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14232580 Ontario Inc. et al. - MRRS Decision
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ONTARIO AND QUEBEC
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
1423280 ONTARIO INC.,
3045207 NOVA SCOTIA COMPANY AND
FUTURELINK CORP.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of the provincesof Ontario and Quebec (together, the "Jurisdictions") has received an application from 1423280 Ontario Inc.("Exchangeco"), 3045207 Nova Scotia Company ("Nova Scotia Co.") and FutureLink Corp. ("FutureLink", together withExchangeco and Nova Scotia Co., the "Filer") for a decision pursuant to the securities legislation of the Jurisdictions (the"Legislation") that the requirement contained in the Legislation to file and obtain a receipt for a preliminary prospectusand a prospectus (the "Prospectus Requirement") and the requirement to be registered to trade in a security (the"Registration Requirement") shall not apply to certain trades in FutureLink Common Shares (as defined below) receivedupon the exchange of exchangeable shares of Exchangeco.
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the"System"), the Ontario Securities Commission is the principal regulator for this application;
AND WHEREAS the Filer has represented to the Decision Makers that:
1. FutureLink is a public company incorporated under the laws of the State of Delaware, is subject to the reportingrequirements of the United States Securities Exchange Act of 1934 (the "Exchange Act"), as amended and isnot a "reporting issuer" or the equivalent concept in any of the Jurisdictions.
2. The authorized capital of FutureLink consists of 300,000,000 common shares without par value (the "FutureLinkCommon Shares") and 20,000,000 preferred shares without par value, of which 68,104,791 FutureLinkCommon Shares and 1,428,571 shares of preferred stock were outstanding as of March 12, 2001.
3. The outstanding FutureLink Common Shares are quoted on the Nasdaq National Market ("Nasdaq").
4. Nova Scotia Co. is an unlimited liability company incorporated under the laws of the Province of Nova Scotiaand is not a "reporting issuer" or the equivalent concept in either of the Jurisdictions.
5. The authorized capital of Nova Scotia Co. consists of 100,000,000 common shares without par value, of which7,500,100 common shares were issued and outstanding as of March 12, 2001.
6. FutureLink is the registered owner of all of the outstanding common shares of Nova Scotia Co.
7. Exchangeco is a corporation incorporated under the laws of the Province of Ontario and is not a "reportingissuer" or the equivalent concept in any of the Jurisdictions. Exchangeco is a "private company" within themeaning of that term in the Legislation.
8. The authorized capital of Exchangeco consists of an unlimited number of common shares, an unlimited numberof Class B non-voting common shares, an unlimited number of Class A non-voting preference shares, anunlimited number of Class C voting preference shares and an unlimited number of exchangeable shares (the"Exchangeable Shares"), of which 2,426,291.387 common shares, no Class B non-voting common shares,35,000 Class A non-voting preference shares, 7,500,000 Class C voting preference shares and 2,199,965Exchangeable Shares were issued and outstanding as of March 12, 2001.
9. Nova Scotia Co. is the registered holder of 100 common shares and all of the issued and outstanding ClassC voting preference shares; FutureLink is the registered holder of the remaining 2,426,191.387 issued andoutstanding common shares; and Glen Holmes, FutureLink's former president, is the registered holder of allof the issued and outstanding Class A non-voting preference shares.
10. Prior to June 19, 2000, Charon Systems Inc. ("Predecessor Charon") was a corporation incorporated under thelaws of the Province of Ontario and was not a "reporting issuer" or the equivalent concept in either of theJurisdictions. Predecessor Charon was a private company within the meaning of that term in the Legislation.
11. The authorized capital of Predecessor Charon consisted of an unlimited number of common voting shares, anunlimited number of non-voting common shares and 7,500,000 preferred class II shares, of which 988,897common shares, 70,004 non-voting common shares and 7,500,000 preferred class II shares were issued andoutstanding as of June 19, 2000.
12. The registered holders of all of the issued and outstanding shares in the capital of Predecessor Charon, as ofJune 19, 2000, were, collectively, Allan Sherk, Edward Matthewson, Joe DaSilva, Layne Harris, Jason Yetman,David Fung, Blair Collins, Aaron Fu, Mark Palangio, Ho Wai Fung, Edward Chi Wai Fung and Malcolm Robins(the "Individual Charon Shareholders"), DataSpec Telecom Multimedia Inc. and Aaron Fu, David Fung and MarkPalangio as trustees on behalf of the Charon Employee Trust (together with the Individual CharonShareholders, the "Charon Shareholders"). Each of the Individual Charon Shareholders was an employee ofPredecessor Charon and is resident in Ontario. All of the issued and outstanding shares of DataSpec TelecomMultimedia Inc. are owned by Diane Laverdiere and Pierre Levesque, each of whom was an employee ofPredecessor Charon and is resident in Quebec. The Charon Employee Trust is a trust formed under the lawsof Ontario, all of the beneficiaries of which were employees of Predecessor Charon and resident in Ontarioexcept for Diane Laverdiere, Jean-Pierre Leesque, Jean-Steve Shaker, Karine Desrosieres, PierreCharbonneau, Sylvain Dallaire and Brent McCoubrey who are residents of Quebec.
