National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- subdivided offering -- the prohibitions contained in the Legislation against trading in portfolio shares by persons or companies having information concerning the trading programs of mutual funds shall not apply to administrator with respect to certain principal trades with the issuer in securities comprising the Issuer's portfolio.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 119, 121(2)(a)(ii).
June 25, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO, ALBERTA, SASKATCHEWAN,
NEWFOUNDLAND AND LABRADOR
AND NOVA SCOTIA
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
SCOTIA CAPITAL INC.
The securities regulatory authority or regulator in each of the Jurisdictions ("Decision Makers") has received an application from the Filer and Scotia Capital under the securities legislation of the Jurisdiction (the "Legislation") for a decision that the prohibition in the Legislation prohibiting trading in portfolio shares by persons or companies having information concerning the trading programs of mutual funds (the "Principal Trading Prohibitions") shall not apply to Scotia Capital in connection with Principal Sales and Principal Purchases (each defined below) with respect to the public offering (the "Offering") of Class B Preferred Shares, Series 2 (the "Series 2 Preferred Shares") of the Filer (the "Exemption Sought").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a coordinated review application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the decision is the decision of the principal regulator and evidences the decision of each other Decision Maker.
Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer was incorporated under the Business Corporations Act (Ontario) on June 27, 1991 and became a reporting issuer under the OSA by filing a final prospectus dated June 26, 1992 relating to an initial public offering of capital shares and equity dividend shares.
2. The Filer filed articles of amendment on March 24, 1998 in connection with a share capital reorganization (the "1998 Reorganization") approved by its shareholders on March 16, 1998. Pursuant to the 1998 Reorganization, the outstanding capital shares of the Company were exchanged for Class A Capital Shares, the outstanding equity dividend shares were redeemed and, in order to maintain the leveraged "split share" structure of the Company, a new class of preferred shares (the "Preferred Shares") was issued pursuant to a final prospectus dated June 16, 1998.
3. The Filer filed articles of amendment on May 11, 2004 in connection with a share capital reorganization (the "2004 Reorganization") approved by its shareholders on April 29, 2004. Pursuant to the 2004 Reorganization, 823,105 Class A Capital Shares were redeemed under the Special Retraction Right and all of the outstanding Preferred Shares were redeemed on June 25, 2004 in accordance with their terms. In order to maintain the leveraged "split share" structure of the Filer, Class B Preferred Shares, Series 1 ("Series 1 Preferred Shares") were issued pursuant to a prospectus dated June 17, 2004.
4. On May 11, 2009, holders of Class A Capital Shares approved a share capital reorganization (the "2009 Reorganization"). The 2009 Reorganization will permit holders of Class A Capital Shares to extend their investment in the Filer beyond the redemption date of June 26, 2009 for up to an additional 5 years. The 2009 Reorganization also provides holders of Class A Capital Shares with a special right of retraction (the "Special Retraction Right") to replace the originally scheduled final redemption. Under the 2009 Reorganization, holders of Class A Capital Shares who do not wish to extend their investment may choose to have their shares redeemed on June 26, 2009. If the 2009 Reorganization is not implemented, the Special Retraction Right will not become effective and the Class A Capital Shares will be redeemed by the Filer on June 26, 2009 in accordance with their terms.
5. The authorized capital of the Filer consists of an unlimited number of Class A Capital Shares, an unlimited number of preferred shares, an unlimited number of Class B preferred shares issuable in series, 1,000 Class B Shares and an unlimited number of Class C Shares. As of the date hereof, there are 2,327,407 Class A Capital Shares, 2,327,407 Series 1 Preferred Shares, 1,000 Class B Shares and 100 Class C Shares issued and outstanding. All of the Series 1 Preferred Shares will be redeemed by the Filer on June 26, 2009 in accordance with their terms and the Class A Capital Shares whose holders have elected to exercise the Special Retraction Right will also be redeemed.
6. The Series 2 Preferred Shares are being offered in order to maintain the leveraged "split share" structure of the Filer and will be issued on or about June 26, 2009 (the "Offering") such that there will be an equal number of Class A Capital Shares and Series 2 Preferred Shares outstanding on and after the expected closing date of June 26, 2009.
7. The Filer filed the Preliminary Prospectus in each of the provinces of Canada on May 22, 2009 (SEDAR Project No. 1425465).
