Cryptologic Inc. - MRRS Decision

MRRS Decision

IN THE MATTER OF

THE SECURITIES LEGISLATION

OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,

ONTARIO AND NOVA SCOTIA

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

THE MATTER OF

CRYPTOLOGIC INC.

MRRS DECISION DOCUMENT

WHEREAS the Canadian securities regulatory authority or regulator (the "Decision Maker") in each of BritishColumbia, Alberta, Saskatchewan, Manitoba, Ontario and Nova Scotia (collectively, the "Jurisdictions") has received anapplication (the "Application") from CryptoLogic Inc. ("CryptoLogic") for a decision pursuant to the securities legislationof the Jurisdictions (the "Legislation") that, in connection with the proposed purchase by CryptoLogic of a portion of itsoutstanding common shares ("Shares") pursuant to an issuer bid (the "Offer"), CryptoLogic be exempt from therequirements in the Legislation to:

1. take up and pay for securities proportionately according to the number of securities deposited by eachsecurityholder (the "Proportionate Take-up and Payment Requirement"),

2. provide disclosure in the issuer bid circular (the "Circular") of such proportionate take up and payment (the"Associated Disclosure Requirement"),

3. state the class and number of securities sought under the Offer (the "Number of Securities Requirement"),and

4. obtain a valuation of the Shares and provide disclosure in the Circular of such valuation, or a summarythereof (the "Valuation Requirement");

AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the"System"), the Ontario Securities Commission is the principal regulator for the Application;

AND WHEREAS CryptoLogic has represented to the Decision Makers that:

1. CryptoLogic is a reporting issuer in each of the Jurisdictions (other than British Columbia) and is not on thelist of defaulting reporting issuers maintained pursuant to such Legislation, where applicable. The headoffice of CryptoLogic is located in Toronto, Ontario.

2. The authorized capital of CryptoLogic includes an unlimited number of Shares, of which 14,015,162 Shareswere issued and outstanding as at March 12, 2001.

3. The Shares are listed and posted for trading on the Toronto Stock Exchange and the NASDAQ StockMarket. On March 12, 2001, the day prior to the announcement of the Offer, the closing price of the Shareson the Toronto Stock Exchange was $16.50 and on such date the Shares had an aggregate market value ofapproximately $231 million, based on such closing price.

4. No person or company holds more than 10% of the Shares other than Andrew Rivkin and Mark Rivkin whohold 1,600,000 and 1,700,000 common shares, respectively, as at March 12, 2001. CryptoLogic has beenadvised by both Andrew Rivkin and Mark Rivkin that neither of them intend to tender any Shares to theOffer.

5. On March 13, 2001, CryptoLogic proposed to purchase approximately 1,000,000 Shares, representingapproximately 7.1% of the outstanding Shares, through the Offer by way of the Circular.

6. The Offer has been made pursuant to a modified Dutch auction procedure as follows:

a. the Circular specifies that the aggregate number of Shares (the "Specified Number of Shares") thatCryptoLogic intends to purchase under the Offer is 1,000,000, excluding any Shares thatCryptoLogic intends to purchase in accordance with the procedures described in subparagraph 6(j)below;

b. the Circular specifies that the range of prices (the "Range") within which CryptoLogic is preparedto purchase Shares under the Offer is between $17.00 and $19.00;

c. holders of Shares (the "Shareholders") wishing to tender to the Offer will be able to specify thelowest price within the Range at which they are willing to sell their Shares (an "Auction Tender");

d. Shareholders wishing to tender to the Offer but who do not wish to make an Auction Tender mayelect to be deemed to have tendered at the Clearing Price determined in accordance withsubparagraph (e) below (a "Purchase Price Tender");

e. the purchase price (the "Clearing Price") of the Shares tendered to the Offer and not withdrawn willbe the lowest price that will enable CryptoLogic to purchase the Specified Number of Shares andwill be determined based upon the number of Shares tendered and not withdrawn pursuant to anAuction Tender at each price within the Range and the number of Shares tendered and notwithdrawn pursuant to a Purchase Price Tender, with each Purchase Price Tender beingconsidered a tender at the lowest price in the Range for the purpose of calculating the ClearingPrice;

f. the aggregate amount that CryptoLogic will expend pursuant to the Offer will not be ascertaineduntil the Clearing Price is determined;

g. all Shares tendered and not withdrawn at or below the Clearing Price pursuant to an AuctionTender and all Shares tendered and not withdrawn pursuant to a Purchase Price Tender will betaken up and paid for at the Clearing Price, subject to proration if the aggregate number of Sharestendered and not withdrawn at or below the Clearing Price pursuant to Auction Tenders and thenumber of Shares tendered and not withdrawn pursuant to Purchase Price Tenders exceeds theSpecified Number of Shares;

h. all Shares tendered and not withdrawn at prices above the Clearing Price will be returned toShareholders who so tender;

i. in the event more than 1,000,000 Shares are tendered at or below the Clearing Price (an"Over-Subscription"), the Shares to be purchased will be pro rated from the Shares so tendered;

