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Minto Apartment Real Estate Investment Trust
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 – issuer holds all of its properties through limited partnership – entity holds units in limited partnership which are exchangeable into and in all material respects the economic equivalent to the issuer’s publicly traded units – issuer may include entity’s indirect interest in issuer when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions – relief granted subject to conditions.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(1)(a), 9.1.
November 27, 2018
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
MINTO APARTMENT REAL ESTATE INVESTMENT TRUST
(the “Filer”)
DECISION
Background
The principal regulator in the Jurisdiction (the “Principal Regulator”) has received an application (the “Application”) from the Filer for a decision under the securities legislation of the Jurisdiction (the “Legislation”) that the Filer be granted an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (“MI 61-101”) from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through Minto Apartment Limited Partnership (“Minto LP”) or any other subsidiary entity of Minto LP (as such term is defined in MI 61-101), 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 indirect equity interest in the Filer in the form of Exchangeable LP Units (defined below), which is currently held by Minto Partnership B LP, a subsidiary of Minto Properties Inc. (“Minto Properties”), were included in the calculation of the Filer’s market capitalization (collectively, 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 the Application; and
(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 Québec, Alberta, Manitoba and New Brunswick.
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 herein.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is an unincorporated open-ended real estate investment trust established under the laws of the Province of Ontario pursuant to an amended and restated declaration of trust dated June 27, 2018, as amended July 10, 2018, as the same may be further amended and/or restated from time to time (the “Declaration of Trust”).
2. The Filer’s head office is located at 200 – 180 Kent Street, Ottawa, Ontario K1P 0B6.
3. The Filer is a reporting issuer in each of the provinces and territories of Canada and is not currently in default of any applicable requirements of the securities legislation thereunder.
4. The Filer is authorized to issue an unlimited number of trust units (“Trust Units”) and an unlimited number of special voting units (“Special Voting Units”). As of the date hereof, there are 15,863,100 Trust Units and 20,859,410 Special Voting Units issued and outstanding. Special Voting Units are only issued in tandem with the issuance of Exchangeable LP Units and therefore the number of Special Voting Units outstanding at any point in time is identical to the number of Exchangeable LP Units issued and outstanding.
5. The Trust Units are listed and posted for trading on the Toronto Stock Exchange under the trading symbol “MI.UN”.
6. The operating business of the Filer is carried on by Minto LP which directly or indirectly owns a portfolio of 22 multi-residential rental properties located in Canada.
7. Minto LP is a limited partnership formed under the laws of the Province of Ontario and is governed by an amended and restated limited partnership agreement dated June 27, 2018 (the “Limited Partnership Agreement”). Minto LP’s head office is located at 200 – 180 Kent Street, Ottawa, Ontario K1P 0B6.
8. Minto LP is not a reporting issuer (or the equivalent thereof) in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.
9. The Filer is the sole shareholder of the general partner of Minto LP. The general partner of Minto LP has the authority to manage the business and affairs of Minto LP.
10. Minto LP is authorized to issue an unlimited number of Class A partnership units (“Class A Units”), an unlimited number of exchangeable Class B partnership units (“Exchangeable LP Units”), and an unlimited number of Class C partnership units (“Class C Units”). The Filer holds all of the outstanding Class A Units, of which 15,863,100 are issued and outstanding. Minto Partnership B LP, a subsidiary of Minto Properties, the vendor of the properties currently owned by Minto LP, currently holds all of the Exchangeable LP Units, of which 20,859,410 are issued and outstanding and Minto Partnership C LP, a subsidiary of Minto Properties, holds all of the Class C Units, of which 22,978,700 are issued and outstanding.
11. The Exchangeable LP Units are, in all material respects, economically equivalent to the Trust Units on a per unit basis. The Exchangeable LP Units are not transferable (except as specifically provided in the Limited Partnership Agreement), however the Exchangeable LP Units are exchangeable on a one-for-one basis for Trust Units at any time at the option of the holder thereof (subject to customary anti-dilution provisions). The distributions made on the Exchangeable LP Units are equal to the distributions that the holder of the Exchangeable LP Units would have received if it were holding the Trust Units that may be obtained upon the exchange of such Exchangeable LP Units. The Exchangeable LP Units are non-voting units of Minto LP (except as specifically provided in the Limited Partnership Agreement), however each Exchangeable LP Unit is accompanied by a Special Voting Unit so that the holder of the Exchangeable LP Units has voting rights on matters respecting the Filer that are the same as the voting rights that the holder would have if it were holding the Trust Units that may be obtained upon the exchange of such Exchangeable LP Units. The Exchangeable LP Units are not exchangeable for securities other than Trust Units nor are they redeemable for cash.
