Securities Law & Instruments


Headnote

Subsection 74(1) - Registration and prospectus relief granted in respect of trades inexchangeable securities of non-reporting Canadian issuer, common shares of reportingU.S. issuer and grant of various rights attached to the exchangeable securities - firsttrade relief granted in respect of trades in exchangeable securities and underlyingcommon shares received upon exercise of rights attached to the exchangeablesecurities.

Statutes Cited

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

Rules Cited

Rule 45-501 - Exempt Distributions, (1998), 21 OSCB 6548.

Rule 72-501 - Prospectus Exemption for First Trade over a Market Outside Ontario,(1998) 21 OSCB 3873.


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

AND

IN THE MATTER OF
SOFTQUAD SOFTWARE INC.

AND

IN THE MATTER OF
SOFTQUAD ACQUISITION CORP.

AND

IN THE MATTER OF
THE AMERICAN SPORTS MACHINE, INC.

RULING
(Subsection 74(1))


UPON the application of Softquad Software Inc. ("Softquad Canada"), SoftquadAcquisition Corp. ("Softquad Acquisition") and The American Sports Machine Inc.("Softquad U.S.") to the Ontario Securities Commission (the "Commission") for a rulingpursuant to subsection 74(1) of the Act that certain trades in securities made in connectionwith or resulting from the proposed share exchange (the "Share Exchange") to beundertaken in connection with the acquisition by Softquad U.S. of all of the issued andoutstanding common shares of Softquad Canada pursuant to a securities exchangetake-over bid (which take-over bid will be exempt from the requirements of Part XX of theAct by virtue of clause 93(1)(d) of the Act) are exempt from sections 25 and 53 of the Act;

AND UPON considering the applications and the recommendations of the staff ofthe Commission;

AND UPON Softquad Canada, Softquad Acquisition and Softquad U.S. havingrepresented to the Commission the following:

1. Softquad Canada is a corporation incorporated under the laws of the Province ofOntario and is a private company within the meaning of the Act and is not areporting issuer under the Act.

2. Softquad Canada's registered office is located at 161 Eglinton Avenue East, Suite44, Toronto, Ontario M4P 1J5.

3. The authorized capital of Softquad Canada consists of an unlimited number ofcommon shares ("Softquad Canada Common Shares"), of which 9,209,275 areissued and outstanding. In addition, there are options outstanding to acquire1,856,000 Softquad Canada Common Shares.

4. As at the date hereof, Softquad Canada Common Shares are held by elevenshareholders. Three of those eleven shareholders, holding 4,447,565 (orapproximately 48.3% of the issued and outstanding Softquad Canada CommonShares) are not Canadian residents.

5. Softquad Acquisition is a corporation incorporated under the laws of the Provinceof Ontario and is a private company within the meaning of the Act and is not areporting issuer under the Act.

6. Softquad Acquisition's registered office is located at 161 Eglinton Avenue East,Suite 400, Toronto, Ontario M4P 1J5.

7. The authorized capital of Softquad Acquisition consists of an unlimited number ofcommon shares, an unlimited number of preferred shares and an unlimited numberof exchangeable shares (the "Exchangeable Shares"), of which one common shareis issued and outstanding. The outstanding common share of Softquad Acquisitionis held by Softquad U.S.

8. Softquad Acquisition is a special subsidiary of Softquad U.S. incorporated tofacilitate the Share Exchange.

9. Softquad U.S. is a corporation incorporated under the laws of the State of Florida.

10. Softquad U.S.'s registered office is located at 222 Lakeview Avenue, Suite 160-146,West Palm Beach, Florida, U.S.A.

11. The authorized capital of Softquad U.S. consists of 50,000,000 common shares("Softquad U.S. Common Shares"), 10,000,000 shares of preferred stock("Preferred Stock"), of which 1,473,405 shares have been designated as "Class AConvertible Preferred Stock" and 1,722,222 shares have been designated as"Class B Convertible Preferred Stock", and one share of special voting stock("Special Voting Stock"), of which 3,936,703 Softquad U.S. Common Shares,1,473,405 shares of Class A Convertible Preferred Stock, 1,722,222 shares ofClass B Convertible Preferred Stock and one share of Special Voting Stock areissued and outstanding. In addition to the foregoing, Softquad U.S. has issuedshare purchase warrants to purchase up to an aggregate of 1,804,699 SoftquadU.S. Common Shares.

12. The Softquad U.S. Common Shares are quoted on the Nasdaq OTC Bulletin BoardService. Softquad U.S. is currently subject to the informational reportingrequirements of the United States Securities Exchange Act of 1934, as amended.Softquad is not a reporting issuer under the Act, or under the securities legislationof any province of Canada.

