Securities Law & Instruments

Headnote

Application for exemption from formal issuer bid requirements and valuation requirement -- Issuer proposes to repurchase outstanding preferred shares -- all preferred shares held by a single holder resident in Ontario -- holder is an "accredited investor" and does not require issuer bid circular nor other protections of the formal issuer bid requirements -- relief conditional on holder providing consent and acknowledgement that offer will be made on a basis that is exempt from the formal issuer bid requirements and the valuation requirement -- relief from formal issuer bid requirements and valuation requirement granted, subject to conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 93 to 99.1, 104(2)(c).

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, Parts 3 and 9.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

(the Act)

AND

IN THE MATTER OF

ACE AVIATION HOLDINGS INC.

(the Issuer)

 

ORDER

UPON the application (the Application) of the Issuer to the Ontario Securities Commission (the Commission) for

(a) an order pursuant to section 104(2)(c) of the Act exempting the Issuer and a wholly owned subsidiary of the Issuer (Subco) from the requirements in sections 93 to 99.1 of the Act that are applicable to issuer bids (the Formal Issuer Bid Requirements), and

(b) an exemption pursuant to section 9.1(2) of Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions (MI 61-101) exempting the Issuer and Subco from the valuation requirements contained in Part 3 of MI 61-101 (the Valuation Requirement);

in connection with the proposed offer (the Proposed Offer) by the Issuer and Subco to purchase all of the issued and outstanding Preferred Shares of the Issuer held by a single holder for a negotiated and agreed upon cash amount, pursuant to which Subco would purchase all of the Preferred Shares in exchange for a number of common shares of Subco and, as part of the same transaction, (i) the Issuer would issue to Subco Class B Voting Shares of the Issuer in exchange for the transfer by Subco to the Issuer of the Preferred Shares acquired by Subco; (ii) Subco would immediately repurchase all of such common shares of Subco issued to the former holder of Preferred Shares for the cash amount agreed to by the Issuer and the former holder of Preferred Shares for the purchase of its Preferred Shares; and (iii) the Issuer would immediately repurchase the Class B Voting Shares of the Issuer issued to Subco under (i) above;

AND UPON the request of the Issuer that this decision and all materials related to the Application (collectively, the Confidential Material) be kept confidential and not be made public until the earlier of:

(i) the date the Issuer advises staff that there is no longer any need for the Confidential Material to remain confidential; and

(ii) the date that is 90 days after the date of this decision (the Confidentiality Relief);

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

AND UPON the Issuer having represented to the Commission that:

The Issuer

1. The Issuer is a corporation incorporated under the Canada Business Corporations Act (CBCA). Its head office is located in Montreal, Québec. Subco will be a wholly owned subsidiary of the Issuer. The registered and head office of Subco will be in Ontario.

2. The Issuer is a reporting issuer or the equivalent in each of the provinces of Canada, and has been for more than 12 months.

3. The Issuer is not in default of securities legislation in any of the provinces of Canada, and is not on any list of defaulting reporting issuers maintained by any securities regulatory authority in Canada.

4. The authorized share capital of the Issuer consists of an unlimited number of Class A Variable Voting Shares, an unlimited number of Class B Voting Shares and of 12,500,000 Preferred Shares. The variable voting share structure is to address airline foreign ownership restrictions that limit foreign owners to no more than 25% of the voting rights attached to all of the Issuer's voting securities. In addition, the Issuer has issued debt securities in the form of 4.25% Convertible Senior Notes. As of the close of business on July 31, 2009, there were 25,680,411 Class A Variable Voting Shares, 10,010,878 Class B Voting Shares and 3,200,000 Preferred Shares issued and outstanding, as well as $63,883,000 principal amount of 4.25% Convertible Senior Notes outstanding.

5. The Preferred Shares are not listed for trading on the Toronto Stock Exchange (TSX) or any other securities exchange. The Class A Variable Voting Shares, Class B Voting Shares and 4.25% Convertible Senior Notes are listed on the TSX under the symbols "ACE.A", "ACE.B" and "ACE.NT.A", respectively.

