Securities Law & Instruments

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 -- transaction is a business combination undertaken for the purpose of eliminating the filer, a holding company, in the corporate structure -- following the transaction, the filer will merge with the underlying company such that the underlying company will be the surviving entity -- transaction is not undertaken for the benefit of a related party -- transaction is an amalgamation or equivalent transaction with no adverse effect on the filer or its minority shareholders -- shareholders of the filer will have a direct interest and the same relative percentage interest in the same underlying company following the transaction -- relief granted from the formal valuation requirement.

Applicable Legislative Provisions

Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions, ss. 3.4, 6.3, 9.1.

January 27, 2016

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 GWR GLOBAL WATER RESOURCES CORP. (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 of the principal regulator (the "Legislation") exempting the Filer, pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") from the requirements of section 4.3 of MI 61-101 to obtain a formal valuation of the common shares of the Filer and the shares of common stock of Global Water Resources, Inc. ("GWRI") to be issued in connection with the Transaction (as defined below) (the "Requested Relief").

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 section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in Quebec.

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.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is incorporated under the laws of the province of British Columbia and was formed on March 23, 2010. The Filer's head offices are located at 21410 N. 19th Avenue, Suite 220, Phoenix, Arizona, 85027, U.S.

2. GWRI is a corporation incorporated under the laws of the State of Delaware and was formed on May 2, 2008.

3. The Filer is a reporting issuer in all provinces and territories of Canada.

4. The Filer is not in default of any requirement of Canadian securities laws.

5. The Filer completed its initial public offering in Canada ("IPO") on December 30, 2010.

6. The Filer was created to acquire shares of common stock of GWRI (the "GWRI Common Stock") and to actively participate in the management, business and operations of GWRI through its representation on the board of directors of GWRI and its shared management with GWRI.

7. The Filer has an unlimited number of common shares (the "Common Shares") authorized for issuance of which, as of the date hereof, there are 8,731,647 Common Shares issued and outstanding. Approximately 78.4% of the Common Shares are held by the public and the remaining 21.6% are held by private stockholders of GWRI, including two directors of the Filer.

8. GWRI has 1,000,000 shares of common stock authorized for issuance of which, as of the date hereof, there are 182,050 shares of common stock issued and outstanding. Approximately 47.8% of the GWRI Common Stock are held by the Filer and the remaining approximate 52.2% of the GWRI Common Stock are held by private stockholders, including two directors of the Filer. As a result, the private stockholders hold an effective interest of approximately 62.5% in GWRI.

9. The Filer has no operations and its sole asset is its equity interest in GWRI and, as such, all of its continuous disclosure is in respect of the business of GWRI.

10. In connection with its IPO, the Filer undertook that for so long as GWRI represents a significant asset of the Filer and is not consolidated into its financial statements, it will provide its shareholders with separate audited annual consolidated financial statements and interim consolidated financial statements of GWRI and related management's discussion and analysis and certify, on an annual basis, that is has complied with such undertaking. The Filer's most recent annual certification regarding the foregoing was filed on SEDAR on March 25, 2015.

11. Currently, one Common Share represents approximately 100 shares of common stock of GWRI. Prior to the completion of the Transaction (as defined below), GWRI will effect a stock split with the result that one Common Share will represent one share of common stock of GWRI.

12. The Filer has determined that it is in the best interests of the Filer to undertake a transaction (the "Transaction") that will result in the following: (i) a merger of the Filer with and into GWRI, with GWRI being the surviving entity of the merger; (ii) a dual listing of the GWRI Common Stock on the TSX and the NASDAQ Global Market ("NASDAQ"); and (iii) an initial public offering of the GWRI Common Stock in the U.S.

13. The Transaction will be effected pursuant to a plan of arrangement under section 288 of the Business Corporations Act (British Columbia), under which shareholders of the Filer will be entitled to dissent rights.

14. The Common Shares are currently listed on the TSX. The GWRI Common Stock are currently not listed on any stock exchange or other published market. It is a condition to completion of the Transaction that the GWRI Common Stock be listed on the TSX and on the NASDAQ. The Filer does not intend to delist from the TSX and, on completion of the Transaction, GWRI will be a reporting issuer in Canada.

15. The Transaction was publicly announced by the Filer by way of a press release issued on January 19, 2016. The boards of directors of each of the Filer and GWRI have approved the Transaction. The board of directors of the Filer has determined that the Transaction is fair to shareholders of the Filer and is in the best interests of the Filer, and the Filer's shareholder meeting circular in respect of the Transaction will include a statement to this effect.

