HeadnoteMutualReliance Review System for Exemptive Relief Applications - goingprivate transaction - continuing employment agreements enteredinto between two senior officers and the corporations proposingan arrangement - senior officers hold less than two percent ofthe shares of the corporation being acquired under the arrangement- employment agreements negotiated at arm's length - senior officersalso signed confidentiality, non-competition and non-solicitationagreements - terms of employment agreements consistent with thoseof similarly situated directors and consultants of the partiesto the arrangement and relevant peers in the marketplace - termsof the agreements fully disclosed in the information circularprovided to securityholders in connection with the arrangement- shares owned by senior officers not to be counted toward compliancewith minority approval requirement - relief granted from valuationrequirements in connection with the arrangement.
ApplicableOntario RulesRule61-501 - Insider Bids, Issuer Bids, Going Private Transactionsand Related Party Transactions, ss. 4.4, 4.5(1) and 9.1.
INTHE MATTER OF
ONTARIOSECURITIES COMMISSION RULE 61-501 AND
QUEBECSECURITIES COMMISSION POLICY STATEMENT Q-27
INTHE MATTER OF
THEMUTUAL RELIANCE REVIEW SYSTEM
INTHE MATTER OF
MRRSDECISION DOCUMENTWHEREASan application (the "Application") has been receivedby the securities regulatory authority or regulator (the "DecisionMakers") in each of Ontario and Quebec from MGI Software Corp.("MGI") for a decision pursuant to Ontario Securities CommissionRule 61-501 ("Rule 61-501") and Commission des valeurs mobilièresdu Québec Policy Q-27 ("Policy Q-27" and, together withRule 61-501, the "Legislation") that, in connection with the proposedarrangement (the "Arrangement"), involving MGI, the holders (the"Shareholders") of common shares of MGI ("Common Shares"), Roxio,Inc. ("Roxio") and Roxio-MGI Holding Corp. ("Subco") pursuantto which Subco would become the sole owner of all of the outstandingCommon Shares, the Arrangement be exempt from the requirementto obtain a formal valuation under the Legislation (the "ValuationRequirement");
ANDWHEREAS, pursuant to the Mutual Reliance Review Systemfor Exemptive Relief Applications (the "System"), the OntarioSecurities Commission is the principal regulator for the Application;
ANDWHEREAS MGI has represented to the Decision Makers that:
1.MGI was incorporated under the Business Corporations Act (Ontario)(the "OBCA") on September 22, 1995 and is a reporting issuer ineach province of Canada. MGI's head office is located in RichmondHill, Ontario.
2.Roxio is incorporated under the laws of the State of Delawareand is not a reporting issuer in any province of Canada. Roxio'shead office is located in Milpitas, California.
3.Subco is incorporated under the laws of the State of Delawareand its head office is located in Milpitas, California. Subcois an indirectly wholly-owned subsidiary of Roxio. Subco is nota reporting issuer in any province of Canada.
4.The authorized share capital of MGI consists of an unlimited numberof Common Shares. As of January 2, 2002, there were 42,449,967Common Shares issued and outstanding.
5.In addition, at January 2, 2002, the following securities convertibleinto Common Shares were outstanding:
(a)3,520,863 options to purchase Common Shares (the "Options"), eachof which entitles the holder thereof to purchase one Common Shareupon payment of the applicable exercise price; and
(b)1,572,500 warrants to purchase Common Shares (the "Warrants"),each of which entitles the holder thereof to purchase one CommonShare upon payment of the applicable exercise price.
6.The Common Shares are listed on The Toronto Stock Exchange (the"TSE") under the symbol "MGI". On December 3, 2001, the last tradingday prior to the public announcement of the Arrangement, the closingprice of the Common Shares on the TSE was $1.05. On January 9,2002, the closing price of the Common Shares on the TSE was $1.23.
7.As at January 2, 2002, Anthony DeCristofaro ("DeCristofaro") andKenneth MacKenzie ("MacKenzie" and, together with DeCristofaro,the "Key Employees"), each of whom is a senior officer of MGI,collectively owned, directly or indirectly, approximately 0.76%of the issued and outstanding Common Shares (approximately 1.58%of the Common Shares on a fully diluted basis), as follows:
(a)DeCristofaro, Chief Executive Officer of MGI, owned, directlyor indirectly, 324,100 Common Shares and 300,000 Options withan exercise price of $4.09 per Common Share; and
(b)MacKenzie, Chief Financial Officer of MGI, owned, directly orindirectly, no Common Shares and 130,000 Options with an exerciseprice of $0.75 per Common Share.
