Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- application from corporation (Filer) for an order exempting Filer and two limited partnerships from continuous disclosure requirements, certification requirements, audit committee requirements, corporate governance disclosure requirements and insider reporting requirements -- real estate investment trust and corporation will provide full and unconditional guarantees of debentures which will become obligations of limited partnerships following transaction -- entities unable to rely on exemptions for credit support issuers in applicable securities legislation -- relief granted on condition that stapled structure remain in place and on conditions substantially analogous to the conditions contained in section 13.4 of National Instrument 51-102 Continuous Disclosure Obligations -- application on behalf of two limited partnerships that will be formed in connection with conversion transaction requesting to be deemed reporting issuers -- requested order harmonizes regulatory treatment of applicants across Canada -- relief granted.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, ss. 1(11)(b), 107, 121(2)(a)(ii).

National Instrument 51-102 Continuous Disclosure Obligations, ss. 13.1, 13.4.

National Instrument 52-109 Certification of Disclosure in Issuer's Annual and Interim Filings, s. 8.6.

National Instrument 52-110 Audit Committees, s. 8.1.

National Instrument 58-101 Disclosure of Corporate Governance Practices, s. 3.1.

National Instrument 55-104 Insider Reporting Requirements and Exemptions, s. 10.1.

December 21, 2012

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

GRANITE REAL ESTATE INC. (the Filer)

ON ITS OWN BEHALF AND ON BEHALF OF

GRANITE REIT HOLDINGS LIMITED PARTNERSHIP (Granite LP)

AND GRANITE EUROPE LIMITED PARTNERSHIP (Finance LP)

FORMED OR TO BE FORMED AS PART OF A CONVERSION OF THE FILER TO A

REAL ESTATE INVESTMENT TRUST STRUCTURE

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on its own behalf and on behalf of Granite LP and Finance LP, new limited partnerships formed in connection with the proposed reorganization of the Filer by way of a plan of arrangement under section 414 of the Business Corporations Act (Québec) (the QBCA) to form a "stapled unit" real estate investment trust structure (the Conversion Transaction), for a decision under the securities legislation of the Jurisdiction (the Legislation) for the following relief (theExemption Sought):

(a) pursuant to section 13.1 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), that Granite LP, Finance LP and the Filer be exempted from the continuous disclosure obligations contained in NI 51-102 (the Continuous Disclosure Requirements);

(b) pursuant to section 8.6 of National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109), that Granite LP, Finance LP and the Filer be exempted from the requirements of NI 52-109 (the Certification Requirements);

(c) pursuant to section 8.1 of National Instrument 52-110 Audit Committees (NI 52-110), that Granite LP, Finance LP and the Filer be exempted from the requirements of NI 52-110 (the Audit Committee Requirements);

(d) pursuant to section 3.1 of National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101), that Granite LP, Finance LP and the Filer be exempted from the corporate governance disclosure requirements of NI 58-101 (the Corporate Governance Disclosure Requirements); and

(e) pursuant to section 121(2) of the Securities Act (Ontario) and pursuant to section 10.1 of NI 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) (the Insider Reporting Requirements) that reporting insiders of Granite LP, Finance LP and the Filer not be required to file insider reports (the Insider Reporting Exemption).

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of itself, Granite LP and Finance LP, for a decision under the Legislation that Granite LP and Finance LP be designated, as of the effective time of the Conversion Transaction, as a reporting issuer in the Jurisdiction (the Reporting Issuer Designation).

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

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

Interpretation

Terms defined in National Instrument 14-101 Definitions or 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 currently a corporation continued under the laws of the Province of Québec. The head office of the Filer is located in Toronto, Ontario. On June 13, 2012, the Filer changed its name from MI Developments Inc. to Granite Real Estate Inc. following approval of the name change by the holders (Granite Common Shareholders) of common shares (Granite Common Shares) of the Filer. The Filer has called and held a special meeting of Granite Common Shareholders (the Granite Special Meeting) on November 15, 2012 for the purpose of voting on a special resolution to approve the Conversion Transaction. At the Granite Special Meeting, the special resolution to approve the Conversion Transaction was approved by the Granite Common Shareholders.

2. The Filer is a reporting issuer or the equivalent under the securities legislation of each of the provinces and territories of Canada and is not in default of securities legislation of any such jurisdiction.

