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.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(a), 9.1.
June 20, 2016
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
BROOKFIELD BUSINESS PARTNERS L.P.
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 5.4 of MI 61-101 (the “Formal Valuation Requirement”) and the requirements of section 5.6 of MI 61-101 (the “Minority Approval Requirement”), in each case relating to any related party transaction of the Filer entered into indirectly through Brookfield Business L.P. (“Holding LP”) or any other subsidiary entity of Holding LP, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(a) of MI 61-101 if the indirect limited partnership interest in the Filer, which is held by Brookfield Asset Management Inc. (“BAM”) in the form of redeemable-exchangeable limited partnership units of Holding LP, were included in the calculation of the Filer’s market capitalization (collectively, the “Requested Relief”).
The structure for the Filer and Holding LP described above was formalized upon the completion of a transaction on June 20, 2016 (the “Transaction”) in which: (a) certain business services and industrial operations of BAM were transferred to various holding companies controlled by Holding LP, a Bermuda exempted limited partnership formed by BAM and the Filer; and (b) BAM made a special dividend to holders of its Class A limited voting shares and Class B limited voting shares of limited partnership units (“LP Units”) in the Filer, a Bermuda exempted limited partnership formed by BAM. On completion of the Transaction, the Filer’s sole direct investment is a managing general partnership interest in Holding LP.
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.
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.
This decision is based on the following facts represented by the Filer:
1. The Filer is a Bermuda exempted limited partnership that was established on January 18, 2016.
2. Holding LP is a Bermuda exempted limited partnership that was established on January 18, 2016.
3. The Filer is a reporting issuer in each of the provinces and territories of Canada. The Filer is not in default of any requirements of the securities legislation in the jurisdictions in which it is a reporting issuer.
4. The LP Units are listed on the New York Stock Exchange (the “NYSE”) under the symbol “BBU” and the Toronto Stock Exchange (the “TSX”) under the symbol “BBU.UN”.
5. Brookfield Business Partners Limited (“BBP GP”), a Bermuda company and a wholly-owned subsidiary of BAM, is the sole general partner of the Filer through its ownership of all of the managing general partnership interests in the Filer, which represent 0.2% of the partnership interests in the Filer.
6. The Filer has entered into a master services agreement (the “Master Services Agreement”) with certain subsidiaries of BAM to provide the Filer, Holding LP and certain subsidiaries of Holding LP with management and other services.
7. The LP Units are non-voting limited partnership units and the Filer’s general partner, being BBP GP, controls the Filer.
8. The Filer is the sole general partner of Holding LP through its ownership of all of the managing general partnership interests in Holding LP, which represent 49% of the partnership interests in Holding LP and is the Filer’s sole direct investment.
9. The limited partnership interest in Holding LP is held by BAM through its direct or indirect ownership of redemption-exchange units (the “Redemption-Exchange Units”) and special limited partnership units (“Special Limited Partnership Units”). The Redemption-Exchange Units are subject to a redemption-exchange mechanism pursuant to which BAM is able to acquire LP Units in exchange for its Redemption-Exchange Units on a one-for-one basis. The Special Limited Partnership Units entitle BAM to receive incentive distributions calculated as: (a) 20% of the growth in the market value of the LP Units quarter-over-quarter multiplied by (b) the number of LP Units outstanding at the end of the quarter (assuming full conversion of the Redemption-Exchange Units into LP Units).
10. The Redemption-Exchange Units effectively represent an ownership interest in the Filer rather than Holding LP and are, in all material respects, economically equivalent to the LP Units.
11. At any time after two years from June 20, 2016, BAM has the right to require Holding LP to redeem all or a portion of the Redemption-Exchange Units for cash, subject to the Filer’s right to acquire such interests (in lieu of redemption) in exchange for LP Units, as described below. BAM may exercise its right of redemption by delivering a notice of redemption to Holding LP and the Filer. After presentation for redemption, BAM will receive, subject to the Filer’s rights described below, for each Redemption-Exchange Unit that is presented, cash in an amount equal to the market value of one LP Unit multiplied by the number of Redemption-Exchange Units to be redeemed (as determined by reference to the five day volume-weighted average of the trading price of LP Units on the principal stock exchange for the LP Units based on trading volumes). Upon its receipt of the redemption notice, the Filer will have a right to elect, at its sole discretion, to acquire all (but not less than all) of the Redemption-Exchange Units presented to Holding LP for redemption in exchange for LP Units, on a one-for-one basis. Based on the number of LP Units issued pursuant to the Transaction, if BAM exercised its redemption right in full and the Filer exercised its right to acquire BAM’s limited partnership interest in Holding LP in exchange for LP Units: (a) BAM would hold LP Units in the Filer representing approximately 78% of the partnership interests in the Filer; and (b) the Filer would continue to hold all of the managing general partnership interests in Holding LP, which would represent approximately 99.9% of the partnership interests in Holding LP.
12. The board of directors of the general partner of the Filer has approved a conflicts policy which addresses the approval and other requirements for transactions in which there is a greater potential for a conflict of interest to arise. These transactions include: (a) the dissolution of the Filer; (b) any material amendment to the Master Services Agreement, the Filer’s limited partnership agreement or Holding LP’s limited partnership agreement; (c) any material service agreement or other arrangement pursuant to which BAM or its affiliates other than the Filer and its related entities (“Brookfield”) will be paid a fee, or other consideration other than any agreement or arrangement contemplated by the Master Services Agreement; (d) co-investments by the Filer and its related entities with Brookfield; (e) acquisitions by the Filer and its related entities from, and dispositions by the Filer and its related entities to, Brookfield; (f) any other material transaction involving the Filer and its related entities and Brookfield; and (g) termination of, or any determinations regarding indemnifications under, the Master Services Agreement. The conflicts policy requires the transactions described above to be approved by the governance and nominating committee of the board of directors of the general partner of the Filer. Pursuant to the conflicts policy, the governance and nominating committee of the board of directors of the general partner of the Filer may grant prior approvals for any of these transactions in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby.
13. It is anticipated that the Filer will from time to time enter into transactions with certain related parties, including BAM and its affiliates other than the Filer and its related entities, indirectly through Holding LP and its direct and indirect wholly-owned subsidiaries.
14. 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 (the “Minority Protections”).
15. 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”).
16. It is unclear whether the Filer will be entitled to rely on the Transaction Size Exemption available under 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.
17. The Redemption-Exchange Units represent part of the equity value of the Filer and are, in all material respects, economically equivalent to the LP Units. Taken together, the effect of BAM’s redemption right and the Filer’s right of exchange is that BAM will receive LP Units, or the value of such units, at the election of the Filer. Moreover, the economic interests that underlie the Redemption-Exchange Units are identical to those underlying the LP Units; namely, the assets and operations held directly or indirectly by Holding LP.
18. If the Redemption-Exchange Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of BAM’s limited partnership interest in Holding LP. As a result, related party transactions by the Filer that are entered into indirectly through Holding LP may be subject to the Minority Protections in circumstances where the fair market value of the transactions are effectively less than 25% of the fully diluted market capitalization of the Filer.
19. The inclusion of the Redemption-Exchange Units when determining the Filer’s market capitalization 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 they are convertible or exchangeable.
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 provided that:
1. the transaction would qualify for the Transaction Size Exemption contained in the Legislation if the Redemption-Exchange Units were considered an outstanding class of equity securities of the Filer that were convertible into LP Units;
2. there be no material change to the terms of the Redemption-Exchange Units, including the exchange rights associated therewith, as described above; and
3. any annual information form or equivalent of the Filer that is required to be filed in accordance with applicable securities laws 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 is not more than 25% of the market capitalization of the issuer. Brookfield Business Partners L.P. (“BBP”) 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 BBP’s market capitalization, if the indirect equity interest in BBP, which is held in the form of redeemable-exchangeable limited partnership units of Brookfield Business L.P. (“Holding LP”), is included in the calculation of BBP’s market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements apply, is increased to include the approximately l% indirect interest in BBP held in the form of redeemable-exchangeable limited partnership units of Holding LP.”
Director, Office of Mergers & Acquisitions
Ontario Securities Commission