Securities Law & Instruments

Headnote

Mutual Reliance Review System - Rule 61-501- Related party transactions - Valuation and minority approvalexemption granted in connection with two-step reorganizationwhere transaction is agreed to by the issuer while the relatedparties are wholly-owned subsidiaries and completed substantiallyin accordance with the terms agreed to and as disclosed in aprospectus sent to all shareholders.

Applicable Ontario Rule

Rule 61-501 - Insider Bids, Issuer Bids, GoingPrivate Transactions and Related Party Transactions, ss. 5.5,5.7 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

PARAMOUNT RESOURCES LTD.

 

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") in eachof Ontario and Quebec (the "Jurisdictions") has receivedan application from Paramount Resources Ltd. ("PRL"or the "Applicant") for a decision under the securitieslegislation of the Jurisdictions (the "Legislation")that the requirements contained in the Legislation to obtaina formal valuation and to obtain the approval of minority shareholders(collectively, the "Valuation and Minority Approval Requirements")shall not apply in connection with a related party transaction;

AND WHEREAS under the Mutual RelianceReview System for Exemptive Relief Applications (the "System"),the Ontario Securities Commission is the principal regulatorfor this application;

AND WHEREAS PRL has represented to theDecision Makers that:

1. PRL is incorporated under the laws of theProvince of Alberta and is currently organized and subsistingunder the Business Corporations Act (Alberta) ("ABCA").

2. The head office of PRL is located in Calgary,Alberta. It is a reporting issuer in both Jurisdictions andis not currently in default of the securities legislationof such Jurisdictions.

3. PRL is authorized to issue an unlimitednumber of common shares of which there are 59,458,600 outstanding.

4. The common shares have been listed on theToronto Stock Exchange since 1984.

5. PRL is in the business of petroleum andnatural gas exploration and production.

6. Paramount Oil & Gas Ltd. ("POG"),and the immediate family of C. H. Riddell (the "C.H.Riddell Family") exercise control and direction over29,590,727 common shares of PRL, representing approximately49.77% of the issued and outstanding shares of PRL. It isanticipated that at the record date for the Dividend (as suchterm is hereafter defined), the C.H. Riddell Family will alsohold vested stock options to purchase 396,000 common sharesof PRL.

7. As at December 31, 2001, PRL had in excessof $1 billion worth of assets.

8. On June 28, 2002, PRL created an open-endedmutual fund trust by trust indenture (the "MFT")under the laws of the Province of Alberta.

9. Initially PRL will be the only holder ofa nominal number of trust units ("MFT Units") ofthe MFT.

10. On June 28, 2002, PRL also created a personaltrust under a trust indenture (the "CT") under thelaws of the Province of Alberta, as a wholly-owned subsidiaryof the MFT.

11. Approximately $81 million worth of royaltytrust properties (the "Initial Properties") willbe transferred from PRL to the CT. The CT and PRL will alsoenter into an agreement (the "Additional Properties Take-upAgreement") whereby PRL will agree to sell to the CTup to 100% of PRL's interest in an additional $220 millionworth of royalty trust properties (the "Additional Properties").The Initial Properties will be transferred to the CT for considerationconsisting of debt of approximately $81 million (the "InitialIndebtedness") incurred by the CT in favour of PRL. TheAdditional Properties Take-up Agreement will be entered intoat that time. At the time of such transfer, both MFT and CTwill provide a limited guarantee (the "Guarantee")and related security (the "Guarantee Security")in favour of PRL's bankers.

12. The CT will grant to the MFT, under aroyalty agreement, a contractual royalty of 99% of the netrevenue from the oil and gas substances produced from theInitial Properties and all after-acquired properties. TheCT will receive in exchange consideration (the "RoyaltyConsideration") of approximately $65 million consistingof approximately $30 million of secured indebtedness (the"Secured Indebtedness") and the issuance of MFTUnits valued at approximately $35 million. The Royalty Considerationwill be paid to PRL as part of a tripartite agreement amongPRL, the MFT and the CT. The Initial Indebtedness to PRL willbe reduced to approximately $16 million. The Secured Indebtednesswill be assigned to PRL's bankers.

13. The MFT will purchase the remaining $16million of Initial Indebtedness from PRL in exchange for theissuance to PRL of additional MFT Units valued at approximately$16 million.

14. The $51 million worth of MFT Units heldby PRL will be distributed to its shareholders by way of adividend in kind (the "Dividend"). The Dividendwill be qualified by a prospectus of the MFT filed in alljurisdictions in Canada (the "Prospectus"). Basedupon the current number of common shares of PRL currentlyoutstanding, PRL shareholders will be entitled to receiveone MFT Unit for every 6 common shares of PRL held by them.However, there will be up to 784,000 vested stock optionsof PRL outstanding at the record date of the Dividend entitlingholders thereof to acquire up to an additional 784,000 commonshares of PRL. In the event that any or all of those optionsare exercised on or prior to the record date of the Dividend,the number of common shares necessary to receive one MFT Unitwill increase to a maximum of 6.079 common shares of PRL.PRL will issue a press release on the record date of the Dividendgiving notice of what this ratio will be.

15. Shortly after the distribution of theDividend, the MFT will distribute rights (the "Rights")to subscribe for additional MFT Units to the persons who thenhold the MFT Units (the "Rights Offering"). Theissuance of the Rights will also be qualified by the Prospectus.Each MFT Unit held on the record date for the Rights Offeringwill entitle the holder to receive three Rights under theRights Offering, resulting in an aggregate issuance of approximately9,909,767 MFT Units on the Dividend and approximately 29,729,301Rights to subscribe for additional MFT Units. Each Right,upon payment of the subscription price, will be exercisedfor one additional MFT Unit. It is anticipated that if allRights are exercised, approximately $150 million will be raisedunder the Rights Offering. The Rights Offering will providefor an additional subscription privilege in accordance withNational Instrument 45-101. There will be no stand-by commitmentunder the Rights Offering. There will be no minimum offeringamount under the Rights Offering.

16. The proceeds from the Rights Offering,along with bank financing proposed to be obtained by the MFT,will be used by the CT to acquire the Additional Propertiesunder the Additional Properties Take-up Agreement. The CT,subject to normal conditions of an oil and gas purchase andsale agreement, will be obligated to complete the transactioncontemplated by the Additional Properties Take-up Agreementto the extent of the amounts raised under the Rights Offeringplus the associated bank financing. If the Rights Offeringis fully subscribed and the banks provide the full financingdescribed in their commitment letter, the CT will utilizesuch proceeds to acquire the full 100% of PRL's interest inthe Additional Properties. If the Rights Offering is not fullysubscribed, a reduced percentage working interest in the AdditionalProperties will be acquired. It is anticipated that the Guaranteeand related Guarantee Security will be releasable upon theexercise by POG of all Rights beneficially held by it, providedthe proceeds of such exercise are used for the acquisitionof a portion of PRL's interest in the Additional Properties.

17. POG and the members of the C.H. RiddellFamily have indicated their intention to subscribe for upto their full pro-rata allotment of MFT Units under the RightsOffering irrespective of whether or not all Rights issuedunder the Rights Offering are exercised. In addition, POGand the C.H. Riddell Family have indicated that they may exercisethe additional subscription privilege under the Rights Offeringto acquire further MFT Units under the Rights Offering.

