European Commercial Real Estate Investment Trust (Re), 2019 CanLII 22947

March 18, 2019

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

EUROPEAN COMMERCIAL REAL ESTATE INVESTMENT TRUST

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a decision pursuant to section 13.1 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) that the Filer be exempt from the requirement to include the financial statement disclosure prescribed under item 14.2 of Form 51-102F5 Information Circular (Form 51-102F5) relating to financial statement disclosure for reverse takeovers (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;

(b) The Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-02) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively, with Ontario, the Jurisdictions); and

(c) All factual information contained herein has been provided to us by the Filer. The details of the application and the reasons therefor are set out below.

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:

1. The Filer is an unincorporated open-ended real estate investment trust that was established pursuant to a declaration of trust dated February 15, 2017, as amended and restated on May 3, 2017 (as further amended or amended and restated from time to time) and is governed under the laws of the Province of Ontario.

2. The Filer’s principal and head office is located at 11 Church Street, Suite 401, Toronto, Ontario M5E 1W1.

3. The Filer’s principal business is to invest in real estate properties in Europe.

4. The authorized capital of the Filer consists of an unlimited number of trust units (Units) and an unlimited number of special voting units (Special Voting Units). As at the date hereof, there were 16,204,568 Units and 717,475 Special Voting Units issued and outstanding.

5. The Units are listed and posted for trading on the TSX Venture Exchange (TSXV) under the symbol “ERE.UN”.

6. The Filer is a reporting issuer in each of the Jurisdictions, and, to the best of its knowledge, is not in default of the securities legislation in any of the Jurisdictions.

The Proposed Acquisition

7. From December 2016 to December 2017, Canadian Apartment Properties Real Estate Investment Trust (CAPREIT) acquired 41 separate properties in the Netherlands comprised of, in the aggregate, 2,091 suites (the Acquisition Portfolio). Pursuant to the securities purchase agreement entered into between the Filer, CAPREIT and CAPREIT Limited Partnership on December 10, 2018, the Filer has agreed to acquire (the Proposed Acquisition) the Acquisition Portfolio by way of acquiring the equity interests in CAPREIT NL Holding BV (the Netherlands Nominee), a subsidiary entity of CAPREIT. In consideration, the Filer will issue Units to CAPREIT in such an amount that would result in CAPREIT owning in excess of 50% of the total issued and outstanding Units. The properties comprising the Acquisition Portfolio (the Acquisition Properties) were acquired by CAPREIT as multiple portfolios in separate transactions, as follows, from various vendors unrelated to the Filer or CAPREIT commencing in December 2016 and are held by the Netherlands Nominee or its wholly-owned subsidiaries:

Portfolio Group

Date of Acquisition by CAPREIT

Number of Properties

Group 1

December 23, 2016

8

Group 2

July 12, 2017

19

Group 3

August 8-25, 2017

4

Group 4

December 1, 2017

10

8. A special committee of the board of trustees of the Filer is supervising the Proposed Acquisition and has retained legal counsel and financial advisors in respect of the Proposed Acquisition.

Proposed Acquisition as a Reverse Takeover

9. The Filer submits that the Proposed Acquisition is properly characterized as a “reverse takeover” (RTO) pursuant to section 1.1(1) of NI 51-102 given that it is a “transaction where [the Filer] acquires a person or company by which the securityholders of the acquired person or company, at the time of the transaction, obtain[s] control of [the Filer]”. Based on this and pursuant to subsection 8.1(2) of NI 51-102, Part 8 of NI 51-102 does not apply to the Proposed Acquisition. As a result, the Proposed Acquisition is not a “significant acquisition” under Part 8 of NI 51-102 and the Filer will not be required to file a business acquisition report in connection with the Proposed Acquisition.

10. The Proposed Acquisition is also characterized as a “reverse take-over” under TSXV Policy 5.2 Changes of Business and Reverse Takeovers (TSXV Policy 5.2) and requires the approval of a majority of holders of Units and holders of Special Voting Units (Unitholder Approval) at a duly called meeting to consider the Proposed Acquisition. In connection with obtaining Unitholder Approval, the Filer intends to hold a meeting of its holders of Units and Special Voting Units on or about March 21, 2019 and provide a management information circular (the Circular) disclosing the material particulars of the Proposed Acquisition for consideration by holders of Units and holders of Special Voting Units.

11. As the Proposed Acquisition is an RTO, it is also a restructuring transaction pursuant to subsection 1.1(1) of NI 51-102. Item 14.2 of Form 51-102F5 provides that if the action to be taken is in respect of a restructuring transaction, the Circular must include disclosure for the business being acquired.

Such disclosure must be the disclosure (including financial statements) prescribed under securities legislation and described in a prospectus that the company, business or entity would be eligible to use immediately prior to the sending and filing of the Circular. Such disclosure would be in respect of the Netherlands Nominee.

12. The financial statement disclosure of the Netherlands Nominee that would be required pursuant to item 14.2 of Form 51-102F5 would be, pursuant to National Instrument 41-101 – General Prospectus Requirements (NI 41-101) and Form 41-101F1 Information Required in a Prospectus (Form 41-101F1), for an “IPO venture issuer” (as defined in NI 41-101). Specifically, pursuant to items 32.2 and 32.3 of Form 41-101F1, the Filer is required to include audited annual financial statements for the years ended December 31, 2016 and 2017 and interim financial statements for the period ended September 30, 2018.

13. Pursuant to item 32.4(1)(c) of Form 41-101F1, the financial statement disclosure of the Netherlands Nominee would not have to include the second most recently completed financial year of the Netherlands Nominee (i.e., financial statements for the year ended December 31, 2016) if the financial statements of the Netherlands Nominee included in the Circular are for the year ended December 31, 2018.

14. Item 14.5 of Form 51-102F5 provides that a company satisfies item 14.2 of Form 51-102F5 if it prepares an information circular in connection with a reverse takeover (as defined in the TSXV policies) provided that the company complies with the policies and requirements of the TSXV in respect of that reverse takeover.

15. TSXV Policy 5.2 prescribes certain financial statement disclosure, but the Filer seeks relief from certain elements of those disclosure requirements and, therefore, the exemption in item 14.5 of Form 51-102F5 is not available. According to section 11.2 of TSXV Policy 5.2, the TSXV cannot waive financial statement requirements in respect of any information circular filed in connection with a reverse takeover.

Unavailable Financial Information

16. Following all efforts made by CAPREIT and the Filer, it has been determined that complete financial records for the Acquisition Properties do not exist or are not obtainable from the previous owners of the applicable Acquisition Properties to fully satisfy the requirements of prospectus level disclosure in respect of the Netherlands Nominee in the event such requirements were to apply. The Filer does not have financial statements for (i) the Acquisition Properties in Group 3 for the period prior to August 8 or 25, 2017, as applicable, or (ii) the Acquisition Properties in Group 4 for the period prior to December 1, 2017 (the Unavailable Financial Information).

Exemption Sought

17. The Filer will include in the Circular the following financial information (Available Financial Information) regarding the Netherlands Nominee in satisfaction of any requirement to include financial disclosure under item 14.2 of Form 51-102F5 and items 32.2(6) and 32.4(1)(c) of Form 41-101F1:

(a) audited consolidated financial statements of the Netherlands Nominee for the 12-month periods ended December 31, 2018 and December 31, 2017;

(b) audited combined financial statements of the Acquisition Properties in Group 2 for the 12-month periods ended December 31, 2018 and December 31, 2017 relating to a predecessor business of the Netherlands Nominee (collectively with the financial statements proposed at paragraphs 17(a) above, the Available Financial Statements); and

(c) a pro forma income statement of the Filer for the 12-month period ended December 31, 2017 (giving effect to the Proposed Acquisition as if it has taken place as of January 1, 2017), a pro forma balance sheet of the Filer as at September 30, 2018, and a pro forma income statement of the Filer for the rolling twelve-month period ended September 30, 2018 and for the year ended December 31, 2018 of the Netherlands Nominee (giving effect to the Proposed Acquisition as if it has taken place as of October 1, 2017).

