Securities Law & Instruments


Headnote

Subsection 74 (1) -Registration and prospectus relief granted in respect of trades inconnection with merger transaction in which exchangeable shares are issued wherestatutory exemptions are unavailable for technical reasons-first trade of securities ofUS public company issued on the exchange of exchangeable shares subject to section72 (5) and section 2.18 (3) of Rule 45-501 unless such trade is made through thefacilities of a stock exchange outside of Ontario or NASDAQ since US public companyis a non-reporting issuer and Ontario shareholders have a de minimus position

Statutes Cited

Securities Act, R.S.O. 1990, c.S.5, as am. sections 25, 53 ,72(5), 74(1)

Rules Cited

Rule 45-501 -Exempt Distributions


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


AND

IN THE MATTER OF
CRITICAL PATH, INC. AND THE DOCSPACE COMPANY INC.

RULING
(Subsection 74(1))


UPON the application of Critical Path, Inc. ("CP"), on its own behalf and onbehalf of The docSpace Company Inc. ("docSpace") to the Ontario SecuritiesCommission (the "Commission") for a ruling, pursuant to subsection 74(1) of the Act,that certain trades in securities made in connection with an acquisition (the"Transaction") of docSpace by CP pursuant to a merger agreement and plan ofreorganization (the "Merger Agreement") entered into as of November 3, 1999,between CP, Compass Holding Corp., Compass Acquisition Corp., 3034996 NovaScotia Company ("Holding ULC"), 3034997 Nova Scotia Company ("AmalgamationSub") and docSpace, shall not be subject to section 25 or 53 of the Act;

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

AND UPON CP and docSpace having represented to the Commission as follows:

1. CP was incorporated under the laws of the state of California on February 19, 1997.

2. Shares of CP common stock (the "CP Common Shares") are quoted on NASDAQ.CP will file with NASDAQ the required form of application for the listing of alladditional CP Common Shares issuable in connection with the Transaction,including pursuant to the exchange of all issuable Exchangeable Shares (as definedbelow), and will pay to NASDAQ all required fees in connection therewith. CP iscurrently subject to the informational requirements of the United States SecuritiesExchange Act of 1934, as amended (the "Exchange Act"). CP is not a "reportingissuer" under the Act or under the securities legislation of any province of Canada.

3. CP is a provider of full-service e-mail and messaging solutions to Internet serviceproviders, web hosting companies, web portals, telecommunications companies andcorporations.

4. CP's principal executive offices are located at 320 First Street, San Francisco,California, USA.

5. As of October 1, 1999, the authorized capital stock of CP consisted of50,000,000 CP Common Shares, no par value, of which 6,000,000 CP CommonShares were issued and outstanding, and 200,000,000 shares of Series A preferredstock (the "Series A Preferred Shares"), no par value, of which 79,268,080 Series APreferred Shares were issued and outstanding. As part of the Transaction, CP willissue a share of its newly created special voting stock (the "Special Voting Share")to a Canadian trust company (the "Trustee") in accordance with the Voting andExchange Trust Agreement (described below).

6. docSpace was amalgamated under the laws of the Province of Ontario on August 1,1999.

7. docSpace is a "private company" as defined in the Act, and is not a "reportingissuer" under the Act or under the securities legislation of any other province.

8. docSpace is in the business of providing web-based applications for secure filedelivery, storage and collection to Internet service providers, application serviceproviders and business outsource processing firms world-wide.

9. docSpace's principal executive offices are located at 156 Front Street West, Suite505, Toronto, Ontario, Canada.

10. The authorized capital of docSpace consists of an unlimited number of commonshares ("docSpace Common Shares"), of which 42 shares are issued andoutstanding as at the date hereof. Of the 61 holders of docSpace Common Shares,37 are resident in the Province of Ontario. Of the 61 holders of docSpace CommonShares, 40 are present employees of docSpace and 2 are ex-employees ofdocSpace. If the transaction was effected as a take-over bid it would be exemptunder the private issuer exemption set out in section 93(1)(d) the Act.

11. Compass Holding Corp. is a Delaware corporation and a wholly owned subsidiary ofCP and was formed on October 29, 1999, for the purpose of participating in theTransaction.

12. Compass Holding Corp. will hold all of the shares of Compass Acquisition Corp.

13. Compass Acquisition Corp. is a Delaware corporation and a wholly ownedsubsidiary of Compass Holding Corp. and was formed on October 25, 1999, for thepurpose of participating in the Transaction. Compass Acquisition Corp. will hold allof the shares of Holding ULC.

