National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions-- capital trust established by insurance company to issue capital trust securities as cost-effective means of raising capital for Canadian insurance regulatory purposes exempted from eligibility requirements to file a short form prospectus, certain form requirements and permitted to abridge 10-day notice requirement -- insurance company is exempt from requirements to file certain disclosure documents as long as its parent files required disclosure -- parent has guaranteed certain obligations of the insurance company -- relief granted as disclosure regarding the insurance company and parent is more relevant -- relief subject to conditions -- National Instrument 44-101 Short Form Prospectus Distributions -- relief also granted for temporary confidentiality of decision
Applicable Legislative Provisions
National Instrument 44-101 Short Form Prospectus Distributions, ss. 2.3, 2.8.
Form 44-101F1 Short Form Prospectus, items 6 and 11.
June 10, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
MANULIFE FINANCIAL CAPITAL TRUST II
(the "Trust"), THE MANUFACTURERS LIFE
INSURANCE COMPANY ("MLI") AND
MANULIFE FINANCIAL CORPORATION ("MFC" and,
together with the Trust and MLI, the "Filers")
The principal regulator in the Jurisdiction has received an application from the Filers for a decision (the "Requested Relief") under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") that:
1. the Trust be exempted from the following requirements of the Legislation in connection with offerings by the Trust from time to time of Notes (as defined herein):
(a) the qualification requirements (the "Qualification Requirements") of Part 2 of National Instrument 44-101 - Short Form Prospectus Distributions ("NI 44-101"), such that the Trust is qualified to file a prospectus in the form of a short form prospectus; and
(b) the disclosure requirements (the "Disclosure Requirements") in Item 6 (Earnings Coverage Ratios) and Item 11 (Documents Incorporated By Reference), with the exception of Item 11.1(1)(5), of Form 44-101F1 - Short Form Prospectus of NI 44-101 in respect of the Trust, as applicable;
2. the Application and this decision documents be held in confidence by the principal regulator, subject to certain conditions.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 - Passport System ("MI 11-102") is intended to be relied upon in each of the provinces and territories other than Ontario.
Terms defined in National Instrument 14-101 - Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filers:
1. MFC was incorporated under the Insurance Companies Act (Canada) (the "ICA") on April 26, 1999. On September 23, 1999, in connection with the demutualization of MLI, MFC became the sole shareholder of MLI. MFC's head office is located at 200 Bloor Street East, Toronto, Ontario, M4W 1E5.
2. The authorized share capital of MFC consists of: (i) an unlimited number of common shares; (ii) an unlimited number of Class A Shares, issuable in series; (iii) an unlimited number of Class 1 Shares, issuable in series; and (iv) an unlimited number of Class B Shares, issuable in series.
3. MFC is a publicly traded company on the Toronto Stock Exchange, the New York Stock Exchange, the Stock Exchange of Hong Kong Limited and the Philippine Stock Exchange.
4. MFC is a reporting issuer in each province and territory of Canada and is not, to its knowledge, in default of its reporting issuer obligations under the securities legislation of any of the provinces or territories of Canada.
5. MFC is qualified to use the short form prospectus system provided by NI 44-101.
6. MLI is an insurance company under the ICA and is regulated by the Superintendent of Financial Institutions (Canada) (the "Superintendent"). The head office of MLI is located at 200 Bloor Street East, Toronto, Ontario, M4W 1E5.
7. The authorized share capital of MLI consists of: (i) an unlimited number of common shares; (ii) an unlimited number of Class A Shares, issuable in series; (iii) an unlimited number of Class 1 Shares, issuable in series; and (iv) an unlimited number of Class B Shares, issuable in series. MFC holds all of the issued and outstanding shares of MLI.
8. MLI is a reporting issuer in each of the provinces and territories of Canada and is not, to its knowledge, in default of its reporting issuer obligations under the securities legislation of any of the provinces or territories of Canada.
9. MFC has guaranteed certain obligations of MLI in order to rationalize the securities reporting obligations of MFC and MLI (the "MFC Guarantees"). The MFC Guarantees included: (i) a subordinated guarantee of MLI's Class A Shares, Class 1 Shares and Class B Shares (the "MFC Preferred Share Guarantee"); (ii) a full and unconditional subordinated guarantee of MLI's $550 million of outstanding 6.24% subordinated debentures due February 16, 2016; and (iii) a full and unconditional guarantee of MLI's obligations under the annuities which provided the cash flows to service the $200 million of 5.390% annuity-backed notes due March 12, 2007 and the $200 million of 4.551% annuity-backed notes due November 12, 2008 issued by Maritime Life Canadian Funding. The annuity-backed notes were repaid on maturity.
