Headnote
MI 11-102 and NP 11-203 as applicable – capital trust established by bank to issue capital trust securities as cost-effective means of raising capital for Canadian bank regulatory purposes exempted from eligibility requirements to file a short form prospectus; certain form requirements and the 10-day notice requirement– trust is not currently a reporting issuer – relief granted as disclosure regarding the bank is more relevant and bank has been reporting issuer for many years – relief subject to conditions – National Instrument 44-101 Short Form Prospectus Distributions – relief also granted for temporary confidentiality of decision
Applicable Legislative Provisions
National Instrument 44-101 Short Form Prospectus Distributions, ss. 2.1
September 3, 2008
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 THE BANK OF NOVA SCOTIA (THE “BANK”) AND SCOTIABANK TIER 1 TRUST (THE “TRUST” AND, TOGETHER WITH THE BANK, THE “FILERS”)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision (the “Requested Relief”) under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) that:
A. the Trust be exempted from the following short form prospectus distribution requirements in connection with offerings by the Trust from time to time of Subordinated Notes (as defined herein):
(i) the requirements of Part 2 of National Instrument 44-101 Short Form Prospectus Distributions (“NI 44-101”), which set forth the eligibility requirements to enable an issuer to file a prospectus in the form of a short form prospectus;
(ii) the disclosure requirements in Item 6 (Earnings Coverage Ratios) and Item 11 (Documents Incorporated by Reference), with the exception of Item 11.1(1)(5), of Form 44-101F1 of NI 44-101 (“Form 44-101F1”) in respect of the Trust, as applicable; and
(iii) the requirement in Section 2.8 of NI 44-101 to file a notice of intention to file a short form prospectus no fewer than 10 business days prior to the filing of the Trust’s first preliminary short form prospectus.
B. the Trust is qualified to file a prospectus in the form of a short form prospectus in accordance with NI 44-101; and
C. the application of the Filers that this decision document be held in confidence by the principal regulator, subject to certain conditions.
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 Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in each of the provinces and territories of Canada other than Ontario.
Interpretation
The terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
“Bank Act” means the Bank Act (Canada);
“Tax Act” means the Income Tax Act (Canada);
Representations
This decision is based on the following facts represented by the Filers:
The Bank
The Bank is a Schedule 1 chartered bank subject to the provisions of the Bank Act (Canada). The head office of the Bank is located at 1709 Hollis Street, Halifax, Nova Scotia B3J 1W1 and the Bank’s corporate headquarters and executive offices are located at Scotia Plaza, 44 King Street West, Toronto, Ontario M5H 1H1.
The authorized share capital of the Bank consists of an unlimited number of: (i) common shares without nominal or par value (“Bank Common Shares”); and (ii) preferred shares without nominal or par value (“Bank Preferred Shares”).
The Bank Common Shares are listed and posted for trading on the Toronto Stock Exchange and the New York Stock Exchange.
The Bank is a reporting issuer, or the equivalent, in each province and territory of Canada that provides for a reporting issuer regime and is not, to the best of its knowledge, in default of any requirement of the securities legislation in such jurisdictions.
The Bank is qualified to use the short form prospectus system provided under NI 44-101.
The Trust
The Trust is a trust established under the laws of the Province of Ontario, pursuant to a declaration of trust dated August 19, 2008, as may be amended, restated and supplemented from time to time.
The Trust proposes to conduct an initial public offering (the “Offering”) of Subordinated Notes to be designated Scotiabank Tier 1 Securities Series 2008-1 Due 2107 (the “Scotia BaTS III Series 2008-1”) in each of the provinces and territories of Canada and may, from time to time, issue further series of similar subordinated notes (“Subordinated Notes”). As a result of the Offering, the capital of the Trust will consist of Scotia BaTS III Series 2008-1 and voting trust units (the “Voting Trust Units” and, collectively with the Scotia BaTS III Series 2008-1, the “Trust Securities”). All of the Voting Trust Units will be held, directly or indirectly, by the Bank.
The Trust will be established for the purpose of effecting offerings of Trust Securities in order to provide the Bank with a cost-effective means of raising capital for Canadian bank regulatory purposes by means of: (i) creating and selling the Trust Securities; and (ii) acquiring and holding assets, which will consist primarily of one or more senior deposit notes of the Bank (the “Trust Assets”). The Trust Assets will generate income for distribution to holders of Trust Securities. The Trust will not carry on any operating activity other than in connection with offerings of Trust Securities and in connection with the Trust Assets.
The Trust is not currently a reporting issuer in any province or territory of Canada. As a result of the Offering, it is anticipated that the Trust will become a reporting issuer, or the equivalent, in each of the provinces and territories of Canada that provide for a reporting issuer regime.
