Headnote
MI 11-102 and NP 11-203 – Exemption from formal issuer bid requirements – Issuer proposes to repurchase, from time to time, preferred shares on a pro rata basis from three preferred shareholders and each such repurchase constitutes an issuer bid under the Act – Each preferred shareholder is a sophisticated investor and would qualify as an “accredited investor” and does not require an issuer bid circular nor the other protections of the formal issuer bid requirements – All preferred shareholders will be treated equally and must provide consent and acknowledgement for the proposed offers – Relief from formal issuer bid requirements granted, subject to conditions
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c.S.5, as am., ss. 93 to 99.1 and 104(2)(c)
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 Fairfax Financial Holdings Limited (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 of the principal regulator (the Legislation) for an exemption from the requirements in sections 93 to 99.1 of the Legislation that are applicable to issuer bids (the Formal Issuer Bid Requirements) in connection with the Proposed Offers (as defined below) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the OSC) is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7(a) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Quebec and Nova Scotia.
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
The decision is based on the following facts represented by the Filer:
The Filer is a corporation incorporated under the Canada Business Corporations Act.
Pursuant to Section 3.6(3)(b) of National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions the Filer has selected the OSC as principal regulator as the Filer’s head office is located in Toronto, Ontario.
The Filer is a reporting issuer in all the provinces and territories of Canada, and has been for more than 12 months, and is not in default of securities legislation in any jurisdiction where the Filer is a reporting issuer.
The authorized share capital of the Filer consists of an unlimited number of multiple voting shares carrying ten votes per share, an unlimited number of subordinate voting shares carrying one vote per share, and an unlimited number of preferred shares issuable in series.
As at April 30, 2008, there were issued and outstanding 17,786,165 subordinate voting shares, 1,548,000 multiple voting shares, 3,000,000 Series A preferred shares and 5,000,000 Series B preferred shares (the Series A preferred shares and Series B preferred shares are collectively referred to as the Preferred Shares).
The subordinate voting shares are publicly listed and posted for trading on the Toronto Stock Exchange (the TSX).
The multiple voting shares are beneficially owned and controlled, indirectly, by V. Prem Watsa, the Filer’s Chairman and Chief Executive Officer, and are not listed on the TSX. The multiple voting shares are convertible into subordinate voting shares.
The Series A preferred shares are held entirely by a Schedule I Canadian chartered bank and the Series B preferred shares are held entirely by two other Schedule I Canadian chartered banks.
The Preferred Shares are not listed on the TSX and are not convertible into subordinate voting shares or multiple voting shares. The Preferred Shares are not entitled to vote except with respect to certain matters affecting such shares as a class or series.
The Series A preferred shares are floating rate cumulative preferred shares with an annual dividend rate based on the prime rate, but in any event not less than 5% per annum and have a stated capital of Cdn$25.00 per share. The Series A preferred shares are currently redeemable at the option of the Filer, however, all of the outstanding Series A preferred shares must be redeemed if the Filer chooses to exercise its redemption right. A partial redemption is not permitted by the terms of the Series A preferred shares.
The Series B preferred shares are fixed rate cumulative preferred shares with a dividend rate of 6.5% per annum until November 30, 2009 and thereafter at an annual rate based upon the yield of five year Government of Canada bonds, and have a stated capital of Cdn$25.00 per share. The Filer may not redeem any of the Series B preferred shares prior to December 1, 2009. The Filer may, on December 1, 2009 and on December 1, in every fifth year thereafter, redeem at any time all, but not less than all, the outstanding Series B preferred shares.
The redemption price for the Series A preferred shares and Series B preferred shares is $25.00 per share, plus accrued and unpaid dividends.
The Series A preferred shares rank on a parity with the Series B preferred shares with respect to dividends and return of capital in the event of the liquidation, dissolution or winding-up of the Filer.
The Preferred Shares are entitled to a preference over the subordinate voting shares and multiple voting shares and over any other shares ranking junior to the Preferred Shares with respect to priority in payment of dividends and in the distribution of assets (to the extent of the redemption price for such shares) in the event of the Filer’s liquidation, dissolution or winding-up, whether voluntary or involuntary, or any other distribution of the Filer’s assets among shareholders for the purpose of winding-up the affairs of the Filer.
