Subsequent Events (Notes)

12 Months Ended

Dec. 27, 2019



24.	Subsequent Events

Commitments and Contingencies

Certain litigation matters occurred in fiscal 2019 or prior but had subsequent updates through the date of this report. See further discussion below and in Note 19 to the consolidated financial statements.

Opioid-Related Matters

On February 25, 2020, the Company announced that it has reached an agreement in principle on the terms of a global settlement that would resolve all opioid-related claims against the Company and its subsidiaries (“Litigation Settlement”). The Litigation Settlement has been reached with a court-appointed plaintiffs' executive committee representing the interests of thousands of plaintiffs in the MDL and is supported by a broad-based group of 47 state and U.S. Territory Attorneys General (the "Plaintiffs"). The Litigation Settlement contemplates the filing of voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”) by certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business (the “Specialty Generics Subsidiaries”) and the establishment of a trust for the benefit of plaintiffs holding opioid-related claims against the Company (the “Opioid Claimant Trust”). Subject to the Settlement Closing (as defined below), the Company has agreed to the payment of certain structured payments to the Opioid Claimant Trust. Pursuant to the terms of a channeling injunction and third-party release, which are subject to court approval, all persons or entities asserting opioid-related claims against the Company would recover solely from the Opioid Claimant Trust on account of such claims. All other claims against, and equity interests in, the Specialty Generics Subsidiaries will be unimpaired and it is expected that all contracts to which the Specialty Generics Subsidiaries are party will be assumed. The Litigation Settlement also provides for:


•	the payment of $300.0 million upon Specialty Generics' emergence from the completed Chapter 11 case;


•	the payment to the Opioid Claimant Trust of additional cash totaling $1,300.0 million, consisting of $200.0 million on each of the first and second anniversaries of emergence and $150.0 million on each of the third through eighth anniversaries of emergence; and

•

the issuance of warrants ("Settlement Warrants") upon emergence from the contemplated Chapter 11 process to the Opioid Claimant Trust to purchase ordinary shares of the Company with an eight year term at a strike price of $3.15 per ordinary share that would represent approximately 19.99% of the Company's fully diluted outstanding shares, including after giving effect to the exercise of the warrants, provided that such warrants may not be exercised during any calendar quarter in a quantity that would exceed 5.0% of the number of shares outstanding.

The consummation of the Litigation Settlement (such consummation, the "Settlement Closing") is conditioned upon, among other things, bankruptcy court approval of the bankruptcy plan effectuating the Litigation Settlement, the emergence of the Specialty Generics Subsidiaries from bankruptcy and:


•	the exchange of the 2020 Notes and the 2022 Notes into new secured notes on terms reasonably satisfactory to the Company;


•	the coordination of the action filed by the State of New York against the Company to allow the Specialty Generics Subsidiaries sufficient time to arrange for pre-arranged filings under Chapter 11;


•	the support and participation of a supermajority of all claimants with opioid-related claims, including a future claims representative (if one is deemed necessary by the Company in consultation with an ad hoc committee of certain Supporting Claimants or their representatives (the "AHC")), against the Company on terms satisfactory to the Company;


•	the resolution of U.S. Department of Justice civil and criminal claims against the Company on reasonable terms;

•

the agreement by and between the Company and the Supporting Claimants to an injunction governing the sale and distribution of opioids by the Specialty Generics Subsidiaries, compliance with which is expected to protect the Company from further opioid-related liability, on terms satisfactory to the Company, with such terms to be binding on the Specialty Generics Subsidiaries and any buyers thereof or successors thereto;


•	the treatment of potential indemnification claims of Covidien plc on terms satisfactory to the Company and the AHC;


•	the disclosure by the Company of a subset of its litigation documents to be made publicly available as part of an industry-wide document disclosure program, subject to scope and protocols to be negotiated by the parties’ informed representatives;


•	the entry of a judgment between the Company and the CMS and the entry by the Company into any other legal judgments or settlements, each on such terms and at such levels as may be acceptable to the Company, such that the Company is able to make all payments required under the terms of the Litigation Settlement;

•

the resolution and settlement of certain outstanding intercompany indebtedness between the Specialty Generics Subsidiaries and the Company’s other subsidiaries and the entry into a shared services agreement between the Specialty Generics Subsidiaries and certain other subsidiaries of the Company, as the case may be, in each case on terms reasonably satisfactory to the Company, subject to consent of the AHC;


•	a rights offering or a shareholder vote to satisfy any applicable legal requirements relating to the issuance of the warrants, in a manner reasonably acceptable to the Company and the AHC; and


•	the satisfaction such other conditions as may be mutually agreed to by the Company and the AHC.

