Securities Law & Instruments

Headnote

Mutual Reliance Review System - related party transactions -- relief from valuation and minority approval requirements in connection with a proposed related party transaction -- issuer to fund purchase of third party assets through a series of transactions involving subscriptions for securities of a number of intermediate entities -- purpose of transactions is to allow the issuer and a related party to fund the purchase of assets in an organizationally efficient manner -- issuer and related party will each fund purchase in direct proportion to the interest that each will be acquiring -- relief granted.

Rules Cited

Rule 61-501 -- Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions, ss. 5.4(1), 5.5(1), 5.6, 5.7(1), 9.1.

August 9, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO AND QUEBEC (the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

MACQUARIE POWER INCOME FUND (the "Filer")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer for a decision under Ontario Securities Commission Rule 61-501 Insider Bids, Issuer Bids, Business Contributions and Related Party Transactions and Autorité des marchés financiers Policy Statement Q-27 (the "Legislation") that the valuation and related disclosure requirement (the "Valuation Requirement") and the minority approval requirement (the "Minority Approval Requirement") applicable to a "related party transaction" under the Legislation shall not apply to the Subject Steps (as defined below).

Under the Mutual Reliance Review System (the "System") for Exemptive Relief Applications

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 - Definitions have the same meaning in this decision as therein unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario on March 15, 2004 by a declaration of trust, as amended and restated as of April 16, 2004 (the "Declaration of Trust"). The principal and head office of the Filer is located at 100 Wellington Street West, Suite 2200, Canadian Pacific Tower, Toronto-Dominion Centre, Toronto, ON, M5K 1J3.

2. The Filer is administered by its trustees (the "Trustees") pursuant to the Declaration of Trust and by Macquarie Power Management Ltd. (the "Manager") pursuant to an administration agreement (the "Administration Agreement") dated April 30, 2004 among the Filer, Macquarie Power Income Trust ("MPT") and the Manager.

3. The Filer does not carry on any business directly, and its activities are currently limited to holding units and notes of MPT. MPT is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario on March 15, 2004 by a declaration of trust, as amended and restated as of April 16, 2004 (the "MPT Declaration of Trust"). MPT, in turn, (a) holds a direct limited partnership interest in Cardinal Power of Canada, L.P. ("Cardinal LP") and (b) owns 100% of the voting equity of Cardinal Power Inc. (the "General Partner"), the general partner of Cardinal LP. MPT is administered by its trustees (the "MPT Trustees") pursuant to the MPT Declaration of Trust and by the Manager pursuant to the Administration Agreement.

4. The Filer is a reporting issuer or equivalent in all provinces and territories of Canada.

5. The authorized capital of the Filer consists of an unlimited number of units ("Units"). The initial public offering of 21,168,977 Units was made pursuant to a prospectus dated April 19, 2004.

6. The Units are listed and posted for trading on the Toronto Stock Exchange under the symbol MPT.UN.

7. The Manager is an indirect, wholly-owned subsidiary of Macquarie Bank Limited ("Macquarie Bank"), an Australian-headquartered bank.

8. Macquarie Bank provides specialized investment and financial services in select markets throughout the world. Macquarie Bank, through subsidiaries, manages various funds totalling approximately $26 billion in infrastructure equity in countries such as Australia, the United States, South Africa, United Kingdom, Singapore, South Korea and Canada. Macquarie Bank has been carrying on business in Canada directly or indirectly since the early 1990s.

9. As further described in the Filer's annual information form dated March 21, 2005 (the "AIF"), under the Administration Agreement, the Manager has been appointed exclusively to provide or cause to be provided administration services to the Filer and to MPT, including those services necessary to assist the Filer in complying with its continuous disclosure obligations under applicable securities legislation; provide investor relations services; monitor compliance of the Filer and MPT with applicable tax laws; and assist with respect to treasury, legal and compliance, financing and risk assessment and such other services as the Filer and MPT may reasonably require from time to time.

10. As further described in the AIF, pursuant to a management agreement (the "Management Agreement") dated April 30, 2004 among the Manager, the Filer, MPT and Cardinal LP, the Manager was exclusively engaged to provide or cause to be provided certain services to Cardinal LP, including overseeing the General Partner in its operation and maintenance of its 156 MW combined co-generation plant located in Cardinal, Ontario as well as the related transmission line (the "Facility"); assisting Cardinal LP in the development, implementation and monitoring of the Facility's strategic plans; and assisting Cardinal LP in developing the Facility's annual business plans, which include operational and capital expenditure budgets.

