Headnote NP 11-203 – relief from prospectus requirements to allow U.S. parent company to spin off shares of its U.S. subsidiary to investors by way of distribution in specie – distribution not covered by legislative exemptions – U.S. parent company is a public company in the U.S. but is not a reporting issuer in Canada – U.S. parent company has a de minimis presence in Canada. Following distribution, U.S. subsidiary will not be a reporting issuer in Canada – no investment decision required from Canadian shareholders in order to receive shares from distribution.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c.S.5, as am., ss. 53, 74(1)
December 16, 2011
IN THE MATTER OF THE SECURITIES LEGISLATION OF EACH OF THE PROVINCES AND TERRITORIES OF CANADA (together, the “Jurisdictions”)
AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
SEARS HOLDINGS CORPORATION
(the “Filer” or “Sears Holdings”)
DECISION DOCUMENT
Background
The principal regulator in the Province of Ontario and the securities regulatory authority or regulator in each of the other Jurisdictions has received an application from the Filer (the “Application”) for a decision under the securities legislation of the Jurisdictions (the “Legislation”) for relief from the prospectus requirements contained in the Legislation in connection with the proposed distribution by the Filer, on a pro rata basis and by way of a dividend in specie, to the Filer’s shareholders, including any who are resident in Canada, of all of the outstanding shares held by the Filer (such shares, the “OSH Shares”) in its indirect majority-owned subsidiary Orchard Supply Hardware Stores Corporation (“OSH”) immediately prior to the distribution (such requested relief, the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the 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 each of the other provinces and territories of Canada.
Interpretation
Defined terms contained in National Instrument 14-101 – Definitions and MI 11-102 have the same meanings in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
Sears Holdings, formed in 2004, is a publicly-traded Delaware corporation. It is a holding company that owns or has interests in various direct and indirect subsidiary entities, including OSH. The principal executive offices of Sears Holdings are located in Hoffman Estates, Illinois.
Shares of Sears Holdings’ common stock (“Sears Common Shares”) are listed and traded on the NASDAQ Global Select Market under the symbol “SHLD”. The Sears Common Shares are not listed or traded on any Canadian stock exchange, and Sears Holdings currently has no intention of listing them or having them traded on any Canadian stock exchange.
Sears Holdings is not a reporting issuer under the securities laws of any province or territory of Canada, and Sears Holdings currently has no intention of becoming a reporting issuer under such laws.
As of June 6, 2011, 18 holders of record of Sears Common Shares were resident in Canada, which constituted in the aggregate approximately 0.11% of the approximately 16,094 holders of record of Sears Common Shares worldwide. As of that date, persons resident in Canada collectively held of record 879 Sears Common Shares, out of over 100 million Sears Common Shares outstanding worldwide. As such, the proportion of total Sears Common Shares held of record by Canadian residents is de minimis.
As of March 8, 2011, based on the number of proxy materials mailed for the 2011 annual meeting of holders of Sears Common Shares (collectively, “Sears Shareholders”), Sears Holdings believes that there were, as of such date, approximately 726 beneficial Sears Shareholders in Canada, or approximately 0.89% of the approximately 81,419 beneficial Sears Shareholders worldwide and that the number of Sears Common Shares held by such beneficial shareholders in Canada is de minimis.
As a result of the information described above, Sears Holdings has concluded that the number and proportion of Sears Common Shares held by both registered and beneficial Sears Shareholders in Canada (collectively, “Canadian Shareholders”) are de minimis.
OSH was originally formed as a farmers’ purchasing cooperative in California in the 1930s and was later incorporated in Delaware (1989). It is presently an indirect majority-owned subsidiary of Sears Holdings. Based in California, OSH is a specialty retailer primarily focused on the consumer segment of the home improvement market, operating the Orchard Supply Hardware business of Sears Holdings. OSH conducts substantially all of its operations through its direct, wholly-owned subsidiary Orchard Supply Hardware LLC. OSH’s principal executive offices are located in San Jose, California, and its website address is www.osh.com.
At the time of the Spin-Off (as defined below), OSH will have a total of four classes of capital stock authorized: (a) Class A common stock (voting), US$0.01 par value per share (the “Class A Common Stock”); (b) Class B common stock (voting), US$0.01 par value per share (the “Class B Common Stock”); (c) Class C common stock (voting), US$0.01 par value per share (the “Class C Common Stock”); and (d) preferred stock (non-voting), Series A, US$0.00001 par value per share (the “Preferred Stock”).
It is expected that pursuing a disposition of OSH through a tax-neutral spin-off of its majority interest in OSH to all Sears Shareholders (the “Spin-Off”) will be in the best interests of Sears Holdings and Sears Shareholders, and that separating OSH from Sears Holdings will provide, among other things, financial, operational and managerial benefits to both OSH and Sears Holdings.
Sears Holdings intends to accomplish the Spin-Off by means of a series of transactions which include a dividend in specie to Sears Shareholders. The dividend in specie will be satisfied by Sears Holdings distributing all of the outstanding shares of Class A Common Stock and Preferred Stock held by Sears Holdings (collectively, the “OSH Shares”) to all Sears Shareholders of record, subject to obtaining requisite approvals and satisfaction of other conditions. No shares of any other classes of OSH stock will be distributed in the Spin-Off. Immediately following completion of the Spin-Off, Sears Holdings will not own any shares of OSH.
In connection with the Spin-Off, OSH filed with the U.S. Securities and Exchange Commission (the “SEC”), on June 23, 2011, a registration statement on Form S-1 under the U.S. Securities Act of 1933 (as subsequently amended, restated and supplemented, the “Registration Statement”). The final prospectus filed as part of the Registration Statement contains audited consolidated financial statements of OSH, and it will be made available to the Sears Shareholders for information purposes. The SEC declared the Registration Statement effective on December 12, 2011.
The distribution of the OSH Shares to the Sears Shareholders will be made on a pro rata basis and in book-entry form, whereby every 22.141777 Sears Common Shares outstanding as of the close of business on December 16, 2011, the record date for the Spin-Off, will entitle its holder to receive one share of Class A Common Stock and one share of Preferred Stock (except that holders of unvested shares of restricted stock of Sears Holdings will receive cash in lieu of shares). Fractional shares of Class A Common Stock or Preferred Stock will not be distributed; instead, a distribution agent will aggregate fractional shares of the Class A Common Stock and the Preferred Stock into whole shares of each security, sell such whole shares in the open market at prevailing rates and distribute the net cash from proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive fractional shares in the distribution. The distribution is expected to be effective on December 30, 2011.
At the time of the distribution, the shares of Class A Common Stock will represent approximately 80% of the general voting power of OSH’s outstanding capital stock (entitling holders thereof to one vote per share) and the shares of Preferred Stock will represent 100% of OSH’s outstanding non-voting capital stock. It is anticipated that immediately following the Spin-Off, ESL Investments, Inc. and affiliated entities, which currently own approximately 61% of Sears Common Shares, will own approximately 61% of (a) the outstanding shares of Class A Common Stock, representing approximately 61% of Class A Common Stock voting power and approximately 49% of the general voting power of OSH’s outstanding capital stock, and (b) the outstanding shares of Preferred Stock. The Class B Common Stock and Class C Common Stock, which are not included in the Spin-Off, are expected to be held at the time of the distribution as follows: (x) all shares of Class B Common Stock, representing less than 0.5% of the general voting power of OSH’s outstanding capital stock, will be held by certain former employees of OSH who acquired such shares in connection with past equity investment programs of OSH, and (y) all shares of Class C Common Stock, representing approximately 20% of the general voting power of OSH’s outstanding capital stock, will be held by ACOF I LLC, a wholly-owned subsidiary of Ares Corporate Opportunities Fund, L.P., an affiliate of Ares Management LLC.
Sears Shareholders will not be required to pay for the OSH Shares received in the Spin-Off, or to surrender or exchange any of their Sears Common Shares in order to receive OSH Shares, or to take any other action in connection with the Spin-Off. The distribution of the OSH Shares will occur automatically without any investment decision on the part of Sears Shareholders. Their proportionate ownership interests in Sears Holdings will not change as a result of the Spin-Off and the distribution of the OSH Shares as a dividend in specie.
Upon completion of the Spin-Off, the Class A Common Stock is expected to be listed on the NASDAQ Capital Market under the symbol “OSH”, and the Preferred Stock is expected to be unlisted but quoted on the OTCQB, an over-the-counter quotation system. As a result, OSH will be a publicly-traded company independent from Sears Holdings, which will not retain any ownership interest in OSH immediately following the Spin-Off.
The OSH Shares are not listed or traded and any stock exchange in Canada and OSH does not currently intend to list the OSH Shares or have them traded on any stock exchange in Canada. OSH is not, and does not currently intend to become, a reporting issuer in any province or territory in Canada.
Following the Spin-Off, the Sears Common Shares will continue to be listed and traded on the NASDAQ Global Select Market.
The Spin-Off will be effected in compliance with Delaware law and all applicable U.S. federal securities laws, and the Registration Statement has been declared effective by the SEC.
Because the Spin-Off will be accomplished by way of a dividend in specie to the Sears Shareholders, no shareholder approval of the transaction is required under Delaware law.
All materials relating to the Spin-Off and the distribution of the OSH Shares to be made available by or on behalf of Sears Holdings or OSH to registered Sears Shareholders in the United States will be made available concurrently to registered Canadian Shareholders.
Following the Spin-Off, Sears Holdings and OSH will concurrently provide to their respective registered shareholders in Canada the same disclosure materials that they provide to their respective registered shareholders in the United States.
The Canadian Shareholders who receive OSH Shares will have the benefit of the same rights and remedies under U.S. federal securities laws in respect of the disclosure documentation provided to them in connection with the Spin-Off and the distribution of OSH Shares that are available to the Sears Shareholders in the United States.
The proposed distribution of the OSH Shares to Canadian Shareholders would be exempt from the Requirements in accordance with subsection 2.31(2) of NI 45-106 but for the fact that OSH is not a reporting issuer in Canada.
In the absence of an available exemption under the Legislation, qualification by prospectus of the proposed distribution of the OSH Shares to Canadian Shareholders as part of the Spin-Off is not practicable, requiring that Canadian Shareholders be excluded from receiving OSH Shares.
Decision
The principal regulator is satisfied that the decision meets the test contained 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 that the first trade in OSH Shares issued pursuant to the Spin-Off will be deemed to be a distribution unless the conditions in section 2.6 or subsection 2.14(1) of National Instrument 45-102 – Resale of Securities are satisfied.
“Sarah B. Kavanagh” “Mary G. Condon”
Commissioner Commissioner
Ontario Securities Commission Ontario Securities Commission