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Choice Properties Real Estate Investment Trust
Headnote
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 holds all of its properties through limited partnership -- entity holds units in limited partnership which are exchangeable into and in all material respects the economic equivalent to the issuer's publicly traded units -- issuer may include entity's indirect interest in issuer when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions -- relief granted subject to conditions.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(1)(a), 9.1.
July 18, 2013
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
CHOICE PROPERTIES REAL ESTATE INVESTMENT TRUST
(THE “FILER”)
DECISION
Background
The securities regulatory authority or regulator in the Jurisdiction ("Decision Maker") has received an application (the "Application") from the Filer for a decision under the securities legislation of the Jurisdiction (the "Legislation") that the Filer be granted an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through Choice Properties Limited Partnership (the "Partnership") or any other subsidiary entity (as such term is defined in MI 61-101) of the Partnership, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect equity interest in the Filer, which is held by Loblaw Companies Limited and its subsidiaries ("Loblaw") or any of its permitted transferees (as set out in subsection 5.8(b) of the Partnership Agreement (as defined below)), in the form of exchangeable Class B limited partnership units of the Partnership, was included in the calculation of the Filer's market capitalization (the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the 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 Quebec.
Interpretation
Terms defined in National Instrument 14-101 -- Definitions, MI 11-102 and MI 61-101 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 Filer is an unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario. The Filer was established pursuant to a declaration of trust dated May 21, 2013.
2. The Filer's head office is located at 22 St. Clair Avenue East, Suite 800, Toronto, Ontario, M4T 2S5.
3. The Filer is a reporting issuer (or the equivalent thereof) in each of the Jurisdictions and is currently not in default of any applicable requirements of the securities legislation thereunder.
4. The Filer is authorized to issue an unlimited number of trust units ("Units") and an unlimited number of special voting units ("Special Voting Units"). As at the date hereof, the Filer has 87,500,000 Units and 272,497,871 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 Exchangeable LP Units (defined below) issued and outstanding.
5. The Units are listed and posted for trading on the Toronto Stock Exchange (the "TSX") under the trading symbol "CHP.UN".
6. The Partnership is a limited partnership formed under the laws of the Province of Ontario and is governed by an amended and restated limited partnership agreement dated as of July 5, 2013 (the "Partnership Agreement"). The Partnership's head office is located at 22 St. Clair Avenue East, Suite 800, Toronto, Ontario, M4T 2S5.
7. The Partnership is not a reporting issuer (or the equivalent thereof) in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.
8. The Partnership is authorized to issue (i) an unlimited number of Class A limited partnership units ("Class A LP Units"), of which 87,500,000 Class A LP Units are issued and outstanding as at the date hereof and are held by the Filer, (ii) an unlimited number of exchangeable Class B limited partnership units ("Exchangeable LP Units"), of which 272,497,871 Exchangeable LP Units are issued and outstanding as at the date hereof and are held by Loblaw, and (iii) an unlimited number of Class C limited partnership units ("Class C LP Units"), of which 92,500,000 Class C LP Units are issued and outstanding as at the date hereof and are held by Loblaw. The Exchangeable LP Units were issued to Loblaw in connection with the Filer's acquisition of 425 properties (the "Transaction") from Loblaw on July 4, 2013.
9. The Exchangeable LP Units are intended to be, in all material respects, the economic equivalent of the Units. Holders of Exchangeable LP Units are entitled to receive distributions equal to those paid by the Filer to holders of Units. The Exchangeable LP Units are exchangeable into Units on a one-for-one basis subject to customary anti-dilution adjustments and each is accompanied by a Special Voting Unit that entitles the holder to receive notice of, attend and vote together with the holders of Units at all meetings of voting unitholders of the Filer. The Exchangeable LP Units are transferable, subject to the satisfaction of the applicable conditions set forth in the Partnership Agreement.
10. The operating business of the Filer is carried on by the Partnership. The principal activity of the Partnership is to own income-producing real estate assets.
11. The Filer currently holds 100% of the Class A LP Units of the Partnership, whereas Loblaw currently holds 100% of the Exchangeable LP Units and the Class C LP Units. As at the date thereof, Loblaw holds an approximate 81.7% effective interest in the Filer on a fully-diluted basis through ownership of 21,500,000 Units and all of the 272,497,871 issued and outstanding Exchangeable LP Units.
12. It is anticipated that the Filer may from time to time enter into transactions with certain related parties, including Loblaw or any of its subsidiaries.
13. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
(a) the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and
(b) the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (requirements (a) and (b) are collectively referred to as the "Minority Protections").
14. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization (the "Transaction Size Exemption").
15. The Filer may not be entitled to rely on the Transaction Size Exemption available under the Legislation from the requirements relating to related party transactions in the Legislation because the definition of "market capitalization" in the Legislation does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.
16. The Exchangeable LP Units represent part of the equity value of the Filer and provide the holder of the Exchangeable LP Units with economic rights which are, in all material respects, equivalent to the Units. The effect of Loblaw's exchange right is that Loblaw will receive Units upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Units; namely, the assets held directly or indirectly by the Partnership.
17. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of Loblaw's Class B limited partnership interest in the Partnership (approximately 76%). As a result, related party transactions by the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer.
18. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 -- Income Trusts and Other Indirect Offerings ("NP 41-201"), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and which transaction MI 61-101 should apply to. Section 1.2 of NP 41-201 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Therefore, it is consistent with MI 61-101 that securities of the operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
19. The inclusion of the Exchangeable LP Units when determining the Filer's market capitalization pursuant to MI 61-101 is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.
Decision
The Decision Maker is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Maker under the Legislation is that the Requested Relief be granted to the Filer provided that:
(a) the applicable transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Units;
(b) there be no material change to the terms of the Exchangeable LP Units and the Special Voting Units, including the exchange rights associated therewith, as described above and in the Exchange Agreement dated July 5, 2013, filed in connection with the Transaction; and
(c) any annual information form or equivalent of the Filer that is required to be filed in accordance with applicable Canadian securities law contain the following disclosure, with any immaterial modifications as the context may require;
"Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction does not exceed 25% of the market capitalization of the issuer. Choice Properties Real Estate Investment Trust has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of Choice Properties Real Estate Investment Trust's market capitalization, if exchangeable Class B limited partnership units of Choice Properties Limited Partnership held by Loblaw are included in the calculation of Choice Properties Real Estate Investment Trust's market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements would apply, is increased to include the approximately 76% indirect exchangeable equity interest in Choice Properties Real Estate Investment Trust held by Loblaw in the form of exchangeable Class B limited partnership units of Choice Properties Limited Partnership."
"Naizam Kanji"
Deputy Director, Corporate Finance
Ontario Securities Commission