National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- issuer is a real estate investment trust which holds all of its properties through limited partnerships -- entity holds units in limited partnerships which are exchangeable into and in all material respects the economic equivalent to the issuer's publicly traded units -- relief granted from the valuation requirement for certain non-cash assets in connection with a specific related party transaction -- valuation not required of exchangeable limited partnership units since public units can be a proxy for such exchangeable units.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5, 5.7, 6.3.
July 21, 2011
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
REAL ESTATE INVESTMENT TRUST
The principal regulator in the Jurisdiction has received an application from the Filer for a decision pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) that the Filer be granted an exemption from the requirement in section 6.3(1)(d) of MI 61-101 to obtain a formal valuation of any Exchangeable LP Units (as defined below) to be issued in connection with a related party transaction described below (the Relief):
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 Québec.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 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 principal, registered and head office of the Filer is located at 5935 Airport Road, Suite 600 in Mississauga, Ontario.
2. The Filer is an unincorporated, open-ended real estate investment trust governed by the laws of the Province of Ontario pursuant to an amended and restated declaration of trust dated as of May 6, 2010.
3. The Filer is a reporting issuer, or the equivalent thereof, in each Province and Territory of Canada and is not in default of securities legislation in any of the jurisdictions of Canada.
4. The trust units of the Filer (the Trust Units) are listed and posted for trading on the Toronto Stock Exchange under the symbol "TGA.UN".
5. The Filer was formed to own multi-suite, residential rental properties across Canada and, as at the date hereof, the Filer owns a portfolio of 94 properties principally located in urban centres in the Provinces of Alberta, Ontario, Québec, New Brunswick and Nova Scotia, which it acquired as part of the closing of its initial public offering of Trust Units in May 2010 and subsequent transactions.
6. The Filer is authorized to issue an unlimited number of Trust Units and an unlimited number of special voting units (the Special Voting Units). As at the date hereof, there are 40,448,970 Trust Units and 7,072,682 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equivalent to, and accompanies, the number of outstanding class B limited partnership units (the Class B LP Units) of limited partnerships managed and controlled by the Filer (the Existing Partnerships). The Class B LP Units are exchangeable into Trust Units and the accompanying Special Voting Units provide voting rights with respect to the Filer to the holder of the Class B LP Units.
7. TransGlobe Investment Management Ltd. and other companies and entities controlled or under the direction of the Drimmer family (collectively, TransGlobe) hold all 7,072,682 issued and outstanding Special Voting Units and accompanying Class B LP Units. The 7,072,682 Special Voting Units and 7,072,682 Class B LP Units held by TransGlobe represent, in aggregate as at the date hereof, an approximate 14.9% voting and effective economic interest in the Filer (on a non-diluted basis) and, together with the 350,000 Trust Units held by TransGlobe, represent, in aggregate as at the date hereof, an approximate 15.6% voting and effective economic interest in the Filer (on a non-diluted basis).
8. The Filer holds all of its residential rental properties through seventeen Existing Partnerships. Each such Existing Partnership is authorized to issue an unlimited number of class A general partnership units (the Class A GP Units), class B general partnership units (the Class B GP Units), class A limited partnership units (the Class A LP Units) and Class B LP Units.
9. All of the outstanding Class A GP Units of the Existing Partnerships are held by a wholly-owned subsidiary of the Filer which is the managing general partner of such limited partnerships, and all of the outstanding Class B GP Units of the Existing Partnerships are held by a TransGlobe entity which carries on specific administrative and/or management duties and responsibilities on behalf of such limited partnerships, but remains subject to the oversight of the Filer, in consideration for cash distributions on such Class B GP Units calculated as a percentage of the gross book value and gross property revenue of such Existing Partnerships.
10. All the outstanding Class A LP Units are held by the Filer and all the outstanding Class B LP Units are held by TransGlobe.
11. In a series of transaction steps, the Filer, through a number of newly created limited partnerships managed and controlled by the Filer (the New Partnerships), proposes to: (i) acquire a portfolio of 57 real estate properties (the Acquisition Properties) and promissory notes (the Notes) from TransGlobe and its co-owners (the Vendors) for consideration of approximately $740 million payable to the Vendors to be comprised of a combination of approximately $394 million in cash, the issue of approximately $83 million of class B limited partnership units of the New Partnerships (the Exchangeable LP Units), and the assumption of mortgages and/or debt in the aggregate principal amount of approximately $263 million; and (ii) sell to TransGlobe or the Vendors two real estate properties (the Sale Properties) for an aggregate price of approximately $24.4 million (the acquisition and sale transactions are hereinafter collectively known as the Proposed Transaction). In respect of three of the Acquisition Properties, the Filer will indirectly acquire such Acquisition Properties by acquiring the securities (the Entity Securities) of the entities that own such Acquisition Properties. Such entities own no other assets and will have no liabilities upon closing of the Proposed Transaction.
12. In connection with the Proposed Transaction, the Filer and TransGlobe propose to internalize the management of the Filer for no valuable consideration (the Management Internalization). In that regard, TransGlobe proposes to transfer assets required to manage the properties of the Filer (including office equipment, computer hardware and software, and intellectual property) to the Filer for nominal consideration and terminate its management relationships with the Filer without any payment by the Filer (which termination shall require the return of the outstanding Class B GP Units by TransGlobe and the termination of, or amendments to, existing agreements involving the Filer and TransGlobe, including deletion of the board appointment rights and limited approval rights described in paragraph 24 below).