13. The terms of the Share Exchange are set forth in an acquisition agreement (the"Acquisition Agreement") dated December 16, 1999 among Softquad Canada,Softquad Acquisition and Softquad U.S. The Share Exchange will be effected byway of the execution and delivery of a share purchase agreement betweenSoftquad U.S. and/or Softquad Acquisition and each of the shareholders ofSoftquad Canada pursuant to the Acquisition Agreement. Under the ShareExchange, each Softquad Canada Common Share will be exchanged for oneSoftquad U.S. Common Share or one Exchangeable Share (depending on thejurisdiction of residence of the shareholder). In addition, all of the outstandingSoftquad Canada options, whether vested or not vested, will be effectivelyexchanged for options to acquire Softquad U.S. Common Shares on substantiallythe same terms.

14. Each Exchangeable Share will be exchangeable at any time by the holder thereoffor Softquad U.S. Common Shares, on a one-for-one basis.

15. The Exchangeable Shares will provide holders thereof with a security of theCanadian issuer have economic and voting rights which are, as nearly aspracticably possible, equivalent to those attaching to Softquad U.S. CommonShares. Exchangeable Shares will generally be received for Canadian taxpurposes on a tax-deferred rollover basis.

16. Each Exchangeable Share will entitle the holder thereof to voting rights in SoftquadU.S. which are equivalent to the voting rights attached to one Softquad U.S.Common Share. In addition, holders of Exchangeable Shares will be entitled toreceive dividends equivalent to the dividends paid on Softquad U.S. CommonShares.

17. Contemporaneously with the implementation of the Share Exchange, Softquad U.S.will issue a new non-participating special voting share (the "Softquad U.S. SpecialVoting Share") to an independent trustee (the "Trustee") for the benefit of theholders of the Exchangeable Shares. The Trustee will hold the Softquad U.S.Special Voting Share pursuant to the terms of a voting and exchange trustagreement to be entered into among Softquad Canada, Softquad Acquisition,Softquad U.S. and the Trustee (the "Trust Agreement"). The Trustee, as theregistered holder of the Softquad U.S. Special Voting Share, will be entitled atshareholder meetings of Softquad U.S. at which holders of Softquad U.S. CommonShares are entitled to vote to a number of votes equal to that number of votes whichthe holders of Exchangeable Shares (excluding Softquad U.S. and its subsidiaries)outstanding at such time would be entitled if they exchanged all of theirExchangeable Shares for Softquad U.S. Common Shares. These voting rights willbe exercised by the Trustee upon receipt of instructions from the holders ofExchangeable Shares (other than Softquad U.S. and its subsidiaries).Contemporaneously with the implementation of the Share Exchange, Softquad U.S.and Softquad Acquisition will also enter into a support agreement (the "SupportAgreement") which will provide, among other things, that Softquad U.S. will notdeclare or pay any dividends on the Softquad U.S. Common Shares unlessSoftquad Acquisition has sufficient resources available to declare and pay, andSoftquad Acquisition simultaneously declares and pays, equivalent dividends onthe Exchangeable Shares in accordance with the provisions attaching to theExchangeable Shares.

18. Upon the liquidation, dissolution or winding-up of Softquad Acquisition, each holderof Exchangeable Shares will be entitled to receive one Softquad U.S. CommonShare for each Exchangeable Share held. In addition, upon the occurrence ofcertain events, including the liquidation, dissolution or winding-up of Softquad U.S.,the Exchangeable Shares will be exchanged for Softquad U.S. Common Shares.

19. The Exchangeable Shares will rank prior to the common shares in the capital ofSoftquad Acquisition and shares of any other class ranking junior to theExchangeable Shares with respect to the payment of dividends and the distributionof assets in the event of a liquidation, dissolution or winding-up of SoftquadAcquisition. Each Exchangeable Share will be entitled to dividends from SoftquadAcquisition payable at the same time as, and in the Canadian dollar equivalent of,dividends payable by Softquad U.S. on each Softquad U.S. Common Share.Subject to the overriding call right of Softquad U.S. referred to below, upon theliquidation, dissolution or winding-up of Softquad Acquisition, all holders ofExchangeable Shares will be entitled to receive from Softquad Acquisition for eachsuch share an amount (the "Liquidation Amount") equal to the market price of oneSoftquad U.S. Common Share on the liquidation date, which will be satisfied by thedelivery of Softquad U.S. Common Shares, together with an additional amountequivalent to the declared and unpaid dividends on each Exchangeable Share andall dividends and distributions declared on a Softquad U.S. Common Share thathave not been declared on each Exchangeable Share with a record date prior to theeffective date of the exchange. Notwithstanding the foregoing, upon any proposedliquidation, dissolution or winding-up of Softquad Acquisition, Softquad U.S. and/ora special purpose wholly-owned subsidiary of Softquad U.S. ("Canco") will have anoverriding call right (the "Liquidation Call Right") to purchase outstandingExchangeable Shares, except for those held by Softquad U.S. and its subsidiaries,at a price per share equal to the Liquidation Amount.

