Securities Law & Instruments


Headnote

Mutual Reliance Review System for Exemptive Relief Applications - Relief from theregistration and prospectus requirements with respect to a proposed offering ofsecurities to Pharmacy owners (independent contractors) not required in Ontariopursuant t Rule 45-503 but relief granted from the issuer bid requirements with respectto the repurchase of securities pursuant to certain agreements entered intoconcurrently with the offering.

Applicable Ontario Statutory Provisions

Securities Act. R.S.O. 1990, c.S.5, as am., ss. 104(2)(c).

Ontario Securities Commission Rule 45-503 - Trades to Employees, Executives andConsultants.

IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,ONTARIO, QUEBEC, NOVA SCOTIA, PRINCE EDWARD ISLAND, NEWFOUNDLAND, NEW BRUNSWICK, NORTHWEST TERRITORIES,AND YUKON

AND

IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF
SHOPPERS ACQUISITION CORPORATION

MRRS DECISION DOCUMENT


1. WHEREAS the local securities regulatory authority or regulator (the "DecisionMaker") in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario,Quebec, Nova Scotia, Prince Edward Island, Newfoundland, New Brunswick,Northwest Territories, and Yukon (the "Jurisdictions") has received an applicationfrom Shoppers Acquisition Corporation ("SAC") for a decision under the securitieslegislation of the Jurisdictions (the "Legislation") that the requirements containedin the Legislation to be registered to trade in a security and to file and receive areceipt for a prospectus (the "Registration and Prospectus Requirements") do notapply to SAC with respect to a proposed distribution of non-voting common sharesby it and that the requirement contained in the Legislation to comply with the rulesgoverning issuer bids (the "Issuer Bid Requirement") does not apply to SAC withrespect to certain repurchases by SAC of non-voting common shares issued by itpursuant to the distribution;

2. AND WHEREAS under the Mutual Reliance Review System for Exemptive ReliefApplications (the "System"), the Alberta Securities Commission is the principalregulator for this application;

3. AND WHEREAS SAC has represented to the Decision Makers that:

3.1 SAC is a corporation incorporated under the laws of the Province of Ontario;

3.2 SAC is not a reporting issuer, or its equivalent, in any of the Jurisdictions;

3.3 the authorized capital of SAC consists of an unlimited number of commonshares ("Common Shares"). In order to accommodate the distributiondescribed below, SAC proposes to amend its authorized capital to also allowfor the issuance of an unlimited number of non-voting common shares ("Non-Voting Shares");

3.4 the securities of SAC are not listed on any stock exchange or traded over thecounter;

3.5 SAC was incorporated for the purpose of acquiring the Shoppers DrugMart/Pharaprix business currently owned and operated by Shoppers DrugMart Limited ("Current SDM");

3.6 Current SDM is a wholly-owned subsidiary of Imasco Limited ("Imasco").The common shares of Imasco are listed and posted for trading on TheToronto Stock Exchange and Imasco is a reporting issuer, or its equivalent,in each of the Jurisdictions;

3.7 as at August 3, 1999, British American Tobacco p.l.c. ("BAT") owned 42%of the issued and outstanding common shares of Imasco. BAT, through itswholly-owned subsidiary British American Tobacco (Canada) Limited ("BATCanada"), proposes to acquire, for cash, the balance of the issued andoutstanding common shares of Imasco as part of a larger transactioninvolving BAT, BAT Canada and Imasco (the "BAT/Imasco Transaction");

3.8 pursuant to the BAT/Imasco Transaction, the assets and liabilitiescomprising the Shoppers Drug Mart/Pharaprix business currently owned andoperated by Current SDM would be transferred to Shoppers Drug Mart Inc.("New SDM"), a newly formed corporation, or to a wholly-owned subsidiaryof New SDM. Following such transfer, Current SDM would own all of theissued and outstanding shares of New SDM;

3.9 completion of the BAT/Imasco Transaction would involve the amalgamationof Current SDM with Imasco, followed by a further amalgamation betweenthe newly amalgamated entity and BAT Canada. As a result, followingcompletion of the BAT/Imasco Transaction, BAT Canada would own all ofthe issued and outstanding shares of New SDM;

3.10 completion of the BAT/Imasco Transaction is conditional on, among otherthings, the shareholders of Imasco giving their approval to the transactionat a meeting scheduled for January 28, 2000;

3.11 pursuant to a letter agreement dated November 18, 1999, BAT and SAChave agreed that, upon completion of the BAT/Imasco Transaction, BATCanada and SAC will enter into a purchase agreement whereby SAC willagree to purchase all of the issued and outstanding shares of New SDMfrom BAT Canada for $2.55 billion in cash;