Scotia BaTS III Series 2008-1
From the issue date of the Scotia BaTS III Series 2008-1 to a date to be described in the prospectus for the Offering (the “Prospectus”), the Trust will pay interest on the Scotia BaTS III Series 2008-1 in equal semi-annual instalments on dates to be described in the Prospectus (“Interest Payment Dates”) at a fixed rate to be described in the Prospectus. Starting on a date to be described in the Prospectus and on every fifth anniversary thereafter (each, an “Interest Reset Date”), the interest rate on the Scotia BaTS III Series 2008-1 will be reset at an interest rate equal to the Government of Canada Yield (as defined in the Prospectus) plus a spread to be described in the Prospectus. The Scotia BaTS III Series 2008-1 will mature in 2107.
Under a share exchange agreement (“Share Exchange Agreement”) to be entered into among the Bank, the Trust and a party acting as exchange trustee, the Bank will agree, for the benefit of holders of Scotia BaTS III Series 2008-1, that in the event that the Trust fails on any Interest Payment Date to pay the interest on the Scotia BaTS III Series 2008-1 in full, the Bank will not declare dividends of any kind on the Bank Preferred Shares or, if no Bank Preferred Shares are then outstanding, on the Bank Common Shares, until a period of time specified in the Prospectus has elapsed, unless the Trust first pays such interest (or the unpaid portion thereof) to holders of Scotia BaTS III Series 2008-1 (the “Dividend Stopper Undertaking”). Accordingly, it is in the interest of the Bank to ensure, to the extent within its control, that the Trust complies with its obligation to pay the interest on the Scotia BaTS III Series 2008-1 on each Interest Payment Date so as to avoid triggering the Dividend Stopper Undertaking.
The Scotia BaTS III Series 2008-1 will be automatically exchanged (the “Automatic Exchange”), without the consent of the holder, for a new series of newly issued Bank Preferred Shares upon the occurrence of certain stated events relating to the solvency of the Bank or actions taken by the Superintendent of Financial Institutions (the “Superintendent”) in respect of the Bank.
The Trust may, subject to regulatory approval, at its option, on a date to be described in the Prospectus not prior to five years after the issue date for the Scotia BaTS III Series 2008-1, redeem the Scotia BaTS III Series 2008-1 without the consent of the holders thereof. The price payable per $1,000 principal amount of Scotia BaTS III Series 2008-1 in respect of any such redemption will be equal to: (i) the greater of par and a Canada Yield Price (to be described in the Prospectus), if redeemed on a date that is not an Interest Reset Date; and (ii) par, if redeemed on an Interest Reset Date together, in each case, with accrued and unpaid interest to, but excluding, the date fixed for redemption (in either case, the “Redemption Price”).
Upon the occurrence of certain regulatory or tax events affecting the Bank or the Trust (each a “Special Event”) within five years of the date of issuance of the Scotia BaTS III Series 2008-1, the Trust may, at its option, without consent of the holders of the Scotia BaTS III Series 2008-1 but subject to regulatory approval, redeem all but not less than all of the Scotia BaTS III Series 2008-1 at a price per $1,000 principal amount of Scotia BaTS III Series 2008-1 equal to par plus accrued and unpaid interest to, but excluding, the date fixed for redemption.
The Bank will covenant that it will maintain direct or indirect ownership of 100% of the outstanding Voting Trust Units. Subject to regulatory approval, the Scotia BaTS III Series 2008-1 will constitute Tier 1 capital of the Bank.
As long as any Scotia BaTS III Series 2008-1 are outstanding and are held by any person other than the Bank, or an affiliate of the Bank, the Trust may only be terminated with the approval of the Bank as holder, directly or indirectly, of the Voting Trust Units and with the approval of the Superintendent: (i) upon the occurrence of a Special Event prior to a date to be specified in the Prospectus; or (ii) for any reason on a date to be specified in the Prospectus. As long as any Scotia BaTS III Series 2008-1 are outstanding and held by any person other than the Bank, or an affiliate thereof, the Bank will not approve the termination of the Trust unless the Trust has sufficient funds to pay the Redemption Price.
On each Interest Payment Date on which a Deferral Event, as defined in the Prospectus, has occurred, holders of Scotia BaTS III Series 2008-1 will be required to invest interest paid on the Scotia BaTS III Series 2008-1 in a new series of Bank Preferred Shares (the “Bank Deferral Preferred Shares”). A “Deferral Event” will occur in circumstances where either: (i) the Bank has failed to declare dividends on all of the outstanding Bank Preferred Shares or, if no Bank Preferred Shares are then outstanding, on the Bank Common Shares in accordance with ordinary dividend practice in the last 90 days preceding the commencement of the interest period for the Scotia BaTS III Series 2008-1 ending on the day preceding the relevant Interest Payment Date; or (ii) the Bank elects, prior to the commencement of the interest period for the Scotia BaTS III Series 2008-1 ending on the day preceding the relevant Interest Payment Date, to require holders of Scotia BaTS III Series 2008-1 to invest interest paid thereon on such Interest Payment Date in such Bank Deferral Preferred Shares. All Bank Deferral Preferred Shares so issued will be held in escrow by a party to be named in the Prospectus on behalf of holders of Scotia BaTS III Series 2008-1 until the next following Interest Payment Date which is not subject to a Deferral Event, upon which such shares will be released from escrow to the holders of Scotia BaTS III Series 2008-1, unless an Automatic Exchange or maturity of the Scotia BaTS III Series 2008-1 shall have occurred prior thereto, in which case the shares will be released upon the Automatic Exchange or maturity, as the case may be.
