National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from the formal valuation requirement in Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions – issuer is undertaking related party transactions that are exempt from the requirement to obtain minority approval – all of the issuer’s common shares are either held by a party to the transactions or the issuer’s management – issuer cannot cease to be a reporting issuer due to the existence of outstanding convertible debentures that are no longer convertible into common shares of the issuer and that cannot be redeemed or repaid in common shares of the issuer.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.4, 9.1(2).
August 1, 2017
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR
EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
DISCOVERY AIR INC.
The principal regulator in the Jurisdiction has received an application (the “Application”) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) exempting the Filer, pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (“MI 61-101”), from the formal valuation requirement in section 5.4 of MI 61-101 in connection with: (a) the conversion, by certain funds managed by Clairvest Group Inc. (together with such funds, “Clairvest”) and certain co-investors of Clairvest, namely DA Holdings Limited Partnership and G. John Krediet (Clairvest, together with such co-investors, the “Clairvest Group”), of $25,000,000, being the outstanding balance under a revolving credit facility dated December 20, 2016 between Discovery Air Defence Services Inc. (“DADS”), a wholly-owned subsidiary of the Filer, as borrower, and the Clairvest Group, as lenders, in the aggregate principal amount of up to $25,000,000 (the “First DADS Facility”), into common shares of DADS (“DADS Shares”) (the “Clairvest Group Conversion”); (b) the conversion, by Clairvest, of $6,000,000, being the outstanding balance under a revolving credit facility dated June 5, 2017 between DADS, as borrower, and Clairvest, as lenders, in the aggregate principal amount of up to $13,000,000 (the “Second DADS Facility”), into DADS Shares (the “Clairvest Conversion” and, together with the Clairvest Group Conversion, the “Conversions”); and (c) the exchange, by the Clairvest Group, of up to $18,400,000 principal amount of senior secured convertible debentures of the Filer (the “DA Debentures”) pursuant to a letter agreement between the Filer, DADS and the Clairvest Group dated June 5, 2017, for DADS Shares having an aggregate value equal to $14,700,000 (the “Swap Option” and, together with the Conversions, the “Transactions”) (the “Requested Relief”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this Application; and
(b) the Filer has provided notice that it intends to rely on subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) in Quebec, Alberta, Manitoba and New Brunswick.
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.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the Canada Business Corporations Act.
2. The Filer’s registered office and head office are located at 170 Attwell Drive, Suite 370, Toronto, Ontario, M9W 5Z5.
3. The Filer is a reporting issuer (or the equivalent thereof) under the securities legislation of each of the provinces and territories of Canada. The Filer is not in default of any requirements of the securities legislation in the jurisdictions in which it is a reporting issuer.
4. The authorized share capital of the Filer consists of an unlimited number of Common Voting Shares (the “Class A Shares”) and an unlimited number of Variable Voting Shares (the “Class B Shares” and, together with the Class A Shares, the “Common Shares”). As at the date hereof, the Filer has 79,286,721 Class A Shares and 2,710,750 Class B Shares issued and outstanding.
5. The business of the Filer and its subsidiaries is specialty aviation, including military airborne training services, helicopter services, medevac equipped aircraft services, airborne fire services, fixed-wing air charter services and expediting and logistics support.
6. On May 26, 2017, pursuant to a plan of arrangement, Clairvest acquired all of the Common Shares of the Filer not owned by the Clairvest Group and certain members of the Filer’s management (the “Privatization”). The consideration per Common Share under the Privatization was $0.20 in cash and the aggregate consideration paid for the Common Shares acquired under the Privatization was approximately $1.5 million. On May 29, 2017, the Common Shares of the Filer were de-listed from the Toronto Stock Exchange (the “TSX”). As a result of the Privatization, the Clairvest Group, together with management of the Filer, owns 100% of the outstanding Common Shares. The Filer and its shareholders are party to a unanimous shareholders agreement dated May 26, 2017 (the “DA USA”).
7. The Filer’s 8.375% convertible unsecured subordinated debentures, which were issued pursuant to a convertible debenture indenture dated May 12, 2011, as amended by a first supplemental convertible debenture indenture dated November 27, 2014 and by a second supplemental convertible debenture indenture dated May 26, 2017 (the “Debenture Indenture”), continue to be listed and posted for trading on the TSX under the trading symbol “DA.DB.A” (the “Public Debentures”). The Public Debentures have customary covenants and reporting requirements for instruments of this nature. As a result of the continued listing of the Public Debentures on the TSX, the Filer is not able to apply to cease to be a reporting issuer. However, pursuant to the terms of the Debenture Indenture, following the completion of the Privatization, there is no circumstance in which holders of Public Debentures can receive Common Shares in exchange for their Public Debentures. Specifically: (a) the Public Debentures are no longer convertible into Common Shares of the Filer; instead, upon exercise of the conversion right thereunder, holders of the Public Debentures are entitled to receive only what they would have received if they had exercised the conversion right immediately prior to the closing of the Privatization and then had those Common Shares acquired pursuant to the Privatization at $0.20 per Common Share; and (b) the Filer does not have the right to redeem or repay the holders of the Public Debentures in Common Shares.
