Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications - Employee retentionagreements to be entered into between offerors and offeree securityholders who are alsosenior officers or directors of the offeree - Such agreements being entered into for reasonsother than to increase the value of the consideration paid to the selling securityholders fortheir shares and may be entered into, notwithstanding the prohibition on collateralagreements

Order made exempting the offerors from the requirement that all holders be offeredidentical consideration - Offerors are wholly-owned subsidiaries of New York corporation -Offerors offering Canadian offerees exchangeable shares of one of the offerors, or at eachofferee's option, cash - Non-Canadian offerees permitted to elect cash or common sharesof the offerors' U.S. parent - Exchangeable shares offered to Canadian offerees areeconomically equivalent to the common shares of the offerors' parent

Securities exchange take-over bid - Offerors exempted from the requirement to providedisclosure prescribed by the form of prospectus appropriate for the offerors and U.S.parent whose securities are being offered as consideration under the bid - Offerors alsoexempted from the requirement to provide pro forma disclosure giving effect to theexchange of securities contemplated by the bid - Exchangeable shares to be offered toCanadian offerees economically equivalent to common shares of U.S. parent of offerors -All information material to business of U.S. parent and relevant to persons considering aninvestment in the exchangeable shares or underlying common shares of the U.S. parentto be contained in, or incorporated by reference into, the take-over bid circular - U.S.parent is a very large, seasoned issuer subject to U.S. securities laws - Acceptance byCanadian offerees of exchangeable shares and the subsequent exercise of the exchangeright would result in the Canadian offerees holding less than 0.09% of the outstandingcommon shares of the U.S. parent - Offerors also exempted from the requirement toreconcile financial statements included in the take-over bid circular to Canadian generallyaccepted accounting principles

Applicable Ontario Statutory Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 97, 98, 104(2)(a) and (c)

Applicable Ontario Regulations

Regulation made under the Securities Act, R.R.O. 1990, Reg. 1015, as am., ss. 1(4), 53,57, 58, 189 and item 15 of Form 32


IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA, ONTARIO,QUEBEC, NOVA SCOTIA AND NEWFOUNDLAND

AND

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

AND

IN THE MATTER OF
IBM CANADA LIMITED AND INTERNATIONAL BUSINESS MACHINES CORPORATION

AND

IN THE MATTER OF
LGS GROUP INC.


WHEREAS the local securities regulatory authority or regulator (the "DecisionMaker") in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec,Nova Scotia and Newfoundland (collectively, the "Jurisdictions") has received anapplication from IBM Canada Limited ("IBM Canada") and International Business MachinesCorporation ("IBM") for a decision pursuant to the securities legislation of the Jurisdictions(the "Legislation") that, in connection with the proposed offers (the "Offers") by IBMAcquisition Inc. ("AcquisitionCo") and IBM Acquisition II L.L.C. ("US BuyCo" and,collectively with AcquisitionCo, the "Offeror") to purchase all of the issued and outstandingClass A Subordinate Voting Shares (the "Class A Shares") and Class B Multiple VotingShares (the "Class B Shares" and, collectively with the Class A Shares, the "LGS Shares")of LGS Group Inc. ("LGS") in exchange for consideration consisting of $19.00 per LGSShare (the "Purchase Price"):

(1) the Offeror shall be exempt from the requirement in the Legislation to offer allholders of the same class of securities identical consideration (the "IdenticalConsideration Requirement"), insofar as holders of LGS Shares who are normallyresident in Canada (collectively, the "Canadian Shareholders") who accept an Offerwill be entitled to elect between receiving the Purchase Price in the form of cash(the "Cash Option") or in the form of exchangeable shares (the "ExchangeableShares") of AcquisitionCo (the "Exchangeable Share Option"), while all otherholders of LGS Shares (collectively, the "Non-Canadian Shareholders" and,together with the Canadian Shareholders, the "Shareholders") who accept an Offerwill be entitled to elect between the Cash Option and receiving the Purchase Pricein the form of Common Shares (the "IBM Common Shares") of IBM (the "US ShareOption");

(2) despite the provision in the Legislation that prohibits an offeror who makes orintends to make a take-over bid or issuer bid and any person acting jointly or inconcert with the offeror from entering into any collateral agreement, commitmentor understanding with any holder or beneficial owner of securities of the offereeissuer that has the effect of providing to the holder or owner a consideration ofgreater value than that offered to other holders of the same class of securities (the"Prohibition on Collateral Agreements"), certain agreements (collectively, the"Retention Agreements") to be entered into with certain employees of LGS who alsohold LGS Shares (collectively, the "Key Executives") are made for reasons otherthan to increase the value of the consideration paid to such Key Executives for theLGS Shares they hold and may be entered into;

(3) the Offeror shall be exempted from the requirements in the Legislation (collectively,the "Prospectus Disclosure Requirements") that require an offeror making a take-over bid and offering as consideration securities of its own issue or those of anotherissuer to include in its take-over bid circular:

(a) the information prescribed by the form of prospectus appropriate for theofferor or other issuer, including the financial statements of the offeror orother issuer; and

(b) where the form of prospectus so requires, a pro forma balance sheet andincome statement of the offeror giving effect to the exchange of thesecurities contemplated by the take-over bid as at the date of the mostrecent balance sheet of the offeror that is included in the circular and basedupon the most recent audited financial statements of the offeree issuer (the"Pro Forma Financial Statements"), a description of the basis of preparationof the Pro Forma Financial Statements and the basic and fully dilutedearnings per share based upon the Pro Forma Financial Statements; and

(4) the Offeror shall be exempted from the requirement in the Legislation (the "GAAPReconciliation Requirement") that requires the financial statements of an issuerincorporated or organized other than in Canada or a province or territory thereofand included in a take-over bid circular pursuant to the Prospectus DisclosureRequirements to include notes that explain and quantify any significant differencesbetween the generally accepted accounting principles prescribed in theincorporating jurisdiction and applied in respect of such financial statements andgenerally accepted accounting principles determined with reference to theHandbook of the Canadian Institute of Chartered Accountants;

AND WHEREAS pursuant to the Mutual Reliance Review System for ExemptiveRelief Applications (the "System"), the Ontario Securities Commission is the principalregulator for this application;

AND WHEREAS IBM Canada and the Parent have represented to the DecisionMakers as follows:

1. IBM Canada is a corporation governed by the Canada Business Corporations Act(the "CBCA"). IBM Canada is an indirect, wholly-owned subsidiary of IBM. IBMCanada is not, and presently does not intend to become, a reporting issuer or theequivalent in any of the provinces or territories of Canada.

2. IBM is a corporation governed by the laws of the State of New York. Its authorizedcapital consists of 150,000,000 shares of preferred stock (the "IBM PreferredShares") and 4,687,500,000 IBM Common Shares. As of March 1, 2000, IBM hadissued and outstanding 2,546,011 IBM Preferred Shares and 1,793,760,770 IBMCommon Shares.

3. The IBM Common shares are listed for trading on the New York Stock Exchange(the "NYSE"), the Chicago Stock Exchange and the Pacific Stock Exchange. TheIBM Preferred Shares are listed on the NYSE.

4. On March 14, 2000, the closing price of the IBM Common Shares on the NYSE wasU.S. $109 per IBM Common Share. Based upon such closing price, IBM had amarket capitalization in excess of U.S. $195 billion on such date.

5. IBM is a registrant under the Securities Act of 1933 (United States) (the "1933 Act")and is subject to the continuous disclosure requirements of the Securities ExchangeAct of 1934 (United States) (the "Exchange Act"). IBM is not, and presently doesnot intend to become, a reporting issuer or the equivalent in any province orterritory in Canada.

6. AcquisitionCo was incorporated under the CBCA on March 10, 2000 for thepurposes of making the Offers. AcquisitionCo is a wholly-owned indirect subsidiaryof IBM.