8.Neither of the Key Employees owns any Warrants either directlyor indirectly.
9.On December 3, 2001, MGI and Roxio entered into an agreement (the"Combination Agreement") pursuant to which Subco will, subjectto the satisfaction of certain conditions, including the requisiteapproval of the Shareholders, acquire all of the issued and outstandingCommon Shares by way of the Arrangement.
10.Under the Combination Agreement, MGI has agreed to call and holda special meeting of the Shareholders for the purpose of consideringand approving the Arrangement (the "Special Meeting"). The SpecialMeeting is expected to be held on January 28, 2002.
11.On December 28, 2001, MGI received an interim order of the SuperiorCourt of Justice (Ontario) with respect to various proceduraland administrative matters relating to the Special Meeting (the"Interim Order").
12.In connection with the execution of the Combination Agreement,certain Shareholders and holders of Options have entered intoagreements ("Designated Shareholder Agreements") with Roxio pursuantto which such persons have agreed, among other things and subjectto certain conditions, to vote in favour of the Arrangement atthe Special Meeting. Approximately 16.41% of the Common Shares(approximately 18.83% of the Common Shares on a fully-dilutedbasis) are subject to the Designated Shareholder Agreements. Eachof the Key Employees has entered into a Designated ShareholderAgreement.
13.On January 3, 2002, MGI mailed to Shareholders a management informationcircular and proxy statement (the "Circular") in order to solicitproxies for the Special Meeting.
14.Among other things, the transactions contemplated by the CombinationAgreement provide for the following:
(a)each issued and outstanding Common Share shall be transferredto Subco in exchange for 0.05269 shares in the common stock, parvalue U.S. $0.001 of Roxio (each whole such share, a "Roxio Share")subject to certain downward adjustments as set forth in the CombinationAgreement;
(b)the vesting of all Options has been fully accelerated and anyOption that remains unexercised into Common Shares immediatelyprior to the effective date of the Arrangement will be cancelledas of such date without the payment of any consideration to theholder thereof; and
(c)all Warrants will either be (i) redeemed by MGI for a cash paymentsubject to obtaining the approval of the holders of such Warrants,or (ii) stay in place and, upon the exercise thereof, subjectto receiving exemptive relief under applicable securities laws,Roxio Shares will be issued to the holders thereof.
15.The respective obligations of Roxio and MGI under the CombinationAgreement are subject to a number of conditions customarily foundin agreements of this nature, including, among others, not morethan 5% of the Common Shares being held by Shareholders who exercisetheir dissent rights under the OBCA (as such dissent rights werevaried by the Interim Order).
16.The respective obligations of Roxio and MGI under the CombinationAgreement are also conditional on agreements being in effect withthe Key Employees.
17.Transitional service agreements between each of Roxio and DeCristofaro(the "DeCristofaro Agreement) and MGI and MacKenzie (the "MacKenzieAgreement" and, together with the DeCristofaro Agreement, the"Transition Agreements") provide for the provision of serviceto Roxio or MGI by DeCristofaro and MacKenzie, respectively, followingthe completion of the Arrangement and are conditional on the closingof the Arrangement.
18.Each Transition Agreement was negotiated on an arm's length basis,independently of the Combination Agreement.
19.Under his current terms of employment, DeCristofaro is, amongother things, (a) paid an annual salary of $150,000, (b) entitledto participate in MGI's bonus plan up to the amount of $400,000per year, (c) entitled to receive a bonus of $84,742 upon thecompletion of a change of control of MGI by way of acquisition,merger or corporate reorganization, (d) entitled to a paymentof 1.5 times his annual salary plus bonus upon a voluntary resignationfollowing the occurrence of a successful take-over bid or changeof control of MGI, (e) entitled to a severance payment of 1.5times his annual salary in the event that he is terminated byMGI with or without cause, (f) obligated to terminate all employmentwith MGI and entitled to a payment of $500,000 in lieu of thepayments noted in clauses (c), (d) and/or (e) above in the eventthat the Arrangement is completed, and (g) granted 300,000 Options,all of which Options are fully vested as at the date hereof.
