Headnote
Mutual Reliance Review System for Exemptive Relief Applications – Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions – Relief granted from the requirement under subsection 6.3(1) to obtain a formal valuation of exchangeable units to be used as non-cash consideration in connection with a related party transaction; exemption to the formal valuation under subsection 6.3(2) of MI 61-101 is technically not available since, for tax reasons, exchangeable units are being issued by a holding entity within a reporting issuer’s structure rather than the reporting issuer directly; investment in Holding LP is akin to an investment in reporting issuer and a formal valuation of the exchangeable units would be in fact a valuation of the reporting issuer.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions, ss. 6.3 and 9.1.
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
NORTHLAND POWER INCOME FUND
(the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(a) exempting the Filer from the requirement in subsection 6.3(1)(d) of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) to obtain a formal valuation of the non-cash assets to be issued to the Vendor (as defined below) as consideration under the Proposed Transaction (as defined below), and
(b) that the decision and the related application be kept confidential and not be made public until the earlier of (i) the date that the Filer publicly announces the Proposed Transaction, and (ii) 90 days from the date of the decision.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(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 Quebec.
Interpretation
Defined terms contained 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:
The Filer
The Filer is an unincorporated open-ended trust established pursuant to a trust indenture, dated February 17, 1997, as supplemented, amended and restated (the “Trust Indenture”), formed under the laws of the Province of Ontario.
The Filer is a reporting issuer, or has equivalent status, under securities legislation in all provinces of Canada and, to its knowledge, is not in default of any of the requirements of such legislation.
The Filer is authorized to issue an unlimited number of units (the Units). As at December 31, 2008 there were 62,353,143 Units issued and outstanding.
As at December 31, 2008, the Filer has issued outstanding $29,035,000 principal amount of convertible debentures (the Convertible Debentures), convertible into Units.
The Units and Convertible Debentures are currently listed and posted for trading on the Toronto Stock Exchange under the symbols NPI.UN and NPI.DB respectively.
Northland Power Income Fund Management Inc. (the Manager) is the administrator of the Filer and provides management services to several entities that are directly or indirectly owned by the Filer.
Holding LP
NPIF Holdings L.P. (Holding LP) is a limited partnership formed under the laws of the Province of Ontario.
The general partner of Holding LP is NPIF Holdings GP Inc. (Holding GP), a wholly owned subsidiary of NPIF Commercial Trust (CT), which itself is wholly owned by the Filer.
The initial limited partner of Holding LP is CT.
Holding LP is not a reporting issuer, or the equivalent, under securities legislation of any jurisdiction.
Prior to the closing of the Proposed Transaction, Holding GP and CT, as the initial limited partner of Holding LP, will enter into a first amended and restated limited partnership agreement (the Holding LP Agreement).
Under the Holding LP Agreement, Holding LP will be authorized to issue an unlimited number of ordinary limited partnership units (the Ordinary LP Units), an unlimited number of Class A exchangeable limited partnership units (the Class A Exchangeable LP Units) and an unlimited number of Class B convertible limited partnership units (the Class B Convertible LP Units), as well as the general partnership interest.
Prior to the closing of the Proposed Transaction, the Filer and CT will sell to Holding LP, and Holding LP will purchase, all of the assets of the Filer (other than its interest in CT) and of CT (other than its interest in Holding GP) in exchange for Ordinary LP Units.
The Proposed Transaction
The Filer, through Holding LP, proposes to acquire (the Proposed Transaction) all of the issued and outstanding shares of Northland Power Inc. (the Corporation) from Northland Power Holdings Inc. (the Vendor) in consideration of the issuance by Holding LP of Class A Exchangeable LP Units, the issuance by the Filer of an equal number of special voting units of the Filer (the Special Voting Units) and the issuance by Holding LP of Class B Convertible LP Units.
Under MI 61-101, the Vendor is a “related party” of the Filer and the Proposed Transaction constitutes a “related party transaction” because the Vendor is an affiliated entity of the Manager (which is a wholly owned subsidiary of the Corporation) and because James C. Temerty, the Chairman of the Board of Trustees of CT, indirectly beneficially owns all of the issued and outstanding shares of the Vendor.
