Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- issuer made acquisition that satisfied the profit or loss test under Part 8 of NI 51-102, necessitating the filing of a business acquisition report -- prior to acquisition acquired company underwent an arrangement resulting in it owning approximately 10% of what it previously owned -- if acquisition considered in view of the arrangement the results of the significance tests would be lower -- issuer submitted that acquisition not significant from a practical, commercial or financial perspective -- in addition to significance test results, issuer supplied information about the volume and net present value of its proved and probable reserves -- issuer relieved from the obligation to file a business acquisition report and other related obligations.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.2(1), 8.4(5), 13.
Form 44-101F1 Short Form Prospectus, ss. 10.2(1), (3) and (4).
Citation: Re Cardinal Energy Ltd., 2015 ABASC 739
June 9, 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 CARDINAL ENERGY LTD. (the Filer)
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) that the Filer be exempted from all of the following requirements:
(a) the requirement under subsection 8.2(1) of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) to file a business acquisition report (BAR) in connection with the Acquisition (as defined below);
(b) the requirement to disclose the Acquisition in any pro forma statements prepared for a future BAR pursuant to subsections 8.4(5) and (7) of NI 51-102; and
(c) the requirement to disclose the Acquisition under subsections 10.2(1), (3) and (4) of Form 44-101F1 Short Form Prospectus.
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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick, Prince Edward Island, Nova Scotia, and Newfoundland and Labrador; and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
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.
This decision is based on the following facts represented by the Filer:
1. The Filer, a corporation formed under the Business Corporations Act (Alberta) with its head office in Alberta, is a reporting issuer in each of the provinces of Canada. The Filer is not in default of securities legislation in any jurisdiction.
2. The Filer acquired all of the issued and outstanding shares (the Purchased Shares) of Pinecrest Energy Inc. (Pinecrest) from Virginia Hills Oil Corp. (the Seller), pursuant to a plan of arrangement (the Acquisition) in accordance with the terms of an arrangement agreement dated January 26, 2015, for a purchase price of $23.5 million. The Filer agreed to pay the Seller an additional $5 million in cash subject to certain conditions being met.
3. The Acquisition proceeded by way of a plan of arrangement (the Arrangement) pursuant to section 193 of the Business Corporations Act (Alberta) through various steps, including: (i) all of the issued and outstanding shares of Pinecrest being transferred to the Seller in exchange for common shares of the Seller; (ii) all of the assets of Pinecrest other than the Retained Assets (defined below) being conveyed to the Seller; and (iii) all of the common shares of Pinecrest held by the Seller being acquired by the Filer.
4. At the time the Purchased Shares were acquired by the Filer, the only assets held by Pinecrest (the Retained Assets) were a 10% interest in the assets it held prior to the Arrangement and a 100% interest in certain lands (the Unitized Lands) that are included in either the Loon Slave Point A Unit or the Red Earth Slave Point Unit #2. The Unitized Lands were transferred to the Filer as a 100% interest rather than a 10% interest in order to simplify the process of conveying lands that are unitized. The Unitized Lands are of very low value to the Filer and thus are immaterial. The Filer attributes no value to the Unitized Lands within the consideration paid to the Seller in connection with the Acquisition.
Significance of the Acquisition
5. Pursuant to subsection 8.2(1) of NI 51-102, if a reporting issuer makes a "significant acquisition" as contemplated in NI 51-102 it must file a BAR within 75 days after the acquisition date. The tests for determining whether an acquisition is a significant acquisition are set out in section 8.3 of NI 51-102 and are referred to as the asset test, the investment test and the profit or loss test. An acquisition by the Filer is a significant acquisition if any of the three foregoing tests yield a result that exceeds 20%.
6. The Acquisition is not a significant acquisition under the asset test in paragraph 8.3(2)(a) of NI 51-102, as the consolidated assets of Pinecrest represent approximately 13.3% of the Filer's consolidated assets as of December 31, 2014.
7. The Acquisition is not a significant acquisition under the investment test in paragraph 8.3(2)(b) of NI 51-102 as the Filer's consolidated investment in Pinecrest represents approximately 2.6% of the consolidated assets of the Filer as of December 31, 2014.
8. The Acquisition is a significant acquisition under the profit or loss test in paragraph 8.3(2)(c) of NI 51-102, as the loss from continuing operations of Pinecrest represents approximately 326.6% of the Filer's income from continuing operations as of December 31, 2014.
9. Under Item 10 of Form 44-101F1 Short Form Prospectus, in certain circumstances, an issuer must disclose in a short form prospectus a completed acquisition that is considered a significant acquisition for the purposes of Part 8 of NI 51-102 and, if applicable, include in the short form prospectus financial statements or other information about the acquisition.
The Effect of the Arrangement
10. The audited financial statements of Pinecrest for the year ended December 31, 2014 do not reflect the Arrangement. Bearing in mind the immateriality of the Unitized Lands, the result of the Arrangement was that Pinecrest as it existed at the time it was acquired by the Filer had assets equal in value to approximately 10% of its consolidated assets as at December 31, 2014. On such basis, the income (loss) associated with the business actually acquired by the Filer would be expected to be approximately 10% of the consolidated loss from the continuing operations of Pinecrest as at December 31, 2014.
11. If the aforementioned profit or loss test could be carried out using 10% of the loss from continuing operations of Pinecrest, the test would yield a result of 32.6%.
The Significance of the Acquisition from a Practical, Commercial or Financial Perspective
12. The Filer is of the view that Pinecrest's financial statements for the year ended December 31, 2014 are not representative of Pinecrest as at the time it was acquired by the Filer.
13. Overall, the Filer is of the view that the Acquisition is not a significant acquisition to it from a practical, commercial or financial perspective when the results of the asset test, investment test and profit or loss test are considered in light of the Arrangement, and considering other metrics provided by the Filer, namely the volume and net present value of the Filer's proved and probable reserves compared to that of the Retained Assets.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted.