Securities Law & Instruments

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.

March 25, 2014

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 MELCOR REAL ESTATE INVESTMENT TRUST (the "Filer")

DECISION

Background

The principal regulator in the Jurisdiction (the "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 Melcor REIT Limited Partnership ("Melcor LP") or a subsidiary entity (as such term is defined in MI 61-101) of Melcor 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 Melcor Developments Ltd. ("Melcor") or its subsidiaries in the Filer, held in the form of Class B LP Units of Melcor LP (the "Exchangeable LP Units"), 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 Quebec.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 61-101 and MI 11-102 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 Alberta pursuant to a declaration of trust dated January 25, 2013, as amended, (the "Declaration of Trust") with its principal and head office located at 900, 10310 Jasper Avenue, Edmonton, Alberta, T5J 1Y8. The Ontario Securities Commission has been selected as the principal regulator for this Application in accordance with the guidelines set out in section 4.5(1) of MI 11-102 and section 3.6(8) of National Policy 11-203 Process for Exemptive Relief Applications In Multiple Jurisdictions on the basis that the Filer's Trust Units are listed and posted for trading on the Toronto Stock Exchange (the "TSX") (TSX: MR.UN).

2. The Filer is authorized to issue an unlimited number of Trust Units and an unlimited number of Special Voting Units. As at February 19, 2014, there were 9,130,000 Trust Units and 9,530,798 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 outstanding.

3. The Filer is a reporting issuer or the equivalent thereof under the securities legislation of each of the provinces and territories of Canada and is not in default of securities legislation in any such jurisdiction.

4. The Filer invests in income-producing retail real property located in Canada and the United States comprised primarily of office, retail, industrial and land lease community properties, with a future growth strategy focused primarily on the acquisition of further commercial properties. As at the date of this Application, the Filer owns a portfolio of 30 income producing properties in 3 provinces comprising approximately 1.76 million square feet of gross leaseable area (net of the portion of such properties owned by the Filer's joint venture partners).

5. Melcor LP is a limited partnership formed under the laws of the Province of Alberta on January 25, 2013 and is governed by an amended and restated limited partnership agreement dated May 1, 2013 (the "LP Agreement"). Melcor LP's head office is located at 900, 10310 Jasper Avenue, Edmonton, Alberta, T5J 1Y8. It is the operating entity through which the Filer conducts its business.

6. Melcor REIT GP Inc. ("Melcor GP"), a corporation incorporated under the laws of the Province of Alberta on January 23, 2013, is the general partner of Melcor LP and is wholly owned by the Filer.

7. Melcor 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.

8. Under the LP Agreement, Melcor LP is authorized to issue an unlimited number of units designated as "Class A LP Units", of which 9,130,000 Class A LP Units were issued and outstanding as of February 19, 2014; an unlimited number of Exchangeable LP Units, of which 9,530,798 Exchangeable LP Units were issued and outstanding as of February 19, 2014; and an unlimited number of units designated as "Class C LP Units", of which 9,454,411 Class C LP Units were issued and outstanding as of February 19, 2014; as well as an unlimited number of general partnership units designated as "Class A GP Units", of which 1 Class A GP Unit was issued and outstanding as of February 19, 2014.

9. All of the outstanding Class A LP Units are held by the Filer, all of the outstanding Exchangeable LP Units and Class C LP Units are held indirectly by Melcor, and all of the outstanding Class A GP Units are held by Melcor GP. Melcor's Exchangeable LP Units and Class C LP Units are held by Melcor REIT Holdings GP Inc. ("Melcor Holdings") (a wholly owned subsidiary of Melcor, acting in its capacity as general partner of Melcor REIT Holdings Limited Partnership).

10. Melcor, indirectly through Melcor Holdings, holds 9,530,798 Exchangeable LP Units representing an approximate 51% economic interest in the Filer.

11. The Exchangeable LP Units are, in all material respects, economically equivalent to the Trust Units on a per unit basis. Pursuant to the terms of an exchange agreement dated May 1, 2013 among the Filer, Melcor and Melcor LP (the "Exchange Agreement"), each Exchangeable LP Unit is exchangeable at the option of the holder for one Trust Unit of the Filer. Each Exchangeable LP Unit also has the same economic rights and entitlements to distributions as a Trust Unit of the Filer, and is accompanied by one Special Voting Unit which provides for the same voting rights in the Filer as a Trust Unit.

12. The Exchangeable LP Units may neither be exchanged for any other securities other than the Trust Units, nor for cash, and are not listed and posted for trading on the TSX or any other stock exchange.

13. The Exchangeable LP Units represent part of the equity value of the Filer and provide the holder of the Exchangeable LP Units with the economic rights which are, in all material respects, equivalent to the Trust Units. The effect of Melcor's exchange right is that Melcor will receive Trust 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 Trust Units; namely, the assets and operations held directly or indirectly by Melcor LP.

14. Under section 2.1 of the Exchange Agreement, subject to certain conditions, the Exchangeable LP Units are directly exchangeable on a one-for-one basis for Trust Units at any time at the option of the holder.

15. The Exchangeable LP Units are not transferable, except pursuant to an exchange of Exchangeable LP Units for Trust Units in accordance with the terms of the Exchange Agreement and provided:

(a) such transfer is to an affiliate of the holder of the Exchangeable LP Units making the transfer or, so long as Melcor, Melcor REIT Holdings Limited Partnership or any of their affiliates is a holder of Exchangeable LP Units, to Melcor, Melcor REIT Holdings Limited Partnership or any of their affiliates, in each case, so long as such transferee remains such an affiliate;

(b) the conditions of such transfer do not require the person acquiring such Exchangeable LP Units to make an offer to the registered holders of Trust Units to acquire Trust Units on the same terms and conditions under applicable securities laws if such Exchangeable LP Units, and all other outstanding Exchangeable LP Units, were converted into Trust Units at the then current exchange ratio in effect under the Exchange Agreement immediately prior to such transfer;

(c) the person acquiring such Exchangeable LP Units submits an identical and contemporaneous offer for Trust Units to the registered holders thereof (having regard to timing, price, proportion of securities sought to be acquired and any other conditions thereto), and acquires such Exchangeable LP Units along with a proportionate number of Trust Units actually tendered to such identical offer;

(d) such transfer will not cause, or create a significant risk that would cause, Melcor LP to be liable for any taxes under subsection 197(2) of the Income Tax Act (Canada) (the "Tax Act");

(e) such transfer does not cause, or create a significant risk that would cause, the REIT to cease to qualify as a "real estate investment trust" under the Tax Act; and

(f) such transfer is not to an Excluded Person. The LP Agreement defines "Excluded Person" as a person that is: (i) a "non-resident" for the purposes of the Tax Act or a "financial institution" as defined in subsection 142.2(1) of the Tax Act; (ii) a person, an interest in which is a "tax shelter investment" for the purposes of the Tax Act; (iii) a person which would acquire an interest in Melcor LP as a "tax shelter investment" for the purposes of the Tax Act; (iv) a partnership that is not a "Canadian partnership" within the meaning of the Tax Act; or (v) not described in subparagraphs (b)(i) through (b)(v) of the definition of "excluded subsidiary entity" in subsection 122.1(1) of the Tax Act.

16. Further, certain rights affecting Melcor or any affiliates or related parties of Melcor, including Melcor REIT Holdings Limited Partnership, (collectively referred to as a "Melcor Limited Partner") in its capacity as a holder of Exchangeable LP Units, as such rights are set out in the Declaration of Trust and the Exchange Agreement, are exclusive to the Melcor Limited Partner and are not transferable to a transferee of the Exchangeable LP Units that is not an affiliate of a Melcor Limited Partner.

17. The Filer and Melcor are parties to a Development and Opportunities Agreement dated May 1, 2013 which gives the Filer a preferential right to acquire any interest of Melcor in investment properties that it owns prior to disposition of any such interest to third parties, and the Filer considers this relationship with Melcor to be one of its competitive strengths.

18. It is anticipated that the Filer may from time to time enter into transactions with certain related parties, including Melcor or any of its subsidiaries, indirectly through Melcor LP.

19. As a result of Melcor's indirect ownership of Exchangeable LP Units and Special Voting Units, transactions involving the Filer entered into indirectly through Melcor LP (or a subsidiary entity or other affiliate of Melcor) are related party transactions subject to MI 61-101.

20. 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").

21. 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").

22. The Filer may not be entitled to rely on the Transaction Size Exemption available under the Legislation because, although the definition of market capitalization in MI 61-101 includes the value of equity securities of the issuer that are convertible into listed equity securities of the issuer, it does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.

23. 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 Melcor's (indirect) limited partnership interest in Melcor LP represented by the outstanding Exchangeable LP Units, being approximately 51%. As a result, related party transactions of the Filer that are entered into indirectly through Melcor LP 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.

24. 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 that 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.

25. 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 are exchangeable.

26. Although the Exchangeable LP Units are not securities of the Filer, they are, as a result of the rights, privileges and restrictions attaching to such Exchangeable LP Units and the various material agreements relating to and governing the Exchangeable LP Units, equivalent to the Trust Units in all material respects, in that:

(a) they are exchangeable into Trust Units on a one-for-one basis;

(b) they have the same economic rights as Trust Units;

(c) together with the Special Voting Units, they carry the same voting rights as Trust Units; and

(d) any additional rights attached to the Exchangeable LP Units arise solely by virtue of the Exchangeable LP Units being limited partnership units and are customary rights associated with limited partnership units.

Decision

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 Requested Relief is granted provided that:

(a) there be no material change to the terms of the Exchangeable LP Units and the Special Voting Units, including the exchange right associated therewith, as described above and in the Declaration of Trust, the LP Agreement and the Exchange Agreement, whether by amendment to such documents, contractual agreement or otherwise;

(b) the applicable transaction is made in compliance with the rules and policies of the TSX or such other exchange upon which the Filer's securities trade;

(c) 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 Trust Units; and

(d) any annual information form or equivalent of the Filer that is required to be filed in accordance with applicable Canadian securities laws 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 where the fair market value of the transaction does not exceed 25% of the market capitalization of the issuer. Melcor 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 Melcor Real Estate Investment Trust's market capitalization, if exchangeable Class B LP Units of Melcor REIT Limited Partnership held indirectly by Melcor Developments Ltd. are included in the calculation of Melcor 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 approximately 51% indirect exchangeable equity interest in Melcor Real Estate Investment Trust held indirectly by Melcor Developments Ltd. in the form of exchangeable Class B LP Units of Melcor REIT Limited Partnership."

"Naizam Kanji"
Deputy Director, Corporate Finance
Ontario Securities Commission