The Filer will issue rights to acquire Units, exercisable after the second anniversary of the closing date of the Proposed Transaction (the Conversion Date) for no additional consideration, to members of management of the Corporation in exchange for the cancellation of their existing rights under the Corporation’s long term incentive plan (the Replacement Rights) to acquire shares of the Corporation.
The Filer will also issue Units in satisfaction of debt owed by the Corporation to a related party of the Vendor and will enter into an agreement to purchase for cash in January 2010 the interests of certain affiliates of the Vendor in a limited partnership in which the Corporation has the balance of the interests.
The Corporation will repay debt owed to the Vendor and the Vendor will repay outstanding debt owed to the Canadian Imperial Bank of Commerce.
The independent trustees of CT (the Independent Trustees) have retained Crosbie & Company Inc. (Crosbie) to provide a formal valuation of the Corporation for the Proposed Transaction, which will be prepared in accordance with MI 61-101.
The Independent Trustees have also retained Crosbie to provide a ‘fairness opinion’ that will speak to the fairness to the Filer, from a financial point of view, of the consideration for the Proposed Transaction.
Crosbie has confirmed that it agrees with the facts set out in this decision.
The Independent Trustees have confirmed that they agree with the facts set out in this decision.
The Class A Exchangeable LP Units and Special Voting Units
Pursuant to the terms of an exchange agreement to be dated as of the closing date of the Proposed Transaction, after the Conversion Date each Class A Exchangeable LP Unit will be exchangeable at the option of the holder for one Unit for no consideration.
The Class A Exchangeable LP Units are not transferrable pursuant to the Holding LP Agreement.
Until the Conversion Date, the Class A Exchangeable LP Units will not receive ordinary cash distributions, although on the Conversion Date the Vendor will be entitled to a cash payment if and to the extent cash distributions on Units exceed $0.09 per month.
After the Conversion Date, the Class A Exchangeable LP Units will receive cash distributions from Holding LP that are equivalent to the cash distributions on the Units paid by the Filer.
A Class A Exchangeable LP Unit does not entitle the holder thereof to receive any distribution or payment from Holding LP in excess of the amounts that would be payable by the Filer in respect of the Units for which such Class A Exchangeable LP Unit could be exchanged.
Each Class A Exchangeable LP Unit will be issued together with a Special Voting Unit.
Each Special Voting Unit will provide the same voting rights in the Filer as a Unit.
The Special Voting Units will not entitle the holder to receive any distributions from the Filer or to participate in the liquidation or winding up of the Filer.
After the Conversion Date, the combination of a Class A Exchangeable LP Unit and a Special Voting Unit will be the economic equivalent of a Unit as a result of the fact that they are:
(a) exchangeable into Units on a one for one basis;
(b) have the same economic rights as Units; and
(c) carry the same voting rights as Units.
Under the Proposed Transaction, the Trust Indenture will be amended to provide the Vendor will be granted pre-emptive rights and the right to appoint up to 3 of 7 Trustees of the Filer, subject to conditions.
Additional rights attached to the Class A Exchangeable LP Units in respect of Holding LP arise by virtue of the Class A Exchangeable LP Units being limited partnership units and are customary rights associated with limited partnership units in structures similar to that of the Filer.
The primary mechanism of liquidity for holders of Class A Exchangeable LP Units after the Conversion Date is expected to be the exchange of the Class A Exchangeable LP Units for Units, given that there will be a public market for the Units and the Class A Exchangeable LP Units are not transferrable.
Until the Conversion Date, the value of the combination of a Class A Exchangeable LP Unit and a Special Voting Unit is expected to be less than the value of a Unit as a result of the lack of ordinary cash distributions payable in respect of Class A Exchangeable LP Units and the lack of liquidity for the Class A Exchangeable LP Units.
Class B Convertible LP Units
The attributes of the Class B Convertible LP Units are designed such that if the development activities of the Corporation are more successful than expected, the additional value will be shared between the Vendor and the Filer.