14. Holding ULC is a Nova Scotia unlimited liability company and a wholly ownedsubsidiary of Compass Acquisition Corp. and was formed on November 2, 1999, forthe purpose of participating in the Transaction.

15. The authorized capital of Holding ULC consists of 100,000,000 common shares,1,000 of which are issued and held by Compass Acquisition Corp.

16. Holding ULC will hold all of the shares of Amalgamation Sub and, following theSecond Amalgamation (as described and defined below), will hold all of thecommon shares of the company resulting from that amalgamation ("Exchangeco").Holding ULC will also hold certain call rights under the terms of the Class A non-voting preference shares of Exchangeco (the "Exchangeable Shares").

17. Amalgamation Sub is a Nova Scotia unlimited liability company and a wholly ownedsubsidiary of Holding ULC and was formed on November 2, 1999, for the purpose ofparticipating in the Transaction.

18. The authorized capital of Amalgamation Sub consists of 100,000,000 commonshares, 1,000 of which are issued and held by Holding ULC.

19. Pursuant to the Second Amalgamation (as described and defined below),Amalgamation Sub will amalgamate with docSpace ULC to form Exchangeco.

20. Exchangeco will be the surviving company after the amalgamation of docSpace ULCand Amalgamation Sub. The authorized capital of Exchangeco will consist of1,000,000,000  common shares (the "Exchangeco Common Shares"), all of whichwill be held indirectly by CP through Holding ULC, 1,000,000,000 ExchangeableShares and 1,000,000,000 Class B non-voting preference shares (the "Class BShares").

21. The Transaction requires, among other things, unanimous approval of theTransaction by docSpace security-holders by execution of a counterpart signaturepage to a Shareholder Implementation Agreement. Together with the ShareholderImplementation Agreement, docSpace security-holders will receive a DisclosureBinder which includes, among certain Transaction documents, certain informationregarding CP which has been made publicly available in accordance with theExchange Act.

22. Upon the initial closing of the Transaction, Holding ULC will acquire all of the issuedand outstanding docSpace Common Shares held by holders resident in the UnitedStates and holders who are United States persons ("U.S. Sellers"), in exchange forcash and CP Common Shares. The aggregate amount of purchase priceconsideration payable to each U.S. Seller for each docSpace Common Share heldby that U.S. Seller will be equal; however, the form of consideration (cash or shares)to be allocated to each U.S. Seller may be different.

23. Each of the docSpace shareholders who are not U.S. Sellers will be permitted toelect to contribute all of that shareholder's docSpace Common Shares to a holdingcompany (each, a "Holding Company") to be newly established to hold those shares(and the securities into which they are subsequently exchanged).

24. Pursuant to the amalgamation (the "First Amalgamation") of docSpace with a newlyformed wholly-owned Nova Scotia unlimited liability company to form an unlimitedliability company ("docSpace ULC"), each holder of a docSpace Common Share willreceive one common share in the capital of docSpace ULC (a "docSpace ULCCommon Share").

25. Pursuant to the amalgamation (the "Second Amalgamation") of docSpace ULC withAmalgamation Sub (the company formed being "Exchangeco"), each holder of adocSpace ULC Common Share will receive one Class B Share of Exchangeco andthe holder of Amalgamation Sub common shares will receive Exchangeco CommonShares.

26. Pursuant to the amendment of the memorandum and articles of association ofExchangeco (the "Reorganization"), all Class B Shares held by Holding ULC will beexchanged for Exchangeco Common Shares, all other Class B Shares will beexchanged for cash and Exchangeable Shares and the Voting and Exchange TrustAgreement will become effective. The aggregate amount of consideration receivedby each holder (other than Holding ULC) for each exchanged Class B Share held bythat holder will be equal; however, the form of consideration (cash or ExchangeableShares) to be received by each holder may be different.

