Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from requirement to provide audited financial statements of the acquired business in a BAR and information circular -- Filer entered into merger agreement and was informed that the preparation of the carve-out financial statements is impracticable -- Filer granted relief to include alternative financial information, comprised of statement of assets acquired and liabilities assumed and statement of operations, as financial statement disclosure for a significant acquisition -- The alternative financial information and the other disclosure prescribed by Form 41-101F1 will provide full, true and plain disclosure of all material facts relating to Advantage and will provide information that is sufficient to enable an investor to make an informed decision regarding the merger.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, s. 13.1.

Citation: Franchise Services of North America Inc., Re, 2012 ABASC 531

December 18, 2012

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

FRANCHISE SERVICES OF NORTH AMERICA INC.

(the Filer)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for relief from the obligation to include financial statements in the information circular (Circular), as required by item 14.2 of Form 51-102F5 Information Circular (Form 51-102F5), and in the business acquisition report (BAR), required by section 8.4 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) (the Exemption Sought).

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

(a) the Alberta Securities Commission is the principal regulator for this 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 British Columbia, Saskatchewan, Manitoba, and Nova Scotia; and

(c) this 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 or MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.

Representations

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

1. The Filer is a corporation incorporated under the Canada Business Corporations Act and has its head offices in Alberta.

2. The Filer is a reporting issuer in Alberta, British Columbia, Saskatchewan, Manitoba, Ontario and Nova Scotia.

3. To its knowledge, the Filer is not in default of securities legislation in any jurisdiction of Canada.

4. The Filer's common shares are listed on the TSX Venture Exchange (TSXV).

5. On 26 August 2012, The Hertz Corporation (Hertz) publically announced a merger agreement pursuant to which it would make a tender offer to acquire all of the shares of Dollar Thrifty Automotive Group, Inc. (DTAG) (the DTAG Acquisition). On 15 November 2012, the United States Federal Trade Commission (the FTC) issued a preliminary decision and order (theFTC Decree) approving the DTAG Acquisition on the basis that Hertz effects certain prescribed divestitures. Adreca Holdings Corp. (the Buyer) is identified in the FTC Decree as an approved "Acquirer" for the prescribed divestitures. The FTC Decree prescribed the divestiture of the Hertz subsidiary Simply Wheelz LLC dba Advantage Rent A Car (Advantage). In addition, the FTC Decree prescribed the divestiture of certain concession agreements between DTAG and various airport authorities to permit car rental facilities to operate at such airports and certain related assets (the Prescribed DTAG Assets). Under the FTC Decree, the disposition of Advantage by Hertz and the Prescribed DTAG Assets can be transferred by Hertz to an approved Acquirer in separate intervals.

6. In order to facilitate the DTAG Acquisition and compliance with the FTC Decree, Hertz entered into an Amended and Restated Purchase Agreement (the Advantage Purchase Agreement) with the Buyer on 10 December 2012 providing for the disposition to the Buyer of Advantage and certain of the Prescribed DTAG Assets. The Buyer is a wholly-owned subsidiary of Boketo LLC (Boketo), and both are subsidiaries of Macquarie Capital (USA) Inc. (Macquarie), the private equity arm of the Macquarie Group Limited, the Australia-based investment bank. Hertz completed the transfer of Advantage to the Buyer on 12 December 2012 (the First Closing).

7. Macquarie does not have the operational capacity or expertise to operate Advantage and the Prescribed DTAG Assets. As a result, the Buyer and the Filer have entered into a Management Services Agreement whereby the Filer will manage and operate Advantage and the Prescribed DTAG Assets for the Buyer until such time that the Filer can obtain all of the consents and approvals required to acquire the Buyer.

8. In order to facilitate the Filer's acquisition of the Buyer, concurrently with the execution of the Advantage Purchase Agreement, the Filer, the Buyer, and Advantage Company Holdings, Inc., a wholly-owned subsidiary of the Filer (MergerSub), entered into an Agreement and Plan of Merger on 13 July 2012, and an Amendment to Agreement and Plan of Merger dated 10 December 2012 (together, the Merger Agreement). Pursuant to the Merger Agreement the Filer agreed to merge MergerSub with and into the Buyer (the Merger) under Delaware law. Boketo entered into the Merger Agreement in consideration for Filer preferred shares that are convertible into 49.76% of the Filer's common shares. In order to facilitate the Merger, the Filer will continue from the Canada Business Corporations Act to Delaware by way of a Plan of Arrangement.

9. The Filer confirms that, based on a preliminary analysis based on the facts available, the acquisition by the Filer of Advantage will not constitute a reverse takeover.

10. The majority of the Prescribed DTAG Assets acquired under the Advantage Purchase Agreement will be transferred to the Buyer (or its successor entity depending on whether the Merger has been consummated at the relevant time) on 15 February 2013. The balance of the Prescribed DTAG Assets will be divested by Hertz to the Buyer (or its successor entity depending on whether the Merger has been consummated at the relevant time) in stages occurring on 19 May 2013 and 19 August 2013.

11. In accordance with the rules of the TSXV, the Filer will seek shareholder approval of the Merger and in connection therewith provide to shareholders the Circular, which pursuant to item 14.2 of Form 51-102F5 requires prospectus level disclosure, which requires audited carve-out financial statements for the years ended 31 December 2011, 2010 and 2009 for the Advantage assets pursuant to item 32.2 of Form 41-101F1 Information Required in a Prospectus.

12. The Filer has concluded that the Merger will constitute a significant acquisition. Accordingly, the Filer will also be required to file a BAR upon completion of the Merger.

13. The Filer has been informed by Hertz that Hertz has concluded that the preparation of the carve-out financial statements relating to Advantage is impracticable. Specifically, Hertz has informed the Filer of the following facts:

(a) Advantage's business was purchased by Hertz in 2009 out of bankruptcy through a court supervised auction. No meaningful financial records or accounting systems were conveyed to Hertz with the business (the principal asset acquired was the Advantage brand name) and Hertz does not have access to financial information previous to the bankruptcy;

(b) Hertz does not maintain general ledger sub-accounts for Advantage or an alternative form of financial information that would permit Hertz to prepare comprehensive financial statements;

(c) Advantage owns no rental vehicles and its primary operating assets and liabilities (cash, accounts receivables and accounts payables) are commingled balances, managed by Hertz on a combined basis. Since its acquisition in 2009, Advantage has been largely dependent upon Hertz to supply Advantage's non-customer facing operations and vehicles from the Hertz owned and financed fleet. Advantage has not maintained its own administrative support functions. These functions are instead provided by Hertz at the corporate level, and the related costs are not allocated to Advantage;

(d) Advantage does not constitute a material portion of Hertz's business. For the year ended 31 December 2011, it is estimated that Advantage accounted for approximately 2% of Hertz's consolidated operating revenues and less than 1% of total assets. Advantage's key operating assets and liabilities are integrated with the Hertz business;

(e) Hertz's systems and procedures do not provide sufficient information for the preparation of stand-alone income tax and interest/capital cost provisions for Advantage; and

(f) Hertz did not prepare or maintain, and was not required to prepare or maintain under applicable corporate or tax laws, stand-alone financial statements that were specific to Advantage.

14. Following the Merger, the Filer expects to integrate Advantage into its existing organization structure which will by necessity have a different cost structure than that within Hertz. Advantage will also enter into lease and sub-lease agreements with Hertz for up to approximately 24,000 rental cars.

15. The Filer will provide the following financial information in the Circular and the BAR (collectively, the Alternative Financial Statements):

(a) an audited statement of Advantage's revenues and operating expenses excluding any allocation of (i) Hertz's corporate expenses (such as accounting, treasury, legal, risk management and human resources) and (ii) income taxes prepared in accordance with IFRS (Statement of Revenues and Operating Expenses) for the years ended 31 December 2011 and 2010 that:

(i) provides a statement that the operating statements are prepared using accounting policies that are permitted by IFRS and would apply to those line items if those line items were presented as part of a complete set of financial statements;

(ii) provides a description of the accounting policies used to prepare the operating statements; and

(iii) includes an auditor's report that reflects the fact that the operating statements were prepared in accordance with the basis of presentation disclosed in the notes to the operating statements;

(b) an audited schedule of the Advantage assets to be acquired and liabilities assumed by the Filer/Buyer for the years ended 31 December 2011 and 2010 (the Schedule) that:

(i) includes all the assets and liabilities acquired;

(ii) provides a statement that the schedule is prepared using accounting policies that are permitted by IFRS and would apply to those line items if those line items were presented as part of a complete set of financial statements;

(iii) provides a description of the accounting policies used to prepare the Schedule; and

(iv) includes an auditor's report that reflects the fact that the Schedule was prepared in accordance with the basis of presentation disclosed in the notes to the Schedule;

(c) an unaudited comparative statement of Advantage's revenues and operating expenses as of Advantage's then most recently completed interim period, reporting revenues and expenses in a manner consistent with the Statement of Revenues and Operating Expenses referred to in clause (a) above, as well as an unaudited schedule of the Advantage assets to be acquired and liabilities to be assumed as of 30 September 2012, reporting in a manner consistent with the Schedule referred to in clause (b) above;

(d) pro forma operating statements for the year ended 30 September 2012, which will include the Filer's income statements and the Statement of Revenues and Operating Expenses; and

(e) a pro forma balance sheet as of 30 September 2012.

16. The Alternative Financial Statements and the other disclosure prescribed by Form 41-101F1 will provide full, true and plain disclosure of all material facts relating to Advantage and will provide information in respect of Advantage that is sufficient to enable an investor to make an informed decision regarding the Merger.

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 for the purpose of the Merger provided that the Filer includes the Alternative Financial Statements in the Circular and BAR.

"Blaine Young"
Associate Director, Corporate Finance