National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings -- An issuer wants relief from the requirement in Part 5 of NI 52-109 to file interim certificates -- The issuer is an SEC foreign issuer under NI 71-102 and files its US continuous disclosure documents to satisfy Canadian requirements; the issuer furnishes to the SEC interim financial information on Form 6-K, which differs in several material respects from interim financial statements and interim MD&A filed on Form 10-Q and required to be certified under SOX 404.
Applicable Legislative Provisions
National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, Part 5, s. 8.6.
Citation: BlackWatch Energy Services Corp., Re, 2010 ABASC 167
April 12, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
BLACKWATCH ENERGY SERVICES CORP.
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) to grant an exemption from the continuous disclosure obligation to include the financial statements in a business acquisition report (BAR) in connection with the Acquisition (as defined below) as required by Section 8.4 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Alberta Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that Subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland, North West Territories, Yukon and Nunavut; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Defined terms contained 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 Filer:
1. The Filer, a corporation formed under the Business Corporations Act (Alberta) with its head office in Alberta, is a reporting issuer in each of the provinces and territories of Canada, except Québec. To its knowledge, the Filer is not in default of securities legislation in any jurisdiction of Canada.
2. The Filer's common shares are listed on the Toronto Stock Exchange.
3. The Filer has entered into an agreement (the Acquisition Agreement) with a petroleum services entity (Libya Co) in Libya and another petroleum services entity (collectively, the Sellers) to acquire two drilling rigs (the Rigs), related equipment, associated contracts and operating infrastructure in Libya (collectively, the Acquired Assets), which will be acquired through the purchase from the Sellers of all of the issued and outstanding shares of a newly formed company (the Libya Drilling Co), being a company incorporated under the laws of Libya and whose registered office is located in Tripoli (the Acquisition).
4. The Acquisition was announced by press release of the Filer dated March 3, 2010 and is expected to close in April 2010.
5. The Acquired Assets are currently located and are operating in the Middle East North Africa region.
6. The Acquisition constituted a significant acquisition by the Filer for the purposes of NI 51-102, which requires the Filer to file a BAR.
7. Section 8.4 of NI 51-102 would require the Filer to include the following financial statements of the Acquired Assets in the BAR:
(a) an income statement, a statement of retained earnings, and a cash flow statement of the Acquired Assets for the financial year ended December 31, 2009 (audited) and December 31, 2008 (unaudited);
(b) a balance sheet for the Acquired Assets as at December 31, 2009 (audited) and December 31, 2008 (unaudited);
(c) a balance sheet for Libya Drilling Co as at December 31, 2009 (audited);
(d) a pro forma income statement for the Filer for the year ended December 31, 2009 giving effect to the Acquisition; and
(e) pro forma earnings per share based on the pro forma income statements.
8. In its examination of the records of the Sellers relating to the Acquired Assets (pursuant to the Acquisition Agreement) the Filer has become aware of the following facts:
(a) Libya Co is a private company operating in the energy services business in the Middle East and North Africa. In addition to owning and operating the Acquired Assets, Libya Co's operations include a substantial well servicing business;
(b) Libya Co did not maintain administrative support functions (such as accounting, treasury, tax and legal functions) dedicated to the Acquired Assets. Rather, these functions were provided by Libya Co at the corporate level and the related administration costs were not allocated to the Acquired Assets;
(c) Libya Co's systems and procedures do not provide sufficient information for the preparation of stand-alone income tax and interest provisions for the Acquired Assets. The Filer further notes that neither Libya Co nor Libya Drilling Co is subject to income tax under Libyan law in respect of the operation of the Acquired Assets;
(d) accounts receivable and accounts payable are maintained for Libya Co's operations in aggregate and it is not practicable to identify specifically those accounts receivable and accounts payable attributable to the Acquired Assets;
(e) separate cash balances were not maintained for the Acquired Assets. Cash receipts and disbursements relating to the operations of the Acquired Assets were aggregated with the cash activity for Libya Co's aggregate business operations;
(f) equity and other capital balance items were not maintained for the Acquired Assets. Such items were aggregated with Libya Co's aggregate business operations; and
(g) the Rigs were not commissioned and put into service by Libya Co until 2009, accordingly no financial information respecting the Acquired Assets is available from Libya Co for any periods prior to 2009.
9. Libya Co has indicated to the Filer that since it did not operate the Acquired Assets as a stand-alone division, it did not maintain separate financial statements or records for the Acquired Assets. Therefore "divisional" financial statements for the Acquired Assets were not available. Based on the examination of the records relating to the Acquired Assets by the Filer, "carve-out" financial statements for the Acquired Assets cannot be prepared as the financial records were not sufficiently detailed to extract information specific to the Acquired Assets.
10. Accordingly, the Filer submits that it is impracticable to prepare the financial statements required by Section 8.4 of NI 51-102 relating to the Acquired Assets.
11. The Filer will provide the following financial information in lieu of the financial statements required by Section 8.4 of NI 51-102 (collectively, the Alternative Financial Statements):
(a) a statement of operations of the Acquired Assets for the financial year ended December 31, 2009 (audited) which will include revenues generated by the Acquired Assets less expenses directly attributable to the Acquired Assets (expenses will include sales and marketing, depreciation and other expenses directly attributable to the Acquired Assets but will not include any allocation of general costs incurred for administrative support (such as accounting, treasury, tax and legal support) nor an allocation of interest or income taxes);
(b) a statement of assets acquired and liabilities assumed as at December 31, 2009 (audited) which will consist only of the Acquired Assets and liabilities specifically assumed;
(c) a presentation note including a description of the significant accounting policies followed in the preparation of the financial statements;
(d) a pro forma operating statement for the year ended December 31, 2009 which will include the Filer's income statements and the statement of operations for the Acquired Assets for the same periods and any necessary pro forma adjustments; and
(e) a pro forma balance sheet as at December 31, 2009 which will include the Acquired Assets, the assumed liabilities and the method of financing the Acquisition.
12. It is expected that the value of the Acquired Assets will not have changed materially between December 31, 2009 and the date of acquisition.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that the Filer includes the Alternative Financial Statements in its BAR.