16. The Transaction is being undertaken for a variety of reasons, including the following:

(a) The Transaction will trigger a call right of GWRI on its outstanding bonds. Management of the Filer believes that it will be able to refinance these bonds on more favourable terms and reduce the overall debt service costs in respect of the business.

(b) The Transaction is expected to improve liquidity for shareholders of the Filer because it will result in a larger public float on the TSX and will be conditional on obtaining an additional listing on the NASDAQ. The NASDAQ listing is also expected to (i) allow greater comparability with peer group companies, bringing the Filer's valuation more in line with its peers, (ii) increase U.S. analyst coverage, and (iii) strengthen the investor market in the U.S., all of which are expected to contribute to a more liquid market in the shares.

(c) The Transaction will simplify the Filer's corporate structure by eliminating one level of holding company ownership, reducing complexity and streamlining financial reporting and disclosure generally.

(d) The Transaction will result in the Filer being domiciled in the United Sates where all of its operations, assets and employees are located.

17. The Transaction is a "business combination" because it would constitute an arrangement, as a consequence of which the interest of a shareholder of the Filer may be terminated without the shareholder's consent, regardless of whether the equity security is replaced with another security. It does not fall within the exclusions in the definition of "business combination" because the Transaction is one in which a related party of the Filer, GWRI, would as a consequence of the Transaction combine with the Filer through an arrangement. Part 4 of MI 61-101 requires the Filer to obtain a formal valuation unless an exemption is available.

18. Section 4.4(1)(f) of MI 61-101 contains an exemption for transactions involving an amalgamation or equivalent transaction with no adverse effect on the issuer or the minority shareholders. Although the Transaction will result in liquidity for the private stockholders of GWRI, the Transaction is not being undertaken for this purpose; rather, this is a consequence of, not the driver for, the Transaction. As the Transaction is not being undertaken in whole or in part for the benefit of another related party and the private stockholders will therefore not indemnify the Filer against any liabilities of GWRI or pay any costs and expenses resulting from the Transaction, the Filer cannot rely on this exemption. However, the Filer expects that the Transaction will not have an adverse effect on the issuer or the minority shareholders.

19. On completion of the Transaction, the nature and extent of the financial participating interests of the Filer's shareholders in GWRI will be the same as, and the value of their financial participating interests will not be less than, that of their interests in the Filer before the Transaction. The nature and extent of the voting interests of the Filer's shareholders in GWRI relative to the voting interest in the Filer are described in paragraph 25.

20. On completion of the Transaction (and for greater clarity, following the stock split), shareholders of the Filer will receive one share of GWRI Common Stock for each Common Share held and will hold the same relative percentage interest in GWRI. Following the stock split, one share of GWRI Common Stock will be economically equivalent to one Common Share of the Filer:

(a) The Common Shares are, under the current corporate ownership structure of the Filer (and for greater clarity, following the stock split), the economic equivalent of the GWRI Common Stock. The Filer is merely a holding company that was established in order to facilitate the IPO. The Filer adds no economic value to holders of the Common Shares (in fact, it incurs costs that must be borne by all shareholders). The Transaction will remove the holding company structure and replace an indirect interest in the GWRI Common Stock with a direct ownership of those shares. In economic terms, holders of the Common Shares who receive the GWRI Common Stock will simply receive directly from GWRI what they would otherwise receive indirectly from GWRI through the Filer.

(b) The holders of the Common Shares, once exchanged for GWRI Common Stock, will be entitled to receive dividends, if any, as may be declared by the board of directors of GWRI out of legally available funds. On completion of the Transaction, the board of directors of GWRI intends to pay a regular monthly dividend of U.S.$0.02 per share of GWRI Common Stock (U.S.$0.24 per share annually), which is approximately the U.S.$ equivalent of the current C$0.0283 monthly dividend of the Filer based on current exchange rates. Currently, all shareholders of GWRI (including the Filer) are entitled to receive the same dividends on their shares of GWRI. Dividends declared by GWRI are distributed to all shareholders of GWRI (including the Filer) and the Filer in turns distributes the dividends to its shareholders. The dividends paid to the Filer from GWRI are paid in Canadian dollars and the dividends paid to the remaining shareholders of GWRI are paid in US dollars (the amount paid in US dollars is the equivalent of the amount paid to the Filer in Canadian dollars). As GWRC is a non-US holder, there is a 5% withholding tax that GWRI is required to withhold from the dividends payable to the Filer. The holders of Common Shares are currently entitled to receive proceeds on liquidation, dissolution or winding up of the Filer and to share ratably in the assets legally available for distribution to shareholders of the Filer after payment of debts and other liabilities. Once exchanged for GWRI Common Stock, the holders of the Common Shares will be entitled, as direct holders of GWRI Common Stock, to receive proceeds on liquidation, dissolution or winding up of GWRI and to share ratably in the assets legally available for distribution to stockholders after payment of debts and other liabilities.

