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PrairieSky Royalty Ltd.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- filer made an acquisition of related businesses that was significant under Part 8 of NI 51-102 -- acquisition was of an Alberta limited partnership, including the general partner thereof -- the general partner is a "related business" under Part 8 of NI 51-102 -- section 8.4 of NI 51-102 require the provision in a business acquisition report of financial statements for each business or related business acquired- general partner had minimal income, assets and liabilities and had no significant recorded or unrecorded liabilities, contingencies or commitments -- filer granted relief from providing financial statements for the general partner in its business acquisition report, on the condition that it provides certain disclosure in the business acquisition report about the general partner including the general partner's income, assets and liabilities.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.
Citation: Re PrairieSky Royalty Ltd., 2015 ABASC 567
February 23, 2015
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 PRAIRIESKY ROYALTY LTD. (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 (the Exemption Sought) under the securities legislation of the Jurisdictions (the Legislation) exempting the Filer from the requirements under section 8.4 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) and Item 3 of Form 51-102F4 Business Acquisition Report with respect to the acquisition as part of the Arrangement (as defined herein) of Range Royalty Management Ltd. (Range GP).
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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the provinces and territories of Canada other than Alberta and Ontario; 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:
The Filer
1. The Filer is a corporation existing under the Business Corporations Act (Alberta) (ABCA).
2. The Filer is a Calgary based royalty-focused company, generating royalty revenues as petroleum and natural gas are produced from its properties located predominantly in the Province of Alberta.
3. The Filer's head office is located in Calgary, Alberta.
4. The Filer is a reporting issuer in each of the provinces and territories of Canada and is not in default of securities legislation in any jurisdiction.
5. The Filer's common shares (the Common Shares) are listed and posted for trading on the Toronto Stock Exchange under the symbol "PSK".
The Arrangement
6. On November 12, 2014, the Filer entered into an arrangement agreement with Range Royalty Limited Partnership (Range LP), Range GP and Range Royalty Trust (Range Trust) pursuant to which the Filer agreed to, among other things, acquire all of the Range Units (as defined herein) pursuant to a plan of arrangement under the ABCA (the Arrangement).
7. The Arrangement was completed on December 19, 2014.
8. Pursuant to the Arrangement, among other things, the Filer acquired, directly or indirectly, all of the Range Units and all of the shares of Range GP, and each of the holders of Range Units received 0.8 of a Common Share for each Range Unit held. Also pursuant to the Arrangement, following the acquisition of the units of Range LP, Range LP was wound-up and dissolved, Range GP and the Filer were amalgamated and Range Trust was wound-up and its assets were distributed to the unitholders of Range Trust.
9. As part of the Arrangement, the Filer issued approximately 19.32 million Common Shares to the holders of the LP Units (as defined herein) and 6,874 Common Shares to the holder of the common shares of Range GP. Based on the closing price of the Common Shares of $32.35 on December 19, 2014, the date of closing of the Arrangement, the total consideration for Range LP was approximately $625 million and for Range GP was approximately $222,000.
10. The value of the Common Shares issued as consideration for the shares of Range GP was approximately 0.035% of the value of the aggregate Common Shares issued as consideration in connection with the Arrangement.
Range LP
11. Prior to the completion of the Arrangement, Range LP was a limited partnership formed under the laws of Alberta. Range LP operated a Canadian oil and gas royalty business.
12. Range LP was not a reporting issuer in any jurisdiction.
13. Range LP had 24,152,015 class B limited partnership units (the LP Units) and 8,593 class A general partnership units (the GP Units and together with the LP Units, the Range Units) issued and outstanding.
14. 41% of the LP Units were held by Range Trust and 59% of the LP Units were widely held. All of the GP Units were held by Range GP.
15. As at December 31, 2013 and September 30, 2014, Range LP had total assets of approximately $186 million and $185 million, respectively. For the twelve months ended December 31, 2013 and the nine months ended September 30, 2014, Range LP had net income of approximately $8 million and $19 million, respectively.
Range GP
16. Prior to the completion of the Arrangement, Range GP was a corporation existing under the ABCA.
17. Range GP's sole business was to be the general partner of Range LP and to act as administrator of Range Trust pursuant to the terms of the limited partnership agreement of Range LP, a management services agreement, an administration agreement and the trust indenture creating Range Trust. Pursuant to a title trust agreement dated effective May 31, 2005 between Range GP and Range LP, Range GP held legal title on behalf of Range LP to its royalty and freehold mineral interests. Range GP carried out all of the management and administrative activities of Range LP.
