National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101, s. 9.1 Protection of Minority Security Holders in Special Transactions - issuer is an income trust with an interest in underlying assets -- entity to hold interest in issuer through units of entity underlying issuer -- units redeemable into units of issuer -- issuer may include entity's indirect interest in issuer when calculating issuer's market capitalization for purposes of using 25% market capitalization exemption for certain related party transactions
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(a) and 9.1.
June 22, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
NORTHWEST HEALTHCARE PROPERTIES
REAL ESTATE INVESTMENT TRUST
The securities regulatory authority or regulator in the Jurisdiction ("Decision Maker") has received an application (the "Application") from the Filer for a decision under the securities legislation of the Jurisdiction (the "Legislation") that the Filer be granted an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through NHP Holdings Limited Partnership ("NHP LP") or a subsidiary entity (as such term is defined in MI 61-101) of NHP LP, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(a) of MI 61-101 if the indirect equity interest of NorthWest Operating Trust ("NW Trust") in the Filer, held in the form of limited partnership units of NHP LP, were included in the calculation of the Filer's market capitalization (the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) The Ontario Securities Commission is the principal regulator for the Application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in Québec.
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 Filer:
1. The Filer is an unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario. The Filer was established pursuant to a declaration of trust dated January 1, 2010, as amended.
2. The Filer's head office is located at 284 King Street East, Toronto, Ontario M5A 1K4.
3. The Filer is a reporting issuer (or the equivalent thereof) in each of the Jurisdictions and, to its knowledge, is currently not in default of any applicable requirements under the securities legislation thereunder.
4. The Filer is authorized to issue an unlimited number of trust units ("Units") and an unlimited number of special voting units ("Special Voting Units"). As at the date hereof, the Filer had 18,750,000 Units and 7,749,772 Special Voting Units issued and outstanding.
5. The Units are listed and posted for trading on the Toronto Stock Exchange (the "TSX") under the trading symbol "NWH.UN".
6. NHP LP is a limited partnership formed under the laws of the Province of Ontario and is governed by the limited partnership agreement of NHP LP dated March 22, 2010. NHP LP's head office is located at 284 King Street East, Toronto, Ontario M5A 1K4.
7. NHP LP is not a reporting issuer (or the equivalent thereof) in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.
8. NHP LP is authorized to issue an unlimited number of Class A limited partnership units ("Class A Units"), of which 18,750,000 Class A Units are issued and outstanding and held by the Filer, and exchangeable Class B limited partnership units ("Exchangeable LP Units"). The Exchangeable LP Units were issued in connection with the Filer's initial public offering on March 25, 2010 (the "IPO") to NW Trust, the entity that indirectly sold the initial properties to the Filer in connection with the IPO. The Exchangeable LP Units are intended to be, to the greatest extent practicable, the economic equivalent of the Units. Holders are entitled to receive distributions equal to those paid by the Filer to holders of Units. The Exchangeable LP Units are not transferable but are exchangeable into Units and each is accompanied by a Special Voting Unit that entitles the holder to receive notice of, attend and to vote together with the holders of Units at all meetings of voting unitholders. As of the date hereof, there are 7,749,772 Exchangeable LP Units issued and outstanding.
9. The principal activity of NHP LP is to own income-producing real estate assets.
10. The Filer holds approximately 70% of the limited partnership units of NHP LP with the balance (the Exchangeable LP Units) held by NW Trust.
11. If MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
(a) the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and
(b) the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (together, requirements (a) and (b) are referred to as the "Minority Protections").
12. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization.
13. The Filer may not be entitled to rely on the automatic size exemptions available under the Legislation from the requirements relating to related party transactions in the Legislation because the definition of market capitalization in the Legislation does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.
14. The Exchangeable LP Units represent part of the equity value of the Filer and provide the holder of the Exchangeable LP Units with economic rights which are, as nearly as practicable, equivalent to the Units. The effect of NW Trust's exchange right is that NW Trust will receive Units upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Units; namely, the assets held directly or indirectly by NHP LP.
15. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of NW Trust's limited partnership interest in NHP LP (initially, approximately 30%). As a result, related party transactions by the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions are effectively less than 25% of the true equity value of the Filer.
16. Section 1.4 of MI 61-101 treats an operating entity of an income fund on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and what transactions MI 61-101 should apply to. Therefore, it is consistent that securities of the operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of the determining the market capitalization of the Filer under MI 61-101.
17. The inclusion of the Exchangeable LP Units when determining the Filer's market capitalization is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.
The Decision Maker is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Maker under the Legislation is that the Requested Relief be granted to the Filer provided that:
(a) the transaction would qualify for the market capitalization exemption contained in the Legislation if the Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Units;
(b) there be no material change to the terms of the Exchangeable LP Units, including the exchange rights associated therewith, as described above and in the prospectus dated March 16, 2010, filed in connection with the IPO; and
(c) the Filer's next interim management's discussion and analysis filing contain the following disclosure, with any immaterial modifications as the context may require:
"Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. NorthWest Healthcare Properties Real Estate Investment Trust has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of NorthWest Healthcare Properties Real Estate Investment Trust's market capitalization, if NorthWest Operating Trust's indirect equity interest in NorthWest Healthcare Properties Real Estate Investment Trust is included in the calculation of NorthWest Healthcare Properties Real Estate Investment Trust's market capitalization. As a result, the 25% threshold above is increased to include the approximately 30% indirect interest in NorthWest Healthcare Properties Real Estate Investment Trust held by NorthWest Operating Trust."