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.
December 11, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
NORTHWEST INTERNATIONAL HEALTHCARE PROPERTIES REAL ESTATE INVESTMENT TRUST
The securities regulator in the Jurisdiction (the Principal Regulator) 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 NWI Healthcare Properties LP (NWI LP) or any other subsidiary entity (as such term is defined in MI 61-101) of NWI LP 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 of NorthWest Value Partners Inc. and its affiliates (NWVP) in the Filer, which is held in the form of class B limited partnership units (Class B Units) and, if and when issued to them, class D general partnership units (Class D Units, and together with the Class B Units, Exchangeable Units) of NWI LP, were included in the calculation of the Filer's market capitalization (the Requested 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 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 Québec.
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 under the laws of the Province of Ontario. The Filer is governed pursuant to an amended and restated declaration of trust dated November 16, 2012 (the "Declaration of Trust").
2. The Filer's head office is located at 284 King Street East, Suite 100, Toronto, Ontario M5A 1K4.
3. The Filer is a reporting issuer (or the equivalent thereof) in each province and territory of Canada and is currently not in default of any applicable requirements under 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 August 30, 2013, the Filer had 45,505,849 Units and 91,068,320 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 Units (defined below) issued and outstanding.
5. The Units are listed and posted for trading on the TSX Venture Exchange (the TSXV) under the trading symbol "MOB.UN".
6. The operating business of the Filer is carried on by NWI LP, which indirectly holds interest in healthcare properties and related assets located internationally.
7. NWI LP is a limited partnership formed under the laws of the Province of Ontario and is governed by the amended and restated limited partnership agreement of NWI LP dated November 16, 2012 (the Limited Partnership Agreement). NWI LP's head office is located at 284 King Street East, Suite 100, Toronto, Ontario, M5A 1K4.
8. The general partners of NWI LP are NWI Healthcare Properties GP Inc. (NWI GP) and NWVP (NWI LP) GP Inc. (NWVP GP). NWI GP is a subsidiary of the Filer. NWVP GP is a subsidiary of NWVP.
9. NWI LP 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.
10. NWI LP is authorized to issue an unlimited number of (a) Class A limited partnership units (Class A Units), of which 19,122,461 are issued and outstanding and held by the Filer; (b) Class B Units, of which 91,068,320 Class B Units are issued and outstanding and held by NWVP; (c) Class C general partnership units (Class C Units), of which 10,000 Class C Units are issued and outstanding and held by NWVP GP; (d) Class D Units, of which no Class D Units are issued and outstanding; and (e) Class E general partnership units (Class E Units) of which one Class E Unit is issued and outstanding and held by NWI GP.
11. The Class C Units held by NWVP GP have nominal economic entitlements and no voting entitlements, but entitle NWVP GP as a general partner of NWVP to receive an annual payment if NWI LP meets certain performance metrics. Upon meeting such performance metrics, Class C Units held by NWVP can become convertible, on an annual basis and at NWVP GP's discretion, into any combination of: (a) cash, in an amount calculated with reference to the growth of the Filer's net tangible assets (referred to as the Class C Amount); (b) a promissory note in the amount of the Class C Amount; or (c) a number of Class D Units determined by the formula "A/B", where "A" is equal to the Class C Amount in respect of a particular adjustment date and "B" is equal to the volume weighted average price of all Units traded on the stock exchange upon which the Units trade for the five trading days immediately preceding the applicable adjustment date. The Filer does not currently intend to issue any Class D Units other than in connection with a conversion of Class C Units.
12. The Class B Units are, and the Class D Units will be, in all material respects, economically equivalent to each other and the Units on a per unit basis. Holders of Class B Units are, and holders of Class D Units will be, entitled to receive distributions equal to those paid by the Filer to holders of Units. The Class B Units have, and the Class D Units will have, attached thereto an equivalent number of Special Voting Units in the Filer that provide the holders thereof with the same voting rights as the holders of the Units at all meetings of voting Unitholders.
13. The Class B Units are, and the Class D Units will be, exchangeable for Units on a one-for-one basis and transferable, subject to the satisfaction of the applicable conditions set forth in the Limited Partnership Agreement and related exchange agreement. Such agreements provide the holder of the Exchangeable Units to require the Filer to exchange each Exchangeable Unit for one Unit, subject to customary anti-dilution adjustments. The exchange procedure may be initiated at any time by the holder of an Exchangeable Unit so long as all of the following conditions have been met: (a) the exchange would not cause the Filer to breach the restrictions respecting Non-Resident ownership contained in the Filer's Declaration of Trust or otherwise cause it to cease to be a "mutual fund trust" for purposes of the Income Tax Act (Canada) or create a substantial risk of such cessation; (b) the Filer is legally entitled to issue the Units in connection with the exercise of the exchange rights; and (c) the person receiving the Units upon the exercise of the exchange rights complies with all applicable securities laws. The Exchangeable Units may not be exchanged for any other securities other than Units, nor for cash.
14. The principal activity of NWI LP is to own income-producing real estate and related assets.
15. The Filer completed its reconfiguration to focus on international healthcare initiatives in November 2012 (the Reconfiguration).
16. In connection with the Reconfiguration, NWI LP issued Class B Units to NWVP in November 2012.
17. As of the date hereof, NWVP holds an effective interest in the Filer of approximately 87% (on an issued and outstanding basis and assuming all Class B Units are exchanged for Units), comprised of 91,068,320 Class B Units and 27,432,703 Units of the Filer.
18. Pursuant to the terms of an asset management agreement dated November 16, 2012 among NWI Asset Management Inc. (NWIAM), the Filer and NWI LP (the Asset Management Agreement), NWIAM (an affiliate of NWVP), is the external asset manager of the Filer and provides the Filer and NWI LP with certain advisory and investment management services, including the services of Chief Executive Officer and Chief Financial Officer.
19. Pursuant to the Asset Management Agreement, the Filer and NWI LP have a right of first opportunity with respect to future acquisition of properties that meet certain investment criteria, which has been disclosed in the Filer's securities filings.
20. It is anticipated that the Filer may from time to time, indirectly (through NWI LP and/or its subsidiaries) enter into transactions with certain related parties, including NWVP.
21. NWI LP has issued Class B Units (rather than Units of the Filer) in order to provide NWVP with a tax deferred rollover on certain transactions undertaken with the Filer (which would have been permitted if the public entity were a corporation or limited partnership).
22. The Filer has disclosed its relationship with NWVP in its securities filings.
23. 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 (together, requirements (a) and (b) are referred to as the Minority Protections).
24. 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).
25. The Filer may not be entitled to rely on the Transaction Size Exemption available under 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.
26. The Class B Units represent, and the Class D Units will represent, part of the equity value of the Filer. The Class B Units provide the holder of Class B Units, and the Class D Units will provide the holder of Class D Units, with economic rights which are, in all material respects, equivalent to the Units. The effect of NWVP's exchange right is that NWVP will receive Units upon the exchange of the Class B Units or, if and when issued, Class D Units. Moreover, the economic interests that underlie the Class B Units are, and the economic interests that will underlie the Class D Units will be, identical to those underlying the Units; namely, the assets held directly or indirectly by NWI LP.
27. If the Class B Units and, if and when issued, the Class D Units, are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of NWVP's interest in NWI LP represented by Class B Units and, if and when issued, Class D Units (currently, approximately 66%). 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.
28. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201Income 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 what transactions 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. Accordingly, it is consistent with MI 61-101 that securities of the operating entity, such as the Class B Units and, if and when issued, the Class D Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
29. The inclusion of the Class B Units and, if and when issued, Class D Units, when determining the Filer's market capitalization 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.
The Principal Regulator 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 Principal Regulator under the Legislation is that the Requested Relief be granted to the Filer provided that:
(a) the transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Class B Units and, if and when issued, Class D 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 Class B Units, Class D Units and Special Voting Units, including the exchange rights associated therewith, as described above and in the Declaration of Trust, Limited Partnership Agreement and the Filer's current annual information form, whether by amendment to either the Declaration of Trust or Limited Partnership Agreement, or by contractual agreement or otherwise;
(c) the transaction is made in compliance with the rules and policies of the TSXV or such other exchange upon which the Filer's securities trade; and
(d) any future annual information form 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 is not more than 25% of the market capitalization of the issuer. NorthWest International Healthcare Properties Real Estate Investment Trust (the "REIT") 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 the REIT's market capitalization, if the class B limited partnership units and [if and when issued] class D general partnership units of NWI Healthcare Properties LP ("NWI LP") are included in the calculation of the REIT'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 % indirect interest held by NorthWest Value Partners Inc. and its affiliates in the REIT in the form of class B limited partnership units and [if and when issued] class D general partnership units of NWI LP."
(e) the Filer will disclose the number of Class B Units and, if and when issued, Class D Units, outstanding in its management's discussion and analysis, annual information form and management information circular, and as otherwise required by applicable securities law.