In the Matter of Redknee Solutions Inc., 2013 CanLII 22626

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption granted from requirement to provide audited financial statements of the acquired business in a BAR – it is impracticable to prepare financial statements – filer granted relief to include alternative financial information, comprised of statement of assets acquired and liabilities assumed and statement of operations, as financial statement disclosure for a significant acquisition.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.1.

April 26, 2013

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction)

AND

IN THE MATTER OF REDKNEE SOLUTIONS INC. (the Filer)

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 relief pursuant to part 13 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), from certain requirements in Item 3 of Form 51-102F4 and Section 8.4 of Part 8 of NI 51-102 in respect of a business acquisition report (BAR) required to be filed by the Filer in connection with a significant acquisition completed by the Filer on March 30, 2013 (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

the Ontario Securities Commission is the principal regulator for this application; and
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 British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland and Labrador.

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

This decision is based on the following facts represented by the Filer:

The Filer is a corporation formed under the Canada Business Corporations Act and has its head office in Ontario.
The Filer is a reporting issuer in Alberta, British Columbia, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and is not in default of its reporting issuer obligations under the securities legislation of any of the jurisdictions of Canada.
The Filer’s common shares are listed and posted for trading on the Toronto Stock Exchange (TSX) under the symbol “RKN”.
On March 30, 2013, the Filer announced that it had closed its transaction (the Acquisition) with Nokia Siemens Networks B.V., the parent company of the Nokia Siemens Networks group comprised of Nokia Siemens Networks B.V. and its subsidiaries (Nokia Siemens Networks), to acquire Nokia Siemens Networks’ Business Support System business (the BSS Business) and other assets (the Acquired Business).
Nokia Siemens Networks is a joint venture of Nokia Corporation and Siemens AG and its financial year end is December 31.
The Filer has concluded that the Acquisition will constitute a significant acquisition. Accordingly, the Filer will be required to file a BAR upon completion of the Acquisition.
The Filer, being aware of the requirements under NI 51-102, held discussions with Nokia Siemens Networks involving their respective auditors regarding these requirements and the type of financial disclosure required in order to satisfy its requirements under NI 51-102. In the course of these discussion, Nokia Siemens Networks advised the Filer that it did not treat the BSS Business as a separate and distinct division and, accordingly, it did not prepare or maintain stand-alone financial statements that were specific to the BSS Business or the Acquired for any purpose (i.e., operationally or financially).
Nokia Siemens Networks informed the Filer that, in its view, the preparation of the financial statements for the Acquired Business in accordance with the requirements of Section 8.4 of NI 51-102 is impracticable due to the following facts:

a. The Acquired Business does not constitute a material portion of Nokia Siemens Networks’ business. For the last completed financial year of Nokia Siemens Networks, it is estimated that the Acquired Business accounted for approximately 1.5% of Nokia Siemens Network’s consolidated operating revenues and less than approximately 0.2% of its total assets.

b. The BSS Business, which constitutes most of the assets being acquired under the Acquisition, is a component of the Customer Experience Management Division of Nokia Siemens Networks, and Nokia Siemens Networks has never accounted for the BSS Business as a separate business and, as such, financial statements for the BSS Business have not been prepared. In addition, the Acquired Business includes certain assets that represent components of other business units (e.g. Policy control) and excludes certain assets that are recorded within the BSS Business but are related to other business units (e.g. GSM-R). As a result, the records are insufficiently detailed to extract information specific to the Acquired Business as would be required to produce the required financial statements.

c. Nokia Siemens Networks has also undertaken several financial reporting and operational reorganizations in the past few years which have resulted in Nokia Siemens Networks being unable to access certain historical related financial and operational data as these relate to its different business units, and any allocation to the BSS Business would be extremely arbitrary, as it was not managed or measured as a business unit, but was a component of a business unit. Therefore, allocation of these expenses to the Acquired Business would entail further assumptions that would make the financial statements further unlikely to be indicative of what the Acquired Business would have experienced as a stand-alone company.

d. Further, since the Acquired Business was integrated in the overall business and structure of Nokia Siemens Networks, the Acquired Business as well as the BSS Business did not maintain their own and were largely dependent on Nokia Siemens Networks’ administrative support functions (such as accounting, treasury, tax, legal, risk management, IT, marketing, pricing, procurement, human resources, etc.). These functions were provided at the corporate level and the related costs were not allocated to the Acquired Business or the BSS Business in the past. To do so now would entail numerous assumptions, a number of which could be highly arbitrary, with the result that the allocated costs would be unlikely to be indicative of what the Acquired Business would have experienced as a stand-alone company.

e. Consistent with the foregoing, Nokia Siemens Networks’ systems and procedures do not provide sufficient information for the preparation of stand-alone income tax and interest/capital cost provisions for the Acquired Business, nor was this required for internal, regulatory or tax purposes as the BSS Business was not operated as a separate business.

f. Nokia Siemens Networks does not maintain separate order forms and/or invoices for the BSS Business or the Acquired Business. Orders and, as a result, customer payments for such orders are commingled between the BSS Business and other parts of Nokia Siemens Networks (i.e., parts which are not being acquired by the Filer as part of the Acquisition). Accordingly, any attempt to construct cash flow statements for the Acquired Business would entail numerous assumptions with respect to opening cash balances and sources and uses of cash for financing and operational purposes that are unlikely to be indicative of what the Acquired Business would have experienced as a stand-alone company. Also, since such documents relate to more than one business line, services, costs and liabilities (such as warranty allocation) related to such agreements have not been previously allocated to the BSS Business or the Acquired Business.

g. Nokia Siemens Networks’ internal reporting system keeps track of customer accounts through general invoicing codes (GICs); however, due to the fact that contracts contain bundled revenue components which in many cases relate to more than one business unit, the GICs include revenues which are shared between different business lines. While Nokia Siemens Networks believes that, with some considerable effort and certain assumptions regarding the GICs, it may segregate those revenues which are generated by the Acquired Business, the same is not true, for example, for accounts payable, accounts receivable, cash and general operating expenses, which are maintained for Nokia Siemens Networks’ operations and are not earmarked to the Acquired Business.

h. The assumptions required for the Filer to produce the financial statements would by necessity be arbitrary and speculative and undermine the reliability of those statements. Any such allocation would be (i) based on Nokia Siemens Networks’ global structure, which will be irrelevant going forward due to the Filer’s and Nokia Siemens Networks’ differing organizational structure, and (ii) performed at such a high level as to mask the true nature of the Acquired Business being transferred.

i. The records are insufficiently detailed to extract information specific to the Acquired Business as would be required to produce the financial statements as set out in NI 51-102 and, in Nokia Siemens Networks’ view, it is impracticable to do so. Such statements would be based on numerous assumptions and estimates and would not reflect the true nature of the Acquired Business or be useful to shareholders or investors.

Following the Acquisition, the Filer expects to integrate the Acquisition into its existing organization structure which will by necessity have a different cost structure than that within Nokia Siemens Networks.
Section 8.4 of NI 51-102 requires that the Filer include in the BAR, the following annual financial statements of the Acquired Business:

a. a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for (i) the audited annual period ended December 31, 2012; and (ii) the annual period ended December 31, 2011;

b. an audited statement of financial position as at December 31, 2012;

c. a statement of financial position as at December 31, 2011; and

d. notes to the required financial statements.

Section 8.4(5) requires that the Filer include:

a. a pro forma statement of financial position of the Filer as at December 31, 2012 that gives effect, as if the Acquisition has taken place as at the date of the pro forma statement of financial position, to the Acquisition; and

b. a pro forma income statement that gives effect to the Acquisition as if it had taken place on at October 1, 2011 for (i) the annual period ended September 20, 2012; and (ii) the interim period ended December 31, 2012.

The Filer proposed to include the following financial statements in the BAR (the Proposed Financial Statements):

a. an audited statement of the assets to be acquired and liabilities to be assumed by the Filer as at December 31, 2012 with an unaudited comparative statement of assets and liabilities as at December 31, 2011 prepared in accordance with IFRS (the Statement of Assets Acquired and Liabilities Assumed) that:

i. includes all the assets and liabilities acquired;

ii. includes a statement that the Statement of Assets Acquired and Liabilities Assumed is prepared using accounting policies that are permitted by IFRS;

iii. includes a description of the accounting policies used to prepare the Statement of Assets Acquired and Liabilities Assumed; and

iv. includes an auditor’s report that reflects the fact that the Statement of Assets Acquired and Liabilities Assumed was prepared in accordance with the basis of presentation disclosed in the notes to the Statement of Assets Acquired and Liabilities Assumed;

b. an audited statement of the Acquired Business’ direct revenues and expenses for the year ended December 31, 2012 with an unaudited comparative statement of direct revenues and expenses for the year ended December 31, 2011 (the Statement of Direct Revenues and Expenses). These statements will be prepared in accordance with IFRS and include revenues generated by the Acquired Business less expenses directly attributable to the Acquired Business and will include notes to the statements outlining the basis of preparation and assumptions used. The notes will include the assumptions used for any allocated costs (e.g. research and development) and the nature of any costs excluded (e.g. accounting, treasury, tax, legal, risk management, IT, marketing, pricing, procurement and human resources). The Statement of Direct Revenues and Expenses will:

i. include a statement that the operating statements are prepared using accounting policies that are permitted by IFRS;

ii. include a description of the accounting policies used to prepare the operating statements; and

iii. include an auditor’s report that reflects the fact that the operating statements were prepared in accordance with the basis of presentation disclosed in the notes to the operating statements;

c. pro forma operating statements for the year ended September 30, 2012 , that includes the Filer’s income statement for the year ended September 30, 2012 and the Statement of Direct Revenues and Expenses and, if applicable, pro forma operating statement that is based on the most recently completed interim period of the Filer ended before the Acquisition closing date; and

d. a pro forma balance sheet as at the date of the Filer’s most recent balance sheet filed that includes the Statement of Assets Acquired and Liabilities Assumed.

The Filer submits that the Exemption Sought would not be prejudicial to the public interest because the Proposed Financial Statements will provide investors with the information material to their understanding of the Acquired Business and the Filer believes that the presentation of financial statements prepared strictly in compliance with Section 8.4 of NI 51-102 would not be more meaningful or relevant to investors than the Proposed Financial Statements, and would potentially be misleading.

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 that the Filer includes in the BAR the following financial statements required to be filed by the Filer in connection with a significant acquisition completed by the Filer on March 30, 2013: