Product Supplement No. STEPS-1
(To Prospectus dated September 7, 2018
and Series H Prospectus Supplement dated September 7, 2018)
December 7, 2018
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Filed Pursuant to Rule 424(b)(5)
Registration Statement No. 333-227001
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The STEP Income Securities
®
(the “
notes
”) are unsecured senior debt securities issued by Royal Bank of Canada. All payments due on the notes, including any repayment of principal, will be subject to the credit risk of Royal Bank of
Canada.
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The notes do not guarantee the return of principal at maturity. Instead, the return on the notes will be based on the performance of an underlying “
Market Measure
,” which will be the
common
equity securities of a company
other than us, the agents
and our respective affiliates (the “
Underlying Stock
”)
.
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The notes pay a fixed interest rate over their term and provide an opportunity to earn an additional fixed payment at maturity (the “
Step Payment
”). However,
your payment at maturity
will be exposed to any negative performance of the Underlying Stock below the Threshold Value (as defined below) on a 1-to-1 basis.
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If the value of the Underlying Stock increases from its Starting Value to an Ending Value (each as defined below) that is greater than or equal to a specified “
Step Level
,” the cash payment per unit at maturity (the “
Redemption Amount
”) will equal the principal amount plus the Step Payment. Your maximum return on the notes will equal the interest payments plus the Step Payment, if any.
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If the Ending Value is less than the Step Level, but greater than or equal to the Threshold Value, you will receive your principal amount at maturity. However,
if the Ending Value is less than the Threshold Value, you will be subject to 1-to-1 downside exposure to the decrease of the Underlying Stock below the Threshold Value. In such case, you may lose all or a significant portion of the
principal amount of your notes.
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This product supplement describes the general terms of the notes, the risk
factors to consider before investing, the general manner in which they may be offered and sold, and other relevant information.
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For each offering of the notes, we will provide you with a pricing
supplement (which we refer to as a “
term sheet
”) that will describe the specific terms of that offering, including the specific Underlying Stock, the Threshold Value, the Step Level, the Step Payment, the interest rate, the interest payment dates, and
certain risk factors. The term sheet will identify, if applicable, any additions or changes to the terms specified in this product supplement.
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The notes will be issued in denominations of whole units.
Unless
otherwise set forth in the applicable term sheet, each unit will have a principal amount of $10.
The term sheet may also set forth a minimum number of units that you must purchase.
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Unless otherwise specified in the applicable term sheet, the notes will not be listed on a securities exchange or quotation system.
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Merrill Lynch, Pierce, Fenner & Smith Incorporated (“
MLPF&S
”) and one or more of its affiliates may
act as our agents to offer the notes, and MLPF&S will act in a principal capacity in such role
.
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The notes are unsecured and are not savings accounts or insured deposits of a bank. The notes are
not insured by the Canada Deposit Insurance Corporation, the U.S. Federal Deposit Insurance Corporation (the “
FDIC
”) or any other Canadian or
U.S. governmental agency or instrumentality. Potential purchasers of the notes should consider the information in “Risk Factors” beginning on page PS-6 of this product supplement, page S-1 of the accompanying Series H prospectus
supplement, and page 1 of the accompanying prospectus.
You may lose all or a significant portion of your investment in the notes.
None of the Securities and Exchange Commission (the “
SEC
”), any state securities commission, or any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this product supplement,
the prospectus supplement, or the prospectus. Any representation to the contrary is a criminal offense.
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General:
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The notes are senior debt securities issued by Royal Bank of Canada, and are not guaranteed
or
insured by the Canada Deposit Insurance Corporation or the FDIC or secured by collateral. They rank equally with all of our other unsecured senior
debt from time to time outstanding
. All payments due on the notes, including any repayment of principal, are subject to our
credit risk.
The return on the notes will be based on the performance of an Underlying Stock, and there is no guaranteed
return of principal at maturity. Therefore, you may lose all or a significant portion of your investment if the value of the Underlying Stock decreases from the Starting Value to an Ending Value that is less than the Threshold
Value.
Each issue of the notes will mature on the date set forth in the applicable term sheet. We cannot redeem the
notes at any earlier date, except under the limited circumstances set forth below. We will make periodic interest payments on the notes at the fixed rate specified in the applicable term sheet.