3.12 the Shoppers Drug Mart/Pharaprix business to be transferred to New SDMas part of the BAT/Imasco Transaction includes retail operations consistingof over 790 drug stores. Each drug store is operated by a pharmacist (an"Associate") who, through a wholly-owned corporation, has entered into alicensing agreement with Current SDM. Each such licensing agreementrequires that the Associate devote their full time and attention to theoperation and management of the drug store that is the subject of thelicense. As a result, each Associate has detailed knowledge of the businesscurrently operated by Current SDM and to be transferred to New SDM aspart of the BAT/Imasco Transaction;

3.13 the Associates and New SDM will continue to be subject to the licensingagreements following the transfer of the Shoppers Drug Mart/Pharaprixbusiness to New SDM as part of the BAT/Imasco Transaction. SAC does notintend to alter the current licensing arrangement in the event that it acquiresNew SDM. As a result, the Associates will render the same services to NewSDM and SAC as they currently render to Current SDM;

3.14 SAC intends to fund the purchase of New SDM by raising approximately$900 million in equity and obtaining debt financing for the balance of thepurchase price. SAC proposes to allow Associates to become equityinvestors in SAC by purchasing Non-Voting Shares with a total aggregatepurchase price of up to $40 million. The balance of the required $900 millionequity investment will be provided through the sale of Common Shares tocertain institutional investors and to certain management employees ofCurrent SDM;

3.15 SAC also proposes to allow Associates to purchase Non-Voting Sharesthrough a Registered Retirement Savings Plan ("RRSP") of which they arethe beneficiary. The Common Shares do not currently qualify as an RRSPeligible investment under the Income Tax Act (Canada), resulting in the needfor the creation of a separate class of securities to allow RRSP investmentby Associates. The Non-Voting Shares will be an RRSP eligible investmentunder the Income Tax Act (Canada);

3.16 Associates who purchase Non-Voting Shares, either directly or through anRRSP of which they are the beneficiary, will be required to enter into aunanimous shareholders' agreement and certain other agreements (the"Governing Agreements") which will restrict their ability to deal with the Non-Voting Shares so acquired. Among other things, the Governing Agreementswill place certain transfer restrictions on the Non-Voting Shares, will provideSAC with a right of first refusal in certain circumstances and will give SACthe right to repurchase the Non-Voting Shares from the Associate in certaincircumstances, including in the event that the licensing agreementrespecting the Associate is terminated. The Governing Agreements will alsoprovide drag-along rights to certain institutional holders of Common Sharesand will provide certain coattail and tag-along rights to the holders of Non-Voting Shares;

3.17 Associates will be provided with an offering memorandum in connection withthe offering of Non-Voting Shares. The offering memorandum will contain,among other things, a full description of the attributes of the Non-VotingShares and the business to be conducted by SAC and New SDM. Theoffering memorandum will also contain a summary of the provisions of theGoverning Agreements and will provide full information concerning anyresale restrictions applicable to the Non-Voting Shares. The offeringmemorandum will be prepared in accordance with the Legislation and willcontain the contractual and statutory rights of action required by theLegislation;

3.18 the participation of Associates in the offering of Non-Voting Shares will bevoluntary. No Associate will be induced, directly or indirectly, to purchaseNon-Voting Shares by expectation of maintaining or continuing their statusas an Associate;

3.19 there are Associates resident in each of the Jurisdictions;

3.20 SAC will not accept any subscription for Non-Voting Shares by an Associateunless the BAT/Imasco Transaction is successfully completed and SACacquires New SDM;

3.21 as Associates will not be employees of either SAC or New SDM, noexemption from the Registration and Prospectus Requirements exists underthe Legislation, other than in Ontario, to allow SAC to issued Non-VotingShares to Associates;

3.22 any repurchase by SAC of Non-Voting Shares pursuant to the terms of theGoverning Agreements will constitute an issuer bid under the Legislation.No exemption from the Issuer Bid Requirement exists under the Legislationwith respect to such repurchases;

4. AND WHEREAS under the System, this MRRS Decision Document evidences thedecision of each Decision Maker (collectively, the "Decision");

5. AND WHEREAS each of the Decision Makers is satisfied that the test contained inthe Legislation that provides the Decision Maker with the jurisdiction to make theDecision has been met;

6. THE DECISION of the Decision Makers under the Legislation is that:

6.1 the Prospectus and Registration Requirements shall not apply to theintended distribution by SAC of Non-Voting Shares to Associates or toRRSPs of which an Associate is the beneficiary, provided that the first tradeof any Non-Voting Share so acquired shall be a distribution, or its equivalent,in each Jurisdiction where such a concept applies; and

6.2 the Issuer Bid Requirement shall not apply to any repurchase of Non-VotingShares from Associates or RRSPs of which an Associate is the beneficiaryby SAC pursuant to the terms of the Governing Agreements, provided thatat the time of any repurchase there is no published market for the Non-Voting Shares.

DATED at Edmonton, Alberta January 14th, 2000.

"Eric T. Spink"     "Ian E.W. McConnan"