3. The Filer also has securities registered under section 12 of the U.S. Securities Exchange Act of 1934, as amended (the 1934 Act). As such, the Filer is an "SEC issuer" as that term is defined under NI 51-102 and National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107).

4. The Granite Common Shares are listed on the Toronto Stock Exchange (TSX) under the symbol "GRT" and on the New York Stock Exchange (NYSE) under the symbol "GRP".

5. The Filer is a Canadian-based real estate company engaged, directly and through its subsidiaries, primarily in the acquisition, development, construction, leasing, management and ownership of a predominantly industrial rental portfolio of properties in North America and Europe.

6. As at November 7, 2012, there were approximately 46,832,908 Granite Common Shares outstanding.

7. The Filer is also the issuer of $265 million of 6.05% Senior Unsecured Debentures Series 1 due December 22, 2016 (the Debentures). The Debentures were issued under a trust indenture dated December 22, 2004 (the Trust Indenture) between Granite and BNY Trust Company of Canada, and were distributed in Canada under a base shelf prospectus dated March 19, 2004 and a prospectus supplement dated December 16, 2004.

The Conversion Transaction

8. On June 30, 2011, the Filer completed a reorganization (the 2011 Reorganization) pursuant to a plan of arrangement under the Business Corporations Act (Ontario) that resulted in (i) the transfer to the Filer's former controlling shareholder (a company controlled by the Stronach Trust) of the horseracing, gaming and certain related assets formerly held by the Filer, in return for the purchase and cancellation of the shares of the Filer held by such shareholder, and (ii) the elimination of the Filer's former dual-class share structure. Following the 2011 Reorganization, an entirely new board of directors took office and new senior management (including the chief executive officer and chief financial officer) was appointed.

9. On October 25, 2011 the Filer announced that, as part of its newly developed strategic plan following the 2011 Reorganization, it intends to convert to a real estate investment trust (a REIT). The purpose of the Conversion Transaction is to complete the conversion of the Filer from a corporate structure to a REIT. The Conversion Transaction will adopt the "stapled unit structure" described below in order to avoid an acquisition of control of the Filer for Canadian income tax purposes.

10. In connection with or as part of the Conversion Transaction, the Filer formed a new corporation ("Granite GP") under the Business Corporations Act (British Columbia) and a new real estate investment trust ("Granite REIT") under the laws of Ontario, and it is proposed that, among other things, the following transactions will occur:

(a) Granite GP (as general partner) and the Filer (as initial limited partner) have formed Granite LP as a new limited partnership under the laws of Québec;

(b) the Filer will transfer the equity of its Canadian and United States subsidiaries, and indebtedness owed to it by one or more United States subsidiaries (the U.S. Debtor Subsidiaries), to Granite LP, and will transfer indebtedness owed to it by certain European subsidiaries (the Euro Debtor Subsidiaries) to Finance LP, in which the Filer will own the general partner (having a 0.01% economic interest) and an approximate 19.99% voting limited partnership interest, and Granite LP will own an approximate 80% non-voting limited partnership interest;

(c) (i) Granite LP and Finance LP will agree to be bound by the terms of the trust indenture and of the Debentures as co-principal debtors in place of the Filer, and the Filer will guarantee all amounts payable under the Debentures, in accordance with the trust indenture, and Granite LP will (except as otherwise agreed with the Filer) assume substantially all of the other indebtedness and liabilities of the Filer, (ii) the Filer will agree to remain bound by the trust indenture and the Debentures as co-principal debtor, as permitted by the trust indenture, and (iii) each of Granite GP and Granite REIT will provide guarantees of all amounts payable under the Debentures, as permitted by the trust indenture;

(d) through a series of steps, Granite Common Shareholders will exchange their Granite Common Shares for units of Granite REIT (Granite REIT Units) and common shares of Granite GP (Granite GP Common Shares) on a one-for-one basis;

(e) all of the Granite Common Shares will become owned by Granite LP; and

(f) all of the limited partnership units of Granite LP (which will represent approximately 99.99% of the economic entitlement in Granite LP) will become held by Granite REIT, with the general partnership interest (which will represent not more than approximately 0.01% of the economic entitlement in Granite LP) remaining held by Granite GP.

11. Subject to required approvals and satisfaction of closing conditions, it is expected that the Conversion Transaction will be completed in late December 2012 or early January 2013.

