Bank of Montreal and BMO Capital Trust
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted to a trust from continuous disclosure requirements under National Instrument 51-102 Continuous Disclosure Obligations and certification obligations under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, subject to certain conditions. Trust established for purpose of effecting offerings of trust securities in order to provide bank with a cost-effective means of raising capital for Canadian bank regulatory purposes. Trust became reporting issuer upon filing a prospectus offering trust securities. Without relief, trust would have to comply with continuous disclosure and certification requirements. Given the nature, terms and conditions of the trust securities and various covenants of the bank in connection with the prospectus offering, the meaningful information to public holders of trust securities is information with respect to the bank, rather than the trust.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations.
National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings.
February 23, 2009
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
BANK OF MONTREAL ("BMO") AND
BMO CAPITAL TRUST II
(the "Trust" and, together with BMO, the "Filers")
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision (the "Exemption Sought") under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") that the requirements contained in the Legislation to:
(a)
(i) file interim financial statements and audited annual financial statements and deliver same to the security holders of the Trust, pursuant to sections 4.1, 4.3 and 4.6 of National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102");
(ii) file interim and annual management's discussion and analysis ("MD&A") and deliver same to the security holders of the Trust pursuant to sections 5.1 and 5.6 of NI 51-102;
(iii) file an annual information form pursuant to section 6.1 of NI 51-102; and
(iv) comply with any other provisions of NI 51-102,
(collectively, the "Continuous Disclosure Obligations"); and
(b) file interim and annual certificates (collectively, the "Officers' Certificates") pursuant to Parts 4 and 5 of National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109") (the "Certification Obligations");
shall not apply to the Trust, subject to certain terms and conditions.
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 Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in each of the provinces and territories of Canada other than Ontario.
Interpretation
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
In this decision,
• "Automatic Exchange" means the automatic exchange of the BMO Tier 1 Notes -- Series A for newly issued Class B Preferred Shares Series 20 upon the occurrence of a Loss Absorption Event.
• "Business Day" means a day on which Canadian chartered banks are open for business in the City of Toronto and which is not a Saturday or Sunday.
• "Class B Preferred Shares Series 20" means the non-cumulative Class B Preferred Shares, Series 20 of BMO.
• "Canada Yield Price" means the price per $1,000 principal amount of BMO Tier 1 Notes -- Series A calculated by BMO to provide an annual yield thereon from the applicable date of redemption to, but excluding, the next Interest Reset Date equal to the GOC Redemption Yield plus (i) 1.75% if the redemption date is any time prior to December 31, 2018, or (ii) 3.50% if the redemption date is any time after December 31, 2018.
• "GOC Redemption Yield" means, on any date, the average of the annual yields at 12:00 p.m. (Eastern time) on the Business Day immediately preceding the date on which the Trust gives notice of the redemption of the BMO Tier 1 Notes -- Series A as determined by two Canadian registered investment dealers, each of which will be selected by, and must be independent of, BMO and the Trust, as being the annual yield from the applicable date of redemption to, but excluding, the next Interest Reset Date which a non-callable Government of Canada bond would carry, assuming semi-annual compounding, if issued in Canadian dollars at 100% of its principal amount on the date of redemption and maturing on the next Interest Reset Date.
• "Government of Canada Yield" means, on any Interest Reset Date, the average of the annual yields as at 12:00 p.m. (Easter time) on the third Business Day prior to the applicable Interest Reset Date as determined by two Canadian registered investment dealers, each of which will be selected by, and must be independent of, BMO and the Trust, as being the annual yield to maturity on such date which a non-callable Government of Canada bond would carry, assuming semi-annual compounding, if issued in Canadian dollars at 100% of its principal amount on such date with a term to maturity of give years.
• "Loss Absorption Event" means the occurrence of any one of the following events: (i) an application for a winding-up order in respect of BMO pursuant to the Winding-up and Restructuring Act (Canada) is filed by the Attorney General of Canada or a winding-up order in respect of BMO pursuant to that Act is granted by a court; (ii) the Superintendent advises BMO in writing that the Superintendent has taken control of BMO or its assets pursuant to the Bank Act; (iii) the Superintendent advises BMO in writing that BMO has a risk-based Tier 1 Capital ratio of less than 5.0% or a risk-based Total Capital ratio of less than 8.0%; (iv) the Board of Directors of BMO advises the Superintendent in writing that BMO has a risk-based Tier 1 Capital ratio of less than 5.0% or a risk-based Total Capital ratio of less than 8.0%; or (v) the Superintendent directs BMO, pursuant to the Bank Act, to increase its capital or provide additional liquidity and BMO elects to cause the Automatic Exchange as a consequence of the issuance of such direction or BMO does not comply with such direction to the satisfaction of the Superintendent within the time specified.
• "Prospectus" means the final short form prospectus of BMO and the Trust dated December 12, 2008.
• "SEDAR" means the System for Electronic Document Analysis Retrieval.
Representations
This decision is based on the following facts represented by the Filers:
The Trust
1. The Trust is a trust established under the laws of Ontario by Montreal Trust Company of Canada (the "Trustee") pursuant to an amended and restated declaration of trust dated as of December 18, 2008, as may be amended, restated and supplemented from time to time. The Trust's principal office is located in Toronto, Ontario.
2. The Trust was established solely for the purpose of effecting the Offering (as defined below) and other offerings of debt securities in order to provide BMO with a cost-effective means of raising capital for regulatory purposes under the Bank Act (Canada) (the "Bank Act"). BMO will be the Administrative Agent of the Trust pursuant to an Administration Agreement between the Trustee and BMO.
3. The Trust completed an initial public offering (the "Offering") of trust subordinated notes (the "Trust Subordinated Notes") in each of the provinces and territories of Canada on December 18, 2008 and may, from time to time, issue further series of Trust Subordinated Notes. The first series of Trust Subordinated Notes were designated as 10.221% BMO Tier 1 Notes -- Series A due December 31, 2107 (the "BMO Tier 1 Notes - Series A"), representing direct subordinated unsecured debt obligations of the Trust. As a result of the Offering, the capital of the Trust consists of BMO Tier 1 Notes -- Series A and voting trust units (the "Voting Trust Units"). The BMO Tier 1 Notes -- Series A distributed pursuant to the Prospectus are held by the public and all outstanding Voting Trust Units are held by BMO.
4. As a result of the Offering, the Trust is now a reporting issuer or its equivalent in each of the provinces and territories of Canada (the "Reporting Jurisdictions") where such concept exists. The Trust is not, to the best of its knowledge, in default of any requirement of the securities legislation in the Reporting Jurisdictions.
5. The BMO Tier 1 Notes -- Series A are debt securities of the Trust, which have the attributes described below under "BMO Tier 1 Notes -- Series A". The Voting Trust Units are voting securities of the Trust.
6. The Trust will not carry on any operating activity other than in connection with the offering of its securities to the public. The assets of the Trust consist primarily of a senior deposit note issued by BMO which has been acquired with the proceeds of the offerings of BMO Tier 1 Notes -- Series A and the Trust may, from time to time, acquire additional senior deposit notes issued by BMO from the proceeds of the offering of other Trust Subordinated Notes (each, a "Bank Deposit Note"). The Bank Deposit Notes will generate income to provide the Trust with funds to pay the interest payable on the BMO Tier 1 Notes -- Series A and other Trust Subordinated Notes (if any) from time to time.
7. BMO Tier 1 Notes -- Series A qualify as Tier 1 Capital of BMO under the Innovative Capital Guidelines issued by the Office of the Superintendent of Financial Institutions (Canada) (the "Superintendent") pursuant to the Bank Act.
BMO
8. BMO is a Schedule I bank under the Bank Act, which constitutes its charter. The principal executive offices are located at Bank of Montreal, 100 King Street West, 1 First Canadian Place, Toronto, Ontario, Canada M5X 1A1. BMO's head office is located at 129 Rue St. Jacques, Montreal, Québec, Canada H2Y 1L6.
9. The authorized capital of BMO consists of an unlimited number of (i) common shares ("Common Shares"), (ii) Class A Preferred Shares, issuable in series, and (iii) Class B Preferred Shares (the "Class B Preferred Shares"), issuable in series.
10. The Common Shares are listed and posted for trading on the Toronto Stock Exchange and the New York Stock Exchange.
BMO Tier 1 Notes -- Series A
11. The BMO Tier 1 Notes -- Series A are issued under the Trust Indenture (the "Trust Indenture") dated December 18, 2008 between the Trust, BMO and Computershare Trust Company of Canada (the "Indenture Trustee"), as trustee for the holders of BMO Tier 1 Notes -- Series A.
12. From December 18, 2008 until December 31, 2107, the Trust will pay interest on the BMO Tier 1 Notes - Series A in equal (subject to the reset of the interest rate) semi-annual instalments on June 30 and December 31 of each year (each semi-annual interest payment date, an "Interest Payment Date"). Starting on December 31, 2018 and on every fifth anniversary of such date thereafter until December 31, 2103 (each such date, an "Interest Reset Date"), the interest rate on the BMO Tier 1 Notes - Series A will be reset at an interest rate per annum equal to the Government of Canada Yield plus 10.50%. The BMO Tier 1 Notes - Series A will mature on December 31, 2107. Interest will be payable in cash, subject to a Deferral Event (as described below).
13. On the maturity date of the BMO Tier 1 Notes - Series A, the Trust will be required to pay the principal amount of the BMO Tier 1 Notes - Series A, together with any accrued and unpaid interest, in cash, subject to the deferral provisions described below.
