InnVest Operations Trust

Decision

Headnote

NP 11-203 -- Business Combination -- Reorganization of two related publicly traded entities with stapled units comprised of a proportionate amount of securities of each entity. The transaction is an exempt related party transaction for one entity and a non-exempt business combination for the other entity -- MI 61-101 requires minority approval and valuation in connection with a business combination and NI 51-102F5 requires prospectus level disclosure in certain circumstances. Relief granted to the filer from complying with the minority and valuation requirements of MI 61-101 provided certain conditions were met and from prospectus level disclosure requirement of NI 51-102F5.

Applicable Legislative Provisions

National Instrument 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.

National Instrument 51-102 Continuous Disclosure Obligations.

Multilateral Instrument 61-101 Protection of Minority Securityholders in Special Transactions.

January 18, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the "Principal Jurisdiction")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

INNVEST OPERATIONS TRUST

(the "Filer")

DECISION

Background

The securities regulatory authority or regulator in the Principal Jurisdiction (the "Principal Regulator") has received an application from the Filer for a decision under the securities legislation of the Principal Jurisdiction (the "Legislation") for the following relief (the "Exemption Sought"):

(a) pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101"), that the Filer be exempted from the requirements of sections 4.3 and 4.5 of MI 61-101 in connection with the 2012 Reorganization (as defined herein); and

(b) pursuant to section 13.1 of National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102"), that the Filer be exempted from the requirement to include the disclosure prescribed by section 14.2 of Form 51-102F5 Information Circular in the Circular (as defined herein).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the Principal Regulator for this application, and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in the Province Quebec in respect of relief under MI 61-101, and in each of the provinces and territories of Canada in respect of the relief under NI 51-102.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer's head office is located in Mississauga, Ontario.

2. Each of the Filer and InnVest Real Estate Investment Trust (the "REIT" and, collectively with the Filer, "InnVest") is a reporting issuer in each of the provinces and territories of Canada. Neither the Filer nor the REIT is in default of the securities legislation in any of those jurisdictions.

3. InnVest's principal business is the ownership and operation of 144 Canadian hotel properties. The REIT, through its subsidiaries, owns the hotels and leases them to subsidiaries of the Filer. The Filer, through its subsidiaries, holds all of the hotel operating assets, earns revenues from hotel customers and pays rent to the REIT. The Filer also holds a 50% interest in Choice Hotels Canada Inc., one of the largest franchisors of hotels in Canada, and earns revenues from franchising fees.

4. The authorized capital of the Filer consists of an unlimited number of voting trust units ("IOT Voting Units"), of which 1,421,364 were outstanding as of November 22, 2011, and an unlimited number of non-voting trust units ("IOT Non-Voting Units"), of which 93,538,022 were outstanding as of November 22, 2011. The authorized capital of the REIT consists of an unlimited number of trust units ("REIT Units"), of which 93,538,022 were outstanding as of November 22, 2011. The REIT Units and the IOT Non-Voting Units trade together on the Toronto Stock Exchange (the "TSX") under the symbol INN.UN as stapled units (the "Stapled Units"). The REIT Units and the IOT Non-Voting Units cannot, prior to an Event of Uncoupling (as defined in the declaration of trust governing the REIT) be issued, traded, redeemed or repurchased except as Stapled Units.

5. Each holder of IOT Non-Voting Units holds an identical number of REIT Units and has an identical proportionate interest in the REIT and the Filer.

6. The Filer is controlled by the REIT. All of the IOT Voting Units are currently held by a wholly-owned subsidiary of the REIT.

7. The REIT also has outstanding 6.00% Series B convertible debentures, 5.85% Series C convertible debentures, 6.75% Series D convertible debentures and 6.00% Series E Convertible Debentures (collectively, the "Pre-2011 Debentures") and the REIT and the Filer together have outstanding 5.75% stapled convertible debentures (the "Stapled Debentures"), all of which are listed and posted for trading on the TSX under the symbols "INN.DB.B", "INN.DB.C", "INN.DB.D", "INN.DB.E" and "INN.DB.F", respectively.

8. InnVest intends to implement a reorganization that would result in the merger of the Filer into the REIT, effective on or about June 30, 2012 (the "2012 Reorganization"). Following this merger, any persons who had previously held Stapled Units (the "Stapled Unitholders") or Stapled Debentures would hold only REIT Units or convertible debentures issued by the REIT, as the case may be.

