreement

Under the transfer agreement, Lorillard agreed to transfer to Imperial Sub, immediately before the effective time of the merger, certain of the Lorillard transferred assets, including Lorillard’s Greensboro facility, Lorillard’s Danville facility, collective bargaining agreements that Lorillard is a party to and the related pension plan and certain liabilities. Completion of the transfers contemplated by the transfer agreement is subject to the satisfaction of all of the conditions to closing of the merger and the divestiture set forth in the merger agreement and the asset purchase agreement, respectively. The transfer agreement will automatically terminate upon termination of the merger agreement or the asset purchase agreement. Under the merger agreement, Lorillard

 

 

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agreed that, prior to the termination of the merger agreement, Lorillard will not (1) amend, modify or waive, grant any consent or extension in respect of, or agree to any change to, any term or condition of the transfer agreement, (2) assign any of its rights or obligations under the transfer agreement or (3) execute any right it may have to terminate the transfer agreement.

Termination Fees (See pages 185, 188, 194 and 208)

Termination Fees Under the Merger Agreement

Except as specifically provided in the merger agreement, each party will pay all fees and expenses incurred by it in connection with the merger agreement, subscription agreement, asset purchase agreement and transfer agreement and the transactions contemplated by such agreements. However, upon a termination of the merger agreement, a party will become obligated to pay to the other party a termination fee, in certain specified circumstances.

If the merger agreement is terminated, Lorillard will be obligated to pay a termination fee of $740 million to RAI if:

 

    the merger agreement is terminated by RAI, or in certain circumstances, could have been terminated by RAI, because (1) prior to obtaining the approval of the Lorillard shareholders of the adoption of the merger agreement, the Lorillard board of directors withdrew, modified (in a manner adverse to RAI) or proposed publicly to withdraw or modify (in a manner adverse to RAI), its recommendation of the adoption of the merger agreement, and such change in its recommendation has not been withdrawn or (2) Lorillard failed to include its recommendation of the adoption of the merger agreement in this joint proxy statement/prospectus, and such failure has not been remedied;

 

    the merger agreement is terminated by Lorillard, as permitted by and in compliance with the terms of the merger agreement, prior to obtaining the approval of the Lorillard shareholders required to complete the merger, to enter into a binding agreement providing for a superior proposal; or

 

    each of the following three events occurs:

 

    the merger agreement is terminated (1) by RAI or Lorillard because the merger is not completed on or before the end date (solely in the event the Lorillard special meeting has not occurred at least five business days before the end date and other than in circumstances in which RAI is required to pay Lorillard a termination fee), (2) by RAI or Lorillard because Lorillard shareholders vote on and fail to adopt the merger agreement at the Lorillard special meeting or (3) by RAI because of certain breaches or failures by Lorillard to perform any of its covenants or agreements in the merger agreement or the failure of certain of Lorillard’s representations or warranties to be true and correct;

 

    a third party has made a Lorillard takeover proposal that has become known to the public and such proposal has not been withdrawn; and

 

    within 12 months after such termination of the merger agreement, Lorillard enters into a definitive contract to complete a Lorillard takeover proposal, which is subsequently completed, or any Lorillard takeover proposal is completed (provided that for the purposes of the foregoing, the references to 15% in the definition of “Lorillard takeover proposal” will be deemed to be references to 50%).

If the merger agreement is terminated, RAI will be obligated to pay a termination fee of $740 million to Lorillard if the merger agreement is terminated by Lorillard (or in certain circumstances, could have been terminated by Lorillard) because (1) prior to obtaining the approval of RAI shareholders of the share issuance, the RAI board of directors withdrew, modified (in a manner adverse to Lorillard) or proposed publicly to

 

 

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withdraw or modify (in a manner adverse to Lorillard), its recommendation of the approval of the share issuance, and such change in its recommendation has not been withdrawn or (2) RAI failed to include its recommendation of the approval of the share issuance in this joint proxy statement/prospectus, and such failure has not been remedied.

Termination Fees Under the Subscription Agreement

In the event that either the merger agreement or the asset purchase agreement is terminated and RAI receives a termination fee with respect to either, RAI has agreed to pay the reasonable out-of-pocket costs of BAT with respect to the merger, divestiture and share purchase, not to exceed $30 million (in the event RAI receives a termination fee from Lorillard with respect to the termination of the merger agreement) or $8.5 million (in the event RAI receives a termination fee from Imperial Sub with respect to the termination of the asset purchase agreement).

Termination Fees Under the Asset Purchase Agreement

Pursuant to the asset purchase agreement, if the asset purchase agreement is terminated, Imperial Sub will be obligated to pay a termination fee of $210 million to RAI if the asset purchase agreement is terminated by RAI, or in certain circumstances, could have been terminated by RAI, because (1) prior to obtaining the approval of the Imperial shareholders of the asset purchase agreement and the divestiture, the Imperial board of directors withholds, withdraws or proposes publicly to withhold or withdraw the recommendation that the Imperial shareholders vote in favor of the transactions contemplated by the asset purchase agreement, and such change in its recommendation has not been withdrawn or (2) Imperial fails to include such recommendation in its shareholder circular. However, Imperial Sub will not be required to pay such termination fee if at the time of termination of the asset purchase agreement the RAI board of directors has changed its recommendation that RAI shareholders approve the share issuance.

If RAI or Imperial Sub terminates the asset purchase agreement upon termination of the merger agreement in accordance with its terms, and RAI receives a termination fee from Lorillard in connection with the termination of the merger agreement, then RAI has agreed to pay a $210 million termination fee to Imperial Sub.

Pursuant to the merger agreement, in the event that the asset purchase agreement is terminated and RAI receives a termination fee from Imperial Sub, then, in the event the merger agreement is terminated, RAI will promptly, and in any event within two business days, following the later of (1) the receipt of such termination fee from Imperial Sub and (2) the termination of the merger agreement, pay Lorillard an amount equal to 40% of such termination fee.

Comparison of Shareholder Rights (See page 235)

Lorillard shareholders will have different rights once they become RAI shareholders due to differences between the organizational documents of RAI and Lorillard and differences between North Carolina law, where RAI is incorporated, and Delaware law, where Lorillard is incorporated. See “Comparison of Shareholder Rights” beginning on page 235 of this joint proxy statement/prospectus.

Appraisal Rights (See page 253)

Pursuant to Section 262 of the DGCL, Lorillard shareholders who do not vote in favor of adoption of the merger agreement, who continuously hold their shares of Lorillard common stock through the effective time of the merger and who otherwise comply precisely with the applicable requirements of Section 262 of the DGCL have the right to seek appraisal of the fair value of their shares of Lorillard common stock, as determined by the Delaware Court of Chancery, if the merger is completed. The “fair value” of your shares of Lorillard common

 

 

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stock as determined by the Delaware Court of Chancery could be greater than, the same as, or less than the value of the merger consideration that you would otherwise be entitled to receive under the terms of the merger agreement.

Lorillard shareholders who wish to exercise the right to seek an appraisal of their shares must so advise Lorillard by submitting a written demand for appraisal in the form described in this joint proxy statement/prospectus prior to the vote to adopt the merger agreement, and must otherwise follow the procedures prescribed by Section 262 of the DGCL. A person having a beneficial interest in shares of Lorillard common stock held of record in the name of another person, such as a nominee or intermediary, must act promptly to cause the record holder to follow the steps summarized in this joint proxy statement/prospectus and in a timely manner to perfect appraisal rights. In view of the complexity of Section 262 of the DGCL, Lorillard shareholders who may wish to pursue appraisal rights should consult their legal and financial advisors. See “Appraisal Rights” beginning on page 253 of this joint proxy statement/prospectus.

Under Article 13 of the NCBCA, RAI shareholders will not have rights to an appraisal of the fair value of their shares in connection with the share issuance.

Organizational Structure of RAI Following Completion of the Merger and Divestiture

The following is an organizational chart depicting the estimated ownership percentages of BAT and existing Lorillard and RAI shareholders and the expected organizational structure immediately following completion of the merger and divestiture. This chart excludes certain immaterial and non-operating companies.

 

LOGO

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF RAI

The following table presents selected historical consolidated financial data of RAI. The selected historical consolidated financial data as of December 31, 2013 and 2012, and for each of the years in the three-year period ended December 31, 2013, are derived from RAI’s audited consolidated financial statements and accompanying notes, which are contained in RAI’s Annual Report on Form 10-K for the year ended December 31, 2013, which is incorporated by reference into this joint proxy statement/prospectus. The selected historical consolidated financial data as of December 31, 2011 and 2010 and 2009, and for the years ended December 31, 2010 and 2009, are derived from RAI’s audited consolidated financial statements for such years, which have previously been filed with the SEC but which are not incorporated by reference into this joint proxy statement/prospectus.

The unaudited selected financial data for RAI as of September 30, 2014, and for the nine months ended September 30, 2014 and 2013, are derived from RAI’s unaudited condensed consolidated financial statements and accompanying notes, which are contained in RAI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which is incorporated by reference into this joint proxy statement/prospectus. The selected financial data as of September 30, 2013 is derived from RAI’s unaudited condensed consolidated financial statements for the quarter ended September 30, 2013, which have previously been filed with the SEC but which are not incorporated by reference into this joint proxy statement/prospectus. The unaudited financial data presented have been prepared on a basis consistent with RAI’s audited consolidated financial statements. In the opinion of RAI’s management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.

 

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The information set forth below is only a summary and is not necessarily indicative of the results of RAI or the combined company following completion of the merger, divestiture and related transactions, and you should read the following information together with RAI’s audited consolidated financial statements and accompanying notes and the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in RAI’s Annual Report on Form 10-K for the year ended December 31, 2013 and in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which are incorporated by reference into this joint proxy statement/prospectus, and in RAI’s other reports filed with the SEC. For more information, see “Where You Can Find More Information” beginning on page 260 of this joint proxy statement/prospectus.

 

    For the Nine Months
Ended September 30,
    For the Years Ended December 31,  
    2014     2013     2013     2012     2011     2010     2009  
    (Unaudited)        
    (Dollars in Millions, Except Per Share Data)  

Results of Operations:

             

Net sales(1)

  $ 6,089      $ 5,944      $ 7,899      $ 7,962      $ 8,062      $ 8,170      $ 8,015   

Net sales, related party

    248        253        337        342        479        381        404   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales(1)

    6,337        6,197        8,236        8,304        8,541        8,551        8,419   

Costs and expenses

             

Costs of products sold(1)

    2,923        2,697        3,678        4,321        4,464        4,544        4,488   

Selling, general and administrative expenses

    1,168        1,020        1,389        1,470        1,606        1,480        1,517   

Amortization expense

    8        4        5        21        24        25        28   

Trademark and other intangible asset impairment charges

    —         —         32        129        48        6        567   

Restructuring charges

    —         —         —          149        —          —          56   

Asset impairment and exit charges

    —         —         —          —          —          38        —     

Goodwill impairment charge

 

 

 

 

—  

 

 

 

 

 

 

—  

 

 

    —          —          —          26        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

 

 

 

 

2,238

 

  

 

 

 

 

2,476

 

  

    3,132        2,214        2,399        2,432        1,763   

Interest and debt expense

    197        193        259        234        221        232        251   

Interest income

    (3     (4     (5     (7     (11     (12     (19

Other expense, net

 

 

 

 

(9

 

 

 

 

 

6

 

  

    137        34        3        7        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

 

 

 

 

2,053

 

  

 

 

 

 

2,281

 

  

    2,741        1,953        2,186        2,205        1,522   

Provision for income taxes

 

 

 

 

756

 

  

 

 

 

 

855

 

  

    1,023        681        780        868        567   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations(2)

 

 

 

 

1,297

 

  

 

 

 

 

1,426

 

  

    1,718        1,272        1,406        1,337        955   

Income (losses) from discontinued operations, net of tax

 

 

 

 

25

 

  

 

 

 

 

—  

 

 

    —          —          —          (216     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

 

 

 

$

 

 

1,322

 

 

  

 

 

 

$

 

 

1,426

 

 

  

  $ 1,718      $ 1,272      $ 1,406      $ 1,121      $ 955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Diluted weighted average shares, in thousands

    535,521        548,701        546,949        567,873        585,383        584,854        583,652   

Diluted income from continuing operations

  $ 2.42      $ 2.60      $ 3.14      $ 2.24      $ 2.40      $ 2.29      $ 1.64   

Diluted income (losses) from discontinued operations

  $ 0.05      $ —       $ —        $ —        $ —        $ (0.37   $ —     

Diluted net income

  $ 2.47      $ 2.60      $ 3.14      $ 2.24      $ 2.40      $ 1.92      $ 1.64   

Cash dividends declared per share of common stock

  $ 2.01      $ 1.85      $ 2.48      $ 2.33      $ 2.15      $ 1.84      $ 1.73   

 

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    For the Nine Months
Ended September 30,
    For the Years Ended December 31,  
    2014     2013     2013     2012     2011     2010     2009  
    (Unaudited)        
    (Dollars in Millions, Except Per Share Data)  

Segment Data:

             

Net sales

             

RJR Tobacco

  $ 5,098      $ 5,087      $ 6,728      $ 6,960      $ 7,317      $ 7,368      $ 7,354   

American Snuff

    581        546        745        681        648        719        673   

Santa Fe

    482        423        572        486        416        338        269   

All Other

    176        141        191        177        160        126        123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net sales

  $ 6,337      $ 6,197      $ 8,236      $ 8,304      $ 8,541      $ 8,551      $ 8,419   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

             

RJR Tobacco(3)

  $ 1,939      $ 2,056      $ 2,587      $ 1,735      $ 1,958      $ 2,096      $ 1,493   

American Snuff

    329        306        420        374        331        320        276   

Santa Fe(4)

    247        208        280        237        186        123        86   

All Other

    (176     (38     (70     (36     18        (14     14   

Corporate expense

    (101     (56     (85     (96     (94     (93     (106
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

  $ 2,238      $ 2,476      $ 3,132      $ 2,214      $ 2,399      $ 2,432      $ 1,763   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net sales and cost of products sold exclude excise taxes of $2,735 million and $2,810 million for the nine months ended September 30, 2014 and 2013, respectively, and $3,730 million, $3,923 million, $4,107 million, $4,340 million and $3,927 million for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
(2) Includes NPM Adjustment credits of $270 million and $420 million for the nine months ended September 30, 2014 and 2013, respectively, and $483 million for the year ended December 31, 2013. As to RAI, its affiliates and subsidiaries, “NPM Adjustment” refers to the availability of a downward adjustment to the annual MSA settlement payment obligation for market year 2003 related to an arbitration between (a) RJR Tobacco, Santa Fe Natural Tobacco Company, Inc. and certain other participating manufacturers and (b) certain settling states under the MSA. See further discussion of the MSA under “Item 1. Business—Consolidated RAI—Litigation and Settlements” in RAI’s Annual Report on Form 10-K for the year ended December 31, 2013, which is incorporated by reference into this joint proxy statement/prospectus.
(3) Includes NPM Adjustment credits of $267 million and $415 million for the nine months ended September 30, 2014 and 2013, respectively, and $478 million for the year ended December 31, 2013.
(4) Includes NPM Adjustment credits of $3 million and $5 million for the nine months ended September 30, 2014 and 2013, respectively, and $5 million for the year ended December 31, 2013.

 

    As of September 30,     As of December 31,  
    2014     2013     2013     2012     2011     2010     2009  
    (Unaudited)                                
    (Dollars in Millions)  

Balance Sheet Data:

             

Current assets

  $ 3,456      $ 4,839      $ 3,655      $ 4,812      $ 4,307      $ 4,802      $ 5,495   

Total assets

    15,332        16,592        15,402        16,557        16,254        17,078        18,009   

Current liabilities

    3,286        4,010        3,076        3,769        4,276        4,372        4,340   

Long-term debt (less current maturities)

    5,087        5,103        5,099        5,035        3,206        3,701        4,136   

Total liabilities

    10,339        11,512        10,235        11,300        10,003        10,568        11,511   

Shareholders’ equity

    4,993        5,080        5,167        5,257        6,251        6,510        6,498   

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF LORILLARD

The following table presents selected historical consolidated financial data of Lorillard. The selected historical consolidated financial data as of December 31, 2013 and 2012, and for each of the years in the three-year period ended December 31, 2013, are derived from Lorillard’s audited consolidated financial statements and accompanying notes, which are contained in Lorillard’s Annual Report on Form 10-K for the year ended December 31, 2013, which is incorporated by reference into this joint proxy statement/prospectus. The selected historical consolidated financial data as of December 31, 2011 and 2010 and 2009, and for the years ended December 31, 2010 and 2009, are derived from Lorillard’s audited consolidated financial statements for such years, which have previously been filed with the SEC but which are not incorporated by reference into this joint proxy statement/prospectus.

The unaudited selected financial data for Lorillard as of September 30, 2014, and for the nine months ended September 30, 2014 and 2013, are derived from Lorillard’s unaudited consolidated condensed financial statements and accompanying notes, which are contained in Lorillard’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which is incorporated by reference into this joint proxy statement/prospectus. The selected financial data as of September 30, 2013, is derived from Lorillard’s unaudited consolidated condensed financial statements for the quarter ended September 30, 2013, which have previously been filed with the SEC but which are not incorporated by reference into this joint proxy statement/prospectus. The unaudited financial data presented have been prepared on a basis consistent with Lorillard’s audited consolidated financial statements. In the opinion of Lorillard’s management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.

The information set forth below is only a summary and is not necessarily indicative of the results of Lorillard or the combined company following completion of the merger, divestiture and related transactions, and you should read the following information together with Lorillard’s audited consolidated financial statements and accompanying notes and the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Lorillard’s Annual Report on Form 10-K for the year ended December 31, 2013 and in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which are incorporated by reference into this joint proxy statement/prospectus, and in Lorillard’s other reports filed with the SEC. For more information, see “Where You Can Find More Information” beginning on page 260 of this joint proxy statement/prospectus.

 

    For the Nine Months
Ended September 30,
    For the Years Ended December 31,  
         2014               2013          2013     2012     2011     2010     2009  
    (Unaudited)                                
    (Dollars in Millions, Except Per Share Data)  

Results of Operations:

             

Net sales(1)

  $ 5,222      $ 5,208      $ 6,950      $ 6,623      $ 6,466      $ 5,932      $ 5,233   

Cost of sales(1)

    3,210        3,148        4,231        4,241        4,123        3,809        3,327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    2,012        2,060        2,719        2,382        2,343        2,123        1,906   

Selling, general and administrative

    491        501        665        504        451        398        365   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income(2)

    1,521        1,559        2,054        1,878        1,892        1,725        1,541   

Investment income(3)

    6        2        2        4        3        4        5   

Interest expense

    (135     (128     (172     (154     (125     (94     (27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    1,392        1,433        1,884        1,728        1,770        1,635        1,519   

Income taxes

    532        535        704        629        654        606        571   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 860      $ 898      $ 1,180      $ 1,099      $ 1,116      $ 1,029      $ 948   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    For the Nine Months
Ended September 30,
    For the Years Ended December 31,  
         2014               2013          2013     2012     2011     2010     2009  
    (Unaudited)                                
    (Dollars in Millions, Except Per Share Data)  

Per Share Data:

             

Diluted weighted average number of shares outstanding, in millions

    361.11        375.93        373.71        390.13        418.06        455.19        493.78   

Diluted earnings per share

  $ 2.37      $ 2.38      $ 3.15      $ 2.81      $ 2.66      $ 2.25      $ 1.91   

Dividends per share

  $ 1.85      $ 1.65      $ 2.20      $ 2.07      $ 1.73      $ 1.42      $ 1.28   

Segment Data:

             

Net sales

             

Cigarettes(1)

  $ 5,096      $ 5,031      $ 6,720      $ 6,562      $ 6,466      $ 5,932      $ 5,233   

Electronic cigarettes(4)

    126        177        230        61        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 5,222      $ 5,208      $ 6,950      $ 6,623      $ 6,466      $ 5,932      $ 5,233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

             

Cigarettes(1)

  $ 1,569      $ 1,550      $ 2,054      $ 1,877      $ 1,892      $ 1,725      $ 1,541   

Electronic cigarettes

    (48     9        —          1        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,521      $ 1,559      $ 2,054      $ 1,878      $ 1,892      $ 1,725      $ 1,541   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net sales and cost of sales includes excise taxes of $1,453 million and $1,488 million for the nine months ended September 30, 2014 and 2013, respectively, and $1,978 million, $1,987 million, $2,014 million, $1,879 million and $1,547 million for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
(2)

The nine months ended September 30, 2014 includes the $27 million favorable impact of the 2003 non-participating manufacturer arbitration award as a result of the September 2013 arbitration panel determination that six states failed to diligently enforce escrow provisions applicable to non-participating manufacturers included as an offset to tobacco settlement expense in cost of sales, the $14 million favorable impact of the reduction in Lorillard’s MSA payments as a result of the settlement with two more states in June 2014 to resolve certain MSA payment adjustment disputes approved by the arbitration panel in March 2013 included as an offset to tobacco settlement expense in cost of sales, $17 million of amortization of the SKYCIG brand included in selling, general and administrative expenses, $17 million in costs related to the RAI merger agreement and a $4 million expense reduction related to a fair value adjustment to the SKYCIG earnout liability included in selling, general and administrative expenses. The nine months ended September 30, 2013 includes the $154 million favorable impact of the reduction in Lorillard’s April 15, 2013 MSA payment as a result of the settlement to resolve certain MSA payment adjustment disputes approved by the arbitration panel in March 2013 included as an offset to tobacco settlement expense in cost of sales and $79 million and $20 million in accrued costs related to compensatory damages and statutory interest to dismiss the Evans case and estimated costs to comply with the U.S. Government Case judgment, respectively, included in selling, general and administrative expenses. The nine months ended September 30, 2013, also includes $4 million in expenses incurred in conjunction with the acquisition of SKYCIG included in selling, general and administrative expenses. The year ended December 31, 2013 includes a $155 million favorable impact on Lorillard’s tobacco settlement expense included in cost of sales related to the reduction in Lorillard’s MSA payments as a result of the settlement with certain states to resolve certain MSA payment adjustment disputes in March 2013. The year ended December 31, 2013 also includes $79 million, $20 million and $22 million unfavorable impacts on administrative expenses resulting from accrued costs related to compensatory damages and statutory interest to dismiss the Evans case, accrued costs related to estimated costs to comply with the U.S. Government Case and accrued costs related to compensatory damages, punitive damages, statutory interest and attorneys’ fees related to certain Engle Progeny Cases, respectively. See further discussion of the MSA, Evans case, U.S. Government Case and Engle Progeny Cases in note 23 to Lorillard’s audited consolidated financial statements and accompanying notes, which are contained in

 

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  Lorillard’s Annual Report on Form 10-K for the year ended December 31, 2013, which is incorporated by reference into this joint proxy statement/prospectus. Lastly, the year ended December 31, 2013 includes $4 million and $6 million unfavorable impacts on administrative expenses resulting from expenses incurred in conjunction with the acquisition of SKYCIG and amortization of the fair value ascribed to the SKYCIG brand that is being amortized over an estimated life of 18 months beginning October 1, 2013, after which amortization charges related to the brand will cease. The year ended December 31, 2012 includes a $6 million unfavorable impact on administrative expenses resulting from the acquisition of blu eCigs on April 24, 2012. The year ended December 31, 2012 also includes a $7 million unfavorable impact on tobacco settlement expense resulting from a competitor’s adjustments to its 2001-2005 operating income and restructuring charges. See further discussion under “Results of Operations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Lorillard’s Annual Report on Form 10-K for the year ended December 31, 2013, which is incorporated by reference into this joint proxy statement/prospectus.
(3) Investment income includes interest income of $6 million ($5 million of which is related to the 2013 NPM arbitration award and the Missouri court ruling in the second quarter of 2014) and $2 million for the nine months ended September 30, 2014 and 2013, respectively, and $2 million, $4 million, $3 million, $4 million and $5 million for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
(4) Results for the nine months ended September 30, 2013 provided above are not comparable to the results for the nine months ended September 30, 2014 as Lorillard purchased the assets and operations of SKYCIG on October 1, 2013.

