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Automotive Properties Real Estate Investment Trust
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 holds all of its properties through limited partnership -- entity holds units in limited partnership which are exchangeable into and in all material respects the economic equivalent to the issuer's publicly traded units -- issuer may include entity's indirect interest in issuer when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions -- relief granted subject to conditions.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(1)(a), 9.1.
September 29, 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 AUTOMOTIVE PROPERTIES REAL ESTATE INVESTMENT TRUST (THE "FILER")
DECISION
Background
The securities regulatory authority or regulator in the Jurisdiction (the "Decision Maker") has received an application (the "Application") from the Filer for a decision under the securities legislation of the Jurisdiction (the "Legislation") that the Filer be granted an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through Automotive Properties Limited Partnership (the "Partnership") or any subsidiary entity (as such term is defined in MI 61-101) of the Partnership, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect equity interests in the Filer, all of which are currently held by 893353 Alberta Inc. and its subsidiaries ("Dilawri"), in the form of exchangeable Class B limited partnership units of the Partnership, were included in the calculation of the Filer's market capitalization (the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator (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, MI 11-102 and MI 61-101 have the same meaning if used in this decision, unless otherwise defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is an unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario. The Filer was established pursuant to a declaration of trust dated June 1, 2015 as amended and restated on July 22, 2015 (the "Declaration of Trust").
2. The Filer's head office is located at 133 King Street East, Suite 300, Toronto, Ontario, M5C 1G6.
3. The Filer's portfolio of 26 income-producing commercial properties represents approximately 958,000 square feet of gross leasable area in Ontario, Saskatchewan, Alberta and British Columbia leased exclusively to affiliates of, or entities related to, Dilawri.
4. The Filer is a reporting issuer (or the equivalent thereof) under the securities legislation of each of the provinces of Canada and is currently not in default of any applicable requirements of the securities legislation thereunder.
5. The Filer completed its IPO of trust units on July 22, 2015, pursuant to a long form prospectus in respect thereof dated July 10, 2015.
6. The Filer is authorized to issue an unlimited number of trust units ("Units") and an unlimited number of special voting units ("Special Voting Units"). As at the date hereof, the Filer has 8,120,000 Units and 9,933,253 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equivalent to and accompanies the number of Exchangeable LP Units (as defined below) outstanding.
7. The Units are listed and posted for trading on the Toronto Stock Exchange (the "TSX") under the trading symbol "APR.UN".
8. The Partnership is a limited partnership formed under the laws of the Province of Ontario and is governed by an amended and restated limited partnership agreement dated as of July 22, 2015 (the "Partnership Agreement"). The Partnership's head office is located at 133 King Street East, Suite 300, Toronto, Ontario, M5C 1G6.
9. Automotive Properties REIT GP Inc. (the "General Partner"), a corporation incorporated under the laws of the Province of Ontario on June 10, 2015, is the general partner of the Partnership and is wholly-owned by the Filer.
10. The Partnership is not a reporting issuer (or the equivalent thereof) in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.
11. The Partnership is authorized to issue: (i) an unlimited number of Class A limited partnership units ("Class A LP Units"), of which 8,120,000 Class A LP Units are issued and outstanding as at the date hereof and are held by the Filer, (ii) an unlimited number of exchangeable Class B limited partnership units ("Exchangeable LP Units"), of which 9,933,253 Exchangeable LP Units are issued and outstanding as at the date hereof and are held by Dilawri, and (iii) an unlimited number of general partnership units designated as "General Partner Units", of which one General Partner Unit was issued and outstanding as of the date hereof and the interest in the General Partner Unit is held by the General Partner as of the date hereof (such interest is not evidenced by a unit certificate).
12. The Exchangeable LP Units that are currently outstanding were issued to Dilawri as partial consideration in connection with the Filer's acquisition from Dilawri of a portfolio of 26 automotive dealership properties located in Canada on July 22, 2015 in conjunction with the closing of the IPO (the "Transaction").
13. The Exchangeable LP Units are, in all material respects, the economic equivalent of the Units on a per unit basis. Holders of the Exchangeable LP Units are entitled to receive distributions equal, on a per unit basis, to those paid by the Filer to holders of Units. The Exchangeable LP Units are exchangeable into Units on a one-for-one basis subject to customary anti-dilution adjustments and each is accompanied by a Special Voting Unit that entitles the holder to receive notice of, attend and to vote together with the holders of Units at all meetings of voting unitholders of the Filer. The Exchangeable LP Units are generally not transferable, except in the limited circumstances set forth in the Partnership Agreement. The Exchangeable LP Units may neither be exchanged for any securities other than Units, nor for cash.