13. As contemplated by an acquisition and amalgamation agreement (the "Acquisition Agreement") dated as ofJune 16, 2000 among FutureLink, Nova Scotia Co., Exchangeco, 1423281 Ontario Inc. ("FL Acquisition Co."),FutureLink Distribution Corp. ("FLD"), Predecessor Charon and the Charon Shareholders, on June 19, 2000,Exchangeco acquired all of the issued and outstanding shares of Predecessor Charon pursuant to anamalgamation between Charon and FL Acquisition Co., a wholly-owned subsidiary of Exchangeco.
14. Pursuant to the terms of the amalgamation, each outstanding common share of Charon was converted into2.0776 Class B non-voting common shares of Exchangeco; each outstanding preferred class II share of Charonwas converted into one Class C voting preference share of Exchangeco; and each outstanding common sharein the capital of FL Acquisition Co. was converted into one fully paid and non-assessable common share in thecapital of the amalgamated entity ("Amalco").
15. Immediately following the amalgamation, the holders of the Class C voting preference shares sold andFutureLink caused Nova Scotia Co. to purchase such shares in consideration for $7,500,000, which purchaseprice was satisfied by the payment of $1,000,000 in cash and the issuance of a promissory note (the"Promissory Note") in the amount of $6,500,000 to the holders of such shares. Payment of the Promissory Notewas secured by a pledge of the Class C voting preference shares (the "Pledged Shares") owned by Nova ScotiaCo. in favour of the Charon Shareholders.
16. As a result of the amalgamation, all employees of Predecessor Charon, including the Individual CharonShareholders, Diane Laverdiere, Pierre Levesque and the beneficiaries of the Charon Employee Trust becameemployees of Amalco.
17. On July 18, 2000, all amounts owing under the Promissory Note were repaid. On July 28, 2000, Amalco wascontinued under the Business Corporations Act (Alberta).
18. As further contemplated by the Acquisition Agreement, FLD, a corporation incorporated under the laws of theProvince of Alberta and a wholly-owned subsidiary of FutureLink and Amalco amalgamated under the laws ofAlberta effective August 1, 2000. Upon the amalgamation, each outstanding Class A common share of FLDbecame 0.7305 common shares of Exchangeco, and each outstanding common share of Amalco became onecommon share of the amalgamated entity, Futurelink Canada Corp.
19. The authorized capital of Futurelink Canada Corp. consists of an unlimited number of common shares, anunlimited number of Class B common shares and an unlimited number of preference shares, of which 100common shares were issued and outstanding as of March 12, 2001. Exchangeco is the registered holder ofthe 100 common shares of FutureLink Canada Corp.
20. As further contemplated by the Acquisition Agreement, on August 16, 2000 the shareholders of Exchangecoauthorized and approved a reorganization of capital, to be effected by the filing of articles of amendment.
21. In connection with the reorganization of capital of Exchangeco, the relevant parties to the AcquisitionAgreement executed and delivered the following agreements, among others:
(a) an exchange agreement (the "Exchange Agreement") dated as of August 16, 2000 betweenFutureLink, Exchangeco, Nova Scotia Co. and the Charon Shareholders;
(b) a call rights agreement (the "Call Rights Agreement") dated as of August 16, 2000 betweenFutureLink, Exchangeco, Nova Scotia Co. and the Charon Shareholders; and
(c) a support agreement (the "Support Agreement") dated as of August 16, 2000 between FutureLink,Nova Scotia Co. and Exchangeco.
22. Pursuant to the Acquisition Agreement, the Charon Shareholders agreed not to exercise any right (i) to requireNova Scotia Co. or Exchangeco to retract, exchange or redeem the Exchangeable Shares, or (ii) which wouldresult in the issuance of FutureLink Common Shares into the Participating Jurisdictions or any other provinceof Canada, until the date upon which this ruling is obtained or unless such exercise is permissible underapplicable securities laws.
23. On September 8, 2000, Exchangeco filed articles of amendment under the laws of Ontario giving effect to itsreorganization of capital.
24. On November 17, 2000, FutureLink Canada Corp. was continued under the Business Corporations Act(Ontario).
25. The share provisions of the Exchangeable Shares are structured so that the Exchangeable Shares are at alltimes, as nearly as possible, the economic equivalent of FutureLink Common Shares.
26. The holders of Exchangeable Shares are entitled to dividends from Exchangeco payable at the same time as,and in the Canadian dollar equivalent of, each dividend paid by FutureLink on a FutureLink Common Share.Subject to the overriding call right of Nova Scotia Co. referred to below in this paragraph, the holders ofExchangeable Shares are entitled, at any time, to require Exchangeco to redeem any or all of the ExchangeableShares held by them and to receive, for each Exchangeable Share, an amount equal to the current market priceof one FutureLink Common Share (the "Retraction Price"), which shall be satisfied by Exchangeco deliveringto such holder one FutureLink Common Share for each Exchangeable Share held and paying to the holder anadditional amount equivalent to all declared and unpaid dividends on each such Exchangeable Share (the"Dividend Amount"). Nova Scotia Co. has a right (the "Retraction Call Right") to purchase the ExchangeableShares that are the subject of such proposed retraction at a price per share equal to the Retraction Price pershare, which shall be satisfied by the delivery of one FutureLink Common Share for each such ExchangeableShare together with, to the extent not paid by Exchangeco, the Dividend Amount.
27. Subject to the overriding call right of Nova Scotia Co. referred to below in this paragraph, Exchangeco is entitledto redeem all of the Exchangeable Shares on a date (the "Redemption Date"), determined by the board ofdirectors of Exchangeco, but which shall not be earlier than December 15, 2007 except in limitedcircumstances, for an amount per share equal to the current market price of a FutureLink Common Share,which shall be satisfied in full by Exchangeco causing to be delivered to each holder of Exchangeable Sharesone FutureLink Common Share for each Exchangeable Share held, plus the Dividend Amount. Pursuant tothe terms of the Call Rights Agreement, each of FutureLink and Nova Scotia Co. has the overriding right (the"Redemption Call Right") to purchase from all of the holders of Exchangeable Shares (other than FutureLinkor any subsidiary thereof) on the Redemption Date all of the shares held by such holders on payment byFutureLink or Nova Scotia Co., as applicable, of an amount per Exchangeable Share equal to the currentmarket price of a FutureLink Common Share, to be satisfied by FutureLink or Nova Scotia Co., as applicable,causing to be delivered to such holder one FutureLink Common Share, plus, to the extent not paid byExchangeco, the Dividend Amount.
28. In the event of the liquidation, dissolution or winding up of Exchangeco, and subject to the exercise by NovaScotia Co. of the Liquidation Call Right (as defined below), a holder of Exchangeable Shares shall be entitledto receive an amount per share equal to the current market price of one FutureLink Common Share which shallbe satisfied in full by Exchangeco causing to be delivered to such holder one FutureLink Common Share plusthe Dividend Amount.
29. The holders of Exchangeable Shares are not entitled to vote, except as required by law.
30. The Exchangeable Shares rank prior to all shares of Exchangeco with respect to the payment of dividends andthe distribution of assets in the event of the liquidation, dissolution or winding-up of Exchangeco.
31. Pursuant to the Exchange Agreement, FutureLink granted to each of the Charon Shareholders the right, in theevent of a proposed liquidation, dissolution or winding-up of Exchangeco, to require FutureLink to purchasefrom each Charon Shareholder all of the Exchangeable Shares held by each Charon Shareholder in exchangefor an equivalent number of FutureLink Common Shares.
32. The Exchange Agreement further provides that if a holder of Exchangeable Shares exercises its right to requireExchangeco to redeem any of the Exchangeable Shares held by such holder, and Exchangeco is not permittedas a result of solvency requirements to redeem such shares, and provided that Nova Scotia Co. has notexercised the Retraction Call Right, FutureLink will purchase such shares and satisfy the purchase price byissuing such number of FutureLink Common Shares as is equal to the number of Exchangeable Shares beingpurchased, plus the Dividend Amount.
33. Pursuant to the Call Rights Agreement, each of FutureLink and Nova Scotia Co. has the overriding right (the"Liquidation Call Right"), in the event of a proposed liquidation, dissolution or winding-up of Exchangeco, topurchase from all of the holders of Exchangeable Shares (other than FutureLink or any subsidiary thereof) allof the shares held by such holders on payment by FutureLink or Nova Scotia Co., as applicable, of an amountper Exchangeable Share equal to the current market price of a FutureLink Common Share, to be satisfied byFutureLink or Nova Scotia Co., as applicable, causing to be delivered to such holder one FutureLink CommonShare, plus, to the extent not paid by Exchangeco, the Dividend Amount.
