Securities Law & Instruments

[Editor's note: A draft version of Enbridge Income Fund Holdings Inc. was inadvertently published on July 9, 2015 at (2015) 38 OSCB 6162. The decision published below replaces that version.]

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 -- related party transactions -- operating entity of an income fund to acquire assets from a related party -- issuer to offer exchange right to the related party to exchange units of the entities in the fund structure to common shares of the issuer -- the exchangeable units are economically equivalent to the common shares of the issuer -- the fund jointly owned by issuer and related party -- issuer will provide a valuation and obtain minority approval of asset acquisition -- issuer exempt from valuation requirement in connection with the exchange right.

Applicable Legislative Provisions

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.4, 9.1(2).

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.

June 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 ENBRIDGE INCOME FUND HOLDINGS INC. (the "Filer")

DECISION

Background

The principal 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") requesting relief (the "Exemptive Relief") from the requirement in section 5.4 of Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions ("MI 61-101") that the Filer include a formal valuation or a summary thereof of the Exchange Right (as defined below) in connection with the acquisition (the "Transaction") by Enbridge Income Partners LP ("EIPLP"), an indirect subsidiary of the Filer and a wholly-owned subsidiary of Enbridge Commercial Trust ("ECT"), of certain Canadian liquids pipeline and renewable power generation assets (the "Subject Assets") held by Enbridge Inc. and its wholly-owned subsidiary, IPL System Inc. (together with Enbridge Inc., "Enbridge" unless the context otherwise requires).

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 subsection 4.7(1) of Multilateral Instrument 11-102 -- Passport System ("MI 11-102") is intended to be relied upon in the Province of Québec;

Interpretation

Capitalized terms in this Application have the same meaning as those defined in National Instrument 14-101 -- Definitions, MI 61-101 and MI 11-102 unless otherwise defined herein.

Representations

This decision is based on the following factual information represented by the Filer:

1. The Filer was incorporated under the laws of the Province of Alberta on March 26, 2010.

2. The Filer's principal and head office is located at Suite 3000, 425 -- 1st Street SW, Calgary, Alberta, T2P 3L8.

3. The Filer's Articles of incorporation restrict the Filer's business to acquiring, holding, transferring, disposing of, investing in and otherwise dealing in assets, securities, properties or other interests of, or issued by, Enbridge Income Fund (the "Fund") and its associates or affiliates, or any other business entity in which the Fund has an interest, as well as all other business and activities which are necessary, desirable, ancillary or incidental thereto, including but not limited to borrowing funds and incurring indebtedness; guaranteeing of debts or liabilities; and issuing, redeeming or repurchasing securities.

4. The Filer is a reporting issuer in all of the provinces of Canada.

5. The authorized capital of the Filer consists of an unlimited number of common shares ("Common Shares"), first preferred shares, issuable in series and limited to one-half of the number of Common Shares issued and outstanding at the relevant time, and one special voting share ("Special Voting Share"), of which an aggregate of 70,351,000 Common Shares, no first preferred shares and one Special Voting Share are issued and outstanding as at the date hereof.

6. Holders of Common Shares (the "Shareholders") are entitled to receive notice of and to attend all meetings of Shareholders and are entitled to one vote per Common Share held at all such meetings.

7. The Common Shares are listed on the Toronto Stock Exchange.

8. The holder of the Special Voting Share is entitled to receive notice of and to attend all annual and special meetings of Shareholders and is entitled to elect one director to the board of directors of the Filer (the "Board of the Filer") for so long as the holder beneficially owns or controls, directly or indirectly, between 15% and 39% of the issued and outstanding Common Shares, provided that if the holder of the Special Voting Share elects to exercise its right to elect one director, it will not be permitted to exercise the votes attaching to the portion of the Common Shares held by such holder representing its pro-rata representation on the Board of the Filer in respect of the election of the remaining directors of the Filer at meetings of Shareholders. Where the holder of the Special Voting Share owns more than 39% of the issued and outstanding Common Shares, its right to elect one director terminates and the holder is entitled to exercise all of the votes attached to its Common Shares in respect of the election of all directors of the Filer.

9. Enbridge holds an aggregate of 14,002,000 Common Shares, representing 19.9% of the outstanding Common Shares and is the holder of the Special Voting Share.

10. The only assets of the Filer are 70,351,00 ordinary units (the "Fund Units") of the Fund, cash and cash equivalents and as such, the Filer provides to the Shareholders an indirect ownership interest in a Fund Unit for each Common Share held by such Shareholders. The Filer has no material liabilities.

