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Brookfield Renewable Partners L.P. and Brookfield Renewable Corporation
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 -- partnership creates corporation to provide investors with alternative way to hold its units -- corporation issues exchangeable shares whose terms are structured so that each exchangeable share is functionally and economically equivalent to a partnership unit -- each exchangeable share provides an equivalent economic return as a partnership unit -- both the partnership and the corporation are reporting issuers -- related party transactions between the partnership and the corporation are exempt from the related party transaction requirements, subject to conditions -- partnership may include corporation's exchangeable shares when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions, subject to conditions.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, Part 5, ss. 5.5(a), 5.7(1)(a), 9.1.
June 22, 2020
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 BROOKFIELD RENEWABLE PARTNERS L.P., AND BROOKFIELD RENEWABLE CORPORATION
DECISION
Background
The principal regulator in the Jurisdiction has received an application from Brookfield Renewable Partners L.P. (BEP) and Brookfield Renewable Corporation (BEPC, and together with BEP, the Filers) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that:
(a) BEP be exempt from the requirements of Part 5 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101, and such requirements, the Related Party Transaction Requirements) in connection with any related party transaction of BEP with BEPC or any of BEPC's subsidiary entities (the BEP Related Party Relief);
(b) BEPC be exempt from the Related Party Transaction Requirements in connection with any related party transaction of BEPC with BEP or any of BEP's subsidiary entities (the BEPC Related Party Relief); and
(c) BEP be exempt from the requirements of sections 5.4 and 5.6 of MI 61-101 (the Valuation and Minority Approval Requirements) in connection with any related party transaction of BEP entered into indirectly through BRELP (as defined below) or any subsidiary entity of BRELP, 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 class A exchangeable subordinate voting shares of BEPC (the Exchangeable Shares) were included in the calculation of BEP's market capitalization (the Transaction Size Relief, collectively with the BEP Related Party Relief and the BEPC Related Party 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 Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Manitoba, New Brunswick, Quebec, and Saskatchewan.
Interpretation
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.
Representations
This decision is based on the following facts represented by the Filers:
Relevant Entities
BEP
1. BEP is an exempted limited partnership established, registered and in good standing under the laws of Bermuda. BEP's registered and head office is located at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.
2. BEP is a reporting issuer in all of the provinces and territories of Canada and is an SEC issuer within the meaning of section 1.1 of National Instrument 51-102 Continuous Disclosure Obligations. BEP is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.
3. The authorized capital of BEP consists of: (a) non-voting limited partnership units (the BEP Units); (b) Class A preferred limited partnership units, issuable in series; and (c) general partnership interests.
4. The BEP Units are listed on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) under the symbols "BEP" and "BEP.UN", respectively.
5. BEP's only substantial asset is its limited partnership interest in Brookfield Renewable Energy L.P. (BRELP), a Bermuda exempted limited partnership that was established on June 27, 2011 and is in good standing under the laws of Bermuda.
6. Brookfield Renewable Partners Limited, a wholly-owned subsidiary of Brookfield Asset Management Inc. (Brookfield), holds the general partner interest in BEP.
Brookfield
7. Brookfield is a corporation existing and in good standing under the Business Corporations Act (Ontario). Brookfield's registered and head office is located at Suite 300, Brookfield Place, 181 Bay Street, Toronto, Ontario, M5J 2T3.
8. Brookfield is a reporting issuer in all of the provinces and territories of Canada and is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.
9. The Class A Limited Voting Shares of Brookfield are listed on the NYSE and the TSX under the symbols "BAM" and "BAM.A", respectively.
10. Brookfield holds an approximate 57% economic interest in BEP on a fully-exchanged basis through its indirect ownership of redeemable partnership units of BRELP (the Redeemable Partnership Units).
11. Brookfield indirectly holds all of the voting interests in BEP through its ownership of the general partner unit of BEP.
12. BEP, BRELP and certain of their subsidiaries have retained Brookfield and its related entities to provide management, administrative and advisory services under a master services agreement.
