MI 61-101 -- exemption from Part 4 -- Business Combinations -- Applicant proposing a business combination that is subject to Part 4 of MI 61-101. Applicant is an SEC foreign issuer but is unable to rely on section 4.14 of NI 71-102 to exempt it from complying with Part 4 of MI 61-101 as its controlling shareholder is Canadian. Other than the controlling shareholder, Canadians own less than 5% of the Applicant's outstanding equity securities on a fully diluted basis. Applicant is a Delaware corporation and SEC foreign issuers and subject to United States federal and state corporate and securities laws.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101), Part 4
National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, s. 4.14.
IN THE MATTER OF
THE SECURITIES ACT,
CHAPTER S.5, AS AMENDED
IN THE MATTER OF MULTILATERAL INSTRUMENT 61-101
PROTECTION OF MINORITY SECURITY HOLDERS
IN SPECIAL TRANSACTIONS
THE MATTER OF
BROOKFIELD HOMES CORPORATION
UPON the application (the "Application") of Brookfield Homes Corporation (the "Filer") to the Director for an order pursuant to section 9.1 of Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions ("MI 61-101") exempting the Filer from the requirements in Part 4 of MI 61-101 relating to the proposed transaction (the "Transaction") resulting in the combination of the Filer with the North American residential land and house division ("BPO Residential") of Brookfield Properties Corporation ("Brookfield Properties");
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Filer having represented to the Director as follows:
1. The Transaction is being structured as a merger of the Filer with BRP Acquisition Corp. (a Delaware corporation and a direct wholly-owned subsidiary of Brookfield Residential). The Filer would be the surviving entity and become a wholly-owned subsidiary of Brookfield Residential.
2. In the merger, each outstanding share of the Filer's common stock will be converted into a fixed number of shares of Brookfield Residential common stock, and each outstanding share of the Filer's 8% convertible preferred stock owned by Brookfield Asset Management Inc. ("Brookfield") (representing 99% of the outstanding preferred stock) would be converted into a fixed number of shares of Brookfield Residential common stock in accordance with the terms of the Filer's convertible preferred stock certificate of designations. The remaining 1% of the Filer's 8% convertible preferred stock would be converted into a fixed number of shares of Brookfield Residential 8% convertible preferred stock in accordance with the terms of the Filer's convertible preferred stock certificate of designations.
3. Immediately prior to the merger, Brookfield Properties and its affiliates will contribute all of its outstanding equity interests in BPO Residential to Brookfield Residential in exchange for shares of Brookfield Residential common stock and one or more promissory notes.
4. Subsequent to the closing of the Transaction, Brookfield Properties will offer a right to acquire the shares of Brookfield Residential common stock received from its contribution of BPO Residential to the holders of common shares of Brookfield Properties. Brookfield will agree to acquire any shares of Brookfield Residential that are not otherwise subscribed for pursuant to the rights offering.
5. As the Filer and Brookfield Properties are both controlled by Brookfield, the board of directors of the Filer and Brookfield Properties have each formed a committee of directors who are independent of Brookfield and their respective companies to consider the Transaction and each of the special committees has engaged independent financial and legal advisors.
6. The Filer was incorporated on August 28, 2002 in Delaware as a wholly owned subsidiary of Brookfield Properties in order to acquire all of the California and Northern Virginia homebuilding and land development operations of Brookfield Properties pursuant to a reorganization of Brookfield Properties' residential homebuilding business (the "Reorganization").
7. In connection with the Reorganization, on January 6, 2003, Brookfield Properties distributed one common share of the Filer for every five Brookfield Properties' common shares held by its shareholders. Prior to that distribution, the Filer filed a registration statement on Form 10 with the United States Securities and Exchange Commission. the Filer also filed a non-offering prospectus dated December 31, 2002 in all of the provinces of Canada to qualify the distribution for exemptive relief in Canada from the prospectus requirements.
8. The Filer's common shares are listed for trading on the New York Stock Exchange. The common shares of the Filer are registered under the Securities Exchange Act of 1934 in the United States (the "1934 Act"). The Filer is current in its reporting obligations under the 1934 Act and the regulations made thereunder.
9. As a result of filing the non-offering prospectus referred to above, the Filer is currently a reporting issuer in all of the provinces of Canada, but no securities of the Filer are listed for trading on any stock exchange or market in Canada. Brookfield Residential, the parent of the Filer following the transaction, will be a reporting issuer in all provinces of Canada.
10. The authorized capital of the Filer consists of 200,000,000 common shares and 10,000,000 8% convertible preferred shares, convertible at any time into 35,714,286 common shares. At June 30, 2010, 29,653,692 common shares and 10,000,000 convertible preferred shares were issued and outstanding.
11. As at June 30, 2010, Brookfield (US) Corporation, a wholly-owned subsidiary of Brookfield, was the registered holder of 18,370,978 common shares of the Filer, representing approximately 62.0% of its issued and outstanding common shares. Further, Brookfield (US) Corporation was the registered holder of 9,922,495 convertible preferred shares of the Filer, representing 99.2% of its issued and outstanding convertible preferred shares. As at June 30, 2010, assuming full conversion of its convertible preferred shares of the Filer, Brookfield (US) Corporation owned approximately 82.7% of the Filer common shares. On August 9, 2010, Brookfield (US) Corporation sold all of its common shares and convertible preferred shares of the Filer to Brookfield BHS Holdings, Inc., a wholly-owned subsidiary of Brookfield, which is to be renamed Brookfield Residential Properties Inc. Brookfield and Brookfield BHS Holdings, Inc. are Ontario corporations whose registered offices are located in Ontario.
12. Based on a review of the Filer's share register and a geographical survey report provided to the Filer by Broadridge Investor Communication Solutions Inc. ("Broadridge"), as of June 2, 2010 there were (i) a total of 1,749 registered and beneficial shareholders holding an aggregate of 1,733,377 common shares resident in Canada (of whom 925 shareholders holding an aggregate of 1,672,047 shares were resident in Ontario, 222 shareholders holding an aggregate of 19,310 shares were resident in Quebec and 602 shareholders holding an aggregate of 42,020 shares were resident in other provinces and territories of Canada). These shares held by shareholders resident in Canada accounted for approximately 5.85% of the currently outstanding the Filer common shares or 2.65% of the outstanding the Filer common shares following the conversion of its convertible preferred shares. The foregoing share numbers and percentages exclude the shares owned by insiders of the Filer and the shares indirectly owned by Brookfield. The Filer has no reason to believe the June 2, 2010 report of Broadridge has changed in any material respect.
13. The Transaction will be a business combination for the Filer under MI 61-101. Unless exempt, the Filer must comply with Part 4 of MI 61-101 which requires the Filer to, among other things, obtain a formal valuation and the approval of the majority of the minority for the Transaction.
14. The Filer is an SEC foreign issuer as defined in National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers ("NI 71-102"). Section 4.14 of NI 71-102 exempts an SEC foreign issuer from complying with part 4 of MI 61-101 in connection with a business combination if the total number of equity securities of the SEC foreign issuer owned directly, or indirectly, by residents in Canada does not exceed 20 per cent, on a diluted basis, of the total number of equity securities of the SEC foreign issuer. The Filer cannot rely on this exemption because of Brookfield's ownership interest in the Filer.
15. The interests of minority shareholders have been taken into account as follows:
(i) The board of directors of the Filer established the special committee (the "Special Committee") on May 12, 2010, comprised solely of directors independent of Brookfield, to review any Transaction. The Special Committee has retained Wells Fargo Securities LLC and Kaye Scholer LLP as independent United States legal and financial advisors and has held six formal meetings to date, in addition to the active participation of the Special Committee Chairman in the negotiation of the Transaction.
(ii) Based on the resolutions adopted by the Board in establishing the Special Committee, the Board granted the Special Committee the power and authority to evaluate and recommend to the Board the terms and conditions of any Transaction. The Special Committee is currently considering whether it would recommend the Transaction. Under Delaware law, the generally understood role of a special committee in transactions involving related parties is to seek to replicate a process that would apply in an arm's-length transaction.
(iii) The Special Committee sought and obtained a commitment from Brookfield, contrary to its interests, not only to convert its 8% convertible preferred shares of the Filer to common shares, but to do so at par, (i) foregoing a preferred position in Brookfield Residential and (ii) foregoing a significant premium on the conversion as estimated by the Special Committee's financial advisor, eliminating a potential conflict in the allocation of the transaction consideration between the common shareholders and the convertible preferred shareholders (of which Brookfield owns 99% of the outstanding convertible preferred shares).
(iv) Brookfield will receive the same consideration for its shares as other common shareholders in the transaction, aligning its interest with those of the minority shareholders.
(v) In addition to negotiating the conversion at par of Brookfield's convertible preferred shares, the terms of a merger agreement and the exchange ratio, the Special Committee has been negotiating the terms of the promissory note to be given to Brookfield Properties in exchange for its equity interests in BPO Residential, a significant portion of which, as a result of the Special Committee's negotiations, will now be deeply subordinated contrary to the interests of Brookfield Properties. To facilitate the Transaction, Brookfield agreed to credit enhance the subordinate portion of the note such that after the first five years of the note, or earlier if in default, Brookfield Properties will be entitled to sell the subordinated portion of the note to Brookfield at par and Brookfield will have the right to acquire the note at par.
(vi) If the Special Committee recommends the Transaction, it will do so based, in part, upon an opinion rendered by the Special Committee's financial advisor as to the fairness of the consideration to be received by the Filer's public shareholders in the Transaction. In accordance with the terms of the engagement letter, no portion of the fee that will be payable to the financial advisor will be dependent upon the success of the transaction. The financial advisor's opinion, together with a detailed description of its analyses, will be published in the disclosure document that will be distributed to shareholders in connection with the Transaction. The financial advisor's analyses would describe the various valuation methodologies employed by the advisor in arriving at its conclusion as to the fairness, from a financial point of view to holders of the Filer common stock (other than Brookfield) of the consideration to be paid for each share of the Filer common stock in the Transaction.
AND UPON the Director being satisfied that to do so would not be prejudicial to the public interest;
IT IS ORDERED pursuant to section 9.1 of MI 61-101 that the requirements of Part 4 of MI 61-101 not apply to the Filer in connection with the Transaction.
DATED at Toronto this 4th day of October, 2010.