Although the term sheet relating to the Litigation Settlement had included a reference to the Company making an exchange offer for the 2020 Notes, the Company currently plans to enter into the Amendment (as defined below), and to use the proceeds of the new term loan to refinance the 2020 Notes, in lieu of any exchange offer for the 2020 Notes.

As a result of the Litigation Settlement, the Company recorded an accrual for this contingency of $1,600.0 million related to the structured cash payments and $43.4 million related to the Settlement Warrants in the consolidated balance sheet as of December 27, 2019, with a corresponding non-cash charge to the consolidated statement of operations as a component of operating expenses.

The fair value of the Settlement Warrants to be issued upon the Settlement Closing has been estimated using the Black-Scholes pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The expected volatility assumption is based on the historical and implied volatility of the Company's peer group with similar business models. The expected term assumption is based on the contractual term of the Settlement Warrants, including the maximum exercise restriction of 5.0% per calendar quarter, which resulted in the valuation of four separate tranches. The expected annual dividend per share is based on the Company's current intentions regarding payment of cash dividends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumed. The estimated fair value for the Settlement Warrants will be subject to revaluation at each balance sheet date with any changes in fair value recorded as a non-cash gain or (loss) in the consolidated statements of operations until the Settlement Warrants are issued, at which point they will be recorded as equity or as a liability based upon the facts and circumstances at the time of issuance.

The key assumptions used to estimate the fair value of the Settlement Warrants as of December 27, 2019 were as follows:



Expected share price volatility	54.4		%
Weighted-average risk-free rate	1.8		%
Expected annual dividend per share	—		%
Weighted-average expected term (in years)	7.6
Share price	$	3.45

Financing Activities

Support and Exchange Agreement

On February 25, 2020, the Company and the Issuers entered into a support and exchange agreement with Aurelius Capital Master, Ltd., Franklin Advisers, Inc. and Capital Research and Management Company (collectively, the "Noteholder Parties", and such agreement, the “Exchange Agreement”) pursuant to which, among other things, the Issuers agreed to use commercially reasonable efforts to commence, by no later than March 20, 2020, a private offer to exchange any and all of the 2022 Notes held by such noteholders for an equal principal amount of new second lien secured notes (such new notes, the "Exchange Offer Notes" and, such private offer to exchange, the "2022 Exchange Offer") at a rate of $1,000 of Exchange Offer Notes for every $1,000 of 2022 Notes exchanged. Pursuant to the Exchange Agreement, the Issuers also agreed to use commercially reasonable efforts to commence, by no later than March 20, 2020, a solicitation of consents from holders of the 2022 Notes to certain amendments to eliminate or waive substantially all of the restrictive covenants contained in the 2022 Notes and the applicable indenture, and eliminate certain events of default, modify covenants regarding mergers and the transfer of assets, and modify and eliminate certain other provisions, including covenants regarding future guarantors and certain provisions relating to defeasance (such solicitation of consents, the "2022 Consent Solicitation"). The closing of the 2022 Exchange Offer will be conditioned on, among other things, the absence of events materially and adversely affecting the ability to implement the Litigation Settlement, and the funding of the new term loans and the effectiveness of the Amendment (as defined below). The noteholders have agreed to tender in the 2022 Exchange Offer all of their 2022 Notes, deliver their consents in the 2022 Consent Solicitation and if the aggregate

principal amount of Exchange Offer Notes issued pursuant to the 2022 Exchange Offer is less than approximately $610.3 million (the “Exchange Cap”), exchange the outstanding October 2023 Notes held by the noteholders party to the Exchange Agreement for an amount of Exchange Offer Notes equal to the excess, if any, by which the Exchange Cap exceeds the aggregate principal amount of Exchange Offer Notes to be issued pursuant to the 2022 Exchange Offer, at a rate of $900 of Exchange Offer Notes for every $1,000 of October 2023 Notes exchanged by each noteholder. The noteholders collectively hold approximately $271.0 million aggregate principal amount of the 2022 Notes and approximately $255.0 million aggregate principal amount of the October 2023 Notes. Additionally, pursuant to the Exchange Agreement, the noteholders have consented, in their capacity as holders of the 2020 Notes, to the adoption of an amendment to the 2020 Notes and the indenture governing the 2020 Notes to provide for the reduction of the optional redemption notice period from 30 days to three business days. The 2022 Exchange Offer will be subject to the satisfaction or waiver of certain conditions, and the failure to consummate the 2022 Exchange Offer could adversely affect the implementation and consummation of the Litigation Settlement.

Support Agreement

On February 25, 2020, the Company and the Issuers entered into a support agreement (the "Support Agreement") with the Noteholder Parties, as well as certain existing term lenders under the Credit Agreement (collectively, the "Lender Parties") dated as of March 19, 2014 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”).

The descriptions below of an amendment (the "Amendment") to our existing credit agreement on terms consistent with an agreed term sheet and the New Term Loans (as defined below) are subject to the effectiveness of the Amendment, which is subject to the satisfaction or waiver of the conditions set forth in the term sheet and the Amendment. Conditions to the effectiveness of the Amendment, include, among other things, (i) the consent by certain thresholds of the existing term lenders and revolving lenders (which condition has not yet been satisfied as of this date) and (ii) the commencement of an exchange offer with respect to the 2022 Notes, pursuant to the Exchange Agreement.

The Amendment, if effected, on the terms contemplated by the term sheet, will provide for a commitment from the Noteholder Parties and certain of the Lender Parties (collectively, the "Backstop Lenders") to provide a new $800.0 million senior secured term loan facility (the “New Term Loans”) upon the satisfaction of certain conditions set forth in the term sheet. The New Term Loans will bear interest at an interest rate per annum equal to adjusted LIBOR plus a spread equal to 6.50%.

The New Term Loans will be guaranteed by the Company and the same subsidiaries of the Company that guarantee the Existing Term Loans (as defined below) and secured by liens on the same assets as secure the Existing Term Loans (as amended by the Amendment and, in each case, subject to certain exceptions set forth in the Amendment). The proceeds from the New Term Loans will be used to fund the redemption or repayment of all of the outstanding approximately $614.8 million of the 2020 Notes and additionally to partially repay loans and terminate corresponding commitments under the Company's revolving credit facility in respect of revolving lenders who agree to extend their loans and commitments to March 2024.

The New Term Loans will amortize at an annual rate equal to 5.00% of the initial principal amount of the New Term Loans, payable in equal quarterly payments. The remaining principal amount of the New Term Loans will mature on the fourth anniversary of the borrowing date of the New Term Loans. Amounts outstanding under the New Term Loans may be voluntarily prepaid at any time, subject to a prepayment premium.

Other than with respect to the maturity date, amortization, the applicable interest rate and prepayment premiums, the New Term Loans will have similar terms to the 2017 Term Loan and the 2018 Term Loan (collectively, the “Existing Term Loans”), in each case as amended by the Amendment.

The Amendment would also implement certain amendments to the terms of the Credit Agreement. The interest rate margins applicable to the Existing Term Loans will be increased by 100 basis points. The Existing Term Loans will also amortize at an annual rate increased to 2.00% of the outstanding principal amount of the Existing Term Loans on the effective date of the Amendment, payable in equal quarterly payments. Certain other covenants (including the financial covenant), mandatory prepayments and events of default set forth in the existing Credit Agreement will also be modified pursuant to the Amendment, including to facilitate the implementation of the Litigation Settlement.

The consummation of the aforementioned financing activities may have a material impact on the Company's financial condition, results of operations and cash flows.