Securities Law & Instruments

Headnote

Rule 61-501 -- going private transactions -- severance payment and non-compete fee payable to a principal shareholder of issuer made for reasons other than to increase the value of the consideration paid to the shareholder under proposed going private transaction -- payments not conditional on support of transaction and reasonably consistent with customary industry practice -- full particulars of payments to be disclosed in disclosure document sent to shareholders in connection with meeting to approve transaction -- principal shareholder permitted to vote that number of common shares that is equal to ten percent of the issued and outstanding common shares of the issuer -- number of common shares permitted to be voted approximately twenty-five percent of eligible minority vote.

Applicable Ontario Rules

Rule 61-501 - Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions, ss. 4.7, 4.8 and 9.1.

IN THE MATTER OF

ONTARIO SECURITIES COMMISSION RULE 61-501 ("Rule 61-501")

AND

IN THE MATTER OF

MR. ZELICK GOLDSTEIN AND 2012413 ONTARIO INC.

 

RULING

(Section 9.1 of Rule 61-501)

UPON the application (the "Application") of Mr. Zelick Goldstein ("Goldstein") and 2012413 Ontario Inc. ("Acquisitionco") (collectively, the "Applicants") to the Director for a decision pursuant to section 9.1 of Rule 61-501 that Mr. Hyman Himmel ("Himmel") be permitted to vote up to that number of common shares (the "Common Shares") of Hy & Zel's Inc. ("Hy & Zel's") that is equal to 10% of the issued and outstanding Common Shares as part of the minority vote required in connection with the going private transaction of Hy & Zel's (the "Transaction") notwithstanding the severance arrangement (the "Severance Arrangement") pursuant to which Himmel will receive a cash payment in connection with the Transaction;

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

AND UPON the Applicants having represented to the Director as follows:

1. Hy & Zel's operates a chain of 17 stores in Southern Ontario, which sell drug store products as well as grocery and general merchandise.

2. Hy & Zel's was incorporated by Letters Patent issued April 1, 1963 pursuant to the Corporations Act (Ontario), and is governed by the provisions of the Business Corporations Act (Ontario) ("OBCA"). By Articles of Amendment dated August 25, 1986, Hy & Zel's amended its share capital to its present authorized and issued share capital and changed its name to its current name.

3. Hy & Zel's has two wholly-owned subsidiaries, The Warehouse Drug Store Ltd. ("Warehouse"), a corporation incorporated under the OBCA, and 3608751 Canada Inc.

4. The authorized capital of Hy & Zel's consists of an unlimited number of Common Shares. As at the date hereof, 2,900,100 Common Shares are issued and outstanding. Hy & Zel's Common Shares are listed on the Toronto Stock Exchange.

5. Goldstein is a senior executive of Hy & Zel's and has been a director of Hy & Zel's since 1963. Goldstein owns or controls 1,054,200 Common Shares, representing approximately 36.4% of the issued and outstanding Common Shares.

6. Acquisitionco was incorporated under the OBCA for the purpose of completing the Transaction and is controlled by Goldstein.

7. Himmel was a senior executive of Hy & Zel's for the past 22 years and has been a director of the Hy & Zel's since 1963.

8. Himmel owns or controls 1,000,000 Common Shares representing approximately 34.5% of the issued and outstanding Common Shares.

9. On December 20, 2002, Goldstein proposed the Transaction to the Hy & Zel's board of directors (the "Board"). Pursuant to the proposal, the Transaction would be completed by the amalgamation of Acquisitionco and Hy & Zel's under the OBCA pursuant to which the shareholders of Hy & Zel's (the "Shareholders") would receive, directly or indirectly cash consideration of $2.25 in exchange for each of their Common Shares.

10. An independent committee (the "Independent Committee") of the Board was formed to review the proposed Transaction and to make a recommendation to the board of directors of Hy & Zel's and the Shareholders.

11. The Transaction would constitute a "going private transaction" under Rule 61-501 and will be subject to the formal valuation and minority approval requirements of Rule 61-501.

12. On December 20, 2002, Himmel entered into a shareholder support agreement (the "Original Support Agreement") with the Applicants pursuant to which Himmel agreed to support the Transaction and to vote the 1,000,000 Common Shares owned or controlled by him in favour of the Transaction. The Original Support Agreement expired on May 31, 2003.

13. On June 6, 2003, Warehouse and Himmel entered into a retirement agreement pursuant to which Himmel retired as an employee of Warehouse and resigned as an officer of Hy & Zel's and its subsidiaries and Warehouse agreed to pay Himmel a retiring allowance in the aggregate amount of $600,000 (the "Retiring Allowance").

14. In October, 2003, Capital Canada Ltd. ("Capital Canada") delivered the results of its valuation report to the Independent Committee. In the opinion of Capital Canada, based on the scope of its review and subject to the qualifications and assumptions set out in its valuation report, the fair market value of the Common Shares is in the range of $2.13 to $3.14 per Common Share as of August 12, 2003. Capital Canada further opined that the Transaction is fair, from a financial point of view, to the minority Shareholders of Hy & Zel's.

15. The Independent Committee has concluded that the Transaction is fair, from a financial point of view, to the minority Shareholders of Hy & Zel's and has concluded that the Board of Directors of Hy & Zel's should recommend that the minority Shareholders of Hy & Zel's vote to approve the Transaction.

16. On October 4, 2003, Himmel entered in a new shareholder support agreement (the "New Support Agreement") with the Applicants pursuant to which Himmel has agreed to support the Transaction and to vote the 1,000,000 Common Shares owned or controlled by him in favour of the Transaction.

17. In addition to the Retiring Allowance, Himmel is to receive a further amount of $250,000 upon successful completion of the Transaction as consideration for entering into a non-competition agreement (the "Non-Compete Fee"). The Retiring Allowance and the Non-Compete Fee are collectively referred to as the "Severance Arrangement".

18. The Severance Arrangement was negotiated in December 2002 as a lump sum payment of $850,000.

19. Himmel is an interested party within the meaning of Rule 61-501 because he will receive a cash payment under the Severance Arrangement that will not be offered to any other Shareholder. Therefore, Himmel's Common Shares are excluded, under Rule 61-501, from the minority Shareholder vote required to approve the Transaction.

20. The Severance Arrangement was made on commercially reasonable terms and the amount payable to Himmel is substantially similar to the amount that Himmel would otherwise be entitled to at common law.

21. The amount to be received by Himmel under the Severance Arrangement is reasonably consistent with customary industry practice.

22. The Severance Arrangement is the result of agreement reached between Goldstein and Himmel. Goldstein wishes to take Hy & Zel's private and carry on the business without his partner in business of almost 40 years and Himmel was not prepared to agree to the termination of his employment without receiving reasonable compensation for his years of service in addition to receiving reasonable value for his equity investment.

23. The Severance Arrangement was offered for business reasons unrelated to Himmel's holdings of Common Shares and not for the purpose of conferring a benefit to Himmel that the other Shareholders do not enjoy or to increase the value of consideration to be paid to Himmel for his Common Shares.

24. The Severance Arrangement is not conditional on Himmel's support of the Transaction.

25. Goldstein's Common Shares are excluded from the minority vote. Since Goldstein holds approximately 36.4% of the Common Shares and Himmel holds approximately 34.5% of the Common Shares, if Himmel is permitted to vote 10% of the Common Shares owned or controlled by him, his vote would represent approximately 25% of the eligible minority vote.

26. In his capacity as a Shareholder, Himmel is being treated identically to the other Shareholders.

27. Full particulars of the benefit to be received by Himmel will be disclosed in any disclosure document that will be sent to security holders in connection with the Transaction.

AND UPON the Director being satisfied that to do so would not be prejudicial to the public interest:

IT IS DECIDED pursuant to section 9.1 of Rule 61-501 that, notwithstanding the Severance Arrangement pursuant to which Himmel will receive a cash payment in connection with the Transaction, Himmel is permitted to vote up to that number of Common Shares that is equal to 10% of the issued and outstanding Common Shares as part of the minority vote required in connection with the Transaction, provided that the Applicants and Hy & Zel's comply with the other applicable provisions of Rule 61-501.

November 14, 2003.

"Ralph Shay"