Héroux-Devtek Inc.

Decision

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the requirements related to acceptable accounting principles for acquisition statements in respect of a business acquisition report to allow the report to include acquisition statements to be prepared in accordance with Spanish generally accepted accounting principles (Spanish GAAP) provided that: (i) the statements include notes describing the material differences between IFRS and Spanish GAAP that relate to recognition, measurement and presentation, quantifying the effect of each such difference and including a tabular reconciliation between profit or loss reported in such financial statements and profit or loss computed in accordance with IFRS; and (ii) the statements are accompanied by an auditor’s report and audited in accordance with International Standards on Auditing.

Applicable Legislative Provisions

National Policy 52-107 Acceptable Accounting Principles and Auditing Standards, ss. 3.11, 5.1.

December 11, 2018

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the “Jurisdictions”)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
HÉROUX-DEVTEK INC.
(the “Filer”)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a “Decision Maker”) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the “Legislation”) for exemptive relief, pursuant to Section 5.1 of National Instrument 52-107 – Acceptable Accounting Principles and Auditing Standards (“NI 52-107”), from the requirements related to acceptable accounting principles for acquisition statements in Section 3.11 of NI 52-107 in respect of the business acquisition report (the “BAR”) to be filed by the Filer pursuant to Part 8 of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”) in connection with the indirect acquisition by the Filer of 100% of the share capital of Compañia Española de Sistemas Aeronáuticos, S.A. (the “Exemption Sought”).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual 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 Multilateral Instrument 11-102 – Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Mani-toba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the “Passport Jurisdic-tions”); and

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in National Instrument 14-101 – Definitions 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 was initially incorporated on March 17, 1942 by letters patent issued pursuant to Part I of the Companies Act (Québec), was continued under Part IA of the Companies Act (Québec) on September 30, 1982 and is now governed by the Business Corporations Act (Québec) which was enacted on February 14, 2011.

2.             The Filer’s head and registered office is located at Suite 658, East Tower, 1111 Saint-Charles Street West, Longueuil, Québec, J4K 5G4.

3.             The Filer is an international company specializing in the design, development, manufacture and repair and overhaul of landing gear and actuation systems and components for the aerospace market. The Filer is the third largest landing gear company worldwide, supplying both the commercial and defence sectors of the aerospace market with new landing gear systems and components, as well as aftermarket products and services. The Filer also manufactures, hydraulic systems, fluid filtration systems and electronic enclosures.

4.             The Filer’s common shares are listed on the Toronto Stock Exchange under the “HRX” ticker symbol.

5.             The Filer is a reporting issuer under the securities legislation in each of the Jurisdictions and Passport Jurisdictions, and is not in default under the securities legislation of the Jurisdictions and the Passport Jurisdictions.

6.             The financial statements of the Filer are prepared in accordance with International Financial Reporting Standards (“IFRS”), as required pursuant Section 3.2 of NI 52-107. The financial year end of the Filer is March 31 of each year.

7.             On October 1, 2018, the Filer completed the indirect acquisition, through its subsidiary Heroux-Devtek Spain, S.L.U., of 100% of the share capital of Compañia Española de Sistemas Aeronáuticos, S.A. (“CESA”) from Airbus Defence and Space, S.A.U. for total consideration of €137 million (approx. $206 million) (the “CESA Acquisition”).

8.             CESA is a company incorporated under the laws of Spain, with registered office at Avenia de John Lennon, 28096 Getafe (Madrid), Spain. Prior to the CESA Acquisition, the financial year end of CESA was December 31 of each year.

9.             The CESA Acquisition qualifies as a “significant acquisition” for the Filer since, based on the audited financial statements of the Filer for the year ended March 31, 2018 and the audited financial statements of CESA for the year December 31, 2017, the assets of CESA represent approximately 26% of the Filer’s consolidated assets, the Filer’s consolidated investments in and advances to CESA represent approximately 32% of the Filer’s consolidated assets, and CESA’s loss represents, in absolute value, approximately 21% of the Filer’s consolidated profit.