7. 3040696 Nova Scotia Company ("ParentCo") is an unlimited liability companyincorporated under the Companies Act (Nova Scotia). ParentCo is a wholly-ownedindirect subsidiary of IBM and the direct parent of AcquisitionCo.

8. US BuyCo was formed under the laws of Delaware on March 14, 2000 as a limitedliability company for the purposes of making the Offers. US BuyCo is a wholly-owned subsidiary of IBM.

9. LGS is a corporation governed by the CBCA and is a reporting issuer or theequivalent in each of the Jurisdictions. It is engaged primarily in the business ofinformation technology consulting services.

10. LGS' authorized capital consists of an unlimited number of first preferred shares,an unlimited number of second preferred shares, an unlimited number of Class AShares, an unlimited number of Class B Shares and an unlimited number of ClassC Multiple Voting Shares. According to information provided by LGS to IBMCanada, as at March 10, 2000, there were 10,043,573 Class A Shares and2,852,800 Class B Shares outstanding. The Class A Shares are listed and postedfor trading on The Toronto Stock Exchange (the "TSE") and the Nasdaq NationalMarket.

11. On March 14, 2000, the Closing Price of Class A Shares on the TSE was Cdn.$18.40. Based upon such closing price, the Class A Shares had an aggregatemarket value of Cdn. $243,741,450 on such date.

12. To the knowledge of IBM Canada after reasonable inquiry, registered holders ofClass A Shares or Class B Shares resident in the United States (collectively, the"U.S. Registered Holders") hold, in the aggregate, 4,195,411 Class A Shares(representing approximately 42% of the class). After investigation as to theresidency of the beneficial owners of the Class A Shares held by U.S. RegisteredHolders, IBM Canada and IBM believe that, of the 4,195,411 Class A Shares heldby U.S. Registered Holders, approximately 1,114,163 Class A Shares representingapproximately 11% of the class are beneficially owned by holders resident in theUnited States.

13. Raymond Lafontaine ("Lafontaine") is a co-founder of LGS and is its President andChairman of its board of directors (the "LGS Board"). Lafontaine owns, directly orindirectly, 144,712 Class A Shares and 1,426,400 Class B Shares.

14. André Gauthier ("Gauthier" and, collectively with Lafontaine, the "Principals") is aco-founder of LGS, is its Senior Executive Vice-President and is a member of theLGS Board. Gauthier owns, directly or indirectly, 161,140 Class A Shares and1,426,400 Class B Shares.

15. On February 15, 2000, IBM Canada entered into a support agreement (the "Lock-upAgreement") with Lafontaine, Gauthier and their related personal holdingcompanies (collectively, the "Locked-up Shareholders") pursuant to which:

(a) IBM Canada agreed to cause the Offers to be made no later than March 15,2000;

(b) the Locked-up Shareholders irrevocably agreed to deposit their LGS Sharesunder the Offers;

(c) the Locked-up Shareholders agreed not to take any steps that would inhibitthe success of the Offers; and

(d) the Principals agreed that, if the Offeror takes up and pays for LGS Sharesdeposited under the Offers, the Principals would enter into RetentionAgreements.

16. Pursuant to the Offers, the Offeror has offered to acquire all of the issued andoutstanding LGS Shares (including LGS Shares that may become outstanding asa result of the exercise of options, warrants and other rights) in exchange forpayment of the Purchase Price.

17. The Offeror has extended the Offers to Shareholders in Canada and any jurisdictionoutside of Canada in which the making and acceptance of the Offers would not beillegal.

18. The Offers are contained in a securities exchange take-over bid circular (the"Circular") that has been sent to, among others, all Canadian Shareholders whoselast address as shown on LGS' books is in any of the Jurisdictions. The Offers arebeing made in accordance with, and the Circular contains the disclosure prescribedby, the Legislation of the Jurisdictions, except to the extent exemptive relief isgranted hereby.

