Mutual Reliance Review System for ExemptiveRelief Applications - Relief from valuation requirement in connectionwith a related party transaction - arrangement among incometrust, affiliate of income trust and company that provides managerialservices to the income trust. Affiliate to acquire all sharesof company providing managerial services in exchange for incometrust units and cash.
Applicable Ontario Rule
OSC Rule 61-501 - Insider Bids, Issuer Bids,Going Private Transaction and Related Party Transactions, ss.5.5, 5.6, and 9.1.
IN THE MATTER OF
THE SECURITIES LEGISLATIONOF
QUEBEC AND ONTARIO
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEWSYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
HOME EQUITY INCOME TRUST (the"Trust") AND
CANADIAN HOME INCOME PLANCORPORATION ("CHIP")
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker")in each of the provinces of Quebec and Ontario (the "Jurisdictions")has received an application (the "Application")from the Trust for a decision under the securities legislationof the Jurisdictions (the "Legislation") thatthe requirement contained in the Legislation to provide a formalvaluation in connection with a related party transaction (the"Formal Valuation Requirements") shall notapply to a related party transaction involving an arrangementbetween a wholly-owned subsidiary of the Trust and CHIP;
AND WHEREAS under the Mutual RelianceReview System for Exemptive Relief Applications (the "System"),the Ontario Securities Commission (the "Commission")is the principal regulator for this Application;
AND WHEREAS the Trust has representedto the Decision Makers that:
1. The Trust is an unincorporated open-endinvestment trust established under the laws of Ontario withits head office in Ontario and is a reporting issuer (or theequivalent) in all of the provinces of Canada.
2. The Trust is engaged in the business ofinvesting in reverse mortgage portfolios. It was establishedat the initiative of CHIP for the purpose of conducting aninitial public offering (IPO). The net proceeds of the Trust'sIPO were used to indirectly invest in a portfolio of reversemortgages owned by certain limited partnerships of which CHIPis the general partner.
3. The authorized capital of the Trust consistsof an unlimited number of units of the Trust ("Units").As at the date hereof, 9,634,900 Units are issued and outstanding.The Units are listed on the Toronto Stock Exchange.
4. CHIP is a corporation incorporated underthe laws of Canada with its head office in Ontario. CHIP isnot a reporting issuer in any province or territory of Canada.
5. CHIP is a financial services company thatoffers reverse mortgages to eligible Canadian homeowners.
6. According to the representations and warrantiesof CHIP contained in the Arrangement Agreement (as definedbelow), the issued and outstanding share capital of CHIP consistsof 9,402,137 voting common shares. The Trust understands thatthere are currently 47 shareholders of CHIP, excluding employeesof CHIP.
7. The Trust and its wholly-owned subsidiary,4142411 Canada Inc. ("Acquireco"), enteredinto an arrangement agreement with CHIP on February 11, 2003(the "Arrangement Agreement") pursuant towhich Acquireco has agreed to acquire all of the issued andoutstanding shares of CHIP (the "CHIP Shares")pursuant to a plan of arrangement at a price of $4.11 perCHIP Share payable partly in cash and partly in Units subjectto a maximum cash consideration of $24,000,005 and the issuanceof a maximum of 1,522,962 Units (the "Proposed Transaction").
8. The Proposed Transaction is conditionalupon, among other things, receipt of the necessary approvalsof the holders of Units and of CHIP Shares at special meetingsof such holders to be called for the purpose of obtainingsuch approvals, and court approval of the plan of arrangement.
9. The Trust has entered into support agreementswith holders of CHIP Shares holding, in the aggregate, approximately58% of the outstanding CHIP Shares who have agreed to votetheir CHIP Shares in favour of the Proposed Transaction.
10. The Proposed Transaction is a relatedparty transaction as CHIP is a "related party" ofthe Trust within the meaning of the Legislation by virtueof the managerial services performed for the Trust by CHIPand Canadian Home Mortgage Corporation ("CHMC"),an affiliate of CHIP, pursuant to the following agreements:
(a) an amended and restated management agreementdated August 2, 2002 (the "Management Agreement")pursuant to which the Trust retained CHMC to administerthe day-to-day operations of the Trust and to provide theservices of CHMC's Chief Executive Officer, Steven Ranson,to serve as Chief Executive Officer of the Trust. The ManagementAgreement provides that the management of the Trust is subjectto the overriding control and direction of the trusteesof the Trust (the "Trustees");
(b) a mortgage servicing agreement datedAugust 8, 2002 pursuant to which CHMC was retained by CHIPMortgage Trust to administer the mortgages held directlyby CHIP Mortgage Trust; and
(c) an origination agreement dated August8, 2002 pursuant to which CHIP has agreed to originate eligiblereverse mortgages exclusively for investment by the Trust.
11. Pursuant to the provisions of the ManagementAgreement, CHMC may not, without the prior written approvalof the Independent Trustees, undertake the following actions:(a) adopt, amend or materially deviate from the annual budgetand investment plan of the Trust; and (b) enter into any materialtransaction on behalf of the Trust with CHMC or an affiliateof CHMC other than as provided for in the annual budget andinvestment plan of the Trust. CHIP is not able to appointor remove any of the Trustees, with the exception of WilliamJ. Turner who is not an Independent Trustee and who was notinvolved in the decision as to whether the Trust should proceedwith the Proposed Transaction or in the negotiation of theterms of the Arrangement Agreement on behalf of the Trust.
12. Each of the Independent Trustees is aTrustee who is not an associate, director, officer or employeeof CHIP or CHMC and who is not related (as defined in TheToronto Stock Exchange Guidelines on Corporate Governance)to CHIP or CHMC, and for this purpose, a Trustee who is anominee of CHIP is deemed not to be an Independent Trustee.The Independent Trustees are appointed at each annual meetingof Unit holders, and may be appointed at a special meetingof Unit holders, in each case to hold office for a term expiringat the close of the next annual meeting of Unit holders followingsuch appointment. Any such appointment may be made eitherby a resolution approved by a majority of the votes cast ata meeting of Unit holders or by a resolution in writing executedby Unit holders holding more than 66-2/3% of the outstandingUnits at the time. An Independent Trustee may be removed fromoffice, with or without cause, only by a resolution approvedby a two-thirds majority of the votes cast at a meeting ofUnit holders called for that purpose, or by a resolution inwriting executed by Unit holders holding more than 66-2/3%of the outstanding Units at the time or, with cause, by atwo-thirds majority of the remaining Independent Trustees.
13. Steven K. Ranson, the CEO of the Trustand of CHMC, was not involved in the decision as to whetherthe Trust should proceed with the Proposed Transaction orin the negotiation of the Proposed Transaction on behalf ofthe Trust.
14. Neither CHIP nor CHMC has had any involvementin the decision as to whether the Trust should proceed withthe Proposed Transaction or in the negotiation of the termsof the Arrangement Agreement on behalf of the Trust.
15. CHIP does not own any Units.
16. In the absence of the requested relief,a formal valuation would be required with respect to the CHIPShares (being the subject matter of the transaction) as wellas the Units to be issued as consideration therefor, as theUnits to be issued under the Proposed Transaction constitutemore than 10% of the outstanding Units.
17. An independent formal valuation of theCHIP Shares dated October 31, 2002 was prepared by Deloitte& Touche Corporate Finance Inc. on behalf of CHIP in connectionwith an issuer bid made by CHIP by way of an issuer bid circulardated November 4, 2002 (the "CHIP Valuation").A copy of the CHIP Valuation was contained in the issuer bidcircular sent to each of CHIP's shareholders and is filedon SEDAR. The valuator determined that the fair market valueof the common shares of CHIP, on a fully diluted basis, wasin the range of $3.60 to $4.00 per share as at October 15,2002.
18. The information circular to be sent toUnit holders in connection with the Proposed Transaction will:(i) indicate an address where a copy of the CHIP Valuationis available for inspection and (ii) state that a copy ofthe CHIP Valuation will be sent to any Unit holder upon requestand without charge.
19. In connection with the Proposed Transaction,the Independent Trustees (the "Independent Committee")in consultation with their independent financial advisor,negotiated the Proposed Transaction and recommended to theTrustees that the Trust enter into the Arrangement Agreement.The financial advisor has delivered a "fairness opinion"to the Independent Trustees in respect of the Proposed Transactionwhich indicates that, in its opinion, the consideration tobe paid by the Trust for the CHIP Shares is fair, from a financialpoint of view, to the Trust. The fairness opinion refers tothe CHIP Valuation and discloses a number of different assumptionsused by the financial advisor to the Independent Trusteesin completing its fairness analysis compared to the assumptionsused in the CHIP Valuation.
20. The Trust will hold a special meetingof its Unit holders for the purpose of, among other things,approving the Proposed Transaction. The materials to be sentto the Unit holders in connection with that meeting will includefull details of the Proposed Transaction, including full disclosureof CHIP's relationship with the Trust, and a copy of the fairnessopinion delivered by the financial advisor to the IndependentTrustees.
21. For the purposes of the Proposed Transaction,the market capitalization of the Trust, as defined in theLegislation relating to exemptions from valuations for relatedparty transactions, is $109,881,217.
22. Approximately 34% of the CHIP Shares arecollectively owned by related parties of the Trust and suchparties will receive aggregate consideration under the ProposedTransaction of approximately $13 million in cash and Unitsas described in paragraph 7. The aggregate fair market valueof any other non-cash consideration such as long term incentiveplans or employment agreements to be received by such partiesis less than $14 million. Accordingly, the fair market valueof the consideration, including non-cash consideration suchas long term incentive plans or employment agreements, tobe received by such parties in connection with the ProposedTransaction, is less than 25% of the market capitalizationof the Trust referred to in paragraph 21.
23. The Proposed Transaction will be subjectto the minority approval requirements of the Legislation.As a result, any Units held by the related parties of theTrust referred to in paragraph 22. will be excluded in determiningthe minority approval requirements. Similarly, persons whoown CHIP Shares carrying more than 10% of the voting rightsattached to all CHIP Shares, will be excluded from votingon the Proposed Transaction.
24. To the knowledge of the Trustees, no personor company beneficially owns, directly or indirectly, or exercisescontrol or direction over, more than 10% of the outstandingUnits.
25. The Trust is seeking relief solely fromthe Formal Valuation Requirements of the Legislation. In allother respects, the Trust will comply with the provisionsof the Legislation applicable to the Proposed Transaction.
AND WHEREAS under the System, this MRRSDecision Document evidences the decision of each Decision Maker;
AND WHEREAS each of the Decision Makersis satisfied that the tests contained in the Legislation thatprovides the Decision Maker with the jurisdiction to make theDecision has been met;
THE DECISION of the Decision Makers underthe Legislation is that the Proposed Transaction will not besubject to the Formal Valuation Requirements contained in theLegislation, provided that the Trust complies with the otherapplicable requirements of the Legislation.
March 17, 2003.