j. in the event of an Over-Subscription, in order to avoid the creation of "odd lots" as a result ofproration, the number of Shares to be purchased from each shareholder who tenders at or belowthe Clearing Price will be increased as follows: in addition to the Specified Number, CryptoLogicwill purchase an additional number of Shares at the Clearing Price from each tenderingshareholder equal to the minimum number of Shares necessary such that the number of Sharesnot purchased from and returned to such Shareholder as a result of proration (the"ReturnNumber") will be a whole multiple of 100, except that, if the Return Number for any suchshareholder is less than 100, CryptoLogic will purchase from each such shareholder that numberof Shares equal to the Return Number. Multiple tenders by the same shareholder will beaggregated for this purpose;

k. in the event the bid is under-subscribed by the initial expiration date but all the terms andconditions thereof have been complied with except those waived by CryptoLogic, CryptoLogic maywish to extend the bid for at least 10 days, in which case CryptoLogic must first take up and pay forall Shares deposited thereunder and not withdrawn. In the event the bid is under-subscribed at theexpiration date, there would be no proration among the tenders taken up and paid for at such time.However, by the time any extension is over, the bid may be oversubscribed, in which caseCryptoLogic intends to pro-rate only among tenders received during the extension and after theoriginal expiration date;

l. all Shares tendered and not withdrawn by Shareholders who specify a tender price for suchtendered Shares that falls outside the Range will be considered to have been improperly tendered,will be excluded from the determination of the Clearing Price, will not be purchased by CryptoLogicand will be returned to Shareholders who have so tendered; and

m. all Shares tendered and not withdrawn by Shareholders who fail to specify any tender price forsuch tendered Shares and fail to indicate that they have tendered their Shares pursuant to aPurchase Price Tender will be considered to have been tendered pursuant to a Purchase PriceTender and will be dealt with as described in subparagraph (e) above.

7. Prior to the expiry of the Offer, all information regarding the number of Shares tendered and the prices atwhich such Shares are tendered will be kept confidential, and the depository will be directed by CryptoLogicto maintain such confidentiality until the Clearing Price is determined.

8. Since the Offer is for less than all the Shares, if the number of Shares tendered to the Offer at or below theClearing Price and not withdrawn exceeds the Specified Number of Shares, the Legislation would requireCryptoLogic to take up and pay for deposited Shares proportionately, according to the number of Sharesdeposited by each Shareholder. In addition, the Legislation would require disclosure in the Circular thatCryptoLogic would, if Shares tendered to the Offer and not withdrawn exceeded the Specified Number ofShares, take up such Shares proportionately according to the number of Shares tendered and notwithdrawn by each Shareholder.

9. During the 12 months ended February 28, 2001:

a. the number of outstanding Shares was at all times at least 5,000,000, excluding Shares that eitherwere beneficially owned, directly or indirectly, or over which control or direction was exercised, byrelated parties with respect to CryptoLogic or were not freely tradeable;

b. the aggregate trading volume of the Shares on the TSE was at least 1,000,000 Shares;

c. there were at least 1,000 trades in Shares on the TSE; and

d. the aggregate trading value based on the price of the trades referred to in paragraph (c) was atleast $15,000,000.

10. The market value of the Shares on the TSE was at least $75,000,000 for the month of February, 2001.

11. Taking into account the information contained in paragraphs 9 and 10 above, and because it is reasonableto conclude that, following completion of the Offer, there will be a market for the beneficial owners of Shareswho do not tender to the Offer that is not materially less liquid than the market that exists at the time theOffer is made, CryptoLogic is able to rely upon the exemption from the Valuation Requirement in Ontariocontained in section 3.4(3) of Ontario Securities Commission Rule 61-501 (the "Presumption of LiquidMarket Exemption").

12. The Circular:

a. discloses the mechanics for the take-up of and payment for, or the return of, Shares as describedin paragraph 6 above;

b. explains that, by tendering Shares at the lowest price in the Range or pursuant to a PurchasePrice Tender, a Shareholder can reasonably expect that the Shares so tendered will be purchasedat the Clearing Price, subject to proration as described in paragraph 6 above;

c. discloses the facts supporting CryptoLogic's reliance on the Presumption of Liquid MarketExemption.

AND WHEREAS pursuant to the System this MRRS Decision Document evidences the decision of each ofthe Decision Makers (collectively, the "Decision");

AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that providesthe Decision Maker with the jurisdiction to make the Decision has been met;

THE DECISION of the Decision Makers in the Jurisdictions pursuant to the Legislation is that, in connectionwith the Offer, CryptoLogic is exempt from the Proportionate Take-up and Payment Requirement, the AssociatedDisclosure Requirement, the Number of Securities Requirement and the Valuation Requirement, provided that Sharestendered to the Offer and not withdrawn are taken up and paid for, or returned to the Shareholders, in the manner andcircumstances described in paragraph 6 above.

April 2 , 2001.

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