19. Canadian Shareholders who accept an Offer may elect the Cash Option or theExchangeable Share Option.

20. The Offers provide that Canadian Shareholders who tender any LGS Shares to anOffer but fail to elect either the Cash Option or the Exchangeable Share Option willbe deemed to have elected the Cash Option.

21. A Canadian Shareholder who accepts an Offer and elects the Exchangeable ShareOption will receive that number of Exchangeable Shares equal to (i) the product ofthe aggregate number of LGS Shares tendered by such Canadian Shareholder andaccepted for purchase under an Offer and the U.S. dollar equivalent of thePurchase Price, divided by (ii) the average closing price in U.S. dollars of an IBMCommon Share on the NYSE for the ten trading days ending immediately prior tothe date the Offeror first takes up and pays for any LGS Shares under either of theOffers (the "Initial Take-up Date"), except that such Canadian Shareholder willreceive cash in lieu of any fractional Exchangeable Share he, she or it otherwisewould be entitled to receive. The U.S. dollar equivalent (the "US Dollar Equivalent")of the Purchase Price will be determined by reference to the noon spot rateestablished by the Bank of Canada for the conversion of Canadian dollars into U.S.dollars on the business day preceding the Initial Take-up Date.

22. If all of the Canadian Shareholders accepted an Offer, elected the ExchangeableShare Option and then exchanged the Exchangeable Shares they receivedpursuant to an Offer for IBM Common Shares, such Canadian Shareholders wouldhold, in the aggregate, less than 0.09% of the outstanding IBM Common Shares.

23. The Exchangeable Shares are intended to provide an opportunity for taxableCanadian Shareholders who elect the Exchangeable Share Option to achieve, incertain circumstances, a deferral of Canadian taxes.

24. The Exchangeable Shares will provide a holder thereof with a security of aCanadian issuer having economic and ownership rights that are, as nearly aspracticable, equivalent to those of a IBM Common Share, except that theExchangeable Shares will be non-voting other than as required by applicable law.Pursuant to a support agreement (the "Support Agreement") to be entered intoamong AcquisitionCo, ParentCo and IBM, IBM will agree to support AcquisitionCo'sobligations in respect of the Exchangeable Shares and take all such actions and dosuch things as are required to cause AcquisitionCo to comply with such obligations.

25. The Exchangeable Shares are not, and will not be, listed for trading on any stockexchange or quotation system. As a consequence of making the Offers,AcquisitionCo will become a reporting issuer in each of the Jurisdictions exceptOntario and Alberta.

26. The Offers have been extended to Shareholders who are "U.S. Persons", as thatterm is defined in Regulation S under the 1933 Act, or resident in the United Statesor any territory or possession thereof ("U.S. Residents" and, collectively with U.S.Persons, "U.S. Shareholders") in reliance upon the Multi-Jurisdictional DisclosureSystem enacted under United States federal securities laws ("MJDS"). Accordingly,the Circular has been filed with the Securities and Exchange Commission (the"SEC") on Form 14(d)(i)(f). In connection with the Offers, IBM has filed with the SECa Registration Statement on Form S-4 to qualify IBM Common Shares that may beissued to Non-Canadian Shareholders who elect the US Share Option and aRegistration Statement on Form S-3 to qualify the IBM Common Shares that maybe issued upon the exercise of the Exchangeable Shares.

27. The following documents (collectively, the "IBM Disclosure Record") have beenincorporated by reference into the Circular and attached to it as an annex:

(a) IBM's Form 10-K dated March 13, 2000;

(b) IBM's Annual Report, which includes comparative audited financialstatements of IBM for the years ending December 31, 1999, 1998 and 1997and "management's discussion and analysis of financial condition andresults of operations" for the year ending December 31, 1999;

(c) IBM's proxy statement dated March 13, 2000 in respect of its annual meetingto be held on April 25, 2000; and

(d) IBM's Certificate of Incorporation and By-laws.

