In the Matter of TerrAscend Corp., 2018 CanLII 97073

Date: October 10, 2018

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 TerrAscend Corp. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that the requirements under:

a) section 12.2 of National Instrument 41-101 General Prospectus Requirements (NI 41-101), relating to the use of restricted security terms, sections 1.13 and 10.6 of Form 41-101F1 Information Required in a Prospectus (Form 41-101F1) and sections 1.12 and 7.7 of Form 44-101F1 Short Form Prospectus (Form 44-101F1) relating to restricted security disclosure shall not apply to the common shares in the capital of the Filer (the Common Shares) (the Prospectus Disclosure Exemption) in connection with prospectuses (Prospectuses) that may be filed by the Filer under NI 41-101 or National Instrument 44-101 Short Form Prospectus Distributions (NI 44‑101), including a prospectus filed under National Instrument 44-102 Shelf Distributions;

b) section 12.3 of NI 41-101 relating to prospectus filing eligibility for distributions of restricted securities shall not apply to distributions of Common Shares (the Prospectus Eligibility Exemption) in connection with Prospectuses;

c) Part 2 of OSC Rule 56-501 Restricted Shares (OSC Rule 56‑501) relating to the use of restricted share terms and restricted share disclosure shall not apply to the Common Shares (the OSC Rule 56-501 Disclosure Exemption) in connection with dealer and adviser documentation, rights offering circulars and offering memoranda (OSC Rule 56-501 Documents) of the Filer;

d) Part 3 of OSC Rule 56-501 relating to the withdrawal of prospectus exemptions for distributions of restricted shares shall not apply to the distribution of the Common Shares (the OSC Rule 56-501 Withdrawal Exemption) in connection with stock distributions (as defined in OSC Rule 56-501) of the Filer; and

e) Part 10 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) relating to the use of restricted security terms and restricted security disclosure shall not apply to the Common Shares (the CD Disclosure Exemption) in connection with continuous disclosure documents (the CD Documents) that may be filed by the Filer under NI 51-102.

The aforementioned requirements are collectively referred to as the Restricted Security Rules. The Prospectus Disclosure Exemption, the Prospectus Eligibility Exemption, the OSC Rule 56‑501 Disclosure Exemption, the OSC Rule 56-501 Withdrawal Exemption and the CD Disclosure Exemption are collectively referred to as 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 British Columbia and Alberta (other than with respect to the OSC Rule 56-501 Disclosure Exemption and the OSC Rule 56-501 Withdrawal Exemption), which, pursuant to subsection 8.2(2) of National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions (NP 11-202) and subsection 5.2(6) of National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203), also satisfies the notice requirement of Section 4.7(1)(c) of MI 11-102.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102, NP 11-202, NP 11-203, NI 41-101, NI 44-101, NI 51-102 and OSC Rule 56-501 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:

1. The Filer is a corporation incorporated under the Business Corporations Act (Ontario) (the OBCA) and is a reporting issuer in British Columbia, Alberta and Ontario.

2. The registered and head office of the Filer is located in Mississauga, Ontario.

3. The authorized capital of the Filer consists of an unlimited number of common shares (the Common Shares).

4. The Common Shares are currently listed on the Canadian Securities Exchange (the CSE) under the symbol "TER".

5. As part of an arrangement under section 182 of the OBCA (the Arrangement), among other things, the articles of the Filer will be amended to authorize the issuance of an unlimited number of a new class of proportionate voting shares (the PV Shares), an unlimited number of a new class of exchangeable shares (the Exchangeable Shares) and an unlimited number of a new class of preferred shares, issuable in series (the Preferred Shares).

6. Upon completion of the Arrangement, the PV Shares will constitute subject securities (as defined in NI 41-101, NI 51-102 and OSC Rule 56-501) and the Filer's only issued and outstanding subject securities will be the PV Shares.

7. Immediately upon completion of the Arrangement, the Filer's authorized share capital will consist of (i) an unlimited number of Common Shares; (ii) an unlimited number of PV Shares; (iii) an unlimited number of Exchangeable Shares; and (iv) an unlimited number of Preferred Shares, issuable in series.