11. In connection with the services provided under the Administration Agreement and the Management Agreement, the Manager has supplied the services of persons to serve as the President and Chief Executive Officer, the Vice-President and Chief Financial Officer and the Corporate Secretary and General Counsel of the Filer and MPT.

12. Macquarie Senior Care LP ("MSCLP"), an indirect wholly-owned subsidiary entity of Macquarie Bank, entered into a series of agreements dated as of March 18, 2005 (the "Acquisition Agreements") which provide for the acquisition (the "Leisureworld LTC Acquisition") by MSCLP of six limited partnerships which together will comprise the long-term care, retirement home and related businesses (the "Leisureworld LTC Business") historically carried on by Leisureworld Inc., Tealwood Developments Inc., Tranquil Brooks Land Development Inc., Ontario Long Term Care Providers Inc., Leisureworld Creemore Inc. and Preferred Health Care Services Inc. (collectively, the "Vendors") for consideration to the Vendors of approximately $465 million.

13. The closing of the Leisureworld LTC Acquisition (the "Acquisition Closing") is subject to various conditions, including the receipt of all required regulatory consents and approvals, including the approval of the Ontario Ministry of Health and Long Term Care, and is currently expected to occur on October 3, 2005.

14. Pursuant to the Acquisition Agreements, MSCLP has paid a deposit (the "Deposit") in the amount of $10 million to the Vendors, which is to be applied toward the purchase price payable thereunder.

15. The Acquisition Agreements provide for customary representations and warranties of the Vendors and covenants relating to, among other things, the operation of the Vendors' businesses and certain events occurring between the signing of the Acquisition Agreements and the Acquisition Closing.

16. The Acquisition Agreements also provide for indemnification by the Vendors in respect of breaches of covenants and representations and warranties by the Vendors, subject to an aggregate limit of $15 million (subject to certain exceptions including that liability for the Vendors' representations regarding their right and ability to sell their assets is limited to 100% of the purchase price payable under the Acquisition Agreements).

17. At the time that Macquarie Bank announced the entering into of the Acquisition Agreements, it stated that it would explore transferring its interest in the Leisureworld LTC Business to a Macquarie-managed fund, such as the Filer.

18. The Acquisition Agreements expressly contemplate that a third party may acquire an interest in MSCLP prior to the Acquisition Closing.

19. The Acquisition Agreements permit MSCLP or any person who has agreed to acquire an interest in MSCLP to file a prospectus and include information about the Vendors in the prospectus provided that, among other things, the proposed issuer of securities under the prospectus offers one of the Vendors the option to receive exchangeable securities of a person controlled by the issuer on a tax-deferred basis as partial payment of the purchase price under the Acquisition Agreements and that such issuer indemnifies the Vendors and their directors and management for any liabilities they may suffer as a result of such prospectus containing a misrepresentation.

20. The Filer is currently considering participating in the Leisureworld LTC Acquisition.

21. In order to finance its participation in the Leisureworld LTC Acquisition, the Filer intends to raise approximately $100 million through a public offering (the "Offering") of subscription receipts, which subscription receipts will automatically be exchanged for Units immediately after the Acquisition Closing on a one-for-one basis. The Filer currently intends to file a preliminary prospectus in respect of the Offering in the second week of August 2005. If a Vendor elects to receive exchangeable securities of a subsidiary entity of the Filer in lieu of part of the cash consideration otherwise payable under the Acquisition Agreements, then the Filer intends to reduce the amount that it raises pursuant to the Offering by the value of exchangeable securities to be issued.

22. Macquarie Bank and the Filer have held discussions about the Filer participating in the Leisureworld LTC Acquisition and have developed a structure for such participation. The Filer's potential participation in the Leisureworld LTC Acquisition remains subject to the approval of the Trustees and will not proceed unless the Trustees, including the Trustees independent of the Manager, determine that it is in the best interests of the holders of Units to participate in the Leisureworld LTC Acquisition.