28. In addition, the following documents (collectively, the "Supplementary DisclosureRecord") have been incorporated by reference into the Circular:

(a) IBM's Form S-3s filed May 24, 1993, February 22, 1990 and October 24,1989;

(b) IBM's Form S-8s filed February 15, 2000, July 15, 1997 and May 24, 1994;

(c) IBM's Form 10-Ks for the years ended December 31, 1997, 1996, 1995 and1994;

(d) IBM's Form 8-Ks and/or 8-K/As filed January 29, 1999, January 8, 1998,August 1, 1997, December 6, 1996 and October 30, 1995; and

(e) IBM's Proxy Statement dated March 14, 1995.

29. Pending completion of the Offers, the Offeror will have no material assets orliabilities, and all information material to the business of IBM and relevant topersons considering an investment in Exchangeable Shares or IBM CommonShares will be contained in or incorporated by reference into the Circular.

30. The Exchangeable Shares will not be qualified for distribution in any jurisdictionoutside Canada and the delivery of Exchangeable Shares to Non-CanadianShareholders may constitute a violation of the laws of such jurisdictions.

31. Non-Canadian Shareholders who accept either of the Offers may elect the CashOption or the US Share Option.

32. The Offers provide that Non-Canadian Shareholders who tender any LGS Sharesto an Offer but fail to elect either the Cash Option or the US Share Option will bedeemed to have elected the Cash Option.

33. A Non-Canadian Shareholder who accepts an Offer and elects the US ShareOption will receive that number of IBM Common Shares equal to (i) the product ofthe aggregate number of LGS Shares tendered by such Non-Canadian Shareholderand accepted for purchase under an Offer and the U.S. Dollar Equivalent of thePurchase Price, divided by (ii) the average closing price in U.S. dollars of an IBMCommon Share on the NYSE for the ten trading days ending immediately prior tothe Initial Take-up Date, except that such Non-Canadian Shareholder will receivecash in lieu of any fractional IBM Common Share he, she or it otherwise would beentitled to receive.

34. The existing, unwritten employment arrangements between LGS and the Principalsprovide:

(a) for payment to each Principal of $253,500 as an annual salary and $191,200as a bonus; and

(b) for each Principal's participation in a non-contributory defined benefitpension plan sponsored by LGS (the "Plan").

35. IBM Canada (or an affiliate of IBM Canada) intends to enter into the RetentionAgreements with the Key Executives.

36. The Retention Agreements to be entered into between IBM Canada and each of theKey Executives will have the following material features:

(a) Each Retention Agreement will include a covenant of the Key Executive:

(i) prohibiting the Key Executive from engaging in any line of businessconducted by LGS at the date of the Retention Agreement either inNorth America or Europe for a period (the "Non-Compete Period") ofone year commencing on the date the Key Executive ceases to beemployed by LGS or any successor thereto or affiliate thereof(collectively, the "IBM Group"), provided that if the Key Executiveceases to be employed by the IBM Group within one year after thedate of the Retention Agreement the Non-Compete Period will beeighteen months;

(ii) prohibiting the Key Executive from soliciting any employees orcustomers of the IBM Group for a period of one year commencing onthe date the Key Executive ceases to be an employee of the IBMGroup; and

(iii) requiring the Key Executive to devote substantially all of his or hertime to employment with the IBM Group and work exclusively for suchentity and with a view to its best interests, except for reasonablesocial, political or charitable activities or existing undertakings.

(b) The Retention Agreements will provide that a Key Executive will be entitledto receive, in addition to his or her annual salary and any annual bonus, aretention bonus (the "Retention Bonus"), payable in semi-annual instalmentsover a two-year period (the "Retention Period"), equal to a specified multipleof the aggregate annual salary and bonus such Key Executive received in1999, provided that such Key Executive remains employed by the IBM Groupand achieves certain objectives (the "Objectives") agreed to by IBM Canadaand such Key Executive. The specified multiple in respect of each of theKey Executives will not exceed 2.