10. As a result of the MFC Guarantees, MLI received an exemption dated January 22, 2007 (the "2007 MLI Order") from the securities regulatory authority in each province and territory other than Yukon, Northwest Territories, Nunavut and Prince Edward Island from the requirements to file certain continuous disclosure materials. For so long as the terms and conditions of the 2007 MLI Order are satisfied, MLI is not required to file interim financial statements or annual or interim management's discussion and analysis. MLI prepares and files annual financial statements prepared in accordance with Canadian generally accepted accounting principles and certain comparative financial information of MLI is filed by MFC on a quarterly basis. MFC makes available to holders of MLI securities on an ongoing basis MFC's audited annual financial statements and unaudited interim financial statements (including management's discussion and analysis thereon) and other MFC continuous disclosure materials.
11. MLI satisfies each of the basic qualification criteria listed in section 2.2 of NI 44-101 other than sections 2.2(d) and (e) and is deemed, pursuant to section 2.8(4) of NI 44-101, to have filed a notice of intention to be qualified to file a short form prospectus. MLI does not satisfy the requirements under sections 2.2(d) because it is exempt from filing interim financial statements, annual and interim management's discussion and analysis and annual information forms for so long as the terms and conditions of the 2007 MLI Order are satisfied, and it does not satisfy the requirement under section 2.2(e) because it is a wholly-owned subsidiary of MFC, so its equity securities are not listed on any exchange.
12. The Trust will be a trust established under the laws of Ontario pursuant to a declaration of trust prior to the filing of a preliminary prospectus by the Trust, MLI and MFC.
13. The Trust is proposing to conduct an initial public offering (the "Offering") of one or more series of subordinated notes (the "Notes") in each of the provinces and territories of Canada and may, from time to time, issue further series of Notes. It is currently anticipated that the first series of Notes will be designated as Manulife Financial Capital Securities II - Series 1 (the "MaCS II Notes"). The Trust will be a newly-formed entity and, as such, will have no prior operating history. As a result of the Offering, the capital of the Trust will consist of the Notes issued pursuant to the Offering and voting trust units, issuable in series (the "Voting Trust Units" and collectively with the Notes, the "Trust Securities"). All of the Voting Trust Units will be held by MLI.
14. The Trust will be a single purpose vehicle to be established for the purpose of effecting offerings of Trust Securities in order to provide MLI with a cost effective means of raising capital for Canadian insurance regulatory purposes by means of: (i) creating and selling the Trust Securities; and (ii) acquiring and holding assets, which will consist primarily of one or more senior unsecured debentures of MLI and other eligible assets to be specified in the prospectus for the Offering (the "Prospectus") ((i) and (ii) collectively, the "Trust Assets"). The Trust Assets will generate income for distribution to holders of Trust Securities. The Trust will not carry on any operating activity other than in connection with offerings of Trust Securities and in connection with the Trust Assets.
15. As a result of the Offering, it is expected the Trust will become a reporting issuer in each of the provinces and territories of Canada.
MaCS II Notes
16. The MaCS II Notes will pay a fixed rate of interest on such date(s) (each, an "Interest Payment Date") as may be described in the Prospectus until such date as described in the Prospectus, following which the interest will be reset every five years (each such interest reset date, an "Interest Reset Date") until maturity at the Government of Canada Yield (as defined in the Prospectus) plus a spread to be described in the Prospectus.
17. Under agreements to be entered into among MLI, MFC, the Trust and a party acting as trustee, MLI and MFC will agree, for the benefit of the holders of each series of MaCS II Notes, that if, in respect of a series of MaCS II Notes, (i) MLI elects, at its sole option, prior to the commencement of the interest period ending on the day preceding the relevant Interest Payment Date, that holders of that series of MaCS II Notes invest interest payable in cash thereon on such Interest Payment Date in a new series of Class 1 Shares of MLI (the "MLI Deferral Preferred Shares"), or (ii) for whatever reason, interest is not paid in full in cash on that series of MaCS II Notes on any Interest Payment Date (in either case, an "Other Deferral Event"), (a) MLI will not declare or pay cash dividends on any MLI Public Preferred Shares (as defined below), or (b) if no MLI Public Preferred Shares are outstanding, MFC will not declare or pay cash dividends on any of its preferred shares or common shares (collectively, the "MFC Dividend Restricted Shares"), until a period of time specified in the Prospectus has elapsed (the "Dividend Stopper Undertaking"). Accordingly, it is in the interest of MLI and MFC to ensure, to the extent within their control, that the Trust pays the interest on the MaCS II Notes in cash on each Interest Payment Date so as to avoid triggering the Dividend Stopper Undertaking. "MLI Public Preferred Shares" means, at any time, preferred shares of MLI which, at that time: (i) have been issued to the public (excluding any preferred shares of MLI held beneficially by affiliates of MLI); (ii) are listed on a recognized stock exchange; and (iii) have an aggregate liquidation entitlement of at least $200 million, provided, however, if, at any time, there is more than one class of MLI Public Preferred Shares outstanding, then the most senior class or classes of outstanding MLI Public Preferred Shares shall, for all purposes, be the MLI Public Preferred Shares.
