National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- issuer holds all of its properties through limited partnership -- entity holds units in limited partnership which are redeemable into and in all material respects are the economic equivalent to the issuer's publicly traded units -- issuer may include entity's indirect interest in issuer when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions -- relief granted subject to conditions.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(1)(a) and 9.1.
June 6, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
WPT INDUSTRIAL REAL ESTATE INVESTMENT TRUST
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Filer, pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101), from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through WPT Industrial, LP (WPT LP) or any subsidiary entity of WPT LP, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect interest held by Welsh Property Trust, LLC (Welsh) and any of its permitted transferees (as set out in section 11.3.A(1) of the Limited Partnership Agreement (as defined below)) in the Filer, which is held in the form of redeemable Class B partnership units of WPT LP, were included in the calculation of the Filer's market capitalization (collectively, the Requested Relief).
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; 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 Québec.
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and MI 61-101 have the same meaning if used in this decision, unless otherwise defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is an unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario. The Filer is governed pursuant to an amended and restated declaration of trust dated April 26, 2013, as the same may be further amended and/or restated from time to time (the Declaration of Trust).
2. The Filer's head office is located at 333 Bay Street, Suite 3400, Toronto, Ontario M5H 2S7.
3. The Filer is a reporting issuer (or the equivalent thereof) in each province and territory of Canada and, to its knowledge, is currently not in default of any applicable requirements under the securities legislation thereunder.
4. The Filer is authorized to issue an unlimited number of trust units (Units). As at June 3, 2013, the Filer had 11,430,000 Units issued and outstanding.
5. The Units are listed and posted for trading on the Toronto Stock Exchange (the TSX) under the symbol "WIR.U". The Units are also quoted on the OTC Pink in the United States by a market maker.
6. The operating business of the Filer is carried on by WPT LP, which indirectly holds interests in 35 industrial properties and two office properties located in the United States (collectively, the Initial Properties).
7. WPT LP is a limited partnership formed under the laws of the State of Delaware and is governed by an agreement of limited partnership dated April 26, 2013 (the Limited Partnership Agreement). WPT LP's head office is located at 4350 Baker Road, Suite 400, Minnetonka, Minnesota, United States 55343.
8. WPT LP is not a reporting issuer (or the equivalent thereof) in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.
9. WPT Industrial, Inc. (US Holdco) is a corporation established under the laws of the State of Delaware. US Holdco is a wholly-owned subsidiary of the Filer and is the general partner of WPT LP.
10. WPT LP is authorized to issue an unlimited number of Class A partnership units (Class A Units) and an unlimited number of Class B partnership units (Redeemable Partnership Units). As of the date hereof, there are 11,430,000 Class A Units and 10,867,362 Redeemable Partnership Units issued and outstanding. US Holdco (a wholly-owned subsidiary of the Filer) holds all of the outstanding Class A Units and Welsh holds all of the outstanding Redeemable Partnership Units.
11. The Redeemable Partnership Units are, in all material respects, economically equivalent to Units on a per unit basis: (i) the Redeemable Partnership Units are entitled to receive distributions equal to those paid on the Units; and (ii) the Redeemable Partnership Units are not transferable (except as specifically provided in the Limited Partnership Agreement or as otherwise consented to by the general partner of WPT LP) but are redeemable by the holder thereof for cash or Units (on a one-for-one basis subject to customary anti-dilution adjustments), at the option of the general partner of WPT LP in its sole discretion, pursuant and subject to the terms, conditions and limitations set out in the Limited Partnership Agreement.
12. The Filer completed its initial public offering of 10,000,000 Units on April 26, 2013 (the IPO) and the issuance of an additional 1,430,000 Units on May 16, 2013 pursuant to the partial exercise of an over-allotment option granted to the underwriters of the IPO.
13. In connection with the IPO and pursuant to the terms of a contribution agreement dated April 26, 2013 among the Filer, WPT LP and Welsh, WPT LP issued 10,867,362 Redeemable Partnership Units to Welsh on April 26, 2013 as part of the consideration for the transfer by Welsh to WPT LP of Welsh's indirect interest in the Initial Properties. WPT LP issued Redeemable Partnership Units (rather than Units) to Welsh in order to provide Welsh with a tax deferred rollover.
14. As at the date hereof, Welsh holds an effective interest in the Filer of approximately 48.7% (on an issued and outstanding basis and assuming all Redeemable Partnership Units held by Welsh are redeemed for Units), comprised of the 10,867,362 Redeemable Partnership Units described above.
15. Pursuant to the terms of an asset management agreement dated April 26, 2013 among Welsh, WPT LP and the Filer, Welsh is the external asset manager of the properties directly or indirectly owned by the Filer and provides the Filer and WPT LP with certain advisory and investment management services, including the services of the Chief Executive Officer, Chief Financial Officer and General Counsel and Secretary.
16. The Filer and WPT LP are party to a non-competition and non-solicitation agreement dated April 26, 2013 with Welsh which gives the Filer the right of first opportunity to acquire industrial properties that meet certain investment criteria set out therein from Welsh, which right has been disclosed by in the Filer's IPO prospectus.
17. It is anticipated that the Filer may from time to time enter into transactions with certain related parties, including Welsh or any of its subsidiaries and/or pursuant to the exercise of the Filer's right of first opportunity described above, indirectly through WPT LP and its direct and indirect subsidiaries.
18. Although Welsh was granted additional rights at the time of the IPO, including pre-emptive rights, registration rights, tag-along rights, board nomination rights and certain limited approval rights, these rights are based on ownership thresholds calculated based on the number of Units assuming that all Redeemable Partnership Units are redeemed for Units. As a result, Welsh does not gain any additional or unique rights of benefits that it would not otherwise have if it were to acquire additional Redeemable Partnership Units (rather than Units) in connection with a transaction with the Filer, such as in connection with the Filer's exercise of its right of first opportunity described above.
19. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
(a) the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and
(b) the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (together, requirements (a) and (b) are referred to as the Minority Protections).
20. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization (the Transaction Size Exemption).
21. The Filer may not be entitled to rely on the Transaction Size Exemption available under the Legislation because the definition of "market capitalization" in the Legislation does not contemplate securities of another entity that are redeemable into equity securities of the issuer.
22. The Redeemable Partnership Units represent part of the equity value of the Filer and are, in all material respects, economically equivalent to the Units. Taken together, the effect of the redemption right of the holder thereof attaching to the Redeemable Partnership Units and the related right of the general partner of WPT LP to pay cash or cause Units to be issued in connection with the exercise of such redemption right is that a holder of Redeemable Partnership Units will receive Units, or the value of such Units, upon the redemption of Redeemable Partnership Units. If the Redeemable Partnership Units are redeemed for cash, such cash amount will generally be equal to the product of (i) assuming the Units are listed on the TSX, the volume weighted average price of the Units on the TSX for the five trading days immediately preceding the valuation date; and (ii) the number of Units equal to the product of (a) the number of tendered Redeemable Partnership Units and (b) an adjustment factor (initially set at 1.0, subject to certain anti-dilution adjustments).
23. Moreover, the economic interests that underlie the Redeemable Partnership Units are identical to those underlying the Units; namely, the assets and operations held directly or indirectly by WPT LP.
24. If the Redeemable Partnership Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of the interest in WPT LP represented by the outstanding Redeemable Partnership Units (currently being approximately 48.7%). As a result, related party transactions of the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer.
25. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 Income Trusts and Other Indirect Offerings (NP 41-201), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and what transactions MI 61-101 should apply to. Section 1.2 of NP 41-201 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Accordingly, it is consistent with MI 61-101 that securities of the operating entity, such as the Redeemable Partnership Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
26. The inclusion of the Redeemable Partnership Units when determining the Filer's market capitalization is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.
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 Requested Relief is granted provided that:
(a) the transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Redeemable Partnership Units were considered an outstanding class of equity securities of the Filer that were convertible into Units;
(b) there be no material change to the terms of the Redeemable Partnership Units, including the redemption rights or ownership restrictions associated therewith, as described above and in the Limited Partnership Agreement and Declaration of Trust; and
(c) any annual information form of the Filer that is required to be filed in accordance with applicable Canadian securities law contain the following disclosure, with any immaterial modifications as the context may require:
"Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. WPT Industrial Real Estate Investment Trust (the "REIT") has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of the REIT's market capitalization, if the Class B partnership units of WPT Industrial, LP held by Welsh Property Trust, LLC and any of its permitted transferees (as set out in section 11.3.A(1) of the agreement of limited partnership dated April 26, 2013 governing WPT Industrial, LP) are included in the calculation of the REIT's market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements would apply, is increased to include the approximately 48.7% indirect interest held by Welsh Property Trust, LLC and any of its permitted transferees in the REIT in the form of Class B partnership units of WPT Industrial, LP."