Securities Law & Instruments

Headnote

Dual Application for relief from formal valuation and minority approval requirements contained in Part 4 of Regulation 61-101 in connection with a business combination -- CCAA proceedings -- for a related party transaction, there is an exemption in Regulation 61-101 from the formal valuation and minority approval requirements in the context of a court approved bankruptcy / insolvency transaction -- no equivalent exemption available for a business combination transaction -- Independent Committee has reviewed the transaction proposed transaction Estimate Valuation Report by RSM Richter Inc., the monitor under the CCAA proceedings, concluded that the common shares of Shermag have no value -- Shareholders of Shermag have no economic interest -- No better alternatives than the proposed transaction.

Applicable Legislative Provisions

Sections 4.2, 4.3, 4.5 and 9.1 of Regulation 61-101 respecting Protection of Minority Security Holders in Special Transactions.

TRANSLATION

March 16, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUEBEC AND ONTARIO

(the "Jurisdictions")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

SHERMAG INC.

(the "Filer")

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the "Decision Maker" and collectively the "Decision Makers") has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") for an exemption from the valuation and minority approval requirements under Sections 4.2, 4.3 and 4.5 of Regulation 61-101 Protection of Minority Security Holders in Special Transactions ("Regulation 61-101").

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

a) the Autorite des marches financiers is the principal regulator for this application, and

b) 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 Regulation 14-101 Definitions and Regulation 11-102 respecting the Passport System have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1. The Filer is a company incorporated under the Companies Act (Quebec) on January 28, 1977. The Filer's core business is the production of household goods and residential furniture.

2. The Filer's head office and its administrative offices are located at 2171 King Street West, Sherbrooke, Quebec, Canada, J1J 2G1.

3. The Filer is a reporting issuer or the equivalent in the provinces of Quebec and Ontario and its common shares are listed for trading on the Toronto Stock Exchange.

4. The connecting factor used to identify Quebec as the principal regulator is the location of the Filer's head office and business operations.

5. On May 5, 2008 (the "Filing Date"), the Filer and its subsidiaries, Jaymar Furniture Corp., Scierie Montauban Inc., Megabois (1989) Inc., Shermag Corporation and Jaymar Sales Corporation (collectively, the "Applicants") applied for and obtained an order of the Quebec Superior Court (the "Court") for their protection under the Companies' Creditors Arrangement Act ("CCAA"), including a general stay of proceedings against the Applicants until June 4, 2008 (the "Stay Termination Date") (the "CCAA Order").

6. The CCAA Order, inter alia, allows the Filer to continue operating as it attempts to develop a restructuring plan (the "Plan") by staying, as of the Filing Date, substantially all claims against the Applicants, their respective property and assets and their respective directors, officers, agents, contractors and employees.

7. Pursuant to the CCAA Order, the Filer obtained from the Court an order releasing it from certain obligations, and in particular that of preparing any document related to a potential shareholders' meeting, including the annual financial statements, management information, circular and annual information form (the "Financial Statement Order").

8. On June 4, 2008, the Applicants received from the Court a new order, inter alia, extending the Stay Termination Date to September 8, 2008. On September 8, 2008, the Filer obtained a new order from the Court further extending the Stay Termination Date to December 10, 2008. On December 10, 2008, the Filer obtained an new order from the Court further extending the Stay Termination Date to April 4, 2009.

9. Under the CCAA Order, the Court appointed RSM Richter Inc. ("RSM Richter") to act as monitor for the affairs and finances of the Filer for the period during which the CCAA Order is in effect, and in particular ordering it to give the Court and stakeholders, including creditors affected by the Plan, a report on the Plan valuation (the "Monitor's Report").

10. Clarke Inc. ("Clarke") is a Nova Scotia-based incorporated company.

11. Clarke is a reporting issuer in all of the provinces and territories of Canada and has its common shares and two series of convertible debentures listed for trading on the Toronto Stock Exchange.

12. Mr. George Armoyan is the Executive Chairman and senior officer of Clarke. Some companies controlled by Mr. Armoyan and/or relatives of Mr. Armoyan, including Geosam (as defined below), own an aggregate of approximately 32.2 % of the issued and outstanding common shares of Clarke.

13. Clarke owns approximately 19.99% of the issued and outstanding common shares of the Filer.

14. Mr. Armoyan and two other officers of Clarke are currently members of the board of directors of the Filer.

15. Geosam Investments Limited ("Geosam") is a Nova Scotia-based incorporated private investment company.

16. Geosam owns approximately 22.9 % of the issued and outstanding common shares of Clarke.

17. Mr. Armoyan is the President and Secretary of Geosam and Melinda Lee, one of the members of the board of directors of the Filer, is a Vice President of Clarke and of Geosam.

18. Geosam is a related party of Clarke as that term is defined in Regulation 61-101. Clarke is a related party of the Filer as it owns more than 10 % of the voting rights attached to all the issued and outstanding voting securities of the Filer. Given the above-described relationships between Geosam, Clarke and the Filer, Geosam may be considered a control person of the Filer or acting in concert with Clarke.

19. On August 1, 2008, the Filer announced that its credit facilities with Wachovia Capital Finance Corporation (Canada) had been assigned to Geosam (the "Debt Assignment"). The Debt Assignment was approved by an order of the Court in the context of the CCAA proceedings concerning the Filer. Due to the Debt Assignment, Geosam became the sole secured creditor of the Filer.

20. Geosam has proposed to the Filer that Geosam acquire the business of the Filer in the context of CCAA proceedings (the "Transaction").

21. While the form that the Transaction will take has not been finalized yet, it is currently anticipated that it will be structured as an arrangement of the Filer pursuant to a Court order in the context of the CCAA proceedings (the "Arrangement"). The Arrangement would include the following features:

a) the existing equity of the Filer would be cancelled;

b) new common shares would be issued by the Filer to Geosam or a party designated by Geosam in consideration for a subscription amount of approximately $1,500,000 (the "Subscription Amount"); and

c) part or all of the Subscription Amount would be used by the Filer to offer and pay an amount to its creditors as a compromise and settlement of their respective claims.

22. The Filer plans to seek to cease to be a reporting issuer following the 'completion of the Transaction.

23. The Transaction could be also carried out by Geosam using an alternative method to the Arrangement, which may be in the form of a forced sale of the assets of the Filer by Geosam following the exercise and enforcement of its rights as secured creditor (the "Asset Sale"). Under Regulation 61-101, the Asset Sale could constitute a "related party transaction" for which there is an exemption from the valuation and minority approval requirements in Part 5 of Regulation 61-101.

24. According to the conclusions set out in the estimated valuation report included in the Monitor's Report prepared as at November 1st, 2008 by RSM Richter Corporate Finance (as defined below) and dated March 3rd, 2009 (the "Estimated Valuation Report"), the common shares of the Filer currently have no value. In addition, whether the Transaction were to be completed by way of the Asset Sale or by way of the Arrangement under the CCAA, in light of the insolvency of the Filer, shareholders of the Filer will not receive anything for their common shares. Therefore to grant the shareholders a right to vote in the context of the Transaction would be the equivalent of giving them a veto over a transaction in which they no longer have any economic interest.

26. The Filer has set up a committee (the "Independent Committee") made up of the independent directors of its Board of Directors, namely Messrs. John LeBoutillier and Claude Pichette. For the purposes of this decision, the Decision Makers have asked for and obtained the following representations and confirmations from the Independent Committee:

a) The Independent Committee was originally created in February 2008 to consider the proposal made publicly by Clarke to acquire, at a price to be negotiated between Clarke and the Filer but below the then market price on the Toronto Stock Exchange, all the issued and outstanding shares of the Filer. Since any offer to be made by Clarke would have been considered an "insider bid" under Regulation 61-101, the Independent Committee formally mandated KPMG LLP to obtain a formal valuation of the shares of the Filer. Considering the conclusion drawn by this formal valuation, in draft form, obtained by the Independent Committee, Clarke ultimately decided not to launch a formal offer for all the issued and outstanding shares of the Filer.

b) After the withdrawal of Clarke's offer in April 2008, the Independent Committee remained in function and closely monitored, and in the end approved along with the other Board members of the Filer, all events leading the Filer to file for protection under the CCAA.