20. The Exchangeable Shares will be non-voting and will be retractable at the optionof the holder thereof at any time. Subject to the overriding call right of SoftquadU.S. referred to below, upon retraction the holders will be entitled to receive fromSoftquad Acquisition for each such share an amount (the "Retraction Amount")equal to the market price of one Softquad U.S. Common Share on the retractiondate, which will be satisfied by the delivery of Softquad U.S. Common Shares,together with an additional amount equivalent to the full amount of all declared andunpaid dividends on each retracted Exchangeable Share and all dividends anddistributions declared on a Softquad U.S. Common Share that have not beendeclared on each Exchangeable Share with a record date prior to the record dateof the exchange. Notwithstanding the foregoing, upon being notified by SoftquadAcquisition of a proposed retraction by a holder of Exchangeable Shares, SoftquadU.S. and/or Canco will have an overriding call right (the "Retraction Call Right") topurchase the Exchangeable Shares, except for those held by Softquad U.S. and itssubsidiaries, that are subject of the proposed retraction for a price per share equalto the Retraction Amount.

21. Subject to the overriding redemption call right of Softquad U.S. referred to below,Softquad Acquisition may redeem all of the Exchangeable Shares remainingoutstanding anytime on or after the fourth anniversary of the issuance (the"Automatic Redemption Date"). Upon a redemption by Softquad Acquisition on theAutomatic Redemption Date, the holders of Exchangeable Shares will be entitledto receive from Softquad Acquisition for each Exchangeable Share redeemed anamount (the "Redemption Amount") equal to the market price of one Softquad U.S.Common Share on the Automatic Redemption Date, which shall be satisfied by thedelivery of Softquad U.S. Common Shares, together with an additional amountequivalent to the full amount of all declared and unpaid dividends on eachExchangeable Share and all dividends and distributions declared on a SoftquadU.S. Common Share that have not been declared on each Exchangeable Sharewith a record date prior the effective date of the exchange. Notwithstanding theforegoing, Softquad U.S. and/or Canco will have an overriding call right (the"Redemption Call Right") to purchase on the last business day prior to theAutomatic Redemption Date all of the Exchangeable Shares, except for those heldby Softquad U.S. and its subsidiaries, at a price per share equal to the RedemptionAmount.

22. The Liquidation Call Right, the Retraction Call Right and the Redemption Call Rightare not transferable by their terms (except as between Softquad U.S. and Canco).

23. In the event of the liquidation, dissolution or winding-up of Softquad U.S. theExchangeable Shares will be automatically exchanged for an equivalent number ofSoftquad U.S. Common Shares so that the holders of Exchangeable Shares mayparticipate in the dissolution, liquidation or winding-up of Softquad U.S. on thesame basis as the holders of Softquad U.S. Common Shares.

24. Upon the exchange of Exchangeable Shares, the holder will no longer be abeneficiary of the trust that holds the Softquad Special Voting Share (see paragraph24 below).

25. The Softquad U.S. Special Voting Share will carry a number of voting rights,including rights exercisable at any meeting of the holders of Softquad U.S. CommonShares, equal to the number of Exchangeable Shares outstanding on the recorddate established for any such meeting (excluding the number of ExchangeableShares owned by Softquad U.S. and its subsidiaries). The holders of Softquad U.S.Common Shares and the holders of Exchangeable Shares (other than SoftquadU.S. and its subsidiaries) will vote together as a single class on all matters unlessotherwise required by applicable law. Holders of Exchangeable Shares (other thanSoftquad U.S. and its subsidiaries) will exercise the voting rights attached to theSoftquad U.S. Special Voting Shares through the mechanism of the TrustAgreement described below. The Softquad U.S. Special Voting Shares will not beentitled to dividends and will not participate on the dissolution, liquidation orwinding-up of Softquad U.S. At such time as the Softquad U.S. Special VotingShare has no votes attached to it because there are no Exchangeable Sharesoutstanding that are not owned by Softquad U.S. and its subsidiaries, the SoftquadU.S. Special Voting Share will be cancelled.

