Securities Law & Instruments

Headnote

Mutual Reliance Review System for ExemptiveRelief Applications - Relief from registration and prospectusrequirements for issuance by RONA of its common shares to Dealer-Owners,provided that certain conditions are met, including those setout in section 2.6 of Multilateral Instrument 45-102 Resaleof Securities.

Applicable Provisions

Securities Act, R.S.O. 1990, c. S.5, as am.,ss. 25, 53 and 74(1).

Multilateral Instrument 45-102 Resale of Securities.

IN THE MATTER OF

THE SECURITIES LEGISLATIONOF

THE PROVINCES OF

SASKATCHEWAN, ONTARIO, QUEBEC,NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARDISLAND AND NEWFOUNDLAND

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEWSYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

RONA INC.

 

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") in eachof the Provinces of Saskatchewan, Ontario, Quebec, New Brunswick,Nova Scotia, Prince Edward Island and Newfoundland (the "Jurisdictions")has received an application from RONA inc. (the "Filer"or "RONA") for a decision under the securities legislationof the Jurisdictions (the "Legislation") that therequirements contained in the Legislation to prepare a prospectusand to be registered in accordance with the Legislation (the"Prospectus and Registration Requirements") shallnot apply to the Filer for the issuance of common shares toDealer-Owners (as defined below), as well as to further tradesof such common shares;

AND WHEREAS under the Mutual RelianceReview System for Exemptive Relief Applications (the "System"),the Commission des valeurs mobilières du Québecis the principal regulator for this application;

AND WHEREAS the Filer has representedand submitted to the Decision Makers that:

1. The Filer is a validly subsisting companywhich results from the amalgamation of Marchands Ro-Na Inc.and Le Groupe Ro-Na Inc. through articles of amalgamationdated January 2, 1984 under Part 1A of the Companies Act (Quebec).The Filer's head office is located at 220 chemin du Tremblay,Bourcherville, Quebec J4B 8H7.

2. The Filer is a reporting issuer in theProvince of Quebec. It became a reporting issuer when itsclass A preferred shares, series 1 and 2 were offered to thepublic in the Province of Quebec by prospectus dated October24, 1984. As such, RONA is subject to the continuous disclosurerequirements of the Securities Act (Quebec) (the "Act")and RONA shareholders receive quarterly and annual financialstatements of RONA as well as proxy related materials andannual information forms, all of which are filed with theCommission des valeurs mobilières du Québec(the "Commission") in accordance with the Act.

3. The Filer is an electronic filer withinthe meaning given to such term under National Instrument 13-101- System for Electronic Document Analysis and Retrieval (SEDAR).

4. The Filer's authorized share capital consistsof an unlimited number of Class A preferred shares, issuablein series of which one series, designated as an unlimitednumber of Class A preferred shares, series 5 (the "ClassA Preferred Shares") is currently authorized, an unlimitednumber of Class B preferred shares (the "Class B PreferredShares"), an unlimited number of Class C preferred shares,issuable in series of which one series, designated as an unlimitednumber of Class C preferred shares, series 1 (the "ClassC Preferred Shares") is currently authorized, an unlimitednumber of Class D preferred shares (the "Class D PreferredShares"), an unlimited number of Class E preferred shares(the "Class E Preferred Shares"), an unlimited numberof Class A common shares (the "Class A Shares"),an unlimited number of Class C common shares (the "ClassC Shares"), an unlimited number of Class D common shares(the "Class D Shares") and an unlimited number ofClass E common shares (the "Class E Shares"), allof which are without par value (except for the Class B PreferredShares which have a par value of $1.00).

5. As at June 30, 2002, the only shares ofRONA issued and outstanding were the following: 4,085,053Class A Preferred Shares, 1,306 Class C Preferred Shares,10,000,000 Class D Preferred Shares, 5,752,826 Class A Shares,1,346,296 Class C Shares, 1,802,450 Class D Shares and 360,490Class E Shares. No Class B Preferred Shares and no Class EPreferred Shares are currently outstanding and no shares ofRONA are currently listed on any stock exchange. It is expectedthat effective upon the filing of a final base PREP prospectusfor RONA's public offering of Common Shares (as defined below)(the "Offering"), the Class A Shares, Class C Shares,Class D Shares and Class E Shares will be subdivided on anexpected four to one basis.

