Headnote
NP 11-203 – Significance test for acquisition by reporting issuer – Filer has IPS structure that produces anomalous result for income test - Filer permitted to use Adjusted Income from Continuing Operations as measure of significance for income test – adjustments permitted wholly relate to anomalies of IPS structure - additional evidence provided by Filer to support acquisition not being significant – undertaking provided by Filer regarding future acquisitions
Applicable Legislative Provision
National Instrument 51-102 Continuous Disclosure Obligations
In the Matter of the Securities Legislation of Ontario
and In the Matter of National Instrument 51-102 – Continuous Disclosure Obligations
and
In the Matter of National Instrument 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions
and
In the Matter of Medical Facilities Corporation
Decision Document
I. Background
The local securities regulatory authority or regulator (the “Decision Maker”) in each of the Jurisdictions has received an application from Medical Facilities Corporation (“MFC”) for a decision under the securities legislation of each of the Jurisdictions (the “Legislation”) granting relief to use an Adjusted Income from Continuing Operations Test (as defined below) rather than the income test as specified under Part 8 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) for purposes of MFC’s continuous disclosure obligations under the Legislation in respect of the acquisition (the “Acquisition”) by MFC of a 51% interest in The Surgery Centre of Newport Coast, LLC (“SCNC”) (the “Requested Relief”).
Under National Instrument 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for this application (the “Principal Regulator”); and
(b) this decision document evidences the decision of each notified passport jurisdiction, being British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia and Newfoundland and Labrador.
II. Interpretation
- Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
III. Representations
This decision is based on the following facts represented by MFC:
MFC is a corporation continued and validly existing under the laws of the Province of British Columbia. Its head office is located in Toronto, Ontario.
MFC owns, indirectly, controlling interests in hospitals and surgery centres located in the U.S.
MFC’s financial year-end is December 31.
MFC is a reporting issuer in all of the provinces and territories of Canada.
MFC is an issuer of income participating securities (IPS). IPSs include a debt and equity component. MFC’s currently issued and outstanding IPSs are listed on the TSX.
SCNC is a limited liability company formed under the laws of the State of Delaware carrying on business as a licensed ambulatory surgery center.
SCNC’s financial year-end is December 31.
SCNC is not a reporting issuer in any jurisdiction, nor are its shares listed for trading on any stock exchange or other market.
The financial statements for SCNC for its December 31, 2007 year end were prepared on a cash basis. These financial statements would not yield materially different results then if the financial statements were prepared on an accrual basis.
On January 7, 2008, MFC acquired a 51% interest in SCNC.
Under subsection 8.3(2) of NI 51-102, MFC is required to file a business acquisition report (BAR) for any completed acquisition that is determined to be significant based on the acquisition satisfying any of the three tests set out in that subsection.
One of the significance tests, the income test, in subsection 8.3(2) of NI 51-102 requires MFC to compare its proportionate share of the income from continuing operations of SCNC to its own income from continuing operations based on the most recently completed financial year end of each ended before the date of acquisition; in this case, December 31, 2006. The application of the income test to the Acquisition resulted in a finding that the Acquisition was significant.
As a consequence of the determination of significance produced by the application of the income test, MFC relied on the optional income test in subsection 8.3(4) of NI 51-102, which permits a similar comparison to be made based on the most recently completed financial year of MFC and the most recently completed financial year of SCNC; in this case, December 31, 2007. The application of the optional income test produced a similar result; that the Acquisition was significant.
The application of the income test and the optional income test both produce an anomalous result for MFC in comparison to the results of the other tests of significance in section 8.3 of NI 51-102 that were not triggered and in comparison to other financial and non-financial measures provided by MFC demonstrating the insignificance of the Acquisition.
The Adjusted Income from Continuing Operations Test, in relation to MFC, means the consolidated income from the continuing operations of MFC as prescribed in NI 51-102, calculated by excluding (i) the interest expense on the subordinated note component of MFC’s IPSs, and (ii) the unrealized foreign currency gain or loss on the subordinated note component of MFC’s IPSs.
The use of the Adjusted Income from Continuing Operations Test, rather than income from continuing operations as prescribed in NI 51-102, provides a more realistic indication of the significance of an acquisition made by MFC.
The application of the Adjusted Income from Continuing Operations Test to the Acquisition produces a result that the Acquisition is not significant, a result which is more consistent with the other tests of significance in section 8.3 of NI 51-102.
MFC has agreed to provide the local securities regulator in each of the Jurisdictions with an undertaking that, in determining its continuing disclosure obligations in respect of any future acquisitions, the Adjusted Income from Continuing Operations Test will be the measure relied upon in assessing significance under the income test or optional income test in NI 51-102.
IV. Decision
The Principal Regulator is satisfied that the tests contained in the Legislation that provides the Principal Regulator with the jurisdiction to make the decisions described herein have been met.
The decision of the Principal Regulator is that the Requested Relief is granted.
“Michael Brown”
Assistant Manager, Corporate Finance Ontario Securities Commission