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 123Dentist Corporation (123 Corp)
and
123Dentist Inc. (123 Inc., and collectively with 123Corp, the Filers)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction (the Legislation) that the take-over bid and issuer bid requirements set out in Part 2 of National Instrument 62-104 Take-Over Bids and Issuer Bids (NI 62-104) and the requirements related to insider bids and issuer bids set out in Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions do not apply to acquisitions (the Subject Transactions) of common shares (123Corp Common Shares) and convertible preferred shares (123Corp Convertible Preferred Shares, and collectively with 123Corp Common Shares, the 123Corp Shares), respectively of 123Corp and common shares (123Inc. Common Shares) and partner shares (123Inc. Partner Shares, and collectively with 123Inc. Common Shares, the 123Inc. Shares), respectively, of 123Inc. (the 123Inc. Shares, collectively with the 123Corp Shares, the Shares, and such decision, 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 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 all provinces and territories of Canada other than Ontario.
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 Filers:
Each Filer was incorporated under the Canada Business Corporations Act on April 17, 2017.
The registered office of each Filer is located at 40 King Street, West, Suite 5800, Toronto, Ontario M5H 3S1.
Each Filer is not, and has never been, a reporting issuer, or its equivalent, in any of the provinces or territories of Canada and is not in breach of any requirement of applicable securities laws.
123Corp’s authorized share capital consists of an unlimited number of 123Corp Common Shares and an unlimited number of 123Corp Convertible Preferred Shares, of which 84,691,631.50 123Corp Common Shares and 24,805,849 123Corp Convertible Preferred Shares are issued and outstanding as of June 26, 2019.
Each 123Corp Common Share and 123Corp Convertible Preferred Share is entitled to one vote in respect of all matters voted on by the shareholders, except as provided for in the Shareholders Agreement (as defined below).
The 123Corp Common Shares are held by an aggregate of 87 holders, of which 28 are members of 123 Corp’s management, employees and founders (which includes 25 employees), 51 are Dental Principals (as defined below), and 8 are not “insiders” of 123Corp, as such term is defined under subsection 1(1) of the Securities Act (Ontario)(the Act). The 123Corp Convertible Preferred Shares are all held by a single arm’s length third party and is a party to the Shareholders Agreement.
As a condition to acquiring any 123Corp Shares, each holder is required to become a party to, and agree to be subject to the terms and conditions of, a unanimous shareholder agreement (the Shareholder Agreement). The Shareholder Agreement provides, among other things, certain rights in respect of the sale of the Business (as defined below), including customary piggy-back and drag-along rights that restrict and govern the transfer of 123Corp Shares.
123Inc.’s authorized share capital consists of an unlimited number of 123Inc. Common Shares and an unlimited number of 123Inc. Partner Shares, of which 35,056,200 123Inc. Common Shares and 19,623,133 123Inc. Partner Shares are issued and outstanding as of June 26, 2019.
The 123Inc. Common Shares are the only voting shares of 123Inc., all of which are held by 123Corp. The 123Inc. Partner Shares are non-voting and are held exclusively by an aggregate of 39 Dental Principals.
123Inc. Partner Shares are only issued to Dental Principals. The 123Inc. Partner Shares are issuable in series and each series relates to a specific dental practice. Holders of 123Inc. Partner Shares are entitled only to dividends equal to a percentage of net income related to a specific dental practice, which enable such holders to a stream of profit sharing in addition to the income earned under a Professional Services Agreement (as defined below).
As a condition of acquiring 123Inc. Partner Shares, each Dental Principal is required to enter into a buy-back agreement with 123Inc. (a Buy-Back Agreement). Each Buy-Back Agreement provides that 123Inc. will buy and the Dental Principal will sell the 123Inc. Partner Shares held by such Dental Principal based on a formula in certain prescribed circumstances, including the Dental Principal ceasing to perform his or her duties under the Professional Services Agreement, and the Dental Principal’s death or disability.
The Filers are affiliates of each other pursuant to subsection 1(2) of the Act.
In connection with a Dental Principal’s sale of an existing dental business and the acquisition by 123Inc. of the hygiene and healthcare portion of that dental business (a Dental Healthcare Endeavour), an individual dentist or their holding entity (as defined in National Instrument 45-106 - Prospectus Exemptions) (a Dental Principal) may receive as consideration one or any combination of 123Corp Common Shares, 123Inc. Partner Shares and cash. 123Inc. does not acquire the portion of the existing dental business that relates to the professional practice of dentistry (the Professional Dental Endeavour) which is at all times owned by the applicable registered dentist and operated independently and with full autonomy and control by such individual, free from any influence or interference whatsoever by the Filers.
With respect to each Dental Healthcare Endeavour:
(a) 123Inc. provides:
(i) support for the business, management, human resources and administrative aspects of the business operations of the Dental Healthcare Endeavour; and
(ii) hygiene and non-regulated healthcare services that are typically provided at or in conjunction with the Professional Dental Endeavour (but which are not professional dentistry services) (the Healthcare Services),
(collectively, the Business);
(b) the Dental Principal undertakes, on behalf of the 123Inc., the delivery or supervision of Healthcare Services.