(c) The Retention Agreements will provide that, if a Key Executive's employmentwith the IBM Group is terminated for any reason prior to expiry of theRetention Period, such Key Executive will have received in any event cashpayments equal to the greater of:

(i) 10% of his or her Retention Bonus, and

(ii) the aggregate amount he or she has become entitled to as aconsequence of remaining employed by the IBM Group for a specifiedperiod of time and achieving some or all of the Objectives,

provided that, in calculating such entitlement no amount will be included forpayments to which such Key Executive would have been entitled had his orher employment not been terminated prior to the date such entitlement wouldhave become due.

(d) The Retention Agreements will provide that Key Executives will be entitledto receive benefits and perquisites comparable to those provided to IBMCanada's employees in similar circumstances and with similar levels ofresponsibility.

(e) Pursuant to the Retention Agreements, each Principal will be grantedoptions to purchase 20,000 IBM Common Shares (collectively, the"Options"). Each Option will be issued with an exercise price equal to theaverage of the high and low sale price of the IBM Common Shares on theNYSE on the date of grant. Options will vest as to 50% on the secondanniversary of the date of grant, as to 25% on the third anniversary of thedate of grant and as to 25% on the fourth anniversary of the date of grant.The Options will be non-transferable. If the Principal's employment with theIBM Group is terminated for any reason, vested Options will terminate 90days thereafter and unvested Options will terminate automatically.

(f) In addition, the Offeror will maintain the Plan for the Principals. On March31, 1999, the Plan had an unfunded actuarial liability of $2,591,000 and thepension expense for the year ended March 31, 1999 was $634,000.

37. Since LGS is engaged principally in the provision of information technologyconsulting services, LGS' personnel represent its principal asset. IBM Canadaproposes to enter into the Retention Agreements in order to ensure the continuedemployment of the Key Executives during the period in which LGS' operations willbe integrated with those of IBM Canada. In particular, IBM Canada believes thatthe continued support and management of LGS' operations by the Key Executivesand, in particular, the Principals, is necessary in order to retain LGS' seniormanagement team. Accordingly, IBM Canada has relied upon the Principals'covenant to enter into Retention Agreements in agreeing to pay the Purchase Price.

38. The terms of the Retention Agreements have been negotiated with the Principalson an arm's-length basis and will be negotiated on an arm's-length basis with theother Key Executives. The compensation arrangements contemplated by theRetention Agreements are consistent with IBM's documented internal guidelines forretention programs associated with IBM's acquisition of businesses and arereasonable in light of the services to be provided to IBM by each of the KeyExecutives. The Retention Agreements are being made for business purposesunrelated to the Key Executives' ownership of LGS Shares and not for the purposeof providing the Key Executives with greater consideration for their LGS Sharesthan the consideration to be received by Shareholders other than the KeyExecutives.

AND WHEREAS pursuant to the System, this MRRS Decision Document evidencesthe decision of each Decision Maker (collectively, the "Decision");

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 the Decisionhas been met;

THE DECISION of the Decision Makers in the Jurisdictions pursuant to theLegislation is that, in connection with the Offers:

(1) the Offeror is exempt from the Identical Consideration Requirement, insofar asCanadian Shareholders who accept an Offer will be entitled to elect between theCash Option and the Exchangeable Share Option, while Non-CanadianShareholders who accept an Offer will be entitled to elect between the Cash Optionand the US Share Option;

(2) the Retention Agreements are being entered into for reasons other than to increasethe value of the consideration paid to the Key Executives in respect of their LGSShares and may be entered into notwithstanding the Prohibition on CollateralAgreements; and

(3) the Offeror is exempt from the Prospectus Disclosure Requirements and theCanadian GAAP Reconciliation Requirement that otherwise would apply becausethe consideration under the Offers includes Exchangeable Shares and IBMCommon Shares.

April 4th, 2000.

"J. A. Geller"      "Howard I. Wetston"