Securities Law & Instruments

Headnote

Direct and indirect issuer bids resulting froma reorganization transaction involving issuer and largest shareholderholding company, followed by the holding company's dissolution- issuer bids exempt from sections 95, 96, 97, 98 and 100 wherethe purpose of the transaction is to enable shareholders todirectly own shares previously held indirectly through theirholding company - beneficial shareholders to provide indemnityand reimbursement to the issuer and its directors - transactionunanimously approved by disinterested board of directors - assessmentof tax consequences provided by issuer's auditor - no adverseeconomic or tax impact or prejudice to issuer or public shareholders.

Subsection 59(1) of Schedule I - issuer is exemptfrom payment of the fee otherwise payable pursuant to clause23(1) and 32(1)(b) of Schedule I to the Regulation in respectof reorganization transaction exempted from the issuer bid requirementspursuant to an order under clause 104(2)(c), where the transactiondid not result in any change to the share ownership structureof the issuer, subject to the requirement that a minimum feeof $800 be paid.

Applicable Ontario Statute

Securities Act, R.S.O. 1990, c. S.5, as am.,ss. 93(1)(c), 95, 96, 97, 98, 100, and 104(2)(c).

Applicable Ontario Regulation

Regulation made under the Securities Act, R.R.O.1990, Reg. 1015, as am., ss. 23(1), 32(1)(b) and 59(1) of ScheduleI.

IN THE MATTER OF

THE SECURITIES ACT R.S.O.1990,

CHAPTER S.5, AS AMENDED (the"Act")

AND

IN THE MATTER OF

THE REGULATION UNDER THE ACT,R.R.0. 1990,

REGULATION 1015, AS AMENDED(the "Regulation")

AND

IN THE MATTER OF

DENNINGHOUSE INC.

 

ORDER

UPON the application (the "Application")of Denninghouse Inc. ("Denninghouse") to the OntarioSecurities Commission (the "Commission") for an order:

(i) pursuant to subsection 104(2)(c) ofthe Act that the acquisition by Denninghouse of certainof its common shares in connection with a proposed reorganizationtransaction (the "Transaction") described below,shall not be subject to the requirements of sections 95,96, 97, 98 and 100 of the Act (the "Issuer Bid Requirements");

(ii) pursuant to subsection 59(2) of ScheduleI of the Regulation (the "Schedule") that Denninghousebe exempt from the requirements under subsections 23(1)and 32(1)(b) of the Schedule to pay fees in connection withthe Transaction (the "Fee Requirements"), providedthat the minimum fee of $800 prescribed by the Scheduleis paid;

AND UPON considering the Applicationand the recommendation of the staff of the Commission;

AND UPON Denninghouse having representedto the Commission as follows:

1. Denninghouse is a corporation incorporatedunder the laws of the province of Ontario. Denninghouse isa reporting issuer under the Act and is not in default ofany requirements of the Act or the Regulation.

2. The authorized capital of Denninghouseconsists of an unlimited number of preferred shares and anunlimited number of common shares ("Common Shares"),of which no preferred shares and 5,159,800 Common Shares wereissued and outstanding as of May 17, 2002.

3. The Common Shares are listed for tradingon the Toronto Stock Exchange (the "TSX").

4. DGK Holdings Ltd. ("DGK") currentlyowns 2,857,500 Common Shares (the "DGK Common Shares"),representing approximately 55% of the issued and outstandingCommon Shares.

5. DGK is a corporation incorporated underthe laws of the province of Ontario, is a private holdingcompany wholly-owned by 1410776 Ontario Limited ("1410776")and has no assets, other than the DGK Common Shares, no liabilitiesand does not carry on any active business.

6. 1410776 is a corporation incorporated underthe laws of the province of Ontario, all of the issued andoutstanding common shares of which are owned by 1410248 OntarioLimited ("1410248") and Diplock Investments Inc.,a domestic Barbados corporation ("Diplock"). TheClass A shares of 1410776, of which 7,571,009 are issued andoutstanding, are held by 1410248. The Class C shares of 1410776,of which 1,000,000 are issued and outstanding, are held byDennis Klein, the Chairman, President and Chief ExecutiveOfficer of Denninghouse. The outstanding Common Shares, ClassA shares and Class C shares of 1410776 are collectively referredto herein as the "1410766 Shares" and 1410248, Diplockand Dennis Klein are collectively referred to herein as the"1410776 Shareholders".

7. 1410776 has no assets, other than the commonshares of DGK, no liabilities and does not carry on any activebusiness.

8. 2015290 Ontario Limited ("2015290")is a corporation incorporated under the laws of the provinceof Ontario and is a wholly-owned subsidiary of Denninghouse.

9. The purpose of the Transaction is to permitthe 1410776 Shareholders to hold the DGK Common Shares directly,rather than indirectly through 1410776 and DKG.