6 The articles of the Filer, as amended (the"Articles"), provide that immediately before butconditionally upon the closing of the Offering, each outstandingClass C Share, Class D Share and Class E Share will be automaticallyconverted into a Class A Share and that the classes of ClassC Shares, Class D Shares, Class E Shares and Class E PreferredShares will be cancelled. In addition, the Articles providethat the Class A Shares will automatically be renamed "CommonShares" (collectively, the "Capital Reorganisation").

7. The Filer also has the intention to listthe Common Shares on The Toronto Stock Exchange.

8. RONA stores are operated under variouscollective trade-marks known as "banners" and theyare either owned by RONA or by dealers (the "Dealer-Owners").

9. Upon joining RONA, each Dealer-Owner isrequired to execute a commercial license agreement (the "LicenseAgreement") pursuant to which it undertakes to complywith RONA's standards, including the operating conditionsof the banner under which it operates. In addition, Dealer-Owners,pursuant to their License Agreement, are typically requiredto purchase a minimum number of Class A Shares when they beginoperating a store under a RONA banner and contribute on anannual basis thereafter a percentage of their purchases fromRONA to a subscription fund created and maintained by RONA(the "Fund"). The contributions so made to the Fundin a given year are used to purchase additional Class A Sharesthat are issued to the Dealer-Owners the following year. EachDealer-Owner is also required to grant in favour of RONA asecurity interest in all the shares of RONA held by it ascontinuing security for the performance of its obligationstowards RONA.

10. In the event of the termination of theLicense Agreement between a Dealer-Owner and RONA, the ClassA Shares held by such Dealer-Owner may be either (i) withthe consent of RONA, transferred to another Dealer-Owner orto a purchaser qualified to become a Dealer-Owner, or (ii)purchased for cancellation by RONA. If a Dealer-Owner's ClassA Shares are purchased for cancellation by RONA, RONA mayeither pay the Dealer-Owner the cash value of those ClassA Shares or issue the Dealer-Owner Class C Preferred Shares,Class B Preferred Shares or Class A Preferred Shares dependingon the date at which such Class A Shares were purchased byRONA. The Filer intends to cease purchasing such shares afterthe closing of the Offering and the listing of the CommonShares on The Toronto Stock Exchange considering that formerDealer-Owners will have a market on which to sell their CommonShares.

11. Prior to February 14, 1994, the Filerissued Class A Shares and Class B Preferred Shares to Dealer-Ownersin the Province of Quebec pursuant to a series of discretionaryrulings granted by the Commission. These rulings providedexemptive relief from prospectus and registration requirementsand, in some cases, also provided certain conditions for theresale of the securities thereby distributed (although RONAcurrently satisfies all of these conditions). On February14, 1994, the Commission granted RONA a perpetual ruling providingexemptive relief from prospectus and registration requirementsfor all Class A Shares and Class B Preferred Shares to beissued by RONA to its Dealer-Owners if such issue was madein accordance with the representations made by RONA in itsapplication to the Commission. On February 8, 1999, a similarruling was granted with regards to the issuance by RONA ofClass A Preferred Shares to the Dealer-Owners.

12. On July 23, 1993, the Ontario SecuritiesCommission (the "OSC") ruled that the issuance ofClass A Shares and Class B Preferred Shares by RONA to Dealer-Ownerswas not subject to the prospectus and registration requirementsof the Securities Act (Ontario), provided that:

(a) Each purchaser of Class A Shares orClass B Preferred Shares has been approved by RONA as anOntario Dealer-Owner and has purchased the Class A Sharesor Class B Preferred Shares pursuant to the License Agreement,

(b) Prior to the first issuance or transferof any Class A Shares or Class B Preferred Shares to anOntario Dealer-Owner, RONA has to provide such Ontario Dealer-Ownerwith:

(i) a copy of the OSC's ruling, and

(ii) a statement that, as a consequenceof such ruling, certain protections, rights and remediesprovided by the Securities Act (Ontario), includingstatutory rights of recession or damages, will not beavailable to Ontario Dealer-Owners,

(c) all continuous disclosure materialsrelating to RONA, including its audited annual reports andits unaudited quarterly reports, furnished to RONA's Dealer-Ownersresiding in the Province of Quebec be concurrently sentto Ontario Dealer-Owners, and

(d) the first trade in the Class A Sharesor Class B Preferred Shares, other than to other Dealer-Owners,a purchaser qualified to become a Dealer-Owner or RONA,is a distribution in accordance with the Securities Act(Ontario).