18. The trustee of the CT is a corporationincorporated under the ABCA ("Trustee Company")and is wholly-owned by the MFT. Trustee Company will holdlegal title to the assets and properties of the CT on behalfof and for the benefit of the CT and will administer, manageand operate the oil and gas business of the CT. The boardof directors of Trustee Company is comprised of 6 directorsof which 2 are C.H. Riddell and S.L. Riddell Rose and 4 ofwhich are outside directors. The holders of MFT Units willhave the right to elect the board of directors of TrusteeCompany. It is intended that C.H. Riddell will initially directthe operations of the MFT and the CT for a period of timeas the Chairman and Chief Executive Officer of Trustee Company,and S.L. Riddell Rose will initially hold the position ofPresident of Trustee Company. Other than reimbursement ofcosts and expenses of Trustee Company to administer and operatethe CT's oil and gas operations, and to administer MFT's operations,Trustee Company will receive no fees as trustee of the CT.The directors and officers of Trustee Company will receivecompensation which is comparable to that received by peersin public oil and gas corporations of similar size and isanticipated to include salaries, unit incentive options andbonuses based on performance.

19. In order to assess the merits of spinningout the Initial Properties and Additional Properties to theCT and the MFT through the Dividend, the Additional PropertiesTake-Up Agreement, and the Rights Offering (collectively,the "Transactions"), PRL has established a specialcommittee (the "Special Committee") of independentmembers of its board of directors.

20. The Special Committee has been grantedauthority by the board of directors of PRL to assess the Transactionswith a view as to whether or not the transactions are in thebest interests of PRL and whether or not the transactionsare fair, from a financial point of view, to the PRL shareholders.As part of the Special Committee's assessment process, theywill receive a fairness opinion from their financial advisors.

21. POG, PRL, the MFT, and the CT are andwill be related parties under the Legislation due to POG'sand the C.H. Riddell Family's direct and indirect shareholdingsin PRL.

22. The consummation of the purchase and saleof the Additional Properties between the CT and PRL pursuantto the Additional Properties Take-up Agreement will be a relatedparty transaction between PRL and the MFT under the Legislation(the "Related Party Transaction").

23. PRL has advised that the 3 primary purposesof the Transactions are: (a) to allow the shareholders ofPRL to participate in certain mature income producing oiland gas assets currently held by PRL through a new separatepublicly traded entity on which the public markets have generallyplaced a greater value than for that of traditional publiclytraded oil and gas corporations holding similar assets; (b)to allow PRL to minimize income taxes paid on income generatedby those mature producing properties; and (c) to allow forthe efficient raising of funds to consummate the purchaseof the Additional Properties from PRL by PET which will allowPRL to reduce its debt levels. As a result, PRL believes thatthe completion of the Transactions will enhance shareholdervalue in a tax effective manner.

24. It is contemplated that the AdditionalProperties Take-up Agreement will be entered into prior tothe payment of the Dividend while the MFT and the CT are bothwholly-owned by PRL. It is contemplated, however, that theMFT and the CT will not be wholly-owned by PRL at the timethe transfer of the Additional Properties occurs.

25. The oil and gas assets comprising theAdditional Properties will have been determined, and agreedto, at the time of the execution of the Additional PropertiesTake-up Agreement. The purchase price for those AdditionalProperties under the Additional Properties Take-up Agreementwill be based upon the present value before income tax ofthe proved plus risked probable reserves applicable thereto,discounted by 15%, as derived from an engineering report preparedby PRL's independent engineers, plus adjustments for undevelopedland and ancillary assets.

26. A full description of the material termsof the Transactions, as well as prospectus level disclosureof the MFT, the CT, and the assets comprised in the InitialProperties and the Additional Properties will be containedin the Prospectus.

27. POG is being treated identically to allother shareholders of PRL in respect of the Dividend and theRights Offering;

AND WHEREAS under the System this MRRSDecision Document evidences the decision of each Decision Maker(collectively, the "Decision");

AND WHEREAS each of the Decision Makersis satisfied that the test contained in the Legislation thatprovides the Decision Maker with the jurisdiction to make theDecision has been met;

THE DECISION of the Decision Makers underthe Legislation is that the Valuation and Minority ApprovalRequirements shall not apply to the Related Party Transaction,provided that PRL and the MFT comply with all other applicableprovisions of the Legislation.

August 12, 2002.

"Ralph H. Shay"