Securities Law & Instruments

Headnote

Application for relief from the registration and prospectus requirements -- Applicant operates as a federated agricultural co-operative, primarily in Illinois, Wisconsin, Iowa and Ontario -- Applicant's business includes operations in agronomy, seed, energy, grain, retail supplies and facility planning and supply -- Applicant proposes to make qualifying Farmers members of the Applicant in order to build stronger commercial relationships and related goodwill between the Applicant and the Farmers, and to make Farmers eligible for patronage distributions -- In order to qualify as a member of the Applicant under its constating documents, eligible Farmers must be an agricultural producer, sign a membership agreement and hold a common share for a nominal amount upon entering into a membership agreement -- The Applicant will also issue one or more shares of Class D Preferred Stock to eligible Farmers for purposes of the patronage provisions of the Income Tax Act -- Farmers not investors in a conventional sense and share issuance not a financing -- Relief granted.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1).

April 28, 2009

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S. 5, AS AMENDED

(THE "ACT")

AND

IN THE MATTER OF

GROWMARK, INC.

 

ORDER

(Subsection 74(1))

WHEREAS GROWMARK, Inc. (the "Applicant") has filed an application (the "Application") with the Ontario Securities Commission (the "Commission") for an order pursuant to subsection 74(1) of the Securities Act (Ontario) (the "Act") that the following transactions shall not be subject to the registration and prospectus requirements arising pursuant to sections 25 and 53 of the Act:

(a) the issuance by the Applicant to qualifying individual farmers resident in Ontario ("Farmers") of GROWMARK Membership Interests (as defined below) and shares of Class D Stock (as defined below); and

(b) subsequent patronage distributions by the Applicant to Farmers of shares of Class D Stock issued in satisfaction of patronage distributions which may be made from time to time by the Applicant.

AND WHEREAS the Commission may, pursuant to subsection 74(1) of the Act, rule that any trade, intended trade, security, person or company is not subject to section 25 or 53 of the Act (the "Registration and Prospectus Requirements") where it is satisfied that to do so would not be prejudicial to the public interest;

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON it being represented by the Applicant to the Commission that:

1. The Applicant was incorporated in 1962 under the laws of Delaware under the name FS Services Inc. In 1980, its name was changed to GROWMARK, Inc. The Applicant operates on a co-operative basis, carrying on business as a federated agricultural co-operative, primarily in Illinois, Wisconsin, Iowa and Ontario. The Applicant's business includes operations in agronomy, seed, energy, grain, retail supplies and facility planning and supply.

2. The Applicant is not a reporting issuer in the Province of Ontario or in any other province or territory of Canada, and has no present intention of becoming a reporting issuer in Ontario. The Applicant files federal and provincial tax returns in Canada and is subject to income tax under the Income Tax Act (Canada) (the "ITA") on its taxable income earned in Canada (and under the corresponding provisions of applicable provincial income tax statutes).

3. Currently, all of the Applicant's Ontario members are corporations governed by the Co-operative Corporations Act (Ontario) ("Corporate Members"). Such Corporate Members are eligible to receive annual distributions ("Patronage Distributions") on the basis of the business they conduct with the Applicant during the year (i.e., purchasing or selling products or services). The amount of any such Patronage Distributions is equal to the net earnings of the Applicant for the year, after setting aside sufficient funds to pay any preferred share dividends and such reasonable reserves and surplus funds as the board of directors of the Applicant determines to be necessary for its business. As described in further detail below, under the ITA, subject to certain limitations, the Applicant is entitled to deduct in computing its taxable income earned in Canada for a taxation year the total of all payments made by it pursuant to allocations in proportion to patronage to its customers for the year.

4. During the period between January 1, 1995 and December 31, 2008, the Applicant made Patronage Distributions to the Corporate Members (including their respective predecessor corporations) totalling approximately US$35.4 million.

5. The Corporate Members also have members (holders of membership shares of the Corporate Members) who are also generally eligible to receive patronage distributions from the Corporate Members on the basis of the business they conduct with the Corporate Members (if and when declared by the board of directors of the Corporate Members).

6. On May 27, 2008, Simcoe District Co-operative Services ("Simcoe"), then a Corporate Member of the Applicant, filed an assignment in bankruptcy under the Bankruptcy and Insolvency Act (Canada). Simcoe was subsequently liquidated and is no longer a Corporate Member or entitled to receive Patronage Distributions.

7. On January 23, 2009, RSM Richter Inc. was appointed interim receiver and receiver of the undertakings, properties and assets of Norfolk Co-operative Company, Limited ("Norfolk"). Norfolk is in the process of being liquidated and is no longer a Corporate Member or entitled to receive Patronage Distributions.