8. The Filer will make the Offering to the public pursuant to a final prospectus (the "Final Prospectus").
9. The Class A Capital Shares will continue to be listed and posted for trading on The Toronto Stock Exchange (the "TSX") and it is expected that the Series 2 Preferred Shares will be listed and posted for trading on the TSX. An application requesting conditional listing approval has been made by the Filer to the TSX.
10. The Class B Shares are the only voting shares in the capital of the Filer. There are currently, and will be at the time of filing the Final Prospectus relating to the Offering, 1,000 Class B Shares issued and outstanding. All of the issued and outstanding Class B Shares are owned by a former director and officer of the Filer. On or about the date of closing of the Offering, NG Split Holdings Corp. will become the sole owner of all of the issued and outstanding Class B Shares and one-third of the common shares of NG Split Holdings Corp. are expected to be owned by each of the three independent directors of the Filer.
11. The Class A Capital Shares and Series 2 Preferred Shares may be surrendered for retraction at any time in the manner described in the Preliminary Prospectus.
12. The Filer has a board of directors (the "Board of Directors") which currently consists of six directors, three of which are independent directors who are not employees of Scotia Capital. Also, the offices of President/Chief Executive Officer and Chief Financial Officer/Secretary of the Filer are held by employees of Scotia Capital.
13. The primary undertaking of the Filer is to invest in a portfolio of common shares (the "Portfolio Shares") of selected Canadian chartered banks, telecommunication, utility and pipeline companies in order to generate fixed cumulative preferential distributions for the holders of the Filer's Series 2 Preferred Shares and to enable the holders of the Filer's Class A Capital Shares to participate in any capital appreciation in the Portfolio Shares. The Portfolio Shares will be the only material assets of the Filer.
14. Series 2 Preferred Share distributions will be funded from the dividends received on the Portfolio Shares. If necessary, any shortfall in the distributions on the Series 2 Preferred Shares will be funded by proceeds from the sale of Portfolio Shares.
15. The record date for the payment of Series 2 Preferred Share distributions, Class A Capital Share dividends or other distributions of the Filer will be set in accordance with the applicable requirements of the TSX.
16. Any Class A Capital Shares and Series 2 Preferred Shares outstanding on a date approximately five years from the closing of the Offering, which date will be specified in the Final Prospectus, will be redeemed by the Filer on such date.
17. The Filer is considered to be a mutual fund, as defined in the Legislation. Since the Filer does not operate as a conventional mutual fund, it is making an application for a waiver from certain requirements of National Instrument 81-102 -- Mutual Funds.
18. It will be the policy of the Filer to hold the Portfolio Shares and to not engage in any trading of the Portfolio Shares, except:
(a) to complete the adjustment to and rebalancing of the Portfolio as described in the Preliminary Prospectus;
(b) to fund retractions or redemptions of Class A Capital Shares and Series 2 Preferred Shares;
(c) following receipt of stock dividends on the Portfolio Shares;
(d) if necessary, to fund any shortfall in the distribution on Series 2 Preferred Shares; and
(e) to meet obligations of the Filer in respect of liabilities including extraordinary liabilities.
19. The Portfolio Shares are listed and traded on the TSX.
20. The net proceeds of the Offering (after deducting the agent's fees and expenses of the issue), depending upon the number and value of Class A Capital Shares redeemed pursuant to the Special Retraction Right, will be used by the Filer to fund the redemption of all of the issued and outstanding Series 1 Preferred Shares of the Filer on June 26, 2009 as well as those Class A Capital Shares being redeemed pursuant to the Special Retraction Right together, with the net proceeds from the sale of a portion of the portfolio.
21. The Final Prospectus will disclose selected financial information and dividend and trading history of the Portfolio Shares.
22. As discussed above, application will be made to list the Series 2 Preferred Shares on the TSX and all of the Class A Capital Shares and Series 2 Preferred Shares outstanding on a date approximately five years from the closing of the Offering will be redeemed by the Filer on such date.
23. Scotia Capital was incorporated under the laws of the Province of Ontario and is a direct, wholly-owned subsidiary of The Bank of Nova Scotia. Scotia Capital is registered under the Legislation as a dealer in the categories of "broker" and "investment dealer" and is a member of the Investment Industry Regulatory Organization of Canada and a participant in the TSX.
24. Pursuant to an agreement (the "Agency Agreement") to be made between the Filer and Scotia Capital and other agents expected to be appointed by the Filer (the "Agents"), the Filer will appoint the Agents, as its agents, to offer the Series 2 Preferred Shares of the Filer on a best efforts basis and the Final Prospectus qualifying the Offering will contain a certificate signed by the Agents, in accordance with the Legislation.
