Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted from the disclosure requirements for an information circular in connection with a plan of arrangement involving an exchangeable share issuer

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations.

National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency.

January 30, 2007

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUEBEC AND ONTARIO

(THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

DOMTAR INC. ("Domtar")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Domtar for a decision under the securities legislation of the Jurisdictions (the "Legislation") that Domtar be exempt from the following requirements in connection with its management information circular (the "Domtar Circular") being prepared in connection with a special meeting of Domtar securityholders to consider the proposed combination of Domtar and the Weyerhaeuser Fine Paper Business (as defined below):

(a) the requirement to include in the Domtar Circular the information relating to Domtar (Canada) Paper Inc. ("Newco Canada Exchangeco") that is required to be included in a prospectus;

(b) the requirement that the financial statements of Domtar Corporation ("Spinco") and the Weyerhaeuser Fine Paper Business included in the Domtar Circular be prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and be audited in accordance with Canadian generally accepted auditing standards ("GAAS");

(c) the requirement that historical and pro forma financial statements of Spinco and the Weyerhaeuser Fine Paper Business (included in the Domtar Circular) prepared in U.S. GAAP be accompanied by a note to

(i) explain and quantify the effect of the material differences between Canadian GAAP and U.S. GAAP that relate to measurements; and

(ii) provide disclosure consistent with Canadian GAAP requirements to the extent not already reflected in the financial statements;

(d) the requirement that the auditors' reports on the applicable financial statements of Spinco and the Weyerhaeuser Fine Paper Business (included in the Domtar Circular) disclose any material differences in the form and content of such auditors' reports as compared to a Canadian auditor's report and confirming that the GAAS applied are substantially equivalent to Canadian GAAS;

(e) the requirement that all management discussion and analysis (the "MD&A") relating to the financial statements of the Weyerhaeuser Fine Paper Business referred to above (and included in the Domtar Circular) provide a restatement of those parts of such MD&A that read differently if they were based on financial statements prepared in accordance with Canadian GAAP and the requirement that the MD&A provide a crossreference to the notes in the financial statements that reconcile the differences between U.S. GAAP and Canadian GAAP;

(f) the requirement that all calculations done to determine whether the acquisition of Domtar and the Weyerhaeuser Fine Paper Business by Spinco is a "significant acquisition" under the Legislation be done using financial statements which are either prepared in accordance with Canadian GAAP or reconciled to Canadian GAAP; and

(g) the requirement that the Interim Financial Statements of the Weyerhaeuser Fine Paper Business (as defined below) include the unaudited combined statements of business unit equity for the comparable period;

(collectively, the "Requested Relief").

Application of Principal Regulator System

Under Multilateral Instrument 11-101 Principal Regulator System ("MI 11-101") and the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Autorité des marchés financiers is the principal regulator for Domtar;

(b) Domtar is relying on the exemption in Part 3 of MI 11-101 in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and the Yukon; and

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

Interpretation

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

Representations

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

The Proposed Transaction and Mechanics of the Arrangement

1. Pursuant to a transaction agreement dated as of August 22, 2006 (as subsequently amended), Domtar and Weyerhaeuser Company ("Weyerhaeuser") agreed to combine Domtar with the Weyerhaeuser Fine Paper Business (the "Proposed Transaction").

2. The Proposed Transaction would, subject to applicable shareholder, regulatory and court approval and other conditions, effect a combination of Domtar with the Weyerhaeuser Fine Paper Business pursuant to a plan of arrangement (the "Arrangement") under Section 192 of the Canada Business Corporations Act (the "CBCA"), utilizing a traditional cross-border "exchangeable share" structure, with the particularity, for United States tax purposes, of a "Reverse Morris Trust" feature which provides certain tax advantages to Weyerhaeuser's U.S. shareholders in the context of the spin-off or split-off of the Weyerhaeuser Fine Paper Business into a separate legal entity.

3. Upon completion of the Proposed Transaction, Spinco will directly or indirectly own and operate the Weyerhaeuser Fine Paper Business and indirectly own all of the common shares of Domtar (the "Domtar Common Shares"). Spinco is referred to herein upon completion of the Proposed Transaction as "New Domtar". Below is a chronological step by step description of the material events relating to the Proposed Transaction.

