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Xerox Corporation et al. - MRRS Decision
Headnote
Rule 61-501 - Mutual RelianceReview System - Related party transactions - Valuation and minorityapproval exemption granted in connection with guarantees providedfor debt owed by related party to arm's length third party lenders- Guarantees limited to amounts borrowed by parent company guarantorfrom related party pursuant to intercompany loans which areexempt from valuation and minority approval requirements pursuantto paragraphs 5.6 - 11 and 5.8 - 3.
Ontario Rules Cited
Rule 61-501 - Insider Bids,Issuer Bids, Going Private Transactions and Related Party Transactions,ss. 5.5, 5.6 - 10, 5.6 - 11, 5.7, 5.8 - 3, and 9.1.
IN THE MATTER OF
THE SECURITIES LEGISLATIONOF
ONTARIO AND QUEBEC
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEWSYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
XEROX CORPORATION, XEROX CANADAINC. AND
XEROX CANADA FINANCE INC.
MRRS DECISION DOCUMENT
WHEREAS the local securitiesregulatory authority or regulator (the "Decision Makers")in each of Ontario and Quebec (the "Jurisdictions")has received an application from Xerox Corporation ("Xerox"),Xerox Canada Inc. ("XCI") and Xerox CanadaFinance Inc. ("XCFI") for, pursuant to OntarioSecurities Commission Rule 61-501 (the "Rule")and Commission des valeurs mobilières du QuébecPolicy Statement Q-27 ("Q-27") (the "Legislation"),a decision that XCI and XCFI be exempt from the valuation andminority approval requirements of the Legislation in connectionwith certain related party loans, guarantees and grants of securityto be undertaken as part of the refinancing of an existing thirdparty credit facility;
AND WHEREAS pursuantto the Mutual Reliance Review System for Exemptive Relief Applications(the "MRRS"), the Ontario Securities Commissionis the principal regulator for this application;
AND WHEREAS Xerox, XCIand XCFI have represented to the Decision Maker that:
1. XCI is a corporation amalgamatedunder the laws of Ontario and its head office is in Ontario.XCI is a reporting issuer in all provinces and territoriesof Canada.
2. The issued and outstandingshare capital of XCI consists of 160,000 Preference Shares(non-voting), 29,996,955 Class A Shares (voting ) and 752,862Class B Shares (non-voting) as at December 31, 2001. All ofthe Preference Shares and Class A Shares are held by Xeroxand all of the Class B Shares are held by the public. TheClass B Shares are traded on the over the counter market (CanadianUnlisted Board). The Class B Shares have a right to the netassets of XCI upon dissolution or liquidation on a paripassu basis with the Class A Shares, with the result thatthe holders of the Class B Shares will be entitled to approximately2% of the net assets of XCI, based on the number of ClassB Shares issued and outstanding on the date hereof. The ClassB Shares are exchangeable at the option of the holder forcommon shares of Xerox, on the basis of two Xerox common sharesfor one XCI Class B Share (subject to adjustment on the occurrenceof certain stated events). In addition, dividends are payableon the Class B Shares in an amount tied to the dividend declaredon the common shares of Xerox (although in July 2001, Xeroxannounced that it had eliminated the payment of dividendson its common shares, and as a result dividends are not currentlypaid on the XCI Class B Shares). Accordingly, the value ofthe Class B Shares is based on the value of the Xerox commonshares.
3. Xerox is a corporationincorporated under the laws of the State of New York. Xeroxis a reporting company under the Securities Exchange Act of1934 as amended and its common shares are listed on the NewYork Stock Exchange. Xerox is a reporting issuer in all provincesand territories of Canada.
4. XCFI is a corporation continuedunder the laws of Ontario and its head office is in Ontario.XCFI is a reporting issuer in all provinces and territoriesof Canada.
5. All of the outstandingshares of XCFI are held by XCI.
6. XCFI has two series ofunsecured debentures outstanding as at December 31, 2001:Cdn. $21,500,000 principal amount of 10.70% sinking fund debenturesdue 2006; and Cdn. $53,800,000 principal amount of 12.15%sinking fund debentures due 2007; as a result, the total amountoutstanding is Cdn. $75,300,000 (collectively, the "Debentures").The Debentures are issued pursuant to trust indentures datedas of December 15, 1986 and as of October 27, 1987, respectively,as amended or supplemented to date, which contain, among otherthings, negative and positive covenants by XCFI which werenegotiated on an arm's length basis between XCFI and the holdersof the Debentures. All holders of Debentures are entitledto the benefit of such covenants.
7. Each of Xerox and XCI hasguaranteed unconditionally the obligations of XCFI under theDebentures.
8. Xerox Canada Capital Ltd.("XCCL") is a corporation incorporated underthe laws of Canada and its head office is in Ontario. XCCLis not a reporting issuer in any province or territory ofCanada. All of the outstanding shares of XCCL are held byXerox.
9. Xerox Canada Ltd. ("XCL")is a corporation continued under the laws of Canada and itshead office is in Ontario. XCL is not a reporting issuer inany province or territory of Canada. As at December 31, 2001,the issued and outstanding share capital of XCL consists of473,000,002 Class A Shares, all of which are held by XCI,and 250,100,000 Class B Shares, all of which are held by XCFI.Each of the Class A Shares and Class B Shares carry the rightto vote; as a result 65% of the voting shares of XCL are heldby XCI and 35% are held by XCFI.
10. As part of a revolvingcredit facility pursuant to which Xerox and its affiliateshave borrowed US$7,000,000,000 from a syndicate of arm's lengththird party banks (the "Lenders"), XCCL hasborrowed US$500,000,000 (this loan or any refinancing of thisloan, the "Loan") from the Lenders pursuantto a revolving credit facility (the "Existing Facility")and has lent the proceeds of that loan to XCI (this loan toXCI or any refinancing of this loan to XCI, the "XCILoan").
