National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Application for relief from prospectus requirement in section 53 of the Act regarding distributions of securities of the issuer to holding companies that are owned by the shareholders (who are also key employees) of licenced automotive dealers operating in the applicable jurisdictions – Filer distributes securities in order to allow for payment of commissions for dealers to sell warranty programs offered by the filer – Relief granted subject to conditions, including that subsequent trades restricted to specified transferees.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).
National Instrument 45-106 Prospectus Exemptions.
July 27, 2018
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
ROYAL WARRANTY COMPANY LTD.
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) for an exemption from the prospectus requirement (the Exemption Sought) in connection with the issuance from time to time of shares of the Filer to BHCs (as defined below) of Dealer Principals (as defined below).
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 in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador, the Yukon Territory, the Northwest Territories and Nunavut.
Terms defined in National Instrument 14-101 Definitions and MI 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 licensed warranty company incorporated on December 18, 2013 and existing under the laws of Barbados. It is in the business of issuing warranty coverage for selected finance, insurance and bill of sale products sold in relation to the sale or lease of automobiles by commercially licensed automotive dealers operating in the provinces and territories of Canada (Dealers).
2. The Filer is not, and has no intention to become, a reporting issuer in any province or territory of Canada and is not an “investment fund” as defined in the Legislation. Except as noted in paragraphs 11 to 14 below, the Filer is not in default of the securities legislation of any province or territory of Canada.
3. The authorized capital of the Filer consists of 100,000 shares which are divided into 1,000 classes of redeemable stock with each class having 100 shares. The classes of stock are divided as follows: (i) class 1 redeemable shares consisting of 100 shares and (ii) Class 2 to Class 1,000 Redeemable Shares (the RWC Shares) consisting of 100 shares for each class, all 100 of which shall be issued together. The terms of each class of RWC Shares are identical.
4. The Filer indirectly offers the RWC Shares to the shareholders (who are also key employees) (collectively, the Dealer Principals) of Dealers that have agreed to sell warranty programs offered by the Filer, with each Dealer Principal indirectly holding a minimum of 100 RWC Shares of a separate class, pursuant to the terms of a participation agreement and a subscription agreement.
5. Pursuant to the participation agreement, the RWC Shares may only be issued to Barbados holding companies which are wholly owned by Dealer Principals, either alone or together with immediate family members (BHCs).
6. It is a mandatory requirement for Dealer Principals of Dealers that sell warranty programs of the Filer to subscribe for the RWC Shares, through BHCs, as a Dealer Principal needs to hold a class of RWC Shares in order to receive the profits generated by his or her Dealer from its warranty sales via dividends from its shareholder account, as further described below.
7. Dividends on the RWC Shares are declared and payable only from the shareholder account attributable to the specific class of shares held by the Dealer Principal’s BHC and not out of any capital or surplus or shareholder account attributable to any other class of shares. Dividends on the RWC Shares are payable when and as declared by the board of directors of the Filer.
8. The shareholder account from which dividends are paid for each class of RWC Shares includes (i) the paid-in capital attributable to the RWC Shares, minus any redemption rights of the holders of Class 1 Redeemable Shares, (ii) the Dealer’s profits or losses from its warranty business; (iii) the Dealer’s investment income or loss, less (iv) the dividends paid or share redemptions in respect of the RWC Shares.
9. The participation cost for each class of RWC Shares is equal to $7,500, consisting of $5,000 for the subscription of a class of RWC Shares and $2,500 for legal and administrative fees, which include fees associated with establishing and maintaining a BHC for the Dealer Principal.
10. As of the date hereof, the Filer has 68 shareholders, all of which are indirectly wholly owned by residents in the Province of Ontario, holding an aggregate of 6,800 RWC Shares.
11. The Filer previously relied on the private issuer exemption from the prospectus requirement of the Legislation as the RWC Shares were beneficially owned by not more than 50 persons, all of whom were “accredited investors”, and subject to transfer restrictions pursuant to the constating documents of the Filer. However, the Filer reached 50 shareholders as of February 17, 2016 and, accordingly, can no longer rely on the private issuer exemption. Since February 17, 2016, the Filer believes that all purchasers of the RWC Shares have been accredited investors.
12. The Filer acknowledges that, although it believes that all purchasers of RWC Shares since February 17, 2016 have been accredited investors, it did not take the steps necessary to confirm such fact nor did it make the required filings under National Instrument 45-106 Prospectus Exemptions, and that to the extent the distributions of securities were made to such purchasers without an available exemption, such distributions were made in contravention of the prospectus requirement of the Legislation.
