Securities Law & Instruments

Headnote

Multilateral Instrument 11-102 Passport System and 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 business acquisition report. Filer granted relief to include alternative financial information, comprising an audited statement of assets acquired and liabilities assumed, a 12 month audited financial forecast and additional information about the acquisition as financial statement disclosure for a significant acquisition.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.1.

March 4, 2015

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (THE "JURISDICTION") AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF ELEMENT FINANCIAL CORPORATION (THE "FILER" OR "ELEMENT")

DECISION

Background

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") for an exemption (the "Exemption Sought") from the financial statement requirements in Section 8.4 of National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102") for the business acquisition report ("BAR") to be prepared and filed with the applicable Canadian securities regulatory authorities in connection with the acquisition by the Filer of certain railcars (the "Railcars") and underlying leases (the "Leases" and, together with the Railcars, the "Railcar Assets") pursuant to a vendor finance program with Trinity Industries Inc. (the "Trinity Vendor Program").

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

(a) the Ontario Securities Commission (the "Commission") is the principal regulator for this application; and

(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, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 or NI 51-102 have the same meanings if used in this decision, unless otherwise defined herein.

Representations

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

The Filer

1. The Filer is a corporation formed under the Business Corporations Act (Ontario).

2. The principal and head office of the Filer is located in Toronto, Ontario.

3. The financial year end of the Filer is December 31.

4. The Filer is an equipment finance company in the business of providing financing to customers to facilitate purchases of equipment by its customers. Financing provided by the Filer typically involves the provision of equipment loans and leases. The Filer originates business through vendor finance programs established with equipment manufacturers.

5. The Filer is a reporting issuer in each of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.

6. To its knowledge, the Filer is not in default of securities legislation in any such jurisdiction in Canada in which it is a reporting issuer.

7. The common shares, Cumulative 5-Year Rate Reset Preferred Shares, Series A, Cumulative 5-Year Rate Reset Preferred Shares, Series C, Cumulative 5-Year Rate Reset Preferred Shares, Series E and 5.125% Extendible Convertible Unsecured Subordinated Debentures of the Filer are listed on the Toronto Stock Exchange under the symbols "EFN", "EFN.PR.A", "EFN.PR.C", "EFN.PR.E" and "EFN.DB", respectively.

The Trinity Vendor Program and the Prior Tranches

8. On December 9, 2013, Element established the Trinity Vendor Program with Trinity Industries Inc. ("Trinity") to acquire Railcar Assets from Trinity and/or its affiliates over a two year period.

9. Under the terms of the Trinity Vendor Program, Element and Trinity formed a strategic alliance whereby Element is presented with preferred opportunities from time to time to acquire Railcar Assets from Trinity on financial terms to be agreed upon by the parties at the time of offer.

10. The identification of the Railcar Assets offered by Trinity to Element under the Trinity Vendor Program may include Leases for: (a) newly manufactured Railcars; (b) existing Railcars; and (c) secondary market purchases of Railcars from third parties identified by Trinity, and is based on predetermined diversification criteria, including limits on Railcar type, use, Lease duration, average age and credit quality of the lessee. Offers of qualifying Railcar Assets are to be made to Element by Trinity from time to time for the duration of the Trinity Vendor Program. Trinity and Element meet on a quarterly basis to report on and consult with respect to material business and process issues under the Trinity Vendor Program.

11. In connection with the Trinity Vendor Program, Element previously acquired approximately US$619 million of Railcar Assets (collectively, the "2013/14 Tranches") pursuant to an approximately US$105 million tranche completed on December 19, 2013, an approximately US$396 million second tranche completed on January 28, 2014 and an approximately US$118 million third tranche completed on March 27, 2014.

12. On May 26, 2014, the Commission, on behalf of the Canadian Securities Administrators, granted an order in response to an exemptive relief application made by the Filer in connection with the 2013/14 Tranches (the "2013/14 Relief"). The 2013/14 Relief provided that in lieu of historical financial statements required by Part 8 of NI 51-102 the Filer would provide alternative financial information in the BAR in respect of the 2013/14 Tranches comprised of: (a) an audited statement of assets acquired and liabilities assumed as at the date of each 2013/14 Tranche; (b) a 12 month financial forecast accompanied by an independent auditor's report reflecting the financial impact of the 2013/14 Tranches; and (c) additional information about the Trinity Vendor Program, including a description of the terms of the Trinity Vendor Program and a description of the Railcars and Leases acquired in the 2013/14 Tranches which includes disclosure of the Leases in default, if any, the year of manufacture of the Railcars, credit ratings of the lessees, remaining Lease terms of the Leases acquired and average initial Lease rates.

