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Alliance Atlantis Communications Inc. et al. - MRRS Decision
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,
ONTARIO, QUÉBEC, NOVA SCOTIA AND NEWFOUNDLAND
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM FOR
EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
ALLIANCE ATLANTIS COMMUNICATIONS INC.,
SALTER STREET FILMS LIMITED AND 3822796 CANADA LIMITED
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of BritishColumbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Newfoundland (the "Jurisdictions") hasreceived an application (the "Application") from Alliance Atlantis Communications Inc. ("Alliance Atlantis") and SalterStreet Films Limited ("Salter Street") for a decision:
(a) under the securities legislation of the Jurisdictions (the "Legislation") that, in connection with an offer (the"Offer") that may be made by Alliance Atlantis to acquire all of the issued and outstanding multiple voting shares(the "MVS") and subordinate voting shares (the "SVS" and, collectively with the MVS, the "Shares") of SalterStreet, certain amendments (the "Employment Addenda") to existing employment agreements (the"Employment Agreements") between Salter Street and each of Michael Donovan and Paul Donovan(collectively, the "Principals") are being made for reasons other than to increase the value of the considerationthat may be paid to the Principals for the Shares they hold and may be entered into despite the prohibition inthe Legislation that prohibits an offeror who makes or intends to make a take-over bid or issuer bid and anyperson acting jointly or in concert with the offeror from entering into any agreement, commitment orunderstanding with any holder or beneficial owner of securities of the offeree issuer that has the effect ofproviding to the holder or owner a consideration of greater value than that offered to other holders of the sameclass of securities (the "Prohibition on Collateral Agreements"); and
(b) under the Legislation in Ontario and Quebec that the proposed amalgamation (the "Amalgamation") of SalterStreet and 3822796 Canada Limited, a wholly-owned subsidiary of Alliance Atlantis, shall not be subject to therequirements in the Legislation in Ontario and Quebec applicable to going private transactions (the "GPTRequirements");
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the"System"), the Ontario Securities Commission is the principal regulator for the Application;
AND WHEREAS Alliance Atlantis and Salter Street have represented to the Decision Makers as follows:
1. Alliance Atlantis is governed by the Canada Business Corporations Act (the "CBCA"), is a reporting issuer orthe equivalent in each of the Jurisdictions and is not in default of any requirement of the Legislation in theJurisdictions. Its head office is located in Toronto, Ontario.
2. Alliance Atlantis is a Canadian broadcaster, creator and international distributor of filmed entertainment content.
3. Salter Street is governed by the Companies Act (Nova Scotia), is a reporting issuer or the equivalent in eachof the Jurisdictions and is not in default of any requirement of the Legislation in the Jurisdictions. Its head officeis located in Halifax, Nova Scotia.
4. Salter Street is an integrated entertainment company that develops, produces and distributes original film andtelevision programming world-wide and has interests in Internet products.
5. Salter Street's authorized share capital consists of 1,450,090 MVS, 199,679,356 SVS, 200,000,000 non-votingshares, 59,002 special shares and 100,000,000 preference shares. The SVS are listed and posted for tradingon The Toronto Stock Exchange (the "TSE"). Each MVS carries the right to ten votes per MVS, and each SVScarries the right to one vote per SVS.
6. As at February 10, 2001, Salter Street's issued and outstanding share capital consisted of 1,450,090 MVS and6,788,949 SVS. In addition, as at February 10, 2001, there were reserved for issuance 710,000 SVS in respectof options under Salter Street's stock option plan (the "Plan"), 67,000 SVS in respect of certain warrants issuedby Salter Street and 26,000 SVS in respect of a purchase of shares of Salter Street New Media Limited froma dissenting shareholder.
7. Michael Donovan is the chief executive officer of Salter Street and chairman of its board of directors (the "SalterStreet Board"). Michael Donovan was one of Salter Street's founders in 1983 and has served as the producerof a number of its productions. As at February 10, 2001, he owned, directly or indirectly:
(a) 725,045 MVS, representing approximately 50% of the class; and
(b) 127,644 SVS and options to acquire 75,000 SVS, representing approximately 2.95% of the class (aftergiving effect to the exercise of options held by him).
8. Paul Donovan is the vice-chair of the Salter Street Board. Paul Donovan is one of Salter Street's founders andhas served as the director and producer of a number of its productions. As at February 10, 2001, he owned,directly or indirectly:
(a) 725,045 MVS representing approximately 50% of the class; and
(b) 125,700 SVS and options to acquire 75,000 SVS, representing approximately 2.92% of the class (aftergiving effect to the exercise of options held by him).
9. In December 2000, discussions commenced between representatives of Alliance Atlantis and Salter Street withrespect to the possible acquisition by Alliance Atlantis of all of the issued and outstanding Shares. During thesame month, the Salter Street Board established a special committee of directors (the "Special Committee"),which retained BMO Nesbitt Burns Inc. as financial advisers to the Special Committee. The Principals werenot members of the Special Committee.
10. On February 11, 2001, Alliance Atlantis and Salter Street entered into an agreement (the "Merger Agreement"),which provides for the continuance of Salter Street under the CBCA (the "Continuance") and the Amalgamation(collectively, the "Transactions"). Pursuant to the Amalgamation and subject to certain conditions, the holdersof Shares (the "Shareholders") will exchange all of their Shares for consideration per Share consisting eitherof: (i) 0.465 of a Class B Non-Voting Share of Alliance Atlantis (a "Class B Share"); or (ii) a combination of 0.31of a Class B Share and one preferred share (immediately redeemable for $3.33 in cash) of the corporation("Amalco") resulting from the Amalgamation.
11. On the same date, Alliance Atlantis entered into support agreements (the "Support Agreements") with certainShareholders (the "Principal Shareholders"), including the Principals. The Support Agreements provide, amongother things, as follows:
(a) As long as the Transaction Value per Share (as that term is defined in the Merger Agreement) is atleast $9.00 and provided that certain other conditions are met, the Principal Shareholders will vote theShares held by them in favour of the Amalgamation.
(b) If the Amalgamation is not completed and the Transaction Value per Share is at least $9.00, thenAlliance Atlantis will have the right (the "Right"), subject to certain conditions, to acquire all of theShares held by the Principal Shareholders pursuant to the Offer, which will be an offer made to allShareholders for any and all Shares for consideration equal to or greater than that offered to theShareholders pursuant to the Merger Agreement in respect of the Transactions. Subject to certainconditions, the Right will be exercisable by Alliance Atlantis for a period of 20 days only incircumstances where the Amalgamation does not proceed as a result of the circumstances describedabove.
(c) Alliance Atlantis's obligation to take up and pay for the Shares pursuant to the Offer will be subject tothe conditions, among others, that all regulatory approvals have been obtained, no prohibition of lawshall prohibit take-up of Shares under the Offer and no material adverse change in the business oraffairs of Salter Street shall have occurred.
12. On February 9, 2001, the last full trading day prior to the announcement of the Transactions, the closing saleprice per SVS on the TSE was $6.60, the closing sale price per Class B Share on the TSE was $19.00 and theclosing sale price per Class B Share on the NASDAQ National Market was US $12.6875.
13. Salter Street prepared a management information circular (the "Circular") to solicit proxies for the meetings ofShareholders to be held on March 30, 2001 to consider the Transactions (the "Meeting") and, if needed, April16, 2001 (the "Confirmatory Meeting"). The Circular was mailed to Shareholders on or about March 5, 2001.
14. As disclosed in the Circular, the Salter Street Board has determined unanimously that the Transactions are fairto the Shareholders and in Salter Street's best interests and, accordingly, the Salter Street Board hasunanimously recommended that Shareholders approve the Transactions.
15. The Continuance must be approved at the Meeting by: (i) at least 75% of votes cast by Shareholders whoattend the Meeting in person or by proxy; and (ii) at least 66% of the votes cast by holders of each class ofShares who attend the Meeting in person or by proxy. Unless the resolution of Shareholders relating to theContinuance is passed unanimously at the Meeting with all Shareholders (representing 100% of the Shares)present in person or by proxy, the Continuance must be confirmed by a majority of the votes cast byShareholders who attend the Confirmatory Meeting in person or by proxy. The Amalgamation must beapproved by at least 66% of the votes cast by holders of each class of Shares who attend the Meeting inperson or by proxy.
16. As part of the negotiations with Alliance Atlantis in respect of the Amalgamation and the Offer, Salter Street andthe Principals agreed to enter into the Employment Addenda, which will become effective on the closing of theAmalgamation or take-up of any Shares under the Offer, as the case might be.
17. The Employment Agreements, which terminate on May 14, 2003, provide, among other things, that, each ofthe Principals:
(a) is entitled to an annual base salary of $250,000 (to be reviewed annually), plus bonuses within theguidelines of the Salter Street compensation plan when deemed warranted by the Salter Street Board;
(b) is entitled to receive stock options, as granted by the Salter Street Board, on the terms set out in thePlan;
(c) is entitled to two years' notice or payment in lieu of notice if Salter Street decides to terminate hisemployment without cause;
(d) will hold in confidence any information concerning Salter Street's business or affairs;
(e) will refrain from engaging in any business in Canada similar to the business of Salter Street for a twoyear period following the date such Principal ceases to be employed by Salter Street; and
(f) will refrain from competing with the business of Salter Street and/or soliciting any business from aclient or account of Salter Street for a two year period following the date such Principal ceases to beemployed by Salter Street.
In the fiscal year ended October 31, 2000, each of the Principals received a bonus of $78,750.
18. The Employment Addenda provide, among other things, that, upon successful completion of the Amalgamationor the take-up of any Shares under the Offer:
(a) Michael Donovan will serve as the Chair of the board of directors of Amalco (the "Amalco Board") and, subjectto certain regulatory approvals, of the board of directors of Independent Film Channel Canada Incorporated;
(b) Paul Donovan will serve as Vice-Chair of the Amalco Board;
(c) the term of each Employment Agreement will be extended to expire on April 1, 2004, subject to the right of eachPrincipal to extend the term of his Employment Agreement until April 1, 2005;
(d) each Principal will receive an annual base salary (the "Base Salary") of $250,000 (to be reviewed annually),plus a bonus of up to 50% of the Base Salary in accordance with Alliance Atlantis' usual bonus policies (the"Bonus");
(e) each Principal will be entitled to receive an incentive bonus in connection with any film or television production(each, a "Production") for which he acts as executive producer (an "Incentive Bonus"), payable annually, in anamount equal to the difference between:
(i) the greater of (A) 25% of any executive producer and corporate overhead fees for each Productionfor which he acts as executive producer and (B) 2.5% of the third party-financed portion of suchProductions' budgets; and
(ii) the sum of the Base Salary and Bonus paid to the Principal in the preceding twelve month period;
(f) each Principal will be entitled to participate in any Alliance Atlantis stock option plan on the same basis as othersenior executives of Alliance Atlantis or its subsidiaries;
(g) each Principal will be entitled to 90 days' notice plus payment of a lump sum equal to 1½ times his Base Salaryif Salter Street or a successor corporation terminates his employment without cause;
(h) each Principal will be entitled to payment of a lump sum equal to two times his Base Salary if he resigns within90 days of a change of control with respect to Alliance Atlantis, Salter Street or a successor to Salter Street;
(i) notwithstanding the termination of Michael Donovan's Employment Agreement for any reason, he will have theright to continue to act as executive producer for a particular production (the "Continuing Production") for solong as the Continuing Production continues to be produced and shall be entitled to receive compensation forcontinuing as executive producer of the Continuing Production equal to the greater of:
(i) 25% of the executive producer and corporate overhead fees for the Continuing Production;
(ii) 2.5% of the third party-financed portion of the budget for the Continuing Production; and
(iii) an annual fee of $250,000;
(j) if Paul Donovan's Employment Agreement is terminated for any reason, he will have the right to purchase allof the right, title and interest to certain works he has written for a specified amount in certain circumstances;and
(k) if the Employment Addenda are terminated, for a period of twelve months from the date of such termination,neither Principal will engage in any business of the same nature as or of a similar nature to the business ofSalter Street, nor will either Principal accept employment with, consult for or participate in the ownership ormanagement of, any enterprise engaged in such business in Canada, other than as a shareholder where hisholdings represent less than 5% of the outstanding shares.
19. The Principals of Salter Street are experienced individuals in the Canadian entertainment industry and haveplayed an integral role in developing Salter Street's business interests. Since both Alliance Atlantis and SalterStreet are engaged in the business of creating, developing, producing and exploiting filmed entertainment, theirpersonnel represent an important part of their business. The Principals' talents are particularly important to thesuccess of the productions with which they are involved. Salter Street has entered into the EmploymentAddenda and Alliance Atlantis has agreed to be bound by the Employment Addenda in order to ensure thePrincipals' continued employment during the period in which Salter Street's operations will be integrated withthose of Alliance Atlantis and their ongoing participation in the creation and production of filmed entertainment.In particular, Alliance Atlantis believes that the Principals' continued support and management of Salter Street'soperations is necessary in order to maintain Salter Street's operations in Halifax and retain senior management.
20. The terms of the Employment Addenda have been negotiated between Alliance Atlantis and the Principals onan arm's-length basis. The compensation arrangements contemplated by the Employment Addenda arereasonable in light of the services to be provided by each of the Principals and are consistent with marketpractice in the Canadian entertainment industry. The Employment Addenda are being entered into for businesspurposes unrelated to the Principals' ownership of Shares and not for the purpose of providing the Principalswith greater consideration for their Shares than the consideration that may be received by Shareholders otherthan the Principals in connection with the Offer or the Amalgamation.
21. But for the fact that the Employment Addenda have been entered into with the Principals in connection with theAmalgamation, the Amalgamation would not constitute a going private transaction within the meaning of theLegislation in Ontario and Quebec.
AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that providesthe Decision Maker with the jurisdiction to make the Decision has been met;
THE DECISION of the Decision Makers in the Jurisdictions under the Legislation, is that, in connection with theOffer, the Employment Addenda are being entered into for reasons other than to increase the value of the considerationpaid to the Principals in respect of their Shares and may be entered into notwithstanding the Prohibition on CollateralAgreements.
March 30, 2001.
"J. A. Geller" "R. Stephen Paddon"
AND THE DECISION of the Decision Makers in Ontario and Quebec under the Legislation in Ontario andQuebec is that the Amalgamation shall not be subject to the GPT Requirements.
March 27, 2001.
"Ralph H. Shay"