Minister of Energy (Ontario) et al.

Order

Ontario-only exemptive relief from the prospectus requirement in section 53 of the Securities Act (Ontario) (the Act) for the distributions of: (i) common shares of Hydro One Limited (Hydro One) by the Province to OFN Power Holdings LP (the Purchaser), an entity wholly-owned and controlled by Ontario First Nations Sovereign Wealth LP (the Master LP), (ii) partnership interests in the Master LP to Participating First Nations (or their Permitted Holders), and (iii) common shares of OFN Asset Management GP Corp., the general partner of the Master LP (the Master LP GP), to Participating First Nations (or their Permitted Holders) – Filers and Participating First Nations are all in Ontario – purchase price for the common shares of Hydro One to be financed by a loan by the Province (the share purchase and loan, together, are the Proposed Transactions), as well as a cash contribution from the Province – parties to the Proposed Transactions have created an ownership structure through which Participating First Nations will indirectly participate in the investment in the Common Shares to be acquired by the Purchaser from the Province and in the cash contribution to be made by the Province – Neither the Purchaser nor the Participating First Nations technically qualify as an "accredited investor" as defined in s. 73.3(1) of the Act or in NI 45-106 Prospectus Exemptions (NI 45-106) – But for the timing of cash contribution from the Province, the Master LP would otherwise qualify under paragraph (m) of the definition of “accredited investor” in section 1.1 of NI 45-106 immediately after the closing of the Proposed Transactions – Participating First Nations may be viewed as akin to municipal government bodies for purposes of paragraph (f) of the definition of “accredited investor” in section 73.3(1) of the Act – Participating First Nations will not be required to make any cash investment in connection with the Proposed Transactions other than a nominal initial subscription amount and property and assets of the Participating First Nations will not be subject to any encumbrance or claim in connection with the Proposed Transactions – Ontario-only exemptive relief granted, subject to conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, ss. 1(1), 53(1), 74(1).
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 45-106 Prospectus Exemptions, s. 1.1.


IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF
HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO,
AS REPRESENTED BY
THE MINISTER OF ENERGY,
OFN ASSET MANAGEMENT GP CORP., and
ONTARIO FIRST NATIONS SOVEREIGN WEALTH LP
(collectively, the “Filers”)

ORDER

The Ontario Securities Commission (the “Commission”) has received an application from the Filers for an order pursuant to section 74(1) of the Securities Act (Ontario) (the “Act”) that:

(i)            the distribution of partnership interests in Ontario First Nations Sovereign Wealth LP (the “Master LP”) to Participating First Nations (as defined below) or their Permitted Holders (as defined below);

(ii)           the distribution of common shares of OFN Asset Management GP Corp., the general partner of the Master LP (the “Master LP GP”), to Participating First Nations or their Permitted Holders; and

(iii)          the distribution of common shares of Hydro One Limited (“Hydro One”) by the Province to OFN Power Holdings LP (the “Purchaser”), an entity indirectly wholly-owned and controlled by the Master LP;

are not subject to the prospectus requirements contained in section 53 of the Act (“Requested Relief”).

INTERPRETATION

In this Order, the following defined terms used herein have the following meanings:

(a)           “CCE” means the Chiefs Committee on Energy;

(b)           “COO” means the Chiefs of Ontario;

(c)           “Electricity Act” means the Electricity Act, 1998 (Ontario);

(d)           “Hydro One Common Shares” means common shares in the capital of Hydro One;

(e)           “Minister of Energy” means the Minister of Energy in his or her capacity as a holder of securities of Hydro One on behalf of the Province under the Electricity Act or such other member of the Executive Council as may be assigned as a holder of securities of Hydro One on behalf of the Province from time to time;

(f)            “OBCA” means the Business Corporations Act (Ontario); and

(g)           “Province” means Her Majesty the Queen in Right of Ontario.

REPRESENTATIONS

The Order is based on the following facts represented by the Province in respect of paragraphs 13 to 18 and 20 to 24 and in respect of paragraphs 1 to 12 and 18 to 32, by the Master GP on behalf of itself, the Master LP, the Purchaser and the Participating First Nations.

The Parties

Ontario First Nations

1.             There are 133 First Nations communities located in Ontario (“First Nations”) that are represented by COO.

2.             The purpose of COO is to enable the political leadership of the First Nations people to discuss and to decide on regional, provincial and national priorities affecting First Nations people in Ontario and to provide a unified voice on relevant issues. COO is administered through the Indian Associations Co-Ordinating Committee of Ontario Inc. (the “Secretariat”).

