Securities Law & Instruments

Headnote

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 is a real estate investment trust which holds all of its properties through limited partnerships -- entity holds units in limited partnerships which are exchangeable into and in all material respects the economic equivalent to the issuer's publicly traded units -- relief granted from the valuation requirement for certain non-cash assets in connection with a specific related party transaction -- valuation not required of exchangeable limited partnership units since public units can be a proxy for such exchangeable units -- no imbalance of material information between the related party and minority shareholders since the reporting issuer has continuous disclosure obligations -- Issuer has multiple classes of shares all substantially equivalent -- application for relief from requirement to obtain separate minority approval for each class of shares -- no difference of interest between holders of Class U Units, Class A Units and Class I Units in connection with the Proposed Acquisition -- safeguards include independent committee, formal valuation, fairness opinions -- declaration of trust of Filer provides that unitholders will vote as a single class unless the nature of the business affects holders of one class of units in a manner materially different from another class -- requiring a vote by class would give a "de facto" veto right to a very small group of shareholders.

Applicable Legislative Provisions

Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions, ss. 5.4, 5.6, 6.3, 8.1, 9.1.

Companion Policy to Multilateral Instrument 61-101, s. 3.3.

April 1, 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 SLATE RETAIL REIT (THE "FILER")

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") 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 requirement in Sections 5.4 and 6.3(1)(d) of MI 61-101 to obtain a formal valuation of certain non-cash assets, being the Class B LP Units (as defined below), which may be issued as consideration to certain parties in connection with the Proposed Acquisition (as defined below); and the requirement in Section 8.1(1) of MI 61-101 that, when minority approval for the Proposed Acquisition is obtained from holders of units of the Filer, such approval be obtained from the holders of every class of affected securities voting separately as a class, and that instead minority approval be obtained from all of the outstanding Units (as defined herein) voting as a single class (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 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 Québec.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1.1 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 second amended and restated declaration of trust dated April 15, 2014 (the "REIT DOT").

1.2 The Filer's head office is located at 200 Front Street West, Suite 2400, Toronto, Ontario M5V 3K2.

1.3 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.

1.4 The Filer focuses on acquiring, owning and leasing a portfolio of diversified revenue producing commercial real estate properties in the United States with an emphasis on grocery anchored retail properties. The Filer's portfolio of properties currently consists of 43 grocery anchored retail commercial properties located in the United States.

1.5 Slate Asset Management L.P. is the manager of the Filer ("Manager").

1.6 On April 15, 2014, the Filer was formed pursuant to a combination transaction whereby: the Filer (formerly named Slate U.S. Opportunity (No. 1) Realty Trust) acquired all of the assets of Slate U.S. Opportunity (No. 2) Realty Trust in consideration for class U units ("Class U Units") of the Filer; the Filer effectively acquired, directly and indirectly, all of the assets of U.S. Grocery Anchored Retail (1A), (1B) and (1C) Limited Partnerships in consideration for Class U Units of the Filer, GAR B Exchangeable Units (as defined herein) and Class B LP2 Units (as defined herein); the Filer effectively acquired certain general partner interests held in subsidiary limited partnerships of Slate U.S. Opportunity (No. 1) Realty Trust and Slate U.S. Opportunity (No. 2) Realty Trust in consideration for Class B LP2 Units; and the Class U Units of the Filer were listed on the Toronto Stock Exchange.

1.7 The Filer is authorized to issue an unlimited number of Units consisting of Class U Units, Class A units ("Class A Units") and Class I units ("Class I Units", and together with the Class A Units and Class U Units, the "Trust Units") and special voting units ("Special Voting Units", and together with the Trust Units, the "Units"). As of March 25, 2015, the Filer had 21,838,818 Class U Units, 511,337 Class A Units, 358,000 Class I Units and 590,117 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equal to the number of GAR B Exchangeable Units (defined below).