This ruling was revoked and replaced on November5, 1999 by a similar ruling which also covered the issuanceof Class A Preferred Shares.

13. Similar orders have been obtained by RONAfor the issuance of Class A Shares and Class B Preferred Sharesin the Provinces of Nova Scotia, Prince Edward Island andNewfoundland on September 15, 1999, January 28, 1998 and January5, 1998 respectively. On January 6, 1998, the Administratorof Securities, New Brunswick also rendered a similar rulingexcept for the fact that this ruling did not contain any resalerestrictions.

14. As a result of the Capital Reorganisation,the Class A Shares held by Dealer-Owners will be redesignated"Common Shares" immediately before the closing ofthe Offering.

15. As of the closing of the Offering, theLicense Agreements and most of the applicable commercial regulationsbetween RONA and the Dealer-Owners will be the same as theycurrently are, except that certain amendments will be madeto modify, among other things, the applicable contributionmaximums and, subject to certain conditions, permit the releaseof a certain number of the Dealer-Owners' Common Shares fromthe pledge granted to RONA.

Following these amendments, new Dealer-Ownerswill be required to purchase, upon their adhesion to RONA'snetwork, Common Shares from RONA's treasury in an aggregateamount of $10,000 (which amount shall be reduced to $5,000for stores with estimated annual purchases from RONA equalor inferior to $1 million), for a price per share based ontheir market value at such time.

Subject to the limitations set out below,Dealer-Owners will continue to be required to make annualcontributions to the Fund in an amount equal to 2% of theirpurchases from RONA of the previous calendar year, exceptin the case of Dealer-Owners operating under the RONA L'entrepôtand RONA Le Régional banners who will have the obligationto contribute a fixed amount annually.

All Dealer-Owners' contributions to the Fundwill now be capped at three levels:

- the annual maximum: in any given yeara Dealer-Owner may not contribute an amount greater thanthe annual maximum applicable to its store category.

- the cumulative subscription maximum: subjectto the terms of the pledge maximum set out below, a Dealer-Owner'scontributions will cease when its total contributions tothe Fund, from time to time, reach a level equal to thelesser of the applicable percentage of its annual purchasesfor the previous calendar year or the fixed maximum thresholdapplicable to its store category, except in the case ofDealer-Owners operating under the RONA L'entrepôtand RONA Le Régional banners who will have the obligationto contribute a fixed amount.

- the pledge maximum: a Dealer-Owner's contributionswill be suspended for a given year if the aggregate valueof the Common Shares held by the Dealer-Owner, as determinedeach year on a date set by the board of directors of RONA(the "Adjustment Date"), is greater than the pledgemaximum applicable to its store category. Notwithstandingthe foregoing, in the first calendar year that includesthe closing date of the Offering, the first Adjustment Datewill be the date of the preliminary base PREP prospectusfiled in respect of the Offering and the second AdjustmentDate will be the closing date of the Offering. The totalvalue of the Common Shares held by a Dealer-Owner on anAdjustment Date will correspond to the amount obtained bymultiplying the number of such shares by 75% of (i) in thecase of the first Adjustment Date, $15.00 (following subdivision),(ii) in the case of the second Adjustment Date, the priceper Common Share under the Offering, or (iii) in the caseof any other Adjustment Date, the market value of a CommonShare.

16. The annual maximum, the cumulative subscriptionmaximum and the pledge maximum will vary with the differentstore categories in the manner set out below:

Store Category

Annual Maximum

Cumulative SubscriptionMaximum (lesser of)

Pledge Maximum (lesserof)

 

 

 

Annual Purchase Percentage

Maximum Threshold

Annual Purchase Percentage

Maximum Threshold

Stores with annual purchases of:

 

 

 

 

 

 

- Between $0 and $1,000,000

$10,000

12%

$100,000

20%

$200,000

 

- Between $1,000,001 and $2,500,000

$20,000

12%

$150,000

20%

$400,000

 

- Between $2,500,001 and $5,000,000

$25,000

12%

$175,000

20%

$600,000

 

- Between $5,000,001 and $10,000,000

$30,000

12%

$200,000

20%

$800,000

 

- More than $10,000,000

$35,000

12%

$225,000

20%

$1,000,000

 

RONA Le Régional

$35,000

-

$225,000

-

$1,000,000

 

RONA L'entrepôt

$75,000

-

$450,000

-

$1,200,000

If, on any Adjustment Date, the value of theCommon Shares held by a Dealer-Owner is greater than its pledgemaximum on that date, RONA will have to, at the Dealer-Owner'srequest and subject to the following conditions, refund suchDealer-Owner the balance of its contributions made to theFund and release from the pledge and return to the Dealer-Ownerthe portion of its Common Shares in excess of the pledge maximum(the "Excess Common Shares"). The release of suchExcess Common Shares is conditional, among other things, onthe Dealer-Owner (i) complying with certain of its undertakingstoward RONA pursuant to its License Agreement and the relatedcommercial arrangements, and (ii) not receiving any director indirect financial assistance from RONA except for theamount customarily extended by RONA to such category of Dealer-Ownerby way of line of credit or advance. A Dealer-Owner whoseaggregate value of Common Shares (calculated as set forthabove) held by it falls below its pledge maximum at any givensubsequent Adjustment Date will have to resume its contributionsto the Fund if its cumulative subscription maximum has notyet been reached.

17. In connection with the amendments describedin the foregoing paragraph, RONA and National Bank Trust (the"Transfer Agent") have entered into escrow agreementswith over 92% of the Dealer-Owners. Under the terms of thesaid escrow agreements, any Dealer-Owner who holds ExcessCommon Shares has undertaken to place the said shares in escrowwith the Transfer Agent. Except for any such shares sold aspart of a secondary offering made concurrently with the Offering,such shares are to be released from escrow, subject to certainconditions, as follows: 15% of the balance of the escrowedshares on the 180th day following the closing dateof the Offering (the "First Release Date"), 30%of the balance of the escrowed shares on the first anniversaryof the First Release Date, 50% of the balance of the escrowedshares on the second anniversary of the First Release Dateand the balance of the escrowed shares on the third anniversaryof the First Release Date. If the License Agreement enteredinto by a Dealer-Owner terminates before the end of the escrowperiod, the escrow agreement also provides that the CommonShares released from RONA's pledge as a result of such terminationwill be escrowed and released pursuant to the remaining timeframe set out above. The release of any escrowed shares issubject to certain conditions which relate, among other things,to the Dealer-Owner complying with certain of its undertakingstoward RONA under its commercial license agreement.

18. RONA currently plans to expand its businessoperations in all provinces of Canada by entering into LicenseAgreements with individuals or businesses that meet RONA requirements.

19. RONA is a reporting issuer in the Provinceof Quebec and an electronic filer on SEDAR. After the Offering,RONA will be subject to continuous disclosure requirementsin all Jurisdictions. As a result, Dealer-Owners will haveaccess to continuous disclosure materials relating to RONA,including its audited annual reports and unaudited quarterlyreports.

20. The underlying commercial objective inoffering Common Shares to Dealer-Owners is to provide RONAwith capital and to encourage Dealer-Owners by virtue of theirposition as shareholders of RONA to utilize the volume purchasingservices of RONA, thereby furthering economies of scale inRONA's purchasing activities and benefiting Dealer-Ownersthrough the use of a collective purchasing power that wouldotherwise be unavailable to them.

21. The contractual arrangements and the termsof the License Agreements between RONA and its Dealer-Ownerswill be, following the Offering, essentially the same as beforethe Offering, with the exception of the amendments describedherein.

22. Based on the foregoing, the Filer submitsthat it would not be prejudicial to the public interest togrant the relief sought.

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

AND WHEREAS each Decision Maker is satisfiedthat to do so would not be prejudicial to the public interest;

IT IS THE DECISION of the Decision Makersunder the Legislation that the Prospectus and Registration Requirementsshall not apply to the issuance by RONA of Common Shares toDealer-Owners in the Jurisdictions, provided that:

(a) each purchaser of Common Shares hasbeen approved by RONA as a Dealer-Owner;

(b) prior to the first issuance of any CommonShares to a Dealer-Owner, RONA provided such Dealer-Ownerwith:

(i) a copy of the Decision, and

(ii) a statement that, as a consequenceof the Decision, certain protections, rights and remediesprovided under the Legislation, including statutory rightsof rescission or damages, would not be available to Dealer-Owners;

(c) except in Québec, the first tradein Common Shares acquired by the Dealer-Owner in a Jurisdictionshall be deemed to be a distribution under the Legislationof such Jurisdiction unless the conditions in subsection(3) or (4) of Section 2.6 of Multilateral Instrument 45-102- Resale of Securities are satisfied.

November 7, 2002.

"Jean-François Bernier"