18. On each Interest Payment Date on which a Deferral Event (as defined below) has occurred in respect of a series of MaCS II Notes, holders of MaCS II Notes of that series will be required to invest interest payable on such MaCS II Notes in MLI Deferral Preferred Shares. A "Deferral Event" means: (i) an Other Deferral Event, or (ii) MLI has failed to declare cash dividends on its Class A Shares Series 1 or, if there are MLI Public Preferred Shares outstanding, MLI has failed to declare cash dividends on any of its MLI Public Preferred Shares in accordance with their respective terms in the last 90 days preceding the commencement of the interest period ending on the day preceding the relevant Interest Payment Date.
19. The MaCS II Notes will be automatically exchanged, without the consent of the holder, for a new series of Class 1 Shares of MLI upon the occurrence of certain stated events relating to the solvency of MLI or actions taken by the Superintendent in respect of MLI (an "Automatic Exchange").
20. The MFC Preferred Share Guarantee will apply to the Class 1 Shares of MLI issuable upon a Deferral Event or an Automatic Exchange. In circumstances where MFC is not the subject of a winding-up order, the MFC Preferred Share Guarantee will entitle the holder to receive payment from MFC within 15 days of any failure by MLI to pay a declared dividend or to pay the redemption price for such shares and, in the case of any amount remaining unpaid with respect to the preference of the preferred shares of MLI upon a winding-up of MLI, within 15 days of the later of the date of the final distribution of property of MLI to its creditors and the date of the final distribution of surplus of MLI, if any, to its shareholders. In circumstances where MFC is the subject of a winding-up order, the MFC Preferred Share Guarantee will entitle the holder to receive payment from MFC within 15 days of the determination of the final distribution of surplus of MFC, if any, to MFC's shareholders. Claims under the MFC Preferred Share Guarantee will be subordinate to all outstanding indebtedness and liabilities of MFC unless otherwise provided by the terms of the instrument creating or evidencing any such liability. In the event that a failure to pay declared dividends, the redemption price or the liquidation preference occurs at a time when MFC is subject to a winding-up order, the MFC Preferred Share Guarantee has been structured so that the amount payable by MFC under the MFC Preferred Share Guarantee will be subject to reduction such that the claims of holders of the respective class of preferred shares of MLI under the MFC Preferred Share Guarantee will, in effect, rank equally with the claims of holders of the respective class of preferred shares of MFC to any surplus assets of MFC remaining for distribution. Otherwise the MFC Preferred Share Guarantee would negatively impact the capital treatment of preferred shares of MLI for insurance regulatory purposes.
21. MLI will covenant that MLI will maintain ownership of 100% of the outstanding Voting Trust Units. Subject to regulatory approval, the MaCS II Notes will constitute Tier 1 capital of MLI.
22. The MaCS II Notes will be non-voting and will be unsecured obligations of the Trust ranking at least equally with other subordinated indebtedness of the Trust from time to time issued and outstanding. On a liquidation or winding-up of the Trust, the indebtedness evidenced by the MaCS II Notes will be subordinate in right of payment to the prior payment in full of all other liabilities of the Trust except liabilities which by their terms rank in right of payment equally with or subordinate to the indebtedness evidenced by the MaCS II Notes. Apart from the rights to receive the interest described herein, holders of MaCS II Notes have no further right in the income of the Trust. The holders of MaCS II Notes will not be entitled to initiate proceedings for the termination of the Trust.
23. Pursuant to an administration agreement to be entered into between the trustee of Trust (the "Trustee") and MLI, the Trustee will delegate to MLI certain of its duties in relation to the administration of the Trust. MLI, as administrative agent, will provide advice and counsel with respect to management of the assets of the Trust and other matters as may be requested by the Trustee from time to time and will administer the day-to-day operations of the Trust.
