Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Application for relief from the prospectus requirement -- Filer operates a centralized buying service for photographic and related products, supplies and wares for the benefit of its members -- Only members may acquire Common Shares, Class A Shares or Class B Shares -- Prior to a share reorganization, Filer proposes to issue Common Shares -- Subsequent to a share reorganization, Filer proposes to issue Class A Shares and Class B Shares -- Common Shares and Class A Shares have nominal purchase and redemption price -- Purchasers of the Class B Shares are same as purchasers of Class A Shares -- Potential purchasers of Class B Shares are not making an investment decision and will receive information about the Filer and the Class B Shares -- Relief granted subject to conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).

May 5, 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 FOTO SOURCE CANADA INC. (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 (the "Legislation") that the prospectus requirements contained in the Legislation shall not apply to the issuance by the Filer of:

1. prior to the Share Reorganization, Common Shares to Members and Applicants (each as defined below);

2. in connection with the Share Reorganization, Class A Shares to Members upon the reclassification and exchange of Common Shares (each as defined below); and

3. subsequent to the Share Reorganization, Class A Shares and Class B Shares to Members and Applicants (each as defined below);

(the "Requested Relief").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

1. the Ontario Securities Commission is the principal regulator for this application; and

2. 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Yukon Territory, Northwest Territories and Nunavut (together with Ontario, the "Jurisdictions").

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. The Filer was incorporated under the Business Corporations Act (Ontario) by Articles of Incorporation dated February 7, 1986, as amended by Articles of Amendment dated April 15, 1994 and February 25, 1997 (collectively, the "Articles of Incorporation").

2. The Filer's head office is located in Oakville, Ontario.

3. The Filer's fiscal year end is June 30.

4. The Filer operates a centralized buying service for photographic and related products, supplies and wares (collectively, the "Products") for the benefit of its Members. The combined buying power of its Members allows the Filer to negotiate better prices and/or payment terms with vendors approved by the Filer ("Authorized Suppliers"), for the benefit of its Members. Members also participate in volume rebates, discounts, allowances and other buying incentives received by the Filer as a result of its greater buying power (collectively, the "Volume Rebates"). As well, Members have access to the Filer's ancillary services which include advertising and promotional expertise.

5. Pursuant to the Articles of Incorporation, the Filer is authorized to issue an unlimited number of common shares ("Common Shares"). Each Common Share entitles the holder thereof to one vote at any meetings of the Members and to receive dividends which may, from time to time, be declared at the discretion of the board of directors of the Filer (the "Board").

6. No Member is entitled to hold more the one Common Share. On liquidation, winding up or dissolution of the Filer, each holder of a Common Share is entitled to receive the return of their $1.00 cost of purchase and any declared but unpaid dividends in respect of such share.

7. The Filer had 60 Common Shares issued and outstanding as of July 31, 2014.

8. The Filer is not a reporting issuer in the Province of Ontario or in any other Jurisdiction where that concept exists, and the Filer has no intention of becoming a reporting issuer in the foreseeable future.

9. No securities of the Filer are, and following the Share Reorganization, no securities of the Filer will be, traded in Canada or another country on a marketplace as defined in National Instrument 21-101 Marketplace Operations or any other facility for bringing together buyers and sellers of securities where trading data is publicly reported. The Articles of Incorporation provide that Common Shares may be transferred only with the consent of the Board. Following the Share Reorganization, the Articles of Amendment (as defined below) will provide that Shares (as defined below) may be transferred only with the consent of the Board.

10. The Filer has the benefit of and currently issues Common Shares to Applicants resident in the Provinces of Ontario, Alberta and British Columbia under an order of the Ontario Securities Commission dated May 21, 1996 ("OSC Exemption Order"), an order of the Alberta Securities Commission dated February 26, 1998 ("ASC Exemption Order") and an order of the British Columbia Securities Commission dated June 3, 1998 ("BCSC Exemption Order" and collectively with the OSC Order and ASC Order, the "Existing Exemption Orders"), respectively exempting the Filer from complying with the prospectus and registration requirements of applicable securities laws of the Provinces of Ontario, Alberta and British Columbia.