BEPC
13. BEPC is a corporation existing and in good standing under the Business Corporations Act (British Columbia). BEPC was incorporated on September 9, 2019. BEPC's registered office is located at 1500 Royal Centre, 1055 West Georgia Street, P.O. Box 11117, Vancouver, British Columbia, V6E 4N7. BEPC's head office is located at 250 Vesey Street, 15th Floor, New York, New York, 10281, United States of America.
14. The authorized share capital of BEPC currently consists of an unlimited number of common shares (the BEPC Common Shares).
15. The sole issued and outstanding BEPC Common Share is held by Brookfield BRP Holdings (Canada) Inc., a wholly-owned subsidiary of BEP.
16. BEPC's principal investments are expected to initially consist of indirect interests in hydroelectric power, wind, solar, storage and ancillary assets in the United States and Brazil, and hydroelectric power assets in Colombia.
17. BEPC is not a reporting issuer in any jurisdiction and is not in default of any applicable requirement of securities legislation.
The Special Distribution
18. BEP believes that certain investors in certain jurisdictions may be dissuaded from investing in BEP because of the tax reporting framework that results from investing in units of a Bermuda exempted limited partnership.
19. BEPC was created, in part, to provide investors that would not otherwise invest in BEP with an opportunity to gain access to BEP's portfolio of renewable power assets, and to provide investors with the flexibility to own, through the ownership of an Exchangeable Share, the economic equivalent of a BEP Unit.
20. BEP will be distributing Exchangeable Shares to holders of BEP Units (the Special Distribution). The Special Distribution is, in effect, a stock split of the BEP Units.
21. On April 24, 2020, (i) BEPC filed a preliminary long form prospectus to qualify the distribution of the Exchangeable Shares to be distributed pursuant to the Special Distribution, and (ii) BEP filed a preliminary short form prospectus to qualify the BEP Units issuable or deliverable upon the exchange, redemption or purchase of Exchangeable Shares pursuant to their terms.
22. Upon obtaining a receipt for the final prospectus, BEPC will become a reporting issuer in each of the provinces and territories of Canada.
23. BEPC has applied to have the Exchangeable Shares listed on the NYSE and TSX.
24. BEPC filed a registration statement on Form F-1/Form F-4 with the U.S. Securities and Exchange Commission (the SEC), as amended, to register the Exchangeable Shares that will be distributed pursuant to the Special Distribution, and BEP filed a registration statement of Form F-3 with the SEC, as amended, to register the BEP Units issuable or deliverable upon the exchange, redemption or purchase of Exchangeable Shares pursuant to their terms.
25. Prior to the closing of the Special Distribution:
(a) BEPC will reclassify its share structure such that, following the reclassification, BEPC's authorized share capital will consist of: (i) an unlimited number of Exchangeable Shares; (ii) an unlimited number of class B multiple voting shares (the Class B Shares); (iii) an unlimited number of class C non-voting shares (the Class C Shares); (iv) an unlimited number of class A senior preferred shares (issuable in series); and (v) an unlimited number of class B junior preferred shares (issuable in series);
(b) the following ownership interests will be transferred, directly or indirectly, by BRELP to BEP Subco Inc., a wholly-owned subsidiary of BEPC, in consideration for Exchangeable Shares and Class C Shares:
(i) a 90% interest in BRP Bermuda Holdings I Limited;
(ii) a 100% interest in Brookfield Power US Holding America Co.; and
(iii) a 100% interest in BEP Bermuda Holdings IV Limited; and
(c) all Exchangeable Shares issued in consideration for the transfer referred to in (b) above will be distributed by BRELP on a proportionate basis to holders of equity units of BRELP, and will result in BEP receiving approximately 44.7 million Exchangeable Shares, which BEP will distribute as part of the Special Distribution.
26. The distribution ratio of Exchangeable Shares for each BEP Unit held will be based on the fair market value of the businesses to be transferred by BEP to BEPC, the number of BEP Units outstanding at the time of the Special Distribution (assuming exchange of the Redeemable Partnership Units), and the market capitalization of BEP. It is expected that holders of BEP Units will receive one (1) Exchangeable Share (less any Exchangeable Shares withheld to satisfy withholding tax obligations) for every four (4) BEP Units held as of the record date of the Special Distribution.
27. Each Exchangeable Share has been structured with the intention of providing an economic return equivalent to a BEP Unit and the rights, privileges, restrictions and conditions attached to each Exchangeable Share (the Exchangeable Share Provisions) are such that each Exchangeable Share is as nearly as practicable, functionally and economically, equivalent to a BEP Unit. In particular:
(a) each Exchangeable Share will be exchangeable at the option of a holder for one (1) BEP Unit (subject to adjustment to reflect certain capital events) or its cash equivalent (the form of payment to be determined at the election of BEPC) (an Exchange);
(b) the Exchangeable Shares are redeemable by BEPC at any time (including following a notice requiring redemption having been given by BEP) for BEP Units on a one-for-one basis (subject to adjustment to reflect certain capital events) (a Redemption);
(c) upon a liquidation, dissolution or winding up of BEPC, holders of Exchangeable Shares will be entitled to receive BEP Units (or its cash equivalent, at BEPC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) and not any remaining property or assets of BEPC following such payment (a BEPC Liquidation);
(d) upon a liquidation, dissolution or winding up of BEP, including where substantially concurrent with a BEPC Liquidation, all of the Exchangeable Shares will be automatically redeemed for BEP Units (or its cash equivalent, at BEPC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) (a BEP Liquidation); and
(e) subject to applicable law and in accordance with the Exchangeable Share Provisions, each Exchangeable Share will entitle the holder to dividends from BEPC payable at the same time as, and equivalent to, each distribution on a BEP Unit. The Exchangeable Share Provisions also provide that if a distribution is declared on the BEP Units and an equivalent dividend is not declared and paid concurrently on the Exchangeable Shares, then the undeclared or unpaid amount of such dividend accrues and accumulates and is to be paid upon the first to occur of any of the circumstances contemplated by paragraphs (a) to (d) above, if not yet paid. BEP will also enter into an equity commitment agreement among BEPC and Brookfield BRP Holdings (Canada) Inc. pursuant to which it will covenant and agree not to declare or pay any distribution on the BEP Units if on such date BEPC does not have sufficient funds or other assets to enable the declaration and payment of an equivalent dividend on the Exchangeable Shares.
28. Upon being notified by BEPC that BEPC has received a request for an Exchange, BEP has an overriding call right to purchase (or have one of its affiliates purchase) all of the Exchangeable Shares that are the subject of the Exchange notice from the holder of Exchangeable Shares for BEP Units (or its cash equivalent, at BEP's election) on a one-for-one basis (subject to adjustment to reflect certain capital events).
29. Upon being notified by BEPC that it intends to conduct a Redemption, BEP has an overriding call right to purchase (or have one of its affiliates purchase) all but not less than all of the then outstanding Exchangeable Shares for BEP Units on a one-for-one basis (subject to adjustment to reflect certain capital events).
30. Upon the occurrence of a BEP Liquidation or BEPC Liquidation, BEP will have an overriding liquidation call right to purchase (or have one of its affiliates purchase) all but not less than all of the then outstanding Exchangeable Shares on the day prior to the effective date of such BEP Liquidation or BEPC Liquidation for BEP Units on a one-for-one basis (subject to adjustment to reflect certain capital events).
31. Prior to the Special Distribution, Brookfield will enter into a rights agreement (the Rights Agreement) pursuant to which it will agree that, for the seven-year period beginning on the date of the Special Distribution (and as automatically renewed for successive periods of two years, unless Brookfield provides the rights agent with written notice of termination in accordance with the terms of the Rights Agreement), Brookfield will guarantee BEPC's obligation to deliver BEP Units or its cash equivalent in connection with an Exchange.
32. An investment in Exchangeable Shares will be as nearly as practicable, functionally and economically, equivalent to an investment in BEP Units. BEP expects that:
(a) investors of Exchangeable Shares will purchase Exchangeable Shares as an alternative way of owning BEP Units rather than a separate and distinct investment; and
(b) the market price of the Exchangeable Shares will be significantly impacted by (i) the combined business performance of BEPC and BEP as a single economic unit, and (ii) the market price of the BEP Units, in a manner that should result in the market price of the Exchangeable Shares closely tracking the market price of the BEP Units.