The Canadian Asset Transfer

4. Weyerhaeuser Company Limited and Weyerhaeuser Saskatchewan Ltd., two Canadian subsidiaries of Weyerhaeuser, will transfer certain of their fine paper and related assets (the "Canadian Fine Paper Assets") to a subsidiary of Newco Canada Exchangeco and such subsidiary of Newco Canada Exchangeco will assume certain of Weyerhaeuser Company Limited's and Weyerhaeuser Saskatchewan Ltd.'s fine paper and related liabilities.

The Newco Contribution

5. Weyerhaeuser will transfer to Domtar Paper Company, LLC ("Newco"), a subsidiary of Weyerhaeuser, certain of Weyerhaeuser's U.S. fine paper and related assets (the "U.S. Fine Paper Assets", together with the Canadian Fine Paper Assets, the "Weyerhaeuser Fine Paper Business") in exchange for the issuance of additional limited liability company interests of Newco to Weyerhaeuser and the assumption by Newco of certain of Weyerhaeuser's fine paper and related liabilities.

The Interim Financing

6. Spinco, a subsidiary of Weyerhaeuser, will draw down U.S.$1.35 billion under a three-month unsecured term loan facility.

The Spinco Contribution

7. Weyerhaeuser will transfer to Spinco all of the issued and outstanding limited liability company interests of Newco in exchange for (a) U.S.$1.35 billion in cash; and (b) a number of shares of common stock of Spinco (the "New Domtar Common Stock"), determined in accordance with a formula specified pursuant to the Proposed Transaction.

The Distribution

8. Weyerhaeuser will distribute all the issued and outstanding shares of New Domtar Common Stock to the Weyerhaeuser shareholders. This distribution may be effected, at Weyerhaeuser's election, as a pro rata dividend, as an exchange offer or as a combination of both. Spinco will file with the United States Securities and Exchange Commission (the "SEC") a registration statement (the "Registration Statement") (a) on Form 10 if this distribution is effected by way of a pro rata dividend or (b) on Form S-4, if this distribution is effected by way of an exchange offer.

The Arrangement

9. The Arrangement will be consummated on the effective date (the "Effective Date") pursuant to Section 192 of the CBCA which will include the following steps at closing:

(a) All outstanding Domtar Common Shares (other than Domtar Common Shares held by holders who have exercised their dissent rights under the Arrangement) will be exchanged, on a one-for-one basis, for Class B common shares (the "Class B Common Shares") of a direct wholly-owned Canadian subsidiary of Newco Canada Exchangeco incorporated under the CBCA ("Offerco");

(b) Following the exchange contemplated above, the Class B Common Shares of Offerco held by former holders of Domtar Common Shares who are Canadian residents or who are partnerships at least one partner of which is a resident of Canada (other than any such holder or partner who is exempt from tax under the Income Tax Act (Canada)) will, at the holder's election, be transferred to Newco Canada Exchangeco (i) for shares of New Domtar Common Stock or (ii) for exchangeable shares of Newco Canada Exchangeco (the "Exchangeable Shares"), in each case on a one-for-one basis. The Exchangeable Shares will be substantially economically equivalent to shares of New Domtar Common Stock, with the same or substantially economically equivalent dividend entitlement and voting rights. The Exchangeable Shares will be exchangeable at any time at the option of the holder into shares of New Domtar Common Stock on a one-for-one basis;

(c) Class B Common Shares of Offerco held by former holders of Domtar Common Shares with an address in Canada who do not make an election or whose election is not effective will be transferred to Newco Canada Exchangeco in exchange for the Exchangeable Shares on a one-for-one basis;

(d) Former holders of Domtar Common Shares who are not referred to in paragraph (b) or (c) above will transfer their Class B Common Shares of Offerco to Newco Canada Exchangeco in exchange for shares of New Domtar Common Stock on a one-for-one basis. After this step Spinco will indirectly own all of the outstanding common shares of Newco Canada Exchangeco which will own all of the Domtar Common Shares;

(e) Spinco shall issue and deposit with the trustee under a voting trust agreement (the "Voting Trust Agreement") one share of special voting stock of New Domtar to be held by the trustee for and on behalf of, and for the use and benefit of, the holders of the Exchangeable Shares in accordance with the Voting Trust Agreement;

(f) The Series A preferred shares of Domtar (the "Series A Preferred Shares") and the Series B preferred shares of Domtar (the "Series B Preferred Shares", together with the Series A Preferred Shares, the "Domtar Preferred Shares") that are not held by a holder who has exercised its dissent rights under the Arrangement shall remain outstanding after the Effective Date;

(g) Class B Common Shares of Offerco received by Newco Canada Exchangeco under the Arrangement (as referred in paragraph (b) above) will be converted into Class A common shares of Offerco under the Arrangement; and

(h) The Domtar Options (as defined below) as well as other Domtar equity awards will be exchanged for options to purchase shares of New Domtar Common Stock or other comparable securities of New Domtar or Newco Canada Exchangeco pursuant to the terms set forth in the Arrangement.

