Securities Law & Instruments

Headnote

Application for relief from the prospectus requirement -- The Filer will operate as a self-funding corporation on a break-even cash flow basis in order to distribute beer in Ontario -- Qualifying Brewers will be given an opportunity to subscribe for First Equity Shares -- The First Equity Shares give holders voting rights in proportion to their annual volume of sales through the Filer -- The First Equity Shares will be offered for nominal consideration -- Qualifying Brewers are not making an investment decision and will receive information about the Filer -- Relief granted subject to conditions.

Statutes Cited

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

October 2, 2015

IN THE MATTER OF THE SECURITIES ACT, R.S.O 1990, CHAPTER S.5, AS AMENDED (THE "ACT") AND IN THE MATTER OF BREWERS RETAIL INC. (THE "FILER")

DECISION

Background

The Ontario Securities Commission (the "Commission") has received an application from the Filer pursuant to subsection 74(1) of the Act for a decision (the "Exemption Sought") that the prospectus requirement contained in subsection 53(1) of the Act (the "Prospectus Requirement") shall not apply to the issuance by the Filer, from time to time, of First Equity Shares to Qualifying Brewers (each as defined below).

Interpretation

Terms defined in National Instrument 14-101 Definitions 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 is a corporation existing under the Business Corporations Act (Ontario) (the "OBCA") operating under the business name "The Beer Store" ("TBS").

2. The Filer has executed the document titled "Modernizing the Distribution of Beer in Ontario Framework of Key Principles" (the "Key Principles") dated April 15, 2015, which has also been executed by the Premier of Ontario's Advisory Council on Government Assets (the "Council"), the current owners of the Filer (the "Current Owners") and the Ontario Ministry of Finance, pursuant to which the parties are negotiating detailed changes to the beer retail and distribution system in Ontario to be contained in the documents necessary to implement the Key Principles (the "New Beer Agreements"). The New Beer Agreements will require that ownership of the Filer be open to all brewers with facilities in Ontario, that all Qualifying Brewers (as defined below) be offered a meaningful opportunity to become equity shareholders of the Filer by subscribing for new shares of the Filer and that any transactions between the Filer and its shareholders be transparent, auditable and commercially reasonable. The New Beer Agreements will also provide that the Filer will continue to operate on a self-sustaining basis as a low cost, efficient distributor of beer in Ontario and will be operated as a self-funding corporation on a break-even cash flow basis. An important element of this is the schedule of listing and service fees to be charged by the Filer to all brewers selling products through the Filer which will be set each year to provide sufficient, but not excess, revenue to cover all of the cash requirements of the Filer consistent with approved operating and capital plans.

3. The articles of amendment of the Filer (the "Articles") and the unanimous shareholders agreement of the Filer (the "Shareholders' Agreement") will define a "Qualifying Brewer" as a brewer that operates a brewery in Ontario, sells beer through TBS and satisfies all of the following criteria:

(a) it has a valid Ontario manufacturing license issued by the Alcohol and Gaming Commission of Ontario;

(b) it has a valid Canadian manufacturing license issued by the Canada Revenue Agency;

(c) it conducts the full brewing process up to the point of packaging, including mashing, lautering, boiling, hop separation and fermentation, in its Ontario Beer manufacturing facilities; and

(d) it either (A) does not produce Beer in any other jurisdiction or (B) its Ontario Beer manufacturing facilities have a minimum annual capacity of 10,000 hectolitres of Beer in the aggregate and a minimum annual production of 2,500 hectolitres of Beer in the aggregate.

4. The Qualifying Brewers entitled to subscribe for First Equity Shares of the Filer under the Shareholders' Agreement will either be: (A) located or resident in the Province of Ontario and eligible to acquire First Equity Shares of the Filer pursuant to the Exemption Sought; (B) located or resident in a province or territory of Canada other than the Province of Ontario and eligible to acquire First Equity Shares of the Filer pursuant to an exemption from prospectus requirements generally available under the applicable securities laws of that province or territory; or (C) neither located nor resident in Canada, and eligible to acquire First Equity Shares pursuant to an exemption from the prospectus, registration or qualification requirements applicable under the securities laws of the jurisdiction outside of Canada in which the Qualifying Brewer is located or resident.

