MI 11-102, NP 11-203 and MI 61-101 -- related party transaction -- relief from requirement to obtain minority approval -- offer to acquire all issued and outstanding warrants of Filer and related amendments to indenture agreements -- under proposed transactions, Filer will offer holders of warrants the opportunity to cashlessly exercise their warrants -- holders of warrants would receive functionally equivalent economic interest -- absent exemptive relief, minority approval requirement would apply to holders of common shares only -- proposed offer will provide equal treatment to all holders of warrants and will not have any adverse effect on the interests of holders of common shares.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions, ss. 3.2(2), 3.6(8).
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.6, 8.1, 9.1.
May 19, 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
THE BRICK LTD.
The securities regulatory authority or regulator in the Jurisdiction (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption from the minority approval requirement for related party transactions in s. 5.6 of Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions (MI 61-101) in respect of the Transaction (as defined below) (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 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 herein.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Canada.
2. The registered and head office of the Filer is located at 16930 -- 114 Avenue, Edmonton, Alberta, T5M 3S2.
3. The Filer is a reporting issuer in each of the provinces and territories of Canada. The Filer is not currently on the list of reporting issuers in default maintained by the securities regulatory authorities in such jurisdictions.
4. The Filer's authorized share capital consists of an unlimited number of Class A Common Shares (Common Shares). As of May 17, 2011, there were 54,463,867 Common Shares outstanding, of which 21,561,983 (39.6%) were held by William Comrie (together with any entity through which he owns or has management control over securities of the Filer) (Comrie) and 11,046,600 (20.3%) were held by Fairfax Financial Holdings Limited (together with its subsidiaries, Fairfax). Accordingly, each of Comrie and Fairfax is a "related party" of the Filer as defined in MI 61-101. To the knowledge of the Filer, there are no other holders of Common Shares who hold greater than 10% of the Common Shares.
5. The Filer also has outstanding:
(A) Common Share purchase warrants issued pursuant to a warrant indenture dated as of May 28, 2009 (the Warrant Indenture) between the Filer and Computershare Trust Company of Canada, as warrant agent, each such warrant exercisable on or before May 27, 2014 to acquire one Common Share for $1.00 (the Debenture Warrants), and
(B) Common Share purchase warrants issued pursuant to a warrant certificate dated as of August 24, 2009 (the Warrant Certificate), each such warrant exercisable on or before August 24, 2014 to acquire one Common Share for $0.82 (the Fairfax Warrants and, together with the Debenture Warrants, the Warrants).
6. As of May 17, 2011, there were outstanding 111,086,458 Debenture Warrants (excluding any Debenture Warrants that have been acquired by the Filer and will be cancelled prior to the Exercise Date (as defined below)). Of these 111,086,458 Debenture Warrants, 48,000,000 (43.2%) are held by Fairfax and 18,000,000 (16.2%) are held by Comrie. To the knowledge of the Filer, other than certain directors and officers, no other related party of the Filer is a holder of Warrants.
7. As of May 17, 2011, there were outstanding 5,317,100 Fairfax Warrants, all held by Fairfax.
8. The Common Shares, Debenture Warrants and Debentures (as defined below) are listed on the Toronto Stock Exchange (the TSX), while the Fairfax Warrants are unlisted.
9. The Filer wishes to make an offer and undertake certain related amendments to the Warrant Indenture, the Warrant Certificate and Debenture Indenture (as defined below), to enable the Warrants it has issued to be exercised on a cashless basis. The purpose of these amendments is to facilitate exercise of the Warrants, which have historically traded (and are currently trading) with little or no premium for their time value, thereby reducing the overhang on the market price of the Filer's Common Shares and potential dilution.
10. Upon a cashless exercise of the Warrants, a Warrantholder (as defined below) would receive Common Shares having a value equal to the in-the-money value of the Warrants. If a Warrantholder exercises Warrants through payment of the cash exercise price, the value of the Common Shares received would be equal to the in-the-money value of the Warrants plus the cash exercise price paid by the Warrantholder to the Filer, with a net economic value to the Warrantholder of the in-the-money value of the Warrants exercised. Thus, the cashless exercise of Warrants provides Warrantholders with an alternative means of exercising their Warrants and realizing the economic value that results from the original terms of the Warrants.
11. The Filer proposes to amend the Warrant Indenture (the Warrant Indenture Amendment) and the Fairfax Certificate (the Warrant Certificate Amendment and, together with the Warrant Indenture Amendment, the Warrant Amendments) to permit the cashless exercise of the Warrants. The Warrant Amendments will permit the Filer to offer to holders of Warrants (Warrantholders) the opportunity, on such terms and conditions as the Filer shall determine from time to time in its sole discretion, to exercise their Warrants on a cashless basis consistent with the formula set out in Section 608(c) of the TSX Company Manual. This formula values the Common Shares underlying the Warrants based on the volume weighted average trading price of the Common Shares (the VWAP) in the five trading days preceding the date of exercise (the Market Price), and results in the issuance of Common Shares having value equal to the in-the-money value of the Warrants (being the excess of the Market Price of the Common Shares over the Warrant exercise price) at the time of exercise.
12. The Warrant Indenture will be amended in accordance with its terms to effect the Warrant Indenture Amendment by way of a supplemental indenture to the Warrant Indenture approved by the written consent of holders of Debenture Warrants (Debenture Warrantholders) holding at least 66 2/3% of all outstanding Debenture Warrants.
13. The Warrant Certificate Amendment will be effected in accordance with its terms by way of written agreement between the Filer and Fairfax.
14. In order to effect the Warrant Amendments, it is also necessary to amend the restricted payments covenant of the debenture indenture (the Debenture Indenture) among the Filer, Computershare Trust Company of Canada, as trustee, and the guarantors party thereto dated as of May 28, 2009 that restricts the repurchase of securities by the Filer, which may apply to the cashless exercise of Warrants to the extent that such cashless exercise may be characterized as a repurchase of securities (the Debenture Amendment, and together with the Warrant Amendments, the Amendments).
15. The Debenture Indenture will be amended in accordance with its terms to effect the Debenture Amendment by way of a supplemental indenture to the Debenture Indenture approved by the written consent of the holders (Debentureholders) of the 12% senior secured debentures (the Debentures) issued pursuant to the Debenture Indenture holding at least a majority of the aggregate outstanding principal amount of the Debentures.
16. The consent of the lenders under the Filer's $130 million asset-based credit facility (the Credit Facility) to the waiver of certain covenants of the Credit Facility will be required in order to permit the Warrant Amendments.
17. The Amendments have been approved by the Board of Directors of the Filer based on the recommendation of a special committee of independent directors that excludes any representative of Fairfax, Comrie or other insiders of the Filer.
18. If the Filer obtains the requested decision, then after obtaining the requisite waivers in respect of the Credit Facility, the Filer intends to promptly commence a written offer (the Offer) to the Warrantholders pursuant to which the Filer will offer the opportunity to the Warrantholders to exercise their Warrants on a cashless basis on the date specified for such exercise in the Offer (the Exercise Date).
19. After commencing the Offer but prior to completing the Offer, the Filer will effect the Amendments.
20. The Filer will prepare an offer letter (the Offer Letter) in respect of the Offer. The Offer Letter shall include disclosure regarding the Offer, including the terms and conditions of the Offer, the consequences of both cashless exercise of the Warrants and of not submitting Warrants for cashless exercise, the Warrant submission procedures, the mechanics of Automatic Withdrawal (as defined below), and detailed descriptions of the Amendments and terms of the Support Agreement (as defined below).
21. The opportunity to exercise the Warrants on a cashless basis will be made available on a date or dates not less than 35 days after the initial date on which the Warrants were permitted to be deposited for the purpose of exercising such cashless exercise.
22. Notice of the opportunity to exercise the Warrants on a cashless exercise basis will be provided to Warrantholders by way of press release that has received the prior approval of the TSX and as required under the Warrant Indenture and the Warrant Certificate.
23. The Offer is subject to a participation requirement which requires that not less than 85% of all Warrants outstanding as of the initial expiry date of the Offer have been properly submitted for cashless exercise pursuant to the Offer not later than such date (the Participation Requirement).
24. If the Participation Requirement and the other conditions to the Offer are satisfied or waived, then each Warrant submitted for cashless exercise pursuant to the Offer, and not withdrawn pursuant to the Automatic Withdrawal, will be accepted for cashless exercise at the Market Price on the Exercise Date. Any submission of Warrants for cashless exercise pursuant to the Offer will be irrevocable except in the event of an Automatic Withdrawal (as defined below).
25. Based on the holdings of Warrants by the Supporting Entities (as defined below), the Filer expects that the Participation Requirement will be satisfied. However, in the event that the Participation Requirement is not satisfied, then:
(A) all Warrants submitted for cashless exercise pursuant to the Offer shall automatically be withdrawn from the Offer (Automatic Withdrawal),
(B) the Exercise Date shall automatically be extended by at least ten days, and
(C) the Participation Requirement will be deemed to be waived.
In the case of an Automatic Withdrawal, Warrantholders who have submitted Warrants pursuant to the Offer shall be permitted to re-submit their Warrants for cashless exercise pursuant to the Offer by delivering prior to the Exercise Date an executed notice of the re-submission of their Warrants for cashless exercise pursuant to the Offer. Otherwise, any Warrants submitted for cashless exercise pursuant to the Offer will be returned promptly to the Warrantholders who submitted such Warrants. In the event of an Automatic Withdrawal, any submission or re-submission of Warrants for cashless exercise pursuant to the Offer after the Automatic Withdrawal shall be irrevocable and may not be withdrawn.
26. The Filer has entered into a support agreement (the Support Agreement and, together with the Offer and the Amendments, the Transaction) with certain Warrantholders and Debentureholders, consisting of Fairfax, Comrie, Mackenzie Financial Corporation and Chou Associates Management Inc. (collectively, the Supporting Entities). The Supporting Entities hold, in the aggregate, 86% of the outstanding Warrants and 82% of the outstanding principal amount of the Debentures. Pursuant to the Support Agreement, the Supporting Entities will agree to:
(i) provide their consent to the Amendments; and
(ii) submit their Warrants for cashless exercise pursuant to the Offer (subject to Automatic Withdrawal in the event that the Participation Requirement is not satisfied) provided that: (a) the VWAP on the TSX in the five trading days immediately preceding the initial expiry date of the Offer is not less than $2.80 per Common Share, and (b) the Market Price minus the exercise price of any Warrant (being $1.00 in the case of the Debenture Warrants and $0.82 in the case of the Fairfax Warrants) is not less than $1.80.
27. All Debenture Warrantholders will receive the same consideration for their Debenture Warrants under the Offer.
28. The Transaction constitutes a related party transaction pursuant to clause (h) of the definition of "related party transaction" in MI 61-101. The formal valuation requirement of Part 5 of MI 61-101 does not apply to the Transaction pursuant to s. 5.4(1) of MI 61-101. However, the minority approval requirement contained in s. 5.6 of MI 61-101 does apply to the Transaction and, unless otherwise exempt, the Filer would be required to obtain minority approval in accordance with Part 8 of MI 61-101.
29. S. 8.1(1) of MI 61-101 requires minority approval to be obtained from the holders of every class of "affected securities" (as defined in MI 61-101) of the issuer. In the context of the Transaction, the only class of affected securities is the Common Shares.
30. The Filer cannot avail itself of the exemption from the minority approval requirement in s. 5.7(1)(a) of MI 61-101 where the fair market value of a related party transaction is less than 25% of the market capitalization of the issuer (the Fair Market Value Exemption) because, in calculating the fair market value of the Transaction, the Filer must include: (i) the fair market value of all Common Shares underlying the Warrants (pursuant to s. 5.5(a)(iv) of MI 61-101) and (ii) the fair market value of all Debentures (pursuant to s. 5.5(a)(iii) of MI 61-101) given that the Debenture Amendment is a "connected transaction" (as defined in MI 61-101) to the Warrant Amendments.
31. The Warrant Amendments do not provide any enhancement in the economic value of the Warrants to the Warrantholders. Rather, they merely provide Warrantholders with an alternative means of exercising their Warrants and realizing the economic value that results from the original terms of the Warrants. As the Warrant Amendments provide no economic value to Warrantholders, there is no economic detriment to holders of Common Shares, and accordingly no need for minority approval of the Transaction to protect the interests of holders of Common Shares or any minority thereof.
32. All Warrantholders will receive identical treatment under the Transaction, but for: (i) the different exercise prices of the Debenture Warrants and the Fairfax Warrants as specified in the Warrant Indenture and Warrant Certificate, respectively and (ii) the requirement that holders of Debenture Warrants must withdraw their Debenture Warrants from CDS in order to effect a cashless exercise.
33. There are no interests of related parties in the Transaction that differ from those of the Debenture Warrantholders who are not related parties. Other than Comrie and Fairfax, none of the Supporting Entities are a "related party" of the Filer. Although Comrie and Fairfax are each a "related party" of the Filer and also an "interested party" to the Transaction because of their respective holdings of Warrants and Debentures and in its capacity as a party to the Support Agreement, neither Comrie nor Fairfax is entitled to receive any payment or distribution that is greater than the entitlement of the general body of Warrantholders.
34. The Debenture Amendment merely facilitates the Warrant Amendments and does not affect any of the interests of the Debentureholders and holders of Common Shares.
The Decision Maker 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 Maker under the Legislation is that the Exemption Sought is granted provided that:
(i) the Transaction proceeds as described above in paragraphs 9 to 27;
(ii) neither Comrie nor Fairfax will receive any payment or distribution that is greater than the entitlement of the general body of Warrantholders.
(iii) all Warrantholders will be treated identically under the Offer, subject to the terms specified in paragraph 32 above; and
(iv) any applicable disclosure required by s. 5.2 of MI 61-101 will be included in a press release to be issued prior to the commencement of the Offer.