10. Following the consummation of the Proposed Transaction (including the implementation of the Arrangement), New Domtar (i.e. Spinco) will be owned approximately 55% by Weyerhaeuser shareholders or former Weyerhaeuser shareholders (including holders of shares exchangeable for shares of Weyerhaeuser) and 45% by former holders of Domtar Common Shares (including through their ownership of the Exchangeable Shares), in each case on a fully-diluted basis.

Court Approval

11. Domtar will apply to the Superior Court of Québec (the "Court") for an interim order (the "Interim Order") which will require that the Arrangement be approved by the securityholders of Domtar. The Interim Order is expected to provide for the calling and holding of a special meeting (the "Domtar Meeting") of the holders of Domtar Common Shares, Domtar Preferred Shares and Domtar Options to vote on the Arrangement. It is also a condition to the closing of the Proposed Transaction that a final order of the Court approving the Arrangement be granted.

Securityholder Approval

12. It is expected that the Arrangement will require the affirmative vote of not less than:

(a) 66 2/3% of the votes cast on the special resolution by the holders of the Domtar Common Shares and the Domtar Preferred Shares (the "Domtar Shares") and holders of options to purchase Domtar Common Shares (the "Domtar Options") under Domtar's stock option plans, present in person or by proxy at the Domtar Meeting; and

(b) 66 2/3% of the votes cast on the special resolution by holders of Domtar Shares present in person or by proxy at the Domtar meeting excluding (i) holders of the Domtar Options; (ii) holders of Domtar Common Shares which are pledged to secure loans provided pursuant to a certain Domtar stock option and share purchase plan; and (iii) holders of Domtar Common Shares who also hold Domtar Options.

Domtar Inc.

13. Domtar was continued under the CBCA in 1977 and it is a reporting issuer or equivalent in all provinces and territories of Canada and is not on the list of defaulting reporting issuers maintained under applicable securities legislation of such jurisdictions. Domtar's head office is located at 395 Maisonneuve Boulevard West, Montreal, Quebec H3A 1L6.

14. Based on production capacity, Domtar is the third largest integrated manufacturer of uncoated free sheet in North America and the fourth largest in the world, with four pulp and paper mills in Canada (one of which is currently not in operation) and five in the United States.

15. Upon completion of the Proposed Transaction, Domtar will remain a reporting issuer in each of the provinces and territories of Canada where such concept exists as the Domtar Preferred Shares will remain listed on the Toronto Stock Exchange (the "TSX").

Spinco / New Domtar

16. Spinco is currently a wholly-owned subsidiary of Weyerhaeuser and was incorporated in its current form as a Delaware corporation in August 2006 to indirectly hold the Weyerhaeuser Fine Paper Business and consummate the Arrangement with Domtar.

17. The Weyerhaeuser Fine Paper Business is currently operated by Weyerhaeuser but will be transferred to subsidiaries of Spinco pursuant to the Proposed Transaction. Assuming the transfer of the Weyerhaeuser Fine Paper Business had occurred, but prior to the consummation of the Arrangement, Spinco would principally manufacture and sell fine paper, including uncoated free sheet and coated groundwood. Based on production capacity, Spinco would be the second largest integrated manufacturer of uncoated free sheet in North America and the third largest in the world, with six uncoated free sheet mills in the United States and two in Canada (one of which is not currently in operation) and one coated groundwood mill in the United States.

18. Spinco has received approval from the New York Stock Exchange (the "NYSE") to list the shares of New Domtar Common Stock issued pursuant to the Proposed Transaction on the NYSE.

19. Application has been made to the TSX to list the New Domtar Common Shares issued pursuant to the Proposed Transaction on the TSX.