20.Under his current terms of employment, MacKenzie is, among otherthings, (a) paid an annual salary of $194,000, (b) entitled toparticipate in MGI's bonus plan up to the amount of $58,200 peryear, (c) entitled to a severance payment equal to 6 months salaryin the event that he is terminated or is the subject of a substantivechange in status, authorities, duties or responsibilities followinga change of control, (d) entitled to receive a bonus of $50,000upon the completion of a change of control of MGI by way of acquisition,merger or corporate reorganization, (e) obligated to terminateall employment with MGI and entitled to a payment of $147,000in lieu of the payments noted in clauses (c) and/or (d) abovein the event that the Arrangement is completed, and (f) granted130,000 Options to vest equally over 4 years on a quarterly basisstarting at April 30, 2001.
21.If the Arrangement is completed, then, in addition to the paymentnoted at clause (f) of paragraph 19 hereof, pursuant to the DeCristofaroAgreement, DeCristofaro will act as an advisor to Roxio's boardof directors for a four-year period and, if further agreed byRoxio and DeCristofaro, DeCristofaro will become a director ofRoxio and receive as compensation from Roxio an irrevocable optionto purchase up to 25,000 Roxio Shares under Roxio's 2001 StockPlan at a price per share equal to the fair market value thereofon the day prior to the closing the transactions contemplatedpursuant to the Arrangement.
22.If the Arrangement is completed, then, in addition to the paymentnoted at clause (e) of paragraph 20 hereof, pursuant to the MacKenzieAgreement, MGI has agreed to retain MacKenzie's services as aconsultant and not an employee for a fixed term of three monthsfollowing the completion of the Arrangement to assist and overseethe transition of accounting and finance functions from MGI'shead office in Richmond Hill, Ontario to Roxio's head office inMilpitas, California, in consideration for which MacKenzie ora company in which he is a principal is to receive the gross amountof $25,000 per month for the duration of the provision of suchservices. The MacKenzie Agreement may be extended for furtherthree-month periods at the mutual agreement of MGI and MacKenzie,as consideration for which MacKenzie or a company in which heis a principal will receive the gross amount of $25,000 per monthfor each such three-month period.
23.In connection with the execution of the Transition Agreements,DeCristofaro has also executed a confidentiality, non-competitionand non-solicitation agreement in favour of Roxio and each ofthe Key Employees has executed a general release in favour ofMGI.
24.The compensation to be paid under the Transition Agreements isconsistent with that paid to similarly situated directors andconsultants, as applicable, of each of Roxio and MGI, as applicable,and by relevant peer employers in the marketplace.
25.If the Arrangement is completed, each of the Key Employees willonly be entitled to receive, directly or indirectly, consequentupon the Arrangement, consideration per Common Share that is identicalin amount and type to that paid to all other Shareholders.
26.Other than pursuant to the Transition Agreements, each of theKey Employees will not be entitled to receive consideration ofgreater value than that paid to all other Shareholders.
27.Upon completion of the Arrangement, neither of the Key Employeeswill own any securities of MGI or exercise control or directionover any securities of MGI and the sole holder of securities ofMGI will be Subco.
28.The Transition Agreements were entered into for reasons otherthan to increase the value of the consideration payable pursuantto the Arrangement for the Common Shares held by the Key Employees.The purpose of the DeCristofaro Agreement is to add DeCristofaro'sknowledge and experience with respect to MGI and the industryin which it conducts business to Roxio's board of directors andthe purpose of the MacKenzie Agreement is to facilitate the processof integrating MGI's and Roxio's finances. Consequently, eachTransition Agreement represents considerable value to Roxio uponthe completion of the Agreement.
29.The terms of the Transition Agreements have been disclosed inthe Circular.
30.The Common Shares that the Key Executives beneficially own orover which they exercise control or direction will not be countedtoward the minority approval required under the Legislation (otherthan in the capacity of proxy holders having no discretion inrespect of how the Common Shares will be voted in connection withthe Arrangement).
ANDWHEREAS, pursuant to the System, this MRRS Decision Documentevidences the determination of the Decision Makers (the "Decision");
ANDWHEREAS each of the Decision Makers is satisfied thatthe test contained in the Legislation that provides the DecisionMaker with the jurisdiction to make the Decision has been met;
THEDECISION of the Decision Makers under the Legislationis that, in connection with the Arrangement, MGI shall be exemptfrom the Valuation Requirement, provided that MGI complies withthe other applicable provisions of the Legislation.