Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from the requirement in item 5 of Form 31-103F1 Calculation of Excess Working Capital that long-term related party debt of a registered firm be included in the adjusted current liabilities of the firm, unless a subordination agreement has been entered into in respect of such debt, in calculating its excess working capital required under section 12.1 of NI 31-103 -- Relief subject to certain conditions.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 12.1.
Québec Securities Act, ss. 263 (Dual application) and 296 (Coordinated review).
December 4, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
FIERA CAPITAL CORPORATION
The securities regulatory authority or regulator in Québec and Ontario (the "Dual Exemption Decision Makers") have received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") exempting the Filer from the requirement in item 5 of Form 31-103F1 Calculation of Excess Working Capital ("Form 31-103F1") that long-term related party debt of a registered firm be included in the adjusted current liabilities of the firm, unless a subordination agreement ("Subordination Agreement") has been entered into in respect of such debt, in calculating its excess working capital required under section 12.1 of Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations ("Regulation 31-103") (the "Exemption Sought").
Furthermore, the securities regulatory authority or regulator in Québec and Ontario (the "Coordinated Decision Makers") have received an application from the Filer that certain parts of the Application and the credit documentation provided to the Coordinated Decision Makers (the "Confidential Information") be declared inaccessible and not made available to the public (the "Confidentiality Request").
On April 24, 2015, the Autorité des marchés financiers ("AMF"), as the principal regulator, and the Ontario Securities Commission ("OSC") granted the Exemption Sought to the Filer for the first time (the "First Decision").
One of the conditions of the First Decision is that it terminates on April 24, 2020. The Borrowers and Lenders (as defined below) have recently amended the terms of the 2017 Fourth Amended and Restated Credit Agreement (as defined below), and as a result, the term of the loan was extended to June 30, 2022. The Filer is now applying for the Exemption Sought a second time.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a hybrid application):
(a) the Autorité des marchés financiers is the principal regulator for this application;
(b) the Filer has provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System ("Regulation 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Yukon and Nunavut;
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario; and
(d) the decision evidences the decision of each Coordinated Decision Maker.
Terms defined in Regulation 14-101 respecting Definitions and Regulation 11-102 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 a corporation formed under the laws of Ontario and a reporting issuer in all provinces of Canada. Its Class A Subordinate Voting Shares ("Class A Shares") are listed on the Toronto Stock Exchange (the "TSX") under the symbol FSZ. The Filer's head office is located in Montreal.
2. The Filer is registered in all provinces and territories of Canada in the categories of portfolio manager and exempt market dealer. The Filer is also registered in Québec, Ontario and Newfoundland and Labrador in the category of investment fund manager, in Manitoba in the category of adviser under The Commodity Futures Act (Manitoba), in Ontario in the categories of commodity trading manager and in Québec in the category of derivatives portfolio manager.
3. The share capital of the Filer is comprised of two classes of shares: Class A Shares and Class B Special Voting Shares ("Class B Shares"). Both classes of shares entitle holders thereof to one vote per share, except in the case of a vote related to the election of directors of the Filer. In such case, holders of Class A Shares are entitled, voting separately as a class, to elect one-third of the directors of the Filer and holders of Class B Shares are entitled, voting separately as a class, to elect two-thirds of the directors of the Filer.
4. As at June 30, 2018, there were 19,412,401 Class B Shares and 77,156,102 Class A Shares outstanding, for a total of 96,568,503 outstanding shares of the Filer.
5. As at June 30, 2018, National Bank of Canada ("NBC"), indirectly through its wholly-owned subsidiaries, owns approximately 22.79% of the Filer's outstanding Class A shares which represents approximately 18.21% of the total outstanding shares of the Filer.
