National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions – issuer is a real estate investment trust which holds all of its properties through limited partnerships – entity holds units in limited partnerships which are exchangeable into and in all material respects the economic equivalent to the issuer’s publicly traded units – relief granted from the valuation requirement for certain non-cash assets in connection with a specific related party transaction – valuation not required of exchangeable limited partnership units since public units can be a proxy for such exchangeable units – no information imbalance between the related party and minority shareholders since the reporting issuer has continuous disclosure obligations.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions, ss. 5.4, 6.3, 9.1.
Citation: Re Melcor Real Estate Investment Trust, 2018 ABASC 2
January 2, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
MELCOR REAL ESTATE INVESTMENT TRUST
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) for relief from the requirements of paragraph 6.3(1)(d) of MI 61-101 to obtain a formal valuation of the Exchangeable LP Units (as defined below) to be issued in connection with the Transaction (as defined below) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Alberta Securities Commission is the principal regulator for the application,
(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 Québec, and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
A term defined in National Instrument 14-101 Definitions, M1 61-101 or MI 11-102 has the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is an unincorporated open-ended real estate investment trust established under the laws of the province of Alberta pursuant to a declaration of trust dated January 25, 2013, as amended, (the Declaration of Trust) with its principal and head office located in Edmonton, Alberta.
2. The Filer is a reporting issuer under the securities legislation of each of the provinces and territories of Canada and is not in default of securities legislation in any such jurisdiction.
3. The Alberta Securities Commission has been selected as the principal regulator for the application in accordance with the guidelines set out in subsection 4.2(b) of MI 11-102 and paragraph 3.6(3)(b) of National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.
4. The Filer invests in income-producing real property located in Canada comprised primarily of office, retail, industrial and land lease community properties, with a future growth strategy focused primarily on the acquisition of further commercial properties.
Filer Units and Organization
5. The Filer’s trust units (Trust Units) are listed and posted for trading on the Toronto Stock Exchange (the TSX) (TSX: MR.UN).
6. Class B LP Units (Exchangeable LP Units) of Melcor REIT Limited Partnership (Melcor LP) are the economic equivalent of the Trust Units and are exchangeable on a one-for-one basis into Trust Units. Additionally, each Exchangeable LP Unit is accompanied by one special voting unit of the Filer (Special Voting Unit), which entitles the holder to voting rights in respect of the Filer that are in all respects equivalent to the voting rights such holder would have if they held a Trust Unit.
7. The Filer is authorized to issue an unlimited number of Trust Units and an unlimited number of Special Voting Units. As of November 27, 2017, there were 11,151,297 Trust Units and 14,615,878 Special Voting Units issued and outstanding.
8. Melcor LP is a limited partnership formed under the laws of the province of Alberta and is governed by an amended and restated limited partnership agreement dated May 1, 2013 (the Melcor LP Agreement). Melcor LP’s head office is located in Edmonton, Alberta. It is the operating entity through which the Filer conducts its business.
9. Melcor REIT GP Inc. (Melcor GP), is a corporation incorporated under the laws of the province of Alberta. It is the general partner of Melcor LP and is wholly owned by the Filer.
10. Melcor LP is not a reporting issuer in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.
11. Under the Melcor LP Agreement, Melcor LP is authorized to issue:
(a) an unlimited number of units designated as Class A LP Units, of which 11,151,297 Class A LP Units were issued and outstanding as of November 27, 2017;
(b) an unlimited number of Exchangeable LP Units, of which 14,615,878 Exchangeable LP Units were issued and outstanding as of November 27, 2017;
(c) an unlimited number of units designated as “Class C LP Units”, of which 9,454,411 Class C LP Units were issued and outstanding as of November 27, 2017; and
(d) an unlimited number of general partnership units designated as “Class A GP Units”, of which 1 Class A GP Unit was issued and outstanding as of November 27, 2017.
12. All of the outstanding Class A LP Units are held by the Filer. All of the outstanding Exchangeable LP Units and Class C LP Units are held indirectly by Melcor Developments Ltd. (Melcor), as they are held by Melcor REIT Holdings GP Inc. (Melcor Holdings) (a wholly owned subsidiary of Melcor). All of the outstanding Class A GP Units are held by Melcor GP.
13. As of November 27, 2017, Melcor, indirectly through Melcor Holdings, holds a 56.7% economic interest in the Filer comprised of 14,615,878 Exchangeable LP Units and 9,454,411 Class C LP Units. In addition, Melcor, indirectly through Melcor Holdings, holds 14,615,878 Special Voting Units of the Filer. Melcor does not, directly or indirectly, hold any Trust Units. The Trust Units are widely held by the public.