 

    As of September 30,     As of December 31,  
    2014     2013     2013     2012     2011     2010     2009  
    (Unaudited)                                
    (Dollars in Millions)  

Financial Position:

             

Current assets

  $ 2,392      $ 2,863      $ 2,736      $ 2,777      $ 2,564      $ 2,935      $ 2,181   

Total assets

    3,275        3,555        3,536        3,396        3,008        3,296        2,575   

Current liabilities

    1,474        1,566        1,651        1,601        1,485        1,426        1,337   

Long-term debt

    3,557        3,571        3,560        3,111        2,595        1,769        722   

Total liabilities

    5,430        5,597        5,600        5,173        4,521        3,521        2,488   

Shareholders’ equity (deficit)

    (2,155     (2,042     (2,064     (1,777     (1,513     (225     87   

 

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SELECTED RAI UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following selected unaudited pro forma condensed combined financial statements give effect to the proposed merger, in which Lorillard will become a wholly owned subsidiary of RAI, and the proposed divestiture, in which, coincident with or immediately prior to the closing of the merger, RAI and Lorillard have agreed, subject to various conditions, to divest the transferred assets to Imperial Sub pursuant to the asset purchase agreement and transfer agreement. The selected unaudited pro forma condensed combined balance sheet data give effect to the merger and the divestiture as if they had occurred on September 30, 2014, and the selected unaudited pro forma condensed combined statements of income data for the nine months ended September 30, 2014, and the year ended December 31, 2013, give effect to the merger and the divestiture as if they had occurred on January 1, 2013, the beginning of the earliest period presented.

The selected unaudited pro forma financial information is provided for illustrative purposes only and is based on available information and assumptions that RAI and Lorillard believe are reasonable. It does not purport to represent what the actual consolidated results of operations or the consolidated financial position of RAI would have been had the merger or the divestiture occurred on the dates indicated, nor is it necessarily indicative of future consolidated results of operations or consolidated financial position. The actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results following the date of the pro forma financial information.

The following unaudited pro forma condensed combined financial data have been developed from and should be read in conjunction with the consolidated financial statements and related notes of both RAI and Lorillard, incorporated by reference into this joint proxy statement/prospectus, and the more detailed unaudited pro forma condensed combined financial statements, including the notes thereto, appearing elsewhere in this joint proxy statement/prospectus. See “RAI Unaudited Pro Forma Condensed Combined Financial Statements” and “Where You Can Find More Information” beginning on pages 215 and 260, respectively, of this joint proxy statement/prospectus.

Unaudited Pro Forma Condensed Combined Statements of Income Data

 

     Nine Months Ended
September 30, 2014
     Year Ended
December 31, 2013
 
     (Dollars in Millions, Except Per Share Amounts)  

Net Sales

   $ 8,414       $ 10,813   

Operating income

   $ 3,174       $ 4,285   

Net income

   $ 1,619       $ 2,061   

Earnings per share attributable to RAI shareholders:

     

Basic

   $ 2.26       $ 2.83   

Diluted

   $ 2.25       $ 2.82   

Weighted average shares outstanding, in thousands:

     

Basic

     716,805         727,944   

Diluted

     718,540         729,968   

Unaudited Pro Forma Condensed Combined Balance Sheet Data

 

     As of
September 30, 2014
 
    

(Dollars in

Millions)

 

Total assets

   $ 43,693   

Total current liabilities

     13,831   

Long-term debt

     9,113   

Shareholders’ equity

     17,690   

Total liabilities and shareholders’ equity

     43,693   

 

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COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA

The following table sets forth selected historical and unaudited pro forma combined per share information for RAI and Lorillard.

Historical per Share Data for RAI and Lorillard Common Stock

The historical per share data for RAI and Lorillard common stock below is derived from the audited consolidated financial statements of each of RAI and Lorillard as of and for the year ended December 31, 2013 and the unaudited condensed consolidated financial statements of each of RAI and Lorillard as of and for the nine months ended September 30, 2014.

Unaudited Pro Forma Combined per Share Data for RAI Common Stock

The unaudited pro forma combined per share data for RAI common stock set forth below gives effect to the merger under the acquisition method of accounting, as if the merger had occurred on January 1, 2013, the first day of RAI’s fiscal year ended December 31, 2013, in the case of net income per share data, and at September 30, 2014, in the case of book value per share data, and assuming that each outstanding share of Lorillard common stock had been converted into shares of RAI common stock based on the exchange ratio of 0.2909. The exchange ratio does not include the $50.50 cash portion of the merger consideration.

The unaudited pro forma combined per share data for RAI common stock is derived from the unaudited condensed consolidated financial statements of each of RAI and Lorillard as of and for the nine months ended September 30, 2014 and the audited consolidated financial statements for each of RAI and Lorillard as of and for the year ended December 31, 2013.

The acquisition method of accounting is based on Financial Accounting Standards Board, referred to as FASB, Accounting Standards Codification, referred to as ASC, 805, Business Combinations, and uses the fair value concepts defined in ASC 820, Fair Value Measurements and Disclosures, which RAI has adopted as required. Acquisition accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Fair value measurements recorded in acquisition accounting are dependent upon detailed valuation studies of Lorillard’s assets and liabilities and other studies that have yet to commence. Accordingly, the pro forma adjustments reflect the assets and liabilities of Lorillard at their preliminary estimated fair values. Differences between these preliminary estimates and the final values in acquisition accounting will occur and these differences could have a material impact on the unaudited pro forma combined per share information set forth in the following table.

The unaudited pro forma combined per share data for RAI common stock does not purport to represent the actual results of operations that RAI would have achieved had the companies been combined during these periods or to project the future results of operations that RAI may achieve after the merger.

Unaudited Pro Forma Combined per Lorillard Equivalent Share Data

The unaudited pro forma combined per Lorillard equivalent share data set forth below shows the effect of the merger from the perspective of an owner of Lorillard common stock. The information was calculated by multiplying the unaudited pro forma combined per share data for RAI common stock by the exchange ratio of 0.2909. The exchange ratio does not include the $50.50 cash portion of the merger consideration.

Generally

You should read the below information in conjunction with the selected historical consolidated financial information included elsewhere in this joint proxy statement/prospectus and the historical consolidated financial statements of RAI and Lorillard and related notes that have been filed with the SEC, certain of which are

 

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incorporated by reference into this joint proxy statement/prospectus. See “Selected Historical Consolidated Financial Data of RAI,” “Selected Historical Consolidated Financial Data of Lorillard” and “Where You Can Find More Information” beginning on pages 43, 46 and 260, respectively, of this joint proxy statement/prospectus. The unaudited pro forma combined per share data for RAI common stock and the unaudited pro forma combined per Lorillard equivalent share data is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information and related notes included in this joint proxy statement/prospectus. See “RAI Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 215 of this joint proxy statement/prospectus.

 

     As of/For the Nine
Months Ended
September 30, 2014
    As of/For the Year
Ended

December 31, 2013
 

RAI Historical per Common Share Data:

    

Net income—basic

   $ 2.48      $ 3.15   

Net income—diluted

     2.47        3.14   

Cash dividends paid

     2.01        2.48   

Book value(1)

     9.32        9.45   

Lorillard Historical per Common Share Data:

    

Net income—basic

   $ 2.38      $ 3.15   

Net income—diluted

     2.37        3.15   

Cash dividends paid

     1.85        2.20   

Book value(1)

     (5.97     (5.52

Unaudited Pro Forma Combined per RAI Common Share Data(2):

    

Net income—basic

   $ 2.26      $ 2.83   

Net income—diluted

     2.25        2.82   

Cash dividends paid(3)

     N/A        N/A   

Book value(1)

     24.62       
N/A
  

Unaudited Pro Forma Combined per Lorillard Equivalent
Share Data(2):

    

Net income—basic(4)(5)

   $ 0.66      $ 0.82   

Net income—diluted(4)(5)

     0.65        0.82   

Cash dividends paid(3)

     N/A        N/A   

Book value(1)(5)

     7.16       
N/A
  

 

(1) Amount is calculated by dividing shareholders’ equity (deficit) by weighted average diluted shares outstanding.
(2) Amounts calculated based on pro forma financial statements giving effect to the merger and the divestiture.
(3) Pro forma combined dividends per share is not presented as the dividend policy for the combined entity will be determined by the RAI board of directors following completion of the merger.
(4) Amounts calculated by multiplying unaudited pro forma combined per share amounts by the exchange ratio in the merger of 0.2909 shares of RAI common stock for each share of Lorillard common stock. The exchange ratio does not include the $50.50 cash portion of the merger consideration.
(5) The information shows how each share of Lorillard common stock would have participated in RAI’s net income (loss) from continuing operations and book value if the merger had occurred on January 1, 2013, in the case of net income per share data, and at September 30, 2014, in the case of book value per share data.

 

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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION

Market Prices

RAI common stock is listed on the NYSE under the trading symbol “RAI.” Lorillard common stock is listed on the NYSE under the trading symbol “LO.”

The cash dividends declared, and intra-day high and low sales prices per share for RAI common stock on the NYSE Composite Tape, as reported by the NYSE, were as follows:

 

     RAI Common Stock  
     High      Low      Dividend  

2014:

        

First Calendar Quarter

     $  56.77         $  46.55         $  0.67   

Second Calendar Quarter

     62.64         53.06         0.67   

Third Calendar Quarter

     63.39         55.22         0.67   

Fourth Calendar Quarter (through December 18, 2014)

     67.59         56.27         0.67   

2013:

        

First Calendar Quarter

     $  45.17         $  41.50         $  0.59   

Second Calendar Quarter

     50.15         44.01         0.63   

Third Calendar Quarter

     52.93         46.82         0.63   

Fourth Calendar Quarter

     52.57         48.01         0.63   

2012:

        

First Calendar Quarter

     $  42.81         $  38.95         $  0.56   

Second Calendar Quarter

     44.90         39.45         0.59   

Third Calendar Quarter

     46.93         43.11         0.59   

Fourth Calendar Quarter

     44.51         39.70         0.59   

The cash dividends declared, and high and low closing sales prices per share for Lorillard common stock on the NYSE Composite Tape, as reported by the NYSE, were as follows:

 

     Lorillard Common Stock  
     High      Low      Dividend  

2014:

        

First Calendar Quarter

     $  55.26         $  47.31         $  0.615   

Second Calendar Quarter

     65.18         52.24         0.615   

Third Calendar Quarter

     67.22         59.03         0.615   

Fourth Calendar Quarter (through December 18, 2014)

     64.06         58.00         0.615   

2013:

        

First Calendar Quarter

     $  42.41         $  37.98         $  0.55   

Second Calendar Quarter

     44.92         40.33         0.55   

Third Calendar Quarter

     46.53         41.86         0.55   

Fourth Calendar Quarter

     53.00         44.18         0.55   

2012:

        

First Calendar Quarter

     $  43.98         $  35.80         $  0.5167   

Second Calendar Quarter

     45.98         39.99         0.5167   

Third Calendar Quarter

     46.55         38.59         0.5167   

Fourth Calendar Quarter

     41.09         37.23         0.5167   

The following table sets forth the closing price per share of RAI common stock and of Lorillard common stock as of February 28, 2014, the last trading day prior to initial media speculation regarding a possible transaction involving RAI and Lorillard; July 2, 2014, the last trading day prior to more recent news reports of a

 

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possible acquisition of Lorillard by RAI; July 14, 2014, the last trading day prior to the public announcement of the merger; and December 18, 2014, the most recent practicable trading day prior to the date of this joint proxy statement/prospectus. The table also shows the implied value of the merger consideration proposed for each share of Lorillard common stock as of the same four dates. This implied value was calculated by multiplying the closing price of a share of RAI common stock on the relevant date by the exchange ratio of 0.2909, representing the stock portion of the merger consideration, and adding $50.50, the cash portion of the merger consideration.

 

     RAI Common Stock      Lorillard Common Stock      Implied Per Share Value
of Merger Consideration
 

February 28, 2014

   $ 50.83       $ 49.06       $ 65.29   

July 2, 2014

   $ 60.16       $ 61.15       $ 68.00   

July 14, 2014

   $ 63.18       $ 67.22       $ 68.88   

December 18, 2014

   $ 65.43       $ 62.60       $ 69.53   

The market prices of shares of RAI common stock and Lorillard common stock have fluctuated since the date of the announcement of the merger agreement and will continue to fluctuate from the date of this joint proxy statement/prospectus to the date of the RAI special meeting, the Lorillard special meeting and the date the merger is completed, and the market price of shares of RAI common stock will continue to fluctuate after the date the merger is completed. No assurance can be given concerning the market prices of RAI common stock and Lorillard common stock before completion of the merger or RAI common stock after completion of the merger. The exchange ratio is fixed in the merger agreement, but the market price of RAI common stock (and therefore the value of the stock consideration and the merger consideration) when received by Lorillard shareholders after the merger is completed could be greater than, less than or the same as shown in the table above. Accordingly, Lorillard shareholders are advised to obtain current market quotations for RAI common stock and Lorillard common stock when considering whether to vote for adoption of the merger agreement.

Dividends

RAI currently pays a quarterly dividend on RAI common stock, and last paid a quarterly dividend on October 1, 2014, of $0.67 per share. In addition, on December 4, 2014, RAI declared a dividend of $0.67 per share, to be paid on January 2, 2015 to RAI shareholders of record at the close of business on December 15, 2014. Under the terms of the merger agreement, during the period before completion of the merger, RAI will not, and will not permit any RAI subsidiary, to declare, set aside or pay any dividend on, or make any other distributions (whether in cash, stock or property or any combination thereof) in respect of, any of its capital stock, other equity interests or voting securities, other than (1) RAI’s regular quarterly cash dividends of $0.67 per share (as may be increased from time to time consistent with past practice) payable in respect of shares of RAI common stock with declaration, record and payment dates consistent with past practice and in accordance with RAI’s current dividend policy and (2) dividends and distributions by a direct or indirect wholly owned subsidiary of RAI to RAI.

Lorillard currently pays a quarterly dividend on Lorillard common stock, and last paid a quarterly dividend on December 10, 2014, of $0.615 per share. Under the terms of the merger agreement, during the period before completion of the merger, Lorillard will not, and will not permit any Lorillard subsidiary, to declare, set aside or pay any dividend on, or make any other distributions (whether in cash, stock or property or any combination thereof) in respect of, any of its capital stock, other equity interests or voting securities, other than (1) Lorillard’s regular quarterly cash dividends of $0.615 per share (as may be increased from time to time consistent with past practice) payable in respect of shares of Lorillard common stock with declaration, record and payment dates consistent with past practice and in accordance with Lorillard’s current dividend policy and (2) dividends and distributions by a direct or indirect wholly owned subsidiary of Lorillard to Lorillard.

Any former Lorillard shareholder who holds the RAI common stock into which Lorillard common stock has been converted in connection with the merger will receive whatever dividends are declared and paid on RAI common stock after completion of the merger. However, no dividend or other distribution having a record date

 

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after completion of the merger will actually be paid with respect to any RAI common stock into which Lorillard common stock has been converted in connection with the merger until the certificates formerly representing shares of Lorillard common stock have been surrendered (or the book-entry shares formerly representing shares of Lorillard common stock have been transferred), at which time any accrued dividends and other distributions on those shares of RAI common stock will be paid without interest. Subject to the limitations set forth in the merger agreement, any future dividends by RAI will be declared and paid at the discretion of the RAI board of directors. Subject to the limitations set forth in the merger agreement, any future dividends by Lorillard will be declared and paid at the discretion of the Lorillard board of directors. There can be no assurance that any future dividends will be declared or paid by RAI or Lorillard or as to the amount or timing of those dividends, if any.

 

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Statements included in this joint proxy statement/prospectus that are not historical in nature are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this joint proxy statement/prospectus and in documents incorporated by reference into this joint proxy statement/prospectus, forward-looking statements include, without limitation, statements regarding financial estimates, regulatory approvals and the expected timing, completion and effects of the merger and divestiture, future financial and operating results, the combined company’s plans, expectations, beliefs, intentions and future strategies, and other statements that are not historical facts that are signified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions.

These statements regarding future events or the future performance or results of the combined company inherently are subject to a variety of risks, contingencies and other uncertainties that could cause actual results, performance or achievements to differ materially from those described in or implied by the forward-looking statements. The risks, contingencies and other uncertainties that could result in the failure of the merger and divestiture to be completed or, if completed, that could have an adverse effect on the results of operations, cash flows and financial position of the combined company and any anticipated benefits of the merger to RAI and Lorillard shareholders, include:

 

    the failure to obtain necessary regulatory or other approvals for the merger and divestiture, or if obtained, the possibility of being subjected to conditions that could reduce the expected synergies and other benefits of the merger, result in a material delay in, or the abandonment of, the merger or otherwise have an adverse effect on RAI;

 

    the obligation to complete the merger and divestiture even if financing is not available or is available on terms other than those currently anticipated, including financing less favorable to RAI than its current commitments, due to the absence of a financing condition in connection with the merger;

 

    the obligation to complete the merger and divestiture even if there are adverse governmental developments with respect to menthol in cigarettes, and, once completed, the effect of such adverse governmental developments on RAI’s subsidiaries’ sales of products that contain menthol which will represent a substantial portion of RAI’s consolidated sales;

 

    the failure to satisfy required closing conditions or complete the merger and divestiture in a timely manner;

 

    the failure to obtain necessary shareholder approvals for the share issuance and the adoption of the merger agreement;

 

    the failure to obtain Imperial shareholder approval for the divestiture and the possibility of needing an alternative divestiture partner;

 

    the possibility of selling the transferred assets, including the brands currently expected to be divested, or which otherwise might be divested (in each case, subject to RAI’s binding obligations under the asset purchase agreement to complete the divestiture), on terms less favorable than the divestiture, due to the absence of a condition in connection with the merger that the divestiture be completed;

 

    the possibility of having to include RJR Tobacco’s DORAL brand as part of the divestiture;

 

    the effect of the announcement of the merger and divestiture on the ability to retain and hire key personnel, maintain business relationships, and on operating results and businesses generally;

 

    the effect of restrictions placed on RAI’s, Lorillard’s or their respective subsidiaries’ business activities and the limitations put on RAI’s and Lorillard’s ability to pursue alternatives to the merger pursuant to the merger agreement and the asset purchase agreement;

 

    the possibility of delay or prevention of the merger by lawsuits challenging the merger filed against RAI, the members of the RAI board of directors, Lorillard, the members of the Lorillard board of directors and BAT;

 

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    the uncertainty of the value of the merger consideration that Lorillard shareholders will receive in the merger due to a fixed exchange ratio and a potential fluctuation in the market price of RAI common stock;

 

    the reliance of RJR Tobacco on Imperial Sub to manufacture Newport on RJR Tobacco’s behalf for a period of time after the divestiture;

 

    RAI’s obligations to indemnify Imperial Sub for specified matters and to retain certain liabilities related to the transferred assets;

 

    the possibility of RAI’s and Lorillard’s directors and officers having interests in the merger that are different from, or in addition to, the interests of RAI and Lorillard shareholders generally;

 

    the possibility of changes in circumstances between the date of the signing of the merger agreement and the closing of the merger that will not be reflected in the fairness opinions obtained by the boards of directors of RAI and Lorillard from their respective advisors;

 

    a termination of the governance agreement or certain provisions of it in accordance with its terms, including the limitations on B&W’s representation on the RAI board of directors and its board committees;

 

    the effect of the substantial additional indebtedness that RAI will incur in connection with the merger;

 

    the continuing decline in volume in the U.S. cigarette industry and RAI’s dependence on the U.S. cigarette industry;

 

    the impact of BAT’s significant beneficial ownership in RAI, the related governance agreement among RAI, BAT and B&W and the provisions favoring BAT in the RAI articles of incorporation on RAI’s business, the RAI board of directors and other RAI shareholders;

 

    the possibility of actual results of operations, cash flows and financial position after the merger and divestiture materially differing from the RAI unaudited pro forma condensed combined financial statements;

 

    the difference in rights provided to Lorillard shareholders under Delaware law, the Lorillard certificate of incorporation and the Lorillard by-laws, as compared to the rights Lorillard shareholders will obtain as RAI shareholders under North Carolina law, the RAI articles of incorporation, the RAI bylaws and the governance agreement;

 

    the failure to realize projected synergies and other benefits from the merger and divestiture;

 

    the incurrence of significant pre- and post-transaction related costs in connection with the merger and divestiture; and

 

    the occurrence of any event giving rise to the right of a party to terminate the merger and divestiture.

For a further discussion of these and other risks, contingencies and uncertainties applicable to RAI and Lorillard, see “Risk Factors” beginning on page 57 of this joint proxy statement/prospectus and in RAI’s and Lorillard’s other filings with the SEC incorporated by reference into this joint proxy statement/prospectus.

Due to these risks, contingencies and other uncertainties, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this joint proxy statement/prospectus. Except as provided by federal securities laws, neither RAI nor Lorillard is required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written or oral forward-looking statements attributable to RAI or Lorillard or any person acting on its or their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. RAI and Lorillard do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this joint proxy statement/prospectus or to reflect the occurrence of unanticipated events, except as may be required under applicable federal securities law.

 

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RISK FACTORS

In deciding whether to vote for the approval of the share issuance, in the case of RAI shareholders, or to vote for the adoption of the merger agreement, in the case of Lorillard shareholders, RAI shareholders and Lorillard shareholders should carefully consider the following risk factors and all of the information contained in or incorporated by reference into this joint proxy statement/prospectus, including but not limited to, the matters addressed in “Cautionary Information Regarding Forward-Looking Statements” beginning on page 55 of this joint proxy statement/prospectus and the matters discussed under “Item 1A. Risk Factors” of RAI’s and Lorillard’s Annual Reports on Form 10-K for the year ended December 31, 2013, as updated from time to time in RAI’s and Lorillard’s subsequent filings with the SEC, which are incorporated by reference into this joint proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 260 of this joint proxy statement/prospectus.

Risk Factors Relating to the Merger and Divestiture

The merger is subject to the receipt of consents and clearances from certain regulatory authorities that may impose conditions that could reduce the expected synergies and other benefits of the merger, result in a material delay in, or the abandonment of, the merger or otherwise have an adverse effect on RAI.

Before the merger can be completed, waiting periods must expire or terminate under applicable antitrust laws, including the HSR Act, and various approvals, consents or clearances must be obtained from certain regulatory entities, including those regulating the cigarette industry. In deciding whether to grant antitrust or regulatory clearances, the relevant authorities will consider the effect of the merger on competition within their relevant jurisdictions. Although RAI and Lorillard have agreed in the merger agreement to use their reasonable best efforts to make certain governmental filings and, subject to certain limitations, obtain the required governmental authorizations, as the case may be, there can be no assurance that the relevant authorizations will be obtained.

The governmental authorities from which these authorizations are required have broad discretion in administering the governing regulations. The terms and conditions of approvals that are granted may impose requirements, limitations, costs or restrictions on the conduct of RAI’s and its subsidiaries’ businesses following the closing of the merger. Under the terms of the merger agreement, subject to certain conditions, RAI, Lorillard, or their respective subsidiaries could be required to divest, hold separate or otherwise take actions that would limit their ownership or control, or their ability to retain or hold, directly or indirectly, businesses, assets, equity interests, product lines, properties or services. In addition, governmental authorities could require as a condition to approval of the merger, among other things, the divestiture of assets that are different from or additional to those included in the divestiture. Moreover, governmental authorities could seek to prevent or enjoin completion of the merger, and under the terms of the merger agreement, subject to certain conditions, RAI and Lorillard agreed to litigate or defend against any proceeding involving governmental authorities seeking to block the merger. Additional information about each party’s commitments to take certain specified actions, subject to certain exceptions and limitations, in connection with obtaining regulatory approvals are described under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Regulatory Approvals Required for the Merger” beginning on page 159 of this joint proxy statement/prospectus.

There can be no assurance that regulators will not impose terms, conditions, requirements, limitations, costs or restrictions that would delay the closing of the merger, impose additional material costs on or limit the revenues of RAI, or limit some of the synergies and other benefits that RAI and Lorillard expect following the closing of the merger. In addition, neither RAI nor Lorillard can provide any assurance that any such terms, conditions, requirements, limitations, costs, or restrictions will not result in a material delay in, or the

 

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abandonment of, the merger. Any delay in completing the merger or any modification to the transactions currently contemplated may adversely affect the synergies and other benefits that RAI expects to achieve if the merger and the integration of the companies’ respective businesses are completed within the expected timeframe.

RAI may encounter difficulties or high costs associated with securing financing in connection with the merger, and RAI will be required to complete the merger whether or not financing is available.

RAI currently intends to finance the cash portion of the merger consideration and related fees and expenses with available cash, up to $500 million in borrowings under its existing revolving credit facility, proceeds from the issuance of debt securities, proceeds from the divestiture and share purchase and, to the extent necessary, borrowings under the bridge facility. RAI expects to incur approximately $9 billion of new debt to finance the cash portion of the merger consideration. RAI has announced its intention to pursue financing that would replace or supplement financing available under the bridge facility. There is no guarantee that replacement or supplemental financing will be available to RAI at all or on acceptable terms. RAI’s ability to obtain financing to replace or supplement the bridge facility will be subject to various factors, including market conditions, operating performance and credit ratings, and may be subject to restrictions in the agreements relating to RAI’s outstanding debt.