13. In May 2017, the management company of the Filer (the Management Company) changed the key relationship manager and servicing employee who is responsible for day-to-day operations and financial reporting, among other things, and oversees the management of the Filer and the Dealers (the Manager). Under the new Manager, the compliance and legal department of the Management Company has taken appropriate steps to put in place policies and procedures that establish a system of controls and supervision sufficient to provide reasonable assurance that it will comply with applicable law. In late 2017, the compliance and legal department of the Management Company identified that the issuance of the RWC Shares might not be in conformity with applicable securities laws and forthwith retained new external counsel to bring an application in order to seek the Exemption Sought.
14. The Filer acknowledges that the Exemption Sought does not apply retroactively to the non-compliance noted in paragraph 12.
15. The Filer has considered whether, under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the Legislation, it could be considered to be engaged in or holding itself out as engaging in the business of trading in securities and therefore required to register as a dealer, rely on another exemption from the dealer registration requirement or seek exemptive relief from the dealer registration requirement. In light of the particular facts and circumstances of the Filer, including the fact that it has no offices or employees, does not receive any fees or other income from engaging in trades or acts in furtherance of distributions, and its activities do not have the attributes typical of a person or company carrying on the business of a dealer, and having considered the guidance in section 1.3 of the Companion Policy to NI 31-103, the Filer has concluded that it should not be considered to be engaged in registrable activities and therefore does not require relief from the registration requirement of the Legislation.
16. The RWC Shares have not been, and will not be, sold to any person other than BHCs of Dealer Principals. Each Dealer Principal beneficially owns his or her RWC Shares through a Canadian holding company, which in turn holds all the shares of the Dealer Principal’s BHC. Pursuant to the articles of incorporation of the Filer, the RWC Shares may not be registered in the name of any person other than the principal or majority owner of a Dealer or a holding company whose principal or majority owner owns a Dealer.
17. There is no market for the RWC Shares and the constating documents of the Filer provide for restrictions on their transfer. Pursuant to the articles of incorporation of the Filer, no shares of the Filer, including the RWC Shares, may be transferred without the approval of the board of directors of the Filer or a committee of the board, and the board or committee may in their absolute discretion and without assigning reasons therefor, decline to register any transfer of any share.
18. The Management Company has established, and maintains and applies, policies and procedures that establish a system of controls and supervision sufficient to provide reasonable assurance that the Filer and each individual acting on its behalf complies with the Legislation, including compliance with the terms and conditions of any statutory or discretionary exemption under the Legislation.
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) prior to the issuance of RWC Shares to a Dealer Principal’s BHC, the Filer shall deliver to such Dealer Principal a copy of:
(1) the articles and by-laws of the Filer, and all amendments thereto;
(2) the most recent annual audited financial statements of the Filer;
(3) this decision;
(4) a statement to the effect that, as a consequence of this decision, certain protections, rights and remedies provided by the Legislation, including statutory rights of rescission or damages, will not be available to the Dealer Principal and that certain restrictions are imposed on the subsequent disposition of the RWC Shares; and
(5) an information document pertaining to the Filer and describing, among other things, the method by which revenues, expenses and losses will be calculated for purposes of the dividends payable to each shareholder’s capital accounts;
(b) all certificates representing RWC Shares shall bear a legend describing the restrictions on the transfer of the RWC Shares;
(c) the exemptions contained in this decision shall cease to be effective if any of the provisions of the articles or by-laws of the Filer relevant to the exemptions granted herein are amended in any material respect without written notice to, and consent of, the principal regulator;
(d) the Filer prepares and sends to each of its shareholders, on an annual basis, audited financial statements and such notices and information as are required under Barbados law in respect of the annual meetings of shareholders;
(e) the Filer conducts annual meetings in accordance with applicable Barbados corporate law;
(f) the Filer prepares and sends to each of its shareholders a statement of account, on at least an annual basis, that includes dividends paid to the shareholder, which is mailed to the shareholder and available to the shareholder through an online portal;
(g) the first trade of any RWC Share by a Dealer’s BHC to a person or company other than the Filer or another Dealer’s BHC shall be deemed a distribution; and
(h) this decision shall cease to be effective after the date that is five years after the date of this decision, unless the Filer applies for and is granted exemptive relief that is substantially the same as the Exemption Sought with respect to the then issuance of RWC Shares.
“Philip Anisman” “Deborah Leckman”
Ontario Securities Commission Ontario Securities Commission