11. Membership in the Filer is subject to approval of the Board, currently open to any person or company who specializes primarily in the sales of cameras and accessories in one or more locations in Canada or operates a retail photofinishing laboratory in one or more locations in Canada (each an "Applicant") and, upon acceptance of an application and compliance with the by-laws of the Filer (the "By-laws"), an Applicant is issued one Common Share at a subscription price of $1.00, whereupon the Applicant becomes a shareholder and member of the Filer (referred to herein individually as a "Member", and collectively as the "Members").

12. The rights and obligations of the Members are governed by various member purchase and payment agreement (the "Purchase and Payment Agreement") and a unanimous shareholders agreement dated March 9, 1994, as amended (the "Unanimous Shareholders Agreement"). Each Member is required to enter into each of these agreements upon the issuance of one Common Share to the subject Member.

13. The Filer has also entered into Purchase and Payment Agreements with various persons and companies who are not also shareholders of the Filer ("Non-Shareholder Members"). Unlike Members, Non-Shareholder Members have no equity interest in the Filer and do not participate in the revenues or profits of the Filer, except to the extent of the Volume Rebates to which a Non-Shareholder Member is entitled along with any other discretionary payments distributed by the Filer to Non-Shareholder Members from time to time. As at the date of this Application, there are approximately 64 Non-Shareholder Members.

14. Pursuant to the terms of the Unanimous Shareholders Agreement, each Member agrees that no shareholder shall be issued more than one Common Share in the capital of the Filer and agrees that such share shall not be sold, assigned or dealt with by any means whatsoever except with the prior written consent of the Board. Changes to the ownership of a corporate shareholder also require the approval of the Board. Each Member is also required to pay the Filer quarterly membership fees, the amount of which is prescribed by the Board from time to time.

15. Pursuant to the terms and conditions of the Purchase and Payment Agreement, each Member is paid its proportionate share of all volume rebates, discounts or allowances generated as a result of purchases by the Filer from Authorized Suppliers, less an amount to cover the costs of the Filer and an amount as determined by the Members to be contributed to a reserve fund (the "Reserve Fund"). The Reserve Fund serves as a contingency fund for the purpose of paying the indebtedness of the Filer to Authorized Suppliers in respect of Members who have not paid the Filer for Products purchased by the Filer and delivered to a Member which results in a liability for the Filer.

16. If a Member is in default of certain terms and conditions of the Unanimous Shareholders Agreement or the Purchase and Payment Agreement, including a default by a Member in the payment of its obligations, which has not been cured by a Member within a given timeframe, the Filer is entitled to require the Member to sell its Common Share to the Filer for cancellation at a price of the $1.00 cost of purchase. In addition, each of the Unanimous Shareholders Agreement and the Purchase and Payment Agreement may be terminated pursuant to their terms under these circumstances. Upon termination of such agreements, the Member is required to pay the Filer any amounts owing by the Member to the Filer and the Filer shall pay the Member all monies due and owing by the Filer to the Member including the Member's portion of the buying group discounts and the Member's portion of the Reserve Fund, subject to set-off rights of the Filer against such monies owed to it by the Member.

17. Annual financial statements prepared by accountants appointed under the Unanimous Shareholders Agreement are presented to the Members at each annual shareholders meeting of the Filer. The Members may by special resolution appoint an auditor, in which case, audited financial statements are presented.

18. Members are all engaged, directly or indirectly, in the sale, supply or service of photographic or imaging Products and possess substantial knowledge of that business and of the Filer's operations and affairs, which operations are not carried on primarily with a view to making profit, but rather as a means of combining the purchasing power of all Members to enable them to obtain, collectively, better prices and terms for the purchase of inventory used in their respective businesses.

19. The Filer intends to distribute its profit to Members on an annual basis, which profit is generated solely from (i) the volume discount purchase business and related central buying allowance (after the distribution of all Volume Rebates), (ii) the investment income earned on the Reserve Fund, and (iii) photographic Products related marketing and promotional activities funded by the vendors of such Products.

20. As each Member is currently entitled to hold only one Common Share, any distribution of retained earnings by way of dividends to the Members has to be on an equal basis and cannot be pro-rated based on the dollar volume of purchases made by each Member.

21. Historically, the vast majority of payments made by the Filer to Members have therefore been in the form of Volume Rebates which the Filer allocated to Members on a pro rata basis according to the dollar volume of purchases made by each Member from Authorized Suppliers through the Filer's centralized buying service over the period in which the Volume Rebates were accumulated. Until paid to the Members, such Volume Rebates, including amounts held back in the Reserve Fund, are booked as an amount due to the shareholders and appear as a liability on the financial statements of the Filer until paid to the Members.

22. To address the concern of the Filer's primary lenders that the Filer's business should be supported through an increase in tangible net worth, the Filer intends to implement the Share Reorganization (as defined below).

23. The creation of equity in the Filer, which does not currently exist due to the nominal amount raised from the issuance of Common Shares, will enable the Filer to reduce the amounts held in the Reserve Fund and will be used for the sole purpose of supporting the Filer's photographic Products volume discount purchase business. The creation of equity in the Filer will be used solely to support lender capitalization requirements as well as the capital and operational expenses relating to the Filer's photographic Products volume discount purchase business and not for any other lines of business or ancillary or new business growth, including mergers and acquisitions activities.

24. The Share Reorganization will also create additional flexibility in the future manner of disbursement of any surplus retained earnings not required for working capital, including by way of pro rata dividends to Members based on their annual purchase volumes.

25. The Board resolved by a written resolution dated July 8, 2014 to have the Articles of Incorporation amended pursuant to articles of amendment (the "Articles of Amendment") to authorize the Filer to re-classify the Common Shares as an unlimited number of Class A preferred shares ("Class A Shares") and to create and issue an unlimited number of Class B common shares ("Class B Shares" and together with the Class A Shares, the "Shares") (the "Share Reorganization"). A summary of the proposed rights to be associated with the Shares are as follows:

(a) Class A Shares will be voting shares. Each Class A Share entitles the holder thereof to one vote at any meetings of holders of Class A Shares ("Class A Shareholders"). The Class A Shareholders shall not be entitled to receive any dividends in respect of such Class A Shares. Each Class A Shareholder will be entitled to receive and hold only one Class A Share at a fixed subscription price of $1.00. Subject to the right to receive the return of the $1.00 cost of purchase ("Class A Share Redemption Amount"), holders of Class A Shares will not otherwise be entitled to receive any further distribution from the Filer including in the event the Filer is liquidated, dissolved or wound-up. Class A Shares are redeemable by the Filer on 30 days' notice to the holder thereof, on payment of the sum of the Class A Share Redemption Amount.

(b) Class B Shares will be non-voting shares and may only be issued and held by holders of Class A Shares. Class B Shares shall be issued in such amounts, and for such subscription price, as is determined and set by the Board from time to time. Holders of Class B Shares will be entitled to receive dividends if, as and when declared by the Board. It is intended that when paid, dividends will be allocated and paid out to the holders of Class B Shares ("Class B Shareholders") in proportion to the dollar volume of purchases made from or through the Filer by each Class B Shareholder. In the event of the dissolution, liquidation or winding up of the Filer, following the payment of the Class A Share Redemption Amount to each Class A Shareholder, the Class B Shareholders shall participate rateably in equally amounts per share, without preference or distinction from the remaining property or assets of the Filer. Class B Shares will be redeemable by the Filer consequent on the redemption of the holder's Class A Share or on 30 days' notice to the holder thereof, in accordance with the terms of, and upon payment by the Filer to the holder of the Class B Redemption Amount referred to in the Articles of Amendment. Pursuant to the terms and conditions of the Articles of Amendment, the Board will be permitted to withhold an amount of after tax earnings retained by the Filer from its net income (being gross income of the Filer less expenses) in any fiscal year, and allocate such amount to a retained earnings account (the "Retained Earnings Account") in order to build up additional retained earnings or equity within the Filer.

26. It is proposed that 750,000 Class B Shares will initially be issued to existing Members at a price of $1.00 per share. Each Member will receive an initial allotment from the available Class B Shares based on the dollar volume of purchases made by each Member from Authorized Suppliers through the Filer's centralized buying service over a specified 12 month period. The subscription price for the initial Class B Shares due from each Member will be funded by a set-off and deduction from certain amounts that the Board determined to return to Members out of the Reserve Fund.

27. The allocation of Class B Shares among Members will be subject to readjustment on at least an annual basis, or more frequently as determined by the Board, based on a Member's changing purchase volumes during the preceding fiscal year relative to all purchases made by all Members over the same period. This readjustment will ensure that each Member's entitlement to any dividends from time to time declared by the Board on the Class B Shares will remain in line with each Member's pro rata purchase volumes. Accordingly, the Filer may from time to time require the mandatory redemptions of a Member's Class B Shares or that a Member subscribe for additional Class B Shares, as the case may be, to accomplish this readjustment and as otherwise may be necessary to satisfy the capitalization requirements of the Filer as determined by the Board. A readjustment to a Member's allocation of Class B Shares will only be required if there is an increase or decrease in such Member's purchase volumes that exceeds $300,000.

28. Following the initial issuance of Class B Shares to existing Members on the Effective Date, all subsequent or new Applicants would be required, as part of the application process, to subscribe for one Class A Share together with that number of Class B Shares, in such amounts and at such subscription price, as is determined by the Board from time to time. New Members will be admitted at the discretion of the Board at the beginning of every fiscal year of the Filer and the amount and subscription price of Class B Shares to be subscribed by such new Members will be based on their actual previous 12 month purchase volume from Authorized Suppliers through the Filer's centralized buying service as a percentage of the total purchase volumes of all then current Members. The Board could also annually, or more often as needed, review the book value of such Class B Shares as the Retained Earnings Account grew over time, and adjust the subscription price accordingly.

29. At no time will Members be asked to or given the opportunity to subscribe for Class B Shares in excess of their pro rata total purchase volumes.

30. Pursuant to the Articles of Amendment, on redemption of a Member's Shares such Member is paid their $1.00 subscription price for the Class A Share held by the Member, together with an amount for the Class B Shares held by the Member consisting of their pro-rata share of the total paid up capital of all Class B Shares, plus any declared but unpaid dividends thereon, together with their pro-rata share of the Retained Earnings Account, within the timelines and subject to the conditions all as more particularly set out in the Articles of Amendment. Due to the Filer's intention to distribute its profit to Members on an annual basis the Retained Earnings Account is not expected to grow over time, and it is expected that the initial $1.00 subscription price established for each Class B Share will not significantly increase when new Class B Shares are issued to new Members in the future. As a result, the Filer expects that the pro-rata share of the paid up capital of the Class B shares plus the pro-rata share of the Retained Earnings Account to be returned to a Member upon redemption will in virtually all cases be at least equal to or exceed the original subscription price paid by the Member for their Class B shares. If there are any undistributed Retained Earnings held within the Filer at the time that a new Member acquires Class B Shares, the Board may adjust the subscription price of such Class B Shares to reflect the additional value that will accrue to the new Member upon becoming shareholder on the basis that the new Member did not contribute to creating this additional value. In these circumstances, upon redemption, the pro rata share of paid up capital returned to the Member may be less than the subscription price, but the difference will have been returned to the Member either as part of a prior dividend or declared but unpaid dividend paid on the Class B Shares for the amount of retained earnings that the Member bought into or as a part of its pro-rata share of the Retained Earnings Account which, in both cases, forms part of the prescribed Class B Redemption Amount.L

31. The Members have resolved, pursuant to a unanimous written resolution dated January 19, 2015, subject to the granting of the Requested Relief by the securities regulatory authority or regulator in each of the Jurisdictions, among other things, to:

32. Approve the Share Reorganization by approving and adopting the Articles of Amendment which:

(i) Re-classify the Common Shares as Class A Shares;

(ii) Create the Class B Shares; and

(iii) Makes it a condition of membership in the Filer that an Applicant must subscribe for a Class A Share as well as the number of Class B Shares, in such amount and for such subscription price as the Board may determine from time to time.

(a) Approve and adopt an amended and restated Unanimous Shareholders Agreement to provide for, among other things, the Share Reorganization.

(b) Approve and adopt amended and restated By-laws to provide for, among other things, consistency with all aspects of the Share Reorganization.

33. Documentation required to give effect to the Share Reorganization, including the written resolution of the Members, was circulated to each Member by the Filer on beginning on July 31, 2014. The Share Reorganization will only become effective on a date (the "Effective Date") to be established by the Board, in its sole discretion, following receipt of all necessary documentation required to be executed by the Members and the satisfaction or waiver by the Board of all pre-conditions to the implementation of the Share Reorganization.

34. In connection with the completion of the Share Reorganization, the Filer anticipates that many Non-Shareholder Members will become Members, however, Non-Shareholder Members will not be required to become Members. The creditworthiness of Non-Shareholder Members will be assessed by the Filer on a case by case basis and Non-Shareholder Members will be required to either (i) deliver to the Filer, on such terms and conditions as are acceptable to the Filer in its sole discretion, a third party guarantee of payment of such Non-Shareholder Member's volume purchases; (ii) post a letter of credit or other form of cash security in such amount as required by the Filer; (iii) permit the Filer to hold back such portion of the Non-Shareholder Member's Volume Rebates as is determined by the Filer in its discretion to fund the Reserve Fund, in each case in order to secure the payment of the volume purchases of the Non-Shareholder Member that are made through the Filer.

35. The Filer receives a central billing allowance in respect of all purchases made by Non-Shareholder Members as well as a membership fee paid by Non-Shareholder Members as prescribed by the Board from time to time. All Non-Shareholder Members participate in Volume Rebates, discounts, allowances and other buying incentives received by the Filer as a result of its greater buying power on the same basis as all other Members. Non-Shareholder Members will not participate in the distribution of profit, if any, generated by the Filer.

36. The majority of the outstanding Common Shares were either issued in reliance on the "private issuer" prospectus and registration exemptions then in effect (the "Private Issuer Exemption") when the Filer had 50 or fewer shareholders or in reliance on the Existing Exemption Orders.

37. The Filer has also issued Common Shares to Members in Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Yukon and the Northwest Territories being all of the remaining Canadian provinces and territories other than Nunavut (together with Nunavut referred to herein as the "Remaining Jurisdictions").

38. This issuance of Common Shares to the Members outside of Ontario, Alberta and British Columbia was not within the scope of the Existing Exemption Orders and the Filer neglected to apply for exemptive relief in respect of such trades.

39. Notwithstanding that some Members resident in the Remaining Jurisdictions purchased their Common Shares pursuant to the Private Issuer Exemption, the Filer cannot confirm that a statutory prospectus and registration exemption was available for each issuance of Common Shares or that it complied with the requirements of any other exemption. There are currently 18 Members who have been issued Common Shares in circumstances where a prospectus exemption cannot be confirmed. The Filer believes that Common Shares were also issued to (and redeemed from) approximately 22 former Members who are no longer affiliated with the Filer.