12. At the conclusion of the Conversion Transaction, each Granite REIT Unit will be stapled to a Granite GP Common Share (together, a Stapled Unit) and the two securities will, subject to listing approval, trade together as a Stapled Unit on the TSX and the NYSE (the Stapled Structure). Assuming listing approval is granted, it is expected that the Stapled Units will be listed and posted for trading in substitution for the Granite Common Shares, which are currently listed and posted for trading. The Filer anticipates that the Granite REIT Units and Granite GP Common Shares forming the Stapled Units will be separately listed, but not separately posted for trading, on the TSX, as is the case with other stapled unit structures.

13. Upon completion of the Conversion Transaction, Granite REIT and Granite GP will enter into an agreement that will facilitate the Stapled Structure, including providing for the simultaneous issue of Granite REIT Units and Granite GP Common Shares, coordination of the declaration and payment of dividends and distributions, and other relevant matters.

14. The Granite REIT Units and the Granite GP Common Shares will only become unstapled (a) in the event that holders of Granite REIT Units vote in favour of the unstapling of Granite REIT Units and Granite GP Common Shares, such that the two securities will trade separately, or (b) at the sole discretion of the trustees of Granite REIT or the directors of Granite GP upon an event of bankruptcy or insolvency of either Granite REIT or Granite GP.

15. Immediately following completion of the Conversion Transaction, the authorized capital of Granite GP will include an unlimited number of Granite GP Common Shares, and all of the issued Granite GP Common Shares will be held by the former Granite Common Shareholders in the form of Stapled Units.

16. Immediately following completion of the Conversion Transaction, the authorized capital of Granite REIT will be an unlimited number of Granite REIT Units, and all of the issued Granite REIT Units will be held by the former Granite Common Shareholders in the form of Stapled Units.

17. Immediately upon completion of the Conversion Transaction, (a) the only material assets of Granite REIT will be the limited partnership interests in Granite LP, (b) the only significant asset of Granite GP will be its relatively nominal general partner interest in Granite LP, and (c) Granite REIT will not own any equity securities of Granite GP and Granite GP will not own any equity securities of Granite REIT.

18. Pursuant to the QBCA, the Granite Common Shareholders are required to approve the Conversion Transaction by at least two-thirds of the votes cast by Granite Common Shareholders at the Granite Special Meeting and such approval was obtained at the Granite Special Meeting held on November 15, 2012.

The Debentures

19. In connection with the Conversion Transaction, it is proposed that (i) Granite LP and Finance LP will agree to be bound by the terms of the Trust Indenture and of the Debentures as co-principal debtors in place of the Filer, and the Filer will guarantee all amounts payable under the Debentures, in accordance with the Trust Indenture, and Granite LP will (except as otherwise agreed with the Filer) assume substantially all of the other indebtedness and liabilities of the Filer, (ii) the Filer will agree to remain bound by the Trust Indenture and the Debentures as co-principal debtor, as permitted by the Trust Indenture, and (iii) each of Granite REIT and Granite GP will provide guarantees of all amounts payable under the Debentures, as permitted by the Trust Indenture;

Combined Financial Presentation of Granite REIT and Granite GP

20. Following the Conversion Transaction, the business and interests of Granite REIT and Granite GP (carried on through Granite LP and its subsidiaries) will effectively be one and the same. The economic interest of a holder of Stapled Units will be in Granite REIT and Granite GP together. Granite GP will have authority to act as the general partner of Granite LP, and Granite REIT and Granite GP will together own all of the partnership interests in Granite LP, which will own, directly and indirectly, all the shares of the (reorganized) Filer and all of the subsidiaries, business and assets previously held by the Filer. The Conversion Transaction does not contemplate the acquisition of any additional operating assets from third parties or the disposition of any existing operating assets to third parties.

21. Granite REIT and Granite GP: (i) will become reporting issuers by operation of law in all provinces and territories other than Ontario following the completion of the Conversion Transaction; (ii) have applied to be designated as reporting issuers in Ontario following the completion of the Conversion Transaction; and (ii) expect to register securities under section 12 of the 1934 Act following the Conversion Transaction and as such will be "SEC issuers" as that term is defined under NI 51-102 and NI 52-107.

