Shermag Inc. -- s. 144.

Headnote

Section 144 -- partial revocation of cease trade order to permit certain trades pursuant to the terms of a CCAA approved share recapitalization, conversion, repurchase and private placement transaction.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., s. 144

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, CHAPTER S.5, AS AMENDED

(THE "ACT")

AND

IN THE MATTER OF

SHERMAG INC.

ORDER

(Section 144)

WHEREAS a Director of the Ontario Securities Commission (the "Commission") issued a temporary cease trade order dated November 20, 2009 pursuant to paragraphs 2 and 2.1 of subsection 127(1) and subsection 127(5) of the Act, as extended by an order dated December 2, 2009 pursuant to paragraphs 2 and 2.1 of subsection 127(1) and subsection 127(5) of the Act (the "Ontario CTO") which provided that all trading of the securities of Shermag Inc. (the "Applicant") are subject to a cease trade order;

AND WHEREAS the Applicant has applied to the Commission pursuant to section 144 of the Act (the "Application") for a partial revocation of the Ontario CTO;

AND WHEREAS the Applicant has represented to the Commission that:

1. The Applicant is incorporated under the Companies Act (Quebec) on January 28, 1977 and continued under Part IA of the Companies Act (Quebec) on January 30, 1981.

2. The Applicant is a reporting issuer in the Provinces of Quebec and Ontario.

3. The connecting factor used to identify Quebec as the principal regulator is the location of the Applicant's head office and business operations.

4. The Applicant's authorized capital consists of an unlimited number of common shares (the "Common Shares") and preferred shares (the "Preferred Shares"), of which 55,015,391 Common Shares and 700,000 Second-ranking Series 1 Preferred Shares are issued and outstanding at the date hereof. In addition, at the date hereof, there are two convertible debentures of the Applicant that are issued and outstanding, one in the aggregate principal amount of $1,000,000 and the other in the aggregate principal amount of $3,000,000, leach being convertible into Common Shares and Preferred Shares of the Applicant (collectively, the "Debentures"). The holders of all stock options issued by the Applicant that were outstanding have waived their rights in connection therewith.

5. The Ontario CTO was issued by the Commission as a result of the Applicant's failure to file the following continuous disclosure materials as required by Ontario Securities law:

a. its audited annual financial statements for the years ended March 31, 2008 and 2009;

b. management's discussion and analysis relating to audited annual financial statements for the years ended March 31, 2008 and 2009; and

c. its interim financial statements and related management discussion and analysis for the interim periods ending June 30 2008, September 30, 2008, December 31, 2008 and June 30 2009.

6. The Applicant is also subject to cease trade orders (collectively, the "Quebec CTO") issued by the Autorite des marches financiers du Quebec (the "AMF") dated November 16, 2009 and December 1, 2009. The Applicant has concurrently applied to the AMF for the revocation of the Quebec CTO (the "Quebec Partial Revocation").

7. The Preferred Shares have never been listed on an exchange and trading of the Common Shares on the TSX was halted on May 1s" 2009, and subsequently de-listed on July 31, 2009.

8. On May 5, 2008 (the "Filing Date"), the Applicant and its subsidiaries, Jaymar Furniture Corp., Scierie Montauban Inc., Megabois (1989) Inc., Shennag Corporation and Jaymar Sales Corporation (collectively, the "Applicants") applied for and obtained an order (the "CCAA Order") of the Quebec Superior Court (the "Court") for their protection under the Companies' Creditors Arrangement Act, including a general stay of proceedings against the Applicants until June 4, 2008 (the "Stay Termination Date").

9. The CCAA Order, inter alia, allowed the Applicant to continue operating as it attempted to develop a restructuring plan by staying, as of the Filing Date, substantially all claims against the Applicants, their respective property and assets and their respective directors, officers, agents, contractors and employees.

10. Pursuant to the CCAA Order, the Applicant obtained from the Court an order releasing it from certain obligations, and in particular that of preparing: (a) any document related to a potential shareholders' meeting; (b) any annual and interim financial statements; (c) any management information circulars; and (d) any annual information forms.

11. From June 4, 2008 onwards, the Applicants received successive new orders from the Court, inter alia, further extending the Stay Termination Date. The last such order was issued on August 12, 2009, and extended the Stay Termination Date to October 16, 2009.

12. On August 20, 2009, the Applicant filed a restructuring plan (the "Plan") before the Court which provided, among other things, that Groupe Bermex Inc. would subscribe for 41,666,667 Common Shares for aggregate consideration of $1,250,000, or $0.03 per share. On September 10, 2009, the creditors of the Applicant approved the Plan and the Court sanctioned the Plan on September 15, 2009. The transactions comprising the Plan closed on October 9, 2009 and on October 14, 2009, all the conditions precedent to the closing of the transactions comprising the Plan were met.

13. Since the closing of the transaction comprising the Plan, Groupe Bermex Inc. is the Applicant's controlling shareholder, holding 44,279,567 Common Shares, or 80.5% of the issued and outstanding Common Shares.

14. On February 12, 2010, the Applicant filed the following the following continuous disclosure materials on SEDAR (the "Materials"):

a. its audited annual financial statements for the year ended April 3, 2009 (including unqualified audited comparative information for the year ended April 4, 2008);

b. its management's discussion and analysis relating to audited annual financial statements for the year ended April 3, 2009; and

c. its interim financial statements and related management discussion and analysis for the interim periods ending July 3, 2009 and October 2, 2009.

15. The Applicant is not otherwise in default of any requirements of the Ontario Act, the Quebec Act or the rules or regulations thereunder, other than as described in paragraph 5, its failure to file its annual information form for the years 2008 and 2009 and, in respect of the Ontario Act, that the Applicant has taken the following steps, one or more of which may constitute an act in furtherance of a trade:

a. the Applicant has filed a news release setting out the terms of the Reorganization (as defined below), the terms of which are described in more detail in paragraph 18 hereof; and

b. the Applicant has mailed disclosure materials to shareholders for the purpose of obtaining shareholder approval of the Reorganisation.

16. The Applicant's current financial situation is precarious and it is currently operating as a going concern.

17. The Applicant's board of directors are of the opinion that the Applicant's status as a reporting issuer is inappropriate and that a reorganization of the Applicant, leading to the privatization of the Applicant, is necessary and desirable. In addition, such a reorganization would provide otherwise inaccessible liquidity for the holders of Common Shares.

18. On February 26, 2010, the Applicant mailed to its shareholders and filed on SEDAR a management information circular containing prospectus-level disclosure in connection with a proposed reorganization of the Applicant. The Applicant will hold an annual and special shareholders meeting (the "Meeting") on March 25, 2010 at which the shareholders of the Applicant will, inter alia, be asked to approve a corporate reorganization of the Applicant (the "Reorganization") comprised of the following transactions:

a. the adoption of by-law 2010-1 abrogating the authorised share capital of the Applicant, replacing it with a share capital comprising three classes of shares, namely common shares, class A preferred shares and class B preferred shares (the "Recapitalization");

b. the conversion of the presently issued and outstanding Common Shares into class B preferred shares and the presently issued and outstanding Preferred Shares into class A preferred shares (the "Conversion");

c. concurrent with the Recapitalization and Conversion, the subscription by way of private placement of Groupe Bermex Inc. of 100 new common shares of the Applicant for a total subscription price of $100 (the "Private Placement"); and

d. immediately following the Recapitalization, the Conversion and the Private Placement, the repurchase by the Applicant of all the issued and outstanding class B preferred shares at a price of $0.03 per share.

19. The Reorganization constitutes a "business combination" within the meaning of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") and the Applicant intends to avail itself of the exemption from the formal valuation requirement provided for in Section 4.4(1)(a) thereof.

20. The Reorganization must obtain "minority approval" as defined in MI 61-101.

21. The Applicant cannot complete the Reorganization without a partial revocation of the Ontario CTO and the Quebec CTO.

22. In connection with the Reorganization, the Applicant will:

a. provide to the Commission and the AMF, statements from the holders of the Debentures and the shareholders of the Applicant following the completion of the Reorganization (i) acknowledging that the issuance of this partial revocation order does not guarantee the issuance of a full revocation order in the future and (ii) acknowledging receipt of a copy of each of the Ontario CTO, the Quebec CTO, the Quebec Partial Revocation and this partial revocation order; and

b. provide a copy of the Ontario CTO, the Quebec CTO, the Quebec Partial Revocation and this partial revocation order to holders of the Debentures and the shareholders of the Applicant following the completion of the Reorganization.

23. Pursuant to an agreement with its principal regulator, the AMF, in connection with the Reorganization, the AMF agreed that the filing of the Materials by the Applicant would be sufficient to relieve it of its default under the Quebec CTO.

24. The Applicant acknowledges that the Ontario CTO and the Quebec CTO will remain in effect following the conclusion of the Reorganization and that trading in the securities of the Applicant will remain ceased.

25. Upon issuance of this partial revocation order, the Applicant will issue and file a news release and a material change report on SEDAR.

26. The Applicant's SEDAR profile and SEDI issuer profile supplement are current and accurate.

AND WHEREAS considering the Application and the recommendation of the staff of the Commission;

AND WHEREAS the Director being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED, pursuant to section 144 of the Act, that the Ontario CTO be and is hereby partially revoked solely to permit trades in securities of the Applicant in connection with the Reorganization subject to:

a. the approval of the Recapitalization by two-thirds of the votes cast at the Meeting;

b. obtaining minority approval (as such term is defined in MI 61-101) of the Reorganization;

c. following the completion of the Reorganization, the Applicant providing each of the holders of the Debentures and each of its shareholders with a copy of the Ontario CTO, the Quebec CTO, the Quebec Partial Revocation and this partial revocation order;

d. the Applicant providing the Commission with statements from the holders of the Debentures and the shareholders of the Applicant following the completion of the Reorganization (i) acknowledging that the issuance of this partial revocation order does not guarantee the issuance of a full revocation order in the future, and (ii) acknowledging receipt of a copy of each of the Ontario CTO, the Quebec CTO, the Quebec Partial Revocation and this partial revocation order.

Dated at Toronto this 25th day of March, 2010.