Securities Law & Instruments

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- application for relief from requirement to include financial statement disclosure in business acquisition report -- issuer does not have access to historical accounting records necessary to audit combined financial statements for acquired assets -- relief granted subject to conditions including provision of alternative financial information.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, s. 8.4.

December 20, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

MI DEVELOPMENTS INC.

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a decision that the Filer is exempt from the requirement to include the financial statement disclosure prescribed under section 8.4 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) in the business acquisition report (BAR) of the Filer relating to the Transferred Assets (as defined herein) (the Exemption Sought).

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

(a) the Ontario Securities Commission is the principal regulator for this application (the Principal Regulator), 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 each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Yukon, Northwest Territories and Nunavut (collectively, with Ontario, the Jurisdictions).

Interpretation

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

Representations

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

1. The Filer is a corporation existing under the Business Corporations Act (Ontario). The registered and head office of the Filer is located at 455 Magna Drive, Aurora, Ontario.

2. The Filer is a reporting issuer in each of the Jurisdictions. The Filer is currently in default of securities legislation in the Jurisdictions for failing to file the BAR and accompanying financial statements when due as required under NI 51-102.

3. The Filer has a fiscal year ending on December 31 and its financial statements are prepared using United States generally accepted accounting principles (U.S. GAAP) and reconciled to Canadian generally accepted accounting principles.

4. Magna Entertainment Corp. (MEC) is a corporation existing under the laws of the State of Delaware. The registered office of MEC is located at 1209 Orange Street, Wilmington, Delaware and the principal executive office of MEC is located at 455 Magna Drive, Aurora, Ontario.

5. In addition to its real estate operations, from its inception as a public company, the Filer has held a majority equity and voting interest in MEC.

6. MEC has a fiscal year ending on December 31 and its financial statements are prepared using United States generally accepted accounting principles.

7. On March 5, 2009, MEC and certain of its subsidiaries filed voluntary petitions for reorganization (the MEC Chapter 11 Filing) under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware and were granted recognition of the Chapter 11 proceedings from the Ontario Superior Court of Justice under section 18.6 of theCompanies' Creditors Arrangement Act in Canada.

8. The Filer has, since December 2004, provided secured project financings and secured bridge financing to MEC. As at March 5, 2009, MEC owed US$371.7 million to the Filer under such loans (the MID Loans). In addition, in connection with the MEC Chapter 11 Filing, the Filer provided MEC with a US$71.4 million secured debtor-in-possession financing facility.

9. Prior to March 2009, MEC's results were consolidated with the Filer's results, with outside ownership of MEC accounted for as a non-controlling interest.

10. As a result of the MEC Chapter 11 Filing, the Filer concluded that, under generally accepted accounting principles, it ceased to have the ability pursuant to its voting interest in MEC to exert control over MEC. Accordingly, MEC was deconsolidated from the Filer's financial statements beginning on March 5, 2009 and the carrying value of the Filer's equity investment in MEC was reduced to zero.

11. On March 26, 2009, MEC announced that it would not file its Annual Report on Form 10-K for the fiscal year ended December 31, 2008, nor would it file quarterly reports on Form 10-Q, with the U.S. Securities and Exchange Commission or the Canadian securities regulators during the period it continues to operate its business as a debtor in possession under the U.S. Bankruptcy Code. MEC attributed its inability to file these materials to the circumstances of MEC's ongoing court-supervised restructuring process under Chapter 11 of the U.S. Bankruptcy Code. In particular, MEC stated that the expense and effort involved in complying with annual and quarterly reporting requirements cannot, in the opinion of MEC, be justified in light of MEC's operational and financial situation.

12. MEC has not filed financial statements since its interim financial statements for the nine-month period ended September 30, 2008 were filed on November 7, 2008 on Form 10-Q.

13. On July 22, 2009, the Official Committee of Unsecured Creditors in connection with the MEC Chapter 11 Filing (the MEC Creditors Committee) commenced an action (theAction) against the Filer seeking, among other things, recharacterization as equity of the MID Loans, equitable subordination of the MID Loans and the avoidance of allegedly fraudulent transfers to the Filer.