13. On May 27, 2014, the Filer filed a BAR in connection with the 2013/14 Tranches.

14. On June 27, 2014, in connection with the Trinity Vendor Program, Element acquired approximately US$121.4 million of Railcar Assets (the "June Tranche").

15. On September 9, 2014, the OSC, on behalf of the Canadian Securities Administrators, granted an order in response to an exemptive relief application made by the Filer in connection with the June Tranche (the "June Relief"). The June Relief provided that in lieu of historical financial statements required by Part 8 of NI 51-102 the Filer would provide alternative financial information in the BAR in respect of the June Tranche comprised of: (a) an audited statement of assets acquired and liabilities assumed as at June 27, 2014; (b) a 12 month financial forecast accompanied by an independent auditor's report reflecting the financial impact of the June Tranche; and (c) additional information about the Trinity Vendor Program, including a description of the terms of the Trinity Vendor Program and a description of the Railcars and Leases acquired in the June Tranche which includes disclosure of the Leases in default, if any, the year of manufacture of the Railcars, credit ratings of the lessees, remaining Lease terms of the Leases acquired and average initial Lease rates.

16. On September 10, 2014, the Filer filed a BAR in connection with the June Tranche.

17. On September 29, 2014, in connection with the Trinity Vendor Program, Element acquired approximately US$135.2 million of Railcar Assets (the "September Tranche", and together with the 2013/14 Tranches and the June Tranche, the "Prior Tranches").

18. On December 15, 2014, the OSC, on behalf of the Canadian Securities Administrators, granted an order in response to an exemptive relief application made by the Filer in connection with the September Tranche (the "September Relief", and together with the 2013/14 Relief and the June Relief, the "Prior Relief"). The September provided that in lieu of historical financial statements required by Part 8 of NI 51-102 the Filer would provide alternative financial information in the BAR in respect of the September Tranche comprised of: (a) an audited statement of assets acquired and liabilities assumed as at September 29, 2014; (b) a 12 month financial forecast accompanied by an independent auditor's report reflecting the financial impact of the September Tranche; and (c) additional information about the Trinity Vendor Program, including a description of the terms of the Trinity Vendor Program and a description of the Railcars and Leases acquired in the September Tranche which includes disclosure of the Leases in default, if any, the year of manufacture of the Railcars, credit ratings of the lessees, remaining Lease terms of the Leases acquired and average initial Lease rates.

19. On December 15, 2014, the Filer filed a BAR in connection with the September Tranche.

The New Tranche

20. In connection with the Trinity Vendor Program, on December 19, 2014, Element acquired approximately US$117.6 million of additional Railcars Assets from Trinity (the "New Tranche").

21. When aggregated with the Prior Tranches pursuant to Section 8.3(12) of NI 51-102, the New Tranche constitutes a "significant acquisition" under Part 8 of NI 51-102.

22. Sections 8.4(1) and 8.4(2) of NI 51-102 require that the Filer include in the BAR the following annual financial statements in respect of the business acquired:

(a) a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for (i) the year ended December 31, 2013 (audited); and (ii) the year ended December 31, 2012 (not required to be audited);

(b) a statement of financial position as at December 31, 2013 (audited) and December 31, 2012 (not required to be audited); and

(c) notes to the required financial statements.

23. Sections 8.4(3) and 8.4(3.1) of NI 51-102 require that the Filer include in the BAR the following interim financial statements in respect of the business acquired:

(a) a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for the nine month period ended September 30, 2014 and comparative financial information for the period ended September 30, 2013;

(b) a statement of financial position as at September 30, 2014; and

(c) notes to the required financial statements.

