In the Matter Of Hollister Biosciences Inc., 2021 CanLII 113156

Ontario Securities Commission

Date: October 29, 2021

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 Hollister Biosciences 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 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 of the Filer (the Common Shares) (the Prospectus Disclosure Exemption) in connection with future 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 (Prospectuses);

b) section 12.3 of NI 41-101 relating to prospectus filing eligibility for distributions of restricted securities, subject securities or securities that are, directly or indirectly, convertible into, or exercisable or exchangeable for, restricted securities or subject securities shall not apply to distributions of Common Shares, Proportionate Voting Shares (as defined below), or securities that are, directly or indirectly, convertible into, or exercisable or exchangeable for, Common Shares or Proportionate Voting Shares (the Prospectus Eligibility Exemption) in connection with Prospectuses;

c) Part 2 of Ontario Securities Commission 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, subject securities or securities that are, directly or indirectly, convertible into, or exercisable or exchangeable for, restricted shares or subject securities, shall not apply to the distribution of the Common Shares, Proportionate Voting Shares, or securities that are, directly or indirectly, convertible into, or exercisable or exchangeable for, Common Shares or Proportionate Voting 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, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.

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 validly existing and in good standing under the Business Corporations Act (British Columbia).

2. The registered office of the Filer is located in Vancouver, British Columbia and the head office of the Filer is located in Hollister, California.

3. The Filer is a reporting issuer in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador, and is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.

4. The authorized capital of the Filer consists of an unlimited number of Common Shares.

5. The Common Shares are listed on the Canadian Securities Exchange (the CSE) under the symbol "HOLL".

6. The Filer will be seeking shareholder approval at its meeting on November 22, 2021 to amend its notice of articles and articles to create an unlimited number of a new class of securities (the Amendments), being the proportionate voting shares (the Proportionate Voting Shares).

7. The Filer desires to create the Proportionate Voting Shares to minimize the proportion of the outstanding voting securities of the Filer that are held by "U.S. persons" for the purposes of determining whether the Filer is a "foreign private issuer" for the purposes of United States securities laws.

8. Although the Filer does not anticipate requiring any specific U.S. resident shareholder to elect to convert their Common Shares into Proportionate Voting Shares, the Filer expects that its directors and officers who are U.S. residents will elect to convert their Common Shares into Proportionate Voting Shares. Additionally, Proportionate Voting Shares may be issuable at the discretion of the Filer's board of directors.

9. The creation of the Proportionate Voting Shares will constitute a restricted security reorganization (as defined in NI 41-101) and a reorganization (as defined in OSC Rule 56-501).

10. The Proportionate Voting Shares will constitute subject securities (as defined in NI 41-101 and OSC Rule 56-501) and will be the Filer's only issued and outstanding subject securities.

11. Following the effective time of the Amendments, the Filer's authorized share capital will consist of (a) an unlimited number of Common Shares; and (b) an unlimited number of Proportionate Voting Shares.

12. The Common Shares may at any time, at the option of the holder, be converted into Proportionate Voting Shares at a ratio of one (1) Proportionate Voting Share for one thousand (1,000) Common Shares.

13. The Proportionate Voting 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) Proportionate Voting Share subject to adjustments for certain corporate changes.

14. No fractional Common Shares shall be issued upon the conversion of any Proportionate Voting Shares and the number of Common Shares to be issued shall be rounded down to the nearest whole Common Share.

15. Fractional Proportionate Voting Shares (to three decimal points) may be issued upon the conversion of any Common Shares.

16. Holders of Common Shares shall be entitled to notice of and to attend at any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote. At each such meeting, holders of Common Shares will be entitled to one vote in respect of each Common Share.

17. Holders of Proportionate Voting Shares shall be entitled to notice of and to attend at any meeting of the shareholders of the Filer, except a meeting of which only holders of another particular class or series of shares of the Filer shall have the right to vote. At each such meeting, holders of Proportionate Voting Shares will be entitled to one vote in respect of each Common Share into which such Proportionate Voting Share could ultimately then be converted, being 1,000 votes per Proportionate Voting Share.