9. The principal steps of the 2012 Reorganization are expected to include the following:

(a) the Filer transfers substantially all of its assets to the REIT in consideration for the assumption by the REIT of all of the Filer's liabilities and obligations and the issuance to the Filer of REIT Units;

(b) the REIT assumes the Filer's obligations with respect to the Filer's convertible debentures forming part of the Stapled Debentures in accordance with the provisions of the trust indenture governing those debentures, and the indenture governing the REIT's convertible debentures forming part of the Stapled Debentures is adjusted in accordance with its terms to provide that the Filer's debentures are consolidated into the REIT's debentures and such consolidated debentures are convertible only into REIT Units;

(c) the Filer repurchases all or substantially all of the IOT Voting Units and all of the IOT Non-Voting Units in exchange for the REIT Units received in paragraph (a), and distributes such REIT Units pro rata to its unitholders;

(d) the REIT cancels the REIT Units received by it from the Filer in exchange for the IOT Voting Units in paragraph (c);

(e) the outstanding REIT Units are consolidated so that each unitholder holds the same number of REIT Units as the number of Stapled Units held by it immediately prior to the effective time of the 2012 Reorganization; and

(f) the Filer is ultimately wound up and, immediately after the above steps, is a wholly-owned subsidiary of the REIT holding nominal assets.

10. At the conclusion of the 2012 Reorganization, the REIT Units will be listed and posted for trading on the TSX in substitution for the Stapled Units.

11. In order to effect the 2012 Reorganization, it will be necessary for the REIT to amend its declaration of trust to remove the provisions relating to the "stapling" of the REIT Units and IOT Non-Voting Units and to make certain other consequential amendments. The declaration of trust of the Filer would also be amended and restated so that it is replaced with a simplified declaration of trust more appropriate for a wholly-owned subsidiary of the REIT.

12. InnVest will only proceed with the 2012 Reorganization if it receives the affirmative vote of at least two-thirds of the votes of the unitholders of the Filer (including the holders of IOT Non-Voting Units voting separately as a class in accordance with the Filer's declaration of trust) and the unitholders of the REIT present in person or by proxy at a joint special meeting of the unitholders of the REIT and the Filer (the "Meeting"), which is expected to be held on or about February 23, 2012.

13. The 2012 Reorganization and the amendments to the declarations of trust of the REIT and the Filer will be described in a management information circular (the "Circular") delivered to the Stapled Unitholders in connection with the Meeting. The Circular will contain sufficient information to enable a reasonable Stapled Unitholder to form a reasoned judgment concerning the nature and effect of the 2012 Reorganization and will incorporate by reference all of the documents that the REIT and the Filer would be required to incorporate by reference in a short form prospectus, including:

(a) the current AIF of the REIT dated March 28, 2011, which includes disclosure required to be included in an annual information form in respect of both the REIT and the Filer;

(b) the audited consolidated financial statements of the REIT (which include the financial results of the Filer) for the financial years ended December 31, 2010 and 2009, the related management's discussion and analysis;

(c) the unaudited interim consolidated financial statements of the REIT (which include the financial results of the Filer) for the three and nine months ended September 30, 2011, together with the related management's discussion and analysis;

(d) the notices of reliance (including summary financial information) filed by the Filer concurrently with the filing of the financial statements of the REIT described in paragraphs (b) and (c), filed pursuant to an undertaking of InnVest to the OSC;

(e) the content of any news release or other public communication made by the REIT or the Filer containing historical financial information about one or both of them for a financial period more recent than the period for which financial statements are required under paragraphs (b) and (c), if such news release or public communication is disseminated prior to the filing of the Circular;

(f) all material change reports, other than any confidential material change reports, of the REIT or the Filer (if any) filed after December 31, 2010;

(g) any business acquisition report filed by the REIT or the Filer under Part 8 of NI 51-102 for acquisitions completed since January 1, 2010, unless:

(i) the business acquisition report is incorporated by reference in an AIF that is itself incorporated by reference in the Circular; or

(ii) at least nine months of the acquired business or related businesses operations have been incorporated into annual financial statements that are incorporated by reference in the Circular;

(h) all information circulars filed by the REIT or the Filer since January 1, 2010, other than any information circular prepared in connection with an annual general meeting of either the REIT or the Filer if it has filed and incorporated by reference in the Circular an information circular for a subsequent annual general meeting;

(i) any other disclosure document which the REIT or the Filer has filed pursuant to an undertaking to a provincial and territorial securities regulatory authority since January 1, 2010; and

(j) any other disclosure document of the type listed in subparagraphs (a) through (h), above, that the REIT or the Filer has filed pursuant to an exemption from any requirement under securities legislation since January 1, 2010.