26. On the date of implementation of the Share Exchange, Softquad U.S., SoftquadAcquisition and Softquad Canada and the Trustee will enter into the TrustAgreement which will provide, inter alia, that the Softquad U.S. Special VotingShare will be held by the Trustee for the benefit of the holders of ExchangeableShares from time to time (other than Softquad U.S. and its subsidiaries) and eachvoting right attached thereto will be voted in accordance with the instructionsreceived from such holders of Exchangeable Shares. In the absence of anyinstructions received from such holder of Exchangeable Shares, the voting rightsto which such holder is entitled will not be exercised. Upon the exchange ofExchangeable Shares for Softquad U.S. Common Shares, all rights of the holderof Exchangeable Shares to exercise votes attaching to the Softquad U.S. SpecialVoting Share will be terminated.

27. Pursuant to the Trust Agreement, Softquad U.S. will grant the Trustee for thebenefit of the holders of the Exchangeable Shares a put right (the "ExchangeRight") exercisable upon the insolvency of Softquad Acquisition. The ExchangeRight, when exercised, will require Softquad U.S. to purchase from each holder ofExchangeable Shares all or any part of the Exchangeable Shares held by suchholder. The purchase price for each Exchangeable Share purchased by SoftquadU.S. will be an amount (the "Exchange Amount") equal to the market price of oneSoftquad U.S. Common Share on the date of closing the purchase under theExchange Right which will be satisfied by the delivery of a Softquad U.S. CommonShare, together with an additional amount equivalent to the full amount of alldeclared and unpaid dividends on each Exchangeable Share and all dividends anddistributions declared on a Softquad U.S. Common Share that have not beendeclared on each Exchangeable Share with the record date prior to the effectivedate of the exchange.

28. In the event of a voluntary or involuntary liquidation, dissolution or winding-up ofSoftquad U.S., on the fifth business date prior to the effective date of the liquidation,dissolution or winding-up of Softquad U.S., each outstanding Exchangeable Share(except for those held by Softquad U.S. or any of its subsidiaries) will beautomatically exchanged (the "Automatic Exchange Right") for a Softquad U.S.Common Share.

29. The Trust Agreement also provides that in the event a tender offer, share exchangeoffer, issuer bid, take-over bid or similar transaction with respect to Softquad U.S.Common Shares (collectively, an "Offer") is to be effected with the consent orapproval of the board of directors of Softquad U.S., Softquad U.S. will use allreasonable efforts expeditiously and in good faith to take all such actions and to doall such things as are necessary or desirable to enable each holder ofExchangeable Shares to participate in such Offer on an economically equivalentbasis as the holders of Softquad U.S. Common Shares.

30. On the effective date of the Share Exchange, Softquad U.S. and SoftquadAcquisition will enter into a Support Agreement which will provide, inter alia, thatSoftquad U.S. will:

(a) not declare or pay any dividends on the Softquad U.S. Common Sharesunless (i) Softquad Acquisition has sufficient assets available to payequivalent dividends on the Exchangeable Shares, and (ii) SoftquadAcquisition simultaneously declares or pays such equivalent dividends onthe Exchangeable Shares;

(b) take all action and do all things as are necessary or desirable to enableSoftquad Acquisition to honour the redemption and retraction rights anddissolution entitlements that are attributes of the Exchangeable Shares; and

(c) not reorganize its capital in a manner affecting the Softquad U.S. CommonShares or make certain distributions on the Softquad U.S. Common Sharesunless an economically equivalent change is made to, or benefit is conferredupon, the holders of the Exchangeable Shares.

31. The trades and possible trades in securities to which the Share Exchange gives riseare as follows:

(a) the issuance by Softquad U.S. (or trade by Softquad Acquisition) of SoftquadU.S. Common Shares to non-Canadian shareholders of Softquad Canada;

(b) the trade by non-Canadian resident shareholders of Softquad Canada ofSoftquad Canada Common Shares to Softquad U.S. (or SoftquadAcquisition);

(c) the issuance by Softquad Acquisition of Exchangeable Shares toCanadian-resident shareholders of Softquad Canada;

(d) the trade by Canadian-resident holders of Softquad Canada of SoftquadCanada Common Shares to Softquad Acquisition;

(e) the termination of options to acquire Softquad Canada Common Shares andthe grant by Softquad U.S. of options to acquire Softquad U.S. CommonShares;

(f) the issuance of Softquad U.S. Common Shares on the exercise of SoftquadU.S. options;

(g) the creation in favour of Softquad U.S. and Canco of the Liquidation CallRight, the Redemption Call Right and the Retraction Call Right providingrights to purchase Exchangeable Shares from the holders thereof. Suchrights are contained in the articles of Softquad Acquisition.