40. In connection with the Share Reorganization, the Filer seeks to obtain comprehensive discretionary relief from the prospectus requirements of applicable securities laws to ensure that going forward, the issuance of all Common Shares and, in connection with and following the Share Reorganization, Class A Shares and Class B Shares are distributed in compliance with a decision that treats Members uniformly, equally and fairly regardless of where in Canada such Member resides. There will be no Common Shares outstanding following the completion of the Share Reorganization.

41. Other than the failure to obtain relief for the issuance of Common Shares in jurisdictions, other than Ontario, Alberta and British Columbia, the Filer is not in default of securities legislation in any of the Jurisdictions.

42. National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103") was adopted in September 2009; the Filer has considered whether under NI 31-103 and the Legislation it would be considered to be engaged in or holding itself out as engaging in the business of trading in securities and therefore required to register as a dealer. The Filer does not receive any fees or other income from engaging in trades or acts in furtherance of distributions and its activities do not have the attributes typical of a person or company carrying on the business of a dealer. Having considered these facts and the guidance provided in section 1.3 of the Companion Policy to NI 31-103, the Filer has concluded that it does not require relief from the registration requirements of the Legislation.

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:

1. prior to the issuance of Common Shares to a Member and Applicant:

(a) the Filer delivers to such Member and Applicant:

(i) the current Articles of Incorporation and By-laws, and all amendments thereto;

(ii) the Filer's most recent annual financial statements;

(iii) this decision; and

(iv) a statement to the effect that, as a consequence of this decision, certain protections, rights and remedies provided by the Legislation, including statutory rights of rescission or damages, will not be available to the Member and Applicant and that certain restrictions are imposed on the disposition of the Common Shares; and

(b) such Member and Applicant has executed a copy of the Unanimous Shareholders Agreement;

2. in connection with and subsequent to the Share Reorganization, prior to the issuance of Class A Shares and Class B Shares to a Member and Applicant:

(a) the Filer delivers to such Member and Applicant:

(i) the current Articles of Incorporation and By-laws, and all amendments thereto, including for greater certainty, the Articles of Amendment;

(ii) the Filer's most recent annual financial statements;

(iii) this decision; and

(iv) a statement to the effect that, as a consequence of this decision, certain protections, rights and remedies provided by the Legislation, including statutory rights of rescission or damages, will not be available to the Member and Applicant and that certain restrictions are imposed on the disposition of the Class A Shares and Class B Shares; and

(b) such Member or Applicant has executed a copy of the Unanimous Shareholders Agreement;

3. the Requested Relief shall cease to be effective if:

(a) any of the provisions of the Articles of Incorporation, By-laws or the Unanimous Shareholders Agreement relevant to the Requested Relief are amended in any material respect (including the provisions relating to the transferability of the Common Shares, Class A Shares or Class B Shares), other than in accordance with the proposed Articles of Amendment, without written notice to, and consent of, the principal regulator;

(b) the Filer is no longer able to make, in all material respects, the representations set out in paragraph 19 above; or

(c) any securities of the Filer are traded in Canada or another country on a marketplace as defined in National Instrument 21-101 Marketplace Operations or any other facility for bringing together buyers and sellers of securities where trading data is publicly reported;

4. the Filer prepares and sends annual financial statements to each Member and Applicant on an annual basis;

5. the first trade in any Common Share, Class A Share or Class B Share acquired by a Member under this decision to a person or company, other than the Filer through the redemption or repurchase for cancellation of a Common Share, Class A Share or Class B Share, is deemed to be a distribution; and

6. from the date of this decision, the Filer does not rely on the Existing Exemption Orders for the purpose of issuing any additional securities of the Filer.

DATED at Toronto, Ontario this 5th day of May, 2015.

"Judith Robertson"
Commissioner
Ontario Securities Commission
 
"Susan B. Kavanagh"
Commissioner
Ontario Securities Commission