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 -- no information imbalance between the related party and minority shareholders since the reporting issuer has continuous disclosure obligations.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions, ss. 5.4, 6.3, 9.1.
August 8, 2013
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
CROMBIE 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") for discretionary relief to exempt the Filer from the requirement under Subsections 5.4 and 6.3(1)(d) of MI 61-101 to obtain a formal valuation of the Class B limited partnership units (the "Exchangeable LP Units") of its wholly owned subsidiary, Crombie Limited Partnership ("Crombie LP"), to be issued and sold by Crombie LP to ECL Developments Limited ("ECL"), a wholly owned subsidiary of Empire Company Limited ("Empire"), a related party of the Filer, pursuant to a private placement (the "Proposed Transaction") (the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the "Decision Maker") 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 Quebec.
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.
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 pursuant to a declaration of trust dated January 1, 2006, as amended and restated November 5, 2009 (the "Declaration of Trust") formed under, and governed by, the laws of the Province of Ontario. The principal, registered and head office of the Filer is located at 115 King Street, Stellarton, Nova Scotia, B0K 1S0. The Filer carries on its business operations through Crombie LP. The Ontario Securities Commission has been selected as the principal regulator for this application in accordance with the guidelines set out in Section 3.6 of National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions on the basis that the Filer is a trust formed under, and governed by, Ontario law, the Filer maintains an office in Toronto, the Filer owns more than twice as many properties in Ontario as it does in Quebec and the Filer's Units (defined below) are listed and posted for trading on the Toronto Stock Exchange (the "TSX").
2. The Filer was formed by Empire in 2006, and Empire retained an interest in the business of the Filer through ownership by ECL of Exchangeable LP Units of Crombie LP.
3. The Filer is authorized to issue an unlimited number of units (the "Units") and an unlimited number of special voting units (the "Special Voting Units"). As at July 18, 2013, there were 53,642,095 Units and 38,420,221 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equal to the number of Exchangeable LP Units outstanding, and each Special Voting Unit accompanies one Exchangeable LP Unit.
4. The Units are currently listed and posted for trading on the TSX under the symbol "CRR.UN".
5. The Filer is a reporting issuer, or has equivalent status, under securities legislation in all provinces of Canada and is not in default of any of the requirements of such legislation.
6. The Filer invests in income-producing retail, office and mixed use properties in Canada, with a future growth strategy focused primarily on the acquisition of retail properties. As at July 18, 2013, the Filer owned a portfolio of 176 commercial properties in nine provinces comprising approximately 14.5 million square feet of gross leaseable area.
7. Crombie LP is a limited partnership formed under the laws of the Province of Nova Scotia and governed by a third amended and restated limited partnership agreement dated April 14, 2008 (the "Crombie LP Agreement") among Crombie General Partner Limited ("Crombie GP"), ECL and Crombie Subsidiary Trust ("CS Trust").
8. Crombie GP, a corporation incorporated under the laws of the Province of Nova Scotia, is the general partner of Crombie LP and is wholly owned by CS Trust.
9. Under the Crombie LP Agreement, Crombie LP is authorizized to issue an unlimited number of Class A limited partnership units (the "Class A LP Units") and an unlimited number of Exchangeable LP Units (collectively, the "LP Units"), as well as an unlimited number of general partnership units.
10. All the outstanding Class A LP Units are held by CS Trust (a wholly-owned subsidiary of the Filer), all the Exchangeable LP Units are held by ECL, and all the outstanding general partnership units are held by Crombie GP.
11. ECL holds 38,430,221 Exchangeable LP Units and Special Voting Units and 909,090 Units, together representing an approximate 42.7% economic and voting interest in the Filer.