10.          As a result of this qualification, the Filer must file, on or before December 14, 2018, a BAR containing, among other disclosure, the following financial statements required pursuant to Section 8.4 of NI 51-102:

(a)           the annual financial statements of CESA for the years ended December 31, 2017 and 2016, consisting of a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for the years ended December 31, 2017 and 2016, a statement of financial position as at December 31, 2017 and 2016 and notes to the financial statements;

(b)           the interim financial statements of CESA for the nine-month periods ended September 30, 2018 and 2017; and

(c)           pro forma financial statements of the Filer, consisting of a pro forma statement of financial position of the Filer as at September 30, 2018 that gives effect, as if it had taken place as at such date, to the CESA Acquisition, and pro forma income statements and pro forma earnings per share of the Filer for the year ended March 31, 2018 and the six-month period ended September 30, 2018 that give effect to the CESA Acquisition as if it had taken place on April 1, 2017 (using the financial results of CESA for the year ended December 31, 2017 and the six month period ended June 30, 2018), with adjustments to conform amounts for CESA to the Filer’s accounting policies.

11.          Pursuant to legislation applicable to Spanish businesses, the annual financial statements of CESA prepared in accordance with generally accepted accounting principles in Spain (“Spanish GAAP”) and audited in accordance with Spanish auditing standards must be filed with a Spanish governmental authority, Registro Mercantil Central, and are made accessible to the public, even though CESA’s securities are not listed on any marketplace.

12.          From the beginning of its due diligence process, the Filer analyzed in detail the recognition, measurement, classification, presentation and disclosure differences between CESA’s accounting policies under Spanish GAAP and those followed by the Filer under IFRS. Spanish experts informed the Filer that Spanish GAAP were largely harmonized with IFRS, and the Filer’s analysis of CESA’s financial statements found differences mainly related to accounting policy choices rather than accounting standard requirements. The only accounting treatment that the Filer, as part of its due diligence process, found not in compliance with IFRS pertained to the classification of government grants, which would result in a reclassification of approximately €700,000 mainly in shareholder’s equity.

13.          When faced with the possibility of converting CESA’s financial statements to IFRS in order to file the BAR, the Filer engaged local experts to specifically look at the differences between Spanish GAAP and IFRS in connection with CESA’s financial statements. The Filer was informed that Spanish GAAP had largely been harmonized with IFRS in 2007-2008. The Filer’s local experts performed a gap analysis of differences between Spanish GAAP and IFRS and found the only difference which affected CESA’s financial statements would be related to the classification of government grants, thereby confirming the Filer’s prior analysis. While other differences exist between Spanish GAAP and IFRS, these differences either do not apply to CESA due to the nature of its business, recent transactions or policy elections, or do not constitute a material difference.

14.          CESA’s independent auditors advised the Filer that they would be able to confirm that their audit of CESA’s annual financial statements complies with International Standards on Auditing, as required pursuant to Section 3.12 of NI 52-107.

15.          Prior to the CESA Acquisition, CESA did not prepare financial statements for any interim period.

16.          Since CESA does not qualify as a “designated foreign issuer” under NI 52-107 because its shares are not listed on any marketplace, and the Spanish legislation requiring filing of its annual financial statements does not qualify as “foreign disclosure requirements” under NI 52-107 because it does not relate to securities laws or the rules of a marketplace, the Filer is not able to rely on Subsection 3.11(1)(e) of NI 52-107 to include in the BAR financial statements of CESA prepared in accordance with Spanish GAAP and, instead, would be required to perform a full IFRS conversion and prepare new financial statements for CESA in accordance with IFRS.

Decision

Each of the Decision Makers 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 Makers under the Legislation is that the Exemption Sought is granted provided that:

(a)           the financial statements of CESA included in the BAR are prepared in accordance with Spanish GAAP and contain notes describing the material differences between IFRS and Spanish GAAP that relate to recognition, measurement and presentation, quantifying the effect of each such difference, and also contain a tabular reconciliation between profit or loss reported in such financial statements and profit or loss computed in accordance with IFRS; and

(b)           the annual financial statements of CESA included in the BAR, including the notes referred to in (a) above, are accompanied by an auditor’s report and audited in accordance with International Standards on Auditing, as required pursuant to Section 3.12 of NI 52-107.

“Gilles Leclerc”
Surintendant des marches de valeurs