11. The Fund is an unincorporated open-ended trust established under the laws of the Province of Alberta on May 22, 2003. The Fund is governed pursuant to an amended and restated trust indenture dated December 17, 2010 (the "Fund Trust Indenture").

12. The Fund's principal and head office is located at Suite 3000, 425 -- 1st Street SW, Calgary, Alberta, T2P 3L8.

13. The Fund is a limited purpose trust and, generally speaking, its activities are restricted to acquiring, holding, and dealing with interests in operating investments that are involved in energy infrastructure and related businesses. The Fund's permitted activities also include issuing securities and engaging in financial and other activities ancillary or incidental to its purpose.

14. The Fund is a reporting issuer in all of the provinces of Canada.

15. The authorized capital of the Fund consists of an unlimited number of Fund Units. As at the date hereof, 79,851,000 Fund Units are issued and outstanding, of which 70,351,000 are held by the Filer, representing 88.1% of the outstanding Fund Units, and 9,500,000 are held by Enbridge, representing 11.9% of the outstanding Fund Units. As of the date hereof, on a fully-diluted basis (assuming conversion of the ECT Preferred Units described below), Enbridge would hold 97,165,750 Fund Units, representing 58% of the outstanding Fund Units.

16. The Fund Units are not listed on any stock exchange or market.

17. The Fund's assets include indirectly-owned interests in renewable and alternative power generation capacity, liquids transportation and storage businesses and natural gas transmission assets.

18. ECT is an unincorporated trust established under the laws of the Province of Alberta on December 20, 2002. ECT is governed pursuant to an amended and restated trust indenture dated November 13, 2014 (the "ECT Trust Indenture").

19. ECT's principal and head office is located at Suite 3000, 425 -- 1st Street SW, Calgary, Alberta, T2P 3L8.

20. ECT is not a reporting issuer in any jurisdiction.

21. The authorized trust units of ECT consist of an unlimited number of units designated as common units pursuant to the ECT Trust Indenture ("ECT Common Units") and an unlimited number of preferred units ("ECT Preferred Units"). As of the date hereof, there are 168,854,837 ECT Common Units issued and outstanding, all of which are held by the Fund, and 87,665,750 ECT Preferred Units issued and outstanding, all of which are held by Enbridge. The ECT Preferred Units are convertible at any time and from time to time into Fund Units on a 1:1 basis (subject to any economically equivalent adjustment) at the option of the holder. Class B Units of ECT ("ECT Class B Units") will be created in connection with the Transaction and have rights, privileges, restrictions and conditions that are in all material respects the same as those of the ECT Preferred Units. No ECT Class B Units will be issued in connection with the Transaction.

22. ECT's activities are restricted to the direct or indirect conduct of the business of, or activities pertaining to, energy infrastructure including the ownership, operation and lease of assets and property, investments, and other rights or interests in companies or other entities involved in the energy infrastructure business and engaging in all activities ancillary or incidental to the foregoing.

23. EIPLP is a limited partnership established under the laws of the Province of Alberta on December 20, 2002. EIPLP is governed pursuant to an amended and restated limited partnership agreement dated December 17, 2010 (the "LP Agreement").

24. EIPLP's principal and head office is located at Suite 3000, 425 -- 1st Street SW, Calgary, Alberta, T2P 3L8.

25. EIPLP is not a reporting issuer in any jurisdiction.

26. The authorized capital of EIPLP consists of an unlimited number of Class A Units ("EIPLP Class A Units") and an unlimited number of Class B Units, issuable in series. In connection with the Transaction, the Class B Units of EIPLP will be cancelled and Class C Units ("EIPLP Class C Units"), Class D Units ("EIPLP Class D Units"), Class E Units and Class F Units of EIPLP will be created. As of the date hereof, there are 245,391,503.768 EIPLP Class A Units, 99.99% of which are owned by ECT and 0.01% of which are owned by Enbridge Income Partners GP Inc. ("EIPGP"), the general partner of EIPLP, and no Class B Units issued and outstanding.

27. EIPGP is a corporation existing under the laws of Canada, with its principal and head office located at Suite 3000, 425 -- 1st Street SW, Calgary, Alberta, T2P 3L8.

28. The authorized capital of EIPGP consists of an unlimited number of common shares (the "EIPGP Common Shares") and an unlimited number of first preferred shares. As of the date hereof, 486,920 EIPGP Common Shares, all of which are held by ECT, and no first preferred shares are issued and outstanding.

29. EIPGP is not a reporting issuer in any jurisdiction.

30. EIPLP's activities are restricted to the direct or indirect conduct of the business of, or activities pertaining to, energy infrastructure including the ownership, operation and lease of assets and property, investments, and other rights or interests in companies or other entities involved in the energy infrastructure business and engaging in all activities ancillary or incidental to the foregoing.