14. Pursuant to the terms of an exchange agreement dated May 1, 2013 among the Filer, Melcor and Melcor LP (the Exchange Agreement), each Exchangeable LP Unit is exchangeable at the option of the holder for one Trust Unit of the Filer. Each Exchangeable LP Unit also has the same economic rights and entitlements to distributions as a Trust Unit of the Filer, and is accompanied by one Special Voting Unit which provides for the same voting rights in the Filer as a Trust Unit.
15. The Exchangeable LP Units cannot be exchanged either for any securities other than the Trust Units, or for cash. They are not listed and posted for trading on the TSX or any other stock exchange.
16. The Exchangeable LP Units represent part of the equity value of the Filer and provide the holder of the Exchangeable LP Units with the economic rights which are, in all material respects, equivalent to the Trust Units. The effect of Melcor’s exchange right is that Melcor will receive Trust Units upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are and shall be, based solely upon the assets and operations held directly or indirectly by the operating entities of the Filer.
17. The Exchangeable LP Units are not transferable, except pursuant to an exchange of Exchangeable LP Units for Trust Units in accordance with the terms of the Exchange Agreement and provided:
(a) such transfer is to an affiliate of the holder of the Exchangeable LP Units making the transfer and, so long as Melcor, Melcor REIT Holdings Limited Partnership or any of their affiliates is a holder of Exchangeable LP Units, to Melcor, Melcor REIT Holdings Limited Partnership or any of their affiliates (as affiliate is defined in the Melcor LP Agreement);
(b) the conditions of such transfer do not require the person acquiring such Exchangeable LP Units to make an offer to the registered holders of Trust Units to acquire Trust Units on the same terms and conditions under applicable securities laws if such Exchangeable LP Units, and all other outstanding Exchangeable LP Units, were converted into Trust Units at the then current exchange ratio in effect under the Exchange Agreement immediately prior to such transfer;
(c) the person acquiring such Exchangeable LP Units submits an identical and contemporaneous offer for Trust Units to the registered holders thereof (having regard to timing, price, proportion of securities sought to be acquired and any other conditions thereto), and acquires such Exchangeable LP Units along with a proportionate number of Trust Units actually tendered to such identical offer;
(d) such transfer will not cause, or create a significant risk that would cause, Melcor LP to be liable for any taxes under section 197(2) of the Income Tax Act (Canada) (the Tax Act);
(e) such transfer does not cause, or create a significant risk that would cause, the Filer to cease to qualify as a “real estate investment trust” under the Tax Act; and
(f) such transfer is not to an Excluded Person. The Melcor LP Agreement defines “Excluded Person” as a person (as person is defined in the Melcor LP Agreement) that is: (i) a “non-resident” for the purposes of the Tax Act or a “financial institution” as defined in subsection 142.2(1) of the Tax Act; (ii) a person, an interest in which is a “tax shelter investment” for the purposes of the Tax Act; (iii) a person which would acquire an interest in Melcor LP as a “tax shelter investment” for the purposes of the Tax Act; (iv) a partnership that is not a “Canadian partnership” within the meaning of the Tax Act; or (v) not described in subparagraphs (b)(i) through (b)(v) of the definition of “excluded subsidiary entity” in section 122.1(1) of the Tax Act.
18. Further, certain rights affecting Melcor or any affiliates or related parties of Melcor, including Melcor REIT Holdings Limited Partnership, (collectively referred to as a Melcor Limited Partner) in its capacity as a holder of Exchangeable LP Units, as such rights are set out in the Declaration of Trust and the Exchange Agreement, are exclusive to the Melcor Limited Partner and are not transferable to a transferee of the Exchangeable LP Units that is not an affiliate of a Melcor Limited Partner.
19. The Filer and Melcor are parties to a Development and Opportunities Agreement dated May 1, 2013 (Development and Opportunities Agreement) which gives the Filer a preferential right to acquire any interest of Melcor in investment properties that it owns prior to disposition of any such interest to third parties.
The Proposed Transaction
20. Pursuant to the terms of an acquisition agreement dated December 4, 2017 the REIT, indirectly through Melcor LP, has agreed to acquire five commercial properties (the Acquisition Properties) from Melcor for an aggregate purchase price of approximately $80,875,000.00 (the Purchase Price), subject to certain customary adjustments (the Transaction). The Filer intends to satisfy: (i) approximately $2.5 million of the Purchase Price by issuing Exchangeable LP Units to Melcor; (ii) approximately $13.31 million of the Purchase Price by issuing Class C LP Units to Melcor; (iii) approximately $31.04 million of the Purchase Price by assuming certain mortgages registered against the Acquisition Properties; and (iv) approximately $34 million of the Purchase Price in cash. The Acquisition Properties were offered by Melcor to the Filer pursuant to the Development and Opportunities Agreement.
