Securities Law & Instruments


Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions National Instrument 62-104, Part 6 Take-Over Bids and Issuer Bids - Exemption from the formal take-over bid requirements - An issuer wants relief so that the take-over bid thresholds are calculated based on the aggregate number of common shares outstanding, rather than for each class of common shares - The issuer is subject to foreign ownership restrictions in its governing federal legislation; the issuer implemented a dual class share structure solely for compliance with foreign ownership restrictions in the aviation industry; both classes of shares are freely tradable, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder’s Canadian or non-Canadian status; shareholders will calculate their ownership position by combining the outstanding classes of shares for the purposes of determining whether take-over bid requirements are triggered.

National Instrument 62-104, Part 6 Take-Over Bids and Issuer Bids - Early warning relief - An issuer wants relief so that the early warning thresholds are calculated based on the aggregate number of common shares outstanding, rather than for each class of common shares - The issuer is subject to foreign ownership restrictions in its governing federal legislation; the issuer implemented a dual class share structure solely for compliance with foreign ownership restrictions in the aviation industry; both classes of shares are freely tradable, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder’s Canadian or non-Canadian status; shareholders will calculate their ownership position by combining the outstanding classes of shares for the purposes of determining whether early warning requirements are triggered.

National Instrument 62-104, Part 6 Take-Over Bids and Issuer Bids - Exemption from the formal take-over bid requirements - News release relief - An issuer wants relief so that the threshold triggering the requirement on an acquiror to file a news release during a take-over bid or an issuer bid is calculated based on the aggregate number of common shares outstanding, rather than for each class of common shares - The issuer is subject to foreign ownership restrictions in its governing federal legislation; the issuer implemented a dual class share structure solely for compliance with foreign ownership restrictions in the aviation industry; both classes of shares are freely tradable, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder’s Canadian or non-Canadian status; acquirors will calculate their ownership position by combining the outstanding classes of shares for the purposes of determining whether the requirement to file a news release during a take-over bid or issuer bid is triggered.

National Instrument 62-103, s. 11.1 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues - Alternative reporting relief - An issuer wants relief so that an eligible institutional investor subject to early warning requirements may rely on alternative eligibility criteria from those set forth in section 4.5 of NI 62-103 in order to benefit from the exemption contained in section 4.1 of NI 62-103 - The issuer is subject to foreign ownership restrictions in its governing federal legislation; the issuer implemented a dual class share structure solely for compliance with foreign ownership restrictions in the aviation industry; both classes of shares are freely tradable, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder’s Canadian or non-Canadian status; eligible institutional investors will calculate their ownership position by combining the outstanding classes of common shares for the purposes of determining whether they are eligible for the reporting exemption in s. 4.1 of NI 62-103.

National Instrument 51-102, s. 13.1 - Continuous Disclosure Obligations - Continuous disclosure relief - An issuer wants relief so that it can provide disclosure on significant shareholders in its information circular on a combined basis, rather than for each class of common shares - The issuer is subject to foreign ownership restrictions in its governing federal legislation; the issuer implemented a dual class share structure solely for compliance with foreign ownership restrictions in the aviation industry; both classes of shares are freely tradable, have identical economic attributes and are automatically and mandatorily inter-convertible based on the shareholder’s Canadian or non-Canadian status; the issuer will provide disclosure on holders of its voting securities on a combined basis in its information circular.

Applicable Legislative Provisions

National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2, ss. 5.2, 5.4 and 6.1.
National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, ss. 4.1, 4.5 and 11.1.
National Instrument 51-102 Continuous Disclosure Obligations, s. 13.1.

July 25, 2018

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
KEW MEDIA GROUP INC.
(the “Filer”)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) that, subject to the conditions of this Decision:

(a)           an offer to acquire either outstanding variable voting shares of the Filer (the “Variable Voting Shares”) or outstanding common voting shares of the Filer (the “Common Voting Shares”, and collectively with the Variable Voting Shares, the “Shares”), which in either case would constitute a take-over bid under the Legislation as a result of the securities subject to the offer to acquire, together with the offeror’s securities of that class, representing in the aggregate 20% or more of the outstanding Variable Voting Shares or Common Voting Shares, as the case may be, at the date of the offer to acquire, be exempt (the “TOB Relief”) from Part 2 of National Instrument 62-104 – Take-Over Bids and Issuer Bids (“NI 62-104”);

(b)           an acquiror who triggers the disclosure and filing obligations pursuant to the early warning requirements contained in the Legislation with respect to either the Variable Voting Shares or Common Voting Shares, as the case may be, be exempt from such requirements (the “Early Warning Relief”);

(c)           an acquiror who acquires, during a take-over bid or an issuer bid, beneficial ownership of, or control or direction over, either Variable Voting Shares or Common Voting Shares, that, together with the acquiror’s securities of that class, would constitute 5% or more of the outstanding Variable Voting Shares or Common Voting Shares, as the case may be, be exempt from the requirement in section 5.4 of NI 62-104 to issue and file a news release (the “News Release Relief”); and

(d)           the Filer be exempt from the disclosure requirements in Item 6.5 of Form 51-102F5 – Information Circular of National Instrument 51-102 – Continuous Disclosure Obligations (the “Alternative Disclosure Relief” and, collectively with the TOB Relief, the Early Warning Relief and the News Release Relief, 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 subsection 4.7(1) of Multilateral Instrument 11-102 – Passport System (“MI 11-102”) is intended to be relied upon by the Filer in Alberta, British Columbia, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Manitoba, Quebec, Yukon Territories, Northwest Territories and Nunavut.

Interpretation

Terms defined in National Instrument 14-101 – Definitions, National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (“NI 62-103”), NI 62-104 and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.

Representations

This decision is based on the following facts represented by the Filer:

1.             The Filer was incorporated on November 3, 2015 as a special purpose acquisition corporation under the Business Corporations Act (Ontario) for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination involving the Filer.

2.             The head office and registered office of the Filer is located at 672 Dupont Street, Suite 400, Toronto, Ontario, M6G 1Z6.

3.             On March 20, 2017, the Filer completed its qualifying acquisition (the “Qualifying Acquisition”) under Part X of the TSX Company Manual, which was comprised of the acquisition of the following six content companies: Content Media Corporation plc; Architect Films Inc.; Bristow Global Media Inc.; Frantic Films Corporation; Media Headquarters Film & Television Inc.; and Our House Media Inc.

4.             The Filer is a reporting issuer in all of the Provinces and Territories of Canada and is not in default of any requirement of the securities legislation in the jurisdictions in which it is a reporting issuer. The Filer is also not in default of the requirements of the TSX Company Manual.

5.             The Filer’s business involves continuously assessing acquisitions and divestitures, with a view to enacting a media and entertainment sector roll-up to form a large international media content company. Including the companies acquired pursuant to the Qualifying Acquisition, the Filer has acquired twelve production and distribution companies to date and is soon to complete the acquisition of an independent content production platform.

6.             The Filer finances a significant portion of its production budgets from federal and provincial governmental agencies and incentive programs, including, in some cases, the Canada Media Fund, provincial film equity investment and incentive programs, federal tax credits and provincial tax credits, and other investment and incentive programs. In order to qualify for such film and television incentives, among other requirements, the Filer’s production companies need to verify to the applicable Canadian film and television incentive authorities that they are each ultimately Canadian-controlled under the Investment Canada Act (the “ICA”).

7.             The ICA establishes a number of rules and presumptions (the “Canadian Status Rules”) for determining who is a Canadian for purposes of the ICA. For example, under the Canadian Status Rules, the Filer would not be considered to be a Canadian if one non-Canadian or two or more members of a voting group who are non-Canadians own 50% or more of the voting shares of the Filer. Furthermore, because the Filer and many of its companies are each engaged in a “cultural business” in Canada (i.e., film production and distribution) even if the Filer is considered to be “Canadian” under the normal Canadian Status Rules, the Minister of Canadian Heritage (the “Minister”) has the discretion to determine that the Filer is controlled in fact by one or more non-Canadians based on any information or evidence submitted to the Minister. The ICA further sets out various rebuttable “presumptions”, one of which is that if a non-Canadian was ever to acquire less than a majority, but one-third or more of the voting shares of the Filer, the non-Canadian would be presumed to have thereby acquired control in fact of the Filer under the ICA, “unless it can be established that, on the acquisition, the corporation is not controlled in fact by the acquirer through the ownership of voting shares”.

8.             As a multi-faceted media company, the Filer may in the future become engaged in broadcasting activities that result in it being regulated under the Broadcasting Act (Canada) (the “Broadcasting Act”) and having to comply with the Canadian ownership and control requirements as set out in the Direction to the CRTC (Ineligibility of Non-Canadians) (the “Direction”).

9.             The implementation of a variable voting structure therefore serves two purposes for the Filer. The first is to help satisfy the Canadian control requirements under the ICA and the second is to satisfy the Canadian ownership and control requirements under the Broadcasting Act.