10. As part of the Transaction, DGK, 2015290and 1410776 will amalgamate (the "Amalgamation")under the Business Corporations Act (Ontario) (the"OBCA") pursuant to an amalgamation agreement (the"Amalgamation Agreement") to form an amalgamatedcorporation referred to herein as "Amalco". Denninghousewill also be a party to the Amalgamation Agreement but willnot be an amalgamating corporation. Pursuant to the termsof the Amalgamation Agreement, among other steps:

(a) Denninghouse will, prior to the completionof the Amalgamation, issue 2,857,500 Common Shares (the"Treasury Shares") to the 1410776 Shareholdersin exchange for the 1410776 Shares; and

(b) the outstanding shares of 2015290 willbe exchanged for newly issued shares of Amalco.

11. Upon completion of the Amalgamation, Amalcowill be a wholly-owned subsidiary of Denninghouse and willown the DGK Common Shares that were formerly held indirectlyby the 1410776 Shareholders. The 1410776 Shareholders willhold the 2,857,500 Treasury Shares directly, rather than the2,857,500 DGK Common Shares that they previously held indirectlythrough 1410776 and DGK.

12. As a further part of the Transaction,immediately following the completion of the Amalgamation,Amalco will distribute its assets, including the DGK CommonShares, to Denninghouse by means of a voluntary winding upof Amalco pursuant to the provisions of Part XVI of the OBCA(the "Winding Up"). Once acquired by Denninghouse,the DGK Common Shares will be cancelled.

13. Immediately following the completion ofthe Transaction, the number of issued and outstanding CommonShares will be the same as prior to the commencement of theTransaction. In addition, the 1410776 Shareholders and thepublic shareholders of Denninghouse (the "Public Shareholders"),will beneficially own the same aggregate number and the samerelative percentages of Common Shares that they owned immediatelyprior to the commencement of the Transaction and will havethe same rights and benefits in respect of such Common Sharesthat they currently have.

14. The Transaction is subject to the approvalof the disinterested members of the board of directors ofDenninghouse (the "Board"). In determining whetherto approve the Transaction, the Board will, among other things,review and consider a written opinion from Goodman and CarrLLP, counsel to the 1410776 Shareholders, with respect tothe tax consequences of the Transaction.

15. Pursuant to an indemnity agreement (the"Indemnity") to be entered into between the 1410776Shareholders and Denninghouse, the 1410776 Shareholders willjointly and severally indemnify Denninghouse (to the satisfactionof the disinterested directors of Denninghouse) for any liabilities,losses or costs that may arise as a result of the Transaction.As security for these indemnification obligations, on completionof the Transaction, the 1410776 Shareholders will deposita certain number of their Treasury Shares with a third partyescrow agent to be held in escrow pursuant to the terms ofan escrow agreement for a certain number of years. The escrowagent will have the authority to sell such escrowed TreasuryShares and use the proceeds thereof to satisfy any claimsmade by Denninghouse against the 1410776 Shareholders pursuantto the Indemnity. The Indemnity and terms of escrow will beapproved by the disinterested directors of Denninghouse.

16. The 1410776 Shareholders have agreed topay all costs (including legal and accounting costs) incurredby Denninghouse in connection with the Transaction.

17. The issuance of the Treasury Shares issubject to approval by the TSX.

18. The Transaction will have no adverse economiceffect on, or adverse tax consequences to, and will in noway prejudice Denninghouse or the Public Shareholders.

19. The acquisition by Denninghouse of the1410776 Shares in connection with the Amalgamation will constitutean indirect issuer bid within the meaning of section 92 andsubsection 89(1) of the Act. Furthermore, the acquisitionby Denninghouse of the DGK Common Shares in connection withthe Winding Up will also constitute an issuer bid within themeaning of section 89(1) of the Act. In neither case wouldany of the exemptions from the requirements of Part XX ofthe Act that are generally available to issuer bids applyin connection with the Transaction.

19. The Transaction will constitute a relatedparty transaction for the purposes of Commission Rule 61-501Insider Bids, Issuer Bids, Going Private Transactions andRelated Party Transactions ("Rule 61-501").Denninghouse is exempt from the formal valuation and minorityshareholder approval requirements of Rule 61-501 pursuantto sections 5.6(12) and 5.8(3) of Rule 61-501.

AND UPON the Commission being satisfiedthat to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to subsection104(2)(c) of the Act that the acquisition by Denninghouse ofthe 1410776 Shares in connection with the Amalgamation is exemptfrom the Issuer Bid Requirements; and

IT IS FURTHER ORDERED pursuant to subsection104(2)(c) of the Act that the acquisition by Denninghouse ofthe DGK Common Shares pursuant to the Winding Up is exempt fromthe Issuer Bid Requirements

December 6, 2002.

"Theresa McLeod"                    "RobertL. Shirriff"

IT IS FURTHER ORDERED that Denninghouseis exempt from the Fee Requirement in connection with the Transaction,provided that the minimum fee of $800 prescribed by ScheduleI is paid.

December 6, 2002.

"Ralph Shay"