8. Following the Arrangement:

a) The Common Shares may at any time, at the option of the holder thereof, be converted into PV Shares on the basis of one (1) Common Share for one one-thousandth (0.001) of a PV Share.

b) The PV Shares may at any time, at the option of the holder thereof, be converted into Common Shares on the basis of one thousand (1,000) Common Shares for one (1) PV Share. If the board of directors of the Filer determines that it is no longer advisable to maintain the PV Shares as a separate class of shares, then the PV Shares shall be converted into Common Shares on the basis of one thousand (1,000) Common Shares for one (1) PV Share.

c) Each PV Share is entitled to dividends if, as and when dividends are declared by the board of directors, with each PV Share being entitled to one thousand (1,000) times the amount paid or distributed per Common Share (or, if a stock dividend is declared, each PV Share shall be entitled to receive the same number of PV Shares per PV Share as the number of Common Shares entitled to be received per Common Share) and otherwise without preference or distinction among or between the shares.

d) In the event of the liquidation, dissolution or winding-up of the Filer, the holders of PV Shares are entitled to participate in the distribution of the remaining property and assets of the Filer, with each PV Share being entitled to one thousand (1,000) times the amount distributed per Common Share and otherwise without preference or distinction among or between the shares.

e) The holders of the Common Shares and PV Shares are entitled to receive notice of, attend and vote at any meeting of shareholders of the Filer, except those meetings at which holders of a specific class of shares are entitled to vote separately as a class under the OBCA.

f) The Common Shares will carry one (1) vote per share and the PV Shares will carry one thousand (1,000) votes per share.

9. The rights, privileges, conditions and restrictions attaching to the Shares may be modified if the amendment is authorized by not less than 66⅔% of the votes cast at a meeting of holders of the Shares duly held for that purpose. However, if the holders of PV Shares, as a class, or the holders of Common Shares, as a class, are to be affected in a manner materially different from such other class of Shares, the amendment must, in addition, be authorized by not less than 66⅔% of the votes cast at a meeting of the holders of the class of shares which is affected differently.

10. No subdivision or consolidation of the Common Shares or PV Shares may be carried out unless, at the same time, the Common Shares or PV Shares, as the case may be, are subdivided or consolidated in the same manner and on the same basis, so as to preserve the relative rights of the holders of each class of Shares.

11. The Exchangeable Shares will be non-voting, non-participating shares in the capital of the Filer that have the right, in certain circumstances, to be exchanged for Common Shares on a one-for-one basis.

12. The Preferred Shares will be issuable in series at the discretion of the board of directors of the Filer and each such series will have the terms and conditions determined by the Filer's board of directors. No Preferred Shares will be issued and outstanding immediately following completion of the Arrangement.

13. The Filer is seeking the Exemption Sought in respect of, among other things, references to the Common Shares in Prospectuses and CD Documents.

14. Section 12.2 of NI 41-101 requires that an issuer must not refer to a security in a prospectus by a term or a defined term that includes the word "common" unless the security is an equity security to which are attached voting rights exercisable in all circumstances, irrespective of the number or percentage of securities owned, that are not less, per security, than the voting rights attached to any other outstanding security of the issuer.

15. Section 12.3 of NI 41-101 requires that an issuer must not file a prospectus under which restricted securities, subject securities or securities that are, directly or indirectly, convertible into, or exercisable or exchangeable for, restricted securities or subject securities, are distributed unless:

a) the distribution has received prior majority approval of the securityholders of the issuer in accordance with applicable law, including approval on a class basis if required and excluding any votes attaching at the time to securities held, directly or indirectly, by affiliates of the issuer or control persons of the issuer, or

b) at the time of any restricted security reorganization related to the securities to be distributed:

i) the restricted security reorganization received prior majority approval of the securityholders of the issuer in accordance with applicable law, including approval on a class basis if required and excluding any votes attaching at the time to securities held, directly or indirectly, by affiliates of the issuer or control persons of the issuer,

ii) the issuer was a reporting issuer in at least one jurisdiction, and

iii) no purposes or business reasons for the creation of restricted securities were disclosed that are inconsistent with the purpose of the distribution.

16. Sections 1.13 and 10.6 of Form 41-101F1 and sections 1.12 and 7.7 of Form 44-101F1 require that an issuer provide certain restricted security disclosure.

17. Section 2.2 of OSC Rule 56-501 requires dealer and adviser documentation to include the appropriate restricted share term if restricted shares and the appropriate restricted share term or a code reference to restricted shares or the appropriate restricted share term are included in a trading record published by the Canadian Securities Exchange or other exchange listed in OSC Rule 56-501.

18. Section 2.3 of OSC Rule 56-501 requires that a rights offering circular or offering memorandum for a stock distribution prepared for a reporting issuer comply with certain requirements including, among others, the restricted shares may not be referred to by a term or a defined term that includes "common", "preference" or "preferred" and that such shares shall be referred to using a term or a defined term that includes the appropriate restricted share term.

19. Section 3.2 of OSC Rule 56-501 provides that the prospectus exemptions under Ontario securities law are not available for a stock distribution of securities of a reporting issuer or an issuer if the issuer will become a reporting issuer as a result of the stock distribution unless either the stock distribution received minority approval of shareholders or all the conditions set out in subsection 3.2(2) are satisfied and the information circular relating to the shareholders' meeting held to obtain such minority approval for the stock distribution included prescribed disclosure.