21. Except as described herein, there will be no changes to the business, operations or assets of GWRI as a consequence of the Transaction.

22. The Filer and GWRI have shared management and on completion of the Transaction there will be no changes to management of GWRI.

23. On completion of the Transaction, the board of directors of GWRI is expected to be comprised of seven individuals, five of whom are current directors of the Filer. The sixth director is a current director of GWRI and was the prior Executive Vice President and Chief Financial Officer of the Filer. The seventh director is the current President and Chief Executive Officer of the Filer and GWRI and in the past has served as GWRI's Interim Chief Executive Officer, Chief Operating Officer and Vice President and General Manager.

24. Currently, holders of Common Shares are entitled to one vote per share on matters that are subject to the approval of shareholders of the Filer under British Columbia corporate law and the Filer's constating documents. Holders of GWRI Common Stock are entitled to one vote per share on matters that are subject to the approval of stockholders of GWRI under the corporate laws of the State of Delaware and GWRI's certificate of incorporation. The material differences between the corporate laws of British Columbia and Delaware and between the constating documents of the Filer and the certificate of incorporation of GWRI will be disclosed in the Filer's shareholder meeting circular in respect of the Transaction. Like the board of directors of the Filer, on completion of the Transaction, the board of directors of GWRI intends to adopt a majority voting policy in respect of the election of directors of GWRI.

25. As the Filer does not hold a majority voting interest in GWRI and to ensure that the minority shareholders of the Filer have certain protections, in connection with the IPO, the Filer, GWRI and the private shareholders of GWRI entered into a shareholders agreement (the "Shareholders Agreement"). The Shareholders Agreement provides the Filer with certain rights with respect to the operations and business of GWRI. In particular, the Shareholders Agreement grants the Filer the right to nominate three directors to the board of directors of GWRI, approval of certain fundamental matters, drag-along rights, tag-along rights and rights of first refusal with respect to a sale of GWRI Common Stock and certain rights to provide funding to GWRI and its subsidiaries. On completion of the Transaction, the Shareholders Agreement will be terminated and all shareholders of GWRI will have equal voting rights in respect of GWRI, as described above.

26. While the precise tax consequences of the Transaction will only be determinable with certainty at the time the merger of the Filer and GWRI is effected, management of the Filer believes, as of the date hereof, that the Transaction will not result in any material adverse Canadian or U.S. tax consequences to the Filer or GWRI. The tax consequences for a shareholder of the Filer will depend on the particular circumstances of the holder and the particular country imposing the tax. From a Canadian perspective, it is expected that the merger will generally qualify for "tax-free" or "rollover" treatment for Canadian tax purposes for all shareholders of the Filer. From a U.S. perspective, it is expected that the merger generally will be U.S. tax-free to all of the Filer's non-U.S. shareholders and may be U.S. tax-free to some of the Filer's U.S. shareholders.

27. On completion of the Transaction, the Filer will cease to exist and all material actual or contingent liabilities of the Filer will become liabilities of GWRI. Other than liabilities disclosed in the GWRI financial statements, liabilities assumed in the ordinary course of business consistent with past practice and liabilities incurred in connection with the Transaction, all of which have been (or will be) disclosed to the Filer's shareholders as part of its continuous disclosure record, no additional material actual or contingent liabilities of GWRI are expected to be incurred prior to completion of the Transaction.

28. The Filer intends to seek minority approval of the Transaction, as required under Part 8 of MI 61-101. Approximately 21.6% of the common shares of the Filer that are held by private stockholders of GWRI will be excluded for purposes of minority approval.

29. The Filer will prepare and mail an information circular to all shareholders of the Filer that will include all of the applicable information prescribed by Form 51-102F5 -- Information Circular and applicable securities law.

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.

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