1.8 As of March 25, 2015:

(a) the Class U Units represented 93.74% of the issued and outstanding Units of the Filer and 95.52% of the Minority Vote (as defined below):

(b) the Class A Units represented 2.19% of the issued and outstanding Units of the Filer and 2.44% of the Minority Vote (as defined below):

(c) the Class I Units represented 1.54% of the issued and outstanding Units of the Filer and 0.44% of the Minority Vote (as defined below); and

(d) the Special Voting Units represented 2.53% of the issued and outstanding Units of the Filer and 1.60% of the Minority Vote (as defined below).

1.9 The holders of the Class A Units, Class I Units and Class U Units have identical rights and obligations and no holder of Trust Units is entitled to any privilege, priority or preference in relation to any other such holder, subject to the following:

(a) The Class A Units are denominated in Canadian dollars. The Class U Units and the Class I Units are denominated in U.S. dollars. The difference in currency denominations was intended solely to allow holders of Units the flexibility to invest in the Filer and receive distributions in either U.S. or Canadian dollars. Subsequent to the listing of the Class U Units on the Toronto Stock Exchange, holders of Class U Units also have the ability to elect at any time to receive distributions in either Canadian dollars or U.S. dollars.

(b) Distributions on the Units, including any returns of capital and the distribution of proceeds on the termination of the Filer, are determined and declared in U.S. dollars. In respect of the Class A Units and any Class U Units for which a holder has elected to receive distributions in Canadian dollars, on the date of the applicable distribution the Filer converts the U.S. dollar distribution payable on the Units into Canadian dollars at the spot exchange rate on such distribution date and holders of such Units receive Canadian dollar distributions.

(c) The Class U Units are listed and posted for trading on the Toronto Stock Exchange under the symbol "SRT.UN". The Class A Units and Class I Units are not listed on any stock exchange. The Class A Units and Class I Units may be converted into Class U Units at the option of the holders thereof at conversion ratios that correspond to their respective distribution entitlements, which (as described in the following paragraph) were determined based on the net U.S. dollar proceeds received by the Filer in respect of each class of Units at the time of the Filer's initial public offering.

(d) The proportionate entitlement of the holders of Class A Units, Class I Units and Class U Units to participate in distributions made by the Filer and to receive proceeds on the redemption of Trust Units and/or a termination of the Filer is determined based on the net U.S. dollar proceeds received by the Filer in respect of such class of Units at the time of the Filer's initial public offering. The net U.S. dollar proceeds received by the Filer in respect of each class of Unit slightly differed as a result of (i) the currency of the unitholder's subscription, and (ii) whether agents' fees were paid in respect of the unitholder's subscription. In particular:

A. On the closing of the Filer's initial public offering, the Filer converted the subscription amount received from the issuance of Class A Units into U.S. dollars. The net U.S. dollar proceeds received by the Filer in respect of the Class A Units was determined by the Canadian/U.S. dollar exchange rate at which the Filer was able to convert such proceeds at the closing date of the offering; and

B. Certain investors subscribed for Class I Units in a private placement concurrent with the initial public offering. No agents' fees were paid on subscriptions for Class I Units pursuant to such private placement, and accordingly the net U.S. dollar proceeds received by the Filer were proportionately higher in respect of such Units.

1.10 Certain affiliates of the Filer have authorized the issuance of securities exchangeable for Class U Units, as follows:

(a) GAR (1B) Limited Partnership ("GAR B") is a limited partnership formed under the laws of Ontario and is governed by an amended and restated agreement of limited partnership dated April 15, 2014. GAR B has authorized and issued exchangeable units ("GAR B Exchangeable Units") pursuant to its limited partnership agreement.

The GAR B Exchangeable Units are in all material respects economically equivalent to the Class U Units on a per unit basis.

Each GAR B Exchangeable Unit is redeemable at the option of the holder thereof for one Class U Unit (subject to customary anti-dilution adjustments); provided that upon any such redemption, GAR B (under the control of the Filer) may, in its discretion, elect to instead satisfy such redemption through the payment of cash, in which case the value of such unit is determined by the volume weighted average price of the Class U Units which traded on the Toronto Stock Exchange for five trading days immediately preceding the valuation date.

Prior to their redemption, the GAR B Exchangeable Units will be entitled to distributions equal in amount to distributions payable in respect of the Class U Units. The distribution amounts are subject to customary anti-dilution adjustments, adjustments in respect of any U.S. corporate income taxes paid by the REIT or its subsidiaries that would affect the post-tax position of a holder of GAR B Exchangeable Units as compared to a holder of Class U Units, and any applicable withholding taxes. The record date and the payment date for any distribution declared on the GAR B Exchangeable Units will generally be the same as those for the Class U Units.

Holders of GAR B Exchangeable Units were issued one Special Voting Unit for each GAR B Exchangeable Unit held. The Special Voting Units have no economic entitlement or beneficial interest in the Filer. Upon the exchange or surrender of an exchangeable security, the associated Special Voting Unit is automatically redeemed and cancelled for no consideration and the former holder ceases to have any rights with respect thereto.

As of March 25, 2015, 590,117 Gar B Exchangeable Units were issued and outstanding (which correspond to the 590,117 Special Voting Units issued and outstanding).

(b) Slate Retail One L.P. ("Slate LP1") is a limited partnership formed under the laws of the State of Delaware and is governed by an agreement of limited partnership dated April 15, 2014. Slate LP1 has authorized the issuance of Class B limited partnership units ("Class B LP1 Units") pursuant to its limited partnership agreement.

The Class B LP1 Units are in all material respects economically equivalent to the Class U Units on a per unit basis.

Each Class B LP1 Unit is redeemable at the option of the holder thereof for one Class U Unit (subject to customary anti-dilution adjustments); provided that upon any such redemption, Slate LP1 (under the control of the Filer) may, in its discretion, elect to instead satisfy such redemption through the payment of cash, in which case the value of such unit is determined by the volume weighted average price of the Class U Units which traded on the Toronto Stock Exchange for five trading days immediately preceding the valuation date.

Prior to their redemption, the Class B LP1 Units will be entitled to distributions equal in amount to distributions payable in respect of the Class U Units. The distribution amounts are subject to customary anti-dilution adjustments, adjustments in respect of any U.S. corporate income taxes paid by the Filer or its subsidiaries that would affect the post-tax position of a holder of Class B LP1 Units as compared to a holder of Class U Units, and any applicable withholding taxes. The record date and the payment date for any distribution declared on the Class B LP1 Units will generally be the same as those for the Class U Units.

The Class B LP1 Units will not be entitled to vote on matters to be voted on by Unitholders of the Filer, and no Special Voting Units are issued to holders of Class B LP1 Units.

Transfers of Class B LP1 Units are generally not permitted subject to limited exceptions in respect of transfers to an affiliate.

As of March 25, 2015, no Class B LP1 Units were issued or outstanding.

(c) Slate Retail Two L.P. ("Slate LP2") is a limited partnership formed under the laws of the State of Delaware and is governed by an agreement of limited partnership dated April 15, 2014. Slate LP2 has authorized and issued class B limited partnership units ("Class B LP2 Units", and together with the Class B LP1 Units, "Class B LP Units"). The terms of the Class B LP2 Units are identical to the terms of the Class B LP1 Units (other than those differences that are administrative or clerical in nature to reflect the issuance from Slate LP2 rather than Slate LP1).

As of March 25, 2015, 1,957,023 Class B LP2 Units were issued and outstanding.

1.11 The GAR Exchangeable Units and the Class B LP Units are not, and will not be, listed and posted for trading on the Toronto Stock Exchange or any other stock exchange.

1.12 The Manager holds 683,147 Class B LP2 Units, 255,720 GAR B Exchangeable Units and 728,031 Class U Units.

1.13 On February 25, 2015, it was announced that the Filer had entered into an agreement (the "Acquisition Agreement") with Slate U.S. Opportunity (No. 3) Realty Trust ("SUSO 3") pursuant to which the Filer will acquire the assets of SUSO 3 in a U.S.$195 million transaction (the "Proposed Acquisition"). Completion of the Proposed Acquisition is subject to approval by the board of trustees and independent committee of each of the Filer and SUSO 3 following the completion of due diligence on behalf of, and satisfactory to, the boards and such committees (including receipt by the Filer of a formal valuation in respect of SUSO 3), approval of the unitholders of each of the Filer and SUSO 3, approval of the Toronto Stock Exchange and other customary closing conditions. The Manager will not earn an acquisition fee for the Proposed Acquisition.

1.14 Subject to satisfaction of the conditions to closing, the Filer will issue 7,721,027 Class U Units (the "Consideration Units") to SUSO 3 (at a deemed price per Unit equal to U.S.$10.47) as consideration for the acquisition (the "SUSO 3 Purchase Price"), subject to adjustment depending on SUSO 3's final working capital at the date of closing. In connection with closing the SUSO 3 Acquisition, SUSO 3 will distribute such Units to SUSO 3's unitholders in a "qualifying exchange" for income tax purposes and will make a special distribution of SUSO 3's remaining cash balance.

1.15 SUSO 3 holds 99.99% of the limited partnership interests of Slate U.S. Opportunity (No. 3) Investment L.P., which in turn holds 99.99% of the limited partnership interests of Slate U.S. Opportunity (No. 3) Holding L.P. ("Holding LP"). SUSO 3's portfolio of properties are held indirectly through single-purpose entities owned by Holding LP. The Manager is the manager of SUSO 3. The Manager controls the general partner of Holding LP, and as such is an "affiliated entity" of Holding LP (and thereby SUSO 3). As a result, SUSO 3 is a "related party" of the Filer pursuant to clause (h) of the definition of "related party" in MI 61-101.

1.16 The Proposed Acquisition is therefore a "related party transaction" pursuant to clause (a) of the definition of "related party transaction" in MI 61-101 and subject to the applicable requirements of MI 61-101 relating to, among other things, preparation of a formal valuation of the non-cash assets involved in the Proposed Acquisition (the "Non-Cash Valuation Requirement") and the approval by a majority of the votes cast by disinterested holders of Units entitled to vote on the Proposed Acquisition (the "Minority Vote") at a special meeting (the "Unitholder Meeting") of holders of Units to seek the approval in accordance with MI 61-101 (subject to the Relief) of the Proposed Acquisition.

1.17 Currently, the general partner interest in Holding LP is held by Slate U.S. Opportunity (No. 3) Holding GP L.P. ("Holding GP LP"). SRT and SUSO 3 have agreed pursuant to the Acquisition Agreement that SUSO 3, through wholly-owned subsidiaries, will directly or indirectly acquire any partnership interests of Holding LP (the "GP LP Interests") held directly or indirectly by third parties, such that immediately prior to the closing of the Proposed Acquisition, SUSO 3 will be the indirect beneficial owner of all of the partnership interests of Holding LP; provided that the Filer and SUSO 3 may agree, in their discretion acting reasonably, upon such alternative arrangements as may be necessary or desirable to ensure the foregoing following completion of the Proposed Acquisition.

1.18 Subject to agreement amongst the parties, in order to give effect to the foregoing, it is currently expected that the indirect holders of the GP LP Interests will transfer such interests to Slate LP1 or Slate LP2 in consideration for 207,150 Class B LP Units in the aggregate (the "Class B Consideration Units") (in which case the number of other Consideration Units to be issued by the Filer pursuant to the Proposed Acquisition would be equal to 7,513,877, subject to the working capital adjustment). The proportion of Class B Consideration Units to the total number of Consideration Units would be less than 3%.

1.19 Messrs. Blair and Brady Welch, principals of the Manager and trustees of the REIT, and Mr. Samuel Altman, a trustee of the Filer (collectively, the "Related Parties"), directly or indirectly hold 95% of the interests in Holding GP LP. Such persons are "related parties" of the Filer and their interests in any Class B Consideration Units received in connection with the foregoing may be considered a "collateral benefit" in respect of the Proposed Acquisition. Accordingly, any Units that are beneficially owned by the foregoing persons, or in respect of which the foregoing persons exercise control or direction, including Units held by the Manager, will be excluded from the Minority Vote required under MI 61-101 in respect of the Proposed Acquisition.

1.20 The Proposed Acquisition is subject to a number of mechanisms to ensure the interests of Unitholders are protected including:

(a) The Filer has established a committee of independent trustees (the "Special Committee") who, among other things, is responsible for supervising the preparation of an independent formal valuation (the "Valuation") of the assets of SUSO 3 to be purchased by the Filer in the Proposed Acquisition and obtaining a formal fairness opinion in respect of the Proposed Acquisition. SUSO 3's assets include 109,400 Class U Units of the Filer. Pursuant to Section 6.3(2) of MI 61-101, no valuation is required in respect of such Units.

(b) The calling and holding of a special meeting of all Unitholders in order to consider and, if deemed advisable, approve the Proposed Acquisition in accordance with Section 5.3 of MI 61-101.

(c) The information circular to be mailed to Unitholders in connection with the Unitholder Meeting will comply with the requirements of applicable securities law and will disclose, among other matters, that the Filer has no knowledge of any material non-public information concerning the Filer or its securities that has not been generally disclosed, in accordance with subsection 6.3(2)(b) of MI 61-101.

(d) Unitholder approval of the Proposed Acquisition in accordance with MI 61-101 (subject to the Relief granted hereby).

1.21 Section 6.3(2)(a) of MI 61 101 provides an exemption (the "Valuation Exemption") from the Non Cash Valuation Requirement where, among others:

(a) the non-cash consideration or assets are securities of a reporting issuer or are securities of a class for which there is a published market;

(b) the person that would otherwise be required to obtain the formal valuation of those securities states in the disclosure document for the transaction that the person has no knowledge of any material information concerning the issuer of the securities, or concerning the securities, that has not been generally disclosed; and

(c) in the case of a related party transaction for the issuer of the securities, the conditions in subparagraphs (c)(i) and (ii) of section 5.5 of MI 61-101 are satisfied, regardless of the form of the consideration for the securities.

1.22 The Consideration Units to be issued in connection with the Proposed Acquisition are securities of a reporting issuer as required under subsection 6.3(2)(a) of MI 61-101.

1.23 Although the Class B Consideration Units are not securities of a reporting issuer or of a class for which there is a published market, the Class B Consideration Units are and will be, in all material respects, economically equivalent to the publicly listed Class U Units on a per unit basis for the following reasons:

(a) each Class B Consideration Unit is redeemable at the option of the holder thereof for one Class U Unit (subject to customary anti-dilution adjustments); provided that upon any such redemption, Slate LP1 or Slate LP2 (under the control of the Filer), as applicable, may, in its discretion, elect to instead satisfy such redemption through the payment of cash, in which case the value of such unit is determined by the volume weighted average price of the Class U Units which traded on the Toronto Stock Exchange for five trading days immediately preceding the valuation date; and

(b) prior to their redemption, the Class B Consideration Units are entitled to distributions that correspond to the distributions payable in respect of the Class U Units.

1.24 The Class B Consideration Units represent, and shall represent, part of the equity value of the Filer and, moreover, the economic interests that underlie the Class B Consideration Units are, and shall be, based solely upon the assets and operations held directly or indirectly by the operating entities of the REIT as a whole.

1.25 Transfers of Class B Consideration Units are generally not permitted subject to limited exceptions in respect of transfers to an affiliate.