24. Section 8.4(5) of NI 51-102 requires that the Filer include the following pro forma financial statements of the Filer:

(a) a pro forma statement of financial position of the Filer as at September 30, 2014 that gives effect, as if the New Tranche and Prior Tranches had taken place as at the date of the pro forma statement of financial position, to the New Tranche and Prior Tranches;

(b) a pro forma income statement of the Filer that gives effect to the New Tranche and Prior Tranches as if they had taken place on January 1, 2013 for the year ended December 31, 2013; and

(c) a pro forma income statement of the Filer that gives effect to the New Tranche and Prior Tranches as if they had taken place on January 1, 2014 for the nine month period ended September 30, 2014.

25. The purchase price for the New Tranche was determined by Element based on the contractual rental payments for each of the individual Leases, the credit profile of the individual lessees underlying the Leases and the Filer's estimates of the residual value of the Railcars forming the Railcar Assets at the end of their respective lease term.

26. The Filer did not acquire any physical facilities, employees, marketing systems, sales forces, operating rights, production techniques or trade names of Trinity in connection with the New Tranche. Such items remained with Trinity following the completion of the New Tranche.

27. The Filer did not acquire a separate entity, a subsidiary or a division of Trinity. Pursuant to the Trinity Vendor Program, Trinity presents Element with opportunities from time to time to purchase Railcars and underlying Leases. The acquisition of the Leases and Railcars is an equipment financing transaction under the Trinity Vendor Program consistent with Element's business as a finance company.

28. The financial information in respect of the individual Railcar Assets and operations of Trinity necessary to produce historical financial statements for the New Tranche has not been made available to Element. Trinity did not prepare financial statements in respect of the Railcar Assets. The Filer has made every reasonable effort to obtain historical financial statements for the Railcar Assets and has been unable to do so.

29. The Filer has established a financing program whereby it expects to securitize substantially all of the Railcar Assets acquired in the New Tranche through the sale of such Railcar Assets to a special purpose vehicle or other entity, which entity issues notes secured by such Railcar Assets.

30. The Filer does not believe that historical financial statements for the New Tranche would be relevant to investors or assist investors in understanding the New Tranche or the Trinity Vendor Program as any such historical financial statements would require extensive assumptions regarding Trinity and would not reflect the financial impact of the Railcar Assets in the hands of the Filer.

31. In lieu of the historical financial statements required by Part 8 of 51-102, the Filer proposes to provide alternative financial information (the "Alternative Financial Information") in respect of the New Tranche as follows:

(a) an audited statement of assets acquired and liabilities assumed as at December 19, 2014 that:

(i) is comprised of the Railcar Assets acquired and liabilities assumed in the New Tranche, such information to be presented in a single statement;

(ii) includes a statement that the statement of assets acquired and liabilities assumed 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 prepared in accordance with IFRS;

(iii) includes a description of the accounting policies used to prepare the statement;

(iv) is accompanied by an independent auditor's report that reflects the fact the statement was prepared in accordance with the basis of accounting disclosed in the notes to the statement;

(b) a 12 month financial forecast covering the period from January 1, 2015 to December 31, 2015 accompanied by an independent auditor's report on the financial forecast reflecting the financial impact of the New Tranche; and

(c) additional information about the Trinity Vendor Program, including a description of the terms of the Trinity Vendor Program and a description of the Railcars and Leases acquired in the New Tranche which includes disclosure of the leases in default, if any, the year of manufacture of the Railcars, credit ratings of the lessees, remaining lease terms of the leases acquired and average initial lease rates.

32. The Exemption Sought is consistent with the Prior Relief.

33. The Filer submits that the Exemption Sought would not be prejudicial to the public interest because the Alternative Financial Information will provide investors with the information material to their understanding of the New Tranche and the Filer believes that the presentation of financial statements prepared strictly in compliance with Section 8.4 of NI 51-102 would not be more meaningful or relevant to investors than the Alternative Financial Information.

34. Any subsequent acquisition under the Trinity Vendor Program that qualifies as a significant acquisition pursuant to Part 8 of NI 51-102 shall not be part of the exemptive relief sought hereunder.

Decision

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 Exemption Sought is granted in respect of the New Tranche, provided that the BAR for the New Tranche includes the Alternative Financial Information.

"Sonny Randhawa"
Manager, Corporate Finance Branch
Ontario Securities Commission