20. Section 10.1 of NI 51-102 requires a reporting issuer that has outstanding restricted securities, or securities that are directly or indirectly convertible into or exercisable or exchangeable for restricted securities or securities that will, when issued, result in an existing class of outstanding securities being considered restricted securities, to provide specific disclosure with respect to such securities in its information circular, a document required by NI 51-102 to be delivered upon request by a reporting issuer to any of its securityholders, an annual information form prepared by the reporting issuer as well as any other documents that it sends to its securityholders.

21. Section 10.2 of NI 51-102 sets out the procedure to be followed with respect to the dissemination of disclosure documents to holders of restricted securities.

22. Pursuant to the Restricted Security Rules, a "restricted security" means an equity security of a reporting issuer if any of the following apply:

a) there is another class of securities of the reporting issuer that, to a reasonable person, appears to carry a greater number of votes per security relative to the equity security,

b) the conditions of the class of equity securities, the conditions attached to another class of securities of the reporting issuer, or the reporting issuer's constating documents have provisions that nullify or, to a reasonable person appear to significantly restrict the voting rights of the equity securities, or

c) the reporting issuer has issued another class of equity securities that, to a reasonable person, appears to entitle the owners of securities of that other class to participate in the earnings or assets of the reporting issuer to a greater extent, on a per security basis, than the owners of the first class of equity securities.

23. The multiple votes attaching to the PV Shares would, absent the Exemption Sought, have the following consequences in respect of the technical status of the Common Shares:

a) pursuant to NI 41-101 and NI 44-101, the Filer would be unable to use the word "common" to refer to the Common Shares in Prospectuses and the Filer would be required to provide the specific disclosure required by NI 41-101 and NI 44‑101 because the PV Shares would represent a security to which are attached voting rights exercisable in all circumstances, irrespective of the number or percentage of securities owned, that are more, per security, than the voting rights attached to the Common Shares,

b) the Common Shares would be considered "restricted shares" pursuant to OSC Rule 56-501 and the Filer would be subject to the dealer and advisor documentary disclosure obligations and distribution restrictions in OSC Rule 56‑501 because the PV Shares would represent a security to which is attached voting rights exercisable in all circumstances, irrespective of the number of percentage of shares owned, that are more, on a per share basis, than the voting rights attaching to the Common Shares of the Filer and the Filer would be unable to use the word "common" to refer to the Common Shares in a rights offering circular or offering memorandum for a stock distribution, and

c) the Common Shares could be considered "restricted securities" pursuant to para. (a) of the definition of the term in NI 51-102 and the Filer would be required to provide the specific disclosure required by NI 51-102 in respect of the Common Shares because the PV Shares would represent another class of securities of the Filer that, to a reasonable person, appears to carry a greater number of votes per security relative to the Common Shares.

24. The CSE advised the Filer on October 5, 2018 that it will permit the Filer to designate the Common Shares as common shares, provided that the Exemption Sought is granted.

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:

a) in connection with the Prospectus Disclosure Exemption and the Prospectus Eligibility Exemption as they apply to Prospectuses, at the time the Filer relies on the Exemption Sought:

i) the representations in paragraphs 6 to 12, above, continue to apply;

ii) the Filer has no restricted securities (as defined in section 1.1 of NI 41-101) issued and outstanding other than the Common Shares; and

iii) the Prospectuses include disclosure consistent with the representations in paragraphs 6 to 12 above;

b) in connection with the OSC Rule 56-501 Disclosure Exemption as it applies to the OSC Rule 56-501 Documents, at the time the Filer relies on the Exemption Sought:

i) the representations in paragraphs 6 to 12, above, continue to apply; and

ii) the Filer has no restricted shares (as defined in section 1.1 of OSC Rule 56 ‑501) issued and outstanding other than the Common Shares;

c) in connection with the OSC Rule 56-501 Withdrawal Exemption, at the time the Filer relies on the Exemption Sought:

i) the representations in paragraphs 6 to 12, above, continue to apply; and

ii) the Filer has no restricted shares (as defined in section 1.1 of OSC Rule 56‑501) issued and outstanding other than the Common Shares;

d) in connection with the CD Disclosure Exemption as it applies to the CD Documents, at the time the Filer relies on the Exemption Sought:

i) the representations in paragraphs 6 to 12, above, continue to apply; and

ii) the Filer has no restricted securities (as defined in subsection 1.1(1) of NI 51-102) issued and outstanding other than the Common Shares.

"Michael Balter"

Michael Balter Manager, Corporate Finance Ontario Securities Commission