6. On December 21, 2017, the Filer completed bought deal public offerings of approximately $169 million in total gross proceeds, including the exercise in full of the underwriters' overallotment options (the "Offerings"), by way of a short form prospectus dated December 15, 2017. Following the closing of the Offerings, NBC's beneficial ownership in the Filer fell below 20% of all issued and outstanding Class A Shares and Class B Shares calculated on a non-diluted basis. As a result, the investor rights agreement entered into on April 2, 2012 between the Filer and NBC terminated and NBC no longer has the right to designate two appointees to the Filer's board of directors. However, to ensure continuity of the relationship between the two organisations, the Filer's management has decided to continue to propose an officer of NBC, Martin Gagnon, to the Filer's board of directors. Martin Gagnon was elected as director at the Filer's annual and special meeting of shareholders held on June 7th, 2018. Notwithstanding the foregoing changes in NBC's position in the Filer, the Filer has determined that NBC is a "related party" as defined under part I of the CPA Handbook.
7. As at June 30, 2018, Desjardins Financial Holding Inc., an indirect wholly-owned subsidiary of one of the Lenders (as defined below), Fédération des caisses Desjardins du Québec ("Desjardins"), indirectly owns approximately 37.20% of the outstanding Class B Shares representing approximately 7.52% of the Filer's outstanding shares and, through a unanimous shareholders agreement between it and Arvestia Inc. (the two shareholders of Fiera Holdings Inc. ("Fiera Holdings"), who in turn is the general partner of Fiera Capital L.P., the only holder of Class B Shares), proposed for election two of the current eight directors of the Filer that the holders of Class B Shares are entitled to elect. The Filer has determined that Desjardins is also a "related party" as defined under part I of the CPA Handbook.
8. A credit agreement dated March 30, 2012 was entered into among the Filer, NBC (as lender and administrative agent), Bank of Montreal ("BMO") and the Caisse centrale Desjardins ("CcD"), which has since then, amalgamated with and become Desjardins, under the terms of which senior unsecured credit facilities in the aggregate amount of Cdn$118,000,000 were made available to the Filer (the "Original Credit Agreement").
9. The Original Credit Agreement was negotiated in the context of the Filer acquiring the business and assets of Natcan Investment Management Inc., a wholly-owned subsidiary of NBC ("Natcan"). The Filer required capital to purchase these assets and the loans obtained through the Original Credit Agreement and this was the best option available to the Filer at that time. Prior to the Filer's acquisition of substantially all of the assets of Natcan's investment management services business, NBC and the Filer were not related parties. The Filer financed this acquisition in part by way of debt and in part by way of the issuance to Natcan of Class A Shares representing 35% of the issued and outstanding shares of the Filer. It is only once the issuance of those shares was completed that the Filer and NBC, as a shareholder of Natcan, became related parties. Therefore, NBC was not a related party of the Filer at the time, and although Desjardins might have been, the Original Credit Agreement was negotiated between the Filer and the lenders thereunder under commercially reasonable terms for parties dealing at arm's length.
10. The Original Credit Agreement was amended and restated as of January 31, 2013 pursuant to the first amended and restated credit agreement entered into among the Filer, NBC, CcD, BMO and The Bank of Nova Scotia ("BNS") to increase the principal amount of the revolving facility to Cdn$20,000,000 and increase the principal amount of the term facility to Cdn$180,000,000 (the "2013 First Amended and Restated Credit Agreement").
11. The 2013 First Amended and Restated Credit Agreement was amended and restated as of October 31, 2013 pursuant to the second amended and restated credit agreement entered into among the Filer, NBC, CcD, BMO, BNS and Royal Bank of Canada ("RBC") with NBC acting as administrative agent, in order to, among other things, increase the principal amount of the revolving facility to Cdn$75,000,000 and reduce the principal amount of the term facility to Cdn$175,000,000 (the "2013 Second Amended and Restated Credit Agreement").
12. The 2013 Second Amended and Restated Credit Agreement was amended and restated as of June 26, 2015 pursuant to the third amended and restated credit agreement entered into among the Filer and Fiera US Holding Inc. ("Fiera US" and collectively with the Filer, the "Borrowers") and NBC, CcD, BMO, BNS, RBC and The Toronto-Dominion Bank ("TD"), with NBC acting as administrative agent, in order to, among other things, add Fiera US as a borrower, increase the principal amount of the revolving facility to Cdn$300,000,000, and terminate the term facility (the "2015 Third Amended and Restated Credit Agreement").
13. The 2015 Third Amended and Restated Credit Agreement was amended and restated as of May 31, 2016 pursuant to the fourth amended and restated credit agreement entered into among the Borrowers and NBC, CcD, BMO, BNS, RBC and TD, with NBC acting as administrative agent in order to, among other things, make available to the Filer a new non-revolving term loan in the principal amount of US$125,000,000, as further amended on July 27, 2017 to increase the amount of the revolving facility from Cdn$300,000,000 to Cdn$350,000,000, and as further amended as of December 5, 2017 in connection with certain of the financial covenants of the Borrowers in relation to the Offerings (the "2017 Fourth Amended and Restated Credit Agreement").
14. The 2017 Fourth Amended and Restated Credit Agreement was amended and restated as of May 28, 2018 pursuant to the fifth amended and restated credit agreement entered into among the Borrowers and NBC, CcD, BMO, BNS, RBC, TD and Canadian Imperial Bank of Commerce ("CIBC" and collectively with NBC, CcD, BMO, BNS, RBC, and TD, "Lenders"), with NBC acting as administrative agent, in order to, and among other things, increase the principal amount of the revolving facility to Cdn$600,000,000, and terminate the existing term facility (the "Credit Agreement").
15. According to the First Decision, the first Exemption Sought applies to any amendment to the 2013 Second Amended and Restated Credit Agreement, including any renewal, extension or increase in the principal amount made available under the credit facilities that take place after the date of the First Decision and up until April 24, 2020, provided that the terms reflect current market practice at the time and that the conditions set forth in the First Decision are respected.
16. The 2015 Third Amended and Restated Credit Agreement, the 2017 Fourth Amended and Restated Credit Agreement and Credit Agreement reflect current market practice and the conditions set forth in the First Decision were respected, and therefore, the First Decision applies to them.
17. Under the terms of the Credit Agreement, a revolving facility in the principal amount of Cdn$600,000,000 was made available to the Borrowers (the "Revolving Facility"). As part of the Revolving Facility, and not in addition thereto, a Canadian swingline facility (the "Canadian Swingline") in the amount of Cdn$10,000,000, and a US swingline facility (the "US Swingline" and together with the Canadian Swingline, the "Swingline Facilities") in the amount of US$5,000,000 were also made available to the Borrowers.
18. The purpose of the Revolving Facility is to :
(a) finance the general corporate purposes of the Borrowers and their wholly-owned subsidiaries;
(b) finance in part the direct and indirect acquisitions completed by the Filer (the "Acquisitions"); and
(c) refinance the term loans under the 2017 Fourth Amended and Restated Credit Agreement.
19. The purpose of the Swingline Facilities is to enable the Borrowers to have access to credit without the same formalities as those applicable to a drawdown under the Revolving Facility, by simply writing cheques on its accounts and making transfers from its accounts, up to the aggregate amount of Cdn$10,000,000 and US$5,000,000. This is customary in most revolving facilities and acts as a credit line would. The Swingline Facilities are part of NBC's commitment under the Revolving Facility, but are subject to redistribution among the other Lenders such that ultimately the risk associated with the Swingline Facilities are borne by all Lenders in accordance with the pro rata share of the Revolving Facility set forth in the Credit Agreement.
20. As at June 30, 2018 the principal amount outstanding under the Credit Agreement was Cdn$ $389,216,202. This amount was incurred primarily in connection with the financing of the recent Acquisitions made by the Borrowers, or their subsidiaries.
21. The book value of these Acquisitions as at June 30, 2018 is estimated at Cdn$962,826,134 which is Cdn$573,609,932 more than the principal amount outstanding under the Credit Agreement.
