IBI Income Fund et al. - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Issuer income fund and arm's length third party agreed to transfer assets of third party to issuer income fund -- related party of the issuer income fund acting as a flow-through for the merger of third party business with the business of issuer income fund-- involvement of flow-through related party in transaction that is otherwise an arm's length transaction triggers requirements under business combination provisions of Rule 61-501 -- issuer exempt from substantive requirements of Rule 61-501 -- decision subject to limited confidentiality provision.

Rules Cited

Ontario Securities Commission Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions 23 O.S.C.B. 971, as amended.

December 22, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO AND QUEBEC (THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

IBI INCOME FUND, IBI GROUP AND

IBI GROUP MANAGEMENT PARTNERSHIP

(THE "FILERS")

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the "Legislation") that the security holder meeting and information circular requirements (the "Meeting and Circular Requirement"), the valuation and related disclosure requirements (the "Valuation Requirement") and the minority approval requirement (the "Minority Approval Requirement") applicable to "related party transactions" under the Legislation shall not apply to the Transactions (as defined below).

Under the Mutual Reliance Review System for Exemptive Relief Applications

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision document unless they are defined in this decision document.

Representations

This decision is based on the following facts represented by the Filers:

1. IBI Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established on July 23, 2004 under the laws of the Province of Ontario and is governed by an amended and restated declaration of trust made of the 31st day of August, 2004.

2. The principal and head office of the Fund is located at 230 Richmond Street West, 5th Floor, Toronto, Ontario, M5V 1V6.

3. The Fund is a reporting issuer in all the provinces and territories in Canada, and has been a reporting issuer since August 24, 2004.

4. The authorized capital of the Fund consists of an unlimited number of trust units ("Trust Units") and an unlimited number of non-participating voting units ("Non-Participating Voting Units") (the Trust Units and the Non-Participating Voting Units are referred to collectively as the "Units").

5. The issued and outstanding capital of the Fund consists of 5,025,778 Trust Units held by the public and 5,025,778 Non-Participating Voting Units held by IBI Group Management Partnership (the "Management Partnership").

6. The outstanding Trust Units of the Fund are listed for trading on the Toronto Stock Exchange under the symbol "IBG.UN".

7. The Fund is in compliance with all of its continuous disclosure requirements. All of the continuous disclosure materials filed by the Fund are available on the System for Electronic Document Analysis and Retrieval.

8. The Fund does not carry on any business directly and its activities are currently limited to holding all of the issued and outstanding notes and units of IBI Holding Trust (the "Holding Trust"), an unincorporated, open-ended, limited purpose trust established on August 24, 2004 under the laws of the Province of Ontario and governed by a declaration of trust made as of the 24th day of August, 2004.

9. The Holding Trust holds 100% of the limited partnership interest in IBI Group L.P. ("IBI LP"), a limited partnership established on August 24, 2004 under the laws of the Province of Manitoba and governed by an amended and restated limited partnership agreement made as of the 31st day of August, 2004. The Holding Trust also holds all of the issued and outstanding shares of IBI GP Holdings Limited, a corporation incorporated under the laws of Canada, which is the sole beneficiary of IBI General Partner Trust, an unincorporated, limited purpose trust established on August 24, 2004 under the laws of the Province of Ontario which acts as the general partner of IBI LP.

10. IBI Group, a partnership established on August 24, 2004 under the laws of the Province of Ontario and governed by an amended and restated partnership agreement made as of 31st day of August, 2004, is the principal operating entity of the Fund and carries on the business of providing professional services, including planning, design, implementation, analysis of operations and other consulting services in relation to four main areas of development, being urban land, building facilities, transportation networks and systems technology.

11. The authorized capital of IBI Group consists of an unlimited number of class A units (the "Class A Units") and an unlimited number of class B units (the "Class B Units") (the Class A Units and the Class B Units are referred to collectively as the "Partnership Units").

12. IBI LP holds 5,025,778 Class A Units, which represent 50% of the outstanding Partnership Units.

13. The Management Partnership holds 5,025,778 Class B Units representing 50% of the outstanding Partnership Units. In addition, the Management Partnership holds 5,025,778 Non-Participating Voting Units of the Fund. The Class B Units held by the Management Partnership, together with the Non-Participating Voting Units of the Fund held by the Management Partnership, are exchangeable, commencing in 2007, subject to the Fund meeting certain financial requirements, for an equivalent number of Trust Units of the Fund.

