Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- exemption from the requirement in Item 14.2 of Form 51-102F5 Information Circular to include in an information circular for an arrangement the financial statement disclosure for various entities as prescribed by the form of prospectus, other than a short form prospectus, that the relevant entity would be eligible to use for a distribution of securities. The arrangement is a business combination under which: (i) the issuer will transfer certain of its oil and gas properties to a second company (Newco); and (ii) the shareholders of the issuer will receive one share of Newco and 0.9527 of a share of a third company for each share of the issuer that they hold. Relief granted, provided that the information circular contain alternative financial disclosure for each entity.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, s. 9.1.

Form 51-102F5 Information Circular, Item 14.2.

Ontario Securities Commission Rule 41-501 General Prospectus Requirements, Part 4 and Part 6.

Citation: Diamond Tree Energy Ltd., 2007 ABASC 699

September 14, 2007

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA AND ONTARIO (THE JURISDICTIONS)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

DIAMOND TREE ENERGY LTD.

(THE FILER)

 

MRRS DECISION DOCUMENT

Background

1. 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 the securities legislation of the Jurisdictions (the Legislation) that the Filer be exempt, subject to certain conditions, from the requirements in Item 14.2 of Form 51-102F5 Information Circular under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) to provide (a) financial statement disclosure for the Newco Assets (as defined below) and Significant Acquisitions (as defined below) of Newco (as defined below) as prescribed by Part 4 and Part 6 of Ontario Securities Commission Rule 41-501 - General Prospectus Requirements (OSC Rule 41-501) or comparable requirements in each of the Jurisdictions in the Information Circular (as defined below) for the Arrangement (as defined below), specifically audited financial statements of the Newco Assets (the Newco Requested Relief) and (b) financial statements for each of the three most recently completed financial years of the Filer as prescribed by Section 4.1 of OSC Rule 41-501, or comparable requirements in each of the Jurisdictions in the Information Circular for the Arrangement (the Filer Requested Relief).

Application of Principal Regulator System

2. Under Multilateral Instrument 11-101 Principal Regulator System (MI 11-101):

(a) The Alberta Securities Commission is the principal regulator for the Filer;

(b) the Filer is relying on the exemption in Part 3 of MI 11-101 in British Columbia; and

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

Interpretation

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

Representations

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

The Filer

(a) The Filer is a corporation amalgamated under the Business Corporations Act (Alberta).

(b) The head office of the Filer is located in Calgary, Alberta.

(c) As at the date hereof, the authorized share capital of the Filer consists of an unlimited number of common shares (the Filer Shares), an unlimited number of first preferred shares, issuable in series, and an unlimited number of second preferred shares. No first preferred shares or second preferred shares of any class are currently outstanding.

(d) The issued and outstanding Filer Shares are listed on the Toronto Stock Exchange (the TSX).

(e) The Filer is a reporting issuer in each of the provinces of Alberta, British Columbia and Ontario and has been for more than 12 months. The Filer is not in default of its obligations as a reporting issuer under the legislation of any jurisdiction in which it is a reporting issuer or the equivalent of a reporting issuer.

(f) The Filer satisfies the basic qualification criteria as set out in Section 2.2 of National Instrument 44-101 -- Short Form Prospectus Distributions (NI 44-101). In particular, the Filer filed on or about March 15, 2007 its annual information form for the year ended December 31, 2006, and filed on or about March 14, 2007 its annual financial statements for the year ended December 31, 2006 and related management's discussion and analysis.

(g) The Filer has a current AIF and current annual financial statements as such terms are defined in Section 1.1 of NI 44-101.

The Arrangement

(h) On August 10, 2007, the Filer, Crocotta Energy Inc. (Crocotta) and Upper Lake Oil and Gas Ltd. (formerly 1340466 Alberta Ltd.) (Newco) entered into an arrangement agreement (the Arrangement Agreement), in which the Filer, Crocotta and Newco agreed to pursue a business combination by way of a plan of arrangement (the Arrangement) under Section 193 of the Business Corporations Act (Alberta) and whereby:

(i) the Filer will transfer certain oil and gas properties of the Filer (the Newco Assets) to Newco (Significant Acquisition); and

(ii) the shareholders of the Filer will receive 0.9527 of a common share in the capital of Crocotta (a Crocotta Share) and one common share in the capital of Newco (a Newco Share) for each Filer Share held.