24. The Trust may, from time to time (including pursuant to the Offering), issue further series of Notes which qualify as Tier 1 capital of MLI for regulatory purposes, the proceeds of which would be used to acquire additional Trust Assets.
25. Because of the terms of the Notes and the various covenants of MLI and MFC, and given that the MFC Preferred Share Guarantee will apply to the Class 1 Shares of MLI issuable upon the occurrence of an Automatic Exchange or Deferral Event and that MLI is exempt from making most continuous disclosure filings, information about the affairs and financial performance of MLI and MFC, as opposed to that of the Trust, is meaningful to holders of Notes.
26. It is expected that the MaCS II Notes will receive an approved rating from an approved rating organization, as defined in National Instrument 41-101.
27. At the time of the filing of any prospectus in connection with offerings of Notes (including the Offering):
(a) the prospectus will be prepared in accordance with the short form prospectus requirements of NI 44-101 other than the Disclosure Requirements, except as permitted by the Legislation;
(b) the Trust will comply with all of the filing requirements and procedures set out in NI 44-101 other than the Qualification Requirements, except as permitted by the Legislation;
(c) MFC and MLI continue to be regulated by the Superintendent;
(d) MFC continues to be the direct or indirect beneficial owner of all of the issued and outstanding voting securities (as defined in the Legislation) of MLI;
(e) MFC and MLI are reporting issuers or the equivalent thereof under the Legislation;
(f) MFC continues to provide the MFC Preferred Share Guarantee;
(g) the prospectus will incorporate by reference the documents of MFC set forth under Item 11.1 of Form 44-101F1, and MLI's annual financial statements;
(h) the prospectus disclosure required by Item 11 (other than 11.1(1)(5) of Form 44-101F1 in respect of the Trust) will be addressed by incorporating by reference MFC's public disclosure documents referred to in paragraph 27(g) above, and MLI's annual financial statements; and
(i) MFC will satisfy all of the criteria in section 2.2 of NI 44-101 and MLI will satisfy the criteria in section 2.2 of NI 44-101 other than sections 2.2(c), (d) and (e).
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:
(i) the Trust, MLI and MFC, as applicable, comply with paragraph 27 above;
(ii) MLI remains the direct owner of all of the outstanding Voting Trust Units;
(iii) MLI, as holder of the Voting Trust Units, will not propose changes to the terms and conditions of any outstanding Notes offered and sold pursuant to a short form prospectus of the Trust filed under this decision that would result in such Notes being exchangeable for securities other than Class 1 Shares of MLI;
(iv) the Trust has minimal assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the Trust Securities or the administration of the Trust Assets;
(v) the Trust issues a news release and files a material change report in accordance with Part 7 of National Instrument 51-102 -- Continuous Disclosure Obligations, as amended, supplemented or replaced from time to time, in respect of any material change in the affairs of the Trust that is not also a material change in the affairs of MFC or MLI;
(vi) the Trust becomes, on or before the filing of a preliminary short form prospectus in connection with the Offering and thereafter remains an electronic filer under National Instrument 13-101 -- System for Electronic Document Analysis and Retrieval (SEDAR);
(vii) following the Offering, the Trust is a reporting issuer in at least one jurisdiction in Canada;
(viii) following the Offering, the Trust files with the securities regulatory authorities in each jurisdiction in which it becomes a reporting issuer all periodic and timely disclosure documents that it is required to have filed in that jurisdiction: (a) under all applicable securities legislation; (b) pursuant to an order issued by the securities regulatory authority; or (c) pursuant to an undertaking to the securities regulatory authority;
(ix) the securities to be distributed: (a) have received an approved rating on a provisional basis; (b) are not the subject of an announcement by an approved rating organization, of which the Trust is or ought reasonably to be aware, that the approved rating given by the organization may be downgraded to a rating category that would not be an approved rating; and (c) have not received a provisional or final rating lower than an approved rating from any approved rating organization; and
(x) the Trust files a notice declaring its intention pursuant to section 2.8 of NI 44-101 prior to or concurrently with the filing of the preliminary short form prospectus for the Offering.
The further decision of the principal regulator is that the application of the Filers and this decision shall be held in confidence by the principal regulator until the earlier of (i) the date that a preliminary prospectus has been filed in respect of the Offering and (ii) the date that is 90 days after the date of this decision document.