Terms of the Preferred Shares

6. The holder of Preferred Shares is entitled to vote on an "as converted" basis with the Class A Variable Voting Shares and the Class B Voting Shares and is subject to the same proportionate reduction in voting percentage applicable to Class A Variable Voting Shares, as if, for voting purposes only, the Preferred Shares had been converted into Class A Variable Voting Shares.

7. The holder of Preferred Shares is entitled to participate on an "as converted" basis with the Class A Variable Voting Shares and the Class B Voting Shares with respect to all dividends, distributions, spin off, split-off, subscription rights or other offers or rights made available to holders of Class A Variable Voting Shares and the Class B Voting Shares and any other similar transactions.

8. In the event of any liquidation, dissolution or winding up of the Issuer (with the holder of the Preferred Shares being entitled to treat the occurrence of a merger, amalgamation, sale of all or substantially all of the assets of the Issuer or other similar transaction involving a change in control of the Issuer as a liquidation for these purposes), then the holder of the Preferred Shares is entitled to receive, prior to and in preference to the holders of Class A Variable Voting Shares and the Class B Voting Shares, an amount per Preferred Share equal to the Fully Accreted Value of such Preferred Shares, determined as of the date of such event. For the purposes of the terms of the Preferred Shares, Fully Accreted Value means, with respect to each Preferred Share issued on September 30, 2004 as of any date, the initial purchase price of such Preferred Share, increased at a rate of 5% per annum, compounded semi annually from the date of issuance of such Preferred Shares.

9. The Preferred Shares are convertible at the option of the holder thereof at any time into Class A Variable Voting Shares at a conversion rate equal to the Fully Accreted Value per Preferred Share (as of the conversion date) divided by the Conversion Price. For the purposes of the terms of the Preferred Shares, Conversion Price is equal to $26 or 130% of the initial per share value attributed to the Class A Variable Voting Shares and Class B Voting Shares on September 30, 2004 of $20. The Conversion Price of the Preferred Shares is subject to certain adjustments, including customary public company anti-dilution protection for stock splits, stock dividends, subdivisions, combinations and similar transactions.

10. As of July 31, 2009, the 3,200,000 issued and outstanding Preferred Shares were convertible at the option of its holder into an aggregate of 3,125,359 Class A Variable Voting Shares, representing a conversion rate of approximately 0.9767 Class A Variable Voting Share for each Preferred Share. On July 31, 2009, the closing price of the Class A Variable Voting Shares on the TSX was $4.91 which, taking into account the current conversion rate, represents approximately 19% of the current Fully Accreted Value of a Preferred Share.

11. The holder of Preferred Shares is subject to certain mandatory conversion provisions pursuant to which it is required to convert its Preferred Shares into Class A Variable Voting Shares in September 2011, and on the date every six months thereafter until September 2014, if on any of such dates the closing prices of the Class A Variable Voting Shares and the Class B Voting Shares over a number of trading days preceding such respective dates exceed the then applicable Fully Accreted Value of a Preferred Share. If the closing prices do not exceed the Fully Accreted Value on any such dates, the then applicable Conversion Price is reduced by 3.75% on each such dates.

12. If no mandatory conversion of the Preferred Shares has occurred by September 2014 (the Final Maturity Date), the holder of Preferred Shares has the right to require the Issuer to redeem each of the Preferred Shares in cash on the Final Maturity Date at a per share redemption price equal to the Fully Accreted Value as at the Final Maturity Date. Except as otherwise described above, the holder of Preferred Shares does not have a fixed cash redemption right prior to the Final Maturity Date.

13. If at any time the closing price of the Class A Variable Voting Shares or Class B Voting Shares, as the case may be, for each of 30 consecutive trading days exceeds 175% of the then applicable Conversion Price, then the Issuer may require the holder of Preferred Shares to convert the Preferred Shares into Class A Variable Voting Shares.

14. With respect to any recapitalization, reorganization, reclassification, consolidation, amalgamation, arrangement, merger, sale of all or substantially all of the Issuer's assets to another person or other transaction which is effected in such a way that holders of Class A Variable Voting Shares and Class B Voting Shares are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Class A Variable Voting Shares or Class B Voting Shares, as the case may be (each an Organic Change) which includes a sale of all or substantially all of the Issuer's assets or where the Issuer is not the surviving entity, the holder of the Preferred Shares shall be entitled to cause the Issuer to either (i) require that the surviving entity or its publicly traded parent issue to the holder of Preferred Shares in exchange for such shares, a security of the surviving or publicly traded parent entity evidenced by a written instrument substantially similar in form and substance to the Preferred Shares, including, without limitation, having the same economic rights and preferences as the Preferred Shares and having a rank senior to all capital stock of such issuing entity or (ii) make appropriate adjustments contemporaneously to the rights attached to the Preferred Shares so as to preserve in all respects the benefits conferred on the holder of the Preferred Shares by the terms of the Preferred Shares. With respect to any reorganization, amalgamation, arrangement, merger or other similar transaction that does not constitute an Organic Change, appropriate adjustments shall contemporaneously be made to the rights (including, without limitation, the conversion right) attached to the Preferred Shares so as to preserve in all respects the benefits conferred on the holder of the Preferred Shares by the terms of the Preferred Shares.

15. The holder of Preferred Shares has pre-emptive rights in connection with further issuances of Class A Variable Voting Shares and Class B Voting Shares or other equity securities, rights, options, warrants or other convertible securities which represent rights to purchase Class A Variable Voting Shares or Class B Voting Shares, subject to certain exceptions.

16. The conditions attaching to the Preferred Shares in the Issuer's articles do not restrict the Issuer's ability to purchase Preferred Shares by private agreement. The Preferred Shares are not redeemable at the option of the Issuer.

Holder of the Preferred Shares

17. All of the Preferred Shares are held by one single holder, being Morgan Stanley Canada Limited, an institutional shareholder resident in Ontario based on the address indicated in the shareholder register of the Issuer.

18. To the knowledge of the Issuer, the holder of Preferred Shares is a sophisticated institutional investor and is an "accredited investor" as defined in Section 1.1 of National Instrument 45-106 -- Prospectus and Registration Exemptions (NI 45-106).

19. To the knowledge of the Issuer, the holder of Preferred Shares is not a related party of the Issuer for the purposes of MI 61-101.

The Proposed Offer

20. Given the preferential attributes of the Preferred Shares, the Issuer has determined based on financial, tax and legal advice that it is in the best interest of its holders of Class A Variable Voting Shares and Class B Voting Shares that the Issuer repurchase the outstanding Preferred Shares as soon as practicable.

21. A direct repurchase by the Issuer for cash of the Preferred Shares could result in the Issuer being liable for the payment of a tax under Part VI.1 of the Income Tax Act (Canada) in an amount equal to 50% of the consideration paid for the repurchase. A repurchase of the Preferred Shares pursuant to the structure referred to in paragraph 22 below (Offer Structure) would not result in the Issuer purchasing taxable preferred shares or short term preferred shares and, as a result, the Issuer would not be liable for the payment of a tax under Part VI.1 of the Income Tax Act (Canada). Any payment of tax under Part VI.1 of the Income Tax Act (Canada) would otherwise be imposed on the Issuer and therefore would become payable out of the assets that would otherwise be available for the holders of Class A Variable Voting Shares and Class B Voting Shares.

22. Under the terms of the Proposed Offer, Subco would make an offer (Preferred Shares Issuer Bid) to the holder of Preferred Shares to purchase its Preferred Shares for a negotiated and agreed upon cash amount (Purchase Price). Payment of the Purchase Price would occur as follows:

(i) The Issuer would contribute to Subco, in cash, the necessary amount to effect the redemption of Subco Common Shares described below in paragraph (iv), in consideration for voting preferred shares of Subco, which will be redeemable and retractable for an amount equal to the cash contributed;

(ii) Subco would acquire the Preferred Shares in consideration of the payment by Subco for each Preferred Share of $0.001 and a number of common shares of Subco (Subco Common Shares), that are exchangeable at the option of the holder on a one-for-one basis for Class A Variable voting shares of the Issuer;

(iii) The Issuer would issue to Subco a number of Class B Voting Shares of the Issuer equal to the number of Subco Common Shares referred to in paragraph (ii) in exchange for the transfer by Subco to the Issuer of the Preferred Shares acquired by Subco as referred to in paragraph (ii) above;

(iv) Subco would redeem (Subco Common Shares Issuer Bid) all of the Subco Common Shares then held by the selling holder of Preferred Shares in consideration for the receipt in cash of a purchase price for all of such Subco Common Shares which shall be equal to the Purchase Price (subject to applicable withholding taxes, if any) for all Preferred Shares to be sold; and

(v) The Issuer would redeem (Class B Voting Shares Issuer Bid) the Class B Voting Shares (Class B Voting Shares Held by Subco) of the Issuer held by Subco.

23. The terms of any Proposed Offer would be negotiated on an arm's length basis between the Issuer and the holder of Preferred Shares, and would be completed at a price not to exceed the Fully Accreted Value of the Preferred Shares. It is proposed that the agreed cash consideration for the Preferred Shares would be divided by the weighted average of the latest closing price of the Class A Variable Voting Shares and the Class B Voting Shares or the weighted average of the latest closing prices of the Class A Variable Voting Shares and the Class B Voting Shares over a number of trading days, which would be both the issue price and the repurchase price. However, the Issuer could also apply a discount in the calculation of the number of Subco Common Shares issuable in exchange for the Preferred Shares as long as the repurchase price for the Subco Common Shares is identical to their issuance price. As long as the issuance price and the repurchase price of the Subco Common Shares are identical, no premium on the Subco Common Shares will be paid to the holder of Preferred Shares.

24. Following the completion of the Proposed Offer, the Preferred Shares repurchased by the Issuer from Subco under step (iii) of paragraph 22 above would be cancelled.

25. The cash Purchase Price for the Preferred Shares will be negotiated by the parties on the basis of the attributes of the Preferred Shares.

26. The terms of the Proposed Offer will be approved by the Issuer's board of directors. There is no requirement under MI 61-101 for the Issuer to establish an independent committee to approve the Proposed Offer.

27. In addition to the foregoing, in order to ensure compliance with applicable tax requirements, the Issuer's and Subco's obligations to consummate the Proposed Offer will be conditional upon the receipt of an opinion of an investment dealer to the effect that the purchase price per Subco Common Share does not exceed the fair market value of such Subco Common Share.

28. The Issuer has engaged financial advisors in connection with the Proposed Offer and will obtain a fairness opinion confirming the fairness of the consideration payable in respect of the Preferred Shares from the point of view of the Issuer and the holders of its Class A Variable Voting Shares and Class B Voting Shares. The Issuer will include a copy of the fairness opinion in a material change report or other public filing to be made on SEDAR at the time of the announcement of the Proposed Offer.

29. As the holder of Preferred Shares is not a related party of the Issuer for the purposes of MI 61-101, the transaction does not constitute a related party transaction under MI 61-101 and minority shareholder approval of the Issuer is therefore not required under MI 61-101. Based on the structure of the Proposed Offer as described above, the Proposed Offer does not require shareholder approval under the CBCA.

30. As an alternative to the Proposed Offer, the Issuer could have amended the rights attached to the Preferred Shares to create an additional redemption right in favour of the Issuer or the holders. However, adding a redemption right to the Preferred Shares which the Issuer or the holder would exercise would not result in the Issuer eliminating the Part VI.1 tax which would still be payable by the Issuer on the total redemption price.

31. Under the Act and the rules adopted thereunder, each of the Preferred Share Issuer Bid, the Subco Common Shares Issuer Bid and the Class B Voting Shares Issuer Bid would constitute an issuer bid for the purposes of the Act. The issuer bid exemptions under Part XX of the OSA are not available in relation to the Preferred Share Issuer Bid or the Class B Voting Shares Issuer Bid. The issuer bid exemption under Section 101.3 of the OSA would be available in relation to the Subco Common Shares Issuer Bid.

32. The Issuer's intention is to purchase all of the Preferred Shares in a single transaction.

33. The Proposed Offer will not constitute an indirect issuer bid for the Class A Variable Voting Shares and Class B Voting Shares and will not be prejudicial to the holders of such shares by reason of its structure which requires, from a tax point of view, the issuance and simultaneous repurchase and cancellation of Subco Common Shares and Class B Voting Shares Held by Subco. From a business and economic point of view, the transaction is strictly a repurchase for cash of the Preferred Shares. If there were not a requirement under tax laws to implement the Proposed Offer pursuant to the Offer Structure, the transaction would simply be a cash payment for the Preferred Shares. As a result, despite its structure, the Proposed Offer has no impact on the holders of Class A Variable Voting Shares and Class B Voting Shares that would be different from a direct purchase of Preferred Shares for cash.

34. The issuance and simultaneous repurchase and cancellation of Class B Voting Shares Held by Subco is only a payment modality required to implement the Offer Structure. These "temporary" Class B Voting Shares Held by Subco would be outstanding on paper only for a single moment in time and, for practical purposes, would never be outstanding with a potential of being traded, nor, as a result, would they be listed on the TSX.

35. The Proposed Offer is not dilutive to holders of Class A Variable Voting Shares and Class B Voting Shares. There would be no change in the holders of Class A Variable Voting Shares and Class B Voting Shares of the Issuer before and after the transaction. There would be no impact on the liquidity of the Class A Variable Voting Shares and Class B Voting Shares, before and after the Proposed Offer. The holders of Class A Variable Voting Shares and Class B Voting Shares will not be prejudiced by the structure of the Proposed Offer, whether the preferred shares are exchanged for "temporary" Subco Common Shares which are issued and simultaneously repurchased for cash or, if instead the Preferred Shares are directly repurchased for cash.

36. Since the issuance price and the repurchase price of the Subco Common Shares will be identical, no premium on the Subco Common Shares will be paid to the holder of Preferred Shares, whether or not there is a formal valuation of the Preferred Shares.

37. A valuation of the Preferred Shares would not provide any benefit to the holder of the Preferred Shares since

(a) there is only one holder of Preferred Shares, which is a sophisticated institutional investor and an accredited investor for the purposes of NI 45-106; and

(b) the Issuer will negotiate a private agreement with the holder of Preferred Shares, and will obtain the prior written consent, in form reasonably satisfactory to staff, of the holder of Preferred Shares to the Proposed Offer being made on a basis that is exempt from the Formal Issuer Bid Requirements and the Valuation Requirement.

42. In addition, a valuation of the Class B Voting Shares Held by Subco would not provide any benefit to the holder of the Preferred Shares as the issuance and simultaneous repurchase of Class B Voting Shares Held by Subco are merely steps required by tax law to allow the transaction to proceed without the payment of a tax under Part VI.1 of the Income Tax Act (Canada).

AND UPON the Commission being satisfied that it would not be prejudicial to the public interest for the Commission to grant the requested exemption.

IT IS ORDERED pursuant to section 104(2)(c) of the Act that the Issuer and Subco be exempt from the Formal Issuer Bid Requirements in connection with the Proposed Offer, provided that:

(a) at the time of the Proposed Offer, no person or company, other than the company described in paragraph 17, holds Preferred Shares;

(b) the holder of the Preferred Shares is an accredited investor for the purposes of NI 45-106;

(c) the holder of the Preferred Shares tenders to the Proposed Offer by entering into a written purchase and sale agreement with Subco; and

(d) the Issuer obtains the prior written consent, in form reasonably satisfactory to staff, of the holder of Preferred Shares to the Proposed Offer being made on a basis that is exempt from the Formal Issuer Bid Requirements and the Valuation Requirement.

IT IS FURTHER the decision of the Commission that the Confidentiality Relief is hereby granted.

September 4, 2009.

"Patrick J. LeSage"
Commissioner
Ontario Securities Commission
 
"Mary G. Condon"
Commissioner
Ontario Securities Commission

IT IS FURTHER the decision of the Director under Part 9 of MI 61-101 that an exemption from the Valuation Requirement is hereby granted.

"Michael Brown"
Assistant Manager, Corporate Finance
Ontario Securities Commission