20. Following the consummation of the Proposed Transaction, New Domtar (i.e. Spinco) will become a reporting issuer under the securities legislation of applicable jurisdictions where such concept exists. New Domtar will also become an "SEC issuer" as that term is defined in National Instrument 52-107 -- Acceptable Accounting Principles, Auditing Standards and Reporting Currency ("NI 52-107") as it:

(a) will have a class of securities registered under Section 12 of the United States Securities Exchange Act of 1934, as amended (the "1934 Act") or will be required to file reports under Section 15(d) of the 1934 Act; and

(b) will not be registered or required to be registered as an investment company under the United States Investment Company Act of 1940, as amended.

Offerco

21. Offerco, currently a subsidiary of Weyerhaeuser, is a corporation incorporated under the CBCA for the purpose of implementing the Proposed Transaction.

22. The Class B Common Shares will be listed on the TSX throughout the period that they are issued and outstanding, immediately following which they will be exchanged for either shares of New Domtar Common Stock, Exchangeable Shares or a combination thereof pursuant to the Arrangement.

23. Offerco will, as a result of the Proposed Transaction, become a reporting issuer under the securities legislation of applicable jurisdictions where such concept exists. However, an application will be made to the applicable jurisdictions for an order that Offerco cease to be a reporting issuer immediately upon completion of the Proposed Transaction.

Newco Canada Exchangeco

24. Newco Canada Exchangeco, currently a subsidiary of Weyerhaeuser, is a corporation continued under the Business Corporations Act (British Columbia) for the purpose of implementing the Proposed Transaction. Newco Canada Exchangeco will undertake various issuances and exchanges of securities in connection with the Arrangement.

25. Application has been made to the TSX to list the Exchangeable Shares on the TSX.

26. Upon completion of the Proposed Transaction, Newco Canada Exchangeco will become a reporting issuer under the securities legislation of applicable jurisdictions where such concept exists.

The Domtar Circular

27. In connection with the Domtar Meeting, Domtar will deliver the Domtar Circular to its securityholders. The Domtar Circular will contain prospectus-level disclosure of the business and affairs of Spinco (including a description of the business and affairs of New Domtar after the Proposed Transaction), a description of the business and affairs of Domtar as well as the particulars of the Proposed Transaction, including the Arrangement.

28. The following historical and pro forma financial statements of Spinco and the Weyerhaeuser Fine Paper Business will be included in the Domtar Circular, all of which are prepared in accordance with U.S. GAAP (and which will be included in the Registration Statement of Spinco):

(a) an audited balance sheet of Spinco as of October 29, 2006;

(b) audited combined statements of operations, business unit equity and cash flows of the Weyerhaeuser Fine Paper Business for each of the years ended December 25, 2005, December 26, 2004 and December 28, 2003;

(c) audited combined balance sheets of the Weyerhaeuser Fine Paper Business as of December 25, 2005 and December 26, 2004;

(d) unaudited combined statements of operations, business unit equity and cash flows of the Weyerhaeuser Fine Paper Business for each of the thirty-nine weeks ended September 24, 2006 and September 25, 2005 (except in respect of business unit equity which is only for the September 24, 2006 period) (the "Interim Financial Statements of the Weyerhaeuser Fine Paper Business");

(e) an unaudited combined balance sheet as of September 24, 2006 of the Weyerhaeuser Fine Paper Business;

(f) unaudited pro forma condensed combined statements of earnings for the thirty-nine weeks ended September 24, 2006 and for the year ended December 25, 2005 which gives effect to the Proposed Transaction as if it had occurred on December 27, 2004, the first day of Spinco's fiscal year ended December 25, 2005; and

(g) unaudited pro forma condensed combined balance sheets as at September 24, 2006 of Spinco which gives effect to the Proposed Transaction as if it had occurred on September 24, 2006.

Prospectus-Level Disclosure Regarding Newco Canada Exchangeco

29 Under the Arrangement, each Domtar Common Share of a holder thereof who has not exercised dissent rights shall be exchanged for one Class B Common Share of Offerco. The Class B Common Shares of Offerco will be listed and posted for trading throughout the period they are issued and outstanding, immediately following which they will be exchanged for shares of New Domtar Common Stock, Exchangeable Shares or a combination thereof under the Arrangement.