14. The operating business of the Filer is carried on by the Partnership. The principal activity of the Partnership is to own income-producing real estate assets.
15. The Filer currently holds 100% of the Class A LP Units of the Partnership, whereas Dilawri currently holds 100% of the Exchangeable LP Units of the Partnership. As at the date hereof, Dilawri holds an approximate 55% effective interest in the Filer on a fully-diluted basis through ownership of 9,933,253 Exchangeable LP Units.
16. Pursuant to the terms of an Administration Agreement dated July 22, 2015 between 893353 Alberta Inc., a Dilawri entity, another Dilawri entity and the Filer, such Dilawri entities will provide, or cause to be provided, certain administrative services to the Filer including, currently, the services of the President and Chief Executive Officer and the Chief Financial Officer and Corporate Secretary of the Filer.
17. It is anticipated that the Filer may from time to time enter into transactions with certain related parties, including Dilawri, indirectly through the Partnership or its subsidiaries.
18. The proceeds of the IPO were used by the Filer as partial consideration for the Transaction.
19. Certain rights affecting holders of Exchangeable LP Units, as such rights are set out in the Limited Partnership Agreement and the Exchange Agreement, including customary tag rights and drag rights, are exclusive to the holders of Exchangeable LP Units and are not available to holders of Units. Furthermore, certain rights are set out in the Exchange Agreement, including pre-emptive rights and registration rights, that were granted by the Filer in conjunction with the Transaction to Dilawri so long as it holds a stated effective interest in the Filer, directly or indirectly. Such rights are generally not transferrable to a transferee of Exchangeable LP Units that is not a Dilawri entity or an affiliate thereof.
20. The Filer and 893353 Alberta Inc., a Dilawri entity, are parties to a Strategic Alliance Agreement dated July 22, 2015 which gives the Filer a preferential opportunity to acquire any interest of Dilawri in certain investment properties that it owns prior to disposition of any such interest to third parties.
21. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
(a) the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and
(b) the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (requirements (a) and (b) are collectively referred to as the "Minority Protections").
22. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization (the "Transaction Size Exemption").
23. The Filer may not be entitled to rely on the Transaction Size Exemption available under the Legislation from the requirements relating to related party transactions in the Legislation because the definition of "market capitalization" in the Legislation does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.
24. The Exchangeable LP Units represent part of the equity value of the Filer and provide the holder of the Exchangeable LP Units with economic rights which are, in all material respects, equivalent to the Units. The effect of the exchange right is that holders of Exchangeable LP Units will receive Units upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Units; namely, the assets held directly or indirectly by the Partnership.
25. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of the Class B limited partnership interest in the Partnership (currently, approximately 55%). As a result, related party transactions entered into by the Filer, indirectly through the Partnership or its subsidiaries, may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer.
26. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 Income Trusts and Other Indirect Offerings ("NP 41-201") on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and to which transactions MI 61-101 should apply. Section 1.2 of NP 41-102 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Therefore, it is consistent with MI 61-101 that securities of the operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
27. The inclusion of the Exchangeable LP Units, when determining the Filer's market capitalization pursuant to MI 61-101, is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which or for which they are convertible or exchangeable.
Decision
The Decision Maker is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Maker under the Legislation is that the Requested Relief be granted to the Filer, provided that:
(a) the applicable transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Units;
(b) there be no material change to the terms of the Exchangeable LP Units and Special Voting Units, including the exchange rights associated therewith, as described above and in the Declaration of Trust, the Partnership Agreement and Exchange Agreement, filed in connection with the Transaction, whether by amendments to such documents, contractual agreement or otherwise; and
(c) the applicable transaction is made in compliance with the rules and policies of the TSX or such other exchange upon which the Filer's securities trade.
(d) any annual information form or equivalent of the Filer that is required to be filed in accordance with applicable Canadian Securities law contain the following disclosure, with any immaterial modifications as the context may require;
"Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction does not exceed 25% of the market capitalization of the issuer. Automotive Properties Real Estate Investment Trust has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of Automotive Properties Real Estate Investment Trust's market capitalization, if exchangeable Class B limited partnership units of equity interest in Automotive Properties Limited Partnership are included in the calculation of Automotive Properties Real Estate Investment Trust's market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements would apply, is increased to include the approximately 55% indirect exchangeable equity interest in Automotive Properties Real Estate Investment Trust held in the form of exchangeable Class B limited partnership units of Automotive Properties Limited Partnership."
"Naizam Kanji"
Director, Office of Mergers & Acquisitions
Ontario Securities Commission