12. The Exchangeable LP Units are not listed and posted for trading on the TSX or any other stock exchange.
13. The Exchangeable LP Units are, in all material respects, equivalent to the Units on a per unit basis. Pursuant to the terms of an exchange agreement dated March 23, 2006 among the Filer, CS Trust, Crombie GP, Crombie LP and ECL Properties Limited (the "Exchange Agreement"), as assigned by ECL Properties Limited to ECL, each Exchangeable LP Unit is exchangeable at the option of the holder for one Unit of the Filer. Each Exchangeable LP Unit is entitled to distributions from Crombie LP in the same amounts and at the same times as the Filer makes distributions on its Units of the Filer. Each Exchangeable LP Unit is accompanied by one Special Voting Unit, which provides for the same voting rights in the Filer as a Unit.
14. 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. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Units; namely, the assets and operations held directly or indirectly by Crombie LP.
15. Under Section 2.1 of the Exchange Agreement, subject to certain conditions, the Exchangeable LP Units are indirectly exchangeable on a one for one basis for Units at any time at the option of the holder.
16. The Exchangeable LP Units entitle the holder to distributions from Crombie LP equal to any distributions paid to holders of Units by the Filer. Under the Exchange Agreement, the Filer may not distribute rights, options, securities, evidence of indebtedness or assets to its Unitholders, unless the economic equivalent of such rights, options, securities, evidence of indebtedness or assets to be issued or distributed are simultaneously issued or distributed by Crombie LP to holders of Exchangeable LP Units.
17. Each Exchangeable LP Unit is accompanied by one Special Voting Unit of the Filer, which provides for the same voting rights in the Filer as a Unit. Additionally, except as required by law and in certain specified circumstances in which the rights of a holder of Exchangeable LP Units are affected, holders of Exchangeable LP Units are not entitled to vote at meetings of the holders of LP Units.
18. In accordance with Section 3.14 of the Crombie LP Agreement, the Exchangeable LP Units and accompanying Special Voting Units of the Filer may not be transferred except (i) to a wholly-owned subsidiary of Empire or (ii) where the conditions of transfer require that the transferee make an offer to the registered holders of Units to acquire Units on the same terms and conditions as if such Exchangeable LP Units had been exchanged for Units immediately prior to such transfer, and the transferee acquires such Exchangeable LP Units along with a proportionate number of Units tendered to such offer.
19. Although ECL was granted additional rights at the time of the Filer's initial public offering including pre-emptive rights (Section 7.6 of the Declaration of Trust), registrations rights (Section 6.1 of the Exchange Agreement), board appointment rights (Section 3.8(b) of the Declaration of Trust) and approval rights (Section 6.6 of the Declaration of Trust), these rights pre-exist the issuance of the Exchangeable LP Units under the Proposed Transaction and are based on ownership thresholds that treat Exchangeable LP Units and Units on a combined basis. As a result, by acquiring Exchangeable LP Units rather than Units, ECL does not gain any additional or unique rights or benefits that they would not otherwise have.
20. Other than the rights described above, the Exchangeable LP Units carry no other rights that would impact their value. The Crombie LP Agreement does contain typical rights for a limited partnership such as tag-along and drag-along rights, but these are customary limited partnership rights that do not confer any special benefit on the holders of Exchangeable LP Units aside from those relating to holding the LP Units of Crombie LP.
21. Empire's subsidiary Sobeys Inc. ("Sobeys") has entered into an agreement with Canada Safeway Limited ("Canada Safeway") to purchase all of the assets comprising Canada Safeway's retail grocery business in Canada for approximately $5.8 billion. Included among the assets to be acquired are certain real estate assets. Empire has announced that it intends to sell a portion of these real estate assets (the "Acquisition Properties") in order to raise approximately $1 billion. Pursuant to a right of first offer agreement between Sobeys and the Filer dated as of August 3, 2011, the Filer has a right of first offer with respect to the Acquisition Properties.
22. On July 24, 2013, the Filer announced that Crombie LP has entered into an agreement with Sobeys and a wholly-owned subsidiary of Sobeys to purchase the Acquisition Properties for a cash purchase price of $990 million. The board of trustees of the Filer formed a Special Committee of independent trustees within the meaning of MI 61-101 to review the acquisition of the Acquisition Properties and make a recommendation to the full board with respect to the transaction, and to supervise the preparation of a formal valuation of the Acquisition Properties. The Special Committee retained Cushman & Wakefield Ltd. to provide a formal valuation of the Acquisition Properties. The formal valuation was prepared under the supervision of the Special Committee and in accordance with MI 61-101 to the knowledge of the Filer and the Special Committee. The Special Committee also obtained a formal "fairness opinion" from Brookfield Financial Corp., the Special Committee's independent financial advisor, to evaluate the acquisition of the Acquisition Properties, that, as of the date of the opinion, the cash consideration payable by Crombie for the Acquisition Properties is fair, from a financial point of view, to the Unitholders of Crombie other than Empire and its associates and affiliates.
23. In order to finance a portion of the purchase price for the Acquisition Properties, the Filer has entered into an agreement with a syndicate of underwriting to issue and sell, on a bought deal basis pursuant to a prospectus, approximately $225 million of subscription receipts exchangeable for Units upon the closing of the acquisition of the Acquisition Properties and $75 million principal amount of convertible debenture. ECL holds a pre-emptive right to participate in any equity offering by the Filer in order to maintain its proportionate ownership of the Filer. As has been the case for prior prospectus offerings of Units by the Filer, to be consistent with the majority of ECL's existing holdings, this right has been satisfied by ECL subscribing for $150 million of additional Exchangeable LP Units rather than Units, at the same price per Exchangeable LP Unit that the Subscription Receipts are being offered to the public. ECL's subscription was reviewed and approved by a committee of trustees of the Filer who are independent within the meaning of MI 61-101. As a result of the Proposed Transaction, Empire and ECL's direct and indirect voting interest in the Filer will be reduced from 42.7% to 42.1%.
24. As noted herein, Empire through ECL beneficially holds 38,430,221 Exchangeable LP Units (being all of the Exchangeable LP Units issued and outstanding) and 909,090 Units, together representing an approximate 42.7% economic interest in the Filer.
25. Under MI 61-101, due to Empire's ownership of Sobeys and indirect interest in the Filer and Crombie LP, Empire and its subsidiaries Sobeys and ECL are considered to be "related parties" of the Filer. Furthermore, as a result of the application of Section 1.4 of MI 61-101, the acquisition by Crombie LP of the Acquisition Properties from Sobeys and the issuance of Exchangeable LP Units to ECL would each be considered to be a related party transaction subject to the valuation and minority approval requirements of Sections 5.4 and 5.6 of MI 61-101. There is no available exemption from these requirements for the potential purchase of the Acquisition Properties due to the size of the purchase price. Consequently, the Filer has obtained a valuation of the Acquisition Properties and has called a Unitholder meeting for the purpose of obtaining the required minority Unitholder approval for the acquisition. The sale of the Acquisition Properties to Crombie LP is a downstream transaction within the meaning of MI 61-101 for Empire.
26. Ordinarily, the issuance of Exchangeable LP Units to ECL in the Proposed Transaction would be exempt from the application of Sections 5.4 and 5.6 of MI 61-101 due to the exemption in Section 5.5(a) of MI 61-101 for transactions for which 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 Filer's market capitalization. However, since the purchase of the Acquisition Properties could be considered to be a connected transaction to the issuance of the Exchangeable LP Units, this threshold would be exceeded for the issuance of the Exchangeable LP Units. As a result, the Filer will seek minority Unitholder approval of ECL's subscription for Exchangeable LP Units, at the Unitholder meeting called to consider the purchase of the Acquisition Properties. ECL's subscription is also a downstream transaction for Empire.