12. Class C Units are non-voting units of Minto LP and are intended solely to service certain secured debt on properties owned by the Filer that was retained by Minto Properties at the time the properties were sold to Minto LP as part of the Filer’s initial public offering.
13. As of the date hereof, Minto Properties holds an effective interest in the Filer of approximately 56.8% (assuming the exchange of all Exchangeable LP Units, which are currently held indirectly by Minto Properties, for Trust Units, but otherwise on a non-diluted basis and without taking into account awards outstanding pursuant to the Filer’s equity incentive plan). Minto Properties effective interest is currently comprised of the outstanding Exchangeable LP Units.
14. It is anticipated that the Filer, indirectly through Minto LP or its subsidiaries, may from time to time enter into transactions with certain related parties (as such term is defined in MI 61-101), including Minto Properties or any of its subsidiaries or affiliates.
15. If MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
15.1. the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61‑101 prepared by an independent valuator; and
15.2. the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (together, the requirements in paragraphs 15.1 and 15.2 are referred to as the “Minority Protections”).
16. A related party transaction that is subject to MI 61‑101 may be exempt from the Minority Protections 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 “Transaction Size Exemption”).
17. The Filer may not be entitled to rely on the Transaction Size Exemption available under the Legislation from the requirements relating to related party transactions in 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.
18. The Exchangeable LP Units represent part of the equity value of the Filer and provide the holder of the Exchangeable LP Units with economic rights which are, in all material respects, equivalent to the Trust Units. The effect of the exchange right attaching to the Exchangeable LP Units is that a holder of Exchangeable LP Units is entitled to receive Trust Units upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Units; namely, the assets held directly or indirectly by Minto LP.
19. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of the interest in Minto LP represented by the Exchangeable LP Units (currently being approximately 56.8%). As a result, related party transactions of the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer (for greater certainty, excluding any outstanding unit-based incentive awards).
20. Section 1.4 of MI 61-101 treats an operating entity of an “income trust”, as such term is defined in National Policy 41-201 Income Trusts and Other Indirect Offerings (“NP 41-201”), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and to which transactions MI 61‑101 should apply. Section 1.2 of NP 41-201 provides that references to an “income trust” refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Therefore, it is consistent with MI 61-101 that securities of the operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
21. The inclusion of the Exchangeable LP Units when determining the Filer’s market capitalization pursuant to MI 61-101 is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer’s market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.
Decision
The Principal Regulator is satisfied that the test contained in the Legislation that provides the Principal Regulator with the jurisdiction to make the decision has been met.
The decision of the Principal Regulator under the Legislation is that the Requested Relief be granted to the Filer provided that:
(a) the applicable transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Trust Units;
(b) there be no material change to the terms of the Exchangeable LP Units and Special Voting Units, including the exchange rights associated therewith, as described above and in the Declaration of Trust, the Limited Partnership Agreement and the Exchange Agreement entered into by the Filer, among others, dated June 27, 2018, whether by amendment to such documents, contractual agreement or otherwise;
(c) the applicable transaction is made in compliance with the rules and policies of the Toronto Stock Exchange or such other exchange upon which the Filer’s securities trade; and
(d) any annual information form or equivalent of the Filer that is required to be filed in accordance with applicable Canadian 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. Minto Apartment Real Estate Investment Trust (the “REIT”) 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 the REIT’s market capitalization, if the exchangeable Class B limited partnership units of Minto Apartment Limited Partnership are included in the calculation of the REIT’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 56.8% indirect exchangeable equity interest in the REIT held by Minto Partnership B LP, a subsidiary of Minto Properties Inc., in the form of exchangeable Class B limited partnership units of Minto Apartment Limited Partnership.”
“Naizam Kanji”
Director, Office of Mergers & Acquisitions
Ontario Securities Commission