18. As long as any Common Shares remain outstanding, the Company will not, without the consent of the holders of the Common Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Common Shares.

19. The Company will not, without the consent of the holders of the Proportionate Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Proportionate Voting Shares. Consent of the holders of a majority of the outstanding Proportionate Voting Shares is required for any action that authorizes or creates shares of any class having preferences superior to or on a parity with the Proportionate Voting Shares.

20. The Proportionate Voting Shares are subject to restrictions on conversion to ensure the filer maintains its status as a "foreign private issuer" (as determined in accordance with Rule 3b-4 under the United States Securities Exchange Act of 1934, as amended), and to ensure that no holder of Proportionate Voting Shares would, after conversion, hold more than 9.99% of the outstanding Common Shares.

21. The holders of Proportionate Voting Shares shall have the right to receive dividends pari passu (on an as converted to Common Share basis) as to dividends and any declaration or payment of any dividend on the Common Shares. No dividend will be paid on the Proportionate Voting Shares unless the Filer simultaneously pays equivalent dividends (on an as-converted to Common Share basis) on the Common Shares.

22. In the event of the liquidation, dissolution or winding-up of the Filer the holders of Proportionate Voting Shares will be entitled to participate pari passu along with all other holders of Proportionate Voting Shares and Common Shares (on an as-converted to Common Share basis).

23. No consolidation or subdivision of the Common Shares or Proportionate Voting Shares may be carried out unless, at the same time, the shares of the other class are consolidated or subdivided in the same manner and on the same basis, so as to preserve the relative rights of the holders of each such class of shares.

24. In addition to the conversion rights described above, if an offer (Offer) is made for Proportionate Voting Shares where: (a) by reason of applicable securities legislation or stock exchange requirements, the Offer must be made to all holders of the class of Proportionate Voting Shares; and (b) no equivalent offer is made for the Common Shares, the holders of Common Shares shall have the right, at their option, to convert their Common Shares into Proportionate Voting Shares for the purposes of allowing the holders of the Common Shares to tender to the Offer, provided however that such conversion will be solely for the purpose of tendering the Proportionate Voting Shares to the Offer in question and that any Proportionate Voting Shares that are tendered to the Offer but that are not, for any reason, taken up and paid for by the offeror will automatically be reconverted into the Common Shares that existed prior to such conversion.

25. In the event that holders of Common Shares are entitled to convert their Common Shares into Proportionate Voting Shares in connection with an Offer, holders of an aggregate of an odd lot of Common Shares of less than one hundred (100) (an Odd Lot) will be entitled to convert all but not less than all of such Odd Lot of Common Shares into an applicable fraction of one Proportionate Voting Share, provided that such conversion into a fractional Proportionate Voting Share will be solely for the purpose of tendering the fractional Proportionate Voting Share to the Offer in question and that any fraction of a Proportionate Voting Share that is tendered to the Offer but that is not, for any reason, taken up and paid for by the offeror will automatically be reconverted into the Common Shares that existed prior to such conversion.

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

27. 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.

28. 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.

29. 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.

30. 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 CSE or other exchange listed in OSC Rule 56-501.

31. 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, that 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.

32. 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 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.

33. 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.

34. 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.

35. 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.

36. The multiple votes attaching to the Proportionate Voting 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 the Prospectuses and the Filer would be required to provide the specific disclosure required by NI 41-101 and NI 44-101 because the Proportionate Voting 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 Proportionate Voting 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 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 Proportionate 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.

37. The CSE advised the Filer on October 15, 2021 that it will permit the Filer to designate the Common Shares as common shares.

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 12 to 25, 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 12 to 25 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 12 to 25, 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 12 to 25, 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 12 to 25, 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.

"Winnie Sanjoto" Winnie Sanjoto Manager, Corporate Finance Ontario Securities Commission