MRRS -- exemption granted from s. 2.1(1) and 10.4(3) of NI 81-102 -- exemption required to facilitate offering of preferred shares by split share company that invests solely in one issuer -- exemption also required to facilitate retraction feature that will provide investor with an unsecured debenture of either the split share company or its parent instead of cash upon retraction -- exemption granted on basis that split share company a special purpose entity the preferred shares of which will be listed on the TSX -- split share company's prospectus will also disclose terms of the preferred shares including risk factors associated with the retraction feature.
Applicable Legislative Provisions
National Instrument 81-102 -- Mutual Funds -- ss. 2.1(1), 10.4(3), and 19.1.
December 22, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ONTARIO, BRITISH COLUMBIA, ALBERTA,
SASKATCHEWAN, MANITOBA, QUEBEC,
NEWFOUNDLAND AND LABRADOR, NEW BRUNSWICK ,
NOVA SCOTIA, AND PRINCE EDWARD ISLAND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
BAM SPLIT CORP. (FORMERLY BNN SPLIT CORP.)
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Company for a decision under the securities legislation of the Jurisdictions (the "Legislation") that it be exempt from:
• the concentration restriction contained in subsection 2.1(1) of National Instrument 81-102-Mutual Funds ("NI 81-102") to enable the Company to invest all or substantially all of its net assets in shares of Brookfield Asset Management Inc. ("Brookfield"); and
• the requirement contained in subsection 10.4(3) that a mutual fund shall pay the redemption price of a security in the currency in which the net asset value per security of the redeemed security was denominated or by making good delivery to the securityholder of portfolio assets to enable the Company to pay the retraction price for Class AA preferred shares, series 3 (the "Series 3 Preferred Shares") with debentures of the Company or BAM Investments Corp. ("BAM Investments"), if agreed by BAM Investments.
(the "Requested Relief").
Under the Mutual Reliance Review System for Exemptive Relief Applications (the "MRRS"):
(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
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Company:
1. The Company was incorporated under the laws of the Province of Ontario on July 13, 2001. The primary undertaking of the Company is to invest in a portfolio of Class A Limited Voting Shares (the "BAM Shares") of Brookfield. The BAM Shares and any cash held by the Company from time to time are the only material assets of the Company.
2. The purpose of the Company is to provide a vehicle through which different investment objectives with respect to participation in the BAM Shares may be satisfied. This is accomplished through the issuance of capital shares (the "Capital Shares") and preferred shares (the "Preferred Shares") of the Company. The Class A Preferred Shares and the Class AA Preferred Shares, series 1 of the Company (the "Series 1 Preferred Shares") are listed on the TSX.
3. The Company holds the BAM Shares in order to generate fixed cumulative preferential dividends for the holders of the Preferred Shares and to enable the holders of the Capital Shares to participate in any capital appreciation in the BAM Shares. BAM Investments owns all of the outstanding Class A Voting Shares, Class AA Preferred Shares, series 2 (the "Series 2 Preferred Shares") and all of the Capital Shares of the Company. BAM Investments also owns directly BAM Shares representing approximately 3% of the outstanding BAM Shares. BAM Investments is a reporting issuer whose principal business mandate is to provide its common shareholders with a leveraged investment in the securities of Brookfield. Its principal investments consist of the Capital Shares and BAM Shares.
4. The Company is a mutual fund because it is an issuer of securities which entitle the holder to receive an amount computed by reference to the value of a proportionate interest in the whole or part of the net assets of the Company, within a specified period after demand.
5. The Company has previously offered to the public by prospectus and has issued and outstanding 5,000,000 Class A Preferred Shares and 3,200,000 Series 1 Preferred Shares.
6. The Company previously received an exemption from various requirements under NI 81-102 in each of the Jurisdictions except Quebec in a decision dated August 24, 2001 (the "2001 Decision"). On December 15, 2006, the Decision Maker in Quebec granted the Company the same relief granted in the 2001 Decision. The 2001 Decision included an exemption from the concentration restriction contained in subsection 2.1(1). This exemption was subject to a condition that the Company would not become an insider of Brookfield (the "Insider Condition"). The purpose of the Insider Condition was to make it clear that the Company remained subject to the control restrictions contained in section 2.2 (the "Control Restrictions"). The Company complies and will continue to comply with section 2.2 of NI 81-102.
7. The Company intends to commence an offering (the "Offering") of Series 3 Preferred Shares shortly. The Series 3 Preferred Shares will be issued for $25 and will pay a cumulative, quarterly dividend. The Series 3 Preferred Shares will be retractable at the option of the holder at any time and redeemable at the option of the Company after the fifth anniversary of the Offering. The Series 3 Preferred Shares will be listed on the TSX. Consequently, holders of such shares will not be relying solely on the retraction privilege to provide liquidity for their investment. The Company has never received a redemption request in connection with either the Class A or the Series 1 Preferred Shares.
8. In lieu of receiving the retraction price in cash, a retracting holder of a Series 3 Preferred Share will receive an unsecured debenture of the Company or, if BAM Investments agrees, an unsecured debenture of BAM Investments (in either case, a "Series 1 Debenture"), with a principal amount equal to the retraction price. Each Series 1 Debenture will have a principal amount of $25, an interest rate that is 10 basis points higher than the dividend rate on the Series 3 Preferred Shares and a maturity date of twelve years from the date of closing of the Offering, also being the Series 3 Preferred Share Redemption Date. The Series 1 Debentures will be redeemable by the issuer at any time for cash. As a debt security, the Series 1 Debentures will rank ahead of the Preferred Shares.
9. The Series 1 Debentures will likely be issued under exemptions from the registration and prospectus requirements under the Legislation. The Series 1 Debentures will not be listed on the TSX. The Company and BAM Investments possess and are expected to possess, based on the Company's current business plan, a similar credit profile with respect to the Series 1 Debentures.
10. The Offering will proceed under a short form prospectus that will contain disclosure of the terms of the Series 3 Preferred Shares and the Series 1 Debentures, including the fact that upon retraction a holder of Series 3 Preferred Shares will receive Series 1 Debentures of the Corporation (or, if BAM Investments agrees, BAM Investments) as the retraction consideration. The prospectus will also contain a risk factor relating to the payment of the retraction price in Series 1 Debentures that also explains the Series 1 Debentures will be illiquid investments. The Company will also disclose this risk factor in bold on the cover page to the prospectus. The tax opinion provided under "Canadian Federal Income Tax Considerations" in the prospectus will cover the tax implications of holding and selling Series 1 Debentures. Once entered into, any trust indenture or supplemental trust indenture for the Series 1 Debenture will be filed on SEDAR. The prospectus will also incorporate by reference information on BAM Investments.
11. The proceeds of the Offering will be used to acquire additional BAM Shares. The Company will not own in excess of 10% of the BAM Shares. Following the Offering, however, the BAM Shares owned by BAM Investments and the Company, taken together, will be in excess of 10% of the BAM Shares. The Company will therefore be considered an insider of Brookfield by virtue of the definition of insider and the deemed beneficial ownership provisions of the Legislation. The Company will no longer be able to comply with the Insider Condition.
12. Other than the relief provided under this Decision or the 2001 Decision, the Company complies with NI 81-102 including the Control Restrictions.
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 Requested Relief is granted for so long as any Preferred Shares issued to the public are listed on the TSX.