18. In addition, the Filer will include in the Circular: (a) a summary of the current independent property appraisal dated December 4, 2018 regarding each of the Acquisition Properties; (b) a description of the phase I environmental reports prepared for CAPREIT by an independent environmental consultant; and (c) a description of each property condition assessment report prepared by an independent consultant, including, as applicable, identified immediate work and capital expenditures recommended by the consultant over the ten year period from the date of acquisition of certain of the properties by CAPREIT (the Non-Financial Alternative Disclosure).

19. The financial statements comprising the Available Financial Statements referenced in paragraph 17(a) and (b) above will be prepared in accordance with International Financial Reporting Standards applicable to publicly accounted enterprises.

Reasons for Exemption Sought

20. The Acquisition Properties were originally acquired by CAPREIT from different vendors in separate transactions and none of such acquisitions constituted a “significant acquisition” for CAPREIT at such time. Accordingly, historical financial statements were not obtained and alternative valuation methodologies typical for acquisitions of this nature were employed by CAPREIT. Further, CAPREIT was advised by each of the Acquisition Properties’ vendors that no separate, individualized property-level accounting was maintained by such seller to be able to provide specific carve-out historical financial statements. As well, it would not be customary in the Dutch real estate market to obtain such financial information and, if such a request had been made by CAPREIT, it would have critically and adversely affected CAPREIT’s bid as compared to other potential purchasers for the Acquisition Properties. As a result of the above reasons, historical financial statements were not provided to CAPREIT as part of the acquisition process.

21. Given the length of time that has passed since the date of these acquisitions by CAPREIT, it is not possible to obtain any additional financial information from the respective vendors of such properties despite CAPREIT having made such requests of the applicable vendors. Additionally, CAPREIT conducted customary property-level due diligence when considering the acquisition of the Acquisition Properties, including, but not limited to, the review of property tax bills, rent rolls, parking revenue analysis, analysis of utilities costs, site visits and interviews with property managers and the commissioning of third-party environmental, building condition and appraisal reports. Management of the Filer has reviewed with CAPREIT the closing and diligence documentation obtained in connection with each of the Acquisition Properties.

22. CAPREIT does not possess, or have access to, and is not legally entitled to obtain access by virtue of any contractual arrangement to, the financial information in respect of the Acquisition Properties for any period prior to the acquisition of such properties by CAPREIT, other than the information that has been obtained in respect of the Acquisition Properties in Group 2. CAPREIT has requested such financial information from the prior vendors of the Acquisition Properties, but such requests have been denied. Accordingly, the Unavailable Financial Information is unavailable to the Filer.

23. But for the Unavailable Financial Information, the Filer is able to satisfy the disclosure requirements of items 32.2 and 32.3 of Form 41-101F1 contemplated by the Circular reporting requirements in item 14.2 of Form 51-102F5. Additionally, the Circular will provide information in respect of the Proposed Acquisition, the Filer and the Acquisition Properties that is sufficient to enable a holder of Units or a holder of Special Voting Units to make an informed decision regarding the Proposed Acquisition. In particular, the Available Financial Information will include audited financial information for more than approximately 80% of the Acquisition Portfolio, on a weighted average basis. The weighting is based on the appraised value of the Acquisition Properties as at December 4, 2018, as determined by a third-party valuator.

24. In making the investment decision to acquire the Acquisition Properties from the applicable vendors, CAPREIT did not consider the Unavailable Financial Information to be material in the overall review of the Proposed Acquisition. Such Unavailable Financial Information was therefore also not relied upon by the Filer in making its investment decision. Rather, in accordance with its customary practice, which is consistent with customary practice in the real estate industry, the Filer conducted significant financial due diligence based on available information and using metrics (e.g., NOI) recognized by the REIT sector. Accordingly, the Filer submits that the Unavailable Financial Information is not material to the investment decisions relating to the Filer, particularly when such holders will be provided the Available Financial Information and the Non-Financial Alternative Disclosure.

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 with respect to the Circular provided that the Filer includes the Available Financial Information and the Non-Financial Alternative Disclosure in the Circular in respect of the Proposed Acquisition.

“Marie-France Bourret”

Marie-France Bourret

Acting Manager, Corporate Finance

Ontario Securities Commission