14. The 2012 Reorganization will be a "related party transaction" for the REIT, within the meaning of MI 61-101. The REIT will be exempt from the requirements for enhanced disclosure, formal valuation and minority approval (collectively, the "Valuation and Approval Requirements") in Part 5 of MI 61-101 because:

(a) if there are no 5% holders of Stapled Units at the time the 2012 Reorganization is agreed to, the 2012 Reorganization will be a "downstream transaction" (as defined in MI 61-101) for the REIT; and

(b) if there are one or more 5% holders of Stapled Units at the time the 2012 Reorganization is agreed to, the exemption from the Valuation and Approval Requirements in section 5.5(a) of MI 61-101 would apply because the fair market value of the Filer's assets acquired by the REIT are expected to be less than 25% of the market capitalization of the REIT.

15. As of the date of the application for this decision, two of the REIT's trustees exercised control or direction over approximately 9.0% of the Stapled Units. In addition, on December 9, 2011, RBC Global Asset Management Inc. filed a report under Part 4 of National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues indicating that it had discretionary trading authority over client accounts holding approximately 8.61% of the Stapled Units.

16. The 2012 Reorganization will be a "business combination" for the Filer within the meaning of MI 61-101 because the equity interests of a unitholder of the Filer may be terminated without its consent (in exchange for REIT Units) and because the Filer is not a control person of the REIT. Accordingly, the Filer is subject to the Valuation and Approval Requirements in Part 4 of MI 61-101 and will not qualify for any of the statutory exemptions. In addition, pursuant to Part 14.2 of Form 51-102F5, the Filer would, absent the Exemption Sought being granted, be required to include prospectus-level disclosure for the REIT in the Circular because REIT Units will be distributed to unitholders of the Filer as part of the 2012 Reorganization.

17. In determining minority approval for the 2012 Reorganization, unless the Exemption Sought is granted, section 8.1 of MI 61-101 would require the Filer to exclude the votes attached to IOT Non-Voting Units that are beneficially owned or over which control or direction is exercised by (a) the Filer, (b) an interested party, (c) a related party of an interested party (unless the related party meets that description solely in its capacity as a director or senior officer of one or more persons that are neither interested parties nor issuer insiders of the issuer), or (d) a joint actor with a person described in (b) and (c). The REIT is an interested party since it will acquire the business of IOT. Trustees and officers of the REIT are related parties of the REIT and, accordingly, unless the Exemption Sought is granted, their votes would be required to be excluded in determining whether the requisite approval is obtained from the holders of the IOT Non-Voting Units by virtue of clause (c), above.

18. Despite the fact that the 2012 Reorganization is an internal reorganization between entities that are under common control, the "downstream transaction" exception from the definition of "business combination" in MI 61-101 is not available to the Filer due to the unique Stapled Unit structure of InnVest, and no other statutory exemptions apply to the Filer for the minority approval requirements of MI 61-101.

19. The IOT Non-Voting Units held by trustees and officers of the REIT will be treated identically to IOT Non-Voting Units held by the public in the 2012 Reorganization, and none of the Stapled Unitholders (including the trustees and officers of the REIT) will receive a collateral benefit as a result of the 2012 Reorganization.

20. As a result of InnVest's Stapled Unit structure, the holders of the IOT Non-Voting Units already own the type of securities (REIT Units) that they will receive as a result of the 2012 Reorganization. In addition, the economic interests represented by the REIT Units following the 2012 Reorganization will be identical to the economic interests represented by the Stapled Units currently held by such holders. Therefore, the 2012 Reorganization will have no economic effect on the Stapled Unitholders, other than the indirect benefits of the 2012 Reorganization due to the adjustments to the tax treatment of InnVest which will be disclosed in the Circular.

Decision

The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.

The decision of the Principal Regulator under the Legislation is that the Exemption Sought is granted, provided that the conditions of subsections (e)(ii) and (e)(iii) of the definition of "business combination" in section 1.1 of MI 61-101 are met.

"Naizam Kanji"
Deputy Director, Corporate Finance
Ontario Securities Commission