14. The Management Partnership administers the business of IBI Group pursuant to an administration agreement (the "Administration Agreement") between, among others, the Management Partnership and IBI Group and provides the services of the principals of its corporate partners to IBI Group pursuant to the Administration Agreement in exchange for a fee.

15. As a result of its holdings of Non-Participating Voting Units, the Management Partnership is a "control block holder" in relation to the Fund and is, therefore, a "related party" of the Fund within the meaning of Rule 61-501. In addition, as result of Section 1.4 of Rule 61-501, a transaction entered into by IBI Group, the underlying operating entity of the Fund, is deemed to be a transaction of the Fund.

16. Daniel Arbour & Associates SENC ("DAA") is a general partnership existing under the laws of the Province of Quebec which carries on the business of providing professional services in, among other areas, research, planning and design of urban land development, in the fields of housing, industrial uses, institutional uses and commercial uses, with an expertise in related fields of tourism and environmental considerations, principally in Quebec and China.

17. Each of IBI Group, the Fund and the Management Partnership deals at arm's length with DAA and its partners.

18. IBI Group and DAA have reached an agreement in principle for certain transactions (the "Transactions") pursuant to which the business of DAA will be merged with the business of IBI Group through the transfer of the Assets of DAA to IBI Group in connection with which DAA will receive, inter alia, certain consideration (the "Consideration") based on a multiple of the normalized EBITDA of DAA for the 24 month period ending December 31, 2005 ("Adjusted EBITDA"). Of the Consideration, 50% of the estimated amount thereof will be payable on the closing (the "Closing") of the Transactions, with the balance payable on the earlier of (i) the first anniversary of Closing, and (ii) January 31, 2007 (the "Second Payment Date") following the determination of the final amount of the Consideration.

19. At the request of DAA, the Transactions are being structured so that they will be effected through the following steps.

20. The Assets will initially be conveyed to the Management Partnership in exchange for a cash payment equal to 50% of the estimated Consideration and a new general partnership interest in the Management Partnership (the "DAA Interest") on a partially tax-deferred basis pursuant to subsection 97(2) of the Income Tax Act (Canada) (the "Tax Act"). For the purposes of the Tax Act, both DAA and the Management Partnership will elect a transfer price less than the fair market value of the Assets.

21. The DAA Interest will be entitled to receive 99.9999% of all capital and income received from time to time by the Management Partnership in respect of the Class C Unit of IBI Group which is described below. Any tax consequences associated with any distributions of capital or income by the Management Partnership to DAA will be allocated to DAA.

22. In addition, the DAA Interest will be entitled to receive, on an annual basis for the three-year period following the closing of the Transactions, an amount equal to 40% of the amount, if any, by which the EBITDA attributable to the DAA business exceeds the Adjusted EBITDA of the DAA business upon which the Consideration for the Assets was based (the "Annual Payment"). In the event that any of the existing partners of DAA are either admitted as partners of the Management Partnership on an individual basis or terminate the provision of their services to the merged business through the Management Partnership for any reason, the Annual Payment will be reduced by a percentage equal to the departing partner's percentage share of the income of DAA immediately prior to the completion of the Transactions.

23. The DAA Interest will also be entitled to receive an amount equal to the base compensation payable in respect of the seven existing partners of DAA for providing the services of such partners to IBI Group through the Management Partnership (the "Base Compensation"). Again, in the event that any of the existing partners of DAA are admitted as partners of the Management Partnership on an individual basis or terminate the provision of their services to the merged business through the Management Partnership for any reason, the Base Compensation will be reduced by the amount thereof which was paid in respect of such partner.

24. The obligations of the Management Partnership to make the required payments on the DAA Interest, including the Annual Payment and the Base Compensation, will be guaranteed by IBI Group.

25. Immediately following the transfer of the Assets by DAA to the Management Partnership, the Management Partnership will transfer all of the Assets to IBI Group in exchange for a cash payment equal to 50% of the estimated Consideration and a new partnership interest in IBI Group represented by a class C unit (the "Class C Unit"). This transfer will be made on a full rollover basis pursuant to subsection 97(2) of the Tax Act (by electing a transfer price equal to the Management Partnership's cost of the Assets). The Class C Unit will have the following entitlements:

(a) a priority capital entitlement to be paid in cash on the Second Payment Date the balance of the Consideration, as adjusted, (the "Priority Capital Entitlement"); and

(b) a priority right to receive out of the income of IBI Group an amount calculated by applying (i) the commercial lending rate of interest, expressed as an annual rate, which IBI Group's bank lender quotes in Toronto as the reference rate of interest for the purpose of determining the rate of interest that it charges to its commercial customers for loans in Canadian funds (the "Prime Rate"), to (ii) the Priority Capital Entitlement, for the period between the Closing and the Second Payment Date.