(i) The Arrangement Agreement provides that it is a condition of completion of the Arrangement that the Crocotta Shares and Newco Shares be listed on the TSX. The Arrangement Agreement also contains a number of other typical conditions to completion of the transactions contemplated thereby.

Crocotta

(j) Crocotta is a corporation amalgamated under the Business Corporations Act (Alberta).

(k) The head office of Crocotta is located in Calgary, Alberta.

(l) As at the date hereof, the authorized share capital of Crocotta consists of an unlimited number of common shares, an unlimited number of non-voting common shares, issuable in series, Class A preferred shares, issuable in series, Class B preferred shares, issuable in series, and an unlimited number of special voting shares. No non-voting common shares, Class A preferred shares, Class B preferred shares or special voting shares are currently outstanding.

(m) Crocotta is a reporting issuer in each of the provinces of Alberta, British Columbia, Saskatchewan, Manitoba, Québec, Ontario and New Brunswick. Crocotta is not in default of its reporting obligations under the Legislation.

(n) Crocotta has a current AIF and current annual financial statements as such terms are defined in Section 1.1 of NI 44-101.

(o) Crocotta satisfies the basic qualification criteria as set out in Section 2.2 of NI 44-101).

Newco

(p) Newco is a corporation incorporated by the Filer on August 1, 2007 under the Business Corporations Act (Alberta).

(q) The head office of Newco is located in Calgary, Alberta.

(r) Newco is a wholly-owned subsidiary of the Filer.

(s) As at the date hereof, Newco does not have any material assets or conduct any active business activities, other than in respect of the Arrangement.

(t) The outstanding Newco Shares are not listed on any exchange.

(u) Newco is not a reporting issuer, or the equivalent thereof, in any jurisdiction.

(v) Immediately following completion of the Arrangement, Newco anticipates that it will become a reporting issuer in each of the provinces of Alberta, British Columbia, Saskatchewan, Manitoba, Ontario, Québec and New Brunswick.

Disclosure of Financial Information

(w) The Filer is required to obtain approval for the Arrangement from shareholders, optionholders and warrantholders of the Filer (collectively the Securityholders). In order to obtain such approval, the Filer must prepare and send an information circular in accordance with Form 51-102F5 (the Information Circular) to all Securityholders and hold a meeting of Securityholders, which meeting is expected to be held on or about October 12, 2007. It is expected that the Information Circular will be mailed to Securityholders on or about September 14, 2007.

(x) Pursuant to item 14.2 of Form 51-102F5, the Information Circular is required to include prospectus level disclosure of the business and affairs of each of (i) the Filer, (ii) Crocotta (iii) Newco (including information in respect of the Newco Assets required under National Instrument 51-101 -- Standards of Disclosure for Oil and Gas Activities (NI 51-101) and the Canadian Oil and Gas Evaluation Handbook) and (iv) the Newco Assets as the business being acquired.

(y) The Information Circular will include long form prospectus level disclosure of Crocotta, as set out in OSC Rule 41-501.

(z) Pursuant to item 14.2 of Form 51-102F5, because the Arrangement is a restructuring transaction under which securities are to be changed, exchanged, issued, or distributed, the Filer is required to include in the Information Circular, among other items, balance sheets, income statements and statements of retained earnings and cash flows in respect of the Newco Assets in accordance with either Section 4.4(1)(b) or Section 6.4 of OSC Rule 41-501.

(aa) The Information Circular will include long form prospectus level disclosure for the Newco Assets, including, specifically, the required management's discussion and analysis, other than the Newco Requested Relief.

