Securities Law & Instruments

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions-- new finance trust issuer wants relief from the prospectus and dealer registration requirements in respect of certain trades and/or distributions in its units to security holders of a real estate investment trust issuer in accordance with the terms and conditions of a security previously issued by that real estate investment trust issuer -- relief required as a result of a prior reorganization of real estate investment trust issuer following which units of the real estate investment trust issuer and units of the new finance trust issuer trade as stapled units -- relief granted but conditional upon each unit of new finance trust issuer being stapled to a unit of the real estate investment trust issuer and trading together as a stapled unit - the first trade of any units of new finance trust issuer acquired under the exemptive relief will be a distribution under the legislation of the jurisdiction where the trade takes place unless specified conditions in National Instrument 45-102 Resale of Securities are satisfied.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., s. 74(1).

July 24, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF ONTARIO

(the "Jurisdiction")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

H&R FINANCE TRUST

 

DECISION

Background

The principal regulator in the Jurisdiction has received an application from H&R Finance Trust ("H&R Finance" or the "Filer") for a decision under the securities legislation of the Jurisdiction (the "Legislation") that, pursuant to section 74(1) of the Securities Act (Ontario) and the equivalent legislation of the Canadian Jurisdictions (as defined below) other than Ontario, H&R Finance be exempted from the dealer registration and prospectus requirements in respect of a trade by H&R Finance of H&R Finance units to a security holder of H&R Real Estate Investment Trust (the "REIT") in accordance with the terms and conditions of a security previously issued by the REIT (the "Exemption Sought").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

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

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Prince Edward Island, New Brunswick, Newfoundland and Labrador, Nova Scotia, Northwest Territories, Yukon Territory and Nunavut (collectively, together with Ontario, the "Canadian Jurisdictions").

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1. The head office of the Filer is located in Toronto, Ontario.

2. The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.

3. On October 1, 2008 the REIT effected a plan of arrangement (the "Plan of Arrangement") pursuant to which, among other things, H&R Finance was established as an open-ended limited purpose unit trust governed by the laws of the Province of Ontario.

4. As contemplated in the Plan of Arrangement and as provided in the respective declarations of trust of the REIT and H&R Finance, each unit of the REIT is stapled to a unit of H&R Finance (and each unit of H&R Finance is stapled to a unit of the REIT), and a unit of the REIT, together with a unit of H&R Finance, trades as a "Stapled Unit" until there is an "Event of Uncoupling".

5. An Event of Uncoupling shall occur only: (a) in the event that unitholders of the REIT vote in favour of the uncoupling of units of H&R Finance and units of the REIT such that the two securities will trade separately; or (b) at the sole discretion of the trustees of H&R Finance, but only in the event of the bankruptcy, insolvency, winding-up or reorganization (under an applicable law relating to insolvency) of the REIT or H&R (U.S.) Holdings Inc. or the taking of corporate action by the REIT or H&R (U.S.) Holdings Inc. in furtherance of any such action or the admitting in writing by the REIT or H&R (U.S.) Holdings Inc. of its inability to pay its debts generally as they become due.

6. As part of the Plan of Arrangement, the REIT and H&R Finance entered into a support agreement (the "Support Agreement") which provided, among other things, for the co-ordination of the declaration and payment of all distributions so as to provide for simultaneous record dates and payment dates; for co-ordination so as to permit the REIT to perform its obligations pursuant to the REIT's Declaration of Trust, Unit Option Plan, Distribution Re-Investment Plan and Unitholder Rights Plan; for H&R Finance to take all such actions and do all such things as are necessary or desirable to enable and permit the REIT to perform its obligations arising under any security issued by the REIT (including securities convertible, exercisable or exchangeable into Stapled Units); for H&R Finance to take all such actions and do all such things as are necessary or desirable to enable the REIT to perform its obligations or exercise its rights under its convertible debentures; and for H&R Finance to take all such actions and do all such things as are necessary or desirable to issue H&R Finance units simultaneously (or as close to simultaneously as possible) with the issue of REIT units and to otherwise ensure at all times that each holder of a particular number of REIT units holds an equal number of H&R Finance units, including participating in and cooperating with any public or private distribution of Stapled Units by, among other things, executing prospectuses or other offering documents.