21. As a result Melcor’s indirect ownership of Exchangeable LP Units, Class C LP Units and Special Voting Units, Melcor is a “control person” (as defined in the Securities Act (Alberta)) of the Filer. Melcor is a “related party” of the Filer and the Transaction is a “related party transaction”, each within the meaning of MI 61-101. Accordingly, the Transaction is subject to the applicable requirements of Part 5 of MI 61-101 relating to, among other things, preparation of a formal valuation of the non-cash assets involved in the Transaction and the approval by a majority of the votes cast by disinterested unitholders of the Filer entitled to vote on the Transaction at a duly constituted meeting of holders of Trust Units of the Filer (Unitholders) held to consider the Transaction.
22. A committee of independent trustees of the Filer (the Special Committee) was established by the Filer for the purposes of considering the Transaction, supervising the process to be carried out by the Filer and its professional advisors in connection with the Transaction, determining whether the Transaction is in the best interests of the Filer and reporting and making recommendations to the board of trustees of the Filer with respect to the Transaction.
23. In order to satisfy the formal valuation requirements of MI 61-101 with respect to the Acquisition Properties, the Special Committee retained Altus Group Limited to provide an independent estimate of the market value of each of the Acquisition Properties as at September 30, 2017 (the Appraisals), under the supervision of the Special Committee. The Appraisals are “formal valuations” within the meaning of MI 61-101 and were prepared in conformity with the Canadian Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and Standards of Professional Practice, each adopted by the Appraisal Institute of Canada.
24. The Special Committee also retained Trimaven Capital Advisors Inc. (Trimaven) to act as an independent financial advisor to the Special Committee to prepare and deliver to the Special Committee a formal fairness opinion in respect of the Transaction. On December 4, 2017, Trimaven delivered a fairness opinion which concluded, subject to the qualifications and assumptions therein, that the consideration payable pursuant to the Transaction is fair, from a financial point of view, to Unitholders, other than Melcor and certain of its associates and affiliates.
25. In order to satisfy the formal valuation requirements of MI 61-101 with respect to the Class C LP Units to be issued to Melcor in partial satisfaction of the Purchase Price, the Special Committee retained Trimaven to provide an independent estimate of the fair market value of such Class C LP Units (the Class C Valuation), under the supervision of the Special Committee. The Class C Valuation is a “formal valuation” within the meaning of MI 61-101 and was prepared in accordance with the Disclosure Standards for Formal Valuations and Fairness Opinions of Investment Industry Regulatory Organization of Canada. On December 4, 2017, Trimaven concluded that, subject to the qualifications and assumptions contained therein, the value of the Class C LP Units to be issued to Melcor in connection with the Transaction is between $13.0 million and $13.2 million.
26. The Filer expects to hold a special meeting of Unitholders on or about January 10, 2018 to obtain the approval of the Transaction by a majority of the minority Unitholders (the Unitholder Meeting) as required by MI 61-101.
27. The management information circular to be mailed to Unitholders in connection with the Unitholder Meeting (the Circular) will comply with the requirements of applicable securities legislation and will disclose, among other matters, that neither the Filer nor Melcor has knowledge of any material non-public information concerning the Filer, Melcor LP or their respective securities that has not been generally disclosed in accordance with paragraph 6.3(2)(b) of MI 61-101. The Circular will also provide a description of the effect of the Transaction on the direct or indirect voting interest in the Filer of Melcor.
The Exemption Sought
28. Paragraph 6.3(1)(d) of MI 61-101 states that an issuer required to obtain a formal valuation shall provide the valuation in respect of the non-cash assets involved in a related party transaction (the Non-Cash Valuation Requirement), which would include the Exchangeable LP Units to be issued to Melcor.
29. Subsection 6.3(2) of MI 61-101 states that a formal valuation of non-cash assets is not required for a related party transaction if:
(a) the non-cash consideration or assets are securities of a reporting issuer or are securities of a class for which there is a published market;
(b) the person that would otherwise be required to obtain the formal valuation of those securities states in the disclosure document for the transaction that the person has no knowledge of any material information concerning the issuer of the securities, or concerning the securities, that has not been generally disclosed;
(c) in the case of an insider bid, issuer bid or business combination:
(i) a liquid market in the class of securities exists;
(ii) the securities constitute 25 per cent or less of the number of securities of the class that are outstanding immediately before the transaction;
(iii) the securities are freely tradeable at the time the transaction is completed; and
(iv) the valuator is of the opinion that a valuation of the securities is not required; and
(d) in the case of a related party transaction for the issuer of the securities, the conditions of paragraphs 5.5(c)(i) and 5.5(c)(ii) of MI 61-101 are satisfied, regardless of the form of the consideration for the securities;
(the foregoing referred to as the Valuation Exemption).
30. Paragraph 6.3(2)(a) of MI 61-101 would provide the Exemption Sought if Melcor were to be issued Trust Units instead of Exchangeable LP Units.