27. The Exchangeable Shares, together with the Voting and Exchange TrustAgreement and Exchangeable Share Support Agreement described below, willprovide holders thereof with a security of a Canadian issuer having economic andvoting rights which are, as nearly as practicable, equivalent to those of a CPCommon Share. Exchangeable Shares will be received by certain Canadianholders of docSpace Common Shares on a Canadian tax-deferred rollover basis.The Exchangeable Shares will be exchangeable by a holder thereof for CPCommon Shares on a one-for-one basis at any time at the option of the holder andwill be required to be exchanged upon the occurrence of certain events, as morefully described below. Subject to applicable law, dividends will be payable on theExchangeable Shares contemporaneously and in the equivalent amount per shareas dividends on the CP Common Shares, although currently no dividends areanticipated to be paid on the CP Common Shares. The number of ExchangeableShares exchangeable for the CP Common Shares is subject to adjustment ormodification in the event of a stock split or other change to the capital structure ofCP so as to maintain at all times the initial one-to-one relationship between theExchangeable Shares and CP Common Shares.

28. The Exchangeable Shares will rank prior to the Class B Shares and the ExchangecoCommon Shares with respect to the payment of dividends and the distribution ofproperty or assets in the event of the liquidation, dissolution or winding-up ofExchangeco, whether voluntary of involuntary, or any other distribution of property orassets of Exchangeco among its shareholders for the purpose of winding-up itsaffairs. The rights, privileges, restrictions and conditions attaching to theExchangeable Shares (the "Exchangeable Share Provisions") will provide that eachExchangeable Share will entitle the holder to dividends from Exchangeco payableat the same time as, and equivalent to, each dividend paid by CP on a CP CommonShare; provided that in the case of a stock dividend declaration on the CP CommonShares, in lieu of declaring a corresponding stock dividend on the ExchangeableShares, the Board of Directors of Exchangeco may, in its discretion and subject toapplicable law, subdivide, redivide or change (the "subdivision") each issued andunissued Exchangeable Share on the basis that each Exchangeable Share beforethe subdivision becomes a number of Exchangeable Shares as is equal to the sumof (a) a CP Common Share and (b) the number of CP Common Shares to be paid asa stock dividend on each CP Common Share. The record date for the determinationof the holders of Exchangeable Shares entitled to receive Exchangeable Shares inconnection with any subdivision of Exchangeable Shares and the effective date ofthat subdivision will be the same dates as the record date and payment date,respectively, for the corresponding stock dividend declared on CP Common Shares.

29. The Exchangeable Shares will be non-voting (except as required by theExchangeable Share Provisions or by applicable law) and will be retractable at theoption of the holder at any time. Subject to the overriding retraction call right ofHolding ULC referred to below in this paragraph, upon retraction the holder will beentitled to receive from Exchangeco for each Exchangeable Share retracted anamount equal to the current market price of a CP Common Share on the lastbusiness day prior to the retraction date, to be satisfied by the delivery of one CPCommon Share, together with, on the designated payment date therefor, alldeclared and unpaid dividends on each such retracted Exchangeable Share held bythe holder on any dividend record date prior to the date of retraction (that aggregateamount, the "Retraction Price"). Upon being notified by Exchangeco of a proposedretraction of Exchangeable Shares, Holding ULC will have an overriding retractioncall right to purchase from the holder all of the Exchangeable Shares that are thesubject of the retraction notice for a price per share equal to the Retraction Price.

30. Subject to applicable law and the overriding redemption call right of Holding ULCreferred to below in this paragraph, Exchangeco will redeem all but not less than allof the then outstanding Exchangeable Shares five years after the initial closing dateof the Transaction (the "Redemption Date"). In certain circumstances the Board ofDirectors of Exchangeco may accelerate the Redemption Date. Upon thatredemption, a holder will be entitled to receive from Exchangeco for eachExchangeable Share redeemed an amount equal to the current market price of a CPCommon Share on the last business day prior to the Redemption Date, to besatisfied by the delivery of one CP Common Share, together with, on the designatedpayment date therefor, all declared and unpaid dividends on each redeemedExchangeable Share held by the holder on any dividend record date prior to theRedemption Date (that aggregate amount, the "Redemption Price"). Upon beingnotified by Exchangeco of a proposed redemption of Exchangeable Shares, HoldingULC will have an overriding redemption call right to purchase on the RedemptionDate all but not less than all of the then outstanding Exchangeable Shares (otherthan Exchangeable Shares held by affiliates of CP) for a price per share equal to theRedemption Price. Upon the exercise of the overriding redemption call right byHolding ULC, holders will be obligated to sell their Exchangeable Shares to HoldingULC.

If Holding ULC exercises its overriding redemption call right, Exchangeco's right andobligation to redeem the Exchangeable Shares on the Redemption Date willterminate.

31. Subject to the overriding liquidation call right of Holding ULC referred to below inthis paragraph, in the event of the liquidation, dissolution or winding-up ofExchangeco, holders of Exchangeable Shares will be entitled to put their shares toCP in exchange for CP Common Shares pursuant to the Voting and Exchange TrustAgreement (as described below). Upon a proposed liquidation, dissolution orwinding-up of Exchangeco, Holding ULC will have an overriding liquidation call rightto purchase from all but not less than all of the holders of Exchangeable Shares(other than Exchangeable Shares held by affiliates of CP) on the effective date ofsuch liquidation, dissolution or winding-up (the "Liquidation Date") all but not lessthan all of the Exchangeable Shares held by each such holder for a price per shareequal to the current market price of a CP Common Share on the last business dayprior to the Liquidation Date, to be satisfied by the delivery of one CP CommonShare, together with an additional amount equivalent to the full amount of alldeclared and unpaid dividends on each such Exchangeable Share held by suchholder on any dividend record date prior to the date of purchase by Holding ULC.

32. Upon the liquidation, dissolution or winding-up of CP, all Exchangeable Shares heldby holders (other than Exchangeable Shares held by affiliates of CP) will beautomatically exchanged for CP Common Shares pursuant to the Voting andExchange Trust Agreement (as described below), in order that holders ofExchangeable Shares will be able to participate in the dissolution of CP on a prorata basis with the holders of CP Common Shares.

33. Upon the exchange of an Exchangeable Share for a CP Common Share, the holderof the Exchangeable Share will no longer be a beneficiary of the trust created by theVoting and Exchange Trust Agreement that holds the Special Voting Share (asdescribed in greater detail below).

34. The Special Voting Share will be authorized for issuance pursuant to the MergerAgreement and, upon the initial closing, will be issued to the Trustee appointedunder the Voting and Exchange Trust Agreement. Except as otherwise required byapplicable law or the CP certificate of incorporation, the Special Voting Share will beentitled to the number of votes, exercisable at any meeting of the holders of CPCommon Shares, equal to the number of Exchangeable Shares outstanding fromtime to time not owned by CP and its affiliates. The holders of the CP CommonShares and the holder of the Special Voting Share will vote together as a singleclass on all matters, except as may be required by applicable law or the CPcertificate of incorporation. Holders of Exchangeable Shares will exercise the votingrights attached to the Special Voting Share through the mechanism of the Votingand Exchange Trust Agreement (described below). The holder of the Special VotingShare will not be entitled to receive dividends from CP and, in the event of anyliquidation, dissolution or winding-up of CP, will receive an amount equal to the parvalue thereof.

When the Special Voting Share has no votes attached to it because there are noExchangeable Shares outstanding not owned by CP and its affiliates, the SpecialVoting Share will be cancelled.

35. The Special Voting Share will be issued to and held by the Trustee for the benefit ofthe holders of the Exchangeable Shares outstanding from time to time (other thanCP and its affiliates) pursuant to a Voting and Exchange Trust Agreement to beentered into by CP, Exchangeco and the Trustee contemporaneously with the initialclosing of the Transaction and effective upon the Reorganization. Each voting rightattached to the Special Voting Share must be voted by the Trustee pursuant to theinstructions of the holder of the related Exchangeable Share. In the absence of anyinstructions from a holder as to voting, the Trustee will not be entitled to exercise therelated voting rights. Upon the exchange of all of a holder's Exchangeable Sharesfor CP Common Shares, all rights of that holder of Exchangeable Shares to instructthe Trustee to exercise votes attached to the Special Voting Share will cease.

36. Under the Voting and Exchange Trust Agreement, CP will grant to the Trustee forthe benefit of the holders of the Exchangeable Shares a right (the "ExchangeRight"), exercisable upon the insolvency of Exchangeco, to require CP to purchasefrom a holder of Exchangeable Shares all or any part of the Exchangeable Sharesheld by that holder. The purchase price for each Exchangeable Share purchasedby CP under the Exchange Right will be an amount equal to the current market priceof a CP Common Share on the last business day prior to the day of closing thepurchase and sale of that Exchangeable Share under the Exchange Right, to besatisfied by the delivery to the Trustee, on behalf of the holder, of one CP CommonShare, together with an additional amount equivalent to the full amount of alldeclared and unpaid dividends on that Exchangeable Share held by the holder onany dividend record date prior to the closing of the purchase and sale.

37. Under the Voting and Exchange Trust Agreement, upon the liquidation, dissolutionor winding-up of CP, CP will be required to purchase each outstandingExchangeable Share, and each holder will be required to sell the ExchangeableShares held by that holder (those purchase and sale obligations are hereafterreferred to as the "Automatic Exchange Right"), for a purchase price per share equalto the current market price of a CP Common Share on the fifth business day prior tothe effective date of the liquidation, dissolution or winding-up of CP, to be satisfiedby the delivery to the Trustee, on behalf of the holder, of one CP Common Share,together with an additional amount equivalent to the full amount of all declared andunpaid dividends on each such Exchangeable Share held by the holder on anydividend record date prior to the date of the exchange.

38. Contemporaneously with the initial closing of the Transaction and effective upon theReorganization, CP, Exchangeco and Holding ULC will enter into an ExchangeableShare Support Agreement which will provide: (a) that CP will not declare or pay anydividends on the CP Common Shares unless Exchangeco is able to declare andpay, and simultaneously declares and pays, as the case may be, an equivalentdividend on the Exchangeable Shares provided that in the case of a stock dividenddeclaration of the CP Common Shares, Exchangeco is able to subdivide andsubdivides each issued and unissued Exchangeable Share in the manner describedabove in lieu of declaring a corresponding stock dividend on the ExchangeableShares; (b) that CP will ensure that Exchangeco and Holding ULC will be able tohonour the redemption and retraction rights and dissolution entitlements that areattributes of the Exchangeable Shares under the Exchangeable Share Provisionsand the related redemption, retraction and liquidation call rights described above;and (c) that CP will cause Holding ULC to exercise its overriding retraction call rightif required to do so by a holder of Exchangeable Shares in the event that CPbecomes a "specified financial institution" (as that term is defined in the Income TaxAct (Canada)), or does not deal at arm's length with such a person.

39. The Exchangeable Share Support Agreement and the Exchangeable ShareProvisions will provide that, without the prior approval of Exchangeco and theholders of the Exchangeable Shares, CP will not issue or distribute additional CPCommon Shares, securities exchangeable for or convertible into or carrying rights toacquire CP Common Shares, rights, options or warrants to subscribe therefor,evidences of indebtedness or other assets, to all or substantially all holders of CPCommon Shares, nor will CP change the CP Common Shares, unless the same oran economically equivalent distribution on or change to the Exchangeable Shares(or in the rights of the holders thereof) is made simultaneously.

40. The steps under the Transaction and the attributes of the Exchangeable Sharescontained in the Exchangeable Share provisions, the Support Agreement, theVoting and Exchange Trust Agreement involve or may involve a number of trades ofsecurities, including trades related to the issuance of the Class B Shares,Exchangeable Shares and CP Common Shares pursuant to the Transaction or uponthe issuance of CP Common Shares in exchange for Exchangeable Shares. Theremay be no registration and prospectus exemptions available under the Act forcertain of the trades and possible trades in securities (collectively, the "Trades") towhich the Transaction gives rise.

41. Assuming the exchange of all Exchangeable Shares for CP Common Shares ,immediately after the completion of the Transaction , all persons or companies whoare resident in Ontario will not in aggregate hold of record or own beneficially morethan 10% of the issued and outstanding CP Common Shares or represent morethan 10% of the number of holders of CP Common Shares .

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

IT IS RULED pursuant to subsection 74(1) of the Act that, to the extent there are noexemptions available from the registration and prospectus requirements of the Act inrespect of any of the Trades, such Trades are not subject to sections 25 or 53 of the Act,provided that :

(i) the first trade in Exchangeable Shares other than the exchange thereof for CPCommon Shares shall be a distribution; and

(ii) the first trade in any CP Common Shares issued upon the exchange ofExchangeable Shares shall be a distribution unless:

(a) such trade is made in compliance with section 72(5) of the Act and section 2.18(3) ofOntario Securities Commission Rule 45-501 - Exempt Distributions as if thesecurities had been issued pursuant to one of the exemptions referenced in section72(5) of the Act; or

(b) such trade is executed through the facilities of a stock exchange outside of Ontarioor through NASDAQ and such trade is made in accordance with the rules of thestock exchange upon which the trade is made or the rules of NASDAQ inaccordance with all laws applicable to that stock exchange or applicable toNASDAQ.

February 18th, 2000.

"J. A. Geller"      "Robert W. Davis"