26. IBI Group will obtain the funds to pay the 50% of the estimated Consideration which is payable on Closing by borrowing such funds (the "Loan") from the Management Partnership. The Loan will be unsecured and subordinated to IBI Group's indebtedness to its bank lender, will bear interest at the rate of interest charged by IBI Group's bank lender on IBI Group's credit facilities and will mature at the same time as IBI Group's credit facilities.

27. The Loan is a related party transaction under the Legislation but, as a loan transaction, it is not within a category of related party transactions which is subject to the Valuation Requirement. Furthermore, because the Loan will be obtained by IBI Group on reasonable commercial terms that are not less advantageous to IBI Group than if the Loan were obtained from a person or company dealing at arm's length with the Fund and is not convertible into equity or voting securities of the Fund or repayable in equity or voting securities of the Fund, it is exempt from the Minority Approval Requirement.

28. It is proposed that the payment of the Priority Capital Entitlement will be financed by a public offering (the "Offering") of Trust Units of the Fund some time during 2006 in which the Management Partnership will participate.

29. To the extent that there is an Offering, DAA will have an option, exercisable on the Second Payment Date, to convert not less than 10% and not greater than 40% of the amount to be loaned by the Management Partnership to DAA on the Second Payment Date as described in the immediately following paragraph into an interest in the Management Partnership that provides an economic return equal to that which would be obtained by holding the number of Trust Units determined by dividing the amount of the loan which is being converted (the "Conversion Interest") by the issue price of the Trust Units pursuant to the Offering. Any amount so converted would reduce the amount to be loaned by the Management Partnership to DAA on the Second Payment Date as described in the immediately following paragraph by an equal amount. The Conversion Interest may be exchanged by DAA for an aggregate number of Trust Units equal to the number determined pursuant to the immediately preceding sentence from the holdings of the Management Partnership.

30. On the Second Payment Date, following the payment by IBI Group of the Priority Capital Entitlement, pursuant to the DAA Interest, the Management Partnership will lend to DAA an amount equal to 99.9999% of the Priority Capital Entitlement less the Conversion Interest (the "DAA Loan"). The DAA Loan shall bear interest at the Prime Rate and shall be repayable on January 1, 2008. Recourse for the DAA Loan will be limited to the DAA Interest.

31. On January 1, 2008, a capital distribution will be made on the DAA Interest equal to 99.9999% of an amount equal to the Priority Capital Entitlement less the Conversion Interest and an income distribution will be made on the DAA Interest in an amount equal to 99.9999% of the total interest payable by DAA to the Management Partnership in respect of the DAA Loan, and such amounts will be set off against the principal amount of the DAA Loan and the interest payable thereon in full payment thereof.

32. IBI Group will pay to the Management Partnership an annual management fee in an amount equal to the aggregate of the Annual Payment and the Base Compensation which amount will be used by the Management Partnership to pay the Annual Payment and the Base Compensation to DAA.

33. The Management Partnership is not receiving any benefit from structuring the Transactions in this manner (other than benefits obtained through its holdings of Class B Units which also accrue on a pro rata basis to the holders of the Units of the Fund and the benefits that it will receive pursuant to the Loan). The Management Partnership is essentially acting as a flow-through for the benefits to be received by DAA in respect of the merger of its business with the business of IBI Group by way of the transfer of the Assets to IBI Group, indirectly through the Management Partnership.

34. The Transactions will, pursuant to the provisions of the Fund's Declaration of Trust and the partnership agreement of IBI Group dealing with interests of management in material transactions, be subject to the approval by the independent trustees of the Fund, after disclosure of the interests of the individuals who are principals of partners in the Management Partnership in the Transactions, including those who serve as trustees of the Fund.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that:

(a) the Meeting and Circular Requirement, the Valuation Requirement and the Minority Approval Requirement under the Legislation shall not apply to the Transactions; and

(b) this Decision be held in confidence by the Decision Makers until the earlier of:

(i) the public announcement of the Transactions, and

(ii) January 31, 2006.