Currently, 123Inc. directly or indirectly conducts the Business at Dental Healthcare Endeavours in the provinces of Ontario, Alberta, British Columbia, Manitoba and Quebec.
The relationship between each Dental Principal and 123Inc. in respect of a Dental Healthcare Endeavour is governed by the terms of a professional services agreement that is entered into between, inter alia, the Dental Principal and 123Inc. (a Professional Services Agreement).
Each Dental Principal has entered into a Professional Services Agreement. Pursuant to the terms of the Professional Services Agreement, the Dental Principal:
(a) provides, or in the case of a delegated service, supervises, the provision of Healthcare Services, with a view to enhancing and improving the relationship between the Dental Healthcare Endeavour and its clients;
(b) supports the interests of 123Inc. in the operation of the Business; and
(c) ensures that the Dental Healthcare Endeavour operates in accordance with work place policies, practices and guidelines established by 123Inc.
Each Professional Services Agreement provides the relevant Dental Principal with a percentage of the revenue derived from the Dental Healthcare Endeavour and the Professional Dental Endeavour carried on by the relevant Dental Principal.
Due to certain legal requirements in respect of the professional practice of dentistry in Canada, the Dental Principals are not employees of 123Inc. and operate as independent contractors.
Each Dental Principal:
(a) is provided with the 123Corp’s annual audited financial statements;
(b) has the right, under their Professional Services Agreement, to access the books and records of the applicable Dental Healthcare Endeavour; and
(c) is invited to attend an annual meeting of Dental Principals during which 123Corp provides detailed information regarding the Business and the Filers’ financial and operating results,
(collectively, the Information and Access Rights).
- Sections 4.3 and 4.9 of NI 62-104 provide exemptions (the Exemptions) from the take-over bid and issuer bid requirements set out in Part 2 of NI 62-104 (the Take-over Bid and Issuer Bid Requirements) in respect of a non-reporting issuer if:
(a) the offeree issuer is not a reporting issuer;
(b) there is no published market for the securities that are the subject of the bid; and
(c) the number of security holders of that class of securities at the commencement of the bid is not more than 50, exclusive of holders who (i) are in the employment of the offeree issuer or an affiliate of the offeree issuer, or (ii) were formerly in the employment of the offeree issuer or in the employment of an entity that was an affiliate of the offeree issuer at the time of that employment, and who while in that employment were, and have continued after that employment to be, security holders of the offeree issuer.
As 123Corp has more than 50 holders of 123Corp Common Shares (including 49 Dental Principals) that are not current or former employees of 123Corp or an affiliate thereof, the Exemptions are not available in respect of the Subject Transactions.
As it is expected that over the coming years 123Inc. will have more than 50 holders of the 123Inc. Partner Shares, all of whom are expected to be Dental Principals that are not current or former employees of the 123Inc. or an affiliate thereof, the Exemptions will not be available in respect of the Subject Transactions.
Given that (i) neither Filer is a reporting issuer, or its equivalent, in any of the provinces or territories of Canada, and (ii) there is no published market in respect of the Shares, if the Dental Principals were treated in the same manner as employees of 123Inc.,
(a) the number of holders of each class of 123Inc. Shares, exclusive of current and former employees of 123Inc., would be fewer than 50, and the Subject Transactions applicable to the 123Inc. Shares would be exempt from the Take-over Bid and Issuer Bid Requirements; and
(b) the number of holders of each class of 123Corp Shares, exclusive of current and former employees of an affiliate of 123Corp, would be fewer than 50, and the Subject Transactions applicable to the 123Corp Shares would be exempt from the Take-over Bid and Issuer Bid Requirements.
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, at the time of each Subject Transfer:
(a) neither Filer is a reporting issuer;
(b) there is no published market for the applicable class of Shares;
(c) the Filers are affiliates of each other pursuant to subsection 1(2) of the Act;
(d) the Information and Access Rights have been and are being fulfilled by the Filers; and
(e) the number of holders of the applicable class of Shares is not more than 50, exclusive of holders who:
(i) are in the employment of the relevant Filer or an affiliate of the relevant Filer;
(ii) were formerly in the employment of the relevant Filer or in the employment of an entity that was an affiliate of the relevant Filer at the time of that employment, and who while in that employment were, and have continued after that employment to be, security holders of the relevant Filer;
(iii) are Dental Principals who have entered into a Professional Services Agreement; or
(iv) were formerly Dental Principals who had entered into a Professional Services Agreement, and have continued to be security holders of the relevant Filer.
Dated at Toronto this 29th day of July, 2019.
“Winnie Sanjoto”
Winnie Sanjoto, Manager Corporate Finance Branch Ontario Securities Commission