31. EIPLP holds directly and indirectly all of the outstanding securities of the partnerships and corporations that own the assets of the Fund and will be acquiring the entities that own the Subject Assets.

32. The Filer, the Fund, ECT, EIPGP and EIPLP are collectively referred to herein as the "Fund Group".

33. As of the date hereof, by virtue of its ownership interests set out above, Enbridge holds a consolidated economic interest in the Fund Group of 66.4%.

34. Enbridge and its affiliates manage the day to day business of the Fund Group pursuant to management contracts in place between affiliates of Enbridge and the Fund Group entities.

35. The Transaction will be effected by the acquisition by EIPLP of direct and indirect subsidiaries of Enbridge (including Enbridge Pipelines Inc. ("EPI"), Enbridge Pipelines (Athabasca) Inc. and other contributed entities that hold renewable energy assets) that collectively own all of the Subject Assets.

36. Pursuant to the Transaction, Enbridge will be receiving 442,923,363 EIPLP Class C Units and subscribing for 84,650,000 Fund Units, in each case at an issue price equal to $35.44 per Fund Unit (based on the Filer's 20-day volume weighted average price as at June 18, 2015). Immediately after the Transaction, Enbridge will hold Fund Units, ECT Preferred Units and EIPLP Class C Units. In support of the Transaction, the Filer will be entering into an Exchange Right Support Agreement ("Exchange Right Support Agreement") that will provide to Enbridge the right (the "Exchange Right") to exchange its Fund Units, ECT Preferred Units, ECT Class B Units and EIPLP Class C Units (collectively, the "Exchangeable Securities") into Common Shares, Fund Units, ECT Preferred Units or ECT Class B Units, as the case may be. The Exchange Right Support Agreement will provide that: (a) any time that Enbridge and its affiliates, collectively, hold more than 19.9% of the issued and outstanding Common Shares after giving effect to an exercise of the Exchange Right (the "Ownership Threshold"), any Common Shares in excess of the Ownership Threshold acquired pursuant to an exercise of the Exchange Right must concurrently be resold pursuant to the Registration Rights Agreement (as defined below) or otherwise in accordance with applicable laws; and (b) any time that Enbridge and its affiliates, collectively, hold more than 87,665,750 of the outstanding ECT Preferred Units, which are the number of ECT Preferred Units currently held by Enbridge, and ECT Class B Units, taken as a whole and after giving effect to an exercise of the Exchange Right (the "ECT Preferred Unit Restriction"), any ECT Preferred Units or ECT Class B Units, taken as a whole, in excess of the ECT Preferred Unit Restriction acquired by Enbridge or its affiliates pursuant to an exercise of the Exchange Right must be, and will be deemed to be, immediately exchanged by Enbridge or its affiliates into Fund Units pursuant to the terms of the ECT Trust Indenture.J

37. The Exchange Right Support Agreement will be entered into and the Fund Trust Indenture, the ECT Trust Indenture and the LP Agreement will be amended at the closing of the Transaction such that these agreements will contain terms and conditions that will function to adjust the rights of, or the rights of the holders of, the Exchangeable Securities to ensure that all of the Exchangeable Securities remain, in all material respects, economically equivalent with the Common Shares (but for the rights and attributes described in the representation set forth in paragraph 39).

38. The Exchangeable Securities shall be, in all material respects, economically equivalent to the Common Shares on a per security basis (but for the rights and attributes described in the representation set forth in paragraph 39) as:

(a) each Exchangeable Security is, and shall be, as applicable, exchangeable on a one-for-one basis for a Common Share (subject to any economically equivalent adjustment) at any time at the option of the holder thereof; and

(b) distributions to be made for any distribution period on any of the Exchangeable Securities are, and shall be, as applicable, equal to the distributions that the holder of the Exchangeable Securities would have received if it was holding any other Exchangeable Securities or Common Shares that may be obtained upon the exchange of such Exchangeable Securities.

39. Immediately after the closing of the Transaction, any additional rights attached to or attributes of the Exchangeable Securities as compared to the Common Shares shall arise by virtue of the Exchangeable Securities being limited partnership units or trust units, as applicable, of subsidiary entities of the Filer (which may result in the Exchangeable Securities having priority over the Common Shares on any distribution resulting from the liquidation, dissolution or winding up of any of such subsidiary entities) and would be no greater than customary rights associated with limited partnership units or trust units, as applicable, except (a) for the Exchange Right and (b) that the ECT Preferred Units and the ECT Class B Units shall be (i) non-voting other than in limited circumstances, (ii) redeemable at maturity on June 30, 2050 and (iii) entitled to receive from the assets of ECT a sum equivalent to their face value in priority to ECT Common Units in the event of any liquidation, dissolution or winding up of ECT, or other distribution of assets of ECT for the purpose of winding up its affairs ("Liquidation Preference Right").

40. The Liquidation Preference Right attached to an ECT Preferred Unit or ECT Class B Unit shall be extinguished upon the exchange of such ECT Preferred Unit or ECT Class B Unit into a Fund Unit or Common Share pursuant to the Exchange Right.

41. BMO Capital Markets, the financial advisor to the Special Committee (as defined below), has confirmed to the Filer that it is of the view that the Exchangeable Securities shall be, in all material respects, economically equivalent to the Common Shares on a per security basis (but for the rights and attributes described in the representation set forth in paragraph 39).

42. The Exchangeable Securities are not, and shall not be, listed and posted for trading on the Toronto Stock Exchange or any other stock exchange.

43. The Filer and Enbridge will enter into a registration rights agreement ("Registration Rights Agreement") that provides subject to certain limitations, the right for Enbridge to require the Filer to prepare and file a prospectus with the securities commissions to qualify the distribution of the Common Shares held by Enbridge.

44. The consideration for the Subject Assets is $30.4 billion, which will be comprised of $18.7 billion in equity consideration and the assumption of associated debt in the aggregate amount of approximately $11.7 billion. Enbridge will also be entitled to the incentive distribution right (the "IDR") and the temporary performance distribution right (the "TPDR") referred to in paragraphs 48 and 49. The Transaction will be effected substantially as follows:

(a) Enbridge Inc. will subscribe for 84,650,000 Fund Units for gross proceeds of $3 billion, which represents a portion of the $18.7 billion equity consideration, at an issue price equal to $35.44 per Common Share (based on the Filer's 20-day volume weighted average price as at June 18, 2015).

(b) The Fund will use the proceeds from the equity issued to Enbridge Inc. to invest in ECT Common Units and ECT will in turn use such proceeds to invest in EIPLP Class A Units.

(c) Enbridge will contribute the shares of the corporations that directly and indirectly own all of the Subject Assets in exchange for EIPLP issuing to Enbridge 442,923,363 EIPLP Class C Units having a value of $15.7 billion and $3 billion in cash.

45. The Fund Units and the EIPLP Class C Units to be issued to Enbridge will pay a per unit cash distribution to their respective holders in the same amount as is paid on the existing ECT Preferred Units and the existing Fund Units.

46. The Filer, the Fund, ECT, EIPLP and Enbridge will enter into the Exchange Right Support Agreement, which will provide for the procedure by which Enbridge can exchange Fund Units, ECT Preferred Units, ECT Class B Units and the EIPLP Class C Units into Common Shares on a one-to-one basis (subject to any economically equivalent adjustment). Enbridge must immediately sell any Common Shares issued pursuant to the Exchange Right to the extent it results in Enbridge holding more that 19.9% of the outstanding Common Shares.

47. The Filer and Enbridge will also enter into a governance agreement that will provide that: (a) at any time Enbridge and its affiliates beneficially own 19.9% or more of the outstanding Common Shares, Enbridge will be entitled to nominate one individual to serve on the Board of the Filer; (b) for so long as Enbridge has the right to nominate an individual to serve on the Board of the Filer, unless otherwise agreed to by the Filer and Enbridge in writing, the Board of the Filer shall at all times consist of six directors; and (c) any time the Filer proposes to issue Common Shares or securities convertible into Common Shares, other than pursuant to certain exemptions contained therein, the Filer will first offer such securities to Enbridge on a pro-rata basis, provided that such proportional percentage is, or will be, equal to or less than 19.9%.

48. Enbridge will be entitled to earn a 25%, reduced by a tax factor, incentive distribution right on pre-incentive distributions, subject to a base distribution threshold of $1.295 per Fund Unit (consistent with the current incentive sharing formula).

49. Enbridge will also be entitled to earn a 33% TPDR on pre-incentive distributions, subject to a base distribution threshold of $1.295 per Fund Unit. The TPDR will be payable in EIPLP Class D Units which receive per unit distributions (of equivalent value to those paid on the Fund Units, ECT Preferred Units and EIPLP Class C Units) in the form of additional EIPLP Class D Units. The EIPLP Class D Units will be exchangeable four years after their issuance into EIPLP Class C Units.