The bridge facility is a senior unsecured term loan in an aggregate principal amount of up to $9 billion that matures 364 days after the draw date. It is currently undrawn and may be drawn only in a single drawing upon the closing of the merger and not thereafter. The amount of the bridge facility available at closing is subject to reduction in accordance with the terms of the bridge facility, including but not limited to reduction upon the contemplated issuance of debt securities used to finance the cash portion of the merger consideration and related fees and expenses. The interest rate applicable to borrowings under the bridge facility will, in certain cases, be a floating interest rate, which could fluctuate significantly over the term of the bridge facility. If RAI is required to draw on the bridge facility, borrowing under the bridge facility will be subject to the conditions precedent set forth in the bridge facility, including:

 

    the completion of the merger, share purchase and divestiture;

 

    the absence of a “Company Material Adverse Effect,” as defined in the merger agreement, where “Company” refers to Lorillard;

 

    the delivery to the bridge facility lenders or filing with the SEC of certain historical and pro forma financial statements related to RAI, Lorillard and their respective consolidated subsidiaries;

 

    RAI’s performance of certain activities in connection with the contemplated issuance of debt securities to finance the cash portion of the merger consideration and related fees and expenses; and

 

    the accuracy at the funding of the bridge facility of certain representations and warranties, including the accuracy of Lorillard’s representations and warranties that are material to the interests of lenders under the bridge facility to the extent RAI or Merger Sub have the right to terminate their obligations under the merger agreement because of an inaccuracy.

If RAI draws under the bridge facility, it will be required to repay or refinance the bridge facility within 364 days after the draw date. There is no guarantee that RAI would be able to refinance the bridge facility at all or on terms acceptable to RAI. The terms of any debt incurred to refinance the bridge facility may be materially worse than the terms of the bridge facility or those anticipated under the proposed alternative financing.

Any impairment of RAI’s ability to obtain future financing on favorable terms, including as a result of a reduction of RAI’s credit ratings, could have an adverse effect on RAI’s ability to finance the cash portion of the merger consideration with the issuance of debt securities or with another alternative to the bridge facility, or to refinance the bridge facility if drawn. Following announcement of the merger, Standard & Poor’s Ratings Services reaffirmed all of its ratings on RAI, including its BBB- corporate credit ratings, and Moody’s Investor Service placed RAI’s Baa2 senior unsecured rating on review for downgrade.

 

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The receipt of financing by RAI is not a condition to completion of the merger and, accordingly, RAI will be required to complete the merger (assuming that all of the conditions to its obligations under the merger agreement are satisfied) whether or not debt financing or other financing is available at all or on acceptable terms.

Under the merger agreement, RAI, through its subsidiaries, will acquire Lorillard’s Newport brand, the leading U.S. menthol cigarette brand; however, any action by the FDA or any other governmental authority that could have the effect of banning or materially restricting the use of menthol in tobacco products would not give rise to a right to terminate the merger agreement.

As a result of the merger, RAI, through its subsidiaries, will acquire Lorillard’s Newport brand, the leading U.S. menthol cigarette brand. In 2013, the FDA issued its preliminary scientific evaluation regarding menthol cigarettes, concluding that menthol cigarettes adversely affect initiation, addiction and cessation compared to non-menthol cigarettes. In 2013, the FDA also issued an Advance Notice of Proposed Rulemaking, seeking comments on various issues relating to the potential regulation of menthol cigarettes. The FDA has the authority to require the reduction of nicotine levels and may also require reduction or elimination of other constituents. Although it is not possible to predict whether or when the FDA will take actions, if the FDA were to adopt regulations banning or severely restricting the use of menthol in tobacco products, those regulations could have a material adverse effect on sales of the Newport brand, which could have an adverse effect on the results of operations, cash flows and financial position of Lorillard and its subsidiaries.

Under the terms of the merger agreement, RAI and Lorillard expressly agreed that a menthol regulatory action would not be considered in determining whether a material adverse effect, as defined in the merger agreement, on a party had occurred, and would not give rise to a right to terminate the merger agreement. In addition, under the terms of the merger agreement, neither the RAI board of directors nor the Lorillard board of directors may change its recommendation to its shareholders in connection with the merger based on any menthol regulatory action.

The merger is subject to a number of conditions to the obligations of both RAI and Lorillard to complete the merger, which, if not fulfilled, or not fulfilled in a timely manner, may result in termination of the merger agreement.

The merger agreement contains a number of conditions to closing of the merger, including, among others:

 

    approval of the share issuance by RAI shareholders;

 

    adoption of the merger agreement by Lorillard shareholders;

 

    the termination or expiration of any applicable waiting period under the HSR Act;

 

    the approval for listing by the NYSE of the RAI common stock issuable to Lorillard shareholders in the merger;

 

    the absence of any law, order, judgment or other legal restraint by a court or other governmental entity that prevents, makes illegal or prohibits the closing of the merger;

 

    the accuracy of the representations and warranties made in the merger agreement by the other party, subject to certain materiality exceptions;

 

    performance in all material respects by the other party of the obligations required to be performed by it at or prior to completion of the merger; and

 

    the absence of a material adverse effect on the other party since the date of the merger agreement.

In certain cases, RAI’s obligation to complete the merger is further subject to the condition that no legal restraint be in effect that would result in a substantial detriment to RAI’s post-merger ownership, control or

 

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operation of its business. For a more complete summary of the conditions that must be satisfied or waived prior to completion of the merger, see “The Merger Agreement—Conditions to the Merger” beginning on page 186 of this joint proxy statement/prospectus.

Many of the conditions to closing of the merger are not within either RAI’s or Lorillard’s control, and neither company can predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived prior to July 15, 2015, which date will automatically be extended to January 16, 2016 under certain limited circumstances, it is possible that the merger agreement may be terminated. Although RAI and Lorillard have agreed in the merger agreement to use their reasonable best efforts, subject to certain limitations, to complete the merger as promptly as practicable, these and other conditions to the completion of the merger may fail to be satisfied. In addition, satisfying the conditions to and completion of the merger may take longer, and could cost more, than RAI and Lorillard expect. Any delay in completing the merger may adversely affect the synergies and other benefits that RAI expects to achieve if the merger and the integration of the companies’ respective businesses are completed within the expected timeframe. See the sections entitled “The Merger Agreement—Conditions to the Merger” beginning on page 186 of this joint proxy statement/prospectus for a discussion of the conditions to closing of the merger, and “The Merger Agreement—Termination of the Merger Agreement” beginning on page 187 of this joint proxy statement/prospectus for a discussion of the rights of each of RAI and Lorillard to terminate the merger agreement.

The merger is subject to the receipt of numerous approvals, including approvals from RAI shareholders as to the share issuance and Lorillard shareholders as to the merger agreement. Failure to obtain these approvals would prevent the closing of the merger.

Before the merger can be completed, RAI shareholders must approve the share issuance and Lorillard shareholders must adopt the merger agreement. There can be no assurance that these approvals will be obtained. Failure to obtain the required approvals within the expected time frame, or having to make significant changes to the structure, terms or conditions of the merger to obtain such approvals, may result in a material delay in, or the abandonment of, the merger. Any delay in completing the merger may adversely affect the synergies and other benefits that RAI expects to achieve assuming the merger and the integration of the companies’ respective businesses are completed within the expected timeframe.

Failure to complete the divestiture with Imperial Sub could require RAI to pursue an alternate divestiture transaction, which may be on less favorable terms to RAI.

On July 15, 2014, RAI entered into the asset purchase agreement and Lorillard entered into the transfer agreement, in each case with Imperial Sub, and, for certain limited purposes of the asset purchase agreement, Imperial, pursuant to which Imperial Sub agreed, among other things, to acquire the transferred assets and assume certain liabilities of each of RAI and Lorillard and their respective affiliates or subsidiaries. The completion of the divestiture is subject to a number of closing conditions, including, among others:

 

    the absence of legal restraints in effect that would prohibit the divestiture, including HSR clearance;

 

    the approval of the divestiture by Imperial shareholders;

 

    the entering of the order in the case filed in 1999 by the DOJ against the major U.S. cigarette manufacturers, including RJR Tobacco and Lorillard, subjecting Imperial Sub to a final judgment and a remedial order related to certain of the transferred assets, specifically the WINSTON, SALEM, KOOL and Maverick (and, under certain circumstances, DORAL) brands;

 

    the satisfaction of the conditions precedent to the closing of the merger; and

 

    no state having provided written notice that it intends to de-list or not recertify any of the cigarette brands included among the transferred assets, where such de-listing or non-recertification would be reasonably likely to result in the inability of Imperial Sub to sell any or all of the acquired brands in certain states.

 

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Many of the conditions to the closing of the divestiture are not within either RAI’s, Lorillard’s, Imperial’s or Imperial Sub’s control, and no company can predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived prior to July 15, 2015, which date will automatically be extended to January 16, 2016 under certain limited circumstances, the divestiture will not be completed in the expected time frame and the asset purchase agreement may be terminated.

If RAI is unable to complete the divestiture, subject to certain limitations, RAI would be required to pursue an alternative transaction to divest the transferred assets on terms that may differ from the terms of the divestiture. There is no assurance as to when any such alternate divestiture transaction would be completed, or that any such alternate divestiture transaction would be completed on terms as favorable to RAI and its shareholders (including, after the merger, former Lorillard shareholders) as the divestiture.

For a more complete summary of the conditions that must be satisfied or waived prior to completion of the divestiture, see “The Divestiture—The Asset Purchase Agreement and Transfer Agreement—Conditions to Closing of the Divestiture” beginning on page 206 of this joint proxy statement/prospectus.

RJR Tobacco’s DORAL brand may be required to be included as part of the divestiture.

Under the asset purchase agreement, RAI will cause its subsidiaries, including RJR Tobacco, to sell to Imperial Sub its WINSTON, KOOL and SALEM brands. In the event that the aggregate market share for these brands is less than 4.9% for the three months ended prior to the month in which closing of the merger occurs, the asset purchase agreement provides that RJR Tobacco’s DORAL brand will also be sold to Imperial Sub as part of the divestiture. RAI will not receive any additional purchase price in the event the DORAL brand is included as part of the divestiture. The DORAL brand represented approximately $278 million of RAI’s net sales, approximately $114 million of RAI’s operating income and approximately $70 million of RAI’s net income in fiscal year 2013. As a result, RAI’s pro forma financial information set forth in this joint proxy statement/prospectus will be adversely impacted if the DORAL brand is required to be included as part of the divestiture.

Uncertainties associated with the merger may cause a loss of RAI’s and Lorillard’s senior management personnel and other key employees, which could have an adverse effect on the results of operations, cash flows and financial position of RAI and Lorillard.

RAI and Lorillard and their respective subsidiaries are dependent on the continued availability and service of senior management personnel. RAI’s success after the merger will depend in part upon its ability and the abilities of its subsidiaries to retain and hire executive officers, other key senior management personnel and other key employees. The employees of RAI and Lorillard and their respective subsidiaries may experience uncertainty about their roles within RAI or Imperial Sub following the merger. This uncertainty may inhibit the ability to retain those executive officers, other key senior management personnel and other key employees following the merger. There can be no assurance that executive officers, other key senior management personnel and other key employees can be retained either prior to or following the closing of the merger to the same extent that RAI and Lorillard and their respective subsidiaries have previously been able to attract and retain their own employees, which could have an adverse effect on the results of operations, cash flows and financial position of RAI and Lorillard.

The business relationships of RAI and Lorillard and their respective subsidiaries may be subject to disruption due to uncertainty associated with the merger, which could have an adverse effect on the results of operations, cash flows and financial position of RAI and Lorillard.

Parties with which RAI or Lorillard, or their respective subsidiaries, do business may experience uncertainty associated with the merger and related transactions, including with respect to current or future business relationships with RAI, Lorillard, their respective subsidiaries or the combined business. RAI’s and Lorillard’s business relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may

 

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attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than RAI, Lorillard, their respective affiliates or subsidiaries or the combined business. These disruptions could have an adverse effect on the results of operations, cash flows and financial position of RAI following the closing of the merger, including an adverse effect on RAI’s ability to realize the expected synergies and other benefits of the merger. The risk, and adverse effect, of any disruption could be exacerbated by a delay in completion of the merger or termination of the merger agreement.

The merger agreement subjects RAI and Lorillard to restrictions on their respective business activities.

The merger agreement subjects RAI and Lorillard to restrictions on their respective business activities and obligates RAI and Lorillard to generally operate their businesses in the ordinary course in all material respects. These restrictions could prevent RAI and Lorillard from pursuing attractive business opportunities that arise prior to the completion of the merger and are outside the ordinary course of business, and otherwise have an adverse effect on RAI’s or Lorillard’s results of operations, cash flows and financial position.

Lawsuits have been filed against RAI, the members of the RAI board of directors, Lorillard, the members of the Lorillard board of directors and BAT, challenging the merger, which could delay the merger and prevent the merger from being completed.

RAI, the members of the RAI board of directors and BAT have been named as defendants in a putative class action lawsuit brought in North Carolina state court on behalf of a purported class of RAI shareholders seeking to enjoin the proposed merger with Lorillard. The complaint generally alleges, among other things, that the members of the RAI board of directors breached their fiduciary duties to RAI shareholders by approving the share purchase and the sharing of technology with BAT. The complaint also alleges that there were various conflicts of interest in the transaction.

In addition, Lorillard, the members of the Lorillard board of directors, RAI and BAT have been named as defendants in putative class action lawsuits brought in the Delaware Court of Chancery by Lorillard shareholders challenging the proposed merger with RAI. The complaints generally allege, among other things, that the members of Lorillard board of directors breached their fiduciary duties to Lorillard shareholders by authorizing the proposed merger of Lorillard with RAI. The complaints also allege that RAI and BAT aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Lorillard board of directors.

The shareholder actions seek injunctive relief enjoining the merger, damages and reimbursement of costs, among other remedies. Additional lawsuits may be filed against RAI, Lorillard, the directors of either company and/or BAT in connection with the merger. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Litigation Relating to the Merger” beginning on page 167 of this joint proxy statement/prospectus for more information about the lawsuits that have been filed related to the merger. Lawsuits challenging the merger could result in a material delay in, or the abandonment of, the merger.

The exchange ratio is fixed and will not be adjusted in the event of any change in either RAI’s or Lorillard’s stock price. Because the market price of RAI common stock may fluctuate, the value of the merger consideration that Lorillard shareholders will receive in the merger is uncertain.

In the merger, each share of Lorillard common stock (other than treasury shares held by Lorillard and any shares of Lorillard common stock owned by any Lorillard subsidiary, RAI or Merger Sub or shares of Lorillard common stock owned by Lorillard shareholders who have properly made and not withdrawn a demand for appraisal rights pursuant to Section 262 of the DGCL) will be converted into the right to receive the merger consideration, consisting of (1) 0.2909 of a fully paid and nonassessable share of RAI common stock plus (2) $50.50 in cash. No fractional shares of RAI common stock will be issued in the merger, and Lorillard shareholders will receive cash in lieu of any fractional shares.

 

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Though the cash portion of the merger consideration is known, because the exchange ratio is fixed, the value of the stock portion of the merger consideration will depend on the market price of RAI common stock at the time the merger is completed. The exchange ratio will not be adjusted for changes in the market price of the common stock of RAI or Lorillard between the date of signing the merger agreement and completion of the merger. There will be a lapse of time between the date on which RAI shareholders vote on the share issuance at the RAI special meeting and Lorillard shareholders vote on the merger agreement at the Lorillard special meeting and the date on which Lorillard shareholders entitled to receive shares of RAI common stock actually receive those shares. The value of the stock portion of the merger consideration has fluctuated since the date of the announcement of the merger agreement and will continue to fluctuate from the date of this joint proxy statement/prospectus to the date the merger is completed and thereafter. The closing price per share of Lorillard common stock as of July 14, 2014, the last trading date before the public announcement of the merger agreement, was $67.22, and the closing price per share has fluctuated as high as $64.06 and as low as $58.00 between that date and December 18, 2014. The closing price per share of RAI common stock as of July 14, 2014, the last trading date before the public announcement of the merger agreement, was $63.18, and the closing price per share has fluctuated as high as $66.93 and as low as $55.75 between that date and December 18, 2014. Accordingly, at the time of the RAI and Lorillard special meetings, the value of the stock portion of the merger consideration will not be known. Stock price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in RAI’s and Lorillard’s respective operations and prospects, cash flows, and financial position, shareholder litigation related to the merger, market assessments of the likelihood that the merger will be completed, the timing of the merger, regulatory considerations and results of smoking and health litigation. Moreover, the issuance of additional shares of RAI common stock in the share issuance could depress the per share price of RAI common stock.

RAI and Lorillard shareholders are urged to obtain current market quotations for shares of RAI and Lorillard common stock.

For a period of time after the divestiture is completed, RJR Tobacco will be reliant on Imperial Sub to manufacture Newport on RJR Tobacco’s behalf, and RJR Tobacco will manufacture WINSTON, KOOL and SALEM (and, under certain circumstances, DORAL) on Imperial Sub’s behalf. RJR Tobacco’s reliance on Imperial Sub for the manufacture of Newport will subject RAI and RJR Tobacco to risks and uncertainties to which it would not otherwise be subject and Imperial Sub’s inability to manufacture Newport as currently contemplated could adversely affect RAI and RJR Tobacco’s results of operations, cash flows, financial position and ability to realize the synergies expected as a result of the merger and divestiture.

RJR Tobacco and Imperial Sub will enter into a reciprocal manufacturing agreement in connection with closing of the merger and the divestiture, pursuant to which for a period of up to two years, subject to automatic one-year extensions, Imperial Sub will manufacture Newport (and any other Lorillard brand acquired in the merger and agreed upon by the parties) on RJR Tobacco’s behalf and RJR Tobacco will manufacture WINSTON, KOOL, SALEM (and, under certain circumstances, DORAL) on Imperial Sub’s behalf. As a result, RAI will be dependent on a single outside source for the manufacture of products representing approximately 40% of RAI’s net sales in fiscal year 2013 on a pro forma basis, assuming the merger and divestiture had occurred on January 1, 2013. Reliance on Imperial Sub for the manufacture of Newport will subject RAI and RJR Tobacco to risks and uncertainties to which it would not be subject if RJR Tobacco manufactured Newport itself, including, among others:

 

    reduced control over the manufacturing process and quality control;

 

    disruptions to Imperial Sub’s operations and the production of Newport caused by conditions unrelated to RAI’s and its subsidiaries’ businesses or operations, including disputes under collective bargaining agreements with labor unions or in connection with negotiation of new collective bargaining agreements, strikes or other work stoppages at the Imperial Sub plant that manufactures Newport or the occurrence of a catastrophic event affecting Imperial Sub; and

 

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    loss of market share and reputational harm to RAI and RJR Tobacco in the event a disruption of the production of Newport by Imperial Sub results in insufficient supply.

In addition, Imperial Sub may not transition the manufacturing of WINSTON, KOOL, SALEM (and, under certain circumstances, DORAL) to the Greensboro plant acquired by Imperial Sub in the divestiture as quickly as currently contemplated.

If Imperial Sub fails to or is unable to perform under the reciprocal manufacturing agreement, RAI’s and RJR Tobacco’s results of operations, cash flows and financial position could be adversely affected, and there could be a delay to RAI and RJR Tobacco’s ability to realize any or all of the synergies expected as a result of the merger and divestiture.

RAI is obligated to indemnify Imperial Sub for specified matters and to retain certain liabilities related to the divested brands and other assets.

Under the asset purchase agreement, RAI will indemnify Imperial Sub against losses arising from, among other things, breaches of representations and warranties, breaches of covenants, assets excluded from the transaction, excluded liabilities, certain specific tobacco liabilities, certain assumed plaintiff fees, certain employment related obligations, and liabilities in connection with certain tobacco litigation, settlement and regulation matters. The asset purchase agreement does not cap RAI’s indemnification obligations except with respect to any indemnification arising from breaches of certain representations and warranties or pre-closing covenants. Accordingly, these indemnification obligations could be substantial and could have an adverse effect on RAI’s results of operations, cash flows and financial position. For a further discussion of the indemnification provisions under the asset purchase agreement, see “The Divestiture—The Asset Purchase Agreement and Transfer Agreement—Indemnification” beginning on page 208 of this joint proxy statement/prospectus.

RAI’s and Lorillard’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of RAI and Lorillard shareholders generally.

Certain of the directors and executive officers of RAI and Lorillard have interests in the merger that are different from, or in addition to, the interests of RAI and Lorillard shareholders generally. With respect to RAI, these interests include, as to the two B&W nominated directors of RAI who are present or former BAT executives, interests as a result of the share purchase, pursuant to which BAT (directly or through one or more of its wholly owned subsidiaries) will subscribe for and purchase a number of shares of RAI common stock necessary to maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger.

With respect to Lorillard, these interests include:

 

    certain acceleration of and payment in respect of outstanding equity awards upon the completion of the merger;

 

    certain accelerated payment of annual bonuses upon the completion of the merger;

 

    the lapse of certain restrictions relating to the Lorillard executive insurance program pursuant to its terms in connection with certain termination events relating to an executive’s employment following the completion of the merger;

 

    certain change in control and termination benefits under existing severance agreements in connection with certain termination events relating to an executive’s employment following the completion of the merger;

 

    the appointment of Murray S. Kessler to the RAI board of directors upon completion of the merger;

 

    certain commitments by RAI to honor rights to indemnification, advancement of expenses and directors’ and officers’ insurance for executive officers and directors as provided in the merger agreement; and/or

 

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    certain offers of employment from Imperial Sub as provided in the asset purchase agreement.

These interests may cause RAI’s and Lorillard’s directors and executive officers to view the proposals relating to the merger differently and more favorably than RAI and Lorillard shareholders may view them. For further information, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Interests of Certain RAI Directors and Officers” and “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Interests of Certain Lorillard Directors and Officers” each beginning on page 151 of this joint proxy statement/prospectus.

The fairness opinions obtained by the boards of directors of RAI and Lorillard from their respective financial advisors will not reflect changes, circumstances, developments or events that may have occurred or may occur after the date of the opinions.

Lazard, RAI’s financial advisor in connection with the merger and the transactions pursuant to the subscription agreement, asset purchase agreement and transfer agreement, rendered its written opinion dated as of July 15, 2014, to the effect that, as of that date and based upon and subject to the matters described in its opinion, the merger consideration to be paid by RAI in the merger (after giving effect to the transactions pursuant to the subscription agreement, asset purchase agreement and transfer agreement) was fair, from a financial point of view, to RAI and to RAI shareholders other than BAT. Each of Barclays and Centerview, Lorillard’s financial advisors in connection with the merger and the other transactions contemplated by the merger agreement, have delivered to the Lorillard board of directors a written opinion, dated as of July 14, 2014, as to the fairness, from a financial point of view, to the holders of shares of Lorillard common stock (other than shares of Lorillard common stock (1) held by Lorillard as treasury stock or owned by a subsidiary of Lorillard, RAI or Merger Sub immediately prior to the effective time of the merger, (2) owned by shareholders who have properly made and not withdrawn a demand for appraisal rights pursuant to Section 262 of the DGCL or (3) held by any affiliate of RAI) of the merger consideration to be paid to such holders pursuant to the merger agreement.

Neither the RAI board of directors nor the Lorillard board of directors has obtained an updated fairness opinion as of the date of this joint proxy statement/prospectus from its respective financial advisors, and neither expects to receive updated fairness opinions prior to the closing of the merger.

The opinions do not reflect changes, circumstances, developments or events that may have occurred or may occur after the date of the opinions, including changes in the operations and prospects of RAI and Lorillard or their respective operating companies, regulatory or legal changes, general market and economic conditions and other factors that may be beyond the control of RAI and Lorillard, and on which the fairness opinions were based, and that may alter the value of RAI and Lorillard or the prices of shares of RAI or Lorillard common stock by the time the merger is completed. The value of the stock portion of the merger consideration has fluctuated since, and could be materially different from its value as of, the date of the opinions, and the opinions do not address the prices at which shares of RAI common stock or Lorillard common stock may trade since the dates of the opinions. The opinions do not speak as of the time the merger will be completed or as of any date other than the dates of such opinions. Neither RAI nor Lorillard anticipates asking its financial advisors to update their opinion, and none of the respective financial advisors has an obligation or responsibility to update, revise or reaffirm its respective opinion based on circumstances, developments or events that may have occurred or may occur after the date of the opinion. The opinions of RAI’s and Lorillard’s financial advisors are included as Annex C, Annex D and Annex E to this joint proxy statement/prospectus, respectively. For a summary of Lazard’s opinion, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinion of RAI’s Financial Advisor” beginning on page 123 of this joint proxy statement/prospectus. For a summary of Barclay’s and Centerview’s opinions, see “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinions of Lorillard’s Financial Advisors” beginning on page 131 of this joint proxy statement/prospectus.

 

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The merger agreement and asset purchase agreement limit RAI’s and Lorillard’s ability to pursue alternatives to the merger and may discourage other companies from trying to acquire RAI or Lorillard.

The merger agreement and asset purchase agreement contain provisions that make it more difficult for RAI and Lorillard to pursue alternatives to the merger and limit the ability to terminate the merger agreement. The definition of “material adverse effect” is limited under the merger agreement and asset purchase agreement. Certain events could materially and adversely affect RAI’s, Lorillard’s or their respective subsidiaries’ business, but not give rise to a right of termination under the applicable agreement.

The merger agreement contains provisions that make it more difficult for the RAI board of directors to withhold or withdraw its recommendation that RAI shareholders approve the share issuance. The RAI board of directors may withhold or withdraw its recommendation in response to any material intervening event that, at the time of execution of the merger agreement, was unknown or not reasonably foreseeable only if the RAI board of directors determines in good faith that the failure to withhold or withdraw its recommendations would be inconsistent with its fiduciary duties to RAI shareholders under applicable law, provided that a material intervening event does not include, among other things, receipt of a takeover proposal for RAI or any events relating to the transactions, Lorillard or its subsidiaries, or a menthol regulatory action.

In addition, the asset purchase agreement contains provisions that make it more difficult for RAI and RJR Tobacco to sell the brands included in the divestiture to a party other than Imperial Sub. These provisions include a general prohibition on RAI soliciting an acquisition proposal for the divested brands or offer for a competing transaction.

The merger agreement contains provisions that make it more difficult for Lorillard to sell its business to a party other than RAI. These provisions include a general prohibition on Lorillard soliciting any acquisition proposal or offer for a competing transaction. Even if the RAI or Lorillard board of directors withdraws or qualifies its recommendation with respect to the share issuance or merger agreement, respectively, in accordance with the terms and conditions of the merger agreement, RAI or Lorillard will still be required to submit the share issuance and the adoption of the merger agreement, respectively, to a vote by its shareholders at its special meeting, unless the merger agreement is terminated prior to the special meeting date in accordance with its terms. Further, there are only limited exceptions to Lorillard’s agreement that the Lorillard board of directors will not withdraw or modify in a manner adverse to RAI the recommendation of the Lorillard board of directors that Lorillard shareholders adopt the merger agreement, and RAI generally has a right to match any competing acquisition proposals that may be made.

In certain circumstances, upon termination of the merger agreement, RAI will be required to pay to Lorillard a termination fee of $740 million (and under certain circumstances 40% of any termination fee received pursuant to the asset purchase agreement). Under the asset purchase agreement, RAI would be entitled to receive a termination fee of $210 million from Imperial Sub if RAI terminates the asset purchase agreement because Imperial makes an adverse recommendation regarding, or fails to include in the circular submitted to Imperial shareholders a recommendation in favor of, the approval of the divestiture by Imperial shareholders.

In certain cases, upon termination of the merger agreement, Lorillard will be required to pay to RAI a termination fee of $740 million. If a termination of the merger agreement results in the termination of the asset purchase agreement, and RAI receives a termination fee from Lorillard pursuant to the merger agreement, RAI has agreed to pay a $210 million termination fee to Imperial Sub. In addition, in the event that either the merger agreement or the asset purchase agreement is terminated and RAI receives a termination fee from Lorillard, RAI will provide BAT an expense reimbursement, up to $30 million in the case of termination of the merger agreement and up to $8.5 million in the case of termination of the asset purchase agreement.

 

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For more information, see “The Merger Agreement—Termination of the Merger Agreement,—Expenses and Termination Fees,”The Subscription Agreement—Termination of the Subscription Agreement,” “The Divestiture—The Asset Purchase Agreement and Transfer Agreement—Termination Fees under the Merger Agreement” and “—Termination Fees” beginning on pages 187, 188, 194, 208 and 208, respectively, of this joint proxy statement/prospectus.

These provisions could discourage potential third-party acquirers that might have an interest in acquiring all or a significant portion of RAI or Lorillard from considering or proposing such an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the value proposed to be received or realized in the merger, or might result in a potential third-party acquirer proposing to pay a lower price to RAI or Lorillard shareholders than it might otherwise have proposed to pay because of the added expense of the termination fees that may become payable in certain circumstances.

If the merger agreement is terminated and either RAI or Lorillard determines to seek another business combination, either party may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the merger.

Failure to complete the merger could negatively impact RAI’s or Lorillard’s stock price and have an adverse effect on their results of operations, cash flows and financial position.

If the merger is not completed for any reason, including as a result of RAI or Lorillard shareholders failing to approve the applicable proposals, the ongoing businesses of RAI and Lorillard may be adversely affected and, without realizing any of the benefits of having completed the merger, RAI and Lorillard would be subject to a number of risks, including the following:

 

    RAI and Lorillard may experience negative reactions from the financial markets, including negative impacts on their respective stock prices;

 

    RAI and Lorillard and their respective subsidiaries may experience negative reactions from their respective customers, regulators and employees;

 

    RAI and Lorillard will be required to pay certain costs relating to the merger, whether or not the merger is completed;

 

    RAI or Lorillard may be required to pay a cash termination fee as prescribed by the merger agreement;

 

    RAI may be required to pay $210 million of any termination fee received from Lorillard to Imperial Sub in the event that a termination of the merger agreement results in the termination of the asset purchase agreement, and RAI may be required to pay BAT an expense reimbursement of up to $30 million in the event of termination of the merger agreement and up to $8.5 million in the event of termination of the asset purchase agreement;

 

    the merger agreement places certain restrictions on the conduct of the businesses of RAI and Lorillard and their respective subsidiaries prior to completion of the merger, which may have prevented them from making certain acquisitions, taking certain other specified actions or otherwise pursuing business opportunities between the signing of the merger agreement and the completion of the merger;

 

    matters relating to the merger (including integration planning) will require substantial commitments of time and resources by RAI and Lorillard management, which could have resulted in the distraction of each company’s management from ongoing business operations between the signing of the merger agreement and the completion of the merger; and

 

    litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against RAI or Lorillard to perform their respective obligations under the merger agreement.

If the merger is not completed, the risks described above may materialize and they may have an adverse effect on RAI’s or Lorillard’s results of operations, cash flows, financial position and stock prices.

 

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Risk Factors Relating to the Combined Company

The substantial additional indebtedness that RAI will incur in connection with the merger could adversely affect RAI and its financial position, including by decreasing RAI’s business flexibility and resulting in a reduction of RAI’s credit ratings.

Following completion of the merger, RAI will have substantially increased debt compared to RAI on a recent historical basis. RAI expects to incur approximately $12.5 billion of debt in connection with the merger as a result of financing to complete the merger and debt assumed in the merger. This increased level of debt could have the effect, among other things, of reducing RAI’s flexibility to respond to changing business and economic conditions and will have the effect of increasing RAI’s interest expense. In addition, the amount of cash required to service RAI’s increased debt levels following completion of the merger and thus the demands on RAI’s cash resources will be greater than the amount of cash flows required to service RAI’s debt prior to the transactions.

RAI’s credit ratings impact the cost and availability of future borrowings and, accordingly, RAI’s cost of capital. RAI’s credit ratings reflect each rating organization’s opinion of RAI’s financial strength, operating performance and ability to meet RAI’s debt obligations. Following announcement of the merger, Standard & Poor’s Ratings Services reaffirmed all of its ratings on RAI, including its BBB- corporate credit ratings, and Moody’s Investor Service placed RAI’s Baa2 senior unsecured rating on review for downgrade. Any reduction in RAI’s credit ratings may limit RAI’s ability to borrow at interest rates consistent with the interest rates that have been available to RAI prior to the merger. If RAI’s credit ratings are reduced, RAI may not be able to sell additional debt securities or borrow money in the amounts, at the times or interest rates or upon the more favorable terms and conditions that might be available if RAI’s current credit ratings are maintained. Any impairment of RAI’s ability to obtain future financing on favorable terms could have an adverse effect on RAI’s ability to finance the cash portion of the merger consideration with the issuance of debt securities or another alternative to the bridge facility on terms more favorable than under the bridge facility, or to refinance the bridge facility if drawn.

If the merger is completed, a substantial portion of RAI’s consolidated sales will be attributable to products that contain menthol, and any action by the FDA or any other governmental authority that could have the effect of banning or materially restricting the sale of menthol cigarettes could have an adverse effect on the results of operations, cash flows and financial position of RAI and its subsidiaries.

In connection with the merger, Newport menthol cigarette styles, which accounted for approximately 80% of Lorillard’s total consolidated net sales in fiscal year 2013, will be added to the brand portfolio of RAI’s operating companies. On a pro forma basis, assuming the merger and divestiture had occurred on January 1, 2013, approximately 50% of the combined company’s total net sales through December 31, 2013 would have been attributable to menthol cigarettes. Although it is not possible to predict whether or when the FDA will take actions, if the FDA or any other governmental authority were to adopt regulations banning or severely restricting the sale of menthol cigarettes, those regulations could have a material adverse effect on the cigarette sales of the combined company, which could have an adverse effect on the results of operations, cash flows and financial position of RAI and its subsidiaries.

 

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Lorillard shareholders will have a reduced ownership and voting interest in RAI immediately after the merger than they currently have in Lorillard, including as a result of BAT’s maintenance of its approximately 42% beneficial ownership interest in RAI, and could have even less ownership and voting interest as a result of the expiration on July 30, 2014 of the standstill provisions of the governance agreement among RAI, BAT and B&W and of RAI’s shareholder rights plan. Therefore, former Lorillard shareholders will have significantly less influence over management of the combined company. BAT’s significant beneficial ownership interest in RAI could be determinative in matters submitted to a vote by RAI shareholders, resulting in the possibility of RAI taking actions that RAI’s other shareholders do not support.

Following the merger, each Lorillard shareholder will become a shareholder of RAI with a percentage ownership of RAI after the merger that is much smaller than the shareholder’s percentage ownership of Lorillard. Based on the number of shares of Lorillard common stock outstanding as of December 8, 2014, and the number of shares of RAI common stock outstanding as of December 20, 2014, it is expected that, immediately after completion of the merger, former Lorillard shareholders will own approximately 105.1 million of the outstanding shares of RAI common stock, representing approximately 15% of the outstanding shares of RAI common stock. In addition, pursuant to the share purchase, BAT will subscribe for and purchase a number of shares of RAI common stock necessary to maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger. Consequently, former Lorillard shareholders will have significantly less influence over the management and policies of RAI than they currently have over the management and policies of Lorillard. As a result of the expiration on July 30, 2014 of the standstill provisions of the governance agreement among RAI, BAT and B&W and of RAI’s shareholder rights plan, BAT, through B&W or other affiliates, may increase its ownership interest in RAI without limitation (but subject to governance agreement limitations on changes in the composition of the RAI board of directors, as described below). Any such increase could result in former Lorillard shareholders having even less influence over management and policies of RAI and could result in the acquisition of RAI by BAT.

BAT beneficially owns, and immediately following completion of the merger will continue to beneficially own, approximately 42% of the outstanding shares of RAI common stock. No other RAI shareholder owns more than 10% of the outstanding shares of RAI common stock. Unless substantially all RAI shareholders other than BAT vote together on matters presented to RAI shareholders, BAT would have the power to determine the outcome of matters submitted to a shareholder vote, which could result in RAI taking actions that RAI’s other shareholders do not support.

The existing governance agreement among RAI, BAT and B&W contains important provisions governing the actions of such parties. That agreement will remain in effect after the merger indefinitely, subject to certain events of termination. The restraints on RAI, or the termination of restraints on BAT and B&W, could adversely affect the interests of RAI shareholders other than B&W.

The governance agreement requires the approval of B&W, or a majority of the RAI directors designated by B&W pursuant to the governance agreement, before RAI takes certain actions, including certain share issuances. The governance agreement also, generally, prohibits RAI from adopting takeover defense measures applicable to BAT and its subsidiaries without B&W’s approval. These provisions, together with BAT’s significant beneficial ownership interest in RAI, RAI’s classified board of directors and other anti-takeover defenses could deter acquisition proposals and make it difficult for a third party to acquire control of RAI without the cooperation of BAT. This could have a negative effect on the price of RAI common stock.

The governance agreement also provides for share transfer restrictions applicable to B&W. If the share transfer restrictions in the governance agreement are terminated, there will be no contractual restrictions on B&W’s ability to sell or transfer its shares of RAI common stock on the open market, in privately negotiated transactions or otherwise. These sales or transfers could create a substantial decline in the price of shares of RAI common stock or, if these sales or transfers were made to a single buyer or group of buyers that consequently will own a large number of shares of RAI common stock, could result in a third party acquiring control of or influence over RAI.

 

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In addition, the governance agreement provides for the slate of RAI director nominees proposed for election by the RAI board of directors to be chosen as follows. Five nominees are designated by B&W. The remaining seven nominees and the chief executive officer of RAI (or equivalent senior executive officer of RAI) are recommended to the RAI board of directors by the board’s corporate governance and nominating committee, referred to as the RAI governance committee. B&W is obligated to vote all of its RAI common stock for the election of the RAI board of directors’ slate (unless an unaffiliated third party solicits proxies for the election of a different slate). The governance agreement provides, however, that in no event will the number of directors designated by B&W, divided by the total number of directors then comprising the RAI board of directors, exceed the number of directors which B&W is then entitled to designate pursuant to the terms of the governance agreement divided by 12, rounded up to the nearest whole number. Thus, B&W is not permitted to designate a sufficient number of directors to constitute a majority of the RAI board of directors unless the foregoing provisions of the governance agreement are terminated. Such termination would either require the beneficial ownership of 100% of RAI’s outstanding shares by BAT or a specified breach of the governance agreement by RAI. If such a breach occurred, BAT could elect to terminate the RAI director nomination and election provisions described above. In such event, B&W would be able to nominate its own designees to become a majority or more of the members of the RAI board of directors and vote the shares of RAI common stock it owns (currently approximately 42% of the outstanding shares of RAI common stock) for the election of such designees.

See “Comparison of Shareholder Rights—Governance Agreement” beginning on page 248 of this joint proxy statement/prospectus for a description of the governance agreement and the rights of, and limitations, on RAI, BAT and B&W thereunder.

Under the RAI articles of incorporation, neither BAT or any of its subsidiaries or affiliates nor any director of RAI who is affiliated with, or employed by, BAT or its subsidiaries and affiliates is required to present a transaction, relationship, arrangement or other opportunity, all of which are collectively referred to as a business opportunity, to RAI if the business opportunity does not primarily relate to the United States. Any loss of favorable business opportunities could have an adverse effect on the results of operations, cash flows and financial position of RAI.

Under the RAI articles of incorporation, neither BAT or any of its subsidiaries or affiliates nor any director of RAI who is affiliated with, or employed by, BAT or its subsidiaries and affiliates, including any B&W designated director, is required to present a business opportunity to RAI, the RAI board of directors or any RAI officer or employee if the business opportunity does not relate primarily to the United States. RAI has renounced any expectancy or interest in, or in being offered an opportunity to participate in, any such business opportunity, and BAT and its subsidiaries and affiliates are entitled to act upon any such business opportunity and will not be liable to RAI or any RAI shareholders for taking any such action or not presenting such business opportunity to RAI. As a result, RAI may not be presented with certain favorable business opportunities and BAT may take advantage and receive the benefits of those business opportunities. Any loss of favorable business opportunities could have an adverse effect on the results of operations, cash flows and financial position of RAI.

After completion of the merger, RAI, through its subsidiaries, will continue to be dependent on the U.S. cigarette market, which is expected to continue to decline. In addition, RAI will continue to be dependent on premium and super premium cigarette brands. The continued decline in U.S. cigarette consumption, or the transition of consumers away from premium cigarette brands, could have an adverse effect on the results of operations, cash flows and financial position of RAI.

RAI’s subsidiaries are, and, following the merger, will continue to be dependent on the U.S. cigarette market. In connection with the merger, RAI is not acquiring any brands outside of the United States and the assets of Lorillard’s subsidiaries related to the “e-vapor” brand blu (including SKYCIG) are included in the divestiture. Lorillard, like RAI, previously divested its international cigarette business.

 

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After completion of the merger, RAI’s subsidiaries’ U.S. combustible cigarette brands will include, among others, NEWPORT, CAMEL, PALL MALL and NATURAL AMERICAN SPIRIT. RAI’s sales in the United States attributable to combustible cigarettes would have represented approximately 91% of RAI’s pro forma 2013 net sales, assuming the merger and the divestiture had occurred on January 1, 2013. U.S. cigarette consumption has declined since 1981, for a variety of factors, including, for example, price increases, restrictions on advertising and promotions, smoking prevention campaigns, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of smoking, increased pressure from anti-tobacco groups, and migration to smoke-free products. U.S. cigarette consumption is expected to continue to decline.

In addition, RAI’s subsidiaries’ brands are subject to consumer price sensitivities, with certain brands subject to greater price sensitivities than others or competitors’ brands. Some consumers may switch to a lower priced brand than the brands offered by RAI’s subsidiaries. As a result of the acquisition of Lorillard’s subsidiaries’ brands, which principally consist of Newport, RAI’s subsidiaries’ concentration of premium brands would increase significantly. As a result, RAI’s subsidiaries will become more susceptible to consumer price sensitivities after the merger. A downturn in the economy or other adverse financial or economic conditions could increase the number of consumers switching to a lower priced brand than any of those offered by RAI’s subsidiaries.

The continued decline in U.S. cigarette consumption, or the transition of consumers away from premium cigarette brands, could have an adverse effect on the results of operations, cash flows and financial position of RAI.

The RAI unaudited pro forma condensed combined financial statements included in this joint proxy statement/prospectus are preliminary and the actual results of operations, cash flows and financial position after the merger and divestiture may differ materially.

The RAI unaudited pro forma condensed combined financial statements in this joint proxy statement/prospectus are presented for illustrative purposes only and are not necessarily indicative of what RAI’s actual results of operations, cash flows and financial position would have been had the merger and divestiture been completed on the dates indicated. The RAI unaudited pro forma condensed combined financial statements reflect adjustments, which are based upon preliminary estimates, to record the Lorillard identifiable assets acquired and liabilities assumed at fair value and the resulting goodwill recognized, as well as the assets and liabilities divested to Imperial Sub. The merger purchase price allocation reflected in this document is preliminary, and final allocation of the purchase price will be based upon the actual purchase price and the fair value of the assets and liabilities of Lorillard that are acquired in the merger and those assets and liabilities of RAI and Lorillard divested in the divestiture as of the date of the completion of the merger and divestiture, respectively. Accordingly, the final acquisition accounting adjustments may differ materially from the pro forma adjustments reflected in this document. For more information, see “RAI Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 215 of this joint proxy statement/prospectus.

Lorillard shareholders who become RAI shareholders will have their rights as shareholders governed by North Carolina law and the RAI articles of incorporation, the RAI bylaws and the governance agreement, which differ from Delaware law and the Lorillard certificate of incorporation and the Lorillard by-laws.

Upon completion of the merger, Lorillard shareholders will become RAI shareholders and their rights as shareholders will be governed by North Carolina law, including the NCBCA, the RAI articles of incorporation, the RAI bylaws and the governance agreement. The rights associated with RAI common stock are different from the rights associated with Lorillard common stock. See “Comparison of Shareholder Rights” beginning on page 235 of this joint proxy statement/prospectus for a discussion of the different rights associated with RAI common stock.

 

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After completion of the merger, RAI may fail to realize the expected synergies and other benefits of the merger, which could adversely affect the value of RAI common stock.

The success of the merger will depend, in part, on RAI’s ability to realize the expected synergies and other benefits from combining the businesses of RAI and Lorillard and their respective subsidiaries and affiliates. RAI’s ability to realize these anticipated benefits and cost savings is subject to certain risks, including the following:

 

    the ability to successfully combine and integrate the businesses of RAI, Lorillard and their respective subsidiaries;

 

    RAI’s ability to reduce its level of indebtedness in a timely manner following the merger; and

 

    the ability to successfully transition manufacturing of Newport from Lorillard’s Greensboro manufacturing facility to RJR Tobacco’s Tobaccoville manufacturing facility when and as expected.

If RAI is not able to successfully combine the businesses of RAI, Lorillard and their respective subsidiaries within the anticipated time frame, or at all, the expected synergies and other benefits of the merger may not be realized fully or at all or may take longer to realize than expected, the combined businesses may not perform as expected and the value of the RAI common stock (including the stock portion of the merger consideration) may be adversely affected. In addition, if RAI is unable to timely reduce its level of indebtedness following the merger, RAI will be subject to increased demands on its cash resources and tightening financial covenants under its revolving credit agreement, which could result in a breach of the covenants or otherwise adversely affect the business and financial results of the combined company.

Further, RAI and Lorillard and their respective subsidiaries and affiliates have operated and, until completion of the merger, will continue to operate, independently, and there can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key employees or customers of RAI or Lorillard or their respective subsidiaries, the disruption of the companies’ ongoing businesses or in unexpected integration issues, higher than expected integration costs and an overall post-merger integration process that takes longer than originally anticipated. RAI will be required to devote significant management attention and resources to integrating the business practices and operations of RAI and Lorillard. It is possible that the integration process could result in:

 

    diversion of the attention of each company’s management;

 

    the lack of personnel or other resources to pursue other potential business opportunities, such as possible acquisition opportunities; and

 

    the disruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies,

any of which could adversely affect each company’s ability to maintain relationships with customers, suppliers, employees and other constituencies or their ability to achieve the anticipated benefits of the merger or could reduce each company’s earnings or otherwise adversely affect the business and financial results of the combined company.

Accordingly, even if the merger is completed, the contemplated benefits may not be realized fully, or at all, or may take longer to realize than expected.

 

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RAI and Lorillard will incur significant transaction related costs in connection with the merger and divestiture.

RAI and Lorillard expect to incur significant costs associated with the merger, divestiture and combining the operations of the two companies. The significant costs associated with the merger and divestiture include, among others, fees and expenses of financial advisors (which are described under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Opinion of RAI’s Financial Advisor” and “—Opinions of Lorillard’s Financial Advisors” beginning on pages 123 and 131 of this joint proxy statement/prospectus, respectively) and other advisors and representatives, certain employment-related costs relating to employees of Lorillard (which are described under “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Interests of Certain Lorillard Directors and Officers” beginning on page 151 of this joint proxy statement/prospectus), litigation costs, costs of public relations firms engaged in connection with the merger, filing fees due in connection with filings required under the HSR Act and filing fees and printing and mailing costs for this joint proxy statement/prospectus. Some of these costs have already been incurred or may be incurred regardless of whether the merger and divestiture are completed, including a portion of the fees and expenses of financial advisors and other advisors and representatives and filing fees under the HSR Act and related to this joint proxy statement/prospectus. RAI also will incur transaction fees and costs related to formulating and implementing integration plans with respect to the two companies, including facilities and systems consolidation costs. Furthermore, the transaction fees and costs associated with the divestiture could deviate from RAI’s current expectations, particularly if Imperial Sub fails to or is unable to perform under the reciprocal manufacturing agreement. RAI continues to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the merger and the integration of the two companies’ businesses. The expected net benefits associated with these costs may not be achieved in the near term, or at all.

RAI and its subsidiaries may have to make additional contributions following completion of the merger to fund its pension and other post-retirement benefit plans, including Lorillard plans.

RAI and Lorillard and their respective subsidiaries currently maintain and contribute to defined benefit pension plans and other post-retirement benefit plans that cover various categories of employees and retirees. The obligation to make contributions to fund benefit obligations under these pension and other post-retirement benefit plans is based on actuarial valuations, which are based on certain assumptions, including the long-term return on plan assets and discount rate. RAI may have to make additional contributions following completion of the merger to fund its pension and other post-retirement benefit plans, including any such Lorillard plans. Additional contributions could have an adverse effect on the results of operations, cash flows and financial position of RAI.

Risk Factors Relating to RAI and Lorillard

RAI’s and Lorillard’s businesses are and will be subject to the risks described above. RAI and Lorillard are, and following completion of the merger RAI will continue to be, subject to the risks described in RAI’s and Lorillard’s Annual Reports on Form 10-K for the fiscal year ended December 31, 2013, as updated from time to time in their subsequent filings with the SEC, including those incorporated by reference in this joint proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 260 of this joint proxy statement/prospectus.

 

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THE COMPANIES

Reynolds American Inc.

RAI is a holding company whose operating subsidiaries include the second largest cigarette manufacturer in the United States, R. J. Reynolds Tobacco Company; the second largest smokeless tobacco products manufacturer in the United States, American Snuff Company, LLC, referred to as American Snuff Co.; the manufacturer of the leading super-premium cigarette brand, Santa Fe Natural Tobacco Company, Inc., referred to as SFNTC; Niconovum AB and Niconovum USA, Inc., marketers of nicotine replacement therapy products in Sweden and the United States, respectively; and R. J. Reynolds Vapor Company, referred to as RJR Vapor, a manufacturer and distributor of digital vapor cigarettes in the United States.

RAI’s reportable operating segments are the RJR Tobacco segment, the American Snuff segment, the Santa Fe segment and the All Other segment:

 

    The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company and includes two of the best-selling cigarettes in the United States: CAMEL and PALL MALL. These brands, and RJR Tobacco’s other brands, including WINSTON, KOOL, DORAL, SALEM, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. R. J. Reynolds Tobacco Company also manages contract manufacturing of cigarettes and tobacco products through arrangements with BAT affiliates, and manages the export of tobacco products to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases. R. J. Reynolds Tobacco Company manages the super-premium cigarette brands, DUNHILL and STATE EXPRESS 555, which are licensed from BAT.

 

    The American Snuff segment consists of the primary operations of American Snuff Co. and, prior to its sale, Lane, Limited. The American Snuff segment includes American Snuff Co.’s largest selling moist snuff brands, GRIZZLY, in the price-value category, and KODIAK, in the premium category.

 

    The Santa Fe segment consists of the primary operations of SFNTC and includes cigarettes and other tobacco products manufactured and marketed under the NATURAL AMERICAN SPIRIT brand.

 

    Niconovum AB, Niconovum USA, Inc. and RJR Vapor, among other RAI subsidiaries, are included in the All Other segment.

RAI was incorporated in the state of North Carolina on January 2, 2004, and its common stock is listed on the NYSE under the trading symbol “RAI.” On July 30, 2004, the U.S. assets, liabilities and operations of BAT’s wholly owned subsidiary, B&W, then known as Brown & Williamson Tobacco Corporation, were combined with RJR Tobacco. As a result of this business combination, BAT beneficially owns approximately 42% of RAI’s outstanding common stock. RAI’s principal executive offices are located at 401 North Main Street, Winston-Salem, North Carolina 27101, and its telephone number is (336) 741-2000. RAI’s website address is www.reynoldsamerican.com. RAI’s website and the information contained therein or connected thereto are not intended to be incorporated into this joint proxy statement/prospectus.

Lantern Acquisition Co.

Lantern Acquisition Co., referred to as Merger Sub, is a Delaware corporation and wholly owned subsidiary of RAI. Merger Sub was incorporated on July 9, 2014, solely for the purpose of effecting the merger. It has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the merger agreement. Merger Sub’s principal executive offices are located at 401 North Main Street, Winston-Salem, North Carolina 27101, and its telephone number is (336) 741-2000.

Lorillard, Inc.

Lorillard, including its subsidiaries and affiliates, is the third largest manufacturer of cigarettes in the United States. Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the United States. Newport, Lorillard’s flagship premium cigarette brand, is the top selling menthol and second largest selling

 

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cigarette brand overall in the United States based on gross units sold in 2013. The Newport brand, which includes both menthol and non-menthol product offerings, accounted for approximately 85.4% of Lorillard’s consolidated net sales for the fiscal year ended December 31, 2013. In addition to the Newport brand, Lorillard’s product line has four additional brand families marketed under the Kent, True, Maverick, and Old Gold brand names. These five brands include 43 different product offerings which vary in price, taste, flavor, length and packaging. In 2013, Lorillard shipped 39.9 billion cigarettes, all of which were sold in the United States and certain U.S. possessions and territories. Lorillard, through its other subsidiaries, is also a leading global electronic cigarette company, with products marketed under the blu eCigs and SKYCIG brands. Newport, Kent, True, Maverick, Old Gold, blu eCigs and SKYCIG are the registered trademarks of Lorillard and its subsidiaries. Lorillard sold substantially all of its major cigarette trademarks outside of the United States in 1977. Lorillard maintains its headquarters and manufactures all of its traditional cigarette products in Greensboro, North Carolina.

Lorillard produces cigarettes for both the premium and discount segments of the domestic cigarette market. Lorillard does not compete in a subcategory of the discount segment that it identifies as the deep discount segment. Premium brands are well known, established brands marketed at higher retail prices. Discount brands are generally less well recognized brands marketed at lower retail prices. Lorillard defines the deep discount subcategory to include brands sold at the lowest retail prices. Deep discount cigarettes are typically manufactured by smaller companies, relative to Lorillard and other major U.S. manufacturers, many of which have no, or significantly lower, payment obligations under the state settlement agreements.

Lorillard common stock is listed on the NYSE under the trading symbol “LO.” Lorillard’s principal executive offices are located at 714 Green Valley Road, Greensboro, NC 27408, its telephone number is (336) 335-7000, and its website is www.lorillard.com. The information contained in, or that can be accessed through, Lorillard’s website is not intended to be incorporated into this joint proxy statement/prospectus.

 

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RAI SPECIAL MEETING

RAI is providing this joint proxy statement/prospectus to its shareholders in connection with the solicitation of proxies to be voted at the RAI special meeting (or any adjournment or postponement of the RAI special meeting). This joint proxy statement/prospectus contains important information for you to consider when deciding how to vote on the matter brought before the RAI special meeting. Please read it carefully and in its entirety.

Date, Time and Location

The date, time and place of the RAI special meeting are set forth below:

 

  Date: January 28, 2015

 

  Time: 9:00 a.m. (Eastern Time)

 

  Place: Reynolds American Plaza Building Auditorium
       RAI Corporate Offices
       401 North Main Street
       Winston-Salem, North Carolina 27101

Attendance at the RAI special meeting will be limited to RAI shareholders as of the RAI record date and to pre-approved guests of RAI. All shareholder guests must be pre-approved by RAI and will be limited to spouses, persons required for medical assistance and properly authorized representatives of RAI shareholders as of the RAI record date. Admittance tickets will be required to attend the meeting. If you are a shareholder and plan to attend, you MUST pre-register and request an admittance ticket for you (and any guest for whom you are requesting pre-approval) no later than January 20, 2015, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990.

If your shares are not registered in your own name, evidence of your stock ownership as of December 20, 2014, must accompany your letter. You can obtain this evidence from your nominee or intermediary, typically in the form of your most recent monthly statement. An admittance ticket will be held in your name at the registration desk—not mailed to you in advance of the meeting. Proper identification will be required to obtain your admittance ticket at the RAI special meeting.

The RAI special meeting is a private business meeting. In accordance with the RAI bylaws and North Carolina law, RAI’s chairman of the board of directors has the right and authority to adjourn and postpone the meeting, and to determine and maintain the rules, regulations and procedures for the conduct of the meeting, including, but not limited to, maintaining order and the safety of those in attendance, dismissing business not properly submitted, opening and closing the polls for voting and limiting time allowed for discussion of the business at the meeting. Failure to abide by the meeting rules will not be tolerated and may result in expulsion from the meeting. A copy of the meeting rules will be provided to all properly pre-registered shareholders and guests with their admittance ticket. Cameras, recording devices and other electronic devices will not be permitted at the RAI special meeting.

RAI anticipates that a large number of shareholders will attend the meeting. Seating is limited, so RAI suggests you arrive early. The auditorium will open at 8:30 a.m. (Eastern Time).

If you have a disability, RAI can provide reasonable assistance to help you participate in the RAI special meeting. If you plan to attend the RAI special meeting and require assistance, please write or call RAI’s Office of the Secretary no later than January 27, 2015, at P.O. Box 2990, Winston-Salem, North Carolina 27102-2990, telephone number (336) 741-5162.

 

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Purpose

At the RAI special meeting, RAI shareholders will vote upon the approval of both the Lorillard share issuance and the BAT share issuance.

Approval of both the Lorillard share issuance and the BAT share issuance by RAI shareholders is a condition to the obligations of RAI and Lorillard to complete the merger.

Under North Carolina law, the sale or disposition of all, or substantially all, of a corporation’s property otherwise than in the usual and regular course of business requires the approval of such corporation’s shareholders. The property to be sold in the divestiture does not constitute all, or substantially all, of RAI’s property. As a result, RAI shareholders are not entitled to vote on the divestiture, and no vote with respect to the divestiture is being solicited by RAI.

Recommendations of the RAI Board of Directors

After consideration and consultation with its advisors, the RAI board of directors unanimously determined that the share issuance is in the best interests of RAI and RAI shareholders, and unanimously approved and declared advisable the merger agreement, subscription agreement, asset purchase agreement, merger, share issuance and divestiture. The RAI board of directors unanimously recommends that RAI shareholders vote “FOR” the Lorillard share issuance and “FOR” the BAT share issuance. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—RAI’s Reasons for the Merger; Recommendations of the RAI Board of Directors” beginning on page 114 of this joint proxy statement/prospectus for a more detailed discussion of the recommendations of the RAI board of directors.

RAI Record Date; Outstanding Shares; Shareholders Entitled to Vote

The RAI board of directors has fixed the close of business on December 20, 2014, as the RAI record date, for determination of the RAI shareholders entitled to vote at the RAI special meeting and any adjournment or postponement thereof. Only RAI shareholders of record on the RAI record date are entitled to receive notice of, and to vote at, the RAI special meeting or any adjournment or postponement thereof.

As of the RAI record date, there were 531,283,513 shares of RAI common stock outstanding and entitled to vote at the RAI special meeting, held by approximately 13,050 holders of record. Each outstanding share of RAI common stock is entitled to one vote. The number of shares you own is reflected on your proxy card.

An alphabetical list of the names of all shareholders of record as of the RAI record date will be available for inspection by any RAI shareholder or his or her representative, upon written demand, during the period from December 24, 2014, to January 28, 2015. This list can be viewed at RAI’s corporate offices located at 401 North Main Street, Winston-Salem, North Carolina 27101 between the hours of 8:30 a.m. and 5:00 p.m. (Eastern Time). Under applicable North Carolina law, a shareholder or his or her representative may, under certain circumstances and at the shareholder’s expense, copy the list during the period it is available for inspection. A shareholder desiring to inspect and/or copy the shareholder list should contact RAI’s Office of the Secretary at P.O. Box 2990, Winston-Salem, North Carolina 27102-2990 (phone: (336) 741-5162), to make necessary arrangements. In addition, RAI will make the shareholder list available for inspection to any shareholder or his or her representative during the RAI special meeting.

Quorum

A quorum of shareholders is necessary to hold a valid meeting. The holders of record, present in person or by proxy at the RAI special meeting, of a majority of the shares of RAI common stock entitled to vote constitute a quorum. Abstentions and broker non-votes will be counted in determining the existence of a quorum. A broker non-vote occurs on an item when a nominee or intermediary is not permitted to vote without instructions from the beneficial owner of the shares and the beneficial owner fails to provide the nominee or intermediary with such

 

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instructions. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting (which must be done if the new meeting date is more than 120 days after the date of the original meeting). Subject to the provisions of the NCBCA, at any adjourned meeting any business may be transacted that might have been transacted at the original meeting if a quorum exists with respect to the matter proposed.

Required Vote

 

Item                         

       

Vote Necessary*

RAI Proposal I    Approval of the Lorillard Share Issuance    Approval requires the affirmative vote, in person or by proxy, of a majority of the votes cast at the RAI special meeting.(1)
RAI Proposal II    Approval of the BAT Share Issuance    Approval requires the affirmative vote, in person or by proxy, of a majority of the votes cast at the RAI special meeting.(1)

 

* Under the rules of the NYSE, if you hold your shares of RAI common stock in street name, your nominee or intermediary may not vote your shares without instructions from you. Without your voting instructions, a broker non-vote will occur on RAI Proposal I and RAI Proposal II. Abstentions from voting will have the same effect as a vote “AGAINST” RAI Proposal I and RAI Proposal II. Broker non-votes will have no effect on RAI Proposal I and RAI Proposal II.
(1) As described further in this joint proxy statement/prospectus, RAI and BAT entered into the subscription agreement, pursuant to which BAT has agreed, directly or indirectly through one or more of its wholly owned subsidiaries, to subscribe for and purchase, simultaneously with the completion of the merger, a number of shares of RAI common stock such that BAT will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger. Pursuant to the subscription agreement, BAT also agreed that at any meeting of RAI shareholders (or with respect to any written consent of RAI shareholders) held to approve the share issuance, it will and will cause its subsidiaries to appear at the meeting in person or by proxy (or otherwise cause all the shares of RAI common stock beneficially owned by it as of the record date to be counted as present for purposes of calculating a quorum at the meeting and respond to each request by RAI for written consent, if any) and vote all shares of RAI common stock beneficially owned by BAT and its subsidiaries to approve both the Lorillard share issuance and the BAT share issuance. BAT has further agreed to vote and cause its applicable subsidiaries to vote (including by written consent) against any action or agreement that would reasonably be expected to materially impede, interfere with or prevent the share issuance and the other transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement and transfer agreement. Thus, approximately 42% of RAI’s outstanding shares already are committed to voting “FOR” the Lorillard share issuance and “FOR” the BAT share issuance.

Share Ownership of and Voting by RAI Directors and Executive Officers

At the RAI record date, RAI’s directors and executive officers and their affiliates beneficially owned and had the right to vote 529,596 shares of RAI common stock at the RAI special meeting, which represents less than 1.00% of the shares of RAI common stock entitled to vote at the RAI special meeting.

It is expected that RAI’s directors and executive officers will vote their shares “FOR” the Lorillard share issuance and “FOR” the BAT share issuance. In addition, under the terms of the subscription agreement, BAT has agreed that at any meeting of RAI shareholders or in any circumstance upon which votes with respect to the share issuance are sought, BAT will vote, or cause to be voted, all shares of RAI common stock beneficially owned by it to approve the Lorillard share issuance and the BAT share issuance. These BAT shares represent, as of the RAI record date, an aggregate of approximately 42% of the outstanding shares of RAI common stock.

 

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Voting of Shares

If your shares of RAI common stock are registered directly in your name with RAI’s transfer agent (Computershare), then you are considered to be the shareholder “of record” with respect to those shares, and this joint proxy statement/prospectus and the accompanying proxy materials are being sent directly to you by RAI. If your shares are held in the name of a nominee or intermediary, then you are considered to hold those shares in street name or to be the beneficial owner of such shares. If you are a beneficial owner, then this joint proxy statement/prospectus and the accompanying proxy materials are being forwarded to you by your nominee or intermediary who is considered the shareholder of record with respect to the shares.

You may vote in person at the RAI special meeting or you may designate another person—your proxy—to vote your shares of RAI common stock. The written document used to designate someone as your proxy also is called a proxy or proxy card. We urge you to submit a proxy to have your shares of RAI common stock voted even if you plan to attend the RAI special meeting. You can always change your vote at the RAI special meeting.

If you are a shareholder of record, then you can have your shares voted by submitting a proxy over the Internet, by mail or by telephone by following the instructions on your proxy card. The deadline for voting by proxy over the Internet or by telephone for the RAI special meeting is 11:59 a.m. (Eastern Time) on January 27, 2015.

If you are a beneficial owner and hold your shares in street name, or through a nominee or intermediary, such as a bank or broker, you will receive separate instructions from such nominee or intermediary describing how to vote your shares. The availability of Internet or telephonic voting will depend on the intermediary’s voting process. Please check with your nominee or intermediary and follow the voting instructions provided by your nominee or intermediary with these materials.

If you plan to attend the RAI special meeting and vote in person and you hold your shares of RAI common stock directly in your own name, then we will give you a ballot when you arrive. However, if you hold your shares in street name, then you must obtain a legal proxy assigning to you the right to vote your shares from the nominee or intermediary who is the shareholder of record. The legal proxy must accompany your ballot to vote your shares in person.

If you participate in the RAI Savings Plan, or in the Puerto Rico SIP, then your proxy card will serve as voting instructions for the trustee of the RAI Savings Plan or the custodian of the Puerto Rico SIP for shares of RAI common stock allocated to your account under the RAI Savings Plan or the Puerto Rico SIP. Shares for which no instructions are received will be voted by the trustee of the RAI Savings Plan and the custodian of the Puerto Rico SIP in the same proportion as the shares for which instructions are received by each of them.

You may specify whether your shares should be voted for or against, or whether you abstain from voting with respect to, the share issuance.

If you sign and return a proxy card, one of the individuals named on the card (your proxy) will vote your shares as you have directed. If you are a shareholder of record and return a signed proxy card, or if you give your proxy by telephone or over the Internet, but do not make specific choices, your proxy will vote your shares in accordance with the RAI board of directors’ recommendation listed below.

 

Item                         

       

Recommendation of RAI
Board of Directors

RAI Proposal I    Approval of the Lorillard Share Issuance    FOR
RAI Proposal II    Approval of the BAT Share Issuance    FOR

If any other matter is presented at the RAI special meeting, then your proxy will vote in accordance with his or her best judgment. As of the date of this joint proxy statement/prospectus, RAI knows of no other matters that had been properly presented to be acted upon at the RAI special meeting.

 

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Your vote is very important, regardless of the number of shares you own. Whether or not you expect to attend the RAI special meeting in person, please submit a proxy as promptly as possible, so that your shares may be represented and voted at the RAI special meeting. If your shares are held in the name of a nominee or intermediary, please follow the instructions on the voting instruction card furnished to you by such record holder. If you participate in the RAI Savings Plan, or in the Puerto Rico SIP, then your proxy card will serve as voting instructions for the trustee of the RAI Savings Plan or the custodian of the Puerto Rico SIP for shares of RAI common stock allocated to your account under the RAI Savings Plan or the Puerto Rico SIP.

Revocability of Proxies; Changing Your Vote

You may revoke your proxy or change your vote at any time before your shares are voted at the RAI special meeting by:

 

    sending a signed written notice stating that you revoke your proxy to the Office of the Secretary, at Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990;

 

    submitting a valid, later-dated proxy via the Internet or by telephone before 11:59 p.m. (Eastern Time) on January 27, 2015, or by mailing a later-dated, new proxy card that is received by Broadridge Financial Solutions, Inc. prior to the RAI special meeting; or

 

    attending the RAI special meeting (or if the RAI special meeting is adjourned or postponed, attending the adjourned or postponed meeting) and voting in person, which will automatically cancel any proxy previously given, or revoking your proxy in person, but your attendance alone will not constitute a vote or revoke any proxy previously given.

If you hold your shares in street name, you must contact your nominee or intermediary to change your vote or obtain a legal proxy to vote your shares if you wish to cast your vote in person at the RAI special meeting.

Solicitation of Proxies; Expenses of Solicitation

This joint proxy statement/prospectus is being provided to RAI shareholders in connection with the solicitation of proxies by the RAI board of directors to be voted at the RAI special meeting and at any adjournments or postponements of the RAI special meeting. RAI will bear all costs and expenses in connection with the solicitation of proxies, except that RAI and Lorillard will each pay 50% of the costs of filing, printing and mailing this joint proxy statement/prospectus. RAI has engaged MacKenzie Partners, Inc. to assist in the solicitation of proxies for the RAI special meeting and will pay MacKenzie Partners, Inc. a fee of approximately $30,000, plus reimbursement of reasonable out-of-pocket expenses.

RAI is making this solicitation by mail, but RAI’s directors, officers and employees also may solicit by telephone, e-mail, facsimile or in person. RAI will pay for the cost of these solicitations, but these individuals will receive no additional compensation for their solicitation services. RAI will reimburse nominees or intermediaries, if they request, for their expenses in forwarding proxy materials to beneficial owners.

Householding

SEC rules allow RAI to send a single copy of this joint proxy statement/prospectus to two or more of our shareholders sharing the same address, subject to certain conditions, in a process called “householding.” To take advantage of the cost savings offered by householding, RAI has delivered only one copy of this joint proxy statement/prospectus to multiple shareholders who share an address, unless RAI received contrary instructions from the impacted shareholders prior to the mailing date. RAI agrees to deliver promptly, upon written or oral request, a separate copy of the joint proxy statement/prospectus to any shareholder at the shared address to which a single copy of that document was delivered. If you prefer to receive separate copies of the joint proxy

 

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statement/prospectus, contact Broadridge Financial Solutions, Inc. at 1-800-542-1061, or in writing at Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717.

If you are currently a shareholder sharing an address with another shareholder and wish to receive only one copy of future notices, proxy statements and Annual Reports on Form 10-K for your household, please contact Broadridge at the above phone number or address.

Adjournment

The RAI special meeting may be adjourned from time to time by the vote of a majority of the votes cast on the motion to adjourn or by any officer entitled to preside at or to act as secretary at the RAI special meeting, without notice other than announcement at the meeting before adjournment. No notices of an adjourned meeting need be given unless a new record date is fixed for the adjourned meeting. A new record date must be fixed if the new meeting date is more than 120 days after the date of the original meeting, in which case a notice of the adjourned meeting will be given to each shareholder of record entitled to vote at the new meeting. At any subsequent reconvening of the RAI special meeting at which a quorum is present, any business may be transacted that might have been transacted at the original meeting, and all proxies will be voted in the same manner as they would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the time the proxy is voted at the reconvened meeting.

Tabulation of Votes; Results

RAI will retain an independent party, Broadridge Financial Solutions, Inc., to receive and tabulate the proxies, and to serve as the inspector of election to certify the results of the RAI special meeting.

Preliminary voting results will be announced at the RAI special meeting, and will be set forth in a press release that RAI intends to issue after the special meeting. The press release will be available on RAI’s website. Final voting results are expected to be published in a Current Report on Form 8-K filed with the SEC within four business days after the special meeting. A copy of that Current Report on Form 8-K will be available on RAI’s website after its filing with the SEC.

Confidentiality

The votes of all RAI shareholders will be held in confidence from RAI’s directors, officers and employees, except:

 

    as necessary to meet applicable legal requirements and to assert or defend claims for or against RAI,

 

    in case of a contested proxy solicitation,

 

    if a shareholder makes a written comment on the proxy card or otherwise communicates his or her vote to management, or

 

    to allow the independent inspector of election to certify the results of the vote.

Other Information

The matter to be considered at the RAI special meeting is of great importance to RAI shareholders. Accordingly, you are urged to read and carefully consider the information contained in or incorporated by reference into this joint proxy statement/prospectus and submit your proxy via the Internet or by telephone or complete, date, sign and promptly return the enclosed proxy in the enclosed postage-paid envelope. If you submit your proxy via the Internet or by telephone, you do not need to return the enclosed proxy card.

 

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Assistance

If you need assistance in completing your proxy card or have questions regarding the RAI special meeting, please contact:

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

Telephone Toll-Free: (800) 322-2885

Telephone Call Collect: (212) 929-5500

Email: proxy@mackenziepartners.com

or

Reynolds American Inc.

P.O. Box 2990

Winston-Salem, North Carolina 27102-2990

Attention: Investor Relations

Email: raiinvestorrelations@reynoldsamerican.com

Telephone: (366) 741-2000

 

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LORILLARD SPECIAL MEETING

Lorillard is providing this joint proxy statement/prospectus to its shareholders in connection with the solicitation of proxies to be voted at the Lorillard special meeting (or any adjournment or postponement of the Lorillard special meeting). This joint proxy statement/prospectus contains important information for you to consider when deciding how to vote on the matters brought before the Lorillard special meeting. Please read it carefully and in its entirety.