33. BEPC is intended to be an entity through which persons who do not wish to hold BEP Units directly, may hold their interests in BEP, and BEP is the entity through which holders of Exchangeable Shares and BEP Units hold their interests in the collective operations of BEP and its subsidiaries, including BEPC and its subsidiaries.
Ownership and Control of BEPC
34. The Related Party Transaction Requirements do not apply to an issuer carrying out a related party transaction if:
(a) as provided under paragraph 5.1(d) of MI 61-101, the parties to the transaction consist solely of (i) an issuer and one or more of its wholly-owned subsidiary entities, or (ii) wholly-owned subsidiary entities of the same issuer. A person is considered to be a "wholly-owned subsidiary entity" of an issuer if the issuer owns, directly or indirectly, all of the voting and equity securities and securities convertible into voting and equity securities of the person; and/or
(b) as provided under paragraph 5.1(g) of MI 61-101 (the Downstream Transaction Carve-Out), the transaction is a downstream transaction for the issuer. A "downstream transaction" means, for an issuer, a transaction between the issuer and a related party of the issuer if, at the time the transaction is agreed to, (i) the issuer is a control person of the related party, and (ii) to the knowledge of the issuer after reasonable inquiry, no related party of the issuer, other than a wholly-owned subsidiary entity of the issuer, beneficially owns or exercises control or direction over, other than through its interest in the issuer, more than five per cent of any class of voting or equity securities of the related party that is a party to the transaction.
35. Section 1.3 of MI 61-101 provides that, for the purposes of MI 61-101, a transaction of a wholly-owned subsidiary entity of an issuer is deemed to be a transaction of the issuer.
36. Related party transactions among BEP and BEPC will be required for the operation of the Exchangeable Share Provisions and in connection with ordinary course financial support arrangements which may be entered into from time to time.
37. The only voting securities of BEPC are the Exchangeable Shares and the Class B Shares. Holders of Exchangeable Shares are entitled to one (1) vote per Exchangeable Share held and holders of Class B Shares are entitled to cast, in the aggregate, a number of votes equal to three (3) times the number of votes attached to the Exchangeable Shares.
38. Neither the Exchangeable Shares nor the Class B Shares carry a residual right to participate in the assets of BEPC upon liquidation or winding-up of BEPC, and accordingly, are not equity securities under the Legislation. The Class C Shares are the only equity securities of BEPC.
39. All of the Class B Shares and the Class C Shares will be indirectly owned by BEP and none of them will be transferable except to an affiliate of BEP. Accordingly, all of the equity securities of BEPC are held indirectly by BEP.
40. BEPC is not a wholly-owned subsidiary of BEP; BEP will not own, directly or indirectly, all of the voting securities of BEPC because Brookfield and members of the public will hold Exchangeable Shares. However, by virtue of the terms of the Class B Shares, BEP holds a 75% voting interest in BEPC, will control BEPC and the appointment and removal of directors of BEPC; the voting rights attached to the Exchangeable Shares do not allow holders of Exchangeable Shares to affect the control of BEPC. The voting right attached to each Exchangeable Share is expected to assist with index inclusion.
41. BEP is not able to rely on the Downstream Transaction Carve-Out because, upon completion of the Special Distribution, Brookfield will beneficially own or exercise control or direction over, more than five per cent of the Exchangeable Shares, as it will hold, directly or indirectly, approximately 57% of the Exchangeable Shares. Brookfield will accordingly have an approximate 14% voting interest in BEPC.
42. BEPC is a controlled subsidiary of BEP and BEP will consolidate BEPC and its businesses in BEP's financial statements.
43. By virtue of the Exchangeable Share Provisions, the economic rights of the holders of the Exchangeable Shares will not be affected by transactions between BEP and BEPC. BEP, as the sole holder of equity securities of BEPC, will receive any benefit and/or bear any detriment from related party transactions between BEP and BEPC.
