Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption granted from the requirement that the audited consolidated financial statements that are required to be included in an information circular in connection with a proposed reverse take-over be accompanied by an auditor's report that does not contain a reservation of opinion, as required by s. 4.2(1) of NI 41-101 General Prospectus Requirements and s. 3.2(a) of NI 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency -- exemption granted from the requirement that the comparatives for the December 31, 2008 audited financial statements contain an audit report that does not contain a reservation, as required by s. 4.1(2) of NI 51-102 Continuous Disclosure Obligations and s. 3.2(a) of NI 52-107 -- exemption granted from the requirement that Westaim include three financial years of consolidated income statements, statements of retained earnings and statements of cash flows for the reverse take-over and instead provide three calendar years of audited consolidated financial statements -- confidentiality granted for a limited period of time.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, s. 4.1(2).

National Instrument 51-102F5 Information Circular, s. 14.2.

National Instrument 41-101 General Prospectus Requirements, s. 4.2(1).

National Instrument 41-101F1 Information Required in a Prospectus, s. 32.2(1)(a) and 32.2(6)(a).

National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency, s. 3.2(a).

September 17, 2008

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA AND ONTARIO

(the Jurisdictions)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

THE WESTAIM CORPORATION (Westaim) AND

PLUMB-LINE INCOME TRUST

(Plumb-Line, and together with Westaim, the Filers)

 

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application (the Application) from the Filers for a decision under the securities legislation of the Jurisdictions (the Legislation) that:

(a) the requirement that financial statements that are required by securities legislation to be audited must be accompanied by an auditor's report that does not contain a reservation does not apply in respect of the Annual Plumb-Line Financial Statements (as defined herein) to be included in the information circular (the Information Circular) to be mailed by Westaim to the holders (the Westaim Shareholders) of Westaim's common shares (the Westaim Shares) in connection with a special meeting (the Westaim Special Meeting) of Westaim Shareholders at which the Westaim Shareholders will be asked to approve Westaim's proposed acquisition of the construction-related businesses of five private entities (collectively, the Target Companies), one of which is Plumb-Line (collectively, the Business Combination);

(b) the requirement that Westaim include annual financial statements of Plumb-Line in the Information Circular consisting of (i) an income statement, a statement of retained earnings, and a cash flow statement for each of the three most recently completed financial years ended more than 120 days before the date of the Information Circular, (ii) a balance sheet as at the end of the two most recently completed financial years described in paragraph (b)(i), and (iii) notes to the financial statements (provided that a transition year of less than nine months is deemed not to be a financial year for the purposes of the requirement to provide financial statements for the three most recently completed financial years), does not apply to the Information Circular;

(c) the requirement that financial statements that are required by securities legislation to be audited must be accompanied by an auditor's report that does not contain a reservation will not apply in respect of the audited consolidated December 31, 2007 comparative annual financial statements to be filed by the Resulting Issuer (as defined herein) for the year ended December 31, 2008; and

(d) the Application, all materials filed in support of the Application, and this decision document (collectively, the Confidential Materials) be held in confidence and not be made public until the earlier of: (i) the date on which Westaim and one or more of the Target Companies enter into a definitive agreement in respect of the proposed Business Combination and issue a press release relating thereto; (ii) the date that the Filers advise the Decision Makers that there is no longer any need for the Confidential Materials to remain confidential; and (iii) the date that is 90 days after the date of this decision document;

(collectively, the Exemptions Sought).

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

(a) the Alberta Securities Commission is the principal regulator for the Application;

(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon Territory, Northwest Territories and Nunavut; and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

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.

References herein to Resulting Issuer refer to Westaim following the completion of the Business Combination.

Representations

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

Westaim

1. Westaim is a corporation incorporated under the laws of the Province of Alberta on May 7, 1996. The principal office of Westaim is located in Calgary, Alberta.