Date, Time and Location

The date, time and place of the Lorillard special meeting are set forth below:

 

  Date: January 28, 2015

 

  Time: 10:00 a.m. (Eastern Time)

 

  Place: The Ballantyne Hotel, 10000 Ballantyne Commons Parkway, Charlotte, North Carolina 28277

Attendance at the Lorillard special meeting will be limited to Lorillard shareholders as of the Lorillard record date, their authorized representatives and Lorillard guests. Registration and seating for the Lorillard special meeting on January 28, 2015 will begin at 9:00 a.m. (Eastern Time). Admission will be by ticket only. For registered shareholders, the bottom portion of the proxy card enclosed with this joint proxy statement/prospectus is the Lorillard special meeting ticket. If you are a beneficial owner of Lorillard common stock and hold your shares in street name, or through a nominee or intermediary, you should request tickets in writing from Lorillard, Inc., Attention: Investor Relations, 714 Green Valley Road, Greensboro, North Carolina 27408, and include proof of ownership, such as a bank or brokerage firm account statement or letter from the nominee or intermediary holding your stock, confirming your beneficial ownership. Lorillard shareholders who do not obtain tickets in advance may obtain them on the Lorillard special meeting date at the registration desk upon verifying their stock ownership as of the Lorillard record date. In accordance with Lorillard’s security procedures, all persons attending the Lorillard special meeting must present a picture identification, such as a driver’s license or passport, along with their admission ticket or proof of beneficial ownership in order to gain admission. Admission to the Lorillard special meeting will be expedited if tickets are obtained in advance. Tickets may be issued to others at Lorillard’s discretion. Cameras, recording devices and other electronic devices will not be permitted at the Lorillard special meeting.

Purpose

At the Lorillard special meeting, Lorillard shareholders will vote on:

 

    the adoption of the merger agreement, pursuant to which Merger Sub will be merged with and into Lorillard; as a result of the merger, the separate corporate existence of Merger Sub will cease, and Lorillard will continue as the surviving corporation in the merger and a wholly owned subsidiary of RAI;

 

    the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger; and

 

    the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

The adoption of the merger agreement by Lorillard shareholders is a condition to the obligations of RAI and Lorillard to complete the merger. The approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger is not a condition to the obligations of RAI or Lorillard to complete the merger. The approval of the adjournment of the

 

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Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement also is not a condition to the obligations of RAI or Lorillard to complete the merger.

Lorillard shareholders are not entitled to vote on the divestiture, and no vote with respect to the divestiture is being solicited by Lorillard.

Recommendations of the Lorillard Board of Directors

After consideration and consultation with its advisors, the Lorillard board of directors unanimously determined that the merger agreement and the transactions contemplated thereby, including the proposed merger, are fair to, and in the best interests of, Lorillard and its shareholders, and unanimously resolved to approve and declare advisable the merger agreement and the transactions contemplated thereby, including the proposed merger.

The Lorillard board of directors unanimously recommends that Lorillard shareholders vote “FOR” the adoption of the merger agreement, “FOR” the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and “FOR” the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement. See “RAI Proposal I: Approval of the Lorillard Share Issuance, RAI Proposal II: Approval of the BAT Share Issuance and Lorillard Proposal I: Adoption of the Merger Agreement—Lorillard’s Reasons for the Merger; Recommendation of the Lorillard Board of Directors,” “Lorillard Proposal II: Non-Binding, Advisory Vote on Compensation” and “Lorillard Proposal III: Adjournment of Lorillard Special Meeting” beginning on pages 117, 213 and 214, respectively, of this joint proxy statement/prospectus for a more detailed discussion of the recommendation.

Lorillard Record Date; Outstanding Shares; Shareholders Entitled to Vote

The Lorillard board of directors has fixed the close of business on December 8, 2014, as the Lorillard record date, for determination of the Lorillard shareholders entitled to vote at the Lorillard special meeting or any adjournment or postponement thereof. Only Lorillard shareholders of record on the Lorillard record date are entitled to receive notice of, and to vote at, the Lorillard special meeting or any adjournment or postponement thereof.

As of the Lorillard record date, there were 360,028,072 shares of Lorillard common stock outstanding and entitled to vote at the Lorillard special meeting, held by approximately 80 holders of record. Each outstanding share of Lorillard common stock is entitled to one vote. The number of shares you own is reflected on your proxy card.

A list of shareholders entitled to vote at the Lorillard special meeting will be available for examination by any shareholder for any purpose germane to the Lorillard special meeting beginning ten days prior to the Lorillard special meeting during ordinary business hours at 714 Green Valley Road, Greensboro, North Carolina 27408, Lorillard’s principal place of business, and ending on the date of the Lorillard special meeting, and such list will also be available at the Lorillard special meeting during the duration of the meeting.

Quorum

A majority of the outstanding shares of Lorillard common stock entitled to vote must be present, in person or represented by proxy, to constitute a quorum at the Lorillard special meeting. Abstentions and broker non-votes will be counted as present in determining the existence of a quorum. A broker non-vote occurs on an item when a nominee or intermediary is not permitted to vote without instructions from the beneficial owner of the shares and the beneficial owner fails to provide the nominee or intermediary with such instructions.

 

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Required Vote

The required number of votes for the matters to be voted upon at the Lorillard special meeting depends on the particular item to be voted upon:

 

Item                                 

       

Vote Necessary*

Lorillard Proposal I

   Adoption of the Merger Agreement    Approval requires the affirmative vote, in person or by proxy, of holders of a majority of the outstanding shares of Lorillard common stock entitled to vote as of the Lorillard record date.

Lorillard Proposal II

   Non-Binding, Advisory Vote on Compensation    Approval requires the affirmative vote, in person or by proxy, of holders of a majority of the shares of Lorillard common stock represented at the Lorillard special meeting and entitled to vote thereon.

Lorillard Proposal III

   Adjournment of Lorillard Special Meeting    Approval requires the affirmative vote, in person or by proxy, of holders of a majority of the shares of Lorillard common stock represented at the Lorillard special meeting and entitled to vote thereon.

 

* Under the rules of the NYSE, if you hold your shares of Lorillard common stock in street name, your nominee or intermediary may not vote your shares without instructions from you. Without your voting instructions, a broker non-vote will occur on Lorillard Proposal I, Lorillard Proposal II and Lorillard Proposal III. Abstentions from voting will have the same effect as a vote “AGAINST” Lorillard Proposal I, Lorillard Proposal II and Lorillard Proposal III. Broker non-votes will have the same effect as a vote “AGAINST” Lorillard Proposal I and will have no effect on Lorillard Proposal II and Lorillard Proposal III.

Share Ownership of and Voting by Lorillard Directors and Executive Officers

At the Lorillard record date, Lorillard’s directors and executive officers and their affiliates beneficially owned and had the right to vote 1,697,458 shares of Lorillard common stock at the Lorillard special meeting, which represents less than 1.00% of the shares of Lorillard common stock entitled to vote at the Lorillard special meeting.

It is expected that Lorillard’s directors and executive officers will vote their shares “FOR” the adoption of the merger agreement, “FOR” the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and “FOR” the approval of the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

Voting of Shares

If your shares of Lorillard common stock are registered directly in your name with Lorillard’s transfer agent (Computershare), then you are considered to be the shareholder “of record” with respect to those shares, and this joint proxy statement/prospectus and the accompanying proxy materials are being sent directly to you by Lorillard. If your shares are held in the name of a nominee or intermediary, then you are considered to hold those shares in street name or to be the “beneficial owner” of such shares. If you are a beneficial owner, then this joint proxy statement/prospectus and the accompanying proxy materials are being forwarded to you by your nominee or intermediary who is considered the shareholder of record with respect to the shares.

 

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You may vote in person at the Lorillard special meeting or you may designate another person—your proxy—to vote your shares of Lorillard common stock. The written document used to designate someone as your proxy also is called a proxy or proxy card. We urge you to submit a proxy to have your shares of Lorillard common stock voted even if you plan to attend the Lorillard special meeting. You can always change your vote at the Lorillard special meeting.

If you are a shareholder of record, then you can have your shares voted by submitting a proxy over the Internet, by mail or by telephone by following the instructions on your proxy card. The deadline for voting by proxy over the Internet or by telephone for the Lorillard special meeting is 11:59 p.m. (Eastern Time) on January 27, 2015.

If you are a beneficial owner and hold your shares in street name, or through a nominee or intermediary, such as a bank or broker, you will receive separate instructions from such nominee or intermediary describing how to vote your shares. The availability of Internet or telephonic voting will depend on the intermediary’s voting process. Please check with your nominee or intermediary and follow the voting instructions provided by your nominee or intermediary with these materials.

If you plan to attend the Lorillard special meeting and vote in person and you hold your shares of Lorillard common stock directly in your own name, then we will give you a ballot when you arrive. However, if you hold your shares in street name, then you must obtain a legal proxy assigning to you the right to vote your shares from the nominee or intermediary who is the shareholder of record. The legal proxy must accompany your ballot to vote your shares in person.

You may specify whether your shares should be voted for or against, or whether you abstain from voting with respect to, each of the proposal to adopt the merger agreement, the proposal to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and the proposal to approve the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

Shares of Lorillard common stock represented by proxies received by Lorillard (whether through the return of the enclosed proxy card, by telephone or through the Internet), where the shareholder has specified his or her choice with respect to the proposals described in this joint proxy statement/prospectus will be voted in accordance with the specification(s) so made. If you are a shareholder of record and you do not vote your proxy, no votes will be cast on your behalf on any of the proposals at the Lorillard special meeting. If you sign and return your proxy card without specific voting instructions, or if you vote by telephone or via the Internet without indicating how you want to vote, your shares will be voted in accordance with the Lorillard board of directors’ voting recommendations as follows:

 

Item                                     

        Recommendation of Lorillard
Board of Directors

Lorillard Proposal I

   Adoption of the Merger Agreement    FOR

Lorillard Proposal II

   Non-Binding, Advisory Vote on Compensation    FOR

Lorillard Proposal III

   Adjournment of the Special Meeting    FOR

The Lorillard board of directors does not intend to bring any matter before the Lorillard special meeting other than those set forth above, and the Lorillard board of directors is not aware of any matters that anyone else proposes to present for action at the Lorillard special meeting. However, if any other matters properly come before the Lorillard special meeting, the persons named in the enclosed proxy, or their duly constituted substitutes acting at the Lorillard special meeting, will have discretionary authority to vote or otherwise act thereon.

Your vote is very important, regardless of the number of shares you own. Whether or not you expect to attend the Lorillard special meeting in person, please submit a proxy as promptly as possible, so that

 

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your shares may be represented and voted at the Lorillard special meeting. If your shares are held in the name of a nominee or intermediary, please follow the instructions on the voting instruction card furnished to you by such record holder.

Revocability of Proxies; Changing Your Vote

You may revoke your proxy or change your vote at any time before your shares are voted at the Lorillard special meeting by:

 

    sending a signed written notice stating that you revoke your proxy to the Corporate Secretary, at Lorillard’s offices at 714 Green Valley Road, Greensboro, North Carolina 27408-7018, Attention: Corporate Secretary;

 

    submitting a valid, later-dated proxy via the Internet or by telephone before 11:59 p.m. (Eastern Time) on January 27, 2015, or by mailing a later-dated, new proxy card that is received by Computershare Limited prior to the Lorillard special meeting; or

 

    attending the Lorillard special meeting (or if the Lorillard special meeting is adjourned or postponed, attending the adjourned or postponed meeting) and voting in person, which will automatically cancel any proxy previously given, or revoking your proxy in person, but your attendance alone will not constitute a vote or revoke any proxy previously given.

If you hold your shares in street name, you must contact your nominee or intermediary to change your vote or obtain a legal proxy to vote your shares if you wish to cast your vote in person at the Lorillard special meeting.

Solicitation of Proxies; Expenses of Solicitation

This joint proxy statement/prospectus is being provided to Lorillard shareholders in connection with the solicitation of proxies by the Lorillard board of directors to be voted at the Lorillard special meeting and at any adjournments or postponements of the Lorillard special meeting. Lorillard will bear all costs and expenses in connection with the solicitation of proxies, except that RAI and Lorillard will each pay 50% of the costs of filing, printing and mailing this joint proxy statement/prospectus. Lorillard has engaged Georgeson Inc. to assist in the distribution and solicitation of proxies for the Lorillard special meeting and will pay Georgeson Inc. a fee of approximately $20,000, plus reimbursement of reasonable out-of-pocket expenses.

Lorillard is making this solicitation by mail, but Lorillard’s directors, officers and employees also may solicit by telephone, e-mail, facsimile or in person. Lorillard will pay for the cost of these solicitations, but these individuals will receive no additional compensation for their solicitation services. Lorillard will reimburse nominees or intermediaries, if they request, for their expenses in forwarding proxy materials to beneficial owners.

Householding

Lorillard has not instituted householding for shareholders of record. However, certain brokerage firms may have instituted householding for beneficial owners of shares of Lorillard common stock held through brokerage firms. If your household has multiple accounts holding shares of Lorillard common stock, you may have already received householding notification from your broker. Please contact your broker directly if you have any questions or require additional copies of this joint proxy statement/prospectus. The broker will arrange for delivery of a separate copy of this joint proxy statement/prospectus promptly upon your request. Lorillard shareholders may decide at any time to revoke a decision to household, and thereby receive multiple copies.

Adjournment

The Lorillard special meeting may be adjourned from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place, if any, thereof and the means of remote communications, if any, by which shareholders and proxyholders may be deemed to be present

 

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in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned Lorillard special meeting, any business may be transacted that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, notice of the adjourned meeting in accordance with the Lorillard by-laws must be given to each shareholder of record entitled to vote at the meeting. If after the adjournment a new record date for determination of shareholders entitled to vote is fixed for the adjourned meeting, the Lorillard board of directors will fix as the record date for determining Lorillard shareholders entitled to notice of such adjourned Lorillard special meeting the same or an earlier date as that fixed for determination of Lorillard shareholders entitled to vote at the adjourned meeting, and will give notice of the adjourned Lorillard special meeting to each Lorillard shareholder of record as of the record date so fixed for notice of such adjourned Lorillard special meeting. All proxies will be voted in the same manner as they would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the time the proxy is voted at the reconvened meeting.

Tabulation of Votes; Results

Lorillard will retain an independent party, Computershare Limited, to receive and tabulate the proxies, and to serve as the inspector of election to certify the results of the Lorillard special meeting.

Preliminary voting results will be announced at the Lorillard special meeting, and will be set forth in a press release that Lorillard intends to issue after the Lorillard special meeting. The press release will be available on Lorillard’s website. Final voting results are expected to be provided in a Current Report on Form 8-K filed with the SEC within four business days after the Lorillard special meeting. A copy of that Current Report on Form 8-K will be available on Lorillard’s website after its filing with the SEC.

Other Information

The matters to be considered at the Lorillard special meeting are of great importance to Lorillard shareholders. Accordingly, you are urged to read and carefully consider the information contained in or incorporated by reference into this joint proxy statement/prospectus and submit your proxy via the Internet or by telephone or complete, date, sign and promptly return the enclosed proxy in the enclosed postage-paid envelope. If you submit your proxy via the Internet or by telephone, you do not need to return the enclosed proxy card.

Assistance

If you need assistance in completing your proxy card or have questions regarding the Lorillard special meeting, please contact:

Georgeson Inc.

480 Washington Blvd., 26th Floor,

Jersey City, New Jersey 07310

Telephone Toll-Free: (800) 279-6913

Email: lorillard@georgeson.com

or

Lorillard, Inc.

P.O. Box 10529

Greensboro, North Carolina 27408-0529

Attention: Investor Relations

Email: investorrelations@lortobco.com

Telephone: (336) 335-7000

 

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RAI PROPOSAL I: APPROVAL OF THE LORILLARD SHARE ISSUANCE,

RAI PROPOSAL II: APPROVAL OF THE BAT SHARE ISSUANCE AND

LORILLARD PROPOSAL I: ADOPTION OF THE MERGER AGREEMENT

General

This joint proxy statement/prospectus is being provided to RAI shareholders in connection with the solicitation of proxies by the RAI board of directors to be voted at the RAI special meeting and at any adjournments or postponements of the RAI special meeting. At the RAI special meeting, RAI will ask its shareholders to vote on the approval of the share issuance, consisting of approval of both (1) the Lorillard share issuance and (2) the BAT share issuance. Approval of the share issuance is a condition to the obligations of RAI and Lorillard to complete the merger. Therefore, both the Lorillard share issuance and the BAT share issuance must be approved by RAI shareholders.

This joint proxy statement/prospectus is being provided to Lorillard shareholders in connection with the solicitation of proxies by the Lorillard board of directors to be voted at the Lorillard special meeting and at any adjournments or postponements of the Lorillard special meeting. At the Lorillard special meeting, Lorillard will ask its shareholders to vote on (1) the adoption of the merger agreement, (2) the approval, on a non-binding, advisory basis, of the compensation payments that will or may be paid by Lorillard to its named executive officers in connection with the merger and (3) the adjournment of the Lorillard special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

The merger agreement provides for the merger of Merger Sub with and into Lorillard; as a result of the merger, the separate corporate existence of Merger Sub will cease, and Lorillard will continue as the surviving corporation in the merger and a wholly owned subsidiary of RAI. The merger will not be completed without the approval of the share issuance by RAI shareholders and the adoption of the merger agreement by Lorillard shareholders. A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus. You are urged to read the merger agreement in its entirety because it is the legal document that governs the merger. For additional information about the merger, see “The Merger Agreement” beginning on page 168 of this joint proxy statement/prospectus.

Upon the closing of the merger, each share of Lorillard common stock (other than treasury shares held by Lorillard and any shares of Lorillard common stock owned by any Lorillard subsidiary, RAI or Merger Sub or shares of Lorillard common stock owned by Lorillard shareholders who have properly made and not withdrawn a demand for appraisal rights pursuant to Section 262 of the DGCL) automatically will be converted into the right to receive the merger consideration, consisting of (1) 0.2909 of a fully paid and nonassessable share of RAI common stock plus (2) $50.50 in cash. Based on the number of shares of Lorillard common stock outstanding as of December 8, 2014, RAI expects to issue approximately 105.1 million shares of RAI common stock to Lorillard shareholders pursuant to the merger. The actual number of shares of RAI common stock to be issued pursuant to the merger will be determined at completion of the merger based on the exchange ratio and the number of shares of Lorillard common stock outstanding at such time. Based on the number of shares of Lorillard common stock outstanding as of December 8, 2014, and the number of shares of RAI common stock outstanding as of December 20, 2014, it is expected that, immediately after completion of the merger, former Lorillard shareholders will own approximately 15% of the outstanding shares of RAI common stock.

In connection with RAI’s entry into the merger agreement, RAI and BAT entered into the subscription agreement for the share purchase, pursuant to which BAT (directly or through one or more of its wholly owned subsidiaries) will subscribe for and purchase a number of shares of RAI common stock necessary to maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the merger. Approval of the BAT share issuance is required, along with approval of the Lorillard share issuance, as a condition to the obligations of RAI and Lorillard to complete the merger. For additional information with respect to the share purchase and the subscription agreement, see “The Subscription Agreement” beginning on page 191

 

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of this joint proxy statement/prospectus. A copy of the subscription agreement is attached as Annex B to this joint proxy statement/prospectus.

In addition, RAI and Lorillard entered into the asset purchase agreement and the transfer agreement, respectively, pursuant to which RAI and Lorillard, directly or indirectly through one or more of their respective affiliates or wholly owned subsidiaries, will transfer the transferred assets to Imperial Sub in connection with the divestiture. For additional information with respect to the divestiture, including the asset purchase agreement, transfer agreement and certain other agreements, see “The Divestiture” beginning on page 197 of this joint proxy statement/ prospectus. A copy of the asset purchase agreement (including the transfer agreement attached thereto as Exhibit I) is filed as an exhibit to the registration statement of which this joint proxy statement/prospectus forms a part and is incorporated herein by reference. Neither RAI nor Lorillard shareholders are entitled to vote on the divestiture and no vote with respect to the divestiture is being solicited by RAI or Lorillard.

Background of the Merger

The Lorillard board of directors, together with Lorillard’s senior management, has in the ordinary course regularly evaluated business development strategies and reviewed Lorillard’s strategic alternatives in pursuing its objective of enhancing shareholder value.

From time to time, in the ordinary course of business, the RAI board of directors, together with RAI’s senior management, has reviewed strategic alternatives and opportunities available to RAI. In September 2012, the RAI board of directors requested an analysis of industry and market conditions, particularly with respect to the cigarette category. Given, among other things, the backdrop of the decline in sales of the RJR Tobacco cigarette support brands and market conditions at the time, the RAI board of directors and RAI’s senior management determined to consider strategic alternatives for growth, including a potential transaction with Lorillard, and decided to form a standing strategic matters review committee, referred to as the SMRC, to assist management with certain strategic matters and potential acquisitions.

In early November 2012, Daniel M. Delen, then president and chief executive officer and a director of RAI, and Thomas C. Wajnert, chairman of the board of RAI, met with representatives of BAT to discuss, among other things, a possible business combination of RAI and Lorillard. The BAT representatives expressed their support, on behalf of BAT as an RAI shareholder, for approaching Lorillard with an indication of interest.

On November 5, 2012, RAI’s senior management and representatives of Lazard, RAI’s financial advisor, met with the members of the RAI board of directors expected to comprise the SMRC to explore a possible transaction with Lorillard. Representatives of Lazard reviewed strategic and tactical considerations that would need to be addressed if RAI proceeded with the analysis of a transaction with Lorillard and presented a preliminary view of the financial implications of the proposed transaction. RAI’s senior management reviewed a variety of factors including structure, the need for divestiture partners and sequencing of discussions. In early November 2012, RAI’s senior management also requested that Jones Day, RAI’s outside legal counsel, undertake a comprehensive antitrust review of a proposed transaction with Lorillard.

On November 15, 2012, at the request of Mr. Delen, Murray S. Kessler, the chairman, president and chief executive officer of Lorillard, met with Mr. Delen. At the meeting, Mr. Delen discussed his views on the current environment and potential future direction of the tobacco industry and expressed an interest in exploring a potential business combination of RAI and Lorillard if Lorillard were willing to engage in discussions. Mr. Delen did not discuss a potential purchase price, form of consideration, or any other specifics regarding a potential business combination transaction. Mr. Kessler indicated he would discuss the merits of engaging in such discussions with the other members of the Lorillard board of directors, but that any further discussions would need to include indications of value for Lorillard shareholders and certainty relative to regulatory considerations. Mr. Delen stated he also would discuss the matter further with the other members of the RAI board of directors and expressed an interest to meet again early the following year.

 

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On November 19, 2012, the Lorillard board of directors held a telephonic meeting, during which Mr. Kessler summarized his discussion with Mr. Delen on November 15, 2012. Following discussion, the Lorillard board of directors authorized Lorillard’s senior management to assemble a team, including legal and financial advisors, to assist the Lorillard board of directors in considering its alternatives, including the merits of pursuing discussions regarding a possible business combination with RAI. Lorillard subsequently retained Simpson Thacher & Bartlett LLP, referred to as Simpson Thacher, as its legal advisor, and Centerview and Barclays as its financial advisors.

In December 2012, RAI engaged Skadden, Arps, Slate, Meagher & Flom LLP, referred to as Skadden, to assist with its antitrust review of a potential transaction with Lorillard.

On December 17, 2012, the Lorillard board of directors met with representatives of Lorillard’s senior management, together with representatives of Centerview, Barclays and Simpson Thacher, at the offices of Simpson Thacher in New York City, New York, to discuss, among other matters, the merits of holding discussions to explore the possibility of a business combination between RAI and Lorillard. During this meeting, among other things, Lorillard’s senior management provided the Lorillard board of directors with an update regarding Lorillard’s results of operations, recent developments and their perspectives on RAI. Simpson Thacher reviewed with the Lorillard board of directors various legal matters in connection with potential discussions with RAI regarding a business combination, including the possible regulatory implications of a potential combination of Lorillard and RAI. Representatives of Centerview and Barclays discussed with the Lorillard board of directors, among other matters, a number of considerations associated with the possibility of exploring potential strategic alternatives generally and entering into discussions with RAI. In connection with these discussions, representatives of Centerview and Barclays observed that, if the Lorillard board of directors were to evaluate further its various strategic alternatives, consideration could be given to the possibility that Imperial might potentially be interested in a transaction with Lorillard as an alternate to any stand-alone plan of RAI or Lorillard. The members of the Lorillard board of directors and the other meeting participants discussed the matters presented and agreed that Mr. Kessler should meet with Mr. Delen in early 2013 if Mr. Delen and RAI continued to desire such further meeting.

Later in December 2012, Mr. Delen contacted Mr. Kessler to inquire as to a possible further meeting. Mr. Delen requested and Mr. Kessler agreed to meet in February 2013.

From time to time in 2012 and thereafter, Mr. Delen expressed to both RAI’s chairman of the board and the chairman of the RAI governance committee that he did not wish to be a long term chief executive officer of RAI, although he then had no present intention to retire. Mr. Delen indicated that he would not make any decision about the timing of his retirement until an acceptable chief executive officer successor candidate was identified and he believed the timing was appropriate for RAI.