(h) the issuance of the Softquad U.S. Special Voting Share to the Trusteepursuant to the Trust Agreement;

(i) the issuance of Softquad U.S. Common Shares on behalf of SoftquadAcquisition upon retraction of the Exchangeable Shares by the holdersthereof;

(j) the issuance of Softquad U.S. Common Shares by Softquad U.S. (or tradeof such shares by its wholly-owned subsidiary, by Canco) to holders ofExchangeable Shares pursuant to the exercise by Softquad U.S. (or Canco)of the Retraction Call Right;

(k) the issuance of Softquad U.S. Common Shares on behalf of SoftquadAcquisition to holders of Exchangeable Shares upon the redemption ofExchangeable Shares on the Automatic Redemption Date;

(l) the issuance of Softquad U.S. Common Shares (or trade of such shares byits wholly-owned subsidiary, Canco) to holders of Exchangeable Sharespursuant to the exercise by Softquad U.S. (or Canco) of the Redemption CallRight;

(m) the issuance of Softquad U.S. Common Shares on behalf of SoftquadAcquisition to holders of Exchangeable Shares following a liquidation ofSoftquad Acquisition;

(n) the issuance of Softquad U.S. Common Shares (or trade of such shares byits wholly-owned subsidiary, Canco) to holders of Exchangeable Sharespursuant to the exercise by Softquad U.S. (or Canco) of the Liquidation CallRight;

(o) the grant, pursuant to the Trust Agreement, to the holders of ExchangeableShares of the Exchange Right, the Automatic Exchange Right and VotingRights in Softquad U.S.

(p) the issuance of Softquad U.S. Common Shares by Softquad U.S. holders ofExchangeable Shares pursuant to the obligations of Softquad U.S. under theExchange Right and the Automatic Exchange Right;

(q) the trade by holders of Exchangeable Shares to Softquad Acquisitionpursuant to trades (i), (k) and (m) above;

(r) the trade by holders of Exchangeable Shares to Softquad U.S. (or Canco)pursuant to trades (j), (l), (n) and (p) above; and

(s) the issuance by Softquad Acquisition pursuant to the Trust Agreement toSoftquad U.S. of Softquad Acquisition common shares in consideration ofthe Softquad U.S. Common Shares issued by Softquad U.S. following aretraction, redemption or dissolution as described in trades (i), (k) and (m)above or in other circumstances under the Share Exchange where SoftquadAcquisition transfers and directs Softquad U.S. to issue Softquad U.S.Common Shares to shareholders of Softquad Canada or SoftquadAcquisition.

(collectively, the "Trades").

32. Ontario residents holding Exchangeable Shares and Softquad U.S. CommonShares will possess an economic interest in Softquad U.S. Common Sharesrepresenting more than 10% of the total issued and outstanding Softquad U.S.Common Shares as of the date of the Share Exchange.

33. All disclosure materials furnished to the holders of the Softquad U.S. CommonShares resident in the United States will be concurrently furnished to the holdersof Exchangeable Shares resident in the Province of Ontario.

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

IT IS RULED, pursuant to subsection 74(1) of the Act that the Trades to or fromOntario residents or the Trustee made in connection with the Share Exchange are notsubject to sections 25 and 53 of the Act provided that:

1. Softquad Acquisition or Softquad U.S. shall provide each recipient orproposed recipient of Exchangeable Shares or Softquad U.S. CommonShares resident in Ontario with an explanation of the limitations imposedupon the disposition of such securities; and

2. the first trade in any securities acquired pursuant to this ruling (or uponexchange, retraction or redemption of the Exchangeable Shares) shall be adistribution unless:

(a) with respect to Exchangeable Shares and Softquad U.S. CommonShares, such trade is made in accordance with subsection 72(5) ofthe Act and section 2.18(3) of the Ontario Securities CommissionRule 45-501 - Exempt Distributions as if the securities had beenissued pursuant to one of the exemptions referenced in section 75(2)of the Act; or

(b) with respect to Softquad U.S. Common Shares, such trade is madein accordance with Rule 72-501 Prospectus Exemption for First TradeOver a Market Outside Ontario as if the security were a restrictedsecurity as defined in Rule 72-501, except for the requirement insubsection 2.1(b) of Rule 72-501, provided that Ontario residentsholding Exchangeable Shares and Softquad U.S. Common Shares donot hold economic interests in more than 10 percent of theoutstanding Softquad U.S. Common Shares and do not represent innumber more than 10 percent of the total number of holders ofSoftquad U.S. Common Shares at the time the first trade is made.

March 7th, 2000.

"J. A. Geller"      "K. D. Adams"