13. The New Partnerships to be created by the Filer in connection with the Proposed Transaction will, in all material respects, have terms and conditions, including capital structure, consistent with the Existing Partnerships and as otherwise described herein after giving effect to the Management Internalization (for clarity, as a result of the Management Internalization, no Class B GP Units will be issued or outstanding and all Class A GP Units will be held by a new, indirect wholly-owned subsidiary of the Filer). In particular, the Exchangeable LP Units to be issued in connection with the Proposed Transaction will have the same attributes, in all material respects, as the Class B LP Units and as otherwise described herein.
14. The Proposed Transaction is subject to the applicable requirements of MI 61-101 relating to, among other things, preparation of a formal valuation of the non-cash assets involved in the Proposed Transaction (the Non-Cash Valuation Requirement) and the approval by a majority of the votes cast by disinterested holders of Trust Units entitled to vote on the Proposed Transaction at a duly constituted meeting (the Unitholder Meeting) of holders of Trust Units and holders of Special Voting Units (collectively, the Unitholders).
15. While the Management Internalization relating to the transfer of assets is not a related party transaction as the assets are being transferred by TransGlobe to the Filer for no valuable consideration and the termination of the management relationships between TransGlobe and the Filer is without any payment by the Filer, the Management Internalization, as a whole, will be voted upon by the Unitholders at the Unitholder Meeting.
16. A committee of independent trustees of the Filer (the Special Committee) has been established by the Filer for the purpose of supervising the preparation of a formal valuation of each of: (i) the Acquisition Properties and the Sale Properties (the Properties Valuations); (ii) the Entity Securities (the Entities Valuation); and (iii) the Notes (the Notes Valuation).
17. The Special Committee has retained CB Richard Ellis, Limited to prepare the Properties Valuations, under the supervision of the Special Committee, which to the knowledge of the Filer and the Special Committee will be prepared in accordance with MI 61-101.
18. The Special Committee has retained Stonecap Securities Inc. (Stonecap) to prepare the Entities Valuation and the Notes Valuation, under the supervision of the Special Committee, which to the knowledge of the Filer and the Special Committee will be prepared in accordance with MI 61-101.
19. The Special Committee has also retained Stonecap to act as an independent financial advisor to the Special Committee in evaluating the Proposed Transaction and Management Internalization and Stonecap will prepare a formal 'fairness opinion' that speaks to fairness from a financial point of view, of the consideration of the Proposed Transaction and if necessary, Management Internalization, to the Unitholders other than the Vendors.
20. The information circular to be mailed to Unitholders in connection with the Unitholder Meeting will comply with the requirements of applicable securities law and will disclose, among other matters, that the Filer has no knowledge of any material non-public information concerning Filer or its securities that has not been generally disclosed, in accordance with subsection 6.3(2)(b) of MI 61-101.
21. The Exchangeable LP Units shall be in all material respects, economically equivalent to the Trust Units:
a. The Exchangeable LP Units shall be exchangeable on a one-for-one basis for Trust Units (subject to customary anti-dilution adjustments) at any time at the option of the holder thereof.
b. The distributions to be made on the Exchangeable LP Units shall be equal to the distributions that the holder of the Exchangeable LP Units would have received if it was holding Trust Units that may be obtained upon the exchange of such Exchangeable LP Units.
c. Each Exchangeable LP Unit shall be accompanied by a Special Voting Unit so that the holder of the Exchangeable LP Units is provided with voting rights on matters respecting the Filer equal to the number of Trust Units that may be obtained upon the exchange of the Exchangeable LP Units to which such Special Voting Units are attached.
22. The Exchangeable LP Units shall represent part of the equity value of the Filer and, moreover, the economic interests that underlie the Exchangeable LP Units shall be based solely upon the assets and operations held directly or indirectly by the operating entities of the Filer.
23. The Exchangeable LP Units shall not be listed and posted for trading on the Toronto Stock Exchange or any other stock exchange.
24. Although TransGlobe was granted additional rights at the time of the Filer's initial public offering of trust units, including pre-emptive rights, registrations rights, tag/drag rights, board appointment rights and limited approval rights, these rights are based on ownership thresholds that treat Exchangeable LP Units, Class B LP Units and Trust Units on a combined basis. As a result, by acquiring Exchangeable LP Units in connection with the Proposed Transaction rather than Trust Units, TransGlobe does not gain any additional or unique rights or benefits that they would not otherwise have. Any additional rights attached to the Exchangeable LP Units arise solely by virtue of the Exchangeable LP Units being limited partnership units and would be no greater than the customary rights associated with limited partnership units. Other than the rights described above, the Exchangeable LP Units carry no other rights that would impact their value.
25. Section 6.3(2)(a) of MI 61-101 provides an exemption from the Non-Cash Valuation Requirement where the non-cash consideration or assets are securities of a reporting issuer or are securities of a class for which there is a published market.
26. Stonecap has confirmed that it agrees with the facts set out in this application.
The principal regulator is satisfied that the decision meets the test set out in MI 61-101 for the principal regulator to make the decision.
The decision of the principal regulator is that the Relief is granted provided the Filer complies with subsection 6.3(2) of Multilateral Instrument 61-101 other than clause (a) thereof.