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 exchangeable into and in all material respects 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.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(a), 9.1.
August 19, 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
BROOKFIELD PROPERTY PARTNERS L.P.
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") 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 requirements of section 5.4 of MI 61-101 (the "Formal Valuation Requirement") and the requirements of section 5.6 of MI 61-101 (the "Minority Approval Requirement"), in each case relating to any related party transaction of the Filer entered into indirectly through Brookfield Property L.P. (the "Property Partnership") or any other subsidiary entity of the Property Partnership, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(a) of MI 61-101 if the indirect limited partnership interest in the Filer, which is held in the form of redeemable-exchangeable limited partnership units of the Property Partnership, were included in the calculation of the Filer's market capitalization (collectively, the "Requested Relief").
The structure for the Filer and the Property Partnership was formalized upon the completion of a transaction (the "Transaction") in which: (i) the commercial property operations of Brookfield Asset Management Inc. ("BAM") were transferred to various holding companies controlled by the Property Partnership, a Bermuda exempted limited partnership formed by BAM and the Filer; and (ii) BAM made a special dividend to holders of its Class A limited voting shares and Class B limited voting shares of limited partnership units ("LP Units") in the Filer, a Bermuda exempted limited partnership formed by BAM. From completion of the Transaction until completion of the Reorganization (as defined below), the Filer's sole asset was a minority limited partnership interest in the Property Partnership.
The Filer is requesting exemptive relief in connection with a reorganization (the "Reorganization"), which was completed on August 8, 2013, pursuant to which: (i) the Filer has become the managing general partner of the Property Partnership; (ii) Brookfield Property GP L.P. ("Property GP LP"), the previous general partner of the Property Partnership, has become a special limited partner of the Property Partnership, and no longer acts as general partner of the Property Partnership; and (iii) the Voting Agreement (as defined below) has been automatically terminated in accordance with its terms.
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; 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 Quebec.
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.
This decision is based on the following facts represented by the Filer:
1. The Filer is a Bermuda exempted limited partnership that was established on January 3, 2013.
2. The Property Partnership is a Bermuda exempted limited partnership that was established on January 4, 2013.
3. The Filer is a reporting issuer, or the equivalent, in the Jurisdictions and is not in default of any requirements under the Legislation.
4. The LP Units are listed on the New York Stock Exchange ("NYSE") and the Toronto Stock Exchange ("TSX") under the symbols "BPY" and "BPY.UN", respectively.
5. The Filer obtained relief on April 16, 2013 (the "April 2013 Decision Document") in connection with the Transaction, granting the Filer substantially the same relief as the Requested Relief. Since completion of the Reorganization, the Filer no longer satisfies the conditions in the April 2013 Decision Document as a result of the termination of the Voting Agreement (as defined below).
6. The general partner of the Filer is Brookfield Property Partners Limited ("BPY General Partner"), a Bermuda company and also a wholly-owned subsidiary of BAM. BPY General Partner holds a 0.2% general partnership interest in the Filer.
7. The Filer has entered into a master services agreement with certain subsidiaries of BAM (the "Managers") to provide the Filer, the Property Partnership and certain subsidiaries with management and other services.
8. The LP Units are non-voting limited partnership units and the Filer's general partner controls the Filer.
9. Prior to the Reorganization, the Filer's sole asset was a minority limited partnership interest in the Property Partnership.
10. Since completion of the Reorganization, the Filer acts as the general partner of the Property Partnership. The Filer holds a 100% general partnership interest in the Property Partnership.
11. Since completion of the Reorganization, Property GP LP no longer acts as general partner of the Property Partnership, and its interest in the Property Partnership is a special limited partnership interest in the Property Partnership with the remaining limited partnership interest held by BAM, directly or indirectly. The limited partnership units of the Property Partnership held by BAM (the "Redemption-Exchange Units") are subject to a redemption-exchange mechanism pursuant to which BAM is able to acquire LP Units in exchange for Redemption-Exchange Units on a one for one basis.
12. The Redemption-Exchange Units effectively represent an ownership interest in the Filer rather than the Property Partnership and are, in all material respects, economically equivalent to the LP Units.
13. At any time after two years from April 15 2013, BAM has the right to require the Property Partnership to redeem all or a portion of the Redemption-Exchange Units for cash, subject to the Filer's right to acquire such interests (in lieu of redemption) in exchange for LP Units, as described below. BAM may exercise its right of redemption by delivering a notice of redemption to the Property Partnership and the Filer. After presentation for redemption, BAM will receive, subject to the Filer's rights described below, for the Redemption-Exchange Units that are presented, either (a) cash in an amount equal to the market value of one LP Unit multiplied by the number of Redemption-Exchange Units to be redeemed (as determined by reference to the five day volume weighted average of the trading price of LP Units on the principal stock exchange for the LP Units based on trading volumes) or (b) such other amount of cash as may be agreed by BAM and the Property Partnership. Upon its receipt of the redemption notice, the Filer will have a right to elect, at its sole discretion, to acquire all (but not less than all) of the Redemption-Exchange Units presented to the Property Partnership for redemption in exchange for LP Units, on a one for one basis. Based on the number of LP Units issued on June 30, 2013, if BAM exercised its redemption right in full and the Filer exercised its right to acquire BAM's limited partnership interest in the Property Partnership in exchange for LP Units: (i) BAM would hold an aggregate interest in the Filer equal to approximately 91.8%; and (ii) the Filer would have a 99% limited partnership interest in the Property Partnership.
14. Upon completion of the Transaction, the Filer and BAM entered into a voting agreement (the "Voting Agreement") pursuant to which BAM agreed that any voting rights with respect to the general partner of Property GP LP, Property GP LP and the Property Partnership would be voted in accordance with the direction of the Filer with respect to (A) the election of directors of the general partner of Property GP LP and (B) the approval or rejection of the following matters relating to any such entity, as applicable: (i) any sale of all or substantially all of its assets, (ii) any merger, amalgamation, consolidation, business combination or other material corporate transaction, except in connection with any internal reorganization that does not result in a change of control, (iii) any plan or proposal for a complete or partial liquidation or dissolution, or any reorganization or any case, proceeding or action seeking relief under any existing laws or future laws relating to bankruptcy or insolvency, (iv) any amendment to the limited partnership agreement of Property GP LP or the Property Partnership or (v) any commitment or agreement to do any of the foregoing. As a result, the Filer was able to consolidate the Property Partnership (and all of the Property Partnership's assets) in its financial statements.
15. Following completion of the Reorganization, the Filer no longer requires the Voting Agreement as it is the general partner of the Property Partnership and controls the Property Partnership directly. The Voting Agreement has been terminated in accordance with its terms.
16. The board of directors of the general partner of the Filer and the general partner of Property GP LP have each approved a conflicts policy which addresses the approval and other requirements for transactions in which there is greater potential for a conflict of interests to arise. These transactions include (i) the dissolution of the Filer; (ii) any material amendment to the Master Services Agreement, the Filer's limited partnership agreement or the Property Partnership's limited partnership agreement; (iii) any material service agreement or other arrangement pursuant to which BAM or its affiliates other than the Filer and its related entities ("Brookfield") will be paid a fee, or other consideration other than any agreement or arrangement contemplated by the Master Services Agreement; (iv) co-investments by the Filer and its related entities with Brookfield; (v) acquisitions by the Filer and its related entities from, and dispositions by the Filer and its related entities to Brookfield; (vi) any other material transaction involving the Filer and its related entities and Brookfield; and (vii) termination of, or any determinations regarding indemnification under, the Master Services Agreement. The conflicts policy requires the transactions described above to be approved by the nominating and governance committee of the board of directors of the general partner of the Filer. Pursuant to the conflicts policy, the nominating and governance committee of the board of directors of the general partner of the Filer may grant prior approvals for any of these transactions in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby.
17. It is anticipated that the Filer will from time to time enter into transactions with certain related parties, including BAM and its affiliates other than the Filer and its related entities, indirectly through the Property Partnership and its direct and indirect wholly-owned subsidiaries.
18. 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 MI61-101 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").
19. 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").
20. It is unclear whether the Filer will 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 exchangeable into equity securities of the issuer.
21. The Redemption-Exchange Units represent part of the equity value of the Filer and are, in all material respects, economically equivalent to the LP Units. Taken together, the effect of BAM's redemption right and the Filer's right of exchange is that BAM will receive LP Units, or the value of such units, at the election of the Filer. Moreover, the economic interests that underlie the Redemption-Exchange Units are identical to those underlying the LP Units; namely, the assets and operations held directly or indirectly by the Property Partnership.
22. If the Redemption-Exchange Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of BAM's limited partnership interest in the Property Partnership. As a result, related party transactions by the Filer that are entered into indirectly through the Property Partnership, may be subject to the Minority Protections in circumstances where the fair market value of the transactions are effectively less than 25% of the fully diluted market capitalization of the Filer.
23. 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 to what transactions MI 61-101 should apply. 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 that securities of the operating entity, such as the Redemption-Exchange Units, be treated on a consolidated basis for the purposes of determining the market value of the Filer under MI 61-101.
24. The inclusion of the Redemption-Exchange 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:
1. the transaction would qualify for the Transaction Size Exemption contained in the Legislation if the Redemption-Exchange Units were considered an outstanding class of equity securities of the Filer that were convertible into LP Units;
2. there be no material change to the terms of the Redemption-Exchange Units, including the exchange rights associated therewith, as described above; and
3. any annual information form or equivalent of the Filer that is required to be filed in accordance with applicable securities laws 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. Brookfield Property Partners L.P. ("BPY") 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 BPY's market capitalization, if the indirect equity interest in BPY, which is held in the form of redeemable-exchangeable limited partnership units of Brookfield Property L.P. (the "Property Partnership"), is included in the calculation of BPY's market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements apply, is increased to include the approximately [_____]% indirect interest in BPY held in the form of redeemable-exchangeable limited partnership units of the Property Partnership."