23. Under the proposed structure, immediately prior to the Acquisition Closing, the Filer will indirectly acquire, through a newly-created, wholly-owned subsidiary entity, MPT LTC Holding LP ("LTC Holding LP"), from a subsidiary of Macquarie Bank a 45% interest (the "Purchase") in Macquarie Master LP ("MMLP"), a recently formed limited partnership that is wholly-owned indirectly by Macquarie Bank, and a 45% interest in MMLP's general partner, which is also wholly-owned indirectly by Macquarie Bank. The Purchase will be made for up to approximately $6 million, representing 45% of the costs incurred by Macquarie Bank and its affiliates in connection with the Leisureworld LTC Acquisition.

24. MMLP's only asset is its 100% ownership of MSCLP (and its general partner). The Purchase will result in the Filer indirectly owning 45% of MSCLP (and its general partner). MSCLP's only assets are the rights and obligations it has under the Acquisition Agreements.

25. Following the Purchase and prior to the Acquisition Closing, the following transaction steps would occur (collectively, the "Subject Steps"): (i) the remaining net proceeds of the Offering would be used by the Filer to subscribe for securities of (or otherwise fund) MPT, (ii) such funds would be used by MPT to subscribe for securities of (or otherwise fund) LTC Holding LP; (iii) LTC Holding LP would then subscribe for securities of (or otherwise fund) MMLP. (Macquarie Bank would also subscribe for securities of (or otherwise fund) MMLP such that the amounts paid by the Filer and Macquarie Bank to MMLP will be in the same proportion as their respective indirect interests in MMLP, namely 45% and 55%, respectively); and (iv) MMLP would then use the funds received indirectly from the Filer and Macquarie Bank to subscribe for securities of (or otherwise fund) MSCLP in order to fund part of the purchase price for the Leisureworld LTC Business. If a Vendor elects to receive, directly or indirectly, securities exchangeable into Units under the Acquisition Agreements as part of the purchase price payable thereunder, the Subject Steps would be adjusted to account for such election with the effect that immediately after the Acquisition Closing and the above-mentioned transfers, the Fund will indirectly hold a 45% indirect interest in the Leisureworld LTC Business.

26. The balance of the funds that MSCLP would require to pay the purchase price for the Leisureworld LTC Business is to be provided to MSCLP by way of a loan from Macquarie Long Term Care Infrastructure Trust (the "Infrastructure Trust"), which in turn will obtain such funds by way of debt financing provided by a Canadian chartered bank. The Infrastructure Trust is a trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated March 18, 2005. The sole trustee of the Infrastructure Trust is Computershare Trust Company of Canada and the sole beneficiary of the Infrastructure Trust is the United Way of Greater Toronto. The Infrastructure Trust is administered by Macquarie North America Ltd. ("Macquarie N.A."), an affiliate of Macquarie Bank, pursuant to an administration agreement under which Macquarie N.A. is entitled to receive certain fees for such administrative services rendered under such agreement.

27. In connection with the Leisureworld LTC Acquisition, Macquarie Bank will not receive any fees, directly or indirectly, from the Filer except the following fees from MSCLP (which would be indirectly paid as to 45% by the Filer by virtue of its indirect 45% ownership interest in MSCLP) for the following financial advisory services:

(a) a financial advisory fee of 1.25% of the total enterprise value of the Leisureworld LTC Business, anticipated to be $6.9 million (including applicable Goods and Services Tax);

(b) a transaction origination fee of 4% of the total equity value of the Leisureworld LTC Acquisition, anticipated to be $8.2 million; and

(c) an anticipated debt placement fee of approximately $0.6 million for its participation in the anticipated underwriting syndicate of a bond market refinancing which is expected to be undertaken by the Infrastructure Trust after the Acquisition Closing.

28. If the Fund and Macquarie Bank were to have entered into the Acquisition Agreements directly and agreed to directly purchase 45% and 55%, respectively, of each of the six limited partnerships that will comprise the Leisureworld LTC Business from the Vendors, such transaction would not be a "related party transaction", as the proportion of the assets acquired by the Fund would be equivalent to its proportion of the overall consideration paid for such assets.

29. The Subject Steps are merely intermediate steps which occur immediately prior to the Acquisition Closing and which facilitate, on an organizationally efficient basis, the ultimate transaction being undertaken by the Fund, being its acquisition from the Vendors of a 45% interest in the Leisureworld LTC Business in consideration for 45% of the total consideration being paid to the Vendors on the Leisureworld Acquisition.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that the Valuation Requirement and Minority Approval Requirement applicable to a "related party transaction" under the Legislation shall not apply to the Subject Steps.

"John Hughes"
Manager, Corporate Finance Branch