7. In the event that the REIT issues additional REIT units, pursuant to the Support Agreement, the REIT and H&R Finance will coordinate so as to ensure that each subscriber receives both REIT units and H&R Finance units, which shall trade together as Stapled Units. Prior to such event, the REIT shall provide notice to H&R Finance to cause H&R Finance to issue and deliver the requisite number of H&R Finance units to be received by and issued to, or to the order of, each subscriber as the REIT directs.

8. In consideration of the issuance and delivery of each such H&R Finance unit, the REIT (on behalf of the purchaser) or the purchaser, as the case may be, shall pay (or arrange for the payment of) a purchase price equal to the fair market value (as determined by H&R Finance in consultation with the REIT) of each such H&R Finance unit at the time of such issuance. The remainder of the subscription price for Stapled Units shall be allocated to the issuance of the REIT units by the REIT.

9. In August, 2008, the Filer was granted exemptive relief from the dealer registration and prospectus requirements in respect of trades of H&R Finance units to (i) REIT employees and (ii) stapled unitholders in connection with the exercise of rights pursuant to the REIT's unitholder rights plan.

10. From time to time, the REIT may wish to issue securities that are convertible, exercisable or exchangeable into Stapled Units.

11. The trade by the REIT of REIT units to a securityholder of the REIT in accordance with the terms of a security previously issued by the REIT, such as the convertible debentures, is exempt from the dealer registration and prospectus requirements pursuant to section 2.42 of National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106").

12. The Exemption Sought is necessary as the trade of H&R Finance units to a securityholder of the REIT in accordance with the terms of a security previously issued by the REIT does not qualify for the exemption from the dealer registration and prospectus requirements in section 2.42 of NI 45-106.

13. Given that (i) each H&R Finance unit will be stapled to a unit of the REIT; (ii) only Stapled Units will trade on the Toronto Stock Exchange; and (iii) unitholders of H&R Finance will be one and the same as unitholders of the REIT, the Exemption Sought is necessary to allow the REIT the flexibility to offer convertible debentures and other exchangeable or convertible securities on equivalent terms as other issuers.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted for so long as the units of the Filer are stapled to the REIT units and trade as Stapled Units, provided that the first trade of any units of the Filer acquired under this exemption is a distribution under the legislation of the jurisdiction where the trade takes place unless:

(a) the conditions in section 2.5 of National Instrument 45-102 Resale of Securities ("NI 45-102") are satisfied, if the units of the Filer were acquired in accordance with the terms and conditions of a security previously issued by the REIT under: (A) any of the circumstances listed in Appendix D of NI 45-102; or (B) an exemption from the prospectus requirement that specifies that the first trade is subject to section 2.5 of NI 45-102;

(b) the conditions in section 2.6 of NI 45-102 are satisfied, if the units of the Filer were acquired in accordance with the terms and conditions of a security previously issued by the REIT under: (A) any of the circumstances listed in Appendix E of NI 45-102; or (B) an exemption from the prospectus requirement that specifies that the first trade is subject to section 2.6 of NI 45-102;

(c) the following conditions are satisfied:

(i) a receipt was obtained for a prospectus qualifying the distribution of the convertible security, exchangeable security or multiple convertible security issued by the REIT,

(ii) the trade is not a control distribution, and

(iii) H&R Finance is a reporting issuer at the time of the trade; or

(d) the following conditions are satisfied:

(i) a securities exchange take-over bid circular or a securities exchange issuer bid circular relating to a distribution of the convertible security, exchangeable security or multiple convertible security issued by the REIT was filed by the offeror on SEDAR,

(ii) the trade is not a control distribution,

(iii) the offeror was a reporting issuer on the date the securities of the offeree issuer were first taken up under the take-over bid or issuer bid, and

(iv) H&R Finance is a reporting issuer at the time of the trade.

"James E. A. Turner"
Commissioner
Ontario Securities Commission
 
"Paulette L. Kennedy"
Commissioner
Ontario Securities Commission