30. Upon completion of the Proposed Transaction, Newco Canada Exchangeco will remain an indirect, controlled subsidiary of New Domtar. Former holders of Domtar Common Shares who are taxable Canadian residents or who are partnerships at least one partner of which is a resident of Canada (other than any such holder or partner who is exempt from tax under the Income Tax Act (Canada)) by electing to receive Exchangeable Shares under the Arrangement can defer Canadian income tax on any capital gain otherwise arising on the exchange of their Class B Common Shares of Offerco until such Exchangeable Shares are exchanged for shares of New Domtar Common Stock.

31. The Exchangeable Shares will provide a holder with a security in a Canadian issuer (i.e. Newco Canada Exchangeco) having economic and voting rights which are substantially equivalent to those of shares of New Domtar Common Stock. In particular, each Exchangeable Share will be (a) entitled to receive dividends from Newco Canada Exchangeco in amounts (or in property in the case of non-cash dividends), which are the same as, or substantially economically equivalent to, and which are payable at the same time, as dividends declared on a share of New Domtar Common Stock; (b) entitled to be redeemed at any time, at the holder's option, for a share of New Domtar Common Stock; (c) entitled on the liquidation, dissolution or winding-up of Newco Canada Exchangeco to be exchanged for one share of New Domtar Common Stock; (d) upon the liquidation, dissolution or winding-up of New Domtar, automatically exchanged for one share of New Domtar Common Stock so that the holder thereof may participate in the dissolution of New Domtar on the same basis as a holder of a share of New Domtar Common Stock; and (e) entitled to vote, on an equivalent basis through the Voting Trust Agreement, at all stockholder meetings at which a holder of a share of New Domtar Common Stock is entitled to vote and with respect to all written consents sought by New Domtar from holders of shares of New Domtar Common Stock.

32. As a result of this substantial economic and voting equivalency between the Exchangeable Shares and shares of New Domtar Common Stock, holders of Exchangeable Shares will have a participating interest determined by reference to New Domtar, rather than Newco Canada Exchangeco, and dividend and dissolution entitlements will be determined by reference to the financial performance and condition of New Domtar, rather than Newco Canada Exchangeco. In light of the fact that the value of the Exchangeable Shares, determined through dividend and dissolution entitlements and capital appreciation, is determined by reference to the consolidated financial performance and condition of New Domtar rather than Newco Canada Exchangeco, information respecting Newco Canada Exchangeco is not relevant to holders of Domtar Common Shares.

33. Holders of Exchangeable Shares will effectively have a participating interest in New Domtar and will not have a participating interest in Newco Canada Exchangeco and it is therefore the financial information relating to New Domtar that is directly relevant to the holders of Domtar Common Shares making a decision in connection with the Arrangement, as ultimate holders of shares of New Domtar Common Stock and/or Exchangeable Shares following the Arrangement.

The Canadian GAAP and Reconciliation Requirements

34. Under NI 52-107, New Domtar will be permitted to prepare its financial statements in accordance with U.S. GAAP without the need to reconcile any of its financial information to Canadian GAAP. Furthermore, under NI 52-107, New Domtar would be permitted to have its audited financial statements audited in accordance with U.S. GAAS.

The Interim Financial Statements of the Weyerhaeuser Fine Paper Business

35. The most recently completed interim period and the comparable period in the preceding financial year for the combined statements of operations and cash flows are included in the Interim Financial Statements of the Weyerhaeuser Fine Paper Business. The combined statements of business unit equity included in the Interim Financial Statements of the Weyerhaeuser Fine Paper Business only include the most recently completed interim period. The financial statements of Spinco and the Weyerhaeuser Fine Paper Business (as referred to above) are to be included in the Registration Statement of Spinco. U.S. GAAP, which applies to the financial statements that are required to be included in the Registration Statement, only requires that the change in business unit equity of the Weyerhaeuser Fine Paper Business be reconciled to the interim balance sheet which is required to be presented (which is as of September 24, 2006). Regulation S-X of the SEC requires neither an interim balance sheet as of September 25, 2005 nor a reconciliation in respect of the change in business unit equity for the interim period then ended to be provided. The audited financial statements of the Weyerhaeuser Fine Paper Business for the year ended December 25, 2005 include combined statements of business unit equity (which can be used to compare any changes to the business unit equity of the Weyerhaeuser Fine Paper Business for the September 24, 2006 period).

Decision

36. The Decision Makers being satisfied that they have jurisdiction to make this decision and that the relevant test under the Legislation has been met, the Requested Relief is granted.

"Josée Deslauriers"
Director of Capital Markets
Autorité des marchés financiers