Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief from the prospectus requirements to allow U.S. company to spin off shares of a partially owned company that it invested assets in to investors by way of a distribution in specie – distribution not covered by legislative exemptions – U.S. parent company is a public company in the U.S. but is not a reporting issuer in Canada – U.S. parent company has a de minimis presence in Canada – no investment decision required from Canadian shareholders in order to receive distributions.

 

Applicable Legislative Provisions

 

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

 

September 12, 2017

 

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

TWO HARBORS INVESTMENT 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 (the Legislation) for an exemption (the Exemption Sought) from the prospectus requirement contained in the Legislation in connection with the proposed distribution (the Distribution) by the Filer of common stock (the GPMT Shares) of Granite Point Mortgage Trust Inc. (GPMT), a majority-owned subsidiary of the Filer, by way of a pro rata dividend in specie to holders (the Filer Shareholders) of common stock of the Filer (the Filer Shares) who are resident in Canada (the Filer Canadian Shareholders).

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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon.

 

Interpretation

 

Terms defined in National Instrument 14-101 Definitions and MI 11-102 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 Maryland corporation focused on investing in, financing and managing residential mortgage-backed securities, mortgage servicing rights, and other financial assets. The Filer was incorporated on May 21, 2009, and commenced operations as a publicly traded company on October 28, 2009, upon completion of a merger with Capitol Acquisition Corp., or Capitol, which became a wholly owned indirect subsidiary of the Filer as a result of the merger. The Filer has elected to be treated as a real estate investment trust (REIT), as defined under the Internal Revenue Code of 1986, as amended, for U.S. federal income tax purposes. The Filer’s corporate headquarters are located at 590 Madison Avenue, 36th Floor New York, NY 10022 U.S.A.

 

2.             The Filer is externally managed and advised by PRCM Advisers LLC, which is a subsidiary of Pine River Capital Management L.P. (Pine River), a global multi-strategy asset management firm with a head office at 601 Carlson Parkway, 7th Floor Minnetonka, MN 55305 U.S.A.

 

3.             The Filer is not a reporting issuer, and has no intention of becoming a reporting issuer, under the securities laws of any province or territory of Canada.


4.             The authorized capital stock of the Filer consists of 900,000,000 Filer Shares and 50,000,000 shares of preferred stock, of which as of August 7, 2017 there were 348,972,325 Filer Shares, 5,750,000 shares of Series A preferred stock and 11,500,000 shares of Series B preferred stock issued and outstanding.

 

5.             The Filer Shares are listed on the New York Stock Exchange (NYSE) under the symbol “TWO”. The Filer Shares are not listed or posted for trading on any exchange or market in Canada and the Filer has no intention of listing its securities on any exchange or market in Canada.

 

6.             The Filer is subject to the United States Securities Exchange Act of 1934, as amended (the 1934 Act) and the rules, regulations and orders promulgated thereunder.

 

7.             According to a geographic breakdown of registered shareholders prepared for the Filer by its transfer agent, Wells Fargo Shareowner Services, as at July 17, 2017, there were two registered Filer Canadian Shareholders holding 20.7460 Filer Shares in the aggregate (one in Ontario holding 18.9600 Filer Shares and one in British Columbia holding 1.7860 Filer Shares), representing approximately 0.47% of the registered shareholders of the Filer worldwide and approximately 0.0000059% of the outstanding Filer Shares. The Filer does not expect these numbers to have materially changed since that date.

 

8.             Based on a geographic analysis of beneficial ownership prepared for the Filer by Broadridge Financial Solutions, Inc., as at July 18, 2017 there were 1,583 beneficial Filer Canadian Shareholders holding approximately 6,665,336 Filer Shares, representing approximately 1.81% of the beneficial holders of Filer Shares worldwide (based on the number of beneficial shareholders worldwide as of March 2017) and 1.91% of the outstanding Filer Shares. The Filer does not expect these numbers to have materially changed since those dates.

 

9.             Based on the information above, the number of Filer Canadian Shareholders and the proportion of Filer Shares held by such shareholders, is de minimis.

 

10.          GPMT is a Maryland corporation that focuses primarily on directly originating, investing in, financing and managing senior commercial mortgage loans and other debt and debt-like commercial real estate investments. GPMT intends to elect to be taxed as a REIT as defined under the United States Internal Revenue Code of 1986, as amended. GPMT was formed to continue and expand the commercial real estate lending business established by the Filer. GPMT was incorporated on April 7, 2017 and its corporate headquarters are located at 590 Madison Avenue, 36th Floor New York, NY 10022 U.S.A.

 

11.          GPMT is externally managed and advised by Pine River, by the same team that managed the commercial real estate lending business while it was conducted by the Filer.

 

12.          GPMT completed its initial public offering (the GPMT IPO) in the United States on June 28, 2017. Prior to the closing of the GPMT IPO, GPMT had no substantive operations.

 

13.          Concurrently with the closing of the GPMT IPO, GPMT completed a formation transaction with the Filer (the Formation Transaction) pursuant to which GPMT acquired the equity interests in its predecessor, TH Commercial Holdings LLC, and its portfolio of 41 commercial real estate debt investments, from the Filer in exchange for, amongst other things, 33,071,000 GPMT Shares (the Consideration Shares).

 

14.          Upon the closing of the GPMT IPO and the Formation Transaction, the Filer owned, and continues to own, 33,071,000 GPMT Shares representing approximately 76.5% of outstanding GPMT Shares.

 

15.          GPMT is not a reporting issuer under the securities laws of any province or territory of Canada. To the knowledge of the Filer, GPMT has no intention of becoming a reporting issuer under the securities laws of any province or territory of Canada.

 

16.          The authorized capital stock of GPMT consists of 450,000,000 GPMT Shares and 50,000,000 shares of preferred stock, of which as of August 14, 2017 there were 43,234,205 GPMT Shares and no shares of preferred stock issued and outstanding.

 

17.          The GPMT Shares are listed on the NYSE under the symbol “GPMT”. GPMT Shares are not listed on any exchange or market in Canada and, to the knowledge of the Filer, GPMT has no intention of listing its securities on any exchange or market in Canada.

 

18.          Subject to applicable law and certain exceptions with respect to fractional shares, as described below, and any jurisdictions where the distribution is illegal, the Filer intends to distribute all of the Consideration Shares on a pro rata basis and by way of a special dividend in specie, to Filer Shareholders as of a record date to be declared by the Filer’s board of directors and the Distribution is expected to occur in October of 2017.

 

19.          The Filer Shareholders will not be required to pay any cash, deliver any other consideration or surrender or exchange their Filer Shares, or take any other action in order to receive the Consideration Shares in connection with the Distribution. The Distribution will not cancel or affect the number of outstanding Filer Shares and the Filer Shareholders will retain their Filer Share certificates, if any. The Distribution will occur automatically and without any investment decision on the part of the Filer Shareholders. Neither the Formation Transaction nor the Distribution requires the Filer Shareholders’ approval under United States law.

 

20.          No fractional GPMT Shares will be distributed in connection with the Distribution. Instead, as soon as practicable after the Distribution, the distribution agent for the Distribution will aggregate all fractional shares into whole GPMT Shares, sell the whole GPMT Shares in the open market at prevailing market prices and distribute the net cash proceeds from the sales pro rata to each Filer Shareholder who otherwise would have been entitled to receive a fractional share in the Distribution.

 

21.          The Distribution will not require registration under the Securities Act of 1933, as amended (the U.S. Securities Act) because the Distribution will meet the conditions for exemption from registration under Staff Legal Bulletin No. 4 (SLB No. 4) and will therefore not constitute a “sale” of securities within the meaning of section 2(a)(3) of the U.S. Securities Act.

 

22.          The Filer Canadian Shareholders who receive the Consideration Shares pursuant to the Distribution will receive the same information as other Filer Shareholders about the ratio the Filer will use to compute the number of Consideration Shares distributed per Filer Share, how fractional shares will be treated and the expected tax consequences of the Distribution. The Filer Canadian Shareholders will have access to all disclosure documents of the Filer via the U.S. Securities and Exchange Commission’s Website at https://www.sec.gov/edgar.shtml, as such documents are available to any other Filer Shareholders.

 

23.          Following the completion of the Distribution, Filer Canadian Shareholders who receive Consideration Shares pursuant to the Distribution, to the extent they continue to hold such shares, will be treated as any other GPMT Shareholder and will be concurrently sent the same disclosure materials required to be sent under applicable U.S. laws that GPMT sends to its shareholders in the United States.

 

24.          There will be no active trading market for the GPMT Shares in Canada following the Distribution and none is expected to develop. Consequently, it is expected that any resale of GPMT Shares distributed in the Distribution will occur through the facilities of the NYSE or any other exchange or market outside of Canada on which the GPMT Shares may be quoted or listed at the time that the trade occurs or to a person or company outside of Canada.

 

25.          The Distribution to Filer Canadian Shareholders would be exempt from the Prospectus Requirement pursuant to subsection 2.31(2) of NI 45-106 Prospectus Exemptions but for the fact that GPMT is not a reporting issuer under the securities legislation in any jurisdiction of Canada.

 

26.          Neither the Filer nor GPMT is in default of any of its obligations under the securities legislation of any jurisdiction in Canada.

 

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 Exemption Sought is granted on the condition that the first trade in GPMT Shares acquired pursuant to the Distribution will be deemed to be a distribution unless the conditions in section 2.6 or subsection 2.14(1) of National Instrument 45-102 Resale of Securities are satisfied.

 

“Garnet Fenn”

Commissioner

Ontario Securities Commission

 

“Robert P. Hutchinson”

Commissioner

Ontario Securities Commission