National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Dual application – Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions – Minority approval of a related party transaction – Application for relief from requirement to require minority approval – Securities are technically equity securities but are akin to preferred shares – Sale of trust assets to redeem securities – OSFI approval is required.
Applicable Legislative Provisions
Securities Act (Québec), s. 263
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.6, 9.1.
May 22, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
NBC ASSET TRUSTTM
The securities regulatory authority or regulator in each of the Jurisdictions (each a “Decision Maker”) has received an application (the “Application”) from the Filer for a decision under the securities legislation of the Jurisdictions (the “Legislation”) for an exemption from the requirement to obtain minority approval from every class of affected securities as set out in Regulation 61-101 respecting Protection of Minority Security Holders in Special Transactions (“Regulation 61-101”) in connection with a proposed related party transaction (as defined in Regulation 61-101) in connection with the proposed Sale of Trust Assets (as defined below) to National Bank of Canada (the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers is the principal regulator for this Application;
(b) the Filer has provided notice that Subsection 4.7(1) of Regulation 11-102 respecting Passport System (“Regulation 11-102”) is intended to be relied upon by the Filer in Alberta, Manitoba and New Brunswick; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in Regulation 14-101 respecting Definitions, Regulation 11-102 and Regulation 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 closed-end trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of December 17, 2007, as amended and restated by an amended and restated declaration of trust dated January 22, 2008 as further amended by a first supplemental declaration of trust dated as of June 30, 2008 and a second supplemental declaration of trust dated as of July 14, 2010.
2. Natcan Trust Company is the trustee of the Filer (the “Trustee”).
3. The Filer’s head office is located at the National Bank Tower, 600 de La Gauchetière Street West, 4th Floor, Montréal, Québec, H3B 4L2.
4. The Filer was established solely for effecting offerings of securities to provide National Bank of Canada (the “Bank”) with a cost-effective means of raising capital for regulatory purposes under the Bank Act (Canada) (the “Bank Act”). The Bank is the administrative agent (“Administrative Agent”) of the Filer pursuant to an administrative and advisory agreement (“Administrative and Advisory Agreement”) entered into between the Trustee and the Bank on December 17, 2007 and as such administers the affairs of the Filer. The Filer issued to investors in all provinces of Canada (the “Offerings”), by way of prospectuses dated January 16, 2008 and June 25, 2008, respectively (collectively, the “Prospectuses”), transferable trust units called Trust Capital Securities – Series 1 or “NBC CapS II – Series 1” and Trust Capital Securities – Series 2 or “NBC CapS II – Series 2” (collectively, the “NBC CapS II”).
5. The Filer is a reporting issuer in each of the provinces of Canada and is not in default of any requirement of the securities legislation in the jurisdictions in which it is a reporting issuer.
6. The capital of the Filer consists of special trust securities (the “Special Trust Securities”) and the NBC CapS II (together, the “Trust Securities”). The NBC CapS II are held by the public and all outstanding Special Trust Securities are held by the Bank. The Trust Securities are not listed and posted for trading on any stock exchange.
7. There are currently $400 million of NBC CapS II – Series 1, $350 million of NBC CapS II – Series 2 and $1,350 million of Special Trust Securities issued and outstanding.
8. The NBC CapS II have the attributes described below. The Special Trust Securities are the only voting securities of the Filer.
9. The objective of the Filer is to acquire, with the proceeds of offerings of securities, and hold assets (“Trust Assets”) primarily from the Bank or its affiliates, generally on a fully-serviced basis, which consist of: residential mortgages, mortgage co-ownership interests, mortgage-backed securities and eligible investments (as defined in the Prospectuses). The Bank and its affiliates are responsible for the servicing of the Trust Assets, including reporting on the performance of the Trust Assets and investment of the proceeds of the Trust Assets. The Trust Assets will generate income for distribution to holders of Trust Securities. The Filer does not, and will not, carry on any operating activity other than in connection with offerings of Trust Securities.
10. The Bank is a chartered bank subject to the provisions of the Bank Act.
11. The Bank’s head office is located at the National Bank Tower, 600 de La Gauchetière Street West, 4th Floor, Montréal, Québec, H3B 4L2.
12. The Bank maintains offices and provides services in each of the Canadian provinces, offering a full range of financial services to individuals, commercial enterprises, financial institutions and governments both in Canada and abroad.
13. The Bank is a reporting issuer in each of the provinces of Canada and is not in default of any requirement of the securities legislation in the jurisdictions in which it is a reporting issuer.
14. The NBC CapS II qualified as Tier 1 capital of the Bank under the Innovative Capital Guidelines, as amended, issued by the Office of the Superintendent of Financial Institutions (Canada) (the “Superintendent”) pursuant to the Bank Act.