34. The Exchange Agreement further provides that in the event of the liquidation, dissolution or winding-up ofFutureLink, FutureLink will purchase all of the then outstanding Exchangeable Shares in exchange for anequivalent number of FutureLink Common Shares (the "Automatic Exchange Right").
35. Pursuant to the Support Agreement, for so long as any Exchangeable Shares not owned by FutureLink or itsaffiliates are outstanding, FutureLink has agreed, among other things:
(a) not to declare or pay any dividend on the FutureLink Common Shares unless Exchangeco is able toand promptly pays an equivalent dividend on the Exchangeable Shares;
(b) to do all things that are reasonably necessary to enable and permit Exchangeco to pay and otherwiseperform its obligations with respect to the satisfaction of the liquidation amount, retraction price orredemption price, as the case may be, in respect of the Exchangeable Shares upon the liquidation,dissolution or winding-up of Exchangeco, the delivery of a retraction request by a holder of anyExchangeable Share or a redemption of Exchangeable Shares by Exchangeco, as the case may be;and
(c) to do all things that are reasonably necessary to enable and permit Nova Scotia Co. to perform itsobligations arising upon the exercise by it of the Liquidation Call Right, the Retraction Call Right or theRedemption Call Right.
36. The Support Agreement also provides that FutureLink, upon notice from Exchangeco or Nova Scotia Co. of anyevent that requires Exchangeco or Nova Scotia Co. to cause FutureLink Common Shares to be delivered toany holder of Exchangeable Shares, FutureLink shall forthwith issue and deliver or cause to be delivered toExchangeco or Nova Scotia Co. the requisite number of FutureLink Common Shares to be received by andissued to or to the order of the former holder of the surrendered Exchangeable Shares.
37. The Support Agreement also provides that in the event a tender offer, share exchange offer, issuer bid, take-over bid or similar transaction (an "Offer") with respect to the FutureLink Common Shares is proposed byFutureLink or to FutureLink and the Exchangeable Shares are not redeemed by Exchangeco or purchased byNova Scotia Co., FutureLink will do all things as are necessary to permit the holders of Exchangeable Sharesto participate in such Offer to the same extent and on an economically equivalent basis as the holders ofFutureLink Common Shares.
38. There are several potential trades (collectively, the "Trades") in FutureLink Common Shares which arise basedon the provisions of the Exchangeable Shares or in connection with the Exchange Agreement and Call RightsAgreement, and which do not fit within existing statutory registration and prospectus exemptions, including:
(a) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the retractionof Exchangeable Shares by the holders thereof;
(b) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the exerciseby Nova Scotia Co. of the Retraction Call Right;
(c) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the redemptionof the Exchangeable Shares;
(d) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the exerciseby Nova Scotia Co. or FutureLink of its Redemption Call Right on the Redemption Date;
(e) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the liquidation,dissolution or winding-up of Exchangeco;
(f) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the exerciseby Nova Scotia Co. of its call right upon notice of any proposed liquidation, dissolution or winding-upof Exchangeco;
(g) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the exerciseby FutureLink of its call right upon notice of any proposed liquidation, dissolution or winding-up ofExchangeco;
(h) the issuance of FutureLink Common Shares to holders of Exchangeable Shares upon the liquidation,dissolution or winding-up of FutureLink; and
(i) the first trade of FutureLink Common Shares acquired by former holders of Exchangeable Shares.
39. There may be no registration or prospectus exemptions available under the Legislation for certain of the Trades.
40. If the holders of Exchangeable Shares acquired the maximum number of FutureLink Common Shares to whichthey are entitled pursuant to the provisions of those shares or the exercise by Nova Scotia Co. or FutureLinkof the various call rights described above then, as at March 12, 2001, persons or companies whose last addressas shown on the books of FutureLink in the Jurisdictions and who held FutureLink Common Shares would nothold more than 10% of the outstanding FutureLink Common Shares and would not represent in number morethan 10% of the total number of holders of FutureLink Common Shares.
41. There is no organized market for FutureLink Common Shares in the Jurisdictions and none is expected todevelop.
AND WHEREAS pursuant to the System this MRRS Decision Document evidences the decision of eachDecision Maker (collectively, the "Decision");
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 pursuant to the Legislation is that the Registration Requirement andthe Prospectus Requirement shall not apply to the Trades provided that the first trade in FutureLink Common Sharesissued upon the exchange of Exchangeable Shares in a Jurisdiction shall be deemed a distribution under the Legislationof such Jurisdiction unless such trade is executed through the facilities of a stock exchange outside of the Jurisdictionsor through Nasdaq.
April 6, 2001.
"John Geller" "K.D. Adams"