50. Enbridge will receive one EIPLP unit designated as the "Class E Unit", which will entitle Enbridge to receive a one-time amount equal to the actual amounts received by EPI as a result of the redemption of the preferred shares of Enbridge Employee Services Canada Inc. held by EPI net of all taxes payable by EPI as a result of the redemption of such preferred shares.

51. Enbridge will receive one EIPLP unit designated as the "Class F Unit", which will entitle Enbridge to receive a tax balancing distribution amount each year calculated with reference to tax savings and dividends received by subsidiary entities of EIPLP in certain circumstances.

52. Enbridge will acquire a 51% interest in EIPGP, in part through the sale by ECT of EIPGP Common Shares to Enbridge.

53. The ECT Trust Indenture will be amended to, among other things, provide Enbridge with the right, subject to the maintenance of certain ownership thresholds in the aggregate outstanding equity securities of the Fund Group, to appoint up to seven of the eleven trustees on the board of trustees of ECT (the "ECT Board").

54. The LP Agreement will be amended to provide for the creation of the new securities and the payment of the incentive distribution right and the TPDR as set out above.

55. Enbridge will continue to manage the day to day business of the Fund Group pursuant to management contracts in place between affiliates of Enbridge and the Fund Group entities, which will be amended upon closing of the Transaction.

56. Enbridge's economic interest in the Fund Group will increase from 66.4% to 91.9%.

57. Completion of the Transaction is subject to a number of conditions, including receipt of regulatory approvals, third party consents, the approval of the Filer's Shareholders and completion of pre-closing transactions.

58. The ECT Board and the Board of the Filer formed a joint special committee of trustees and directors who are independent of Enbridge (the "Special Committee") to review, consider, negotiate, report and make recommendations regarding the Transaction to the ECT Board and the Board of the Filer. To assist in the discharge of its responsibilities, the Special Committee retained:

(a) BMO Capital Markets to act as its independent financial advisor and, in particular, to prepare and deliver to the Special Committee a formal valuation of the Subject Assets (net of the IDR and the TPDR) prepared in accordance with the standards set out in MI 61-101 and a written opinion as to the fairness of the consideration to be paid pursuant to the Transaction, from a financial point of view to ECT, the Fund and the Filer and the Shareholders (other than Enbridge) (the "Valuation and Fairness Opinion");

(b) independent legal counsel; and

(c) IHS Global Canada Limited as the independent crude oil market consultant to provide views on North American crude oil fundamentals, supply, demand and pricing, and Dynamic Risk Assessment Systems Inc. as the independent pipeline safety and integrity management consultant to conduct due diligence.

59. The Special Committee unanimously approved the Transaction and unanimously recommended that the Board of the Filer recommend that the Shareholders approve the Transaction.

60. The members of the ECT Board who are independent of Enbridge have considered and unanimously approved the Transaction on behalf of ECT and the Fund.

61. The members of the Board of the Filer who are independent of Enbridge have considered and unanimously approved the Transaction and the making of a recommendation to the Shareholders that the Shareholders approve the Transaction.

62. The Filer intends to hold a meeting (the "Meeting") of the Shareholders to obtain approval of, inter alia, the Transaction in accordance with the majority of the minority requirements under MI 61-101. The votes of Enbridge, a "related party" of Enbridge and any "joint actor" of Enbridge (as such terms are defined in MI 61-101) will be excluded from the Shareholder vote on such matter.

63. The management information circular to be sent to the Shareholders in connection with the Meeting will include particulars of the Transaction as required under applicable securities legislation and the Valuation and Fairness Opinion.

64. The conditions of section 6.3(2) of MI 61-101 are otherwise satisfied in respect of the Common Shares that are issuable upon exercise of the Exchange Right.

Decision

The principal regulator is satisfied that the decision to grant the Exemptive Relief 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 Exemptive Relief is granted, provided that:

a) The management information circular for the Transaction will contain a formal valuation of the Subject Assets (net of the IDR and the TPDR) prepared in accordance with the standards set out in MI 61-101,

b) The Filer will hold a meeting of the holders of Common Shares to obtain approval of the Transaction in accordance with the majority of the minority requirements in accordance with MI 61-101,

c) Neither the Filer nor, to the knowledge of the Filer after reasonable inquiry, Enbridge has knowledge of any material information concerning the Filer, the Fund Group or their securities that has not been generally disclosed, and the management information circular for the Transaction will include a statement to that effect, and

d) The management information circular for the Transaction includes a description of the effect of the Transaction on the direct or indirect voting interest of Enbridge.

"Naizam Kanji"
Director, Office of Mergers & Acquisitions
Ontario Securities Commission