22. Because of the revolving nature of the Revolving Facility and because the Borrowers have regularly made repayments of amounts that had been borrowed for past Acquisitions, the Borrowers have at times drawn-down on the Credit Agreement in order to provide working capital and fund the ongoing operations of the Borrowers. However, the funding of the Acquisitions remains the primary purpose of the Credit Agreement and the Borrowers would not have needed to enter into any of the Credit Agreements had they not made the Acquisitions. The Filer has demonstrated that the total cash paid for Acquisitions since 2012 is significantly greater than the current principal amount outstanding under the Credit Agreement.
23. The term for the Revolving Facility is June 30, 2022, at which time the Borrowers are obliged to repay, the entire amount of the loan outstanding on such date.
24. However, on a yearly basis, the Borrowers may request an extension of the Revolving Facility for an additional one (1) year period, by giving an extension request to the administrative agent (NBC) for delivery to each Lender between April 1 and April 30. Within thirty (30) days from the date that the extension request is received by the administrative agent, each Lender shall notify the administrative agent of its decision whether or not to extend the Revolving Facility by a one (1) year period.
25. If the Lenders unanimously elect to extend the Revolving Facility, then the Revolving Period shall be extended for an additional one (1) year period. If a percentage of Lenders representing in the aggregate less than the Majority Lenders (as defined below) have elected to extend the Revolving Facility, then the Revolving Facility shall terminate on the last day of the term then in effect. If a percentage of Lenders representing in the aggregate the Majority Lenders (as defined below), or more, the term of the Revolving Facility shall be extended for the Lenders who have agreed to extend same. Also, in those circumstances, the Borrowers shall have the option within 120 days from the date on which the administrative agent has confirmed which of the Lenders has agreed to extend the Revolving Facility to (i) require that the Lenders who have chosen not to extend the Revolving Facility (the "Non-Extending Lenders") assign their commitment under the Revolving Facility to another person, (ii) cancel the commitment under the Revolving Facility of the Non-Extending Lender, or (iii) with respect to the commitments under the Revolving Facility which have not been assigned or cancelled as contemplated above, that the term of such commitments remain the same as the term then in effect for the Revolving Facility.
26. In addition, the Borrowers may at any time, voluntarily repay the whole or any part of the loans without penalty or premium. Any repayment of loans made under the Revolving Facility may be re-borrowed by the Borrowers at any time, given the revolving nature of the Revolving Facility.
27. Except for the loans made under the Swingline Facilities, all repayments of any part of the loans must be made to the administrative agent (NBC) who shall forthwith distribute to each of the Lenders their rateable share of such repayments. The loans made under the Swingline Facilities are only repaid to NBC until such time as NBC, as administrative agent, requests that the other Lenders participate in the loans made under the Swingline Facilities up to their respective rateable shares, which it can do at any time. The Lenders each have a residual interest in the loans made under the Swingline Facilities as they may each have to purchase their proportionate share of such loan from NBC. Note that upon acceleration of the term of the Revolving Facility, such a redistribution of the loans under the Swingline Facilities are automatic and, therefore, as noted above, ultimately the risk associated with the Swingline Facilities is borne by all Lenders in accordance with their pro rata share of the Revolving Facility. As a result, NBC cannot have the Swingline Facilities repaid in preference to loans of the other Lenders.
28. The Credit Agreement is a typical syndicated credit agreement, negotiated at arm's length between the Borrowers and a group of financial institutions, each acting independently one from the other. Its terms and conditions are no different from what is typically seen on the market.
29. The Credit Agreement includes standard default provisions and standard remedies for such defaults, including declaring the whole or any part of the Revolving Facility to be cancelled and accelerating the maturity of all or any part of the loans thereunder.
