Homburg Invest Inc. - MRRS Decision

MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Applications - relief from sections 8.4(1) and 8.4(2) of National Instrument 51-102. - Filer acquired 11 real estate properties in the Netherlands and was unable to gain access to financial records relating to five properties acquired as asset purchases in order to prepare carve-out financial statements for the two fiscal years and the interim period prior to the acquisition of the properties. Relief granted from preparing the "carve out" financial statements as required by National Instrument 51-102 sections 8.4(1) and 8.4(2). Alternative financial and other disclosure was provided.

April 25, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

NOVA SCOTIA, ALBERTA, SASKATCHEWAN, ONTARIO

AND QUEBEC (THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

HOMBURG INVEST INC. (THE "FILER")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (collectively, the "Decision Makers") in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") that relief from the requirements under the Legislation that certain financial statements prescribed by subsections 8.4(1) and (2) of National Instrument 51-102 - Continuous Disclosure Obligations ("NI 51-102") and item 3 of Form 51-102F4 of that instrument be filed with the business acquisition report prepared by the Filer in connection with the Filer's acquisition of interests in 11 retail properties be granted on the condition that acceptable alternative financial statements be provided for such acquisitions (the "Requested Relief").

Under the Mutual Reliance Review System for Exemptive Relief Applications (the "System"):

(a) the Nova Scotia Securities Commission is the principal regulator for the 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 unless they are defined in this decision.

Representations

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

1. The Filer is a corporation incorporated under the laws of the Province of Alberta. The head and principal offices of the Filer are located at Suite 600, 1741 Brunswick Street, Halifax, Nova Scotia B3J 3X8 and its registered office is located at 3700, 400 Third Ave. S.W., Calgary, Alberta T2P 4H2.

2. The Filer owns a diverse portfolio of real estate including office, retail, warehouse and residential apartment and townhouse properties throughout Canada, in the United States and in Germany and the Netherlands.

3. The Class A Subordinate Voting Shares (the "Class A Shares") and Class B Multiple Voting Shares in the capital of the Filer are listed and posted for trading on the Toronto Stock Exchange under the symbols HII.SV.A and HII.MV.B, respectively.

4. The Filer is a reporting issuer in the Jurisdictions and, except as noted with respect to the filing of its business acquisition report, to the best of its knowledge is not in default of any requirements of the Legislation.

5. Effective June 1, 2005 and June 2, 2005, Homburg completed the acquisition of 11 real estate properties (the "Properties") consisting of office buildings, shopping centers, logistics centers and production, warehousing and distribution facilities located in Germany and the Netherlands from vendors located in those jurisdictions (collectively, the "Vendors").

6. The acquisition of the Properties involved a series of share purchase and asset purchase transactions whereby limited partnerships owned 100% by the Filer acquired interests in three companies (which together held six of the Properties) (the "Share Purchase Companies") and five individual Properties (the "Asset Purchase Properties").

7. The total consideration paid by Homburg to acquire the Properties was CDN$494.02 million, comprised of: (i) the issuance of 21,677,487 Class A Shares at a price of $3.00 per share for total share consideration equal to CDN$65 million; (ii) a cash payment of CDN$34.90 million; and (iii) the assumption of existing debt and new debt totalling CDN$394.12 million. Of the total consideration paid, 69% was paid with respect to the acquisition of the six Properties held by the Share Purchase Companies.

8. All of the Properties were under common control or management prior to the acquisition being completed and were, therefore, "related businesses" within the meaning of Part 8 of NI 51-102. When taken together, the acquisition of the Properties constitutes a "significant acquisition" for the Filer for the purposes of NI 51-102 (exceeding the 40% threshold of the significance tests as determined in accordance with section 8.3 of NI 51-102), requiring the Filer to file a business acquisition report with respect to the acquisition pursuant to section 8.2 of NI 51-102.

9. Pursuant to section 8.4 of NI 51-102, the business acquisition report relating to the acquisition of the Properties must be accompanied by certain financial statements, including: (i) audited financial statements for each of the 2 most recently completed financial years of the business acquired ended more than 45 days before the date of the acquisition; (ii) unaudited interim financial statements for the most recently completed interim period of the business acquired that ended before the date of the acquisition, together with a comparative interim financial statement for the comparative period in the preceding year of the business acquired (the "BAR Financial Statements").

10. Management of the Filer has obtained audited annual financial statements for each of the years ended December 31, 2004 and December 31, 2003 and unaudited interim financial statements for the five month period commencing January 1, 2005 and ending May 31, 2005 for each of the Share Purchase Companies and these statements, which have been prepared under Dutch generally accepted accounting principles ("Dutch GAAP") and reconciled to Canadian generally accepted accounting principles ("Canadian GAAP"), will be filed with the business acquisition report.

11. Each of the Asset Purchase Properties represented just one of the properties in a portfolio of real estate properties owned by the Vendors and, accordingly, separate financial statements have never been prepared for the Asset Purchase Properties.

12. Management of the Filer obtained independent appraisals (the "Appraisals") with respect to each of the 11 Properties. The appraisals were prepared by a qualified independent real estate appraiser on a going forward basis, using the discounted cash flow method, based on long term "triple net" leases in place. The appraised values for the Properties on an aggregate basis were $521.3 million while the purchase price for the Properties on an aggregate basis was $494.02 million.

13. Annual audited financial statements and unaudited interim financial statements for the Asset Purchase Properties in the format required by subsections 8.4(1) and (2) of NI 51-102 do not exist and the information to produce such statements cannot be obtained by the Filer as the Asset Purchase Properties were one of a portfolio of properties held by the Vendors and the Vendors did not maintain separate financial records and financial statements for the Asset Purchase Properties; the information was simply consolidated with the Vendors' records.

14. Furthermore, the Filer cannot obtain from the Vendors of the Asset Purchase Properties historical balance sheets and/or financial information of the Vendors of the Asset Purchase Properties which would enable the Filer to prepare the balance sheets setting out the assets and liabilities directly attributable to the Asset Purchase Properties so as to meet the requirements for the production of "divisional" or "carve out" financial statements as set out in Section 8.6 of the Companion Policy to NI 51-102 (the "Carve Out Statements").

15. The Filer had requested that Accredo Groep BV (the "Auditors"), the accounting firm located in Eindhoven, the Netherlands, which audited the financial statements to be included in the Filer's business acquisition report, contact each of the Vendors of the Asset Purchase Properties. The Filer obtained a letter from the Auditors stating: (i) that the Vendors of the Asset Purchase Properties had never completed individual financial statements for the five Asset Purchase Properties as they did not have the need nor had been required to do so; and (ii) that the Auditors, at the request of the Filer, had contacted each of the Vendors of the Asset Purchase Properties within a specified two and one-half week period to obtain their historical balance sheets and any other financial information which would enable Carve Out Statements to be prepared and that in each case its request for parent company information was refused.

16. The Filer also obtained formal letters from each of the Vendors of the Asset Purchase Properties and where applicable, the companies or individuals who owned the Asset Purchase Properties prior to the Vendors of the Asset Purchase Properties confirming that: (i) the Auditor and the Filer, directly, had requested: (A) financial statements with respect to the Property acquired from the Vendor; and (B) alternatively, if separate statements were not maintained with respect to this Property, the historical balance sheets and/or financial information of the Vendor from which the Filer could prepare financial statements (the "Requested Financial Information"); and (ii) that the Vendor was refusing to provide such Requested Financial Information. Each of the Vendors of the Asset Purchase Properties cited the grounds for such refusal as the fact that the historical balance sheets and other financial information required for the Filer to prepare the necessary Carve Out Statements did not exist or that the release of such financial information to the Filer, a competitor, could jeopardize the Vendor's competitive advantage.

17. In satisfaction of or in place of the BAR Financial Statements or the Carve Out Statements for the Asset Purchase Properties, the Filer will file the following financial information:

(a) unqualified audited combined net operating statement including all 11 Properties with line items including property revenue and all direct expenses as at and for the years ended December 31, 2004 and 2003 and for the five months interim period ended May 31, 2005 reconciled to Canadian GAAP;

(b) individual audited net operating statements for each of the 11 Properties with line items including rental revenue and all direct expenses as at and for the years ended December 31, 2004 and 2003 and for the 5 months interim period ended May 31, 2005 (including notes thereto) reconciled to Canadian GAAP;

(c) pro forma financial statements (including notes thereto) and a compilation report for the year ended December 31, 2004 and the six months ended June 30, 2005 and a reconciliation of Dutch GAAP to Canadian GAAP; and

(d) executive summaries of the Appraisals with respect to each of the 11 Properties.

18. The Filer will file pro forma income statements (including notes thereto) and a compilation report for the year ended December 31, 2004 and the six months ended June 30, 2005 to satisfy the requirement to file pro forma financial statements as set out in subsections 8.4(3) and (4) of NI 51-102. The Filer has determined that a pro forma balance sheet is not required since the Filer's unaudited interim financial statements as at and for the three and six months ended June 30, 2005 which were filed August 10, 2005 reflected one month of ownership and operation of the Properties and included a balance sheet as at June 30 reflecting ownership of the Properties.

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 the Requested Relief is granted provided that:

1. The business acquisition report contains:

(a) audited annual financial statements, reconciled to Canadian GAAP, as at and for the years ended December 31, 2004 and 2003 for each of the Share Purchase Companies;

(b) unaudited interim financial statements, reconciled to Canadian GAAP, as at and for the five month period commencing January 1, 2005 and ending May 31, 2005 for each of the Share Purchase Companies;

(c) audited operating costs statements for each of the 11 Properties and audited combined operating costs statements for the 11 properties collectively, with line items including rental revenue and all direct expenses as at and for the years ended December 31, 2004 and 2003 and for the 5 months ended May 31, 2005, such statements reconciled to Canadian GAAP;

(d) pro forma income statement (including notes thereto) and a compilation report for the year ended December 31, 2004 and the six months ended June 30, 2005;

(e) executive summaries of the Appraisals with respect to each of the 11 Properties; and

(f) a description of the properties acquired including square footage, occupancy rate, square footage occupied by and duration of leases with anchor tenants.

DATED at Halifax, Nova Scotia on this 25th day of April, 2006.

"Nicholas A. Pittas"
Director of Securities
Nova Scotia Securities Commission