2. Westaim is a holding company that holds 100% of the shares of iFire Technology Ltd. (a company formerly engaged in the development of flat panel television technology) and 74.5% of the shares of NUCRYST Pharmaceuticals Corp. (a public company engaged in the development of medical products that fight infection and inflammation).

3. Westaim is a reporting issuer or the equivalent under the legislation of each of the provinces and territories of Canada. To its knowledge, Westaim is not in default of securities legislation in any jurisdiction of Canada.

4. The Westaim Shares are listed on the Toronto Stock Exchange (the TSX).

5. Westaim's year end is December 31.

Plumb-Line

6. Plumb-Line is an open-end unincorporated investment trust established under the laws of the Province of Alberta on September 29, 2006. The principal office of Plumb-Line is located in Calgary, Alberta.

7. Plumb-Line indirectly holds (among other assets) 100% of the limited partnership units of Con-Forte Contracting Limited Partnership (Con-Forte LP).

8. Plumb-Line is privately held and is not a reporting issuer in any jurisdiction. To its knowledge, Plumb-Line is not in default of securities legislation in any jurisdiction of Canada.

9. Plumb-Line's year end is December 31.

Con-Forte LP

10. Con-Forte LP is a limited partnership established under the laws of the Province of Alberta on October 4, 2006. The principal office of Con-Forte LP is located in Calgary, Alberta.

11. Con-Forte LP is a contractor engaged in commercial formwork and residential cribbing for basements and foundations.

12. To the knowledge of Plumb-Line, Con-Forte LP is not in default of securities legislation in any jurisdiction of Canada.

13. The business of Con-Forte LP was previously conducted by Con-Forte Contracting Co. Ltd. (Con-Forte Co.). On October 1, 2006, the business of Con-Forte Co. was reorganized such that Con-Forte Co. ceased active business operations and Con-Forte LP commenced the operation of the business previously conducted by Con-Forte Co. Because Plumb-Line was created to continue the business of Con-Forte Co. through its subsidiary Con-Forte LP, under Canadian generally accepted accounting principles (Canadian GAAP) the consolidated financial statements of Plumb-Line have been prepared on a continuity of interests basis with Plumb-Line as the successor to Con-Forte Co.

14. Prior to ceasing active business operations, Con-Forte Co.'s year end was May 31. Con-Forte LP's year end is December 31.

The Proposed Business Combination

15. Subject to the satisfactory completion of due diligence and the negotiation of satisfactory terms, Westaim intends to enter into a definitive agreement pursuant to which the Business Combination of Westaim, Plumb-Line and the other Target Companies will be completed. Westaim will issue Westaim Shares as consideration for the acquisition of Plumb-Line.

16. Prior to the consummation of the Business Combination, Plumb-Line intends to dispose of certain assets, including all of the securities and/or assets of its wholly-owned subsidiary A&K Millwork Limited Partnership (A&K).

17. Westaim and Plumb-Line have each concluded that the Business Combination (if consummated) will constitute a transaction that Westaim will be required under Canadian GAAP to account for as a reverse takeover. Westaim will be the reverse takeover acquiree and Plumb-Line will be the reverse takeover acquirer. Westaim and Plumb-Line have each reviewed this position with their auditors, Deloitte & Touche LLP (D&T).

18. Following the expected completion of the Business Combination: (i) the primary business of the Resulting Issuer will be the construction businesses acquired from the Target Companies; (ii) the Resulting Issuer will continue to be a reporting issuer or the equivalent under the legislation of each of the provinces and territories of Canada; and (iii) the Westaim Shares will continue to be listed on the TSX.

The Westaim Special Meeting and the Information Circular

19. The Business Combination (if consummated) will constitute a "backdoor listing" pursuant to the rules of the TSX. The TSX rules therefore require that the Westaim Shareholders must approve the Business Combination at the Westaim Special Meeting to be called and held by Westaim.

20. In order to solicit proxies from registered holders of Westaim Shares in respect of the approval of the proposed Business Combination at the Westaim Special Meeting, Westaim's management must prepare the Information Circular in compliance with the requirements of Form 51-102F5 -- Information Circular (the Information Circular Form) and deliver it to the Westaim Shareholders in compliance with applicable corporate and securities laws.

21. Section 14.2 of the Information Circular Form requires that the Information Circular must contain the disclosure (including financial statements) prescribed under securities legislation and described in the form of prospectus that the entity that will result from the Business Combination and that the Westaim Shareholders will have an interest in after the Business Combination is complete would be eligible to use immediately prior to the sending and filing of the Information Circular for a distribution of securities. Therefore, the Information Circular will contain the disclosure prescribed by Form 41-101F1 Information Required in a Prospectus (the Prospectus Form) for the Resulting Issuer.

Financial Statement Disclosure for Plumb-Line Required by the Prospectus Form

22. Because Westaim's proposed acquisition of Plumb-Line is a proposed reverse takeover, Section 36.1 of the Prospectus Form requires Westaim to include, among other things, financial statement disclosure in respect of Plumb-Line (as the reverse takeover acquirer) in the Information Circular in accordance with Item 32 of the Prospectus Form.

23. Section 32.1(a) of the Prospectus Form provides that the financial statements of Plumb-Line required under Item 32 to be included in the Information Circular must include the financial statements of any predecessor entity that formed, or will form, the basis of the business of Plumb-Line (in this case, Con-Forte Co.), even though Con-Forte Co. is, or may have been, a different legal entity, if Plumb-Line has not existed for three years. Because Plumb-Line has not existed for three years, the financial statements of Con-Forte Co. (as the predecessor to the business of Plumb-Line) must be included in the Information Circular.

24. Section 32.2(1) of the Prospectus Form provides that Westaim must include annual financial statements of Plumb-Line in the Information Circular consisting of (a) an income statement, a statement of retained earnings, and a cash flow statement for each of the three most recently completed financial years ended more than 120 days before the date of the Information Circular, (b) a balance sheet as at the end of the two most recently completed financial years described in paragraph (a), and (c) notes to the financial statements.

25. Section 32.2(6) of the Prospectus Form provides that if financial statements of any predecessor entity, business or businesses acquired by Plumb-Line (in this case, Con-Forte Co.) are required to be disclosed under Section 32.2 of the Prospectus Form, then Westaim must include in the Information Circular: (a) income statements, statements of retained earnings, and cash flow statements for Con-Forte Co. for as many periods before the acquisition as may be necessary so that when these periods are added to the periods for which Plumb-Line's income statements, statements of retained earnings, and cash flow statements are included in the Information Circular, the results of Con-Forte Co., either separately or on a consolidated basis, total three years; and (b) balance sheets for Con-Forte Co. for as many periods before the acquisition as may be necessary so that when these periods are added to the periods for which Plumb-Line's balance sheets are included in the Information Circular, the financial position of Con-Forte Co., either separately or on a consolidated basis, total two years.

26. Section 32.2(4) of the Prospectus Form provides that if an issuer changed its financial year end during any of the financial years referred to in Section 32.2 and the transition year is less than nine months, the transition year is deemed not to be a financial year for the purposes of the requirement to provide financial statements for the number of financial years required by Section 32.2 of the Prospectus Form. Because pursuant to Section 32.1(a) of the Prospectus Form Plumb-Line and Con-Forte Co. are collectively considered the "issuer" for the purposes of the financial statement disclosure required by Section 32.2 of the Prospectus Form, the transition from Con-Forte Co.'s May 31 year end to Plumb-Line's December 31 year end results in the audited consolidated financial statements of Con-Forte Co. for the four month period ended September 30, 2006 being considered a transition year of the "issuer" for securities law purposes that is deemed not to be a financial year for the purposes of the requirement to provide financial statements for Plumb-Line for three financial years in accordance with Section 32.2(1) of the Prospectus Form. However, in accordance with Section 32.2(5) of the Prospectus Form, the audited consolidated financial statements of Con-Forte Co. for the four month period ended September 30, 2006 must be included in the Information Circular.

27. Section 32.3(1) of the Prospectus Form provides that Westaim must include comparative interim financial statements of Plumb-Line in the Information Circular for the most recent interim period ended subsequent to December 31, 2007 and more than 60 days before the date of the Information Circular. Section 32.3(2) of the Prospectus Form provides that the aforementioned interim financial statements must include: (a) a balance sheet as at the end of the interim period and a balance sheet as at the end of the immediately preceding financial year; (b) an income statement, a statement of retained earnings, and a cash flow statement, all for the year-to-date interim period, and comparative financial information for the corresponding interim period in the immediately preceding financial year; (c) for interim periods other than the first interim period in a current financial year, an income statement and a cash flow statement, for the three month period ending on the last day of the interim period and comparative financial information for the corresponding period in the preceding financial year; and (d) notes to the financial statements.

28. Section 4.2(1) of National Instrument 41-101 General Prospectus Requirements (NI 41-101) requires that any financial statements included in the Information Circular must be audited in accordance with National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107), unless an exception in Section 32.5 of the Prospectus Form applies. Section 32.5 of the Prospectus Form provides that the audit requirement in Section 4.2 of NI 41-101 does not apply to any interim financial statements required to be included in the Information Circular under Section 32.3 of the Prospectus Form. Section 3.2(a) of NI 52-107 requires that financial statements that are required by securities legislation to be audited must, among other things, be accompanied by an auditor's report that does not contain a reservation.

29. In accordance with Sections 36.1, 32.1(a), 32.2(1), 32.2(4), 32.2(5), 32.2(6) and 32.3 of the Prospectus Form, Westaim intends to include the following financial statements of Plumb-Line and Con-Forte Co. in the Information Circular:

(a) audited consolidated interim financial statements of Plumb-Line for the six month period ended June 30, 2008 and unaudited consolidated interim financial statements of Plumb-Line for the six month period ended June 30, 2007;

(b) audited consolidated financial statements of Plumb-Line for the initial 15 month year ended December 31, 2007;

(c) audited consolidated financial statements of Con-Forte Co. (as the predecessor to the business of Plumb-Line) for the four month period ended September 30, 2006; and

(d) audited consolidated financial statements of Con-Forte Co. (as the predecessor to the business of Plumb-Line) for the 12 month period ended May 31, 2006;

(collectively, the Audited Plumb-Line Financial Statements).

30. However, notwithstanding that the Audited Plumb-Line Financial Statements collectively cover a 37 month period, the Audited Plumb-Line Financial Statements do not satisfy the requirement of Section 32.2(1) of the Prospectus Form that Westaim include audited annual financial statements of Plumb-Line and Con-Forte Co. (as the predecessor to the business of Plumb-Line) in the Information Circular for each of the three most recently completed financial years because Section 32.2(4) of the Prospectus Form deems Con-Forte Co.'s four month period ended September 30, 2006 not to be a financial year for the purposes of satisfying this requirement.

31. D&T was appointed the auditors of Con-Forte LP during the financial year ended December 31, 2007 and was appointed the auditors of Plumb-Line during the financial year ended December 31, 2008. Con-Forte Co. did not appoint auditors prior to ceasing active business operations. D&T has been engaged to audit the Audited Plumb-Line Financial Statements. However, because D&T was not present at the counting of inventory at any time prior to the December 31, 2007 year end of Plumb-Line, the audit reports issued in respect of:

(a) the audited consolidated financial statements of Plumb-Line for the initial 15 month year ended December 31, 2007 will contain a reservation of opinion as to opening (but not closing) inventory;

(b) the audited consolidated financial statements of Con-Forte Co. (as the predecessor to the business of Plumb-Line) for the four month period ended September 30, 2006 will contain a reservation of opinion as to both opening and closing inventory; and

(c) the audited consolidated financial statements of Con-Forte Co. (as the predecessor to the business of Plumb-Line) for the 12 month period ended May 31, 2006 will contain a reservation of opinion as to both opening and closing inventory;

(collectively, the Annual Plumb-Line Financial Statements).