31. Although the Exchangeable LP Units are not securities of a reporting issuer or of a class for which there is a published market, they are, as a result of the rights, privileges and restrictions attaching to such Exchangeable LP Units and the various material agreements relating to and governing the Exchangeable LP Units, equivalent to the Trust Units in all material respects on a per unit basis and, from the Filer’s perspective, issuing Exchangeable LP Units through Melcor LP is equivalent to issuing Trust Units of the Filer.
32. The Exchangeable LP Units are economically equivalent to the Trust Units in that:
(a) they are exchangeable into Trust Units on a one-for-one basis at any time at the option of the holder as well as automatically exchanged into Trust Units on a one-for-one basis in certain circumstances, including in connection with a take-over bid, the transfer of all of substantially all of the Filer's assets and other similar circumstances;
(b) they have the same economic rights as Trust Units;
(c) together with the Special Voting Units, they carry the same voting rights as Trust Units; and
(d) any additional rights attached to the Exchangeable LP Units either: (i) pre-exist the issuance of the Exchangeable LP Units under the Transaction and treat the Exchangeable LP Units and Trust Units on the same basis, or (ii) arise solely by virtue of the Exchangeable LP Units being limited partnership units and are customary rights associated with limited partnership units.
33. The Exchangeable LP Units entitle the holder to distributions from Melcor LP equal to any distributions paid to holders of Trust Units by the Filer. Under the Exchange Agreement, the Filer may not distribute rights, options, securities, evidence of indebtedness or assets to its Unitholders, unless the economic equivalent of such rights, options, securities, evidence of indebtedness or assets to be issued or distributed are simultaneously issued or distributed by Melcor LP to holders of Exchangeable LP Units.
34. Each Exchangeable LP Unit is accompanied by one Special Voting Unit of the Filer, which provides for the same voting rights in the Filer as a Trust Unit. Additionally, except as required by law and in certain circumstances in which the rights of a holder of Exchangeable LP Units are affected, holders of Exchangeable LP Units are not entitled to vote at a meeting of the holders of Exchangeable LP Units.
35. Although Melcor was granted additional rights at the time of the Filer’s initial public offering, including pre-emptive rights, registration rights, board appointment rights and limited approval rights, these rights are independent of, and pre-exist, the issuance of the Exchangeable LP Units under the Transaction and are based on ownership thresholds that treat Exchangeable LP Units and Trust Units on a combined basis. As a result, by acquiring Exchangeable LP Units rather than Trust Units, Melcor does not gain any additional or unique rights or benefits that it would not otherwise have. Any additional rights attached to the Exchangeable LP Units arise solely by virtue of the Exchangeable LP Units being limited partnership units and are customary rights associated with limited partnership units that do not confer any special benefit on the holders of Exchangeable LP Units. Other than the rights described above, the Exchangeable LP Units carry no other rights that would impact their value.
36. Other than in respect of matters affecting the rights, benefits or entitlements of the holders of Exchangeable LP Units or as required by law, a holder of Exchangeable LP Units does not, and shall not, have the right to exercise any votes in respect of matters to be decided by the partners of Melcor LP and the Exchangeable LP Units do not provide the holder thereof with an interest in any specific asset or property of Melcor LP.
37. Absent the Exemption Sought, the Non-Cash Valuation Requirement would require the Filer to have a formal valuation prepared in respect of the Exchangeable LP Units to be issued to Melcor as partial consideration for the Acquisition Properties. Any such formal valuation would, in all material respects, mirror a formal valuation of the Trust Units. Pursuant to the Valuation Exemption in subsection 6.3(2) of MI 61-101, a formal valuation would not be required if Trust Units, rather than their economic equivalent, Exchangeable LP Units, were issued as the Trust Units are securities of a reporting issuer for which there is a published market.
38. As a result, absent the Exemption Sought, the Filer would be subject to a requirement that is inconsistent with the logic underlying the exemption of securities of a reporting issuer or for which there is a published market from the requirement to obtain a formal valuation (i.e., the Valuation Exemption).
The Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Exemption Sought.
The decision of the Decision Maker under the Legislation is that the Exemption Sought is granted, provided that:
(a) neither the Filer, nor to the knowledge of the Filer after reasonable inquiry, Melcor or its affiliates has knowledge of any material fact or material change concerning the Filer, Melcor LP or their respective securities that has not been generally disclosed;
(b) the Circular includes the required disclosure under MI 61-101 with respect to the Transaction and otherwise complies with the requirements of applicable securities legislation, and includes:
(i) a statement that neither the Filer, nor to the knowledge of the Filer after reasonable inquiry, Melcor or its affiliates has knowledge of any material fact or material change concerning the Filer, Melcor LP or their respective securities that has not been generally disclosed; and
(ii) a description of the effect of the Transaction on the direct or indirect voting interest in the Filer of Melcor and its affiliates.
Alberta Securities Commission