The Independent Committee considered, and ultimately independently approved, any and all aspects of the CCAA proceedings where any related party to the Filer or Clarke had an interest. In this regard, only the Independent Committee supervised and made decisions regarding matters where Clarke or Geosam had an interest, including the Debt Assignment, the subsequent amendments to the terms and conditions of such debt, the management agreement entered into with Clarke, the granting of additional security on uncharged assets of the Filer to Geosam, and all aspects of the Transaction;

c) The Filer is currently insolvent;

d) The Transaction is in the best interest of the Filer and all its stakeholders;

e) There are no better alternatives to the Transaction for the Filer and its stakeholders;

f) No proposal has been made to the Filer by any person pursuant to which its shareholders would receive any consideration for their shares of the Filer;

g) The Independent Committee is aware that the independent valuation and minority approval requirements prescribed by Regulation 61-101 are triggered by the Transaction if carried out by Arrangement;

h) The Independent Committee has determined that such requirements should not, in the circumstances, be applicable due to the fact that the Independent Committee has satisfied itself that the fair market value of the issued and outstanding shares of the Filer is negative;

i) The Independent Committee is of the view that:

i) no shareholder approval, as prescribed by Regulation 61-101, should be required in the circumstances, and the Independent Committee will not request or recommend same;

ii) no independent valuation as prescribed by Regulation 61-101, other than the Estimated Valuation Report, should be required, and the Independent Committee will not request or recommend same;

iii) there is no need, or relevance, to request KPMG LLP to finalise its formal valuation obtained in 2008, and the Independent Committee will not request or recommend same;

j) If such valuation and approval are nevertheless required, the Filer would likely be forced into bankruptcy, and less money would be made available for the unsecured creditors of the Filer;

k) The Independent Committee has reviewed the Estimated Valuation Report. While the Estimated Valuation Report does not constitute an "Independent Valuation" for the purposes of Regulation 61-101, it was prepared by an independent party, being the corporate finance division ("RSM Richter Corporate Finance") of the Court-appointed CCAA Monitor (working in conjunction with RSM Richter) for the purposes of submitting the Plan. The Independent Committee was further satisfied of RSM Richter Corporate Finance's experience, qualifications and independence and, taking into account all of the circumstances, including the interests of Geosam in the Transaction as well as the holdings and historical involvement of Clarke in and with the capital of the Filer, that RSM Richter Corporate Finance was given access to the information necessary to prepare its Estimated Valuation Report in an independent manner;

I) The Independent Committee is aware of the qualifications and limitations set forth in the Estimated Valuation Report;

m) The Independent Committee is satisfied with the manner in which the Estimated Valuation Report has been prepared and has accepted its conclusions;

n) Based upon the Estimated Valuation Report, the Independent Committee has concluded that :

i) the outstanding shares of the Filer have no value and will not have any value going forward;

ii) the shareholders of the Filer have no more economic interest in the Filer and will not have any economic interest going forward; and

iii) performing another valuation would be of no benefit under these circumstances since there is no scenario under which the Filer's shareholders would receive any value for their shares;

o) Shareholders of the Filer do not have any economic interest in the outcome of the CCAA proceedings in that they will not receive any consideration for their shares and therefore their voting interest should not be considered within the context of the Transaction; and

p) The only viable solution for the Filer and the applicants to emerge from CCAA protection and continue its business that has been presented or proposed is the Transaction.

27. Since the, Filing Date, all material changes concerning the File have been duly and publicly disclosed as required by the securities legislation.

28. Due to the Financial Statement Order, the Filer has not filed the following continuous disclosure documents:

a) its annual information form in respect of its fiscal year ended April 4, 2008;

b) its annual financial statements and MD&A for its fiscal year ended April 4, 2008;

c) its interim financial statements and interim MD&As; and

d) its management proxy circular in respect of its fiscal year ended April 4, 2008. Decision

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 Exemption Sought is granted provided that the Transaction proceeds by way of Arrangement as set forth above.

"Louis Morisset"
Surintendant des marches de valeurs