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Interest Rate:
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The interest rate for each issuance of the notes will be specified in the applicable term sheet.
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Underlying
Stock:
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The
common
equity securities
of a company (the
“
Underlying Company
”)
represented either by
a class of equity securities registered under the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”)
,
or by American Depositary Receipts (“
ADRs
”) registered under the Exchange Act.
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Underlying
Stock
Performance:
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The performance of the Underlying Stock will be measured according to the percentage change of the Underlying
Stock from its Starting Value to its Ending Value.
Unless otherwise specified in the applicable term sheet:
The “
Starting Value
”
will be the price of the Underlying Stock on the date when the notes are priced for initial sale to the public (the “
pricing date
”), determined as set forth in the applicable term sheet.
The “
Threshold Value
”
will be a price of the Underlying Stock that equals a specified percentage (100% or less) of the Starting Value. The Threshold Value will be determined on the pricing date and set forth in the term sheet. If the Threshold Value is
equal to 100% of the Starting Value, you will be exposed to any decrease in the value of the Underlying Stock from the Starting Value to the Ending Value on a 1-to-1 basis, and you may lose all of your investment in the notes.
The “
Ending Value
”
will equal the Closing Market Price (as defined below) of the Underlying Stock on the valuation date multiplied by the Price Multiplier (as defined below).
If a Market Disruption Event (as defined below) occurs and is continuing on the
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valuation date, or if certain other events occur, the calculation agent will determine the Ending Value as set forth in the
section “Description of the Notes—The Starting Value and the Ending Value—Ending Value.”
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Price
Multiplier:
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Unless otherwise set forth in the applicable term sheet, the “
Price Multiplier
” for each Underlying Stock will be 1, and will be subject to adjustment for certain corporate events relating to an Underlying Stock described below under
“Description of the Notes—Anti-Dilution Adjustments.”
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Step Level:
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A price of the Underlying Stock that is a specified percentage (over 100% of the Starting Value, as set forth in
the applicable term sheet.
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Step Payment:
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A dollar amount that will be equal to a percentage of the principal amount. The Step Payment will be determined
on the pricing date and set forth in the applicable term sheet.
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Redemption
Amount at
Maturity:
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At maturity, you will receive a Redemption Amount that will equal the principal amount plus the Step Payment if
the Ending Value is greater than or equal to the Step Level. If the Ending Value is less than the Step Level, but is greater than or equal to the Threshold Value, then the Redemption Amount will equal the principal amount. If the
Ending Value is less than the Threshold Value, you will be subject to 1-to-1 downside exposure to the decrease of the Underlying Stock below the Threshold Value, and will receive a Redemption Amount that is less than the principal
amount. If the Threshold Value is equal to 100% of the Starting Value, the Redemption Amount could be zero.
All payments due on the notes, including any repayment of principal, are subject to our
credit risk as issuer of the notes.
The Redemption Amount, denominated in U.S. dollars, will be calculated as follows:
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Principal at
Risk:
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You may lose all or a significant portion of the principal amount of the notes. Further, if you sell your notes
prior to maturity, you may find that the market value per note is less than the price that you paid for the notes.
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Calculation
Agent:
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The calculation agent will make all determinations associated with the notes. Unless otherwise set forth in the
applicable term sheet, we will appoint MLPF&S or one of its affiliates to act as calculation agent for the notes. See the section entitled “Description of the Notes—Role of the Calculation Agent.”
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Agents:
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MLPF&S and one or more of its affiliates will act as our agents in connection with each offering of the
notes and will receive an underwriting discount based on the number of units of the notes sold. None of the agents is your fiduciary or advisor solely as a result of the making of any offering of the notes, and you should not rely
upon this product supplement, the term sheet, or the accompanying prospectus or prospectus supplement as investment advice or a recommendation to purchase the notes.
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Listing:
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Unless otherwise specified in the applicable term sheet, the notes will not be listed on a securities exchange
or quotation system.
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Value of the Underlying Stock.
