Ontario Securities Commission
January 19, 2023
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
Pharmasave Drugs (East) Ltd. (“Pharmasave”)
Decision
Background
The principal regulator in the Jurisdiction has received an application from Pharmasave for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an order pursuant to subsection 74(1) of the Securities Act, R.S.O. 1990, c. S.5 (the Act) that the prospectus requirements of section 53 of the Act (the Prospectus Requirements) shall not apply to certain trades in securities of Pharmasave, as described below. Pharmasave has also applied to revoke and replace the Ontario Securities Commission’s (OSC) ruling dated April 24, 1998 (the Ruling) with this decision.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) The OSC is the principal regulator for this decision, and
(b) Pharmasave has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Saskatchewan and Yukon.
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 Pharmasave:
Pharmasave is a corporation formed by the filing of Articles of Incorporation (Articles) under the Business Corporations Act, R.S.O. 1990, c. B.16. Its head office is located at 3100 Steeles Avenue East, Suite 404 in Markham, Ontario, Canada.
Pharmasave operates as a franchisee of Pharmasave Drugs (National) Ltd. (National). There are currently two franchised corporate regions operating under the National umbrella: Pharmasave and Pharmasave Drugs (West) Ltd.
Pharmasave previously operated as Pharmasave Drugs (Ontario) Ltd. Its corporate name was changed to Pharmasave Drugs (East) Ltd. following the consolidation of regions between the Ontario Region and the Eastern Canada Region.
Pharmasave and its franchisees are all engaged directly or indirectly in the pharmacy or drug store business. Pharmasave is a member-owned organization whose operations are not carried on primarily with a view to making a profit but rather to facilitate the promotion of its franchisee business on a collective basis under the control of the franchisees.
Pharmasave is not, and does not intend to become, a reporting issuer under the securities legislation of any jurisdiction in Canada.
Pharmasave’s shares are not listed or posted for trading on any stock exchange and Pharmasave does not intend to list or post its shares for trading on any stock exchange.
Pharmasave is not a “private company” within the meaning of the Act but its Articles provide that the transfer of its shares (including the proposed class of shares) will be subject to approval from its board of directors.
There is no active trading market for Pharmasave’s shares and none is expected to develop. Pharmasave’s Articles restrict the issuance, transfer and ownership of its shares to and among its franchisees. Pharmasave will only issue shares to franchisees being:
a. Individuals who have an interest in a franchise agreement with Pharmasave or its subsidiaries, as an individual franchisee;
b. Individuals who are shareholders of a corporation which is a party to a franchise agreement with Pharmasave or its subsidiaries, except where that shareholder is a corporation (in which case, shares will be issued to an individual who is a shareholder of that corporation); and
c. Individuals who are members of a partnership which is a party to a franchise agreement with Pharmasave or its subsidiaries, except where that partnership includes partners who are corporations (in which case, shares will be issued to an individual who is a shareholder of one of the corporations).
- Pharmasave has previously been granted exemptive relief substantially identical to the relief requested in this decision. On April 24, 1998, the OSC issued the Ruling exempting National and Pharmasave from sections 25 and 53 of the Act provided that Pharmasave’s Articles and each franchise agreement contain:
a. The aforementioned restrictions on share issuance, transfer and ownership in subparagraph 8 of this decision; and
b. A provision requiring each franchisee to “subscribe for or acquire an equal number of common shares of Pharmasave”, among other requirements.
At the time of the Ruling, there was only one class of common shares. The operative intention in including the aforementioned subparagraph 9(b) of this decision in both the Ruling and Pharmasave’s franchise agreements was to ensure all franchisees have an equal number of voting common shares per franchise.
The authorized share capital of Pharmasave currently consists of 535,000 common shares and Pharmasave is authorized to issue an unlimited number of common shares. The holders of common shares are entitled to receive notice of and to attend all meetings of the shareholders of Pharmasave and are entitled to one vote for each common share held.
National’s franchise agreement with its five original regions gave each region the right to limit the total number of stores a shareholder could hold voting shares in to limit the influence a single shareholder could exert in each region. The limit varied between region to region. National presently has consolidated into two regions: Pharmasave East and Pharmasave West. The articles of incorporation for Pharmasave (West) permit non-voting common shares.
Pharmasave intends to amend its Articles to add a new non-voting, fully-participating common share class to deal with franchisee issues following the consolidation of regions (the Proposed Amendment). The Proposed Amendment would create a voting Class A Common Share and a non-voting Class B Common Share. Pharmasave’s franchise agreement currently disentitles any one individual or group that owns more than five franchises from exercising their voting rights for any franchise over five. This is a significant issue after the Eastern Canada region was absorbed by the Ontario Region. Post-merger, Pharmasave requires a prospectus exemption to continue operating as it did under the original Ruling.
Since the Ruling:
a. The Articles were amended to change the name of the corporation from Pharmasave Drugs (Ontario) Ltd. to Pharmasave Drugs (East) Ltd. to reflect the post-merger reality. There have been no other amendments to Pharmasave’s Articles and by-laws;
b. Pharmasave’s Franchise Agreement has been subtly amended since the Ruling in non-material respects. The form of Franchise Agreement used in 1998 was amended in 2005 to introduce a table of contents, headings, definition section, appendices section and conversion of legal language to plain language. Other changes included further restrictions on the transfer of shares and right of first refusal; and
c. After the addition of Pharmasave East franchises, the Franchise Agreement was amended to effect administrative changes and ensure language in the Franchise Agreement was consistent with franchises outside of Ontario. In addition, while there was no change made to the value and subscription cost of the common shares, the annual requirement that said value of the shares was to be determined after the Board received a report from its auditors was removed. Currently, the Board of Directors annually fix the value of each common share at $1.00.
Paragraph 14 of the Ruling refers to voting common shares but does not prohibit or exclude the creation of non-voting common shares provided Franchisees still “subscribe for or acquire an equal number of Common Shares” per franchise.
All existing shareholders and owners of common shares in Pharmasave would have their common shares reclassified as Class A Common Shares. Non-voting Class B Common Shares would only be issued, as applicable to those franchises, when an owner or ownership group owned more than five franchises.
Pharmasave believes that the requested relief is necessary as:
a. Pharmasave is not a “private issuer” within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). Pharmasave would otherwise benefit from the “private issuer” exemption under section 73.4 of the Act and section 2.4 of NI 45-106 but it has over 50 shareholders. Unlike shareholders in publicly traded companies, Pharmasave’s shareholders are not subject to market volatility and external factors that the Act intends to guard against;
b. The trades outlined in paragraphs (a) and (b) below will not be made to "accredited investors” (as such term is defined in NI 45-106) in every case where such a trade is made, and it does not appear that any of the other exemptions set forth in NI 45-106 will be available in respect of the trades outlined in paragraphs (a) and (b) below; and
c. Pharmasave’s ability to sell Class A and B Common Shares to new and existing shareholders is essential to the continued operation of Pharmasave. The creation of non-voting Class B Common Shares preserves the spirit of paragraph 14 of the Ruling while allowing franchisees who own six or more franchises to continue participating.
The exemptive relief requested in this decision would not be prejudicial to the public interest and would have minimal (if any) impact on the public while promoting a fair and efficient capital structure for Pharmasave, its regional affiliate corporations and a specific market sector interested in the drug store business.
Pharmasave is not in default of securities legislation in any jurisdiction.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation.
IT IS ORDERED, pursuant to subsection 74(1) of the Act, that the Prospectus Requirements shall not apply to:
(a) The issue of any Class A Common Shares or Class B Common Shares by Pharmasave; and
(b) The sale or transfer of any Class A Common Shares or Class B Common Shares by Pharmasave to new and existing franchisees;
for so long as:
(c) The representations in paragraphs 2-17 above, continue to apply;
(d) Prior to the initial trade to a franchisee of any Class A Common Share or Class B Common Share, Pharmasave shall deliver to each franchisee a copy of:
i. Pharmasave’s Articles and by-laws, and all amendments thereto;
ii. Pharmasave’s most recent annual audited financial statements, and a copy of any subsequent interim financial statements;
iii. this decision; and
iv. a written statement to the effect that as a consequence of this decision certain protections, rights and remedies provided by the Act, including statutory rights of rescission and damages, will not be available to purchasers of any Class A Common Shares or Class B Common Shares and that certain restrictions are imposed on the disposition or transfer of any Class A Common Shares or Class B Common Shares;
(e) At the time of the specific trade, the Articles and each franchise agreement contain the provisions described in paragraphs 7, 8 and 9, above;
(f) Pharmasave has not issued any securities from treasury since the Ruling other than common shares;
(g) All share certificates for Class A Common Shares or Class B Common Shares issued after the date of this decision, and prior to making the specific trade, bear a legend describing the restrictions on the transfer of shares;
(h) The Articles, by-laws and any franchise agreement of Pharmasave, as specifically relating to this decision, are not amended, without notice to, and the consent of, the Director (as defined in the Act);
(i) The first trade of any Class A Common Shares or Class B Common Shares purchased or acquired pursuant to paragraphs (a) or (b) will be a distribution; and
(j) The amendment of the Articles in the manner described in representation 12 hereof is or has been approved by the required shareholder vote.
AND IT IS ORDERED that the Ruling is revoked.
“Marie-France Bourret”
Marie-France Bourret
Manager, Corporate Finance
Ontario Securities Commission
OSC File # : 2022/0326