Securities Law & Instruments

Headnote

Application under subsection 74(1) for relief from the registration and prospectus requirements -- the Corporation is in the business of providing volume discounts and other related services to its Franchisees in connection with the operation of retail drug stores -- Franchisees not investors in a conventional sense and share issuance not a financing vehicle for the applicant -- relief granted subject to conditions.

Statutes Cited

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

IN THE MATTER OF

THE SECURITIES ACT, Act, R.S.O. 1990, Chapter S.5,

AS AMENDED (THE ACT)

AND

IN THE MATTER OF

AXIS PHARMACY INC.

 

RULING

(Subsection 74(1))

UPON the application (the Application) of Axis Pharmacy Inc. (the Corporation) to the Ontario Securities Commission (the Commission) for a ruling pursuant to subsection 74(1) of the Act, that certain trades in Common Shares (as defined below) of the Corporation are not subject to sections 25 and 53 of the Act;

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Corporation having represented to the Commission that:

1. The Corporation was incorporated under the Business Corporations Act (Ontario) by Articles of Incorporation dated August 8, 2002. The Articles of Incorporation of the Corporation were amended by Articles of Amendment dated March 4, 2003.

2. The authorized capital of the Corporation consists of an unlimited number of Common Shares, of which there are currently 35 Common Shares issued and outstanding.

3. The constating documents of the Corporation provide that no shares of the capital of the Corporation shall be transferred without either (a) the sanction of the directors of the Corporation expressed either by a resolution or by an instrument or instruments in writing signed by a majority of the directors, or alternatively, (b) the sanction of the shareholders of the Corporation expressed either by a resolution or by an instrument or instruments in writing signed by the holders of a majority of the outstanding shares of the capital of the Corporation.

4. The Corporation is not, and has no current intention of becoming, a reporting issuer in any jurisdiction.

5. For approximately 6 years the Corporation has, either itself or through its predecessor, negotiated volume discounts from various companies in respect of products sold or services used by retail drug stores for the benefit of its associated pharmacies including volume discounts, rebate fees, educational allowances or discount bonuses (hereinafter collectively called the Volume Discounts).

6. The Corporation's business is to provide Volume Discounts and other related services to its Franchisees relating to the operation of retail drug stores.

7. The Corporation commenced its franchise operations at the beginning of 2003. The nature of the business franchised is a retail drug store business. It consists of (a) the right to use the Axis Pharmacy System; (b) the license to use the Axis Pharmacy and Axis trademarks, logotypes and other commercial symbols; and (c) a non-exclusive right to operate a retail drug store at the designated location.

8. There are currently 35 shareholders of the Corporation, each owning 1 Common Share, which were issued for $1.00 per share.

9. There is no market for the Common Shares of the Corporation.

10. A Common Share is issued only to a Franchisee who has executed a Franchise Agreement and the Corporation's Shareholder Agreement.

11. Each certificate representing a Common Share bears a legend stating that the share represented by such certificate and the right to transfer the said Common Share is subject to the restrictions on transfer contained in the Franchise Agreement and the Corporation's Shareholder Agreement and the Articles of Incorporation and Amendment of the Corporation.

12. Each Franchisee will be provided with the audited annual financial statements of the Corporation. As well, the Corporation holds an Annual Shareholder's Meeting, at which time all shareholders of the Corporation are provided with a review of the operating results of the Corporation and are provided with the opportunity to ask questions of management of the Corporation.

13. Each Franchisee is a Common Shareholder of the Corporation.

14. The Franchisee is obligated to pay to the Corporation, upon execution of the Franchise Agreement, a non-refundable initial Franchise Fee as specified in the Franchise Agreement. The initial Franchise Fee is deemed to be fully earned by the Corporation upon execution of the Franchise Agreement and is not refundable. The current range of the initial Franchise Fee is from $4,000.00 to $5,000.00.

15. Subject to the provisions of the Franchise Agreement, the Corporation agreed to issue and allot to each of its current 35 Franchisees, 1 fully paid and non-assessable Common Share in the capital stock of the Corporation in consideration for which each Franchisee paid to the Corporation the sum of $1.00 and the Franchisee agreed to execute and deliver to the Corporation, at the time of execution of the Franchise Agreement, the Corporation's Shareholder Agreement binding the Franchisee thereto.

16. Pursuant to the Corporation's Shareholder Agreement, each Franchisee agrees with the Corporation that the Franchisee will not encumber or dispose of any interest in the above mentioned 1 Common Share in any manner, save and accept as set out in the Corporation's Shareholder Agreement.

17. Franchisees share in certain of the after-tax profits generated by the Corporation from its operations through the receipt of dividends declared by the Corporation to its Common Shareholders from time to time.

18. Immediately upon the termination for any reason whatsoever of the Franchise Agreement, the Franchisee must sell and the Corporation must purchase for cancellation in consideration of the payment of the sum of $1.00 by the Corporation to the Franchisee, the 1 Common Share of the Corporation which was issued and allotted to the Franchisee pursuant to the Franchise Agreement.

19. Pursuant to the provisions of the Act and Commission Rule 45-501 -- Exempt Distributions (the Rule) the maximum number of Common Shareholders of the Corporation is currently limited to 35 Common Shareholders. As a result, the maximum number of Franchisees is currently limited to 35 Franchisees.

20. No Franchisee is, or at the time it last acquired a Common Share of the Corporation was an "accredited investor" as defined in Section 1.1 of the Rule.

21. The only Franchisees to whom Common Shares will be issued pursuant to this Ruling are those Franchisees who (i) are not "accredited investors" under the Rule; and (ii) are not able to avail themselves of any other exemption from the registration and prospectus requirements in sections 25 and 53 of the Act.

AND UPON THE Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS RULED pursuant to subsection 74(1) of the Act that the proposed issuance of Common Shares by the Corporation to a Franchisee from time to time is not subject to sections 25 or 53 of the Act, provided that:

A. prior to the initial trade of Common Shares to each Franchisee as permitted by this Ruling, the Corporation shall deliver to the Franchisee a copy of:

(i) the articles and by-laws of the Corporation, and all amendments thereto;

(ii) the most recent annual audited financial statements of the Corporation;

(iii) this Ruling; and

(iv) a statement to effect that as a consequence of this Ruling, certain protections, rights and remedies provided by the Act, including statutory rights of rescission or damages, will not be available to purchasers of Common Shares and that certain restrictions are imposed on the subsequent disposition of the Common Shares;

B. all share certificates representing the Common Shares bear a legend stating that the right to transfer the Common Shares is subject to restrictions contained in the Franchise Agreement, the Corporation's Shareholder Agreement and in the Articles of the Corporation;

C. the exemptions contained in this Ruling cease to be effective if any one of the provisions of the articles or by-laws of the Corporation or of the Franchise Agreement relevant to the exemptions granted herein are amended in any material respect without written notice to, and consent by the Commission;

D. the Corporation prepares and sends audited financial statements to each Franchisee on an annual basis; and

E. the first trade in Common Shares to a person or entity other than a Franchisee or the Corporation shall be deemed a distribution to the public.

February 10, 2004.

"Paul Moore"
"Suresh Thakrar"