8. On March 26, 2009, the Applicant completed transactions with two other financial distressed Corporate Members, Inland Co-operative Inc. ("Inland") and Waterloo-Oxford Co-operative Inc. ("Waterloo-Oxford"), resulting in the sale by such corporations of substantially all of their respective assets to the Applicant for a purchase price that allows each of Inland and Waterloo-Oxford to repay all of their respective debt and distribute a certain amount of equity to their respective members. As of March 26, 2009, each of Inland and Waterloo-Oxford also ceased to be Corporate Members entitled to receive Patronage Distributions. Inland and Waterloo-Oxford is each in the process of being wound-down and dissolved.

9. During the period between January 1, 1995 and December 31, 2008, the Applicant made Patronage Distributions to Inland, Waterloo-Oxford, Simcoe and Norfolk (and their respective predecessor corporations) totalling approximately US$5.1 million.

10. In Ontario, the Applicant is currently engaged in the grain business through:

(a) Great Lakes Grain Inc. ("GLG Inc."), a corporation governed by the Ontario Business Corporations Act, in respect of which the Applicant holds (directly and indirectly) an 80% interest and AGRIS Co-operative Ltd., a corporation governed by the Co-operatives Act (Ontario) ("AGRIS"), holds a 20% interest; and

(b) FS Partners, a general partnership registered under laws of Ontario, in respect of which the Applicant indirectly through two wholly-owned subsidiaries holds a 100% interest in the profits or losses of the partnership.

11. In transactions scheduled to be completed on May 1, 2009, the businesses currently conducted by GLG Inc. and FS Partners will be reorganized (the "Reorganization") as follows:

(a) a new general partnership (the "GLG Partnership") will be registered under the laws of Ontario to conduct the grain procurement and marketing business currently conducted by GLG Inc.; the Applicant and AGRIS will be the two initial general partners of the GLG Partnership; GLG Inc. and FS Partners will each transfer and assign to the GLG Partnership all of its grain-related inventory and accounts, along with certain other grain-related business assets (including certain grain and other contracts); following this transfer by GLG Inc., and the subsequent winding-up of its affairs (e.g., filing of a final tax return), GLG Inc. will be dissolved; and

(b) the Applicant will acquire substantially all of the non-grain related assets and liabilities of FS Partners, and offer employment to the majority of the current employees of FS Partners; following the completion of these transactions, the Applicant will conduct directly the non-grain businesses currently conducted by FS Partners (these activities will be conducted through a division of the Applicant to be called FS Partners).

12. In order to build stronger commercial relationships and related goodwill between the Applicant and the Farmers, and to make Farmers eligible for Patronage Distributions, it is proposed that the Applicant would make qualifying Farmers (who conduct business with GROWMARK) members of the Applicant. In order to qualify as a member of the Applicant under its constating documents, it would be necessary that the Farmer be an agricultural producer, sign a membership agreement and hold a share of, or a fractional interest in a share of, Common Stock of the Applicant. It is proposed that the Applicant would issue a 1/10,000 fractional interest in a share of Common Stock of GROWMARK (a "GROWMARK Membership Interest") to a Farmer for a nominal amount at the time the Farmer signs a membership agreement.

13. Holders of Common Stock of GROWMARK, or of a fractional interest therein, have no rights to vote, no rights to dividends (other than Patronage Distributions) and no preferences on liquidation, dissolution or winding up, but would be eligible under the Applicant's constating documents to Patronage Distributions. Pursuant to the Applicant's constating documents, shares of Common Stock can only be transferred with the prior written consent of the Applicant. This restriction will also be contained in the membership agreement signed by a Farmer and will apply in respect of a GROWMARK Membership Interest.

14. Under the ITA, subject to certain limitations, GROWMARK is entitled to deduct in computing its taxable income earned in Canada for a taxation year the total of all payments made by it pursuant to allocations in proportion to patronage to its customers for the year. The policy of the Applicant in Canada is to pay patronage only to customers who are members of the Applicant. The holding by a Farmer of a GROWMARK Membership Interest, although sufficient to qualify the Farmer as a member of the Applicant under its constating documents, would not qualify such Farmer as a member of the Applicant for purposes of the patronage provisions of the ITA. For this reason, it is proposed that the Applicant also issue one or more shares of Class D Preferred Stock of GROWMARK ("Class D Stock") to the Farmer. Such Class D Stock would be issued to Farmers prior to the declaration by the board of directors of the Applicant of any Patronage Distributions (such issuance would occur at the time the Membership Interest is issued to the Farmer or later). The shares of Class D Stock have a par value of US$100 per share. Holders of Class D Stock are entitled to one vote per share at any meeting of the stockholders of the Applicant.

15. Holders of Class D Stock are also entitled to receive payment of the par value of such shares upon liquidation, dissolution or winding up of the Applicant, subject to the rights of holders of Class B Preferred Stock and Class C Preferred Stock of the Applicant. No dividends or distributions of earnings, including patronage distributions, are payable to holders of shares of Class D Stock (except that a holder of Class D Stock who is also a holder of a share of Common Stock, or a fractional interest therein, is entitled to patronage distributions if and when declared by the board of directors of the Applicant is respect of such share of Common Stock or fractional interest therein). Shares of Class D Stock held by a member located in Ontario can only be transferred with the prior written consent of the Applicant. This restriction will also be contained in the membership agreement signed by a Farmer and will apply in respect of such Class D Stock.

16. The holding by a Farmer of a GROWMARK Membership Interest and one or more shares of Class D Stock will qualify the Farmer as a member of the Applicant under its constating documents and a member of Applicant for purposes of the patronage provisions of the ITA.

17. On December 6, 1994, an order (the "1994 Order") was issued by the Commission pursuant to subsection 74(1) of the Act that the following transactions should not be subject to sections 25 and 53 of the Act:

(a) the issuance by the Applicant to the members of United Co-operatives of Ontario ("UCO") of Common Stock, Series O and Class D Stock, Series O to such members in connection with the sale of substantially all of UCO's assets to the Applicant; and

(b) future issuances of shares in Class D Stock, Series O as part of any Patronage Distributions to members of UCO.

18. On July 28, 2000, an order (the "2000 Order") was issued by the Commission pursuant to subsection 74(1) of the Act (replacing the 1994 Order) that the following transactions should not be subject to sections 25 and 53 of the Act:

(a) the issuance to member co-operatives of the Applicant resident in Ontario ("Corporate Members") of one share of Common Stock and Class D Stock, Series A to such Corporate Members as part of a reorganization of the share capital of the Applicant; and

(b) subsequent patronage distributions by the Applicant to such Corporate Members of shares of Class D Stock, Series A as part of any Patronage Distributions to such Corporate Members.

19. On May 28, 2002, an order (the "2002 Order") was issued by the Commission pursuant to subsection 74(1) of the Act that the following transactions should not be subject to sections 25 and 53 of the Act:

(a) the issuance to Corporate Members of one share of Class D Stock to such Corporate Members as part of a reorganization of the share capital of the Applicant; and

(b) subsequent patronage distributions by the Applicant to such Corporate Members of shares of Class D Stock or other securities, similar in all material respects to the Class D Stock, issued in satisfaction of such patronage distributions.

The 1994 Order, the 2000 Order and the 2002 Order, collectively, the "Prior Orders".

20. None of the Prior Orders, which deal with trades of securities to Corporate Members, would apply in respect of a trade of a GROWMARK Membership Interest or share of Class D Stock to a Farmer (an individual).

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS RULED pursuant to subsection 74(1) of the Act that the following transactions shall not be subject to the Registration and Prospectus Requirements:

(a) the issuance by the Applicant to Farmers of GROWMARK Membership Interests and shares of Class D Stock; and

(b) subsequent patronage distributions by the Applicant to Farmers of shares of Class D Stock or other securities, similar in all material respects to the Class D Stock, issued in satisfaction of patronage distributions which may be made from time to time by GROWMARK,

provided that:

(a) before the issuance of a GROWMARK Membership Interest and shares of Class D Stock under paragraph (a), each Farmer is provided with a copy of a written statement to the effect that certain protections, rights and remedies provided by the Act, including statutory rights of rescission and damages, will be unavailable to that Farmer or transferee and that there are restrictions imposed on the disposition or transfer of the GROWMARK Membership Interests and shares of Class D Stock;

(b) the Applicant will provide to the Farmer the following materials:

(i) this decision;

(ii) the articles and by-laws of the Applicant, and all amendments thereto; and

(iii) the most recent annual audited financial statements of the Applicant;

(c) the Applicant will prepare and make available to each Farmer on its website a copy of its annual report containing audited financial statements and quarterly unaudited financial statements;

(d) the transfer restrictions applicable to the GROWMARK Membership Interests and shares of Class D Stock held by Farmers will continue to apply -- it being understood that the exemptions contained in any order issued by the Commission would cease to be effective if such transfer restrictions are amended in any material respect without written notice to, and the consent of, the Commission; and

(e) the first trade of a GROWMARK Membership Interest or share of Class D Stock issued in reliance upon the order will be deemed to be a distribution of such securities within the meaning of the Act.

DATED at Toronto this 28th day of April, 2009.

"Paul Bates"
Commissioner
Ontario Securities Commission
 
"Suresh Thakkar"
Commissioner
Ontario Securities Commission