18. Other than the GP Units, Range GP did not have any assets. Pursuant to the limited partnership agreement of Range LP, Range GP was entitled to be reimbursed by Range LP for all direct and indirect operating, general and administrative and other costs and expenses incurred by Range GP on behalf of Range LP, which consisted entirely of payroll and certain charges related to Range LP's credit facility. The Range GP Units represented approximately 0.035% of the aggregate number of Range Units, and therefore a 0.035% interest in the assets and business of Range LP. For the fiscal year ended December 31, 2013 and the 9 month period ended September 30, 2014, Range GP received a distribution per GP Unit equal to $1.45 and $1.37 per GP Unit, respectively, or in aggregate $12,460 and $11,772 respectively.
19. The management services agreement, title trust agreement and administration agreement were terminated pursuant to the Arrangement.
20. Range GP did not receive a management fee for acting as general partner of Range LP or administrator of Range Trust. All employment expenses for the officers and employees of Range GP and the directors' fees for the directors of Range GP were indirectly paid by Range LP and are therefore reflected in the financial statements of Range LP. The expenses of Range GP consisted solely of bank charges and taxes payable, which were de minimis for the year ended December 31, 2013. The income of Range GP consisted solely of its 0.035% allocation of Range LP's accounting income, which for the year ended December 31, 2013 was approximately $3,000 and for the nine months ended September 30, 2014 was approximately $7,000. Range GP's assets consisted of a minimal amount of cash and accounts receivable which were approximately $11,000 and $82,000, respectively, for the year ended December 31, 2013 and $46,000 and $94,000, respectively, for the nine months ended September 31, 2014. The accounts receivable was comprised entirely of unpaid distributions from Range LP. Range GP's sole liabilities were: (i) amounts owing to Range LP for the acquisition of the GP Units (8,574 GP Units at $5.83 per GP Unit) (Investments), which amount was offset over time by the accumulated distributions on the GP Units; and (ii) amounts due to Range LP, which was changes in the bank balance offset by accounting income booked yearly (0.035% of Range LP accounting income). As at December 31, 2013, Investments and amounts due to Range LP were approximately $17,000 and $33,000, respectively. As at September 30, 2014, Investments and amounts due to Range LP were approximately $29,000 and $61,000 respectively.
21. At the effective time of the Arrangement, Range GP had no significant recorded or unrecorded liabilities, contingencies or commitments.
22. At the effective time of the Arrangement, Range GP had no assets or liabilities other than a small cash balance and a small amount of tax payable that would have been accrued for 2014 (approximately $1,000). As part of the Arrangement, Range LP was wound-up and dissolved and Range Trust was wound-up. As Range GP's sole business was acting as general partner of Range LP and administrator of Range Trust, there was no longer any business for Range GP to carry on.
23. As no assets or liabilities (other than the immaterial amounts disclosed in paragraph 20 above) or ongoing business was acquired by the Filer in connection with the acquisition of Range GP, the financial information of Range GP is irrelevant to an investor. Further, the price paid for the outstanding shares of Range GP was de minimus. All of the relevant financial information in respect of the effect of the Arrangement on the Filer is contained in the financial statements of Range LP.
Business Acquisition Report Financial Statement Requirements
24. The Filer has determined that the acquisition of Range LP constitutes a significant acquisition for purposes of NI 51-102 and accordingly, the Filer is required to file a business acquisition report (BAR) within 75 days of the completion of the Arrangement pursuant to section 8.2 of NI 51-102.
25. The acquisition of Range GP is highly immaterial to the Filer. In addition, given that Range GP's only asset was approximately 0.035% of the Range Units, representing a corresponding 0.035% interest in the business of Range LP, the acquisition of Range GP is viewed as ancillary to the acquisition of Range LP by the Filer.
26. As the acquisition of Range LP and Range GP were contingent upon a single common event, pursuant to subsection 8.1(1) of NI 51-102 the acquisition of Range GP constitutes the "acquisition of a related business". Pursuant to subsection 8.3(2) of NI 51-102, the Filer must consider the significance tests of related businesses on a combined basis. As the acquisition of Range LP alone constitutes a significant acquisition, the acquisition of Range GP and Range LP on a combined basis constitutes a significant acquisition for purposes of NI 51-102. Pursuant to subsection 8.4(8), the Filer is required to include separate financial statements for each related business.
27. As a result of the foregoing, the Filer is required to include in the BAR the following financial statements for each of Range LP and Range GP:
(a) a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for the most recently completed financial year ended on or before the effective date of the Arrangement and the financial year immediately preceding the most recently completed financial year;
(b) a statement of financial position as at the end of the periods specified in paragraph 27(a) above;
(c) notes to the financial statements;
with all of the foregoing for the most recently completed financial year end to be accompanied by an auditor's report thereon (collectively, the Annual Financial Statements);
(d) a comparative interim financial report including (i) a balance sheet as at the end of the interim period and a balance sheet as at the end of the immediately preceding financial year; (ii) an income statement, a statement of retained earnings and a cash flow statement, all for the year-to-date interim period, and comparative financial information for the corresponding interim period in the immediately preceding financial year; and (iii) notes to the financial statements (collectively, the Interim Financial Statements);
(e) a pro forma statement of financial position of the Filer as at the date of the most recent statement of financial position filed that gives effect, as if they had taken place as at the date of the pro forma statement of financial position, to significant acquisitions that have been completed, but are not reflected in the Filer's most recent statement of financial position for an annual or interim period;
(f) a pro forma income statement of the Filer that gives effect to significant acquisitions completed since the beginning of the financial period referred to in paragraph 27(e) as if they had taken place at the beginning of that financial year, for each of the following financial periods: (i) the most recently completed financial year for which it has filed financial statements; and (ii) the interim period for which the Filer has filed an interim financial report that started after the period in (i) and ended immediately before the acquisition date;
(g) pro forma earnings per share based on the pro forma financial statements referred to in paragraph 27(f) (paragraphs 27(e), (f) and (g) are collectively referred to as the Pro Forma Financial Statements).
28. The Filer is currently preparing the financial information required to be included in the BAR pursuant to section 8.4 of NI 51-102 in respect of Range LP.
29. Range GP has never prepared financial statements. Range GP historically prepared basic accounting information for each fiscal year which included cash balances, payroll expenses and bank debits and credits which was used for purposes of completing Range GP's tax returns.
30. The Filer submits that the granting of the requested relief would not be prejudicial to the public interest, and the inclusion of Range LP's Annual Financial Statements and Interim Financial Statements and the inclusion of Range LP in the Pro Forma Financial Statements in the BAR would provide investors with all of the relevant financial information in respect of the effect of the Arrangement on the Filer and the exclusion of Range GP's financial statements would not have any impact on investors' understanding and evaluation of the Filer or of the Arrangement for the following reasons:
(a) The value of the shares of Range GP and the consideration paid by the Filer for such shares in connection with the Arrangement was highly immaterial to both the Filer and relative to Range LP. But for the requirement to aggregate "related businesses" for purposes of the significance tests, Range GP considered alone is clearly immaterial for purposes of such tests.
(b) In addition to the immateriality of the size and value of Range GP in the context of the Arrangement, the sole business of Range GP was to act as the general partner of Range LP and administrator of Range Trust and other than providing management and administrative services to Range LP and Range Trust, Range GP did not carry on any active business and other than as described in paragraph 20 above, did not have beneficial title to any assets. In connection with the completion of the Arrangement, all of the management and administrative services provided by Range GP to Range LP were terminated. The sole purpose of the Filer effecting the Arrangement was to acquire Range LP. As Range GP was an entity that existed as part of the Range LP structure, including the acquisition of the shares of Range GP in the overall structure of the transaction was important to Range LP as it had no use for the company following completion of the Arrangement.
(c) Given that Range GP's only asset was approximately 0.035% of the Range Units, representing a corresponding 0.035% interest in the business of Range LP, the financial information which is relevant to investors is that of Range LP described in paragraph 27 above, and such information will be included in the BAR.
(d) Range GP has never prepared financial statements and to prepare Range GP's financial statements would provide no benefit to investors over and above the financial information of Range LP to be included in the BAR described in paragraph 27 above.
(e) In lieu of the financial statements in respect of Range GP, the Filer will include in the BAR the information in respect of Range GP provided in representations 17 to 23 above (the Alternative Range GP Financial Disclosure).
Decision
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that the BAR includes the Alternative Range GP Financial Disclosure.
"Tom Graham"
Director, Corporate Finance