Application by a reporting issuers for an order granting relief from the requirement in OSC Rule 13-502 Fees (the Fees Rule) to pay participation fees – Relief analogous to relief for “subsidiary entities” contained in section 2.4(1) of the Fees Rule – issuers may not, from a technical accounting perspective, be entitled to rely on the exemption in section 2.4(1)(b) of the Fees Rule – issuers meet all of the substantive requirements to rely on the exemption in section 2.4(1) other the requirement that the audited financial statements of the parent consolidate the parent and the subsidiary and the definition of “subsidiary” that refers to a “subsidiary” being determined by the applicable generally accepted accounting principles – issuers exempt from requirement to pay participation fees, subject to conditions.
Applicable Legislative Provisions
OSC Rule 13-502 Fees, ss. 2.2, 8.1.
IN THE MATTER OF
ONTARIO SECURITIES COMMISSION RULE 13-502 FEES
IN THE MATTER OF
MANULIFE FINANCIAL CAPITAL TRUST II (the “Trust”),
MANULIFE FINANCE (DELAWARE), L.P. (“MFLP”),
THE MANUFACTURERS LIFE INSURANCE COMPANY (“MLI”) AND
MANULIFE FINANCIAL CORPORATION
(“MFC” and, together with the Trust , MFLP and MLI, the “Filers”)
WHEREAS the Ontario Securities Commission (the Commission) has received an application from the Filers for an order, pursuant to section 8.1 of OSC Rule 13-502 Fees (the Fees Rule), that the requirement to pay a participation fee under section 2.2 of the Fees Rule shall not apply to the Trust and MFLP, subject to certain terms and conditions.
AND WHEREAS the Filers have represented to the Commission that:
1. The Trust is a trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of June 12, 2009, as amended and restated on July 10, 2009, and as it may be further amended, restated and supplemented from time to time.
2. The Trust’s head office is located at 200 Bloor Street East, Toronto, Ontario, M4W 1E5 and has a financial year end of December 31.
3. The Trust is a reporting issuer or the equivalent in all of the provinces and territories of Canada (the Reporting Jurisdictions). The Trust is not in default under the securities legislation of any of the Reporting Jurisdictions.
4. Pursuant to an administration agreement dated June 12, 2009, as amended and restated on July 10, 2009 and as it may be further amended and restated from time to time, entered into between Computershare Trust Company of Canada, as trustee of the Trust (the MaCS II Trustee) and MLI, the MaCS II Trustee has delegated to MLI certain of its obligations in relation to the administration of the Trust. MLI, as administrative agent, at the request of the MaCS II Trustee, administers the day-to-day operations of the Trust and performs such other matters as may be requested by the MaCS II Trustee from time to time.
5. As of the date hereof, the issued and outstanding capital of the Trust consists of:
(a) $1,000,000,000 principal amount of 7.405% Manulife Financial Capital Trust II Notes – Series 1 due December 31, 2108 (the MaCS II – Series 1), which were distributed by way of an initial public offering on July 6, 2009; and
(b) 1,000 voting trust units of the Trust (Voting Trust Units, and together with the MaCS II – Series 1, the Trust Securities). All of the outstanding Voting Trust Units are held by MLI.
6. The Trust Securities are the only outstanding securities of the Trust. No Trust Securities are currently listed on a marketplace as defined in National Instrument 21-101 Marketplace Operation (NI 21-101).
7. The Trust is a single purpose vehicle established solely for the purpose of effecting the public offering of the MaCS II – Series 1 (the Trust Offering) in order to provide MLI (and indirectly MFC) with a cost-effective means of raising capital for Canadian insurance company regulatory purposes by:
(a) creating and selling the Trust Securities; and
(b) acquiring and holding assets, which consist primarily of a senior debenture issued by MLI in respect of the MaCS II – Series 1 (the MLI Debenture). The Trust used the proceeds of the Trust Offering to purchase the MLI Debenture. The MLI Debenture generates income for payment of principal, interest, the redemption price, if any, and any other amounts in respect of the MaCS II – Series 1.
8. The Trust does not have any material assets other than the MLI Debenture. The Trust has no material liabilities other than an unsecured credit facility in the amount of up to $30,000,000 provided by MLI to the Trust (the Credit Facility). The purpose of the Credit Facility is to ensure liquidity in the normal course of the Trust’s activities. As of December 31, 2016, no amount was outstanding under the Credit Facility.
9. MFC and MLI do not intend to issue further securities through the Trust.
10. On August 21, 2009, the Trust received an order from the securities regulatory authorities in each province and territory of Canada (the 2009 Order) exempting the Trust from certain continuous disclosure and certification requirements, subject to certain specified conditions as specified in the 2009 Order. On January 13, 2017, the Trust received an order from the securities regulatory authorities in each province and territory of Canada (the 2017 Order) replacing the 2009 Order and exempting the Trust from substantially the same continuous disclosure and certification requirements as contained in the 2009 Order, subject to certain specified conditions as specified in the 2017 Order.
11. Pursuant to the 2017 Order, the Trust is exempt from the requirements contained in National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102) to file and deliver, as applicable, (a) audited annual financial statements including management’s discussion and analysis (MD&A) thereon required by sections 4.1 and 5.1 of NI 51-102; (b) unaudited interim financial reports including MD&A thereon required by sections 4.3 and 5.1 of NI 51-102; (c) an annual information form required by section 6.1 of NI 51-102; (d) press releases and material change reports required by section 7.1 of NI 51-102 in the case of material changes that are also material changes in the affairs of MFC; and (e) other material contracts required by section 12.2 of NI 51-102 in the case of material contracts that are also material contracts of MFC (the Continuous Disclosure Filings).
12. As a result, subject to certain terms and conditions and, except as set out in the 2017 Order, no continuous disclosure documents concerning only the Trust will be filed with the Commission.
13. The Trust is a “Class 2 reporting issuer” under the Fees Rule and would be required (but for this order) to pay participation fees under the Fees Rule.
14. MFLP is a limited partnership formed under the Delaware Revised Uniform Limited Partnership Act, as amended, on November 1, 2006, pursuant to a limited partnership agreement and the filing of a certificate of limited partnership with the Secretary of State of the State of Delaware.
15. The Filer’s head office is located at 1105 North Market Street, Suite 1222, Wilmington, Delaware, 19801, and has a financial year end of December 31.
16. MFLP is a reporting issuer or the equivalent in each of the Reporting Jurisdictions. MFLP is not in default under the securities legislation of any of the Reporting Jurisdictions.
17. The authorized unit capital of MFLP consists of an unlimited number of general partnership units and limited partnership units. The sole general partner of MFLP is Manulife Finance Holdings Limited, a wholly-owned subsidiary of MFC incorporated under the Canada Business Corporations Act. The sole limited partner of MFLP is MLI.
18. MFLP completed a public offering (the MFLP Offering) of $650,000,000 principal amount of 5.059% fixed/floating senior debentures of MFLP due December 15, 2041 (first redeemable December 15, 2036) (the MFLP Subordinated Debentures) on December 14, 2006. As of the date hereof, an aggregate principal amount of $650,000,000 MFLP Subordinated Debentures were issued and outstanding.
19. The general partnership units and the limited partnership units of MFLP and the MFLP Subordinated Debentures (collectively, the MFLP Securities) are the only outstanding securities of MFLP. No MFLP Securities are currently listed on a marketplace as defined in NI 21-101.
20. MFC and MLI do not intend to issue further securities through MFLP.
21. MFLP was formed to provide financing to subsidiaries of MFC. MFLP raised funds through the MFLP Offering.
22. MFLP will primarily invest in indirect and direct subsidiaries of MFC. To the extent investments are not made therein, investments may be made in investment grade fixed income securities and short-term money market securities. MFLP has no operations that are independent of MFC and is an entity that functions essentially as a special purpose division of MFC.
23. The MFLP Subordinated Debentures are fully and unconditionally guaranteed by MFC. As a result of the full and unconditional guarantee by MFC, MFLP is entitled to rely on the exemption in section 13.4 of NI 51-102 and is exempt from the Continuous Disclosure Requirements.
24. No Continuous Disclosure Filings concerning only MFLP will be filed with the Commission unless and until MFC no longer provides a full and unconditional guarantee of MFLP Subordinated Debentures, other than those required in section 13.4 of NI 51-102.
25. MFLP is a “Class 2 reporting issuer” under the Fees Rule and would be required (but for this Order) to pay participation fees under the Fees Rule.
The Exemption Sought
26. The Fees Rule includes an exemption for “subsidiary entities” in subsection 2.4(1) of the Fees Rule. MFC and the Trust and MFLP, respectively, meet all of the substantive requirements to rely on the exemption in section 2.4(1) of the Fees Rule, but for (a) the requirement in subsection 2.4(1)(b) of the Fees Rule that the audited financial statements of the parent prepared in accordance with National Instrument 52-107 – Acceptable Accounting Principles and Auditing Standards consolidate the parent and the subsidiary; and (b) the definition of “subsidiary” in section 1.1 of the Fees Rule that refers to a “subsidiary” being determined by the applicable generally accepted accounting principles (being the generally accepted accounting principles determined with reference to the Handbook of the Canadian Institute of Chartered Accountants, as amended from time to time), rather than to a legal definition based on control.
27. Within International Financial Reporting Standards (IFRS), IFRS 10 – Consolidated Financial Statements (IFRS 10) defines a “subsidiary” as “an entity that is controlled by another entity.” IFRS 10 requires subsidiaries to be consolidated into the parent’s financial statements so that the parent and its subsidiaries are presented as a single economic entity.
28. IFRS 10, paragraph six presents three elements of control, listed below, all of which must be held by a potential parent (investor) for control to exist over another entity (investee):
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns.
29. MFC believes it has power over the Trust and MFLP, but is not exposed to their variable returns:
(a) MFC views the significant variable returns generated by these entities to be the financial returns on the financial instruments which they issued to public investors.
(b) It is those investors who are exposed to the Trust and MFLP’s financial returns.
(c) MFLP and the Trust provide tax and regulatory capital advantages to MFC, as compared to if MFC had simply issued financial instruments directly to the same investors. MFC does not view these advantages to be variable returns under IFRS 10.
30. Since MFC is not exposed to the variable returns of the Trust and MFLP, under IFRS 10, the Trust and MFLP are not consolidated into MFC’s financial statements.
31. MFC, as a legal matter, controls:
(a) the Trust through its indirect ownership of all the Voting Trust Units issued by the Trust; and
(b) MFLP, through its indirect ownership of all the general partnership units and limited partnership units of MFLP.
32. MFC has paid, and will continue to pay, participation fees applicable to it under section 2.2(1) of the Fees Rule.
33. MFC annually files a Form 13-502F1 Class 1 Participation Fee and includes the capitalization of the Trust and MFLP in the participation fee calculated applicable to MFC and MFC has paid the participation fee calculated on this basis.
THE ORDER of the Director under the Fees Rule is that the requirements to pay a participation fee under Section 2.2 of the Fees Rule shall not apply to the Trust, for so long as:
(a) MFC, MLI and the Trust continue to satisfy all of the conditions contained in the 2017 Order (or any further order exempting the Trust from substantially the same continuous disclosure and certification requirements as contained in the 2017 Order); and
(b) the capitalization of the Trust represented by the MaCS II – Series 1 and all other outstanding securities of the Trust, other than those held directly or indirectly by MFC, are included in the participation fee calculation applicable to MFC and MFC has paid the participation fee calculated on this basis.
The further decision of the Commission under the Legislation is that the requirements to pay participation fee under section 2.2 of the Fees Rule shall not apply to MFLP, for so long as:
(a) MFLP and MFC continues to satisfy all of the conditions contained in section 13.4 of NI 51-102; and
(b) the capitalization of MFLP represented by the MFLP Subordinated Debentures and all other outstanding securities of MFLP, other than those held directly or indirectly by MFC, are included in the participation fee calculation applicable to MFC and MFC has paid the participation fee calculated on this basis.
DATED this 17th day of May, 2017
Manager, Corporate Finance
Ontario Securities Commission