25. Pursuant to an administration agreement (the "Administration Agreement") between Scotia Managed Companies Administration Inc. ("Scotia Managed Companies"), a wholly-owned subsidiary of Scotia Capital, and the Filer, the Filer will retain Scotia Managed Companies to administer the ongoing operations of the Filer and will pay Scotia Managed Companies a quarterly fee of 1/4 of 0.25% of the market value of the Portfolio Shares held by the Filer from and after June 26, 2009.
26. Scotia Managed Companies and Scotia Capital's economic interest in the Filer and in the material transactions involving the Filer are disclosed in the Preliminary Prospectus and will be disclosed in the Final Prospectus under the heading "Interests of Management and Others in Material Transactions" and include the following:
(a) agency fees with respect to the Offering;
(b) commissions in respect of the disposition of Portfolio Shares to fund a redemption, retraction or purchase for cancellation of the Class A Capital Shares and Series 2 Preferred Shares;
(c) interest and reimbursement of expenses, in connection with any acquisition of Portfolio Shares; and
(d) amounts in connection with Principal Sales and Principal Purchases (as described below).
The Principal Trades
27. Through Scotia Capital, the Filer may purchase Portfolio Shares in the market on commercial terms or from non-related parties with whom Scotia Capital and the Filer deal at arm's length. Subject to regulatory approval, certain of such Portfolio Shares may also be purchased from Scotia Capital, as principal (the "Principal Sales").
28. Scotia Capital may receive commissions not exceeding normal market rates in respect of its purchase of Portfolio Shares, as agent on behalf of the Filer, and the Filer will pay any carrying costs or other expenses incurred by Scotia Capital, on behalf of the Filer, in connection with its purchase of Portfolio Shares, as agent on behalf of the Filer. In respect of any Principal Sales made to the Filer by Scotia Capital as principal, Scotia Capital may realize a financial benefit to the extent that the proceeds received from the Filer exceed the aggregate cost to Scotia Capital of such Portfolio Shares. Similarly, the proceeds received from the Filer may be less than the aggregate cost to Scotia Capital of the Portfolio Shares and Scotia Capital may realize a financial loss.
29. The Final Prospectus will disclose that any Principal Sales will be made in accordance with the rules of the applicable stock exchange and the price paid to Scotia Capital (inclusive of all transaction costs, if any) will not be greater than the price which would have been paid (inclusive of all transaction costs, if any) if the acquisition had been made through the facilities of the principal stock exchange on which the Portfolio Shares are listed and posted for trading at the time of the purchase from Scotia Capital.
30. Scotia Capital will not receive any commissions from the Filer in connection with the Principal Sales and all Principal Sales will be approved by the independent directors of the Filer. In carrying out the Principal Sales, Scotia Capital will deal fairly, honestly and in good faith with the Filer.
31. Scotia Capital may sell Portfolio Shares to fund retractions of Class A Capital Shares and Series 2 Preferred Shares prior to the Redemption Date and upon liquidation of the Portfolio Shares in connection with the final redemption of Class A Capital Shares and Series 2 Preferred Shares on the Redemption Date. These sales will be made by Scotia Capital as agent on behalf of the Filer, but in certain circumstances, such as where a small number of Class A Capital Shares and Series 2 Preferred Shares have been surrendered for retraction, Scotia Capital may purchase Portfolio Shares as principal (the "Principal Purchases") subject to receipt of all regulatory approvals and approval by the independent directors of the Filer.
32. In connection with any Principal Purchases, Scotia Capital will comply with the rules, procedures and policies of the applicable stock exchange of which they are members and in accordance with orders obtained from all applicable securities regulatory authorities. The Final Prospectus will disclose that Scotia Capital may realize a gain or loss on the resale of such securities.
33. Scotia Capital will take reasonable steps, such as soliciting bids from other market participants or such other steps as Scotia Capital, in its discretion, considers appropriate after taking into account prevailing market conditions and other relevant factors, to enable the Filer to obtain the best price reasonably available for the Portfolio Shares so long as the price obtained (net of all transaction costs, if any) by the Filer from Scotia Capital is at least as advantageous to the Filer as the price which is available (net of all transaction costs, if any) through the facilities of the applicable stock exchange at the time of the trade.
34. Scotia Capital will not receive any commissions from the Filer in connection with Principal Purchases and, in carrying out the Principal Purchases, Scotia Capital shall deal fairly, honestly and in good faith with the Filer.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted.