Securities Law & Instruments


Headnote

Subsection 74(1) - relief from sections 25 and 53 in respect of trades in connection withthe restructuring of existing investment in a related group of companies - investorshave significant net worth, are sophisticated and have access to professional andfinancial advice - first trades to be made in accordance with subsection 72(4), asmodified by section 3.10 of Rule 45-501 Exempt Distributions

Statutes Cited

Securities Act, R.S.O. 1990, c.S.5, as am., ss. 25, 35(1)5, 35(1)21, 53, 72(1)(d),72(1)(p), 72(4) and 74(1).

Regulations Cited

Regulation made under the Securities Act, R.R.O. 1990, Reg. 1015, as amended

Rules Cited

Ontario Securities Commission Rule 45-501 Exempt Distributions (1998), 21 OSCB6548.


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

AND

IN THE MATTER OF
PET VALU, INC., PET VALU CANADA INC. AND PVUS HOLDINGS INC.

RULING
(Subsection 74(1))

UPON the application of Pet Valu, Inc. ("PV U.S."), Pet Valu Canada Inc. ("PVCanada") and PVUS Holdings Inc. ("Holdco") (collectively the "Applicants") to the OntarioSecurities Commission (the "Commission") for a ruling, pursuant to section 74(1) of theAct, that certain trades in securities made in connection with a transaction involving PVU.S., PV Canada and Holdco shall not be subject to sections 25 or 53 of the Act, subjectto certain terms and conditions;

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

AND UPON the Applicants having represented to the Commission that:

1. PV Canada, a corporation continued under the laws of the Province of Ontario bycertificate and articles of arrangement dated April 23, 1996, is a subsidiary of PVU.S. and is a reporting issuer under the Act. To the best of its knowledge,information and belief, PV Canada is not in default of any requirement of the Act orthe regulations or rules made thereunder.

2. The authorized capital of PV Canada consists of an unlimited number of commonshares, an unlimited number of exchangeable shares, 7,000,000 class A convertiblepreferred shares, 176,845 class B convertible preferred shares and one class Cpreferred share. As at February 18, 2000, one common share (the "CommonShare"), 7,850,118 exchangeable shares (the "Exchangeable Shares") and1,454,396 class A convertible preferred shares of PV Canada were issued andoutstanding.

3. The outstanding Exchangeable Shares are listed on The Toronto Stock Exchange(the "TSE") and are exchangeable on a one-for-one basis into shares of CommonStock of PV U.S. (as hereinafter defined).

4. The Common Share is held by PV U.S.

5. PV U.S. is a corporation incorporated under the laws of the State of Delaware onFebruary 28, 1996, is not currently a registrant with the United States Securitiesand Exchange Commission under the United States Securities Exchange Act of1934, as amended, and is not a reporting issuer under the Act.

6. The authorized capital of PV U.S. consists of 20,000,000 shares of common stock(the "Common Stock"), one special non-participating voting share (the "SpecialVoting Share"), 9,626,274 shares of additional special non-participating votingstock (the "Additional Special Voting Stock"), and 100,000,000 shares of preferredstock (the "Preferred Stock"). The shares of Preferred Stock are retractable at theoption of the holder and redeemable at the option of PV U.S. at a price ofU.S.$0.0624, plus accrued and unpaid dividends. As of February 18, 2000, 100shares of Common Stock, 9,626,274 shares of Additional Special Voting Stock and100,000,000 shares of Preferred Stock were issued and outstanding.

7. In June 1998, PV U.S. distributed 100,000,000 shares of Preferred Stock, togetherwith 1,000,000 warrants (the "1998 Warrants", and, together with the PreferredStock, the "1998 Securities") to a group of investors (the "Investors"), for anaggregate offering price of US$6,250,000.

8. The 1998 Warrants currently entitle the holder to purchase one share of CommonStock or to obtain one Exchangeable Share from PV U.S. at an exercise price ofUS$4.55 per share of Common Stock or Exchangeable Share for a period of tenyears.

9. The Investors are comprised of forty-two separate investors. The 1998 Securitieswere distributed: (i) to twenty-seven of the Investors (the "Exempt Investors")pursuant to the registration exemption in paragraph 35(1)5 and the prospectusexemption in clause 72(1)(d) of the Act (collectively, the "Private PlacementExemptions") and; (ii) to fifteen of the Investors (the "Non-Exempt Investors')pursuant to the registration exemption in paragraph 35(1)21 and the prospectusexemption in clause 72(1)(p) of the Act (collectively, the "Seed CapitalExemptions").

10. Pursuant to a letter of intent dated April 30, 1999, as amended by letter agreementdated October 22, 1999 (the "Letter of Intent"), PV Canada issued a promissorynote (the "Promissory Note") to the Investors, who advanced, in aggregate,US$4,000,000 to PV Canada on July 9, 1999 (the "Bridge Loan").

11. The Promissory Note was distributed to the Exempt Investors in reliance upon thePrivate Placement Exemptions (as modified by section 3.1 of Commission Rule 45-501 Exempt Distributions ("Rule 45-501")), and to the Non-Exempt Investors inreliance upon the Seed Capital Exemptions (as modified by section 3.6 of Rule 45-501).

12. The purpose of the Bridge Loan was to afford PV Canada time to obtain analternate source of equity financing capital of US$10,000,000 or more during theterm of the Bridge Loan. PV Canada has been unable to obtain an alternate sourceof equity capital on acceptable terms.

13. Pursuant to the terms of the Letter of Intent, PV Canada had the option, at any timeprior to the repayment of the Bridge Loan, to convert the Bridge Loan into an equityinvestment by the Investors provided that, if PV Canada exercises that option, allof the 1998 Securities in PV U.S. be converted into long term debt and equity of PVCanada and PV U.S..

14. PV Canada has exercised the option under the Letter of Intent and, as part of aproposed transaction (the "Transaction") to convert the Bridge Loan and the 1998Securities into long term debt and equity of PV Canada and PV U.S., PV Canadaincorporated Holdco under the laws of the Province of Nova Scotia.

15. The authorized capital of Holdco consists of 2,000,000 common shares, 6,240,000class A preferred shares (the "Class A Shares") having an aggregate redemptionvalue of US$6,240,000 and 2,000,000 class B preferred shares (the "Class BShares"). The Class B Shares to be issued will have a redemption value equal tothe accrued and unpaid dividends on the Preferred Stock (approximatelyUS$856,735 as at February 18, 2000), will be redeemable on May 26, 2001 and willnot bear dividends.

16. Pursuant to the Transaction:

(a) PV Canada will issue to the Investors debentures in the aggregate principalamount of US$6,240,000 bearing an average annual interest rate of 7.95%per annum (the "7.95% Debentures") and debentures in the aggregateprincipal amount of US$3,994,871.85 bearing an average annual interestrate of 8.08% per annum (the "8.08% Debentures", and, together with the7.95 Debentures, the "PV Canada Debentures")(the consideration for whichis to be comprised of US$6,240,000 in cash and US$3,994,871.85 upondeemed conversion of the Bridge Loan);

(b) PV Canada and PV U.S. will issue an aggregate of 3,843,750 warrants(collectively, the "1999 Warrants") to the Investors for an aggregateconsideration of US$15,128.15. Each 1999 Warrant will entitle the holderto purchase either: (i) one Exchangeable Share during the 5 year periodfollowing closing for an exercise price of CDN$4.00 per ExchangeableShare; or (ii) one share of Common Stock during the 9 year period followingclosing for an exercise price of CDN$4.00 per share of Common Stock;

(c) Holdco will issue 6,240,000 Class A Shares to PV Canada for US$6,240,000in cash;

(d) the Investors will sell all of the Preferred Stock of PV U.S. (including theirrights in respect of accrued and unpaid dividends thereon) to Holdco forUS$6,240,000 in cash and the Holdco Class B Shares;

(e) PV U.S. will issue the one Special Voting Share to a trustee for the benefitof the Investors. The Special Voting Share will entitle the Investors toindirectly vote at meetings of shareholders of PV U.S. on the basis of onevote for each 1999 Warrant outstanding; and

(f) the 1998 Warrants will be returned by the Investors to PV U.S. and will becancelled by PV U.S.

(The PV Canada Debentures, the 1999 Warrants, the Class B Shares and the oneSpecial Voting Share are collectively referred to as the "1999 Securities").

17. The following trades and distributions (collectively, the "Trades") that are to takeplace pursuant to the Transaction are subject to the registration and prospectusrequirements of the Act, unless an exemption therefrom is available:

(a) the issue by PV Canada of the 7.95% Debentures to the Investors ("Trade#1");

(b) the issue by PV Canada of the 8.08% Debentures to the Investors ("Trade#2");

(c) the issue by PV Canada of the 1999 Warrants to the Investors ("Trade #3");

(d) the issue by PV U.S. of the 1999 Warrants to the Investors ("Trade #4");

(e) the issue by Holdco of Class A Shares to PV Canada ("Trade #5");

(f) the first trades by the Investors in Preferred Stock of PV U.S. to Holdco("Trade #6");

(g) the issue by Holdco of Class B Shares to the Investors ("Trade #7");and

(h) the issue by PV U.S. of the Special Voting Share to a trustee for the benefitof the Investors (Trade #8).

18. Trade #2 is exempt from the registration and prospectus requirements of the Actpursuant to the exemptions contained in paragraph 35(1)12(iii) and 72(1)(f)(iii) ofthe Act, respectively.

19. Trade #5 is exempt from the registration and prospectus requirements of the Actpursuant to the Private Placement Exemptions.

20. To the extent that Trades #1, #3, #4, #6, #7 and #8 involve the Exempt Investors,they are exempt from the registration and prospectus requirements of the Actpursuant to the Private Placement Exemptions (as modified by section 2.11 of Rule45-501).

21. To the extent that Trades #1, #3, #4, #6, #7 and #8 involve the Non-ExemptInvestors, they are not exempt from the registration and prospectus requirementsunder the Act.

22. All of the Non-Exempt Investors have an existing investment in PV U.S. and PVCanada as a result of the 1998 Investment and the Bridge Loan. The Tradesconstitute, in substance, a restructuring of the Non-Exempt Investors' existinginvestment in a related group of companies.

23. All of the Non-Exempt Investors have a significant net worth, are sophisticatedinvestors and have access to professional and financial advice.

24. PV U.S. held a special meeting (the "Meeting") of the holders of Common Stock ofPV U.S. (which holders of the Exchangeable Shares were invited to attend and atwhich they were entitled to exercise the voting rights applicable to theExchangeable Shares) on Monday, November 29, 1999 for purposes, inter alia, ofapproving the Transaction. The Transaction was described in the ManagementInformation Circular of PV U.S. dated October 22, 1999, a copy of which wasdelivered to the holders of Common Stock of PV U.S. and to the holders of theExchangeable Shares. At the Meeting, the Transaction was approved by a majorityof the disinterested shareholders voting thereon.

25. The PV Canada Debentures, the 1999 Warrants and the Class B Shares will beheld either directly by the Investors or by a bank listed in Schedule I to the Bank Act(Canada) or a trust corporation registered under the Loan and Trust CorporationsAct as custodian.

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

IT IS RULED, pursuant to Section 74(1) of the Act, that Trade #1, Trade #3, Trade#4, Trade #6, Trade #7 and Trade #8 to the Non-Exempt Investors are not subject tosections 25 and 53 of the Act, provided that each first trade in any 1999 Securitiesacquired by a Non- Exempt Investor pursuant to this ruling shall be a distribution unlesssuch trade is made in accordance with the provisions of subsection 72(4) of the Act, asmodified by section 3.10 of Rule 45-501, as if the security had been acquired pursuant toone of the exemptions referenced in subsection 72(4) of the Act, except that, for thesepurposes, it shall not be necessary to satisfy the requirement in clause 72(4)(a) that theissuer not be in default of any requirement of the Act or the regulations if the seller is notin a special relationship with the issuer, or, if the seller is in a special relationship with theissuer, the seller has reasonable grounds to believe that the issuer is not in default underthe Act or the regulations, where, for these purposes, "special relationship" shall have thesame meaning as in Commission Rule 14-501.

March 3rd, 2000.

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