5. Pursuant to the Articles and the New Beer Agreements, the capital of the Filer will be restructured and the Filer will be authorized to issue an unlimited number of First Equity Shares and a fixed number of Second Equity Shares as well as First Preferred Debentures as follows:

(a) The First Equity Shares will be offered to all Qualifying Brewers (including the Current Owners) for nominal consideration, and will provide the holders with voting rights in proportion to the volume of their annual sales of beer through TBS that is produced at a facility in Ontario or imported into Ontario in accordance with Ontario's Inter-Plant Transfer Policy for beer from time to time. On liquidation of TBS, the First Equity Shares will entitle the holders to share in any increase in the book value of TBS from December 31, 2014 (subject to certain adjustments to reflect legacy assets and liabilities of the Current Owners) in proportion to the service fees that the holders have paid to TBS from September 1, 2015. The First Equity Shares would also entitle the holders to receive any dividends declared by the board of directors of TBS with the approval of a majority of the Independent Directors (as defined in the Shareholders' Agreement).

(b) The Second Equity Shares will be non-voting and will be issued to the Current Owners in exchange for their existing equity in, and any other financing (other than trade payables) provided to, TBS (effected through a court approved plan of arrangement or other tax-efficient mechanism), and will entitle the holders to receive any residual value upon liquidation of TBS, after the liquidation amount payable to the holders of the First Equity Shares. Holders of the Second Equity Shares would not be entitled to receive dividends.

Exemptive relief is not sought at this time for any distribution of Second Equity Shares and therefore any distributions of Second Equity Shares must be under a prospectus or an exemption from the prospectus requirement that is generally available under applicable securities laws and must comply with the registration requirement if applicable. Resale of Second Equity Shares distributed under an exemption from the Prospectus Requirement will be a deemed distribution of such securities within the meaning of the Act.

(c) If TBS requires new capital, the First Preferred Debentures may be issued to any Qualifying Brewers (including the Current Owners) from time to time to fund capital replacement or improvements (e.g., when TBS cannot borrow from third parties on reasonable commercial terms), and will entitle the holders to annual interest at a reasonable commercial rate as well as the return of their principal when redeemed by TBS or upon liquidation of TBS, in priority to any distribution to the holders of any class of shares of TBS. The First Preferred Debentures will contain limited covenants only (such as with respect to the payment of interest and acceleration upon an event of insolvency).

Exemptive relief is not sought at this time for any distribution of First Preferred Debentures and therefore any distributions of First Preferred Debentures must be under a prospectus or an exemption from the prospectus requirement that is generally available under applicable securities laws and must comply with the registration requirement if applicable. Resale of First Preferred Debentures distributed under an exemption from the Prospectus Requirement will be a deemed distribution of such securities within the meaning of the Act.

6. In compliance with the applicable provisions of the OBCA, the Filer will continue to hold annual meetings of shareholders.

7. The Filer is not a reporting issuer under applicable Canadian securities laws of any jurisdiction and has no present intention of becoming a reporting issuer in Ontario or any other jurisdiction.

8. There is currently no market for the securities of the Filer. The Filer has no present intention of listing or posting its securities on a marketplace as defined in National Instrument 21-101 Marketplace Operation ("NI 21-101") or on any other facility for bringing together buyers and sellers of securities where trading data is publicly reported.

9. The Council has advised the Filer that, as of June 1, 2015, there were approximately 153 Qualifying Brewers. Not all of the Qualifying Brewers are known to be, or are expected to be at the time of the issuance of First Equity Shares, "accredited investors" as defined in Section 1.1 of NI 45-106.

10. Prior to the initial issuance of First Equity Shares, each Qualifying Brewer will receive a welcome letter (an "Initial Disclosure Document") containing a summary of the current TBS structure, a description of the ownership opportunity that is being made available to Qualifying Brewers in Ontario pursuant to the New Beer Agreements and a description of the contractual right of rescission and right of action for damages if the Initial Disclosure Document contains a misrepresentation. The Initial Disclosure Document will attach as schedules the following:

(a) The Articles, including provisions of the First Equity Shares and the Second Equity Shares, and all amendments thereto.

(b) The most recent annual and interim financial statements of the Filer.

(c) The most recent annual budget of the Filer.

(d) The form of subscription agreement to be entered into between the Filer and the Qualifying Brewer in respect of the First Equity Shares.

(e) The form of Shareholders' Agreement to be entered into by the Qualifying Brewer, including all amendments thereto.

(f) This decision.

(g) A statement to the effect that, as a consequence of this decision, certain protections, rights and remedies provided by the Act, including statutory rights of rescission or damages will not be available to the Qualifying Brewers and that certain restrictions are imposed on the disposition of the First Equity Shares.

11. The Initial Disclosure Document is not being prepared primarily to assist the Qualifying Brewers to make an investment decision in respect of the First Equity Shares, but rather, it is being prepared to describe the agreement between the Filer and the Province of Ontario on changes to the beer retail and distribution system in Ontario and the involvement of Qualifying Brewers in that system. Qualifying Brewers will be, or will become, familiar with TBS through its sales of beer through TBS, which is one of the characteristics of a Qualifying Brewer.

12. Pursuant to the Shareholders' Agreement, in addition to the information required under the OBCA, TBS has agreed to provide its shareholders with: (i) quarterly unaudited and annual audited financial statements, (ii) TBS's annual budget and its annual business and capital plans, together with an analysis of the impact of those on the schedule of listing and service fees to be charged by TBS to all brewers selling products through TBS, and (iii) any information reasonably required by publicly owned shareholders to comply with their own reporting obligations.

13. Pursuant to the Shareholders' Agreement, members of the board of directors of the Filer will be permitted to share confidential information of the Filer with its shareholders, and provisions will be made for such information to be so shared with its shareholders on an equitable basis.

14. Pursuant to the Shareholders' Agreement, all shareholders of the Filer are to be provided with equal opportunity, in compliance with applicable securities laws, to subscribe for any additional required capital (in the form of First Preferred Debentures), if any, from time to time, on terms to be approved by a majority of the Independent Directors.

15. The First Equity Shares of the Filer will be non-transferrable under the Shareholders' Agreement, except to a person who controls or is controlled by the Qualifying Brewer.

16. All certificates, if any, representing First Equity Shares and Second Equity Shares will bear a legend stating that the securities represented by the certificate are subject to restrictions on transfer.

17. The Filer does not currently intend to issue any securities other than First Equity Shares, Second Equity Shares and First Preferred Debentures.

18. The Filer has considered whether, under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103") and other applicable securities 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 contained in subsection 25(1) of the Act.

Decision

The Commission is satisfied that the decision meets the test set out in the Act for the Commission to make the decision.

The decision of the Commission is that the Exemption Sought is granted provided that:

(a) the Filer is in compliance with the provisions of the OBCA;

(b) the only securities to be issued by the Filer are First Equity Shares, Second Equity Shares and First Preferred Debentures;

(c) the Filer is not a reporting issuer in any jurisdiction of Canada;

(d) no securities of the Filer are traded in Canada or any other country on a marketplace as defined in NI 21-101 or on any other facility for bringing together buyers and sellers of securities where trading data is publicly reported;

(e) the First Equity Shares and Second Equity Shares of the Filer are only issued to Qualifying Brewers;

(f) solicitations for First Equity Shares and Second Equity Shares of the Filer are conducted solely by the Filer and that there are no finder's fees or commissions paid in connection with the issuance or transfer of shares of the Filer;

(g) the certificates representing the First Equity Shares and Second Equity Shares bear a legend that they are subject to restrictions on transfer;

(h) the Filer does not make any written or oral representations to Qualifying Brewers regarding potential future profits from any business relationship with the Filer or regarding any profits arising from the Qualifying Brewer's interest in any securities of the Filer, other than stating the interest rate applicable to any First Preferred Debentures;

(i) at the time of entry into any subscription agreement to acquire First Equity Shares of the Filer, Qualifying Brewers are provided with a contractual right of rescission and a right of action for damages if the Initial Disclosure Document contains a misrepresentation;

(j) prior to the distribution of any First Equity Shares by the Filer to a Qualifying Brewer, the Filer delivers to such Qualifying Brewer the Initial Disclosure Document, including the schedules thereto, and a copy of this decision;

(k) the Filer will provide ongoing access to information and disclosure to the shareholders of the Filer in accordance with the requirements of the OBCA and the Shareholders' Agreement, including certain disclosure as to the affairs of the Filer, as described in paragraph 12 above;

(l) the exemptions contained in this decision cease to be effective

(i) if any of the provisions of the Articles or the Shareholders' Agreement of the Filer relevant to the exemptions granted herein, including the restrictions on transfers of the Filer's securities and the disclosure obligations of the Filer to its shareholders, are amended in any material respect without prior written consent of the Commission; or

(ii) upon any securities of the Filer being traded in Canada or any other country on a marketplace as defined in NI 21-101 or on any other facility for bringing together buyers and sellers of securities where trading data is publicly reported; and

(m) the first trade of any First Equity Shares (other than to a Qualifying Brewer, to a person who controls or is controlled by the Qualifying Brewer or to the Filer itself) shall be deemed a distribution of such securities within the meaning of the Act.

"Grant Vingoe"
"Monica Kowal"
Ontario Securities Commission
Ontario Securities Commission