(bb) Provided the Newco Requested Relief is granted, the Information Circular will include the following financial and other disclosure in respect of the acquisition by Newco of the Newco Assets:

(i) audited schedules of gross revenue, royalty expenses, production costs and operating income for the Newco Assets for each of the three years ending December 31, 2006, 2005 and 2004;

(ii) schedules of gross revenue, royalty expenses, production costs and operating income for the Newco Assets for the six months ending June 30, 2007 and 2006;

(iii) an audited balance sheet of Newco as at August 15, 2007;

(iv) pro forma balance sheet of Newco as at June 30, 2007, after giving effect to the acquisition of the Newco Assets pursuant to the Arrangement;

(v) substantially all of the information set forth in Section 3.3(2)(b) of Companion Policy 41-501CP -- to OSC Rule 41-501 General Prospectus Requirements (OSC 41-501CP), or comparable information in each of the Jurisdictions, including specifically: (i) information with respect to reserves estimates and estimates of future net revenue and production volumes and other relevant information regarding the Newco Assets, if material; (ii) actual production volumes of the Newco Assets for each of the years ended December 31, 2006, 2005 and 2004; and (iii) estimated production volumes of the Newco Assets for the next year, based on information in the independent engineering evaluation of the Newco Assets prepared by AJM Petroleum Consultants, which is dated September 5, 2006 and effective December 31, 2006; and

(vi) reserves data and other oil and gas information prepared in accordance with NI 51-101 in respect of the Newco Assets,

(collectively, the Alternative Newco Disclosure).

(cc) The Alternative Newco Disclosure will exceed the alternative disclosure set out in Section 3.3 of OSC 41-501CP.

(dd) The Filer is unable to provide audited financial statements of income, retained earnings and cash flow in respect of the Newco Assets as:

(i) the Newco Assets do not have any separate historical audited or unaudited financial statements; and

(ii) the Newco Assets do not constitute a reportable segment of the Filer.

(ee) The acquisition of the Newco Assets by Newco is an acquisition of interests in oil and gas properties constituting a business, as provided in OSC 41-501CP.

(ff) The Alternative Newco Disclosure will comply with National Instrument 52-107 - Acceptable Accounting Principles, Auditing Standards and Reporting Currency.

(gg) Moreover, the acquisition by Newco of the Newco Assets from the Filer pursuant to the Arrangement will satisfy the conditions to the availability of the exemption set forth in Section 8.10 of NI 51-102, and the disclosure required in a business acquisition report under paragraphs (e) and (f) of Section 8.10(3) of NI 51-102, with the exception of Section 8.10(3)(e)(ii), for the Newco Assets will be included in the Information Circular. In particular, the Newco Assets are interests in oil and gas properties, financial statements do not exist for the Newco Assets, the acquisition of the Newco Assets will not constitute a reverse take-over and the Newco Assets do not constitute a "reportable segment" of the vendor (the Filer).

(hh) The Information Circular will include, among other things, a detailed description of the Arrangement and the disclosure (including financial statements) for the Filer prescribed by Form 44-101F1 - Short Form Prospectus (Form 44-101F1).

(ii) A pro-forma operating statement of Newco Assets will not be provided with the Information Circular as Newco has no revenues, the resulting pro-forma operating statement would look identical to the operating statements provided, and add no further value to the reader.

(jj) The Information Circular will incorporate by reference all documents of the type described in item 11.1 of Form 44-101F1 filed by the Filer after the date of the Information Circular and before the date of the Meeting.

(kk) The Information Circular will contain sufficient information for Securityholders to make a reasoned decision about whether to approve the Arrangement.

Decision

5. The Decision Makers are satisfied that they each have jurisdiction to make this decision and that the relevant test contained under the Legislation has been met. The Decision of the Decision Makers is that the Newco Requested Relief and the Filer Requested Relief are granted provided that:

(a) at the time of filing of the Information Circular, the Filer satisfies the basic qualification criteria as set out in Section 2.2 of NI 44-101;

(b) the Information Circular (and the documents incorporated by reference in the Information Circular) includes information about the Filer required by NI 44-101 to be included or incorporated by reference in a short form prospectus; and

(c) the Filer includes the Alternative Newco Disclosure in the Information Circular.

"Agnes Lau"
Associate Director, Corporate Finance
Alberta Securities Commission