Petrobank Energy and Resources Ltd. and Petrominerales Ltd.

Decision

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Control distribution -- Exemption from the requirement to file Form 45-102F1 on SEDAR at least seven days before the first trade of securities that is part of a distribution in the context of a securities lending transaction where the control person is lending securities for the purposes of facilitating a convertible bond offering.

Applicable Legislative Provisions

National Instrument 45-102 Resale of Securities, s. 3.1.

Citation: Petrobank Energy and Resources Ltd., Re, 2010 ABASC 59

February 16, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA AND ONTARIO

(THE JURISDICTIONS)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

PETROBANK ENERGY AND RESOURCES LTD.

(the Filer)

AND

PETROMINERALES LTD.

(Petrominerales)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer and Petrominerales for a decision under the securities legislation of the Jurisdictions (the Legislation) that the Filer be exempted from the requirement to file Form 45-102F1 on SEDAR at least seven days before loans of common shares of Petrominerales (Petrominerales Shares) are made by the Filer, a control person of Petrominerales, to one or more banks or investment dealers (the Banks) for the purposes of facilitating the Bond Offering (as that term is defined below) (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the Alberta Securities Commission (the Commission) is the principal regulator for this application;

(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 British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, the Northwest Territories, Nunavut and Yukon; and

(c) the Decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this Decision, unless they are otherwise defined.

Representations

This Decision is based on the following facts represented by the Filer:

1. The Filer is a corporation incorporated under the laws of the Province of Alberta.

2. The Filer is a reporting issuer or has equivalent status in each of the provinces of Canada and is not in default of any of the requirements of securities legislation applicable to it.

3. The Filer's common shares are listed and posted for trading on the Toronto Stock Exchange (the TSX).

4. Petrominerales is a corporation incorporated under the laws of the Bahamas.

5. Petrominerales is a reporting issuer or has equivalent status in each of the provinces of Canada and is not in default of any of the requirements of securities legislation applicable to it.

6. Petrominerales shares have been listed and posted trading on the TSX since June 29, 2006.

7. The Filer currently holds 67% of the issued and outstanding shares of Petrominerales. As such, the Filer is a "control person" of Petrominerales, as that term is defined in the Legislation.

8. As a consequence of the Filer being a control person, its Petrominerales Shares are subject to resale restrictions. The Filer is currently able to rely on the prospectus exemption for a trade by a control person in subsection 2.8(1) of National Instrument 45-102 Resale of Securities (NI 45-102) because the Filer is able to satisfy the conditions of subsection 2.8(2) of NI 45-102.

9. Petrominerales intends to complete an offering of convertible bonds (Convertible Bonds) by private placement (the Bond Offering) expected to be sold to a limited group of large international sophisticated funds (the Bond Purchasers). The Convertible Bonds will be convertible into Petrominerales Shares.

10. By participating in the Bond Offering, the Bond Purchasers will establish a significant position in Petrominerales. In order to neutralise this position, it is expected that certain of the Bond Purchasers will borrow Petrominerales Shares in the market and sell those shares.

11. The Filer holds 67% of the issued and outstanding Petrominerales Shares. The remaining 33% are held broadly by members of the public. As such, the liquidity of Petrominerales Shares is low. Consequently, the number of Petrominerales Shares available for Bond Purchasers to borrow in accordance with their investment strategy is low.

12. Unless there are shares of Petrominerales available in the market for Bond Purchasers to borrow, Petrominerales will not be able to pursue the Bond Offering, as potential Bond Purchasers will be unwilling to acquire the Convertible Bonds unless they can also borrow Petrominerales Shares to establish a hedged position.

13. The Filer has been asked, and has agreed in principal, to lend to the Banks approximately 15% of its Petrominerales Shares, representing approximately 10% of the issued and outstanding Petrominerales Shares, in order to increase the liquidity of Petrominerales Shares and facilitate the Bond Offering. These loans will be in the form of standard securities lending agreements (SLAs).

14. The SLAs will contain a term that provides that the Filer will transfer the Petrominerales Shares that are the subject of the loans to the Banks for the duration of the loans and that the Banks will be entitled to deal with such securities. The SLAs will contain a term that the Banks must return equivalent Petrominerales Shares to the Filer after a period of time, not expected to exceed three years.

15. The SLAs will contain provisions to enable the Filer to exercise the voting rights attached to the loaned Petrominerales Shares. The Filer may exercise the right to require the Banks to return to the Filer equivalent loaned Petrominerales Shares in advance of the record date for voting them, following which the Filer would vote them. Alternatively, the Filer may enter into an agreement with the Bank which would provide that the Bank will continue to hold the loaned Petrominerales Shares but the Bank would be required to vote the Petrominerales Shares in accordance with instructions received from the Filer.

16. The SLAs will provide a method to ensure that amounts equivalent to dividend amounts, if any, received by the Banks in connection with the loaned Petrominerales Shares are paid to the Filer. In addition, the SLAs will allow the Filer, in certain circumstances, to call back the Petrominerales Shares lent pursuant to the SLAs.

17. Petrominerales will publicly announce the Bond Offering and, at the same time, the Filer will disclose information regarding the SLAs.

18. Should the Filer be able to lend 15% of its Petrominerales Shares, the Filer expects to receive annual fees ranging from approximately 0.005% to 0.0125% of the value of the Petrominerales Shares lent, for the duration of the time the Petrominerales Shares remain loaned.

19. The filing by the Filer of Form 45-102F1 in advance of the lending of its Petrominerales Shares would publicly disclose the proposed Bond Offering, which would jeopardize Petrominerales' ability to complete the Bond Offering, the terms of which will not be finalized or negotiated at that time. Further, the purpose of Form 45-102F1 is to provide notice to the market when a control block holder is selling shares to prepare the market for the sale of such shares. In this case, as the Filer has no intention of selling its Petrominerales Shares, the Form 45-102F1 does not serve its purpose in the context of the Bond Offering.

20. The Petrominerales Shares are being loaned to a Bank who will then lend Petrominerales Shares to various other sophisticated entities, depending on demand. The parties borrowing Petrominerales Shares in the market are expected to be large sophisticated international funds and banks who, on a routine basis, undertake the hedging strategies described herein in connection with their investments.

21. The participation by the Filer in the SLAs will benefit Petrominerales and all of its shareholders since it will allow Petrominerales to complete the Bond Offering on more favourable terms than would otherwise be available.

22. If the Exemption Sought is granted, the existence and material terms of the Filer's involvement in the Bond Offering and the transfers of securities pursuant to the SLAs will be fully apparent to investors since:

(a) the Filer will, at least 24 hours prior to the transfer of Petrominerales Shares to the Banks, file a completed and signed Form 45-102F1 in relation to the transfer;

(b) Petrominerales will, in accordance with the requirements of the Legislation, file a news release in relation to the Bond Offering;

(c) the Filer will, in accordance with the requirements of the Legislation, file insider reports disclosing the transfers of Petrominerales Shares under the SLAs and the existence and material terms of the SLAs; and

(d) the Filer will, if required, file separate reports in relation to the transfers of Petrominerales Shares under the early warning requirements set out in subsections 5.2(1) and (2) of MI 62-104 Take-Over Bids and Issuer Bids and, in Ontario, subsections 102.1(1) and (2) of the Securities Act (Ontario).

Decision

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 to the Filer provided that:

(a) the Filer satisfies the conditions set forth in subsection 2.8(2) of NI 45-102; and

(b) the Filer and Petrominerales comply with the representations in paragraph 22 hereof.

Furthermore, the decision of the principal regulator and the securities regulatory authority or regulator in Ontario is that the application and this Decision be kept confidential and not be made public until the earliest of:

(a) the date on which Petrominerales publicly announces the Bond Offering;

(b) the date on which the Filer advises the principal regulator that there is no longer any need for the application and this Decision to remain confidential; and

(c) the date that is 120 days after the date of this Decision.

"William S. Rice, QC"
Alberta Securities Commission
 
"Stephen R. Murrison"
Alberta Securities Commission