15. The terms of the NBC CapS II include the following:
(a) The NBC CapS II pay a fixed non-cumulative distribution (the “Indicated Distribution”) on the last day of June and December in each year. Each semi-annual payment date for the Indicated Distribution in respect of the NBC CapS II (a “Distribution Date”) will be either a “Regular Distribution Date” or a “Distribution Diversion Date”. A Distribution Date will be a “Distribution Diversion Date” with the result that the Indicated Distribution will not be paid in respect of the NBC CapS II but, instead, the Filer will pay the net distributable funds of the Filer to the Bank as holder of the Special Trust Securities if: (i) the Bank has failed in the period described in the Prospectuses to declare regular dividends on the Bank preferred shares of any series; or (ii) if no Bank preferred shares are then outstanding, the Bank has failed in the period described in the Prospectuses to declare regular dividends on the Bank common shares. In all other cases, a Distribution Date will be a “Regular Distribution Date” (the “Regular Distribution Date”). The Bank preferred shares and common shares are hereinafter collectively referred to as the “Dividend Restricted Shares”.
(b) Under the Bank Share Exchange Agreements dated January 22, 2008 and June 30, 2008 entered into among the Bank, the Filer and a party acting as exchange trustee (the “Bank Share Exchange Agreements”), the Bank agreed, for the benefit of the holders of NBC CapS II, that in the event that the Filer fails on any Regular Distribution Date to pay the Indicated Distribution on the NBC CapS II in full, the Bank will not pay dividends on the Dividend Restricted Shares until a specified period of time has elapsed, unless the Filer first pays such Indicated Distribution (or the unpaid portion thereof) to holders of NBC CapS II (the “Dividend Stopper Undertaking”). Accordingly, it is in the interest of the Bank to ensure that the Filer complies with the obligation to pay the Indicated Distribution on each Regular Distribution Date.
(c) The NBC CapS II will be automatically exchanged, without the consent of the holder, for newly issued First Preferred Shares Series 19 or First Preferred Shares Series 23 of the Bank (the “Bank Preferred Shares”) upon the occurrence of certain circumstances (an “Automatic Exchange”).
(d) The Filer may, subject to the approval of the Superintendent, on June 30, 2013 or July 31, 2013, and on each Distribution Date thereafter, redeem the NBC CapS II – Series 1 or the NBC CapS – Series 2, as the case may be. The price payable in respect of any such redemption will include an early redemption compensation component (the “Early Redemption Price”) in the event of a redemption prior to June 30, 2018 (in respect of NBC CapS II – Series 1) or June 30, 2020 (in respect of NBC CapS II – Series 2) (the “Early Redemption Date”). The price payable in all other cases will be $1,000 per NBC CapS II together with any unpaid Indicated Distribution thereon (the “Redemption Price”).
(e) Upon the occurrence of certain regulatory or tax events affecting the Bank or the Filer (a “Special Event”), in each case prior to the Early Redemption Date, the Filer may, subject to approval of the Superintendent, redeem all but not less than all of the NBC CapS II – Series 1 or NBC CapS II – Series II, as the case may be, at the Early Redemption Price.
(f) The Bank has covenanted that all of the outstanding Special Trust Securities will be held by it at all times. Except for the initial $140 million of Special Trust Securities issued to the Bank in January 2008, all other Special Trust Securities held by the Bank are redeemable, in whole or in part, at any time or from time to time, at the option of the Bank, subject to Superintendent approval.
(g) As long as any NBC CapS II are outstanding and are held by any person other than the Bank, the Filer may only be terminated with the approval of the Bank as the sole holder of the Special Trust Securities and with the approval of the Superintendent: (i) upon the occurrence of a Special Event prior to July 31, 2013; or (ii) for any reason on July 31, 2013 or any Distribution Date thereafter. Holders of each series of outstanding Trust Securities will rank pari passu in the distribution of the property of the Filer in the event of a termination of the Filer after the discharge of any creditor claims. As long as any NBC CapS II are outstanding and held by any person other than the Bank, the Bank will not approve the termination of the Filer unless the Filer has sufficient funds to pay the Early Redemption Price in the case of a termination prior to the Early Redemption Date, or the Redemption Price in the case of a termination at any other time.
(h) The NBC CapS II are non-voting except in limited circumstances.
(i) Except to the extent that the Indicated Distribution is payable to holders of NBC CapS II, and other than in the event of a termination of the Filer, the NBC CapS II holders have no claim or entitlement to the income of the Filer or the assets held by the Filer.
16. Pursuant to the Administrative and Advisory Agreement, the Trustee has delegated to the Bank certain of its obligations in relation to the administration of the Filer. The Bank, as advisor and Administrative Agent, provides advice and counsel with respect to the management of the Trust Assets and administers the day-to-day operations of the Filer and provides other advice or counsel as may be requested by the Trustee from time to time.
17. The Filer intends, upon providing notice, no later than May 31, 2018, to the holders of the NBC CapS II – Series 1, to redeem on June 30, 2018 all the $400 million outstanding NBC CapS II– Series 1 (the “Redemption of Series 1”) at the Redemption Price in accordance with their terms.
18. The Filer intends to redeem the NBC CapS II– Series 1 as these instruments no longer qualify as additional Tier 1 capital instruments, are being phased-out and excluded from the Bank’s additional Tier 1 and total capital.
19. In connection with the Redemption of Series 1, and to allow the Filer to have sufficient funds to proceed with the Redemption of Series 1, the Filer is proposing to sell Trust Assets to the Bank at fair market value for an aggregate amount equivalent to the Redemption Price plus any related expenses of the Filer (the “Redemption of Series 1 Sale of Trust Assets”).
20. The Bank and the Filer undertook to the Superintendent that the book value of the net assets of the Filer, less (i) undistributed income of the Filer and (ii) contributed surplus (if any) arising from the difference in the book values and tax values of assets acquired by the Filer, will not at any time exceed the aggregate issue price of all series of NBC CapS II issued by the Filer (namely $750 million) by more than 200% without the Superintendent’s approval (the “Ratio”). The Ratio is currently at approximately 180%.
21. In order to maintain the Ratio at 180%, the Bank also intends to require the Filer to redeem, concurrently with the Redemption of Series 1, subject to Superintendent approval, approximately $720 million of Special Trust Securities held by the Bank in accordance with the terms of such securities (the “Redemption of Special Trust Securities”), and the Filer is proposing to sell Trust Assets to the Bank at fair market value for an aggregate amount equivalent to approximately $720 million to proceed with such redemption (the “Special Trust Securities Redemption Sale of Trust Assets”).
22. If following the Redemption of Series 1 and Redemption of Special Trust Securities, the Ratio were to increase above 200%, the Filer may be required from time to time to sell additional Trust Assets to the Bank if required by the Superintendent to satisfy the 200% Ratio limitation (together with the Redemption of Series 1 Sale of Trust Assets and Special Trust Securities Redemption Sale of Trust Assets, the “Sale of Trust Assets”).
23. The Bank is a related party of the Filer under Regulation 61-101 as the sole holder of voting Special Trust Securities and as Administrative Agent of the Filer under the Administration and Advisory Agreement.
24. The Sale of Trust Assets by the Filer to the Bank would constitute a related party transaction under Regulation 61-101, which may be greater than 25% of the market capitalization of the Filer.
25. Pursuant to subsection 5.5(b) of Regulation 61-101, the Filer is exempt from the formal valuation requirement for the Sale of Trust Assets under subsection 5.4(1) of Regulation 61-101 since none of the Filer’s securities are listed on specified markets.
26. Absent exemptive relief, the Filer will be required to obtain minority approval for the Sale of Trust Assets from holders of NBC CapS II since even if they have all of the attributes of preferred shares, the NBC CapS II may constitute “equity securities” within the meaning of Regulation 61-101 because they are entitled to a residual right to participate in the assets of the Filer upon its termination.
27. The only purpose of the Sale of Trust Assets is to raise sufficient funds to allow the Filer to proceed with the Redemption of Series 1 and Redemption of Special Trust Securities in accordance with the terms of such securities and to allow the Filer to comply with the Ratio.
28. The holders of NBC CapS II – Series 1 will have their shares redeemed in accordance with their terms on June 30, 2018, following the Sale of Trust Assets. Such holders will receive the same consideration for their securities regardless of whether the Trust Assets are sold to the Bank or a third party.
29. The payment of the Indicated Distribution on the NBC CapS II – Series 2 will be entirely dependent on the income stream generated by the Trust Assets held by the Filer. It is in the Bank’s interest to ensure that, on any Regular Distribution Date, holders of NBC CapS II – Series 2 receive the Indicated Distribution since, if the Filer fails to pay the Indicated Distribution on such date, the Dividend Stopper Undertaking will preclude the Bank from paying dividends on the Dividend Restricted Shares for a specified period of time. Accordingly, the Bank would have an incentive to provide support to the Filer if the Filer is unable to pay the Indicated Distribution since such a failure would have a significant adverse effect on the price of the Dividend Restricted Shares as well as the Bank’s ability to raise capital.
30. The Redemption of Series 1 and Redemption of Special Trust Securities will only be exercised with the approval of the Superintendent. The Superintendent granted its approval on May 18, 2018.
31. Given that the Bank has an incentive to provide support to the Filer in the event that the Filer is unable to pay the Indicated Distribution, that the Superintendent authorized the Redemption of Series 1 and Redemption of Special Trust Securities and taking into account the terms of the NBC CapS II – Series 2, the rights and economic interests of the holders of NBC CapS II – Series 2 are protected.
32. The policy objectives of Regulation 61-101 are not served by imposing the vote of minority NBC CapS II holders in the context of the Sale of Trust Assets.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted.
“Lucy J. Roy”
Directrice principale du financement des sociétés
Autorité des marchés financiers