Holders of Series A preferred shares have the right to convert such shares into Series B preferred shares on a one-for-one basis on December 1, 2004 and on December 1 in every fifth year thereafter. Holders of Series B preferred shares have the right to convert such shares into Series A preferred shares on a one-for-one basis on December 1, 2009 and on December 1 in every fifth year thereafter. Such conversion rights are subject to limitations and to the Filer’s right to automatically convert all remaining shares of a series if less than 500,000 shares of the series would be outstanding following the exercise of conversion rights by holders.
The conditions attaching to the Preferred Shares in the Filer’s articles permit, subject to applicable law, the repurchase of all or any part of an outstanding series of Preferred Shares by private contract at the lowest price or prices at which, in the opinion of the Filer’s board of directors, such shares are then obtainable.
The Filer intends to invite, from time to time, the holders of the Preferred Shares (the Preferred Shareholders) to sell Preferred Shares back to the Filer for cancellation by way of private contract (the Proposed Offers).
The Preferred Shareholders are all sophisticated investors with extensive knowledge of the Canadian securities market and would qualify as “accredited investors” as defined in Section 1.1 of National Instrument 45-106 Prospectus and Registration Exemptions and accordingly do not require the protection afforded by the Formal Issuer Bid Requirements.
All of the Preferred Shareholders are the original holders of the Series A preferred shares and Series B preferred shares, respectively.
The Filer and the Preferred Shareholders have determined that it would be advantageous for the Filer to be able to make Proposed Offers in order to avoid the time and expense involved in complying with the Formal Issuer Bid Requirements.
Any private contract entered into between the Filer and the Preferred Shareholders would include an acknowledgement from the Preferred Shareholders that (i) the Filer is relying on an exemption from the Formal Issuer Bid Requirements, (ii) that the Preferred Shareholders are accredited investors, and (iii) that they will not receive an issuer bid circular from the Filer or be afforded the other protections in Part XX − Take-Over Bids and Issuer Bids of the Legislation.
The terms of any Proposed Offer would be negotiated on an arm’s length basis between the Filer and the Preferred Shareholders, but would be completed at a price not to exceed the redemption price of Cdn$25.00 per Preferred Share, plus accrued and unpaid dividends, and otherwise in accordance with the conditions attaching to the Preferred Shares and any other outstanding shares in the capital of the Filer.
To the extent there is more than one holder of a particular series of Preferred Shares, any purchases made under the Proposed Offer would be made pro rata among the holders of the series accepting the Proposed Offer and only with the agreement of all holders of such series of Preferred Shares.
Any Proposed Offer made to the holders of Series A preferred shares will be made to the holders of Series B preferred shares, and vice versa.
The terms of any Proposed Offer will be approved by the Filer’s board of directors.
The Proposed Offers will not adversely affect the Filer nor the rights of any of its security holders.
Each Proposed Offer would constitute an “issuer bid” under the Formal Issuer Bid Requirements. The exemptions from the Formal Issuer Bid Requirements contained in the Legislation would not be available in respect of each Proposed Offer.
All holders of the Preferred Shares have been advised of this order and have not raised any objection to its granting nor the resulting exemption from the Formal Issuer Bid Requirements.
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 Proposed Offers, to the extent made by the Filer from time to time, shall be exempt from the Formal Issuer Bid Requirements, provided that:
(a) At the time of each Proposed Offer, no person or company, other than the Preferred Shareholders as of the date of this decision, holds Preferred Shares;
(b) Each Proposed Offer is made to all holders of Series A preferred shares and Series B preferred shares on a pro rata basis and on identical terms and only with the agreement of all holders of such series of Preferred Shares, although the timing of closing of the repurchase of shares pursuant to a Proposed Offer may differ between series to coincide with the next dividend payment date applicable to a particular series; and
(c) The private contracts entered into between the Filer and the Preferred Shareholders in respect of each Proposed Offer include an acknowledgement from the Preferred Shareholders that (i) the Filer is relying on an exemption from the Formal Issuer Bid Requirements, (ii) that the Preferred Shareholders are accredited investors and (iii) that the Preferred Shareholders will not receive an issuer bid circular from the Filer or be afforded the other protections in Part XX - Take-Over Bids and Issuer Bids of the Legislation.
David L. Knight
Mary Condon
Name: David L. Knight
Name: Mary Condon
Title: Commissioner
Title: Commissioner
Ontario Securities Commission
Ontario Securities Commission