10.          The legal requirements relating to Canadian ownership and control of broadcasting undertakings are embodied in the Direction, which is a direction from the Governor in Council (i.e., Cabinet of the Canadian federal government) to the Canadian Radio-television and Telecommunications Commission (the “CRTC”) pursuant to authority contained in the Broadcasting Act. Pursuant to the Direction, the CRTC may not issue, amend or renew a broadcasting licence to an applicant that is controlled by a non-Canadian. In order for a corporation to qualify as a “Canadian”, non-Canadians are permitted to own and control, directly or indirectly, up to 33 1/3% of the voting shares and up to 33 1/3% of the votes of a holding company which has a subsidiary operating company licensed under the Broadcasting Act. Additional ownership restrictions apply to a subsidiary licensee under the Direction and would be applicable to the Filer at such time as it acquired an entity that is a licensee under the Broadcasting Act or applied for a licence under the Broadcasting Act. While the Direction does not include any explicit restrictions on the number of non-voting shares that may be held by non-Canadians, the level of total equity ownership is relevant to the analysis of “control in fact” or “effective control” of both the licensee subsidiary and its holding company that would be undertaken by the CRTC.

11.          At the annual and special meeting of the Filer held on June 14, 2018, shareholders of the Filer approved an amendment to the articles of the Filer to authorize the conversion of all Class B shares of the Filer owned by Canadians to Common Voting Shares, and to convert all Class B shares of the Filer owned by non-Canadians to Variable Voting Shares. Also on June 14, 2018, the Filer filed articles of amendment to implement the variable voting structure.

12.          As part of the amendment to the articles of the Filer, the Filer created a class of preferred shares (the “Preferred Shares”), issuable in series, none of which have been issued to date, but will be available for future issuance. The Preferred Shares provide the Filer with greater flexibility to raise capital in the future and enable the Filer to take additional steps to ensure compliance with the Direction, if necessary. The Filer will monitor the number of Variable Voting Shares outstanding and, if the non-Canadian ownership threshold may be exceeded, could issue Preferred Shares to Canadians that carry voting rights but do not have any economic entitlements. The Filer could also issue Preferred Shares to ensure continued compliance with the provisions of both the ICA and the Broadcasting Act, in the event that the Filer satisfies the Canadian ownership and control requirements as set out in the Direction, but does not also satisfy the Canadian control requirements under the ICA. The Filer has provided a written undertaking to the Ontario Securities Commission regarding future issuances of Preferred Shares.

13.          The Common Voting Shares can only be held, beneficially owned and controlled, directly or indirectly, by Canadians (within the meaning of the Direction for the purposes of the Broadcasting Act). An outstanding Common Voting Share will be converted into one Variable Voting Share, automatically and without any further act of the Filer or the holder, if such Common Voting Share becomes held, beneficially owned or controlled, directly or indirectly, by a person who is not a Canadian.

14.          The Variable Voting Shares can only be held, beneficially owned or controlled, directly or indirectly, by persons who are not Canadians. An outstanding Variable Voting Share will be converted into one Common Voting Share, automatically and without any further act of the Filer or the holder, if such Variable Voting Share becomes held, beneficially owned or controlled, directly or indirectly, by a Canadian.

15.          Each Common Voting Share and Variable Voting Share confers the right to one vote, unless: (i) the number of votes that may be exercised in respect of all issued and outstanding Variable Voting Shares equals or exceeds thirty-three and one third percent (33 1/3%) of the total number of votes that may be exercised in respect of all issued and outstanding Variable Voting Shares and Common Voting Shares (or any greater percentage that would qualify the Filer as a “Canadian” for the purposes of the Broadcasting Act); or (ii) the total number of votes cast by or on behalf of the holders of Variable Voting Shares at any shareholder meeting on any matter on which a vote is to be taken equals or exceeds thirty-three and one-third percent (33 1/3%) (or any greater percentage that would qualify the Filer as a “Canadian” for the purposes of the Broadcasting Act) of the total number of votes that may be cast at such meeting. If either of the above noted thresholds would be surpassed at any time, the vote attached to each Variable Voting Share will decrease automatically and without further act or formality such that: (i) the Variable Voting Shares as a class do not carry more than thirty-three and one-third percent (33 1/3%) (or any greater percentage that would qualify the Filer as a “Canadian” for the purposes of the Broadcasting Act) of the total voting rights attached to the aggregate number of issued and outstanding Variable Voting Shares and Common Voting Shares; and (ii) the total number of votes cast by or on behalf of holders of Variable Voting Shares at any meeting does not equal or exceed thirty-three and one-third percent (33 1/3%) (or any greater percentage that would qualify the Filer as a “Canadian” for the purposes of the Broadcasting Act) of the total number of votes that may be cast at the meeting.

16.          Aside from the differences in voting rights stated above, the Variable Voting Shares and Common Voting Shares are the same in all other respects, including with regard to the right to receive dividends and the right to receive the property and assets of the Filer in the event of dissolution, liquidation or winding up of the Filer.

17.          The articles of amendment of the Filer contain coattail provisions pursuant to which (i) Variable Voting Shares will be converted into Common Voting Shares in the event of a formal take-over bid for the Common Voting Shares which is not also available to the holders of Variable Voting Shares; and (ii) Common Voting Shares will be converted into Variable Voting Shares in the event of a formal take-over bid for the Variable Voting Shares which is not also available to the holders of Common Voting Shares.

18.          The Variable Voting Shares and the Common Voting Shares of the Filer are listed on the Toronto Stock Exchange under one ticker symbol.

19.          The Filer’s dual class structure was implemented to help satisfy the Canadian control requirements under the ICA and the Canadian ownership and control requirements under the Broadcasting Act; it has no other purpose.

20.          An investor does not control or choose which class of Shares it acquires and holds. There are no unique features of either class of Shares which an existing or potential investor can choose to acquire, exercise or dispose of. The class of Shares ultimately available to an investor is solely a function of the investor’s Canadian or non-Canadian status. Moreover, if after having acquired Shares, a holder’s Canadian or non-Canadian status changes, the Shares will convert accordingly and automatically.

21.          The Variable Voting Shares are not considered “restricted voting securities” or “restricted voting shares” for the purposes of the Legislation.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

(a)           the Filer publicly discloses the terms of the Exemption Sought in a news release filed on SEDAR promptly following the issuance of this Decision;

(b)           the Filer discloses the terms and conditions of the Exemption Sought in all of its annual information forms and management information circulars filed on SEDAR following the issuance of this Decision and in any other filing where the characteristics of the Shares are described;

(c)           with respect only to the TOB Relief, the Variable Voting Shares or Common Voting Shares, as the case may be, subject to the offer to acquire of an offeror, together with the Variable Voting Shares and Common Voting Shares beneficially owned, or over which control or direction is exercised, by the offeror or by any person acting jointly or in concert with the offeror, would not constitute, at the date of the offer to acquire, in the aggregate 20% or more of the outstanding Variable Voting Shares and Common Voting Shares on a combined basis;

(d)           with respect only to the Early Warning Relief,

(i)            the acquiror complies with the early warning requirements, except that, for the purpose of determining the percentage of outstanding Variable Voting Shares or Common Voting Securities, as the case may be, that the acquiror has acquired or disposed of beneficial ownership, or acquired or ceased to have control or direction over, the acquiror calculates the percentage using (A) a denominator comprised of all of the outstanding Variable Voting Shares and Common Voting Shares, determined in accordance with subsection 1.8(2) of NI 62-104, on a combined basis, as opposed to a per-class basis, and (B) a numerator including, as acquiror’s securities, all of the Variable Voting Shares and Common Voting Shares that constitute acquiror’s securities; or

(ii)           in the case of an acquiror that is an eligible institutional investor, the acquiror complies with the requirements of the alternative monthly reporting system set out in Part 4 of NI 62-103 to the extent it is not disqualified from filing reports thereunder pursuant to section 4.2 of NI 62-103, except that, for purposes of determining the acquiror’s securityholding percentage, the acquiror calculates its securityholding percentage using (A) a denominator comprised of all of the outstanding Variable Voting Shares and Common Voting Shares, determined in accordance with subsection 1.8(2) of NI 62-104, on a combined basis, as opposed to a per-class basis, and (B) a numerator including all of the Variable Voting Shares and Common Voting Shares owned or controlled by the eligible institutional investor;

(e)           with respect only to the News Release Relief, the Variable Voting Shares or Common Voting Shares, as the case may be, that the acquiror acquires beneficial ownership of, or control or direction over, together with the securities of the Filer beneficially owned, or over which control or direction is exercised, by the acquiror or any person acting jointly or in concert with the acquiror, would not constitute 5% or more of the outstanding Variable Voting Shares and Common Voting Shares, as the case may be, calculated using (A) a denominator comprised of all of the outstanding Variable Voting Shares and Common Voting Shares, determined in accordance with subsection 1.8(2) of NI 62-104, on a combined basis, as opposed to a per-class basis, and (B) a numerator including as acquiror’s securities, all of the Variable Voting Shares and Common Voting Shares that constitute acquiror’s securities;

(f)            with respect only to the Alternative Disclosure Relief, the Filer provides the disclosure required by Item 6.5 of Form 51-102F5, except that for purposes of determining the percentage of voting rights attached to the Variable Voting Shares or Common Voting Shares, the Filer calculates the voting percentage using (A) a denominator comprised of all of the outstanding Variable Voting Shares and Common Voting Shares on a combined basis, as opposed to a per-class basis, and (B) a numerator including all of the Variable Voting Shares and Common Voting Shares beneficially owned, or over which control or direction is exercised, directly or indirectly, by any person who, to the knowledge of the Filer’s directors or executive officers, beneficially owns, controls or directs, directly or indirectly, voting securities carrying 10% or more of the voting rights attached to the outstanding Variable Voting Shares and Common Voting Shares on a combined basis.

“Naizam Kanji”    
Director, Office of Mergers & Acquisitions
Ontario Securities Commission