September 30 , 2016
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
Yum! BRANDS, INC.
(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 (the “Legislation”) for:
(a) an exemption from the prospectus requirement of section 53 of the Securities Act (Ontario) (the “Act”) in connection with the proposed distribution (the “Spin-Off”) by the Filer of the shares of common stock (“SpinCo Shares”) of YUM! China Holding, Inc. (“SpinCo”), an indirectly wholly-owned subsidiary of the Filer, by way of a dividend in specie to holders (“Filer Shareholders”) of shares of common stock of the Filer (“Filer Shares”) resident in Canada (“Filer Canadian Shareholders”); and
(b) an exemption from the prospectus requirement of section 53 of the Act and the dealer registration requirement of section 25 of the Act, in connection with the proposed distributions by SpinCo of SpinCo Awards (as defined below) to holders of Filer Awards (as defined below) resident in Canada who will not become employees of SpinCo or any of its subsidiaries (“Filer Canadian Employees”) after the Spin-Off, and from the dealer registration requirement of section 25 of the Act in connection with any subsequent exercise or conversion in connection therewith.
(collectively, 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 this application; and
(b) the Filer has provided notice that subsection 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
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 incorporated in North Carolina with principal executive offices in Louisville, Kentucky, U.S.A. The Filer is a global fast food concept company that develops, operates, franchises and licenses a worldwide system of restaurants.
The Filer is not a reporting issuer, and, currently, has no intention of becoming a reporting issuer, under the securities laws of any province or territory of Canada.
The authorized capital of the Filer consists of 1,000,000,000 shares, without par value, of which 750,000,000 shares are Filer Shares and 250,000,000 shares are preferred shares. As of July 12, 2016, there were 389,887,084 Filer Shares and no preferred shares issued and outstanding.
Filer Shares are listed on the New York Stock Exchange (the “NYSE”) and trade under the symbol “YUM”. Other than the foregoing listing on the NYSE, no securities of the Filer are listed or posted for trading on any exchange or market in Canada or outside of Canada. The Filer has no present intention of listing its securities on any Canadian stock exchange.
The Filer is a registrant with the United States Securities and Exchange Commission (the “SEC”) and is subject to the requirements of the United States Securities Exchange Act of 1934, as amended (the “1934 Act”) and the rules and regulations thereunder.
Based on a “Geographical Analysis Report” provided by American Stock Transfer & Trust Company, LLC, as of May 23, 2016 there were 171 registered Filer Canadian Shareholders holding approximately 19,817 Filer Shares, representing approximately 0.3% of the registered shareholders of the Filer worldwide and holdings of approximately 0.005% of the outstanding Filer Shares. The Filer does not expect these numbers to have materially changed since that date.
Based on a “Geographic Survey” of beneficial shareholders prepared for the Filer by Broadridge Financial Services, Inc., as of March 22, 2016 there were 129 beneficial Filer Canadian Shareholders, representing approximately 0.5% of the beneficial holders of Filer Shares worldwide, holding approximately 2,344,939 Filer Shares, representing approximately 0.6% of the outstanding Filer Shares. The Filer does not expect these numbers to have materially changed since that date.
Based on the information above, the number of registered and beneficial Filer Canadian Shareholders and the proportion of Filer Shares held by such shareholders are de minimis.
The Filer is proposing to spin off its restaurant operations in China (the “SpinCo Business”) into a newly formed independent company, SpinCo, through a series of transactions. These transactions are expected to result in the Spin-Off by the Filer, pro rata to its shareholders, of 100% of the outstanding SpinCo Shares. Each Filer Shareholder will receive one SpinCo Share for each Filer Share.
SpinCo is a Delaware corporation with principal executive offices in Louisville, Kentucky, U.SA. It is currently an indirectly wholly-owned subsidiary of the Filer that, at the time of the Spin-Off, will hold the Filer’s SpinCo Business.
As of the date hereof, all of the issued and outstanding SpinCo Shares, being 1,000 SpinCo Shares, are held indirectly by the Filer, and no other shares or classes of stock of SpinCo are issued and outstanding.
Fractional SpinCo Shares will not be distributed in connection with the Spin-Off. The distribution agent will aggregate the amount of fractional shares that would otherwise have been distributed into whole shares, sell such whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) pro rata to each Filer Shareholder who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares, if any, will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.
Filer Shareholders will not be required to pay any consideration for the SpinCo Shares, or to surrender or exchange Filer Shares or take any other action to receive their SpinCo Shares. The Spin-Off will occur automatically and without any investment decision on the part of Filer Shareholders.
Subject to the satisfaction of certain conditions, it is currently anticipated that the Spin-Off will become effective on or about the end of October 2016.
Following the Spin-Off, SpinCo will cease to be a subsidiary of the Filer.
SpinCo will apply to have the SpinCo Shares listed on the NYSE before the Spin-Off.
After the completion of the Spin-Off, the Filer will continue to be listed and traded on the NYSE.
SpinCo is not a reporting issuer in any province or territory in Canada nor are its securities listed on any stock exchange in Canada. SpinCo has no present intention to become a reporting issuer in any province or territory of Canada or to list its securities on any stock exchange in Canada after the completion of the Spin-Off.
The Spin-Off will be effected under the laws of the State of North Carolina.
Because the Spin-Off will be effected by way of a dividend of SpinCo Shares to Filer Shareholders, no shareholder approval of the proposed transaction is required (or being sought) under North Carolina law.
In connection with the Spin-Off, SpinCo has filed with the SEC a registration statement on Form 10 under the 1934 Act, detailing the proposed Spin-Off. SpinCo initially filed the registration statement with the SEC on May 4, 2016, subsequently filed amendments thereto on June 24, 2016, July 12, 2016, August 2, 2016, August 31, 2016 and September 19, 2016 and will file further amendment(s) to the registration statement (the “Registration Statement”) closer to the date of the Spin-Off.
After the SEC has completed its review of the Registration Statement, Filer Shareholders will receive a copy of an information statement (the “Information Statement”) detailing the terms and conditions of the Spin-Off and forming part of the Registration Statement. All materials relating to the Spin-Off sent by or on behalf of the Filer and SpinCo in the United States (including the Information Statement) will be sent concurrently to Filer Canadian Shareholders.
The Information Statement will contain prospectus level disclosure about SpinCo.
Filer Canadian Shareholders who receive SpinCo Shares pursuant to the Spin-Off will have the benefit of the same rights and remedies in respect of the disclosure documentation received in connection with the Spin-Off that are available to Filer Shareholders resident in the United States.
Following the completion of the Spin-Off, SpinCo will be subject to the requirements of the 1934 Act and, if listed for trading on the NYSE, its rules and regulations. SpinCo will send concurrently to holders of SpinCo Shares resident in Canada the same disclosure materials required to be sent under applicable United States securities laws to holders of SpinCo Shares resident in the United States.
There will be no active trading market for the SpinCo Shares in Canada following the Spin-Off and none is expected to develop. Consequently, it is expected that any resale of SpinCo Shares distributed in connection with the Spin-Off will occur through the facilities of the NYSE or any other exchange or market outside of Canada on which the SpinCo Shares may be quoted or listed at the time that the trade occurs or to a person or company outside of Canada.
The Spin-Off to Filer Canadian Shareholders would be exempt from the prospectus requirements pursuant to subsection 2.31(2) of National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) but for the fact that SpinCo is not a reporting issuer under the securities legislation of any jurisdiction in Canada.
After the Spin-Off, employees of the Filer or its subsidiaries in Canada will remain Filer Canadian Employees.
The Filer has previously granted equity-based compensation awards to its employees comprised of stock options (“Filer Options”), restricted stock units (“Filer RSUs”) and stock appreciation rights (“Filer SARs”, together with the Filer Options and Filer RSUs, the “Filer Awards”) exercisable for, or convertible into, Filer Shares under its various equity incentive plans (“Filer’s Plans”).
As of May 23, 2016, there was 1 Canadian holder of Filer Options who held approximately 0.79% of the outstanding Filer Options granted. Therefore, there are a de minimis number of Canadian holders of Filer Options.
As of May 23, 2016, there were 7 Canadian holders of Filer RSUs who held approximately 0.36% of the outstanding Filer RSUs granted. Therefore, there are a de minimis number of Canadian holders of Filer RSUs.
As of May 23, 2016, there were 13 Canadian holders of Filer SARs who held approximately 0.35% of the outstanding Filer SARs granted. Therefore, there are a de minimis number of Canadian holders of SARs.
As a result of the Spin-Off, the value of the Filer Shares will decrease. Accordingly, the Filer Awards will be adjusted after the Spin-Off according to formulae intended to preserve the intrinsic value of the Filer Awards as measured immediately before and immediately after the Spin-Off (including, as applicable, adjustments to exercise prices and number of shares subject to awards, subject to rounding, and will be effected in compliance with the terms of the Filer Awards (the “intrinsic value methodology”)). Therefore, subject to rounding, the financial position of the holder with respect to the relevant Filer Awards remains the same immediately before and immediately after the Spin-Off.
The adjustments for Filer Canadian Employees who hold Filer Awards, include:
(a) Filer Options being adjusted, into both options exercisable for Filer Shares and options exercisable for SpinCo Shares, at equivalent value using the intrinsic value methodology;
(b) Filer RSUs being adjusted, into both restricted stock units convertible into Filer Shares and restricted stock units convertible into SpinCo Shares, at equivalent value using the intrinsic value methodology; and
(c) Filer SARs being adjusted, into both stock appreciation rights exercisable for Filer Shares and stock appreciation rights exercisable for SpinCo Shares, at equivalent value using the intrinsic value methodology.
As a result of the adjustments to the Filer Awards, such Filer Canadian Employees may hold (i) adjusted equity-based awards exercisable for, or convertible into, Filer Shares (“Adjusted Filer Awards”) and (ii) adjusted equity-based awards exercisable for, or convertible into, SpinCo Shares (“SpinCo Awards”).
The current plan administrator for the Filer’s Plans (the “Plan Administrator”) will administer the distributions of the SpinCo Awards (in addition to the Adjusted Filer Awards) to Filer Canadian Employees after the Spin-Off. The Plan Administrator has also been separately retained as the plan administrator for SpinCo’s various equity incentive plans and will facilitate their exercise or conversion and any first trades of SpinCo Shares pursuant to the relevant plans.
In connection with the adjustment to Filer Awards, each Filer Canadian Employee will receive the same disclosure material that each United States employee of the Filer or SpinCo would receive who holds the Filer Awards.
It is intended that Canadian Employee holders of Filer Awards will receive a one time benefit of the Exemption Sought under this Application in respect of the SpinCo Awards. After the Spin-Off, in respect of the grant of new awards, Filer Canadian Employees, will potentially receive awards exercisable for, or convertible into, Filer Shares.
The distribution, after the Spin-Off, of SpinCo Awards to Filer Canadian Employees would be exempt from the prospectus requirement pursuant to section 2.24 of NI 45-106 and the dealer registration requirement pursuant to section 8.16 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations but for the fact that such distribution will occur after the Spin-Off at a time when the Filer and SpinCo will not be related entities for the purposes of these exemptions.
Neither the Filer nor SpinCo is in default of any securities legislation in any jurisdiction of Canada.
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 first trade in
(c) the SpinCo Shares acquired pursuant to the Spin-Off; and
(d) the SpinCo Shares issued to Filer Canadian Employees on the exercise or conversion of SpinCo Awards, as described in paragraph 39 above;
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.
“Edward P. Kerwin”
“Anne Marie Ryan”
Commissioner Commissioner
Ontario Securities Commission Ontario Securities Commission