30. As the Credit Agreement is a syndicated loan, NBC has been appointed as administrative agent under the Credit Agreement to oversee the day-to-day administration of the agreement and the loans. In its capacity as administrative agent, NBC cannot exercise any remedy further to the occurrence of any default on its own without first being instructed to do so by the Majority Lenders (as defined below), including demanding immediate repayment of the loans. To the extent that the administrative agent is notified of a default of the Borrowers, it can only take such action and assert such rights as it is instructed in writing by the Majority Lenders to take or assert. As is the case in any syndicated loan financing, NBC has no influence beyond that of any other Lender by sole reason of its role as administrative agent.
31. The "Majority Lenders" are defined as follows: if (i) there are two Lenders, both Lenders, (ii) there are more than two Lenders and at least 66?% of the Loans are due to one Lender or, if no Loans are then outstanding, the commitment of one Lender represents at least 66?% of the Revolving Facility, two Lenders representing at least 66?% of the Loans then outstanding or of the commitment of all the Lenders, as the case may be, and (iii) there are more than two Lenders and none of them is owed at least 66?% of the Loans or, if no Loans are then outstanding, the commitment of one Lender does not represent at least 66?% of the Revolving Facility, the Lenders to which at least 66?% of the Loans are due or, if no Loans are then outstanding, Lenders whose commitments represent at least 66?% of the Revolving Facility. The amount owed to NBC under the Revolving Facility (the "NBC Loan") and the amount owed to Desjardins under the Revolving Facility (the "Desjardins Loan") currently account, in the aggregate, for less than 66?% of the Revolving Facility.
32. Regardless of the composition of the syndicate of Lenders at any time, the definition of Majority Lenders would never permit NBC to make any decisions without at least one other Lender being in agreement with such decision. As the syndicate of Lenders currently exists, no decision of the Majority Lenders can be made without the votes of at least four of the Lenders, which means that neither NBC nor Desjardins may make decisions, alone or together, without two other Lenders also approving this decision.
33. Any amendment to the Credit Agreement can only be made with the consent of the Borrowers and the administrative agent, acting in accordance with the instructions of the Majority Lenders, or in the case of certain important provisions, with the consent of every Lender. Similarly, non-compliance by the Borrowers with any term of the Credit Agreement may only be waived by the Majority Lenders or all the Lenders, as the case may be, depending on the provision in question.
34. The Credit Agreement contains the framework within which the Lenders have agreed as a group to lend money to the Borrowers. Any deviation from that framework requires at a minimum, the consent of the Majority Lenders.
35. Section 12.1 of Regulation 31-103 requires that the Filer, as a registered firm, must ensure that it has excess working capital, as calculated using Form 31-103F1, that is greater than zero. Item 5 of Form 31-103F1 essentially provides that in determining a registered firm's excess working capital, the firm must include in its adjusted current liabilities all long-term related party debt, unless the firm and the lender have entered into a Subordination Agreement in the form set out in Appendix B to Regulation 31-103 with respect to such debt and delivered a copy of the agreement to the regulator. The notes included in Form 31-103F1 require that a registered firm refer to the definition of "related party" under part I in the CPA Handbook for publicly accountable enterprises when determining whether the firm has related parties.
36. The loans are not owed to a single related-party lender, but rather to a syndicate of Lenders. The Borrowers cannot choose to repay a single Lender and no single Lender can demand payment of its loans owing under the Revolving Facility. Any repayment made by the Borrowers will be applied proportionately between the Lenders. Consequently, neither NBC nor Desjardins can demand repayment of only its portion of the loans made under the Revolving Facility.
37. The Lenders are sophisticated institutions and they would not be influenced by any other Lender to make loans on terms which would not be commercially acceptable to them for the benefit of Lenders who may be related parties to the borrower. The seven Lenders under the Credit Agreement are some of the most prominent financial institutions in Canada and the decision to enter into the Credit Agreement was closely examined by competent and informed individuals or a committee formed of such individuals who would not permit the loans to unduly benefit one Lender over the others. Such diligent, arm's length oversight also applies to any decision each of the Lenders needs to make under the terms of the Credit Agreement while the Revolving Facility is in place.