The Scotia BaTS III Series 2008-1 will be non-voting and the Scotia BaTS III Series 2008-1 will be unsecured obligations of the Trust ranking at least equally with other subordinated indebtedness of the Trust from time to time issued and outstanding. On a liquidation or winding-up of the Trust, the indebtedness evidenced by the Scotia BaTS III Series 2008-1 will be subordinate in right of payment to the prior payment in full of all other liabilities of the Trust except liabilities which by their terms rank in right of payment equally with or subordinate to the indebtedness represented by the Scotia BaTS III Series 2008-1. Apart from rights to receive the interest described in paragraph 10, holders of Scotia BaTS III Series 2008-1, as such, have no further right in the income of the Trust.
Pursuant to an administration and advisory agreement entered into between the trustee of the Trust (the “Trustee”) and the Bank, the Trustee has delegated to the Bank certain of its duties in relation to the administration of the Trust. The Bank, as administrative agent, will provide advice and counsel with respect to management of the assets of the Trust and other matters as may be requested by the Trustee from time to time and will administer the day-to-day operations of the Trust.
The Trust may, from time to time, issue further series of Subordinated Notes, the proceeds of which would be used to acquire additional Trust Assets.
Because of the terms of the Subordinated Notes, the Share Exchange Agreement and the various covenants of the Bank, information concerning the affairs and financial performance of the Bank, as opposed to that of the Trust, is meaningful to holders of Subordinated Notes.
It is expected that the Scotia BaTS III Series 2008-1 will receive an approved rating from an approved rating organization, as defined in NI 44-101.
At the time of the filing of any prospectus in connection with offerings of Subordinated Notes (including the Offering):
(i) the prospectus will be prepared in accordance with the short form prospectus requirements of NI 44-101, except as varied by this decision or as permitted by the Legislation;
(ii) the Trust will comply with all of the filing requirements and procedures set out in NI 44-101 except as varied by this decision or as permitted by the Legislation;
(iii) the prospectus will incorporate by reference the documents that would be required to be incorporated by reference under Item 11 of Form 44-101F1 if the Bank were the issuer of such securities;
(iv) the prospectus disclosure required by Item 11 (other than Item 11.1(1)(5)) of Form 44-101F1 in respect of the Trust) will be addressed by incorporating by reference the Bank’s public disclosure documents; and
(v) the Bank will satisfy the criteria in section 2.2 of NI 44-101 if the word “issuer” is replaced with “Bank”.
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 Requested Relief is granted provided that:
(i) the Trust and the Bank, as applicable, comply with paragraph 23 above;
(ii) the Bank remains the direct or indirect beneficial owner of all of the outstanding Voting Trust Units;
(iii) the Bank, as holder of the Voting Trust Units, will not propose changes to the terms and conditions of any outstanding Subordinated Notes offered and sold pursuant to a short form prospectus of the Trust filed under this decision that would result in such Subordinated Notes being exchangeable for securities other than Bank Preferred Shares;
(iv) the Trust has minimal assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the Trust Securities;
(v) the Trust issues a news release and files a material change report in accordance with Part 7 of NI 51-102, as amended, supplemented or replaced from time to time, in respect of any material change in the affairs of the Trust that is not also a material change in the affairs of the Bank;
(vi) the Trust becomes, on or before the filing of a preliminary prospectus in connection with the Offering, and thereafter remains, an electronic filer under NI 13-101;
(vii) following the Offering, the Trust is a reporting issuer in at least one jurisdiction of Canada;
(viii) following the Offering, the Trust files with the securities regulatory authority in each jurisdiction in which it becomes a reporting issuer all periodic and timely disclosure documents that it is required to have filed in that jurisdiction: (a) under all applicable securities legislation; (b) pursuant to an order issued by the securities regulatory authority; or (c) pursuant to an undertaking to the securities regulatory authority;
(ix) the securities to be distributed (a) have received an approved rating on a provisional basis; (b) are not the subject of an announcement by an approved rating organization, of which the issuer is or ought reasonably to be aware, that the approved rating given by the organization may be down-graded to a rating category that would not be an approved rating, and (c) have not received a provisional or final rating lower than an approved rating from any approved rating organization; and
(x) the Trust files a notice of intention pursuant to Section 2.8 of NI 44-101 prior to or concurrently with the filing of its first preliminary short form prospectus.
The further decision of the principal regulator is that the application of the Filers and this decision shall be held in confidence by the principal regulator until the earlier of: (i) the date the Filers publicly announce the Offering; (ii) the date that a preliminary short form prospectus is filed in respect of the Offering; (iii) the date the Filers advise the Decision Makers that there is no longer any need for the application and decision to remain confidential; and (iv) November 30, 2008.
“Erez Blumberger”
_________________________
Erez Blumberger
Manager, Corporate Finance
Ontario Securities Commission