During discussions between representatives of RAI and BAT beginning in January 2013, BAT’s representatives reiterated BAT’s support, as a RAI shareholder, for a business combination of RAI and Lorillard. They also indicated BAT would wish to maintain its approximately 42% beneficial ownership interest in RAI after the transaction and was willing to provide equity financing for such a transaction in order to maintain its ownership interest. BAT’s representatives also stated that decisions as to whether and how to pursue a business combination between RAI and Lorillard were to be made by the RAI board of directors, but that BAT, in its capacity as a substantial financing source and holder of contractual approval rights under the governance agreement, would cooperate with combining the companies only on transactional terms and with an execution strategy of which it approved. Such issues included, among others, the brands to be divested, the subscription price for any additional BAT investment, maintaining the terms of the governance agreement, avoiding a RAI commitment to pay any material “reverse termination fee” due to the failure to obtain regulatory clearance and an executive succession plan for the combined company.

 

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At regularly scheduled meetings of the RAI board of directors in early February 2013, representatives of Jones Day and Skadden presented a preliminary regulatory analysis of a potential combination of RAI and Lorillard. At the same meetings, representatives of Lazard reviewed potential transaction structures and possible sequencing of any potential transactions given their anticipated complexity. At the conclusion of the meetings, the RAI board of directors requested that RAI’s senior management develop the business case regarding a potential transaction with Lorillard and agreed that Mr. Delen should speak with Mr. Kessler to assess Lorillard’s interest in pursuing a transaction with RAI.

On February 17, 2013, the RAI board of directors met with representatives of Lazard and RAI’s senior management. During this meeting, RAI’s senior management reviewed the strategic rationale for a potential transaction with Lorillard and reported that the business case regarding a potential transaction was being developed. Representatives of management reviewed, among other things, the complementary geographic footprints of RAI and Lorillard and the potential efficiencies that could be realized in a combination of the two companies. The consensus of the RAI board of directors was that Mr. Delen should not deliver a specific proposal or a specific timeframe to Mr. Kessler regarding a potential combination transaction, but should report on the analysis undertaken to understand the possibilities and indicate that both the RAI board of directors and RAI’s largest shareholder supported exploration of a potential transaction between the two companies.

During a meeting on February 19, 2013 between Messrs. Delen and Kessler, Mr. Delen reported that (1) RAI continued to be interested in exploring a possible business combination with Lorillard, (2) BAT was very supportive of such discussions, and (3) RAI was exploring a brand divestiture transaction to provide greater regulatory certainty to a potential transaction. However, he also noted that given the complexity of a potential transaction, RAI was not currently prepared to propose any specific terms or parameters of such a potential transaction. Furthermore, Mr. Delen did not predict if and when RAI would be prepared to hold any substantive discussions. In light of the nature of Mr. Delen’s presentation, Mr. Kessler informed Mr. Delen that he and Lorillard would consider the discussions closed and would return to conducting its business in the ordinary course. In response to a question from Mr. Delen, Mr. Kessler acknowledged that he and the Lorillard board of directors would remain open to considering any tangible developments that could enhance Lorillard shareholder value. The closing prices per share of Lorillard’s and RAI’s common stock on February 19, 2013 were $42.41 and $44.18, respectively.

Shortly after his meeting with Mr. Delen on February 19, 2013, at a telephonic meeting Mr. Kessler informed the Lorillard board of directors of his meeting with Mr. Delen and that he considered the discussions with RAI closed.

There were no contacts between RAI and Lorillard with respect to a possible transaction between February and December 2013.

On March 8, 2013, at a meeting of the RAI board of directors in which management and representatives of Jones Day, Richards, Layton & Finger, P.A., another outside legal counsel to RAI, referred to as Richards Layton, and Lazard were present, RAI’s senior management presented the initial business case for a transaction with Lorillard. Mr. Delen reported on his February 19, 2013 meeting with Mr. Kessler, including that Mr. Kessler stated that because RAI was not yet in a position to present a more definitive proposal, Lorillard was not interested in continuing to engage in discussions. Representatives of Lazard presented a preliminary financial analysis of the proposed transaction, including, among other things, a financial comparison of RAI and Lorillard on a stand-alone basis and on a pro forma basis for a combination. Representatives of Lazard also reviewed potential transaction structures and operating assumptions. RAI’s senior management supported further exploration of the potential transaction because it was aligned with RAI’s long-term objectives, and recommended continuing to explore the proposed transaction and to further refine and develop the analysis. The RAI board of directors also discussed a review of potential antitrust and menthol regulatory issues. In connection with antitrust issues, it was proposed that RAI seek to identify a buyer for various RAI and Lorillard brands in order to facilitate antitrust clearance of the transaction by the FTC. The RAI board of directors authorized continued work on this project and, in particular, directed Messrs. Wajnert and Delen to work with BAT

 

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representatives to facilitate contact with Imperial as a potential buyer of divested brands. Consideration was also given to other international tobacco companies perceived to have the financial capacity and possible strategic interest in acquiring the brands expected to be divested. As discussed below, representatives of one other international tobacco company were contacted during the summer of 2013.

During an ordinary course discussion between Richard Burrows, chairman of the BAT board of directors, and Ian Napier, chairman of the Imperial board of directors, in mid-April 2013, in response to a question, Mr. Napier expressed interest in the possible acquisition of brands by Imperial from RAI if RAI were interested in any potential sales.

On April 24, 2013, RAI received from BAT a draft non-binding term sheet with respect to the subscription by BAT for additional shares of RAI common stock in order to provide financing for the potential transaction involving RAI and Lorillard and to maintain BAT’s approximately 42% beneficial ownership interest in RAI. In its review of the term sheet at a meeting in May 2013, the SMRC considered the need to keep BAT involved in discussions regarding a potential transaction given BAT’s role as a significant financing source, as well as certain rights under the governance agreement, including approval rights of B&W, an affiliate of BAT, over certain brand divestitures. The SMRC also considered the need under NYSE rules to obtain shareholder approval of the share issuance that the combination would require. Negotiations between RAI and BAT and discussions by the RAI board of directors regarding this non-binding term sheet continued periodically through June 14, 2013, when the final form of non-binding term sheet was approved by the RAI board of directors and executed by RAI and BAT, based on the recommendation of the SMRC and the approval of the independent directors of RAI not designated by B&W, referred to as the Other Directors (the approval of a majority of the Other Directors being required, under the terms of the governance agreement, for RAI to enter into a material agreement with BAT). The final non-binding term sheet included a provision, at the insistence of BAT, that neither BAT nor RAI would seek any changes in the governance agreement in connection with the possible acquisition of Lorillard.

After consideration of potential divestiture partners given the regulatory dynamics, RAI determined to approach Imperial to assess its interest in a potential divestiture transaction. In May 2013, at a meeting of the SMRC, RAI’s senior management provided an update on the potential transaction, addressed potential divestiture candidates and directed Thomas R. Adams, executive vice president and chief financial officer of RAI, to lead the RAI senior management working team efforts on the potential transaction.

On May 3, 2013, representatives of RAI, BAT and Imperial met at Jones Day’s offices in London to discuss Imperial’s potential interest in acquiring certain brands and assets of RAI and/or Lorillard if RAI were to consider a divestiture. RAI, BAT and Imperial executed a three-way confidentiality agreement. Throughout the spring and summer of 2013, representatives of RAI and BAT and their outside legal and financial advisors engaged in discussions with Imperial, Credit Suisse, financial advisor to Imperial in connection with the divestiture, and Allen & Overy LLP, referred to as Allen & Overy, legal advisor to Imperial in connection with the divestiture, regarding a potential brand divestiture transaction. Imperial and its advisors commenced due diligence and explored the structure of a potential transaction focused on commercial matters and presented Imperial’s request that any divestiture package include Lorillard’s “e-vapor” brand blu. Representatives of Imperial presented to RAI a preliminary valuation for a divestiture package of Lorillard’s “e-vapor” brand blu, RJR Tobacco’s WINSTON, SALEM and KOOL brands and possibly other brands in the range of $5.5 billion to $6.0 billion.

During the summer of 2013, representatives of BAT indicated to representatives of RAI that BAT was not prepared to provide financial support to a transaction that would include a divestiture of the “e-vapor” brand blu, as requested by Imperial, although eventually it changed its position. In July 2013, with the support of the RAI board of directors, Mr. Adams, along with Scott M. Hayes, then group head of mergers & acquisitions for BAT, contacted representatives of another international tobacco company to inquire about the possibility of such party’s participation in a brand divestiture transaction. This other potential divestiture partner was not prepared to enter into a confidentiality agreement with RAI and indicated that it was not interested in a transaction that did not include RJR Tobacco’s CAMEL brand. This requirement was not acceptable to either RAI or BAT. RAI’s senior management updated the RAI board of directors and the members of the SMRC on these developments

 

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and other developments related to menthol regulation. Due to the lack of interest expressed by the other potential divestiture partner identified by the RAI board of directors in proceeding with a transaction that did not include the CAMEL brand, the RAI board of directors determined to continue to explore a potential divestiture transaction with Imperial. Throughout the summer of 2013, RAI’s senior management continued to develop the business case regarding a potential transaction with Lorillard and to explore the parameters of possible divestitures of assets to Imperial.

In September of 2013, representatives of Lazard and RAI’s senior management updated the SMRC and the RAI board of directors on developments related to the potential transaction with Lorillard and discussions with Imperial. RAI’s senior management reported on September 4, 2013, that Imperial had increased its valuation for the WINSTON, SALEM and KOOL cigarette brands and “e-vapor” brand blu to $6.625 billion. The RAI board of directors also reviewed market and regulatory conditions. Later in September 2013, following additional discussions among RAI, BAT, Imperial and their respective outside legal and financial advisors, Imperial representatives advised Mr. Adams that they were prepared to acquire the WINSTON, SALEM, KOOL and Maverick cigarette brands, “e-vapor” brand blu and certain other assets for $7.1 billion, subject to satisfactory completion of due diligence and negotiation of definitive documentation.

On October 17, 2013, during meetings of the SMRC and the RAI board of directors, RAI’s senior management and representatives of Lazard updated the directors on discussions with Imperial and the analysis of a potential transaction with Lorillard. Mr. Adams reviewed with the members of the SMRC, without Lazard in attendance, the existing Lazard retention arrangements. The SMRC authorized Mr. Adams to include a fee for a potential transaction with Lorillard in the renewal of the Lazard retainer. The SMRC continued to support pursuit of the divestiture transaction with Imperial, including seeking a higher price for the divested assets. The RAI board of directors received an update on recent discussions with representatives of Imperial related to the potential divestiture package being considered if RAI proceeded with a combination with Lorillard, as well as an analysis of menthol regulatory developments and the impact of changes in menthol regulation on a potential transaction with Lorillard. Representatives of Lazard described the changes in deal parameters since its last meeting with the RAI board of directors, including the increase in Lorillard’s equity value and the composition of the proposed divestiture package. Representatives of Lazard also reviewed updated financial analyses, taking into account the current formulation of the divestiture package and adjusting certain modeling assumptions. The RAI board of directors authorized RAI’s senior management to negotiate a detailed memorandum of understanding with Imperial with respect to the potential RAI and Lorillard brands and assets to be divested.

Over the next several weeks, representatives of RAI, BAT and Imperial, as well as their outside legal and financial advisors, negotiated the terms of and exchanged drafts of a memorandum of understanding for the potential asset divestiture in the event the transaction with Lorillard proceeded. During the course of these negotiations, representatives of BAT indicated to representatives of RAI’s senior management that, in light of the revised proposal from Imperial, including the increased purchase price, BAT would support the inclusion of the “e-vapor” brand blu (including SKYCIG) as a part of the potential asset divestiture. Given their confidence in the VUSE digital vapor cigarette of RJR Vapor, a wholly owned subsidiary of RAI, RAI’s senior management was comfortable including the “e-vapor” brand blu (including SKYCIG) in the divestiture package.

The SMRC met on November 21, 2013, with representatives of RAI’s senior management, Jones Day, Richards Layton and Lazard. Mr. Hayes also participated in part of the meeting. RAI’s senior management reported on negotiations with Imperial, including that Imperial confirmed its proposed purchase price of $7.1 billion for the divestiture package and indicated it would consider acquiring the Lorillard manufacturing facility as part of that package. Lazard reviewed financial metrics related to a potential transaction with Lorillard and focused on the increase in Lorillard’s share price in the prior several weeks and its potential impact on transaction value. Lazard presented a variety of transaction parameters, and the members of the SMRC discussed the impact of various transaction structures and the potential premium to be received by Lorillard shareholders in any such transaction. At the request of the SMRC, Mr. Hayes presented BAT’s view of a possible transaction with Lorillard and expressed BAT’s support for such a transaction. RAI’s senior management reviewed a number

 

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of strategic reasons to pursue a transaction with Lorillard at this time as well as certain risks associated with such a transaction, including, among others, the potential consequences of increased leverage on RAI and increased exposure to the menthol regulatory environment. At the conclusion of the meeting, the SMRC directed RAI’s senior management to continue to negotiate the memorandum of understanding with Imperial and to further refine its analysis in order to present a recommendation to the full RAI board of directors at its regularly scheduled meeting on December 5, 2013.

On December 4 and 5, 2013, the RAI board of directors met in Tysons Corner, Virginia with representatives of Jones Day, Richards Layton and Lazard. Representatives of Jones Day presented an antitrust regulatory analysis of the potential transaction with Lorillard taking into account the anticipated divestiture package being negotiated with Imperial. Representatives of BAT provided BAT’s view of the potential transaction, including BAT’s belief that the transaction was value enhancing for all RAI shareholders and important from a competitive perspective and that, given the status of discussions with Imperial, BAT supported renewing contact with Lorillard. RAI’s senior management reviewed the strategic rationale for engaging with Lorillard at this time. RAI’s senior management updated the RAI board of directors on negotiations with Imperial and concerns about the possibility of losing Imperial as a potential divestiture partner if RAI did not approach Lorillard promptly and management’s concern that there would not be an alternative divestiture partner available if Imperial was no longer an option. Representatives of Lazard reviewed the recent rise in the market price of shares of Lorillard common stock and then presented a revised financial analysis, including alternative cash and stock allocations in a potential “merger-of-equals” transaction. Representatives of Lazard also presented a draft letter to be delivered to Lorillard setting forth the proposed basis on which RAI would be interested in considering a transaction with Lorillard. Following extensive discussion, the RAI board of directors authorized Mr. Wajnert to contact Mr. Kessler to explore the possibility of a potential transaction between RAI and Lorillard on the terms reviewed at the meeting. Also during the meeting, the RAI board of directors elected Susan M. Cameron, RAI’s former chief executive officer, to fill a vacancy on the RAI board of directors created by the retirement of another director. Ms. Cameron had been nominated to fill the vacancy by the RAI governance committee.

On December 6, 2013, a representative of Lazard contacted a representative of Centerview by telephone and indicated that Mr. Wajnert was going to contact Mr. Kessler to request a meeting to re-open the possibility of holding discussions regarding a potential business combination of RAI and Lorillard. This was communicated by Centerview to Mr. Kessler. Mr. Kessler informed Virgis Colbert, the lead independent director of the Lorillard board of directors, of the possibility of a meeting with Mr. Wajnert, and thereafter throughout the process leading to the announcement of the transaction Mr. Kessler continued to regularly discuss and consult with Mr. Colbert with respect to developments regarding a potential transaction. Mr. Colbert also from time to time notified individual members of the Lorillard board of directors of certain such developments.

In December 2013, Imperial consented to RAI disclosing to Lorillard Imperial’s potential participation as a divestiture partner if a transaction with Lorillard was pursued.

On December 11, 2013, Mr. Wajnert telephoned Mr. Kessler to arrange a meeting, and on December 19, 2013, Messrs. Wajnert and Kessler met in Washington, D.C. During this meeting, Mr. Wajnert reported that RAI continued to be interested in exploring the possibility of combining RAI and Lorillard and that BAT continued to be supportive of such discussions. Mr. Wajnert further reported that RAI and its advisors, together with BAT and its advisors, had been working on the proposed parameters of a potential business combination, including with respect to structuring a transaction that RAI believed would satisfy potential regulatory concerns and would allow shareholders of both companies to benefit from the strength of the combined company. Mr. Wajnert then described RAI’s then-current proposed objectives for a potential business combination of RAI and Lorillard, including, among other elements, that

 

   

the proposed business combination would be a market based transaction structured in a manner similar to a “merger-of-equals,” in which Lorillard shareholders would receive consideration consisting of a mix of cash and stock at market value without a premium and both Lorillard’s and RAI’s shareholders

 

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would realize future value creation through the realization of meaningful synergies and changed market dynamics;

 

    BAT would maintain a significant beneficial ownership interest in the combined company, including through an investment of approximately $4.5 billion in cash at the consummation of the proposed business combination transaction;

 

    the leadership and governance of the combined company would be structured as a balance between the two organizations, subject to BAT’s expressed desire to preserve its right under the governance agreement to designate five members to the board of directors of the combined company (three of whom would be required to be independent of both BAT and the combined company); and

 

    in connection with a proposed business combination, RAI’s subsidiaries’ WINSTON, SALEM and KOOL and Lorillard’s Maverick cigarette brands and Lorillard’s “e-vapor” brand blu (including SKYCIG) would be divested to Imperial in an effort to enhance the receipt of antitrust clearance from the regulatory authorities.

With respect to the last item above and with the consent of Imperial, Mr. Wajnert informed Mr. Kessler that RAI had engaged in discussions with Imperial and was entering into a memorandum of understanding regarding a proposed asset divestiture package. Mr. Wajnert noted that the memorandum of understanding provided that Imperial would acquire the proposed assets for approximately $7.1 billion in cash, which would result in approximately $4.5 billion of net after tax proceeds to the combined company, and that the divestiture proceeds together with the proceeds from BAT’s proposed approximately $4.5 billion investment would be used to fund part of the cash consideration payable in connection with the proposed transaction.

Mr. Kessler responded that he would discuss this proposal with the Lorillard board of directors in early January and that he expected there would be significant discussion at that time regarding the value for Lorillard shareholders inherent in the terms of such proposal, which Mr. Kessler indicated in his view, was insufficient. Later on December 19, 2013, Mr. Kessler received a letter from Mr. Wajnert with RAI’s non-binding preliminary proposal, the terms of which were consistent with what Mr. Wajnert had described to Mr. Kessler at their meeting. The closing prices per share of Lorillard and RAI common stock on December 18, 2013, the day before RAI made its proposal, were $49.95 and $48.80, respectively.

On December 20, 2013, the Lorillard board of directors met telephonically with representatives of Lorillard’s senior management, Centerview and Simpson Thacher to discuss the December 19, 2013 meeting between Messrs. Wajnert and Kessler. Mr. Kessler summarized his meeting with Mr. Wajnert, including Mr. Wajnert’s views of the industry and of the benefits of a possible business combination. A discussion ensued, during the course of which, among other things, the members of the Lorillard board of directors expressed concerns about various elements of the December 19, 2013 proposal, including whether the proposal was really reflective of a “merger-of-equals”-like transaction other than with respect to the absence of a premium being payable to Lorillard shareholders. The Lorillard board of directors requested that, for purposes of its further consideration of RAI’s proposal at a board meeting to be held in early January 2014, Lorillard’s senior management and Centerview review and analyze RAI’s proposal in further detail and that Simpson Thacher review in further detail legal matters in connection with RAI’s proposal, including RAI’s existing contractual relationships with BAT. Following this meeting, a representative of Centerview contacted a representative of Lazard to discuss next steps and they remained in contact over the next several weeks.

On December 23, 2013, RAI and Imperial entered into a memorandum of understanding, the commercial terms of which were not legally binding, providing for the divestiture of the WINSTON, SALEM, KOOL and Maverick cigarette brands and “e-vapor” brand blu (including SKYCIG) for at least $7.1 billion in the event RAI and Lorillard proceeded with a business combination transaction.

On January 9, 2014, the Lorillard board of directors met at the offices of Simpson Thacher in New York City, New York, with representatives of Lorillard’s senior management, Centerview and Simpson Thacher to review and

 

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discuss in further detail RAI’s proposal of a business combination of RAI and Lorillard as presented orally by Mr. Wajnert at his meeting with Mr. Kessler on December 19, 2013, and reflected in Mr. Wajnert’s December 19, 2013 letter to Mr. Kessler. During this meeting Centerview discussed, among other matters, certain financial analyses relating to the proposed business combination transaction, including that, assuming Lorillard shareholders did not receive a premium and the proceeds of BAT’s cash investment and the asset divestiture to Imperial were distributed pro rata among RAI shareholders other than BAT and Lorillard, Lorillard’s shareholders would own approximately 34% of the outstanding common stock of the combined company. In addition, representatives of Centerview discussed with the Lorillard board of directors their preliminary views on Lorillard’s strategic alternatives to the proposed transaction with RAI, including operating as an independent company or a sale of some or all of Lorillard to, a potential other merger transaction with, or an asset acquisition by Lorillard from, the universe of other potential strategic partners for Lorillard in the tobacco industry, none of whom was viewed at the time as a likely candidate for any such transaction, particularly in light of Imperial’s decision to participate in discussions and execute a memorandum of understanding with RAI to acquire various assets from RAI and Lorillard in connection with the possible combination of RAI and Lorillard. Simpson Thacher reviewed with the Lorillard board of directors, among other matters, the directors’ fiduciary duties under applicable law, RAI’s existing contractual relationships with BAT (including the potential impact on a “merger-of-equals”-like transaction in light of the fact that BAT’s standstill agreement with RAI (but not its commitment to vote for a board of directors with a majority of directors designated by the RAI board of directors rather than BAT) would expire at the end of July 2014) and regulatory aspects relating to a business combination of RAI and Lorillard. Following discussion, the Lorillard board of directors concluded that various elements of RAI’s proposal, including the lack of any premium to Lorillard shareholders, were deficient, but that the strategic merit associated with the possibility of combining the two organizations warranted further exploratory discussions. Accordingly, the Lorillard board of directors authorized Mr. Kessler, with the assistance of other members of Lorillard’s senior management and Centerview, to engage in further discussions with representatives of RAI and BAT to determine whether the key terms regarding the proposed business combination transaction could be improved sufficiently to warrant more detailed negotiations between the parties.

On January 11, 2014, Mr. Kessler called Mr. Wajnert and informed Mr. Wajnert that the Lorillard board of directors had met to consider the terms of RAI’s December 19, 2013 proposal, and that, while the Lorillard board of directors was potentially interested in the strategic and long-term financial aspects of a potential business combination between the companies, they did not think the RAI proposal provided sufficient value to Lorillard shareholders. Mr. Kessler indicated, however, that the Lorillard board of directors was willing to explore a business combination that was structured like a “merger-of-equals” if the key terms were improved, including by providing that Lorillard shareholders would receive a premium to the then-current market price and by revising the structure in a manner that, among other things, would increase the relative ownership level and governance rights of Lorillard shareholders in the combined company. It was agreed that representatives of Centerview and representatives of Lazard would meet to discuss the matters that Mr. Kessler raised with Mr. Wajnert in further detail to determine if there was a path forward to continue these discussions.

On January 13, 2014, Mr. Adams advised a representative of Imperial that RAI had contacted Lorillard regarding a potential business combination transaction and that additional discussions were expected to occur over the next several weeks while valuation and other aspects of the proposed transaction were being evaluated.

On January 14, 2014, the RAI board of directors met telephonically and Mr. Wajnert reviewed his recent discussions with Mr. Kessler. Mr. Wajnert advised the RAI board of directors that Lorillard was potentially interested in the strategic benefits of the proposed transaction, but felt that insufficient value was being delivered to Lorillard shareholders. He reported that Mr. Kessler suggested that the parties instruct their respective financial advisors to meet to discuss their financial models and analyses with respect to the potential combination transaction, and that Messrs. Wajnert and Kessler and the Lorillard and RAI financial advisors would meet to determine if a potential business combination transaction was worth pursuing. A representative of Lazard reported that he had contacted representatives of UBS Limited and Deutsche Bank AG, financial advisors to BAT, referred to as UBS and Deutsche Bank, respectively, to discuss potential pro forma ownership. Mr. Adams

 

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and Martin L. Holton III, executive vice president and general counsel of RAI, informed the RAI board of directors that they had contacted representatives of BAT to brief them on the recent discussions and to convey Lorillard’s expressed view that the value allocation was unbalanced and would need to be further refined if discussions were to continue.

On January 15, 2014, representatives of Lazard contacted Centerview by telephone and indicated that the RAI board of directors would discuss Lorillard’s response at its upcoming meetings from February 4 to February 6, 2014. Later on January 15, 2014, Mr. Wajnert telephoned Mr. Kessler to discuss the status of their discussions and negotiations, including that he believed it would be helpful for Centerview and Lazard to continue to review the parameters of the proposed business combination and the potential synergies that could be achieved in the proposed business combination in advance of RAI’s February board meetings.

On January 16, 2014, the Lorillard board of directors held a telephonic meeting with representatives of Lorillard’s senior management, Centerview and Simpson Thacher. During this meeting, Mr. Kessler and representatives of Centerview reported on their respective discussions with Mr. Wajnert and representatives of Lazard. Following discussion, the Lorillard board of directors authorized the continuance of discussions regarding the possible parameters of a business combination transaction for consideration by the Lorillard board of directors in connection with its evaluation of the possibility of authorizing more detailed exploratory discussions.

On January 18, 2014, separate telephonic meetings of the Other Directors, the SMRC and the RAI board of directors took place with members of RAI’s senior management and representatives of Lazard, Jones Day and Richards Layton in attendance. In each meeting, Messrs. Wajnert and Adams, together with representatives of Lazard, updated the participants on recent discussions with representatives of Lorillard and its financial advisors and BAT and its financial advisors. A representative of Lazard reviewed certain features of the letter delivered to Lorillard and a revised perspective on its prior analysis, updating key deal parameters (including share price and pro forma ownership of the combined company) and introducing an alternative approach in which cash available as consideration would be distributed on a pro rata basis to Lorillard shareholders and to RAI shareholders other than BAT. Representatives of Lazard also reported on recent discussions between management and Lazard, on the one hand, and BAT and its financial advisors, on the other, during which the parties discussed potential solutions that would be in the best interests of RAI shareholders other than BAT and continue to meet the objectives of both Lorillard and BAT. These discussions included the possibility that BAT and/or RAI shareholders other than BAT could have decreased post-closing ownership interest in the combined company. At the end of each of these meetings, RAI’s senior management and Lazard were authorized to continue to proceed with their work on the potential transaction. At the meeting of the Other Directors, RAI’s outside legal advisors reviewed the fiduciary duties of the Other Directors.

From mid-January 2014 through RAI’s board meetings beginning on February 4, 2014, representatives of Centerview held various discussions regarding the possible parameters of a business combination transaction involving RAI and Lorillard with representatives of Lazard, as well as with representatives of UBS and Deutsche Bank.

From February 4 to 7, 2014, the RAI board of directors, various of its committees and the Other Directors each met with RAI’s senior management and representatives of Lazard, Jones Day and Richards Layton. Representatives of Lazard and RAI’s senior management provided an update on the potential transaction with Lorillard, including refinement of potential synergies and cost savings and factors that could affect the economics of the transaction. Representatives of Lazard presented a variety of modifications to the proposal made in December in connection with the exploration of an alternative proposal to present to Lorillard. The modifications considered included providing a premium on cash paid to Lorillard shareholders, a premium on shares of RAI common stock issued, changes to the BAT investment and incremental changes to RAI’s leverage and cash allocation. It was the consensus of the Other Directors that RAI shareholders other than BAT should receive at least 30% of the equity ownership of the combined company and receive a pro rata portion of the cash

 

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distribution. The Other Directors discussed engaging independent legal counsel. Mr. Adams also reported that RAI, Imperial and BAT continued discussions regarding a potential divestiture transaction. At the conclusion of its meeting, the RAI board of directors directed Mr. Wajnert to advise Mr. Kessler that RAI needed more time to address the concerns identified by Lorillard in response to the RAI proposal.

On February 12, 2014, the Other Directors met with representatives of Lazard, Jones Day, Richards Layton and Moore & Van Allen, PLLC, a North Carolina law firm available to serve as counsel for the Other Directors, referred to as Moore & Van Allen. A representative of Moore & Van Allen provided an overview of the firm, including its practices and relevant experience, and the role of the Other Directors with respect to a potential transaction. Following additional discussion, the Other Directors engaged Moore & Van Allen as independent legal counsel to the Other Directors, subject to the RAI board of directors authorizing the same. (At the meeting of the RAI board of directors that followed the Other Directors’ meeting, the engagement of Moore & Van Allen was authorized by the RAI board of directors). Following this portion of the meeting, representatives of Lazard reviewed a revised letter to be presented to Lorillard and reviewed financial and management presentations related to the potential transaction. There was extensive discussion regarding the consideration to be received by RAI shareholders other than BAT and BAT’s willingness to move from its initial position regarding post-transaction equity ownership. A representative of Lazard updated the Other Directors on the recent earnings announcements of RAI and Lorillard and how the current performance of the companies affected the stand-alone and combination analyses of valuation for each company. Lazard representatives presented a “has-gets” analysis for RAI shareholders other than BAT, BAT and Lorillard shareholders under the proposed transaction structure including the review of the proposed letter to Lorillard.

On February 14, 2014, the Other Directors met with RAI’s senior management and representatives of Lazard, Jones Day, Richards Layton and Moore & Van Allen. Representatives of Lazard presented a revised non-binding proposal letter addressed to Lorillard including increased ownership for Lorillard shareholders and decreased percentage of ownership of BAT on a post-transaction basis. The letter also provided for a significant cash premium for Lorillard shareholders and provided BAT with the ability to invest over time following the consummation of the transaction to increase its equity position. The consensus view of the Other Directors was that they supported sending such a letter to Lorillard. Later that day, the RAI board of directors met with RAI’s senior management and representatives of Lazard, Jones Day, Richards Layton and Moore & Van Allen. The RAI board of directors reviewed the terms of the revised proposal to Lorillard and authorized Mr. Wajnert to preview the letter with Mr. Kessler and deliver it on behalf of RAI.

After the board meeting, Mr. Wajnert telephoned Mr. Kessler again and informed him that Mr. Wajnert would send him a letter with RAI’s revised proposal. Mr. Wajnert then sent Mr. Kessler the letter with RAI’s revised non-binding proposal for a business combination of RAI and Lorillard, in which Lorillard shareholders would receive consideration consisting of a mix of cash and stock with a premium of approximately 20% on the cash consideration to be received by Lorillard shareholders relative to Lorillard’s closing share price of $47.72 on February 13, 2014. RAI shareholders would receive an equivalent cash premium in the transaction contemplated at that time (relative to RAI’s closing share price of $47.61 on February 13, 2014). RAI’s revised proposal indicated that, upon completion of the proposed transaction, the ownership level of Lorillard shareholders in the combined company would be approximately 36.5%, with RAI shareholders other than BAT and BAT holding approximately 30% and 33.5% of the outstanding common stock of the combined company, respectively. In line with these changes, BAT would contribute approximately $2 billion in cash in exchange for additional shares of the combined company upon completion of the proposed transaction, and BAT would have the right to invest up to an additional $1.25 billion in exchange for additional shares of the combined company after each of the first and second years following completion of the proposed transaction at then prevailing share prices (after which time the synergies available in the proposed transaction were anticipated by RAI and Lorillard to have a positive effect on the share price of the combined company). In the letter, RAI also proposed that, at the appropriate juncture, RAI and Lorillard discuss senior management and board positions for the combined company on the basis of the continuance of the existing governance agreement with BAT.

 

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Following receipt of the February 14, 2014 letter and in preparation for the meeting of the Lorillard board of directors to be held on February 19, 2014, Mr. Kessler and other representatives of Lorillard’s senior management held numerous discussions with representatives of Centerview and Simpson Thacher to review and discuss RAI’s revised proposal. During the course of these discussions, it was determined that, when taking into account the estimated approximate cash (25%) and stock (75%) mix, as calculated by Lorillard and its financial advisors, being proposed by RAI, RAI’s revised proposal, as calculated by Lorillard and its financial advisors, represented a 7.3% premium to Lorillard’s closing share price of $47.72 on February 13, 2014, on a blended basis.

Discussions regarding the proposed divestiture among representatives of RAI, Imperial and BAT continued throughout the week of February 17, 2014.

On February 17, 2014, Mr. Kessler called Mr. Wajnert and indicated that he did not believe that RAI’s revised proposal of February 14, 2014, would meet the expectations of the Lorillard board of directors regarding the premium that Lorillard shareholders would receive in the proposed transaction. Mr. Kessler also reported that the Lorillard board of directors had a regularly scheduled meeting on February 19, 2014, and requested that RAI consider a further increase in the premium that would be paid to Lorillard shareholders and the Lorillard shareholders’ ownership level in the combined company. Mr. Wajnert indicated that he would review this request with the RAI board of directors.

On February 18, 2014, the Other Directors and the RAI board of directors each met with representatives of Lazard, Jones Day, Richards Layton and Moore & Van Allen to review the RAI proposal and the response by Lorillard to RAI. In each meeting, Mr. Wajnert reported that Mr. Kessler had advised him that Lorillard required a higher blended premium, supported the concept of the BAT phase-in for increased ownership and believed pro forma equity ownership of Lorillard shareholders needed to increase to a level of 38% to 40% of the combined company. The Other Directors considered the impact of increased ownership for Lorillard shareholders on RAI shareholders other than BAT, and discussed the amount of time necessary to complete the next phase of due diligence and Lorillard’s desire to engage a third party consultant to perform a synergy analysis. Representatives of Lazard reviewed the proposal and potential alternative scenarios and the implications of each. At the conclusion of the meeting, the Other Directors expressed their preference that any additional equity to Lorillard shareholders come from decreased ownership by BAT, although they recognized this was a matter for negotiation with BAT.

Later that day, at the meeting of the RAI board of directors, the RAI board and its outside legal and financial advisors considered the response from Lorillard described above. Following such considerations, Mr. Wajnert was authorized by the RAI board of directors to advise Mr. Kessler that 37.5% share ownership by Lorillard shareholders was acceptable, that there might be flexibility to increase that amount depending on the results of further due diligence investigations and that RAI would like to move forward with further discussions with Lorillard promptly.

On February 19, 2014, Mr. Wajnert telephoned Mr. Kessler to indicate that RAI agreed to increase the proposed ownership level of Lorillard shareholders in the combined company to 37.5% (which would reflect an approximate 10.8% premium to Lorillard’s closing share price on February 13, 2014 on a blended basis, as calculated by Lorillard and its financial advisors) and suggested that, depending on the results of additional financial analysis and completion of the due diligence process, RAI was willing to consider a further increase in the Lorillard shareholders’ ownership level in the combined company to 38% (which would reflect an approximate 12.5% premium on a blended basis, as calculated by Lorillard and its financial advisors).

On February 19, 2014, the Lorillard board of directors held a meeting at Lorillard’s headquarters in Greensboro, North Carolina with representatives of Lorillard’s senior management, Centerview and Simpson Thacher to review and discuss, among other matters, RAI’s revised proposal. Mr. Kessler began the meeting by providing the Lorillard board of directors with an update regarding his and Centerview’s discussions with Mr. Wajnert and RAI’s and BAT’s financial advisors, respectively. At this meeting, representatives of

 

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Centerview reviewed with the Lorillard board of directors, among other things, Lorillard’s and RAI’s results of operations during the fourth quarter of the fiscal year ended December 31, 2013, and recent developments at Lorillard and RAI. In addition, representatives of Centerview discussed with the Lorillard board of directors and the other meeting participants its analysis of RAI’s revised proposal, including a comparison to RAI’s December 19, 2013 proposal, and an illustrative work plan and timeline to conduct due diligence and negotiate definitive transaction agreements. Following discussion, the Lorillard board of directors authorized Lorillard’s senior management, with the assistance of Lorillard’s advisors, to continue the discussions and negotiations with RAI and to engage in mutual due diligence, but to emphasize in such discussions that given the significant continuing equity ownership of Lorillard shareholders in the combined company, the leadership team of the combined company should include Mr. Kessler as chief executive officer and as many members of Lorillard’s senior management as possible based on Lorillard’s operational success.

On February 21, 2014, Messrs. Kessler and Wajnert spoke, as did representatives of Centerview and Lazard. During these calls, Mr. Wajnert and the Lazard representatives were advised that Lorillard was prepared to move forward to explore a potential “merger-of-equals”-like transaction with RAI. RAI representatives conveyed this information to the RAI board of directors, BAT and Imperial.

Beginning on February 20, 2014 and continuing throughout the week of February 24, 2014, representatives of Jones Day, Cravath, Swaine & Moore LLP, counsel to BAT, referred to as Cravath, Allen & Overy and Simpson Thacher negotiated the terms of mutual confidentiality agreements. On February 24, 2014, Lorillard, RAI and BAT entered into a mutual confidentiality agreement, which was amended and restated on March 3, 2014, when Lorillard, RAI and BAT entered into a mutual confidentiality agreement with Imperial. Each confidentiality agreement included mutual standstill and non-solicitation and no-hire covenants.

During the course of these discussions, representatives of Jones Day, Cravath and Simpson Thacher began to discuss the outlines of other potential terms in the “merger-of-equals”-like transaction. Representatives of Cravath indicated that BAT was not prepared to extend the standstill covenant in the governance agreement in connection with the proposed business combination transaction and pointed out that the voting provisions of the governance agreement would continue to prevent BAT or its affiliates from obtaining control of the surviving company’s board of directors.

On February 26, 2014, members of RAI’s and Lorillard’s senior managements met telephonically to review and discuss, among other matters, the status of discussions and negotiations between RAI and Imperial regarding the proposed asset divestiture to Imperial and certain aspects of the due diligence investigations to be conducted among RAI, Imperial and Lorillard.

In the morning of February 27, 2014, representatives of RAI, BAT and Imperial met at the offices of Lazard in New York City, New York, to discuss certain process matters regarding the proposed asset divestiture. That afternoon, representatives of RAI, BAT and Lorillard and their respective financial advisors met at Lazard’s offices in New York City, New York, during which representatives of RAI and Lazard updated the representatives of Lorillard and Centerview regarding their discussions with Imperial that morning and other process matters regarding the proposed transaction.

On March 3, 2014, Allen & Overy, with RAI’s permission, provided Simpson Thacher with a copy of the memorandum of understanding, dated December 23, 2013, between RAI and Imperial. Also on March 3, 2014, the Alphaville blog of the Financial Times and, following that, several other media outlets reported that RAI was exploring a bid to acquire Lorillard (the report on the Alphaville blog of the Financial Times is referred to as the Alphaville report). On February 28, 2014, the last full trading day prior to the Alphaville report, the closing prices per share of Lorillard and RAI common stock were $49.06 and $50.83, respectively.

From March 5 through March 6, 2014, members of Lorillard’s, RAI’s and BAT’s senior managements and their respective advisors met at Jones Day’s offices in New York City, New York, to provide an overview of

 

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their respective businesses and to discuss financial and operational due diligence matters. Messrs. Delen and Kessler made presentations providing an overview of the businesses of RAI and Lorillard, respectively. In these meetings, RAI’s senior management shared its plan for synergies achievable in various functional areas in connection with the proposed business combination transaction. During the course of these meetings, the parties also discussed the status of discussions and negotiations between RAI and Imperial with respect to the proposed divestiture of brands and other assets and the terms embodied in the memorandum of understanding. In connection with these meetings, on March 6, 2014, Mr. Kessler met with Mr. Wajnert and Nicandro Durante, the chief executive and a director of BAT, to discuss, among other matters, their respective perspectives on the industry and the proposed governance and management structure and future potential of the combined company. Such matters continued to be discussed among the respective companies’ senior managements and financial advisors over the next few days.

Commencing on March 7 through March 12, 2014, representatives of Lazard and Centerview continued to review the matters that were discussed during the meetings from March 5 through March 6, 2014.

On March 10, 2014, the Lorillard board of directors held a telephonic meeting with representatives of Lorillard’s senior management, Centerview and Simpson Thacher, during which Mr. Kessler summarized the discussions and negotiations that Lorillard’s senior management and its advisors had with RAI and BAT regarding the proposed business combination transaction since the last Lorillard board of directors meeting on February 19, 2014. Among other things, Mr. Kessler informed the Lorillard board of directors that RAI and BAT had agreed that he would be strongly considered for the position of chief executive officer of the combined company upon the completion of the “merger-of-equals”-like transaction. However, Mr. Kessler informed the Lorillard board of directors that the discussions and negotiations that had occurred over the weeks leading up to this meeting raised a number of questions regarding whether the potential transaction envisioned by RAI should appropriately be viewed as a “merger-of-equals”-like transaction by Lorillard. Among other things, a discussion ensued regarding (1) the terms of the memorandum of understanding between RAI and Imperial, which provided that Imperial would potentially assume most of Lorillard’s salespeople, its manufacturing facilities and headquarters building (one effect of which would be that there would be very few Lorillard employees involved in the operations of the combined company), (2) the facts that BAT would continue to be the most significant shareholder of the combined company with the right to board representation in accordance with the governance agreement and that BAT would resist agreeing to an extension of the standstill agreement in the governance agreement and (3) an increasing perception that the spirit of the proposed transaction was significantly more consistent with an acquisition of Lorillard than it was with a “merger-of-equals”-like transaction in all respects other than the lack of a full acquisition premium being paid to Lorillard shareholders. Following a discussion of the matters presented, Mr. Kessler asked for the weekend to further discuss the transaction with Lorillard’s advisors and provide a recommendation to the Lorillard board of directors on March 13, 2014. The Lorillard board of directors concluded to reconvene in short order to further discuss and consider the merits of continuing the discussions and negotiations with RAI regarding the proposed business combination transaction.

On March 11, 2014, representatives of RAI, Imperial and Lorillard and representatives of Jones Day met to continue their discussions regarding the scope of the proposed brand and asset divestiture transaction with Imperial.

On March 12, 2014, the RAI board of directors met telephonically with its outside legal and financial advisors to review recent discussions with Lorillard and Imperial.

On March 13, 2014, the Lorillard board of directors met telephonically to further discuss and consider the merits of continuing the discussions and negotiations with RAI regarding the proposed business combination transaction. Following discussion and Mr. Kessler’s recommendation, the Lorillard board of directors determined not to proceed with the proposed business combination transaction and to terminate the related discussions with RAI, BAT and Imperial. Among other things, based on what had been learned over the prior two weeks, the Lorillard board of directors did not believe that the proposed transaction in fact reflected a “merger-of-equals”-like transaction and, accordingly, that the consideration proposed for Lorillard shareholders did not provide such

 

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shareholders with an appropriate premium for a transaction that effectively constituted an acquisition of Lorillard. Later on March 13, 2014, Mr. Kessler telephoned Mr. Wajnert to inform him of the Lorillard board of directors’ decision. Mr. Kessler thanked Mr. Wajnert and noted that he and Lorillard would consider the discussions closed, and would return to conducting its business in the ordinary course.

On March 13, 2014, Mr. Wajnert advised the RAI board of directors, RAI’s senior management, Lazard, Jones Day, Richards Layton and Moore & Van Allen by phone that Lorillard had determined not to proceed with the transaction, noting that while the transaction was characterized as a “merger-of-equals” transaction, Lorillard did not believe RAI’s proposal met the requirements of such a transaction. Although Lorillard had terminated discussions, the RAI board of directors continued to consider the combination opportunity, taking into account the fact that Imperial might not remain interested in acquiring certain assets in the future. At the conclusion of this meeting, the RAI board of directors requested that RAI’s senior management and Lazard re-examine acquisition structures other than a “merger-of-equals.”

There were no contacts between RAI and Lorillard with respect to a possible transaction between March and May 2014.

Throughout March and April, RAI’s senior management and its advisors continued to explore the possibility of an acquisition of Lorillard at a premium rather than on a “merger-of-equals” basis and remained in contact with representatives of Imperial. In early April, representatives of RAI’s senior management, Lazard and Strategy& (formerly Booz & Company), a third party consultant engaged by RAI, reviewed and updated the assumptions and financial projections for a proposed transaction as well as the anticipated synergies analysis. Representatives of the RAI board of directors and RAI’s senior management met with representatives of BAT to explore BAT’s continued support for a transaction, particularly given management’s concerns related to leverage at RAI on a post-transaction basis and the desire of RAI to maintain its investment grade rating.

During this period, the RAI board of directors met numerous times with its legal and financial advisors to review the updated transaction analysis. The RAI board of directors concluded that, while the RAI stand-alone projections were strong, the potential strategic benefits of an acquisition of Lorillard warranted the continued exploration of an acquisition.

In March, 2014, Mr. Delen indicated to the RAI board of directors in executive session that he was considering retirement in the near term. He told the RAI board of directors that he had previously expressed to both the RAI chairman of the board and the chairman of the RAI governance committee that he did not wish to be a long-term chief executive officer of RAI, but would make such a decision only when an acceptable chief executive officer successor candidate was identified and he believed the timing was appropriate for RAI. Subsequently, Ms. Cameron expressed her willingness to serve as Mr. Delen’s successor should he decide to retire. On April 16, 2014, Mr. Delen submitted his resignation, effective April 30, 2014, and Ms. Cameron was elected chief executive officer of RAI, effective May 1, 2014.

On April 25, 2014, the RAI board of directors met with RAI’s senior management and its outside legal and financial advisors, as well as representatives of Strategy&. During this meeting, RAI’s senior management and representatives of Lazard and Strategy& reviewed the financial case for a potential Lorillard acquisition as well as a stand-alone analysis of each of RAI and Lorillard. RAI’s senior management reviewed the potential risks and benefits associated with a potential transaction of this nature, including the strength of the combined brand portfolio and transformative nature of the transaction, as well as the sensitivities with respect to the financial assumptions and projections utilized in the analysis. RAI’s senior management updated the RAI board of directors on menthol regulatory issues that factored into the analysis as well. At the conclusion of the meeting, the RAI board of directors decided to continue to explore an acquisition of Lorillard.

On April 29, 2014, CNBC televised a report indicating that the tobacco industry was undergoing a consolidation process in the near term, including speculation that RAI was seeking to acquire Lorillard.

 

 

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On May 5, 2014, in light of certain provisions in the previously executed confidentiality agreement between RAI, Lorillard and BAT, representatives of Lazard and Centerview met at Lazard’s request to discuss the possibility that RAI might re-approach Lorillard, but this time with an acquisition proposal for Lorillard, including an appropriate acquisition premium.

On May 7 and 8, 2014, the RAI board of directors met with members of RAI’s senior management and its legal and financial advisors to discuss a potential approach to Lorillard regarding an acquisition, rather than a “merger-of-equals”-like transaction. Ms. Cameron reported that since the April 25, 2014 board meeting, management had continued to develop the business case for a potential acquisition of Lorillard and reviewed the most recent financial projections and synergy analysis. She reviewed the strategic rationale, risks and potential mitigating factors for a potential transaction with Lorillard. Mr. Adams reported that Imperial remained interested in pursuing a divestiture transaction and was prepared to proceed with the brand package previously discussed. Representatives of Lazard reviewed with the RAI board of directors financial analyses in connection with the potential transaction, examining the transaction at a range of potential Lorillard share values. Lazard also highlighted the favorable financial impact resulting from the increase in RAI’s share price during the preceding months (the closing price per share of RAI common stock on May 2, 2014 was $55.94). The per share price and allocation between stock and cash for the potential transaction were discussed among the members of the RAI board of directors. RAI’s senior management recommended making a proposal to Lorillard involving a combination of cash and stock consideration with an implied value of $65 per share of Lorillard common stock and reported that BAT supported an approach on that basis. Representatives of Lazard reviewed a revised non-binding proposal letter to Lorillard and discussed the financial implications of the proposal. At the conclusion of the meeting and following discussion of the unique opportunity presented by the possible Lorillard transaction at this time, the RAI board of directors authorized a non-binding proposal to acquire Lorillard at an implied value of $65 per share and on the other terms reflected in the letter. Also during the meeting, the RAI board of directors dissolved the SMRC as a standing committee, in light of the role required by the governance agreement of the Other Directors in considering the transaction and the fact that the SMRC was not otherwise operative at this time.

Later on May 7, 2014, the Other Directors met with RAI senior management, representatives of RAI’s outside legal and financial advisors and Moore & Van Allen to consider further the possibility of an acquisition of Lorillard, as opposed to a “merger-of-equals” with Lorillard, from the perspective of RAI’s shareholders other than BAT. Representatives of Lazard presented a variety of financial analyses in connection with the proposed transaction to the Other Directors. There was extensive discussion, among other things, of the potential benefits to such shareholders of BAT’s commitment to purchase additional shares of RAI common stock as part of the financing for the proposed transaction, including that it was unlikely RAI would be able to obtain equity financing