32. Consideration has been given as to whether audit opinions that do not contain a reservation of opinion could be obtained in respect of the Annual Plumb-Line Financial Statements, but it has been concluded that this is not possible given the significant passage of time since the relevant inventory counts occurred.

33. The Information Circular will include audited consolidated interim financial statements of Plumb-Line for the six month period ended June 30, 2008, on which D&T will provide an audit report that does not contain a reservation of opinion.

34. Other than the business conducted by A&K, which was acquired by Plumb-Line on April 1, 2007 and will be disposed of prior to the consummation of the Business Combination, the only business that was conducted by Plumb-Line and its subsidiaries and their predecessors during the calendar years ended 2005, 2006 and 2007 that generated revenue was the business formerly conducted by Con-Forte Co. and presently conducted by Con-Forte LP.

35. The nature of Con-Forte LP's business is such that it is not seasonal. There is a fairly consistent demand for the provision of commercial formwork and residential cribbing services for basements and foundations throughout the year. Although revenue may be impacted by severe weather conditions, these conditions can occur at various times of the year and are not limited to a specific season.

Financial Statement Disclosure of the Resulting Issuer for the Year Ended December 31, 2008

36. Section 4.1(1) of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) will require the Resulting Issuer to file annual financial statements in respect of the financial year ended December 31, 2008 that include: (a) an income statement, a statement of retained earnings, and a cash flow statement for (i) the most recently completed financial year (being the Resulting Issuer's year ended December 31, 2008), and (ii) the financial year immediately preceding the most recently completed financial year (being the Resulting Issuer's initial 15 month year ended December 31, 2007); (b) a balance sheet as at the end of each of the periods referred to in paragraph (a); and (c) notes to the financial statements.

37. Section 4.1(2) of NI 51-102 requires that annual financial statements filed under Section 4.1(1) of NI 51-102 must be audited. Section 3.2(a) of NI 52-107 requires that financial statements that are required by securities legislation to be audited must, among other things, be accompanied by an auditor's report that does not contain a reservation.

38. Therefore, the audited consolidated financial statements of the Resulting Issuer for the initial 15 month year ended December 31, 2007 that will form a part of the audited consolidated comparative annual financial statements to be filed by the Resulting Issuer for the year ended December 31, 2008 must be accompanied by an auditor's report that does not contain a reservation.

39. For the reasons described above in paragraphs 31 and 32, the audit report to be issued in respect of the audited consolidated financial statements of the Resulting Issuer for the initial 15 month year ended December 31, 2007 that will form a part of the audited consolidated comparative annual financial statements to be filed by the Resulting Issuer for the year ended December 31, 2008 will contain a reservation of opinion as to opening (but not closing) inventory.

Public Disclosure and Confidentiality

40. Neither Westaim nor any of the Target Companies is currently required to, or currently intends to, publicly disclose the potential Business Combination until a definitive agreement relating thereto has been executed (if ever). The disclosure of the Confidential Materials to the public prior to the execution of a definitive agreement and the issuance of a press release relating thereto could adversely impact the ability of the parties to negotiate a definitive agreement and conclude the Business Combination.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemptions Sought are granted, provided that: (i) the Audited Plumb-Line Financial Statements are included in the Information Circular; and (ii) the audited consolidated interim financial statements of Plumb-Line for the six month period ended June 30, 2008 to be included in the Information Circular are accompanied by an audit report that does not contain a reservation of opinion.

"Agnes Lau, CA"
Associate Director, Corporate Finance
Alberta Securities Commission