44. Minority approval is required of every class of affected securities, being equity securities of the issuer. For BEPC, minority approval of a related party transaction of BEPC with BEP would be sought from the holders of its Class C Shares, all of which are held by BEP. BEP, as the counterparty to such a related party transaction, does not require the protections of MI 61-101.
Market Capitalization Calculation
45. It is anticipated that BEP will, from time to time, enter into transactions with certain related parties, including Brookfield and its affiliates (other than BEP and its related entities, including BEPC) indirectly through BRELP and its subsidiaries (including BEPC and its subsidiaries).
46. The Valuation and Minority Approval Requirements require, subject to the availability of an exemption, that an issuer obtain: (a) a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and (b) approval of the transaction by disinterested holders of the affected securities of the issuer.
47. A related party transaction that is subject to MI 61-101 may be exempt from the Valuation and Minority Approval Requirements 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 Market Cap Exemption).
48. It is unclear whether BEP would be entitled to rely on the Market Cap 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.
49. The Exchangeable Shares represent part of the equity value of BEP and are functionally and economically equivalent to the BEP Units. As a result of the Exchangeable Share Provisions, holders of Exchangeable Shares have the ability to receive a BEP Unit or its cash equivalent (the form of payment to be determined at the election of BEPC) and will receive identical distributions to the BEP Units, as and when declared by the board of directors of BEPC. Moreover, the economic interests that underlie the Exchangeable Shares are identical to those underlying the BEP Units; namely, the assets and operations held directly or indirectly by BEP.
50. Any costs related to a transaction occurring within the BEPC group would be borne by BEP as the sole holder of the equity securities of BEPC. BEP will consolidate BEP and its businesses in its financial statements and the business of BEP (including BEPC and its subsidiaries) will be the same as it was before the creation of BEPC and the transactions conducted in connection with, and to facilitate, the Special Distribution.
51. If the Exchangeable Shares are not included in the market capitalization of BEP, the equity value of BEP will be understated initially by the value of the Exchangeable Shares, being approximately 20% (assuming a one-for-four distribution ratio). As a result, related party transactions of BEP that are entered into through a subsidiary entity of BEPC may be subject to the Valuation and Minority Approval Requirements in circumstances where the fair market value of the transactions are effectively less than 25% of the fully diluted market capitalization of BEP.
52. BEP has already received relief similar to the Transaction Size Relief in respect of the Redeemable Partnership Units. On December 15, 2011, the Ontario Securities Commission granted Brookfield Renewable Energy Partners L.P. (the prior entity name of BEP), an exemption from the Valuation and Minority Approval Requirements in connection with any related party transaction of BEP entered into indirectly through BRELP and its subsidiaries if that transaction would qualify for the Market Cap Exemption if the Redeemable Partnership Units were included in the calculation of BEP's market capitalization.
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:
1. in respect of the BEP Related Party Relief and BEPC Related Party Relief:
(a) all of the equity securities of BEPC are owned, directly or indirectly, by BEP;
(b) all of the voting securities of BEPC (other than the Exchangeable Shares) are owned, directly or indirectly, by BEP;
(c) there are no material changes to the Exchangeable Share Provisions, as described above; and
(d) BEP consolidates BEPC and its businesses in BEP's financial statements;
2. in respect of the Transaction Size Relief:
(a) the transaction would qualify for the Market Cap Exemption if the Exchangeable Shares were considered an outstanding class of equity securities of BEP that were convertible into BEP Units;
(b) there are no material changes to the Exchangeable Share Provisions, as described above; and
(c) any annual information form or equivalent of BEP that is required to be filed in accordance with applicable 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 when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. Brookfield Renewable Partners L.P. ("BEP") 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 BEP's market capitalization, if Brookfield's indirect equity interest in BEP and the class A exchangeable subordinate voting shares of Brookfield Renewable Corporation ("BEPC") are included in the calculation of BEP'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 42% indirect interest in BEP in the form of redeemable partnership units of Brookfield Renewable Energy L.P. held by Brookfield and the approximately 20% indirect interest in BEP in the form of class A exchangeable subordinate voting shares of BEPC held by Brookfield and the public.
"Jason Koskela"
Manager, Office of Mergers & Acquisitions
Ontario Securities Commission