14. On January 11, 2010, the Filer and MEC agreed in principle to the terms of a settlement of the Action with the MEC Creditors Committee (as subsequently amended, the Settlement). The Settlement contemplated, among other things, (a) the dismissal of the Action with prejudice and a full release of the Filer and certain other parties, and (b) a plan of reorganization of MEC in connection with the MEC Chapter 11 Proceeding (the MEC Plan of Reorganization) which provides for, among other things, the full satisfaction and release of all of the Filer's claims in respect of the MID Loans and the transfer of certain assets of MEC to the Filer including, among other assets, Santa Anita Park, Golden Gate Fields, Gulfstream Park (including MEC's interest in The Village at Gulfstream Park, a joint venture between MEC and Forest City Enterprises, Inc.), The Maryland Jockey Club, Portland Meadows, AmTote International, Inc. and XpressBet, Inc. (collectively, the Transferred Assets).

15. On April 26, 2010, the U.S. Bankruptcy Court issued an order confirming the MEC Plan of Reorganization and the MEC Plan of Reorganization became effective at the close of business on April 30, 2010.

16. All of the Transferred Assets (excluding Portland Meadows and XpressBet, Inc.) were directly operated by subsidiaries of MEC that were debtors in possession under the MEC Chapter 11 Filing.

17. The Filer's investments in and advances to the Transferred Assets as at March 31, 2010 represented approximately 22% of the consolidated assets of the Filer as at March 31, 2010 (excluding any investments in or advances to the Transferred Assets as at March 31, 2010).

18. The historical results of the Transferred Assets from March 5, 2009 to April 30, 2010 while they were operated by MEC as a debtor in possession under the U.S. Bankruptcy Code under the supervision of the U.S. Bankruptcy Court are not indicative of normal operations and are based on out-of-date values.

19. The Filer has obtained independent valuations and appraisals for the Transferred Assets in connection with determining the recoverability of the MID Loans and the values to be assigned to the Transferred Assets for purposes of the Filer's financial statements (the Appraisals).

20. The Filer proposes to file the Appraisals with the BAR with the following portions marked to be unreadable:

(a) individual tenant names, suite numbers, square footage and building percentage share of individual tenants, base rents for individual tenants, rent adjustment amounts for individual tenants and operating expense reimbursements for individual tenants in the Appraisal of MID Properties Around Gulfstream Park dated August 12, 2010;

(b) number of acres or percentage of site assumed to be dedicated for public use in the Appraisal of Santa Anita Racetrack Site and Excess land dated July 26, 2010; and

(c) names of specific customers in the Intangible Valuation Analysis of Amtote International, Inc. dated August 10, 2010;

The Filer reasonably believes that disclosure of such portions would be seriously prejudicial to the interests of the Filer in dealing with the applicable property or asset or would violate confidentiality provisions and that such portions are not material to a Filer shareholder's understanding of applicable appraisals.

21. The Filer is unable to produce audited combined financial statements for the Transferred Assets as contemplated by section 8.4 of NI 51-102 as it is unable to obtain or provide the management representation letter required by its external auditors in order for them to complete their audit. Certain key management of MEC who played a critical role in preparing and reviewing MEC's financial results during the Chapter 11 bankruptcy period and who were responsible for testing control procedures and addressing key accounting issues have departed from MEC and are not available to provide explanations to the Filer in respect of certain documents and financial records or to provide management representation letters required by the Filer's auditors in order to conduct an audit of the financial statements.

22. During the Chapter 11 bankruptcy process, management of MEC did not assess and test control procedures over financial reporting, including information technology related controls, nor did it carry out quarterly disclosure calls, as it was not required to comply with the Sarbanes-Oxley Act. In the absence of such testing and assessment of internal control procedures, the Filer is unable to ensure the completeness or accuracy of such financial records and results or that the financial records used in the preparation of the financial results were prepared in accordance with current U.S. or Canadian accounting standards and is also unable to provide the management representation letters to its auditors.