We anticipate that the market
value of the notes prior to maturity generally will depend to a significant extent on the value of the Underlying Stock. In general, it is expected that the market value of the notes will decrease as the value of the Underlying Stock
decreases, and increase as the value of the Underlying Stock increases (up to the Step Level). However, as the value of the Underlying Stock increases or decreases, the market value of the notes is not expected to increase or
decrease at the same rate. If you sell your notes when the value of the Underlying Stock is less than, or not sufficiently above, the applicable Starting Value, then you may receive less than the principal amount of your notes.
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Volatility of the Underlying Stock.
Volatility is the term
used to describe the size and frequency of market fluctuations. Increases or decreases in the volatility of the Underlying Stock may have an adverse impact on the market value of the notes. Even if the value of the Underlying Stock
increases after the applicable pricing date, if you are
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Economic and Other Conditions Generally.
The general economic
conditions of the capital markets in the United States, as well as geopolitical conditions and other financial, political, regulatory, and judicial events and related uncertainties that affect stock markets generally, may adversely
affect the value of the Underlying Stock and the market value of the notes.
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Interest Rates.
We expect that
changes in interest rates will affect the market value of the notes. In general, if U.S. interest rates increase, we expect that the market value of the notes will decrease, and conversely, if U.S. interest rates decrease, we expect
that the market value of the notes will increase. In general, we expect that the longer the amount of time that remains until maturity, the more significant the impact of these changes will be on the value of the notes. The level of
interest rates also may affect the U.S. economy and any applicable market outside of the U.S., and, in turn, the value of the Underlying Stock
, and,
thus, the market value of the notes may be adversely affected. If the Underlying Stock is an ADR, the level of interest rates in the relevant foreign country may affect the economy of that foreign country and, in turn, the value of
the ADR, and, thus, the market value of the notes may be adversely affected
.
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Dividend Yields.
In general, if the cumulative dividend yield
on the Underlying Stock increases, we anticipate that the market value of the notes will decrease; conversely, if that dividend yield decreases, we anticipate that the market value of your notes will increase.
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Our Financial Condition and Creditworthiness.
Our perceived
creditworthiness, including any increases in our credit spreads and any actual or anticipated decreases in our credit ratings, may adversely affect the market value of the notes. In general, we expect the longer the amount of time
that remains until maturity, the more significant the impact will be on the value of the notes. However, a decrease in our credit spreads or an improvement in our credit ratings will not necessarily increase the market value of the
notes.
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Time to Maturity.
There may be a disparity between the market
value of the notes prior to maturity and their value at maturity. This disparity is often called a time “value,” “premium,” or “discount,” and reflects expectations concerning the value of the Underlying Stock prior to the maturity
date. As the time to maturity decreases, this disparity may decrease, such that the value of the notes will approach the expected Redemption Amount and the interest payment to be paid at maturity.
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Market Liquidity and Volatility.
The relevant foreign
securities markets may be less liquid and/or more volatile than U.S. or other securities markets and may be affected by market developments in different ways than U.S. or other securities markets.
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Political, Economic, and Other Factors.
The prices and
performance of securities of companies in foreign countries may be affected by political, economic, financial, and social factors in those regions. Direct or indirect government intervention to stabilize a particular securities
market and cross-shareholdings in companies in the relevant foreign markets may affect prices and the volume of trading in those markets. In addition, recent or future changes in government, economic, and fiscal policies in the
relevant jurisdictions, the possible imposition of, or changes in, currency exchange laws, or other laws or restrictions, and possible fluctuations in the rate of exchange between currencies, are factors that could adversely affect
the relevant securities markets. The relevant foreign economies may differ from the U.S. economy in economic factors such as growth of gross national product, rate of inflation, capital reinvestment, resources, and self-sufficiency.
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If the Ending Value is greater than or equal to the Step Level, then the Redemption Amount will equal:
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If the Ending Value is less than the Step Level but is greater than or equal to the Threshold Value, then the Redemption Amount will equal the principal amount.
