Securities Law & Instruments


Headnote

Take-over bid - Insider bid - Collateral benefits - Insider interested in acquiring the otherprincipal shareholder's direct and indirect interests in the offeree - Insider prepared tomake an offer for all of the common shares of offeree if it was possible for the insider toprivatize the offeree, the other principal shareholder reinvested a portion of the proceedsof the sale of its indirect interest in the offeree's common shares in the insider and theother principal shareholder exchanged its other direct and indirect investments in theofferee for investments in the insider on equivalent or inferior terms - Agreement betweenthe insider and the other principal shareholder entered into for a business purpose relatingto the terms upon which the insider was prepared to acquire all of the offeree's commonshares - Transactions contemplated by the agreement between the insider and the otherprincipal shareholder not resulting in the principal shareholder receiving a greaterconsideration for its common shares of offeree than the consideration to be received bythe other holders of the offeree's common shares - Agreement may be entered into despitesubsection 97(2) of the Act

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as amended, ss. 97(2) and 104(2)(a)


IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED (THE "Act")

AND

IN THE MATTER OF
TEMBEC INC., TEMBEC INDUSTRIES INC. AND MALETTE QUÉBEC INC.

DECISION
(Clause 104(2)(a) of the Act)


Upon the application (the "Application") of Tembec Inc. ("Tembec") to the OntarioSecurities Commission (the "Commission") for a decision under clause 104(2)(a) of theAct, in connection with a proposed take-over bid (the "Offer") to be made by Malette RexforInc. ("Holdco") to acquire all of the issued and outstanding common shares (the "MQICommon Shares") of Malette Québec Inc. ("MQI") not owned by Tembec or its affiliates,that the agreement entered into with SGF Rexfor Inc. ("Rexfor") has been made forreasons other than to increase the value of the consideration paid to Rexfor and that suchagreement may be entered into notwithstanding subsection 97(2) of the Act;

AND UPON considering the Application and the recommendation of the staff of theCommission;

AND UPON Tembec and Holdco having represented to the Commission as follows:

1. MQI is governed by the Canada Business Corporations Act ("CBCA"), is a reportingissuer in Ontario and Quebec and is not on the list of defaulting reporting issuersmaintained pursuant to subsection 72(9) of the Act.

2. MQI's authorized capital consists of an unlimited number of: (i) MQI CommonShares, of which 28,012,131 are issued and outstanding; (ii) Class A preferredshares (the "MQI A Shares"), of which 2,200 are issued and outstanding; and (iii)Class B preferred shares (the "MQI B Shares" and, collectively with the MQICommon Shares and MQI A Shares, the "MQI Shares"), of which 25,579 MQI BShares are issued and outstanding.

3. The MQI Common Shares are listed and posted for trading on The Toronto StockExchange (the "TSE"). On December 14, 1999, the closing price of the MQICommon Shares on the TSE was $2.80.

4. The MQI B Shares:

A. carry a fixed, preferential and non-cumulative dividend equal to $5.00 perMQI B Share; and

B. are redeemable or retractable on or after September 30, 2009 at a priceequal to $1,000 per MQI B Share, plus any declared and unpaid dividends(the "Redemption Price").

5. The Redemption Price is payable, at MQI's option, in cash, MQI Common Sharesor a combination thereof. The number of MQI Common Shares to be issued inpayment, in whole or in part, of the Redemption Price, shall equal that portion of theRedemption Price to be satisfied by the issuance of MQI Common Shares dividedby the "current market value" of an MQI Common Share at the redemption date,where the current market value equals 100% of the weighted average trading priceof the MQI Common Shares on the TSE during the 20 consecutive trading daysimmediately preceding the redemption date.

6. As at December 10, 1999, Holdco owned 25,595,384 MQI Common Sharesrepresenting approximately 91.4% of the class and 8,579 MQI B Sharesrepresenting approximately 33.5% of the class.

7. As at December 10, 1999, Rexfor owned 4,900 MQI B Shares.

8. As at December 10 1999, Tembec Industries Inc. ("Tembec Industries"), an indirectwholly-owned subsidiary of Tembec, owned 2,200 MQI A Shares and 12,100 MQIB Shares.

9. Approximately 8.6% of the MQI Common Shares are owned by the public.

10. As at December 10, 1999, each of Tembec Industries and Rexfor owned 50% of theissued and outstanding common shares of Holdco (the "Holdco Common Shares").

11. In addition, Tembec Industries has granted unsecured, non-interest bearingdemand loans to Holdco for principal amounts aggregating $4,375,290 (the"Tembec Industries Loan") and Rexfor has granted to Holdco unsecured, non-interest bearing demand loans for principal amounts of $9,433,682 (the "RexforCommon Equity Loan") and $4,203,710 (the "Rexfor Preferred Equity Loan").

12. On December 15, 1999, Tembec announced its intention to cause Holdco to makethe Offer for cash consideration equal to $3.20 per MQI Common Share.