3.             The CCE was established by COO at the request of the Chiefs-in-Assembly to oversee the nego-tiation of the Proposed Transactions (as defined below) and is comprised of eight Chiefs and various First Nations technical advisors.

4.             COO has coordinated the establishment of a number of entities to facilitate the participation of First Nations in the Proposed Transactions (as defined below), none of which currently carry on any business or other activities. These entities include:

(a)           the Master LP, a holding entity in which Participating First Nations (as defined below) will directly hold limited partnership interests;

(b)           the Master LP GP, the general partner of the Master LP, in which Participating First Nations (as defined below) will directly hold common shares.

5.             The Master LP, in turn, will have two principal subsidiary entities established to hold assets in connection with the following transactions (collectively, the “Proposed Transactions”):

(a)           OFN Capital Wealth LP (the “Investment LP”) will receive a cash contribution of up to $45 million from the Province, to provide meaningful opportunities for collective wealth creation and to advance economic development initiatives (the “Cash Contribution”); and

(b)           the Purchaser will purchase up to 14,875,000 Hydro One Common Shares from the Province, with the purchase price funded entirely by drawings under the Loan Agreement (as defined below).

6.             The Master LP will also directly own all of the common shares of the general partners of the Investment LP and the Purchaser, respectively.

7.             The Master LP, the Master LP GP and these subsidiary entities were established or incorporated, as applicable, under the laws of Ontario on June 22, 2017. The head office of each of these entities is located at 236 Frontenac Street, Batchewana First Nation, Ontario.

8.             Prior to implementation of the Proposed Transactions, all of the common shares of the Master LP GP and all of the limited partnership interests in the Master LP are owned by the Secretariat.

9.             The Proposed Transactions will only proceed if a minimum of 80% of the 133 First Nations in Ontario confirm, prior to the end of 2017, their intention to participate and acquire limited partnership interests in the Master LP and common shares of the Master LP GP. Following closing of the Proposed Transactions, a First Nation that subsequently elects to participate and that was unable to do so beforehand due to extraordinary circumstances, as well as newly recognized First Nations that meet certain requirements, may be issued limited partnership interests in the Master LP and common shares of the Master LP GP (all of such First Nations described in this paragraph 9 being collectively referred to as the “Participating First Nations”).

10.          Prior to the closing of the Proposed Transactions, the Limited Partnership Agreement governing the Master LP will be amended and restated to: (i) enable Participating First Nations to subscribe for limited partnership interests in the Master LP; and (ii) the limited partnership interest of the Secretariat in the Master LP will be redeemed and cancelled. Equity interests of the Participating First Nations in the Master LP will be based upon the equity allocation formula agreed to by Participating First Nations, which is expected to be calculated based on a combination of a base factor, a population size factor and a remoteness factor. Each Participating First Nation will be entitled to one vote on any matter that limited partners of the Master LP are entitled to vote on.

11.          In addition, immediately prior to the closing of the Proposed Transactions, each Participating First Nation will subscribe for one common share of the Master LP GP and the shares of the Master LP GP held by the Secretariat will be purchased for cancellation by the Master LP GP.

12.          This ownership structure has been created to allow Participating First Nations to indirectly participate in the benefits of the Cash Contribution held by Investment LP, and in the investment in the Hydro One Common Shares to be acquired by the Purchaser. The Cash Contribution and the Hydro One Common Shares will be held in separate entities to support and segregate the security interest over the shares and the limited recourse nature of the related loan, such that other assets of the Master LP and the other entities in the structure will not be at risk.

The Province and the Hydro One Investment

13.          The Minister of Energy is the designated representative of the Province and the registered shareholder in respect of the Province’s holdings of Hydro One Common Shares.

14.          Hydro One was incorporated on August 31, 2015 under the OBCA as part of a reorganization intended to facilitate the sale by the Minister of Energy of a majority ownership interest in Hydro One. The head office of Hydro One is located in Toronto, Ontario.

15.          In April 2015, the Province announced its intention to broaden the ownership of Hydro One. At that time, the Province publicly communicated its intention to reduce its stake over time, until it holds approximately 40% of the Hydro One Common Shares.

16.          On November 5, 2015, Hydro One completed an initial public offering (the “IPO”), by way of secondary offering by the Minister of Energy, of Hydro One Common Shares. Concurrently with the closing of the IPO, the Minister of Energy also sold Hydro One Common Shares to two trusts established for the benefit of the Power Workers’ Union and to two trusts established for the benefit of The Society of Energy Professionals.