22. The Filer has determined, in consultation with its auditors Ernst & Young LLP, that under both United States generally accepted accounting principles and International Financial Reporting Standards (Canadian GAAP applicable to publicly accountable enterprises, as set forth in Part 1 of the Handbook of the Canadian Institute of Chartered Accountants), (a) the financial statements of Granite REIT would consolidate the financial position and results of Granite LP and its subsidiaries, (b) in its own, stand-alone, financial statements, Granite GP would equity account for its relatively nominal general partner interest in Granite LP and (c) Granite REIT and Granite GP will be able to prepare combined financial statements, so long as the Stapled Structure exists. If the Conversion Transaction is completed, Granite REIT and Granite GP will account for the transaction on a continuity of interests basis from the Filer.

23. The Filer has applied, on behalf of itself and Granite REIT and Granite GP, for exemptive relief (the Parent CD Relief) from a number of the continuous disclosure requirements of the securities laws in the Jurisdiction including, in particular, those relating to financial statement and management's discussion and analysis (MD&A) disclosure to permit Granite REIT and Granite GP to prepare, file and deliver one set of financial statements prepared on a combined basis (Combined Financial Statements) using the accounting principles applicable to Granite REIT and Granite GP pursuant to the securities legislation of the Jurisdiction (Applicable Accounting Principles), and related MD&A, to reflect the financial position and results of Granite REIT and Granite GP on a combined basis, instead of each of them preparing, filing and delivering their own stand-alone financial statements, while the Stapled Structure is in place.

24. An unmodified audit report will be provided on the audited annual Combined Financial Statements.

Granite LP

25. If the required approvals are obtained and the Conversion Transaction is completed, the Debentures will be non-convertible debt securities and will have been guaranteed by Granite GP, the general partner of Granite LP (which is deemed to control Granite LP, Finance LP and the Filer under section 1.1(3) of NI 51-102). However, it is not clear that the Debentures would satisfy the definition of "designated credit support securities" (as defined in NI 51-102), since Granite LP and Finance LP are limited partnerships and it is not clear that they will be a "subsidiary" of Granite GP for this purpose since the term "subsidiary" (which is not defined in NI 51-102) is defined under the Securities Act (Ontario) with reference only to companies.

26. In addition, the requirements of the exemption for credit support issuers provided in section 13.4(2) of NI 51-102 would not be satisfied for a number of reasons, including that

(a) Granite LP will have issued securities (limited partnership units) to Granite REIT, which would not be an affiliate of Granite GP for purposes of NI 51-102 (a requirement of paragraph (c)(ii) of section 13.4(2) is that equity securities not have been issued other than to the parent credit supporter or an affiliate of the parent credit supporter), and

(b) Granite GP will not be the only guarantor of the designated credit support securities (a requirement of paragraph (k) of section 13.4(2)), since it is contemplated that Granite REIT and the Filer will also provide guarantees.

27. Granite LP would also not satisfy the requirements of the other exemption for credit support issuers provided in section 13.4(2.1) of NI 51-102 for a number of reasons, including that

(a) it will not be able to satisfy the conditions in paragraph (2)(c) of section 13.4, as described above (a requirement of paragraph (a) of section 13.4(2.1)), and

(b) Granite GP and the Filer will not be the only guarantors of the designated credit support securities (a requirement of paragraph (d) of section 13.4(2.1)), since Granite REIT will also provide a guarantee.

28. Similarly, Granite LP, Finance LP and the Filer will not meet the requirements of the exemption from insider reporting in section 13.4(3) of NI 51-102 since the conditions of paragraph 13.4(2)(a) and (c) will not be complied with.

29. If the Exemption Sought is granted, the Filer, Granite LP, Finance LP, Granite REIT and Granite GP will: (i) treat Granite REIT and Granite GP, together, as a parent credit supporter of Granite LP, Finance LP and the Filer, as a credit support issuer, and comply with the conditions in section 13.4(2.1) of NI 51-102 that apply to parent credit supporters, viewing both Granite REIT and Granite GP together as the parent credit supporter for these purposes (including in applying paragraphs 13.4(2)(a) and (c)(ii) and paragraphs 13.4(2.1)(b) and (d)) and (ii) treat the Debentures as designated credit support securities and comply with the conditions in section 13.4(2.1) that apply to designated credit support securities, all in accordance with the terms and conditions of the decision granted.

Decision

1. The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

2. The decision of the principal regulator under the Legislation is that the Exemption Sought is granted, provided that the Conversion Transaction is implemented in substantially the manner contemplated by the representations set forth above in this Decision, and Granite LP, Finance LP and the Filer are bound by the terms of the Trust Indenture and of the Debentures as co-principal debtors, and subject to the further conditions specified below:

(a) in respect of the Continuous Disclosure Requirements, Granite LP, Finance LP, the Filer, and Granite GP and Granite REIT, continue to satisfy the conditions set out in section 13.4(2.1) of NI 51-102, except as modified as follows:

(i) any reference to parent credit supporter in section 13.4 shall be deemed to include both Granite REIT and Granite GP, taken together, and Granite LP, Finance LP and the Filer shall be deemed to be a credit support issuer for these purposes;

(ii) the Parent CD Relief has been granted and Granite REIT and Granite GP are in compliance with the conditions of the Parent CD Relief;

(iii) each Granite GP Common Share is stapled to a Granite REIT Unit and they trade together as a Stapled Unit;

(iv) Granite LP, Finance LP, the Filer, Granite GP and Granite REIT do not have to comply with the conditions of section 13.4(2)(a) and section 13.4(2.1)(b) of NI 51-102 if:

(A) Granite GP and Granite REIT or their subsidiaries (as such term is defined in National Instrument 45-106 Prospectus and Registration Exemptions) together own all of the partnership interests in Granite LP;

(B) one of Granite REIT or Granite GP controls, including in the case of Granite GP, through Granite LP, each of Finance LP and the Filer;

(C) the financial statements of Granite LP, Finance LP and the Filer are consolidated into the Combined Financial Statements of Granite REIT and Granite GP; and

(D) Granite REIT and Granite GP are reporting issuers in a Jurisdiction and have filed all documents they are required to file under NI 51-102 and the Parent CD Relief;

(v) Granite LP, Finance LP, the Filer, Granite GP and Granite REIT do not have to comply with the conditions of section 13.4(2)(c) of NI 51-102 if Granite LP does not issue any securities, and does not have any securities outstanding, other than:

(A) designated credit support securities guaranteed by Granite GP and Granite REIT, including the Debentures;

(B) securities issued to and held by Granite GP, Granite REIT or affiliated entities (including non-corporate entities) of Granite GP or Granite REIT;

(C) debt securities issued to and held by banks, loan corporations, loan and investment corporations, savings companies, trust corporations, treasury branches, saving or credit unions, financial services cooperatives, insurance companies or other financial institutions; and

(D) securities issued under the exemptions from the prospectus requirements in section 2.35 of National Instrument 45-106 Prospectus and Registration Exemptions; and

(vi) the unaudited summary financial information referred to in section 13.4(2.1)(c) of NI 51-102 will be reconciled to the Combined Financial Statements of Granite REIT and Granite GP;

(b) in respect of the Certification Requirements, the Audit Committee Requirements and the Corporate Governance Disclosure Requirements, Granite REIT, Granite GP, Granite LP, Finance LP and the Filer continue to satisfy the conditions for relief from the Continuous Disclosure Requirements set forth above; and

(c) in respect of the Insider Reporting Requirements:

(i) Granite REIT, Granite GP, Granite LP, Finance LP and the Filer continue to satisfy the conditions for relief from the Continuous Disclosure Requirements set forth above, and

(ii) the insider complies with the conditions in sections 13.4(3)(b) and (c) of NI 51-102.

As to the Exemption Sought (other than from the Insider Reporting Requirements in the Securities Act (Ontario).

"Jo-Anne Matear"
Manager, Corporate Finance Branch
Ontario Securities Commission

AND UPON the principal regulator being satisfied that to do so would not be prejudicial to the public interest;

The Exemption Sought from the Insider Reporting Requirements in the Securities Act (Ontario) is hereby granted, and

IT IS HEREBY ORDERED pursuant to clause 1(11)(b) of the Securities Act (Ontario) that the Reporting Issuer Designation is granted, such that Granite LP and Finance LP will be a reporting issuer for the purposes of Ontario securities law, effective at the effective time of the Conversion Transaction.

"Christopher Portner"
Commissioner
Ontario Securities Commission
 
"Judith Robertson"
Commissioner
Ontario Securities Commission