23. The Filer does not have access to the records of employees and senior management of MEC in respect of procedures undertaken by MEC management to prevent and detect conflicts of interest and fraud during 2009 and in 2010 until April 30, 2010 because such procedures were not undertaken during the Chapter 11 bankruptcy period. Specifically, the Filer does not have the ethics and conflict disclosure statement from each employee and member of management of MEC for 2009 or in 2010 until April 30, 2010. The ethics and conflict disclosure statements are integral to the Filer's ability to make representations regarding conflicts of interest and fraud as required by its auditors to conduct an audit of the financial statements. Given the departure of key management of MEC both at the head office and operating asset level, this disclosure, when taken as a whole, cannot be adequately reproduced.

24. The Filer is unable to prepare U.S. GAAP interim financial statements as quarterly disclosure reporting procedures were not carried out by MEC throughout the Chapter 11 bankruptcy process. The Filer has attempted but has been unable to locate the minutes to quarterly disclosure calls with respect to each of the Transferred Assets of MEC during such period and has determined that no such records existed during the bankruptcy period as the disclosure calls were not completed.

25. The Filer does not currently have access to the most appropriate senior individuals at MEC in order to obtain assurance that oral contracts or guarantees were not entered into during the Chapter 11 bankruptcy period. Such representations are required in the management representation letter to its auditors who have indicated that they cannot audit the financial statements without such representations.

Decision

The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.

The decision of the Principal Regulator under the Legislation is that the Exemption Sought is granted provided that:

(a) the Filer includes in the BAR the Appraisals together with a summary of the aggregate appraised value of the Transferred Assets and the adjustments made thereto for purposes of the Filer's financial statements, provided that the following portions of the Appraisals may be marked to be unreadable:

(i) individual tenant names, suite numbers, square footage and building percentage share of individual tenants, base rents for individual tenants, rent adjustment amounts for individual tenants and operating expense reimbursements for individual tenants in the Appraisal of MID Properties Around Gulfstream Park dated August 12, 2010;

(ii) number of acres or percentage of site assumed to be dedicated for public use in the Appraisal of Santa Anita Racetrack Site and Excess land dated July 26, 2010; and

(iii) names of specific customers in the Intangible Valuation Analysis of Amtote International, Inc. dated August 10, 2010;

(b) the Filer includes in the BAR the allocation of the purchase consideration to the Transferred Assets and explanatory notes prepared in accordance with U.S. GAAP Accounting Standards Codification No. 805, Business Combinations with such allocation to be audited in accordance with CICA Handbook 5805;

(c) the Filer includes in the BAR the monthly operating report filed by MEC on the Electronic Data Gathering, Analysis, and Retrieval system of the U.S. Securities and Exchange Commission dated May 31, 2010 for the period from April 5, 2010 to April 30, 2010, together with a cover page describing the purpose for which such monthly report was prepared and the relevance of such monthly operating report;

(d) the Filer makes a representation in writing to the Principal Regulator, no later than the time the BAR is filed, that the Filer has made every reasonable effort (as described therein) to obtain access to, or copies of, the historical accounting records necessary to audit the combined financial statements for the Transferred Assets as contemplated by section 8.4 of NI 51-102, but that such efforts were unsuccessful;

(e) the Filer discloses in the BAR the fact that the business of the Transferred Assets had recently emerged from bankruptcy and current management of the business and the Filer has made every reasonable effort to obtain access to, or copies of, the historical accounting records necessary to audit the combined financial statements for the Transferred Assets as contemplated by section 8.4 of NI 51-102 but such efforts were unsuccessful; and

(f) the Filer promptly files the BAR and promptly thereafter issues a press release disclosing that the Filer has filed the BAR.

"Sonny Randhawa"
Assistant Manager, Corporate Finance
Ontario Securities Commission