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 -- 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), 9.1.
October 23, 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
FAM REAL ESTATE INVESTMENT TRUST
The principal regulator in the Jurisdiction (the "Principal Regulator") has received an application (the "Application") from the Filer for a decision under the securities legislation of the Jurisdiction (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 FAM Management Limited Partnership ("FAM LP") or any other subsidiary entity (as such term is defined in MI 61-101) of FAM 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 in the Filer, which is held in the form of Class B limited partnership units ("Class B Units") of FAM 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 a declaration of trust dated August 27, 2012, as amended and restated on December 27, 2012, (the "Declaration of Trust") and as may be further amended and/or restated from time to time.
2. The Filer's head office is located at 2000-5000 Miller Road, Richmond, British Columbia, V7B 1K6.
3. The Filer is a reporting issuer (or the equivalent thereof) in each province and territory of Canada and 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") and an unlimited number of special voting units ("Special Voting Units"). As of the date hereof, the Filer has 8,898,775 Units and 2,511,038 Special Voting Units issued and outstanding. The number of issued and outstanding Special Voting Units is equal to the number of issued and outstanding Class B Units. The Filer is also authorized to issue preferred units ("Preferred Units") from time to time which may be created and issued in one or more series, subject to the Board of Trustees executing an amendment to the Declaration of Trust. As of the date hereof, the Filer has not issued any Preferred Units.
5. The Units are listed and posted for trading on the Toronto Stock Exchange ("TSX") under the symbol "F.UN".
6. As of the date hereof, the Filer has 1,598,550 warrants ("Warrants") issued and outstanding pursuant to a warrant indenture dated December 28, 2012 (the "Indenture"), as supplemented January 29, 2013, as may be further amended, restated and/or supplemented from time to time. The Warrants trade on the TSX under the symbol "F.WT" and each Warrant entitles the holder thereof to purchase one Unit at an exercise price of $10.50. The Warrants are exercisable prior to 5:00 p.m. (Toronto time) on December 28, 2015 after which time they expire and become null and void.
7. The operating business of the Filer is carried on through FAM LP, and Huntingdon Capital Corp. ("Huntingdon") indirectly holds an approximate 26% interest in the Filer through the ownership of 447,694 Units and 2,511,038 Class B Units of FAM LP, which are economically equivalent to, and exchangeable for Units.
8. FAM LP is a limited partnership formed under the laws of the Province of Ontario and is governed by an agreement of limited partnership dated December 28, 2012 (the "Limited Partnership Agreement"). The general partner of FAM LP is FAM GPCo Inc. ("FAM GP"), a company established under the laws of Ontario. FAM GP is a wholly-owned subsidiary of the Filer.
9. FAM LP is authorized to issue an unlimited number of Class A limited partnership units ("Class A LP Units"), an unlimited number of Class B Units and general partnership interests. As of the date hereof, FAM LP has (i) 5,882,662 Class A LP Units issued and outstanding, all of which are held by the Filer, (ii) 2,511,038 Class B Units issued and outstanding, all of which are held by Huntingdon as set out above, and (iii) uncertificated general partnership interests representing a 0.01% interest in FAM LP issued and outstanding, which is held entirely by FAM GP.
10. FAM 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.
11. The Class B Units are, in all material respects, economically equivalent to Units on a per unit basis, and holders are entitled to receive distributions from FAM LP equal to those paid to the holders of the Units by the Filer. Each Class B Unit is exchangeable at the option of the holder for one Unit of the Filer (subject to customary anti-dilution adjustments) and is accompanied by a Special Voting Unit that entitles the holder to receive notice of, attend and vote together with the holders of Units at all meetings of voting unitholders of the Filer. The Class B Units are not transferable and the limited partnership agreement of FAM LP requires Huntingdon to not take any action that would result in the Class B Units being held by a non-resident.
12. The Filer completed its initial public offering of 5,880,000 Units and 1,470,000 Warrants on December 28, 2012 (the "IPO"). The Filer issued an additional 128,550 Warrants pursuant to the Indenture in connection with the 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 an acquisition agreement dated December 28, 2012, by and among the Filer, Huntingdon, FAM GP and FAM Property Inc. ("FAM Property") (a former general partner of FAM LP which is no longer in existence), the Filer indirectly acquired a portfolio of 27 income producing properties (the "Initial Properties") from Huntingdon through the acquisition of: (i) a promissory note originally issued by FAM LP in favour of Huntingdon with a principal amount equal to approximately $31.1 million (the "FAM LP Note"), (ii) 2,768,611 Class A LP Units, (iii) 100% of the issued and outstanding shares of FAM GP and, (iv) 49% of the issued and outstanding shares of FAM Property. The Filer then contributed the FAM LP Note to FAM LP in consideration for the issuance of an additional 3,111,389 Class A LP Units. In addition, the then general partners of FAM LP, on behalf of FAM LP, directly or indirectly assumed mortgages on certain of the Initial Properties in the aggregate amount of approximately $93.7 million.
14. As at the date hereof, Huntingdon holds an effective interest in the Filer of approximately 26% on an issued and outstanding basis and assuming all Class B Units held by Huntingdon are exchanged for Units.
15. Pursuant to the terms of a management agreement dated December 28, 2012 between Huntingdon and the Filer, Huntingdon is the external asset manager of the properties directly or indirectly owned by the Filer and provides the Filer with certain advisory and investment management services, including the services of the Chief Executive Officer and Chief Financial Officer, as well as the right to nominate one Trustee for election to the Board of Trustees, subject to certain restrictions.
16. The Filer and Huntingdon are party to a right of first offer agreement (the "ROFO Agreement") dated December 28, 2012, which gives the Filer the right of first offer to acquire industrial, office and retail properties owned or subsequently acquired by Huntingdon and/or its affiliates, prior to disposition of any such properties to a third party which will be on terms not materially less favourable to the Filer than those offered by or to such third party. The Filer expects to be offered assets from Huntingdon as these properties become stabilized and more suitable under the Filer's investment criteria, as disclosed 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 Huntingdon or any of its subsidiaries and/or pursuant to the exercise of the Filer's right of first offer under the ROFO Agreement described above, indirectly through FAM LP and/or its direct and indirect subsidiaries.
18. Although Huntingdon was granted additional rights at the time of the IPO, including pre-emptive rights, "piggy-back" registration rights, board nomination rights and certain limited approval rights, such rights are based on ownership thresholds calculated based on the number of Units assuming that all Class B Units are exchanged for Units. As a result, Huntingdon does not gain any additional or unique rights or benefits that it would not otherwise have if it were to acquire additional Class B Units (rather than Units) in connection with any transaction with the Filer, such as in connection with the Filer's exercise of its right of first offer under the ROFO Agreement as 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 exchangeable into equity securities of the issuer.
22. The Class B Units represent part of the equity value of the Filer and provide the holder of the Class B Units with economic rights which are, in all material respects, equivalent to the Units. The effect of the exchange right of the Class B Units is that the holder of such Class B Units will receive Units upon exchange of such Class B Units. Moreover, the economic interests that underlie the Class B Units are identical to those underlying the Units; namely, the assets and operations held directly or indirectly by FAM LP.
23. If the Class B Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of Huntingdon's interest in FAM LP represented by the outstanding Class B Units (approximately 24%). As a result, related party transactions of the Filer that are entered into indirectly through FAM LP and/or its direct and indirect subsidiaries 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.
24. 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 apply to MI 61-101. 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 Filer's Class B Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
25. The inclusion of the Class B 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 test contained in the Legislation that provides the Principal Regulator with the jurisdiction to make the decision has been met.
The decision of the Principal Regulator under the Legislation is that the Requested Relief is granted to the Filer provided that:
(a) the transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Class B 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 Class B Units and the Special Voting Units, including the exchange rights associated therewith, as described above and in the limited partnership agreement of FAM LP; 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. FAM 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 limited partnership units of FAM Management Limited Partnership ("FAM LP") held by Huntingdon Capital Corp. ("Huntingdon") 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 [ ]% indirect interest in the REIT in the form of Class B limited partnership units of FAM LP held by Huntingdon.