38. In light of the way decisions must be made by the syndicate of Lenders under the Credit Agreement, NBC, (whether as a Lender or as administrative agent) is not in a position to make any decision on its own, other than the day-to-day administration of the loans. Any important decision (including acceleration of maturity following an event of default) must be made by the Majority Lenders, which means that NBC and Desjardins may not make decisions, alone or together, without at least one other Lender approving this decision. None of the other Lenders would approve any such decision unless it thought it best for such Lender.
39. The Filer believes that because decisions are made at a minimum by the Majority Lenders (currently, a minimum of four Lenders) and because the Majority Lenders together are not a related party of the Filer, it is reasonable to consider that the loans under the Credit Agreement are not structured as typical related party debt, (within the meaning intended by the Canadian Securities Administrators (CSA) for that expression to have in Form 31103F1), do not present the public policy concerns that the CSA has in respect of typical related party debt, and hence it is reasonable to grant the Exemption Sought.
40. The requirement to add the NBC Loan and the Desjardins Loan to item 5 of Form 31103F1 fails to take into account the fact the NBC Loan and the Desjardins Loan and all of the other loans made under the Credit Agreement:
(a) arose primarily in connection with the financing of long-term Acquisitions; and
(b) are more than offset by the Cdn$962,826,134 of long-term Acquisitions acquired through the Filer's recent acquisitions.
41. In the absence of the Exemption Sought and since the Filer cannot avail itself of the option to enter into a Subordination Agreement with NBC or Desjardins in respect of the amount of the NBC Loan and of the Desjardins Loan, in order to comply with Regulation 31-103, the Filer would be in breach of Regulation 31-103. Furthermore, any change to the structure of the financing would be detrimental to the Filer.
Each of the principal regulator and the securities regulatory authority or regulator in Ontario is satisfied that the decision meets the test set out in the Legislation to make the Decision.
The decision of the Dual Exemption Decision Makers under the Legislation is that the Exemption Sought is granted, subject to the following conditions:
i. except for decisions which can be made by NBC as administrative agent in accordance with the Credit Agreement, all decisions under the Credit Agreement will require at least one Lender who is not a related party (as defined under part I of the CPA Handbook) of the Filer;
ii. the Credit Agreement will not be amended to expand the scope of decisions which the administrative agent may currently make acting as such pursuant to the Credit Agreement, to decisions which, to be made, currently require at least one Lender who is not a related party (as defined under part I of the CPA Handbook) of the Filer;
iii. on or before March 31st of each year, the Filer will file with its principal regulator a notice with the following information, as at December 31st of each preceding year:
A. the principal amount outstanding under the Credit Agreement;
B. the pro-rata share by each Lender of the commitments and loans under the Credit Agreement; and
C. the value of the Acquisitions made using funds from the Credit Agreement; and
iv. 10 days after the amendment and restatement of the Credit Agreement the Filer will deliver to the principal regulator a written notice of the significant changes to the Credit agreement;
v. in the event that the aggregate value of the NBC Loan and Desjardins Loan exceeds the aggregate value of the long term Acquisitions related to loans made under the Credit Agreement, then NBC and Desjardins will be asked to enter into Subordination Agreements for their share of such excess amount and the Filer will deliver these Subordination Agreements to its principal regulator within the prescribed due date by section 12.2 of Regulation 31-103 or, failing such, such excess amount will be added to item 5 of Form 31-103F1 by the Filer.
This decision shall apply to any amendment to the Credit Agreement, including, any renewal, extension or increase in the principal amount made available under the Facilities that takes place after the date of this decision, provided that the terms reflect current market practices at that time and that the conditions set forth above are respected.
This decision, except for the Confidentiality Request, shall terminate on the day that is five years after the date of this decision.
Furthermore, the decision of the Coordinated Decision Makers is that the Confidentiality Request is granted until the date that the Filer advises its principal regulator that there is no longer any need for Confidential Information to remain inaccessible.