The Class B Convertible LP Units carry no voting rights (except with respect to any amendment to the terms of the LP Agreement which would adversely affect their rights), no right to distributions and the right to receive $0.001 per Class B Convertible LP Unit only. The Class B Convertible LP Units are not transferrable.
The Class B Convertible LP Units will be converted into Class A Exchangeable LP Units on a one-for-one basis when and to the extent that certain development activities are successful and in accordance with terms that are set out in the Holding LP Agreement and which will be described in the information circular to be issued in connection with the annual and special meeting of Unitholders to consider the Proposed Transaction (the Unitholder Meeting). If at the time of such conversion all of the previously issued Class A Exchangeable LP Units have been exchanged for Units, then the Class A Exchangeable LP Units issued on the conversion of the Class B Convertible LP Units will be immediately exchanged for Units.
Special Meeting of Unitholders
The Unitholder Meeting will be held to obtain approval for the Proposed Transaction, including minority approval as required under MI 61-101.
The information circular to be mailed to Unitholders in connection with the Unitholder Meeting will comply with the requirements of applicable securities law and will disclose, among other matters:
(a) that the Filer has no knowledge of any material information concerning the Filer, Holding LP or their securities that has not been generally disclosed, in accordance with subsection 6.3(2)(b) of MI 61-101;
(b) that, to the knowledge of the Filer after reasonable inquiry, no related party of the Filer involved in the Proposed Transaction has knowledge of any material information concerning the Filer, Holding LP or their securities that has not been generally disclosed, in accordance with subsection 6.3(2)(d) of MI 61-101; and
(c) a description of the effect of the Proposed Transaction on the direct or indirect voting interest in the Filer of any related party of the Filer involved in the Proposed Transaction, in accordance with subsection 6.3(2)(d) of MI 61-101.
The information circular will disclose that Independent Trustees have considered the impact of the Proposed Transaction on the business of the Filer, the consideration to be paid by the Filer and the valuation and fairness opinion of Crosbie in formulating its recommendation regarding the Proposed Transaction.
The information circular will include the valuation and fairness opinion of Crosbie. In determining whether the Proposed Transaction is fair from a financial point of view to the Filer, Crosbie will attribute a value to the consideration being paid to the Vendor. For this purpose, Crosbie will use the market value of the Units adjusted to reflect the differences between the Class A Exchangeable LP Units and the Units such as the lack of cash distributions prior to the Conversion Date, the lack of liquidity prior to the Conversion Date, and control attributes, including the pre-emptive rights and the right to elect Trustees. Crosbie will also consider adjustments for the value of the Class B Convertible LP Units, if any, based upon the likelihood of their becoming exchangeable. Crosbie will stipulate in the fairness opinion what value or range of values it is attributing to the non-cash assets being paid as consideration to the Vendor.
The process described in paragraph 42 may not constitute a formal valuation of the non-cash assets being paid as consideration as required by section 6.3(1)(d) of MI 61-101.
The exemption in section 6.3(2) of MI 61-101 is not available because the Class A Exchangeable Units and the Class B Convertible Units are not securities of a reporting issuer or securities of a class for which there is a published market, but their value derives entirely from their relationship to the Filer, which is a reporting issuer, and the value of the Units, for which there is a published market.
All of the assets of the Filer will be held through Holding LP and all of the business of the Filer will be carried on through entities owned directly or indirectly by Holding LP. All of the liabilities of the Filer are either liabilities of Holding LP (on a consolidated basis) or have priority over the Class A Exchangeable LP Units.
An investment in Holding LP is akin to an investment in the Filer.
A formal valuation of the Class A Exchangeable LP Units and the Class B Convertible LP Units would be in fact a valuation of the Filer.
Any material changes or material facts with respect to Holding LP would be material changes or material facts with respect to the Filer.
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 provided the Filer complies with subsection 6.3(2) of MI 61-101 to the extent applicable to a related party transaction, other than clause (a) thereof.
“Naizam Kanji”
Deputy Director, Mergers & Acquisitions, Corporate Finance
Ontario Securities Commission