1.26 Any additional rights (as compared to the Class U Units) attached to the Class B Consideration Units arise by virtue of the Class B Consideration Units being limited partnership units and would be no greater than customary rights associated with limited partnership units intended to achieve economic equivalence with the Class U Units. Other than the rights described herein, the Class B Consideration Units carry no other rights that would impact their value as compared to Class U Units and the holders thereof do not, as a result of acquiring the Class B Consideration Units rather than Class U Units in connection with the Proposed Acquisition, gain any additional or unique rights that they would not otherwise have.

1.27 Other than in respect of matters affecting the rights, benefits or entitlements of the holders of Class B Consideration Units, a holder of Class B Consideration Units does not, and shall not, have the right to exercise any votes in respect of matters to be decided by the partners of Slate LP1 or Slate LP2, as applicable, and Class B Consideration Units do not provide the holder thereof with an interest in any specific asset or property of Slate LP1 or Slate LP2, as applicable.

1.28 Absent the Relief, the Non-Cash Valuation Requirement would require the REIT to have a formal valuation prepared in respect of the Class B Consideration Units. Any such formal valuation would, in all material respects, mirror a formal valuation of the Trust Units, including Trust Units to be issued to SUSO 3 pursuant to the Proposed Acquisition (in respect of which the REIT is entitled to rely upon the Valuation Exemption). As a result, the REIT would be subject to a requirement that would be not be consistent with the logic underlying the exemption of securities of a reporting issuer or for which there is a published market from the requirement to obtain a formal valuation (i.e. the Valuation Exemption).

1.29 The division of the Trust Units into Class A Units, Class I Units and Class U Units is related only to the different currency and net proceeds received by the Filer on the initial issuance of such Units. Other than the different proportional entitlement to distributions that was determined at the time of their initial issuance, the holders of the Class A Units, Class I Units and Class U Units all have the same rights and obligations. Furthermore, the Class A Units and Class I Units can be converted at any time into Class U Units at the option of the holders thereof.

1.30 The REIT DOT provides that Unitholders will vote as a single class in respect of any matter to be voted upon unless the nature of the business to be transacted at the meeting affects holders of one class of Trust Units in a manner materially different from its effect on holders of another class Trust Units.

1.31 The REIT DOT provides that holders of Special Voting Units shall generally be entitled to vote with the holders of Units. However, the Special Voting Units would not be considered an "affected security" under MI 61-101 and therefore, absent the Requested Relief, would not be permitted to participate in the Minority Vote pursuant to MI 61-101.

1.32 The Filer is of the view that the interests of the holders of each class of Units are entirely aligned in respect of the Proposed Acquisition and the Proposed Acquisition will not have any differential impact upon any class of Units. Accordingly, the Board of Trustees did not determine that the Proposed Transaction affects holders of one class of Units in a manner materially different from its effect on holders of another class of Units and therefore decided that a class by class vote is not necessary for the Proposed Transaction.

1.33 The Filer has included information about this application for Requested Relief in a press release dated March 25, 2015.

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 Requested Relief is granted, provided that the mechanisms set out in Paragraph 1.20 are implemented and remain in place as described herein and provided further that:

(a) pursuant to subsection 6.3(2) of MI 61-101, a formal valuation of the Consideration Units is not required;

(b) neither the Filer nor, to the knowledge of the Filer after reasonable inquiry, any of the Related Parties, SUSO 3 or any of its affiliates has knowledge of any material information concerning the Filer, Slate LP1, Slate LP2 or their respective securities that has not been generally disclosed, and

(c) the information circular for the Unitholder Meeting includes the disclosure required under MI 61-101 with respect to the Proposed Acquisition and otherwise complies with the requirements of applicable securities law, and includes:

(i) a statement that neither the Filer nor, to the knowledge of the Filer after reasonable inquiry, any of the Related Parties, SUSO 3 (or any of its affiliates) has knowledge of any material information concerning the Filer, Slate LP1, Slate LP2 or their securities that has not been generally disclosed; and

(ii) a "de"scription of the effect of the Proposed Acquisition on the direct or indirect voting interest in the Filer of the Related Parties.

"Naizam Kanji"
Director
Office of Mergers and Acquisitions
Ontario Securities Commission