13. The Offer is an "insider bid" within the meaning of subsection 182(1) of theregulation made under the Act (the "Regulation") and OSC Policy 9.1 ("Policy 9.1").Accordingly, in connection with the Offer, MQI's board of directors constituted anindependent committee (the "Committee") and delegated to the Committee the dutyto commission and supervise a formal valuation of the MQI Common Shares, ascontemplated by the Regulation and the Policy. The Committee engaged CIBCWorld Markets, which has conducted such a valuation.

14. In connection with the Offer, Tembec Industries, Rexfor and Holdco entered into anagreement (the "Rexfor Agreement") providing as follows:

A. Prior to the Offer, Holdco will purchase for cancellation the Holdco CommonShares held by Rexfor and repay the Rexfor Common Equity Loan bytransferring to Rexfor 12,797,692 MQI Common Shares (representingRexfor's indirect interest in the MQI Common Shares owned by Holdco).

B. Rexfor will tender the 12,797,692 MQI Common Shares it acquires fromHoldco to the Offer, unless a "Competing Offer", as that term is defined inthe Rexfor Agreement, is made.

C. Prior to the Offer's expiry, Rexfor will: (i) sell its rights under the RexforPreferred Equity Loan to Tembec Industries for consideration payable by theissuance of Series 4 Class B shares of Tembec (the "Tembec B Shares")having paid-up capital equivalent to $4,203,710; and (ii) exchange its 4,900MQI B Shares for Tembec B Shares having equivalent paid-up capital.

D. The rights, privileges, restrictions and conditions attaching to the Tembec BShares will be identical to those attaching to the MQI B Shares, except thatthe issuer will have the right to redeem the Tembec B Shares at any timeand pay the redemption price in cash or by delivering Class A Shares ofTembec ("Tembec A Shares") issued at their "fair market value", which fairmarket value shall equal 100% of the weighted average trading price of suchTembec A Shares on the TSE during the 20 consecutive trading days endingon the fifth business day preceding: (i) the date on which notice ofredemption is given by the issuer; or (ii) if the Tembec A Shares areredeemed at maturity, the redemption date.

E. Rexfor will undertake to invest in Tembec or one of its affiliates $30,000,000,representing a portion of the proceeds of Rexfor's sale of MQI CommonShares pursuant to the Offer, by subscribing for an unsecured debenturehaving a principal amount of $30,000,000 (the "Tembec Debenture") andbearing interest at an annual rate of 7%, calculated and payable quarterly.

F. Unless repayment of the principal amount of the Tembec Debenture isaccelerated as provided for in paragraphs 14(H) or (I), the principal amountshall be repaid in six equal annual instalments of $5,000,000 payable oneach anniversary of the closing of the Offer.

G. The Tembec Debenture will not be convertible and will be repayable at anytime in cash or, at Tembec's option, Tembec A Shares issued at their fairmarket value or a combination of cash and Tembec A Shares.

H. If MQI does not invest, in the aggregate, $20,000,000 in capitalimprovements in the forest product mills in Saint-Georges-de-Champlainand/or Saint-Raymond-de-Portneuf on or before the second anniversary ofthe closing of the Offer, Tembec's obligation to repay the principal amountof the Tembec Debenture will be accelerated such that the balance willbecome payable in two instalments of $10,000,000 each on the third andfourth anniversaries of the closing of the Offer.

I. If MQI is not privatized within 18 months of the closing of the Offer and eitherall, or substantially all, of the assets of MQI or control over the votingsecurities of MQI is sold to a third party within such period, Tembec'sobligation to repay the principal amount of the Tembec Debenture will beaccelerated such that the balance will become payable as of the date ofsuch sale.

J. Tembec Industries will assume MQI's obligations under two loans grantedby Investissement Quebec, which loans have an aggregate principal amountof approximately $33,359,000, in consideration for the issuance of twopromissory notes in the same aggregate principal amount and $555,020 incash (representing interest payable on September 30, 1999).

15. The Rexfor Agreement was entered into for a business purpose relating to theterms upon which Tembec was prepared to make an offer for all of the MQICommon Shares. In particular, Tembec was willing to make an offer for all of theMQI Common Shares only if:

A. it was possible for Tembec to acquire all of the MQI Shares;

B. Rexfor invested in Tembec, in the form of debt financing, a portion of theproceeds of sale of its indirect interest in MQI Common Shares; and

C. Rexfor exchanged its other direct or indirect investments in MQI forinvestments in Tembec on equivalent or inferior terms.

16. CIBC World Markets has provided an opinion to the Commission that, on the basisof the Rexfor Agreement, the transactions between Rexfor, Tembec Industries andHoldco relating to the Offer will not result in Rexfor receiving a greaterconsideration for its MQI Common Shares than the consideration to be received byholders of MQI Common Shares other than Rexfor.

AND UPON the Commission being satisfied that to do so would not be prejudicialto the public interest;

IT IS DECIDED pursuant to clause 104(2)(a) of the Act that, for the purposes ofsubsection 97(2) of the Act, the Rexfor Agreement has been made for reasons other thanto increase the value of the consideration to be paid to Rexfor for its MQI Common Sharesand such agreement may be entered into notwithstanding subsection 97(2) of the Act.

January 7th, 2000.

"J. A. Geller"      "R. Stephen Paddon"