8. The Clairvest Group holds approximately 95% of the outstanding Common Shares of the Filer and members of the Filer’s management hold approximately 5% of the outstanding Common Shares of the Filer. The Clairvest Group also holds approximately $110 million (inclusive of accrued interest) of DA Debentures (but none of the Public Debentures) convertible into Common Shares of the Filer, and has made available an aggregate of $38 million to DADS pursuant to the First DADS Facility and the Second DADS Facility.
9. The First DADS Facility and the Second DADS Facility contain optional conversion features (collectively, the “Conversion Features”), which provide the Clairvest Group and Clairvest, respectively, with an option, subject to certain conditions described below, to effect the Conversions at a conversion price (the “Conversion Price”) determined with reference to an agreed upon valuation methodology.
10. The Swap Option grants the Clairvest Group the right to exchange up to $18,400,000 principal amount of DA Debentures for that number of DADS Shares having an aggregate value equal to $14,700,000 based on the same valuation methodology used in determining the Conversion Price with respect to the Conversions. Exercise of the Swap Option is subject to substantially the same conditions as the exercise of the Conversion Features, as described below.
11. The exercise of the Conversion Features and the Swap Option are each subject to the prior satisfaction of certain conditions, including, if required under applicable securities law: (a) approval of the Filer’s shareholders in accordance with the requirements of applicable securities laws (including MI 61-101 and the TSX Company Manual); and (b) completion of a formal valuation in accordance with MI 61-101.
12. In order to support the Filer’s anticipated financing requirements in connection with various initiatives, the Filer has been advised that the current intention of the Clairvest Group is to be in a position to exercise the Conversion Features and the Swap Option as soon as possible to maximize financing alternatives available to the Filer.
13. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt, the issuer must obtain: (a) approval for the transaction from a majority of disinterested holders of the affected securities of the issuer (the “Minority Approval Requirement”); and (b) a formal valuation for the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator (the “Formal Valuation Requirement”). The Transactions are “related party transactions” to which Part 5 of MI 61-101 would apply.
14. Pursuant to subsection 5.7(1)(g) of MI 61-101, a related party transaction that is subject to MI 61-101 is exempt from the Minority Approval Requirement if one or more persons that are interested parties within the meaning of subparagraph (d)(i) of the definition of interested party beneficially own, in the aggregate, 90% or more of the outstanding securities of a class of affected securities at the time the transaction is agreed to and an appraisal remedy, or the equivalent thereof, is available to holders of the class of affected securities (the “90% Exemption”). Since the Clairvest Group beneficially owns, in the aggregate, approximately 95% of the outstanding Common Shares of the Filer, and 100% of the outstanding Common Shares of the Filer are subject to the DA USA, the Transactions are exempt from the Minority Approval Requirement.
15. In connection with the Privatization, Capital Canada Limited, the Filer’s financial advisor, completed a formal valuation of the Filer on March 24, 2017 in accordance with the requirements set out in MI 61-101 (“Filer Valuation”). Although the Filer Valuation was not a formal valuation of DADS itself, the Filer Valuation included an analysis of DADS and the value attributed to it. A special committee of the board of directors of the Filer received the Filer Valuation in connection with the Privatization and unanimously recommended the Privatization based on, among other things, the value attributed to the Filer in accordance with the Filer Valuation. The Filer Valuation was disclosed to shareholders in connection with the Privatization and is accessible on the System for Electronic Document Analysis and Retrieval (“SEDAR”).
16. In connection with entering into the First DADS Facility in December 2016, RSPartners, LLC conducted financial analysis on DADS to advise the Company’s special committee of independent directors in connection with the negotiation of the
formula for the Conversion Feature under the First DADS Facility. The value attributed to DADS through this process was consistent with the valuation later attributed to DADS in connection with the Filer Valuation. The methodology for determining the Conversion Price under the Second DADS Facility is the same as that under the First DADS Facility. As well, the value at which DADS Shares would be issued pursuant to the Swap Option would be determined on the same basis.
17. No Common Shares will be beneficially owned by persons other than the Clairvest Group and members of the Filer’s management prior to the completion of the Transactions.
18. Pursuant to subsection 5.1(d) of MI 61-101, Part 5 of MI 61-101 would not apply to the Transactions but for the facts that: (a) members of the Filer’s management own approximately 5% of the outstanding Common Shares; and (b) G. John Krediet, a member of the Clairvest Group and a director of the Filer, owns approximately 2% of the outstanding Common Shares.
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 Requested Relief is granted, provided that:
1. the Transactions would qualify for the 90% Exemption;
2. the Filer issues and files a news release on SEDAR promptly following the issuance of this decision document disclosing that the Requested Relief has been granted; and
3. the Filer discloses in any material change report required to be filed on SEDAR in connection with the Transactions that the Requested Relief has been granted.
Director, Office of Mergers & Acquisitions
Ontario Securities Commission