17.          Following additional secondary offerings by the Province, the Minister of Energy currently directly owns approximately 49.9% of the issued and outstanding Hydro One Common Shares. The Province has announced that it has completed its initiative to broaden the ownership of Hydro One and that it does not anticipate making any further offerings of Hydro One Common Shares, other than sales for the collective benefit of Indigenous communities (including the Proposed Transac-tions).

The Proposed Transactions

18.          Prior to the IPO, COO expressed to the Province the interest of the First Nations in owning a portion of Hydro One. Following this expression of interest, the Province entered into discussions regarding potential equity participation in Hydro One by the First Nations. An agreement-in-principle with respect to the Proposed Trans-actions was announced by the Province and COO on July 12, 2016.

19.          On October 27, 2015 and June 29, 2016, the Chiefs in Assembly passed resolutions authorizing the CCE to negotiate and formalize definitive agreements with the Province on behalf of First Nations, and approved the agreement-in-principle reached through negotiation between the CCE and the Province. On May 3, 2017, the Chiefs-in-Assembly passed resolutions approving the manner in which interests in the Master LP and the Master LP GP would be allocated among the various Participating First Nations and related governance matters.

20.          On June 30, 2017, Her Majesty the Queen in Right of Ontario, as represented by the Minister of Energy, entered into a share purchase and contribution agreement (the “Purchase Agree-ment”) with the Purchaser, the Master LP and the Investment LP, which, together with the Loan Agreement, are the definitive agreements relating to the Proposed Transactions.

21.          Pursuant to the Purchase Agreement, if the closing conditions are satisfied, the Province will sell to the Purchaser, on December 29, 2017 or on such other date to be agreed by the parties, up to 14,875,000 Hydro One Common Shares (subject to reduction and proration based on the number of Participating First Nations) at a purchase price of $18.00 per Hydro One Common Share (representing a 22.5% discount to the closing trading price of the Hydro One Common Shares of $23.23 at the date of the Purchase Agreement). In addition, the Province will make the Cash Contribution of up to $45 million (subject to reduction and proration based on the number of Participating First Nations) to the Investment LP.

22.          The Purchaser will fund the purchase price for the Hydro One Common Shares from an advance under a term loan agreement dated June 30, 2017, among Her Majesty the Queen in Right of Ontario, as represented by the Minister of Finance, the Purchaser, the Master LP and the Investment LP, and their respective general partners (the “Loan Agreement”). No portion of the purchase price will be paid directly or indirectly by the Participating First Nations. The Loan Agreement provides for a 25-year term loan of up to approximately $268 million, depending on the level of First Nations participation. The interest rate for the loan will be equal to the Province’s borrowing rate, plus 15 basis points.

23.          Under the Loan Agreement, there is no mandatory principal repayment prior to maturity, absent a default. Quarterly interest payments on the loan will be paid with dividends on the Hydro One Common Shares. If dividends are insufficient to pay any interest payment, the loan interest shortfall can be deferred and paid at a later date.

24.          The Hydro One Common Shares acquired by the Purchaser will be pledged to the Province as security for the loan; however, once the market value to loan ratio of the Hydro One Common Shares held by the Purchaser reaches 150%, excess Hydro One Common Shares may be released from the security arrangements. The loan is made on a non-recourse basis, such that at maturity, any amounts outstanding to the Province may only be satisfied from the remaining pledged Hydro One Common Shares or other assets of the Purchaser (and no claim can be made against the other entities in the structure, or any Participating First Nations).

25.          Participation in the Proposed Transactions by First Nations is voluntary. Each First Nation may decide, having regard to its own circumstances, whether or not to acquire a limited partnership interest in the Master LP and common shares of the Master LP GP.

26.          Participating First Nations may not dispose of any interest in the Master LP or the Master LP GP for a period of: (i) five years following the closing date of the Proposed Transactions (the “Closing Date”); and (ii) thereafter, until the date that all obligations are discharged under the loan (the “Loan Termination Date”), only to another Participating First Nation. Notwithstanding the foregoing, Participating First Nations will be able to dispose of their interest in the Master LP and the Master LP GP at any time to a “Permitted Holder”, defined as:

(a)           a corporation, all of the voting securities of which are legally and beneficially owned directly by the relevant Partici-pating First Nation;

(b)           a partnership, trust, syndicate or other entity, in which the relevant Participating First Nation has actual and sole power or authority to manage and direct the affairs of the entity and legally and beneficially owns all of the beneficial interests in such entity; or

(c)           any individual, over which the relevant Participating First Nation has actual and sole power and authority to direct the individual in respect of the equity and voting interests of the Participating First Nation in the Master LP or in the Master LP GP that are held by the individual,;

and, in each case, provided that the ownership is not subject to, or in any way affected by, rights in favour of a third party, subject to limited permitted encumbrances.

27.          The parties to the Proposed Transactions cannot rely on any available prospectus exemptions in the Act or in National Instrument 45-106 Prospectus Exemptions (NI 45-106) to distribute: (i) partnership interests in Master LP to the various Participating First Nations or their Permitted Holders, (ii) common shares of Master LP GP to the various Participating First Nations or their Permitted Holders; and (iii) Hydro One Common Shares to the Purchaser, as currently con-templated under the Proposed Transactions. Accordingly, the Requested Relief is needed to complete the Proposed Transactions.

28.          The structure of the Proposed Transactions, including the terms of the Loan Agreement, permit the Participating First Nations to benefit from any potential upside in their investment in Hydro One Common Shares, with no downside financial risk. Participation in the Proposed Transactions by First Nations is entirely voluntary. No Participating First Nation will be required to make other than a nominal ($2) capital commitment in relation to its participation in the Proposed Transactions, and the property and assets of the Participating First Nations (and any individual members of such First Nations) will not be subject to any encumbrance or claim in connection with the Proposed Transactions.

29.          But for the timing of the Cash Contribution from the Province, the Master LP and Master LP GP would otherwise qualify under paragraph (m) of the definition of “accredited investor” in section 1.1 of NI 45-106 immediately after the closing of the Proposed Transactions.

30.          The Participating First Nations are all recognized, or are pending recognition, by certain federal authorities, and in all cases perform governmental functions analogous to municipalities and public boards, in relation to their communities and members served, such as providing governance in a particular area and holding elections of community representatives. Paragraph (f) of the definition of “accredited investor” in section 73.3(1) of the Act includes “a municipality, public board or commission in Canada …”.

31.          Hydro One is an established reporting issuer with a significant market following and extensive public disclosure record. Further, in their assessment and negotiation of the Proposed Transactions, COO and the CCE have received and continue to receive ongoing professional advice, including legal advice from Dickinson Wright LLP and financial advice from COO’s financial advisor, Crosbie & Company Inc. (“Crosbie”), which is registered as an exempt market dealer under the Act.

32.          The Participating First Nations have been provided with information to assess the Proposed Transactions and related structuring considera-tions. Crosbie conducted due diligence on Hydro One, which included a detailed review of Hydro One’s public disclosure, the data room material provided to the underwriters for the IPO, and direct discussions with Hydro One senior manage-ment concerning the business, operations and prospects of Hydro One. Since the IPO, all First Nations have been invited to participate in a number of Hydro One forums and webinars to receive information regarding the Proposed Transactions and to discuss their interest in par-ticipating in the Proposed Transactions, including with their professional advisors. However, none of the Province, the Master LP or the Master LP GP have prepared or provided any offering memoran-dum or similar disclosure document with respect to the sale of the Hydro One Common Shares or for the distributions of interests in Master LP and Master LP GP to Participating First Nations for purposes of the Proposed Transactions.

ORDER

The Commission is satisfied that the Order meets the test set out in the Act for the Commission to make the Order.

The Order of the Commission under the Act is that the Requested Relief is granted provided that:

1.             the first trade in securities distributed in reliance on this order (other than a trade in securities of the Master LP or the Master LP GP to a Participating First Nation or its Permitted Holder) will be deemed to be a distribution that is sub-ject to section 2.5 of National Instrument 45-102 Resale of Securities;

2.             with the exception of dispositions to Permitted Holders, Participating First Nations and their Permitted Holders are not permitted to dispose of their interests in the Master LP or Master LP GP until after the fifth anniversary of the Closing Date;

3.             Participating First Nations and their Permitted Holders may, following the fifth anniversary of the Closing Date until the Loan Termination Date, dispose of their interests in the Master LP and the Master LP GP only to another Participating First Nation or its Permitted Holder; and

4.             neither the Purchaser nor the Partici-pating First Nations will use section 4.7 of Multilateral Instrument 11-102 Passport System to extend the Request-ed Relief to other provinces and territories of Canada.

DATED at Toronto, Ontario this 19th day of December, 2017.

“Tim Moseley”
Vice-Chair
Ontario Securities Commission

“Grant Vingoe”
Vice-Chair
Ontario Securities Commission