27. MI 61-101 requires:
(a) pursuant to Section 5.4, the preparation of a formal independent valuation of the non-cash assets involved in the transaction; and
(b) pursuant to Section 5.6, approval by a majority of the votes cast by disinterested Unitholders (i.e. excluding votes cast by Empire and its affiliates), entitled to vote on the Proposed Transaction at a duly constituted meeting of Unitholders held to consider the Proposed Transaction.
28. Subsection 6.3(1)(d) of MI 61-101 states that an issuer required to obtain a formal valuation shall provide the valuation in respect of, subject to Subsection 6.3(2), the non-cash assets involved in a related party transaction, which would include the Exchangeable LP Units to be issued to ECL.
29. Subsection 6.3(2) of MI 61-101 states that a formal valuation of non-cash assets is not required for a related party transaction if:
(a) 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;
(b) the person that would otherwise be required to obtain the formal valuation of those securities states in the disclosure document for the transaction that the person has no knowledge of any material information concerning the issuer of the securities, or concerning the securities, that has not been generally disclosed;
(c) in the case of an insider bid, issuer bid or business combination
(i) a liquid market in the class of securities exists,
(ii) the securities constitute 25 per cent or less of the number of securities of the class that are outstanding immediately before the transaction,
(iii) the securities are freely tradeable at the time the transaction is completed, and
(iv) the valuator is of the opinion that a valuation of the securities is not required, and
(d) in the case of a related party transaction for the issuer of the securities, the conditions in subparagraphs (c)(i) and (ii) of section 5.5 are satisfied, regardless of the form of the consideration for the securities.
30. Subsection 5.5(c) of MI 61-101 provides an exemption from the valuation requirement in Section 5.4 for a transaction that is a distribution of securities of the issuer to a related party for cash consideration if:
(i) neither the issuer nor, to the knowledge of the issuer after reasonable inquiry, the related party has knowledge of any material information concerning the issuer or its securities that has not been generally disclosed, and the disclosure document for the transaction includes a statement to that effect; and
(ii) the disclosure document for the transaction includes a description of the effect of the distribution on the direct or indirect voting interest of the related party.
31. Subsections 5.5(c) and 6.3(2)(a) of MI 61-101 each would provide the Requested Relief if ECL were to subscribe for Units instead of Exchangeable LP Units.
32. Although the Exchangeable LP Units are not securities of the Filer, of a reporting issuer or of a class for which there is a published market, they are, as a result of the rights, privileges, restrictions and conditions attaching to such Exchangeable LP Units and the various material agreements relating to and governing the Exchangeable LP Units, equivalent to the Units in all material respects, in that:
(a) they are exchangeable into Units on a one for one basis;
(b) they have the same economic rights as Units;
(c) they carry the same voting rights as Units; and
(d) any additional rights attached to the Exchangeable LP Units either: (i) pre-exist the issuance of the Exchangeable LP Units under the Proposed Transaction and treat the Exchangeable LP Units and Units on the same basis, or (ii) arise solely by virtue of the Exchangeable LP Units being limited partnership units and are customary rights associated with limited partnership units.
33. The information circular for the Unitholder meeting being held to consider the acquisition of the Acquisition Properties and the ECL subscription will include the required disclosures under MI 61-101 with respect to the acquisition of the Acquisition Properties and will otherwise comply with the requirements of applicable securities law, and will disclose:
(a) that neither the Filer nor ECL has any knowledge of any material information concerning the Filer, Crombie LP or their securities that has not been generally disclosed, in accordance with subsection 6.3(2)(b) of MI 61-101; and
(b) a description of the effect of the Proposed Transaction on the direct or indirect voting interest in the Filer of Empire and ECL, in accordance with subsection 6.3(2)(d) of MI 61-101.
The Decision Maker is satisfied that the decision meets the test set out in MI 61-101 for the Requested Relief.
The decision of the Decision Maker is that the Requested Relief is granted, provided that the Filer and Crombie LP comply with Subsection 6.3(2) of MI 61-101 other than clause (a) thereof.