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If the Ending Value is less than the Threshold Value, then the Redemption Amount will equal:
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if the Underlying Stock (or such other security) is listed or admitted to trading on a national securities exchange, the last reported sale price, regular way
(or, in the case of The Nasdaq Stock Market, the official closing price), of the principal trading session on that day on the principal U.S. securities exchange registered under the Exchange Act on which the Underlying Stock (or such
other security) is listed or admitted to trading;
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if the Underlying Stock (or such other security) is not listed or admitted to trading on any national securities exchange but is included in the OTC Bulletin
Board, the last reported sale price of the principal trading session on the OTC Bulletin Board on that day;
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if the Underlying Stock (or such other security) is issued by a foreign issuer and its closing price cannot be determined as set
forth in the two bullet points above, and the Underlying Stock (or such other security) is listed or admitted to trading on a non-U.S. securities exchange or market, the last reported sale price, regular way, of the principal trading
session on that day on the primary non-U.S. securities exchange or market on which the Underlying Stock (or such other security) is listed or admitted to trading
(converted to U.S. dollars using such exchange rate as the calculation agent, in its sole discretion, determines to be commercially reasonable)
; or
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if the Closing Market Price cannot be determined as set forth in the prior bullets, the mean, as determined by the calculation agent, of the bid prices for the
Underlying Stock (or such other security) obtained from as many dealers in that security (which may
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(A) |
the suspension of or material limitation of trading, in each case, for more than two consecutive hours of trading, or during the
one-half hour period preceding the close of trading, of the shares of the
Underlying Stock
(or the successor to the
Underlying Stock
) on the primary exchange where such shares trade, as determined by the calculation agent (without taking into account any extended or after-hours trading
session); or
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( B ) |
the suspension of or material limitation of trading, in each case, for more than two consecutive hours of trading, or during the
one-half hour period preceding the close of trading, on the primary exchange that trades options contracts or futures contracts related to the shares of
the
Underlying Stock
(or successor to the
Underlying Stock
) as determined by the calculation agent (without taking into account any extended
or after-hours trading session), in options contracts or futures contracts related to the shares of the
Underlying Stock
; or
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(C) |
the determination that the scheduled valuation date is not a trading day by reason of
an
extraordinary event, occurrence, declaration, or otherwise.
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(1) |
a limitation on the hours in a trading day and/or number of days of trading will not constitute a Market Disruption Event if it
results from an announced change in the regular business hours of the relevant exchange;
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(2) |
a decision to permanently discontinue trading in
the
shares of the Underlying Stock (or successor Underlying Stock) or
the
relevant futures or options contracts relating to such shares will
not constitute a Market Disruption Event;
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(3) |
a suspension in trading in a futures or options contract on
the
shares of
the
Underlying Stock (or successor
Underlying Stock
), by a major securities market by reason of (a) a price change violating limits set by that securities market,
(b) an imbalance of orders relating to those contracts, or (c) a disparity in bid and
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(4) |
subject to paragraph (
3
) above, a suspension
of or material limitation on trading on the relevant exchange will not include any time when that exchange is closed for trading under ordinary circumstances; and
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(5) |
for the purpose of clause (A) above, any limitations on trading during significant market fluctuations under NYSE Rule 80B, or any
applicable rule or regulation enacted or promulgated by the NYSE or any other self-regulatory organization or the SEC of similar scope as determined by the calculation agent, will be considered “material.”
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the prior Price Multiplier; and
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the number of shares that a holder of one share of the Underlying Stock before the effective date of the stock split or reverse
stock split would have owned immediately following the applicable effective date.
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the prior Price Multiplier; and
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the number of additional shares issued in the stock dividend with respect to one share of the Underlying Stock;
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the prior Price Multiplier; and
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a fraction, the numerator of which is the Closing Market Price per share of the Underlying Stock on the trading day preceding the ex-dividend date and the
denominator of which is the amount by which the Closing Market Price per share of the Underlying Stock on that preceding trading day exceeds the Extraordinary Dividend Amount.
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in the case of cash dividends or other distributions that constitute regular dividends, the amount per share of
the
Underlying Stock of that Extraordinary Dividend minus the amount per share of the immediately preceding
non-Extraordinary Dividend for that share; or
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in the case of cash dividends or other distributions that do not constitute regular dividends, the amount per share of the
Underlying Stock of that Extraordinary Dividend.
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the prior Price Multiplier; and
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the number of shares of the Underlying Stock that can be purchased with the cash value of those warrants or rights distributed on one share of the Underlying
Stock.
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(a)
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there occurs any reclassification or change of the Underlying Stock, including, without limitation, as a result of the issuance of
tracking stock by the Underlying Company;
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(b)
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the Underlying Company, or any surviving entity or subsequent surviving entity of the Underlying Company (a “
Successor Entity
”), has been subject to a merger, combination, or consolidation and is not the surviving entity;
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(c)
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any statutory exchange of securities of the Underlying Company or any Successor Entity with another corporation occurs, other than under
clause (b) above;
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(d)
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the Underlying Company is liquidated or is subject to a proceeding under any applicable bankruptcy, insolvency, or other similar law;
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(e)
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the Underlying Company issues to all of its shareholders securities of an issuer other than the Underlying Company, including equity
securities of an affiliate of the Underlying Company, other than in a transaction described in clauses (b), (c), or (d) above;
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(f)
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a tender or exchange offer or going-private transaction is consummated for all the outstanding shares of the Underlying Company;
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(g)
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there occurs any reclassification or change of the Underlying Stock that results in a transfer or an irrevocable commitment to transfer
all such outstanding shares of the Underlying Stock to another entity or person;
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(h)
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the Underlying Company or any Successor Entity is the surviving entity of a merger, combination, or consolidation, that results in the
outstanding Underlying Stock (other than Underlying Stock owned or controlled by the other party to such transaction) immediately prior to such event collectively representing less than 50% of the outstanding Underlying Stock
immediately following such event; or
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(i)
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the Underlying Company ceases to file the financial and other information with the SEC in accordance with Section 13(a) of the Exchange
Act (an event in clauses (a) through (i), a “
Reorganization Event
”),
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(A) |
holders of the Underlying ADR are not
eligible to participate in any of the events that would otherwise require anti-dilution adjustments as set forth above if the notes had been linked directly to the common shares of the Underlying Company represented by the
Underlying ADR; or
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(B) |
to the extent that the calculation agent
determines that the Underlying Company or the depositary for the ADRs has adjusted the number of common shares of the
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(i) |
is someone with whom we do not deal at arm’s length (within the meaning of the Income Tax Act (Canada)) at the time of making such payment;
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(ii) |
is subject to such taxes by reason of its being connected presently or formerly with Canada or any province or territory thereof otherwise than by
reason of the holder’s activity in connection with purchasing the notes, the holding of the notes or the receipt of payments thereunder;
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(iii) |
is, or does not deal at arm’s length with a person who is, a “
specified shareholder
” (within the meaning of subsection 18(5) of the Income Tax Act (Canada)) of Royal Bank of Canada (generally a person will be a “specified shareholder” for this purpose if that person,
either alone or together with persons with whom the person does not deal at arm’s length, owns 25% or more of (a) our voting shares, or (b) the fair market value of all of our issued and outstanding shares);
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(iv) |
presents such notes for payment (where presentation is required, such as if a note is issued in definitive form) more than 30 days after the relevant
date; for this purpose, the “relevant date” in relation to any payments on any note means:
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(a) |
the due date for payment thereof (whether at maturity or upon an earlier acceleration), or
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(b) |
if the full amount of the monies payable on such date has not been received by the trustee on or prior to such due date, the date on which the full
amount of such monies has been received and notice to that effect is given to holders of the notes in accordance with the senior indenture;
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(v) |
could lawfully avoid (but has not so avoided) such withholding or deduction by complying, or requiring that any third party comply with, any statutory
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(vi) |
is subject to deduction or withholding on account of any tax, assessment, or other governmental charge that is imposed or withheld by reason of the
application of Section 1471 through 1474 of the United States Internal Revenue Code of 1986, as amended (the “
Code
”) (or any
successor provisions), any regulation, pronouncement, or agreement thereunder, official interpretations thereof, or any law implementing an intergovernmental approach thereto, whether currently in effect or as published and amended
from time to time.
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(a) |
it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in
investment activity (within the meaning of section 21 of the United Kingdom's Financial Services and Markets Act 2000, as amended (the “
FSMA
”)) received by it in connection with the issue or sale of any of the notes in circumstances in which section 21(1) of the FSMA would not, if Royal Bank of Canada were not an authorized person, apply to Royal Bank
of Canada; and
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(b) |
it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the notes in, from or
otherwise involving the United Kingdom.
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