National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101, s. 9.1 Protection of Minority Security Holders in Special Transactions -- issuer is an income trust with an interest in underlying assets -- entity to hold interest in issuer through units of entity underlying issuer -- units redeemable into units of issuer -- issuer may include entity's indirect interest in issuer when calculating issuer's market capitalization for purposes of using 25% market capitalization exemption for certain related party transactions
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(a), 9.1.
July 9, 2010
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
CROMBIE REAL ESTATE INVESTMENT TRUST
The principal regulator in the Jurisdiction has received an application from the Filer for a decision pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") that the Filer be granted an exemption 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 Crombie Limited Partnership ("Crombie LP") or a subsidiary entity (as such term is defined in MI 61-101) of Crombie LP, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(a) of MI 61-101 if the indirect equity interest of ECL Developments Ltd. ("ECL") in the Filer, held in the form of limited partnership units of Crombie LP, were included in the calculation of the Filer's market capitalization (the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the "Decision Maker") is the principal regulator for this 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 Quebec.
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 an unincorporated open-ended real estate investment trust established pursuant to a declaration of trust dated January 1, 2006, as amended and restated (the "Declaration of Trust") formed under, and governed by, the laws of the Province of Ontario. The principal, registered and head office of the Filer is located at 115 King Street, Stellarton, Nova Scotia, B0K 1S0. The Ontario Securities Commission (the "OSC") has been selected as the principal regulator for this application in accordance with the guidelines set out in Section 3.6 of NPS 11-203 on the basis that the Filer is a trust formed under, and governed by, Ontario law, the Filer maintains an office in Toronto, the Filer owns approximately twice as many properties in Ontario as it does in Quebec and the Filer's Units are listed and posted for trading on the Toronto Stock Exchange (the "TSX").
2. The Filer is authorized to issue an unlimited number of units (the "Units") and an unlimited number of special voting units (the "Special Voting Units"). As at June 30, 2010, there were 32,045,298 Units and 28,925,730 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equivalent to, and accompanies the number of Exchangeable LP Units outstanding.
3. The Units are currently listed and posted for trading on the TSX under the symbol "CRR.UN".
4. The Filer is a reporting issuer, or has equivalent status, under securities legislation in all provinces of Canada and is not in default of any of the requirements of such legislation.
5. The Filer invests in income-producing retail, office and mixed use properties in Canada, with a future growth strategy focused primarily on the acquisition of retail properties. As at June 30, 2010, the Filer owned a portfolio of 118 commercial properties in seven provinces comprising approximately 11.5 million square feet of gross leaseable area.
6. Crombie LP is a limited partnership formed under the laws of the Province of Nova Scotia and governed by a second amended and restated limited partnership agreement dated March 23, 2006 (the "Crombie LP Agreement") among Crombie General Partner Limited ("Crombie GP"), ECL (as successor in interest to ECL Properties Limited) and Crombie Subsidiary Trust ("CS Trust") and is the operating entity through which the Filer conducts its business.
7. Crombie GP, a corporation incorporated under the laws of the Province of Nova Scotia, is the general partner of Crombie LP and is wholly owned by CS Trust.
8. Under the Crombie LP Agreement, Crombie LP is authorized to issue an unlimited number of class A limited partnership units (the "Class A LP Units") and an unlimited number of class B limited partnership units (the "Exchangeable LP Units" and collectively with the Class A LP Units, the "LP Units"), as well as an unlimited number of general partnership units.
9. All the outstanding Class A LP Units are held by CS Trust (a wholly-owned subsidiary of the Filer), all the Exchangeable LP Units are held by ECL, and all the outstanding general partnership units are held by Crombie GP.
10. ECL holds 28,925,730 Exchangeable LP Units representing an approximately 47.4% economic interest in the Filer.
11. The Exchangeable LP Units are in all material respects, equivalent to the Units on a per unit basis. Pursuant to the terms of an exchange agreement dated March 23, 2006 among the Filer, CS Trust, Crombie GP, Crombie LP and ECL (the "Exchange Agreement"), each Exchangeable LP Unit is exchangeable at the option of the holder for one Unit of the Filer. Each Exchangeable LP Unit also has the same economic rights and entitlements to distributions as a Unit of the Filer, and is accompanied by one Special Voting Unit, which provides for the same voting rights in the Filer as a Unit.
12. 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, as nearly as possible, equivalent to the Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Units; namely, the assets and operations held directly or indirectly by the operating entities.
13. The Exchangeable LP Units are not listed and posted for trading on the TSX or any other stock exchange.
14. ECL is a wholly-owned subsidiary of Empire Company Limited ("Empire"). The Filer was formed by Empire in 2006 and has acquired most of its properties from subsidiaries of Empire in a number of transactions upon and since its formation. Crombie LP is party to a development agreement with ECL which gives Crombie LP a preferential right to acquire retail properties developed by ECL, and the Filer has regularly disclosed its relationship with ECL in its public filings as one of its competitive strengths.
15. As a result of ECL's ownership of Exchangeable LP Units and Special Voting Units, transactions involving the Filer entered into indirectly through Crombie LP or a subsidiary entity (as such term is defined in MI 61-101) and ECL or other affiliates of Empire are related party transactions subject to MI 61-101.
16. MI 61-101 requires, unless an exemption is available:
(a) pursuant to Section 5.4 the preparation of a formal independent valuation of the non-cash assets involved in the transaction; and
(b) pursuant to Section 5.6, approval by a majority of the votes cast by disinterested Unitholders (excluding votes cast by ECL), entitled to vote on the proposed transaction at a duly constituted meeting of Unitholders held to consider the proposed transaction ((a) and (b) collectively, the "Minority Protections").
17. 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.
18. The Filer may not be entitled to rely on the automatic transaction size exemptions available under the Legislation from the requirements relating to related party transactions in MI 61-101 because although the definition of market capitalization in MI 61-101 includes the value of equity securities of the issuer that are convertible into listed equity securities of the issuer, it does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.
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 ECL's limited partnership interest in Crombie LP, approximately 47.4%. As a result, related party transactions by the Filer that are entered into directly or indirectly through Crombie LP may be subject to the Minority Protections in circumstances where the fair market value of the transactions are effectively less than 25% of the fully diluted market capitalization of the Filer.
The Decision Maker is satisfied that decision meets the test set out in MI 61-101 for the Requested Relief.
The decision of the Decision Maker is that the Requested Relief is granted provided that:
(a) the transaction would qualify for the market capitalization exemption contained in MI 61-101 if the Exchangeable Units were considered an outstanding class of equity securities of the Filer that were convertible into Units;
(b) there be no material change to the terms of the Exchangeable LP Units and the Special Voting Units, as described above and in the Exchange Agreement, the Declaration of Trust and the Crombie LP Agreement; and
(c) any annual report or equivalent of the Filer 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 Shareholders 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. The Crombie Real Estate Investment Trust (the "REIT") has applied for exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, would permit 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 Empire Company Limited's indirect economic and voting interest in the REIT was 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 would be increased to reflect the approximately 47.4% indirect interest in the REIT held by Empire Company Limited."