11. The XCI Loan is on thesame terms as the Loan from the Lenders to XCCL under theExisting Facility except for a nominal increase in the costof funds provided in the XCI Loan over the cost of the Loanto XCCL. XCI considers that the XCI Loan in such circumstancesis on very favourable terms and therefore that it is on reasonablecommercial terms that are not less advantageous to XCI thanif such loan were obtained directly from an arm's length thirdparty. The XCI Loan does not, directly or indirectly, involvethe issue of participating securities of XCI or a subsidiaryof XCI.
12. As part of a worldwiderestructuring program announced by Xerox in March 2000 anda turnaround program announced by Xerox in October 2000 (whichincludes a wide-ranging plan to sell assets, cut costs andstrengthen core operations), the US$7,000,000,000 existingfacility, which must otherwise be repaid in 2002, is beingrefinanced. The restructuring is designed to improve the financialposition of Xerox and its subsidiaries, including XCI, XCLand XCFI. The Lenders will consent to the refinancing of theExisting Facility only if certain guarantees are providedby one or more of XCI, XCFI and XCL and security is providedfor such guarantees.
13. In this regard, the obligationsof XCCL under the Loan by the Lenders to XCCL will be guaranteedby one or more of XCI, XCFI and XCL, and any such guarantorwill grant security in support of its guarantee on some orall of its assets, which may include shares of other companiesheld by it. Xerox will also be required to guarantee the Loanand to pledge the shares of XCI which it owns as securityfor its obligations under the refinanced US$7,000,000,000facility.
14. The amounts guaranteedby XCI, XCL or XCFI will be limited to the amount of the XCILoan, and any payments under the Loan or guarantees woulddirectly reduce the amount outstanding under the Loan fromthe Lenders or, in the case of a guarantee, the amount forwhich the guarantor would be liable. Similarly, any increasein the XCI Loan would result in a corresponding increase inthe amount for which the guarantor would be liable.
15. Following the proposedrefinancing, the XCI Loan will remain on commercially reasonableterms that are not less advantageous to XCI than if the loanhad been obtained directly from an arm's length third party,and the loan does not involve, directly or indirectly, theissue of participating securities of XCI or a subsidiary ofXCI.
16. XCI may lend all or partof the proceeds of the refinanced XCI Loan to XCL or any othersubsidiary. If XCI were to make a loan to XCL, or any othersubsidiary, it would be on reasonable commercial terms thatwould not be less advantageous to XCL, or any other subsidiary,than if such loan were obtained directly from an arm's lengththird party, and the loan would not, directly or indirectly,involve the issue of participating securities of XCL or anyother subsidiary.
17. Xerox, XCCL, XCI, XCFIand XCL are "related parties" of each other withinthe meaning of the Legislation.
18. Although the XCI Loanis a "related party transaction" within the meaningof the Legislation, XCI is exempt from the valuation and minorityapproval requirements of the Legislation with respect to theXCI Loan as XCI has concluded that such loan is on reasonablecommercial terms that are not less advantageous to XCI thanif the loan had been obtained directly from an arm's lengththird party, and the loan does not involve, directly or indirectly,the issue of participating securities of XCI or a subsidiaryof XCI.
19. XCCL is a related partyof XCI as each is controlled by Xerox. Any guarantee by XCIof the Loan to XCCL and any granting of security thereforwould be a "related party transaction" within themeaning of the Legislation. XCI also owns 100% of the sharesof XCFI. Any guarantee by XCFI of the Loan to XCCL and anygranting of security could also be construed as the indirectguarantee by XCI of the Loan to XCCL. As XCL is also whollyowned by XCI, any guarantee by XCL of the Loan to XCCL andany granting of security could be also be construed as theindirect guarantee by XCI of the Loan to XCCL. Consequently,absent an exemption or discretionary relief, XCI would haveto comply with the valuation and minority approval requirementsof the Legislation. This is the case even though the proceedsof the Loan have been lent to XCI (i.e., the XCI Loan), whichtransaction is exempt from the Legislation as described inparagraph 18 above.
20. XCCL is a related partyof XCFI as XCCL is an affiliated entity of XCI, which controlsXCFI. As a result, any guarantee by XCFI of the Loan to XCCLand any granting of security therefor would be a related partytransaction within the meaning of the Legislation and, absentan exemption or discretionary relief, XCFI would have to complywith the valuation requirement of the Legislation. The minorityapproval requirements would not be applicable since all ofthe affected securities (within the meaning of the Legislation)of XCFI are owned by XCI.
21. The refinancing of theExisting Facility is very important to Xerox and its subsidiaries,including XCI, XCFI and XCL and will improve their financialposition. The Lenders will not consent to the refinancingof the Existing Facility unless the guarantees and the grantingof the security therefor which are the subject of this applicationare provided to the Lenders.
AND WHEREAS pursuantto the system, this MRRS Decision Document evidences the decisionof each of the Decision Makers (collectively, the "Decision");
AND WHEREAS each of theDecision Makers is satisfied that the test contained in theLegislation that provides each Decision Maker with the jurisdictionto make the Decision has been met;
THE DECISION of the DecisionMakers pursuant to the Legislation with respect to any guaranteeand grant of security by XCI, XCFI and XCL with respect to theLoan by the Lenders to XCCL is that the valuation and minorityapproval requirements of the Legislation shall not apply toXCI and the valuation requirements of the Legislation shallnot apply to XCFI so long as;
1. XCI is exempt from thevaluation and minority approval requirements of the Legislationin respect of the XCI Loan; and
2. the amounts guaranteedby XCI, XCL or XCFI are limited to the amount of the XCI Loan.
March 28, 2002.
"Ralph Shay"