14. Pursuant to the Assignment, Set-Off and Trust Agreement between BMO, the Trust and the Indenture Trustee dated December 18, 2008 (the "Assignment and Set-Off Agreement"), on each Interest Payment Date in respect of which a Deferral Event has occurred (each a "Deferral Date"), holders of the BMO Tier 1 Notes - Series A will be required to invest interest payable on the BMO Tier 1 Notes - Series A in a series of non-cumulative perpetual Class B Preferred Shares of BMO (the "Class B Deferral Preferred Shares"). A new series of Class B Deferral Preferred Shares will be issued in respect of each Deferral Event. A "Deferral Event" will occur in circumstances where (i) BMO has failed to declare cash dividends on all of the outstanding Class B Preferred Shares or, failing any Class B Preferred Shares being outstanding, on all of the outstanding Common Shares (other than a failure to declare dividends on such shares during a Dividend Restricted Period), in accordance with BMO's ordinary dividend practice in effect from time to time, in each case, in the last 90 days preceding the commencement of the Interest Period ending on the day preceding the relevant Interest Payment Date; or (ii) BMO elects, at its sole option, prior to the commencement of the Interest Period ending on the day preceding the relevant Interest Payment Date, that holders of BMO Tier 1 Notes -- Series A will be required to invest interest payable on the BMO Tier 1 Notes -- Series A on the relevant Interest Payment Date in Class B Deferral Preferred Shares; or (iii) for whatever other reason, interest is not paid in full in cash on the BMO Tier 1 Notes -- Series A on any Interest Payment Date (or the next following Business Day if the relevant Interest Payment Date is not a Business Day) (in the case of either (ii) or (iii) referred to as an "Other Deferral Event"). "Dividend Restricted Period" means the period from and including a Deferral Date to but excluding the applicable Dividend Declaration Resumption Month. "Dividend Declaration Resumption Month" means the month that is the 6th month following the relevant Deferral Date in respect of which an Other Deferral Event has occurred, being the month in which BMO may resume declaring dividends on the Common Shares and Class B Preferred Shares (collectively, "Dividend Restricted Shares").f
15. The subscription amount of each Class B Deferral Preferred Share will be an amount equal to the face amount of the Class B Deferral Preferred Share, and the number of Class B Deferral Preferred Shares subscribed for on each Deferral Date will be calculated by dividing the amount of the interest payment on the BMO Tier 1 Notes - Series A that has not been paid in cash on the applicable Deferral Date by the face amount of each Class B Deferral Preferred Share. There is no other limit on the number of Deferral Events that may occur.
16. Pursuant to the Assignment and Set-Off Agreement, BMO has agreed that in the event of an Other Deferral Event, in the period commencing on the relevant Deferral Date to but excluding the Dividend Declaration Resumption Month: (i) BMO will not declare dividends of any kind on any of the Dividend Restricted Shares; and (ii) no subsidiary of BMO may make any payment to holders of Class B Preferred Shares or, failing any Class B Preferred Shares being outstanding, on any Common Shares in respect of dividends not declared or paid by BMO, and no subsidiary of BMO may purchase any Class B Preferred Shares or, failing any Class B Preferred Shares being outstanding, any outstanding Common Shares, provided that any subsidiary of BMO whose primary business is dealing in securities may purchase shares of BMO in certain limited circumstances as permitted by the Bank Act or the regulations thereunder. Accordingly, it is in the interest of BMO to ensure, to the extent within its control, that the Trust complies with the obligation to pay interest in cash on the BMO Tier 1 Notes - Series A in full when due.
17. The BMO Tier 1 Notes - Series A, including any accrued and unpaid interest thereon, will be exchanged automatically, without the consent of the holder thereof, for newly issued non-cumulative Class B Preferred Shares, Series 20 of BMO upon the occurrence of certain stated events relating to the solvency of BMO or actions taken by the Superintendent in respect of BMO, as described in the Prospectus.
18. On or after December 31, 2013, the Trust may, at its option, with the prior approval of the Superintendent, redeem the BMO Tier 1 Notes - Series A, in whole or in part. The price payable in respect of any such redemption will include an early redemption compensation component in the event of a redemption on any date other than an Interest Reset Date. The price payable in all other cases will be the principal amount of the BMO Tier 1 Notes - Series A together with any accrued and unpaid interest thereon.
19. Upon the occurrence of certain regulatory or tax events affecting BMO or the Trust, as described in the Prospectus, the Trust may, at its option, with the prior approval of the Superintendent, redeem at any time all but not less than all of the BMO Tier 1 Notes - Series A at a price equal to the principal amount of the BMO Tier 1 Notes - Series A together with any accrued and unpaid interest thereon.
20. On or after December 31, 2013, the Trust may purchase in whole or in part, at the direction of BMO and with prior approval of the Superintendent, in the open market or by tender or private contract at any price, the BMO Tier 1 Notes - Series A. BMO Tier 1 Notes - Series A purchased by the Trust shall be cancelled and not re-issued.
21. BMO has covenanted for the benefit of the holders of BMO Tier 1 Notes -- Series A, pursuant to the Share Exchange Agreement dated December 18, 2008 (the "Share Exchange Agreement") between BMO, the Trust and Computershare Trust Company of Canada, or the Assignment and Set-Off Agreement, as applicable, that:
(a) all of the outstanding Voting Trust Units will be held at all times by BMO;
(b) as long as any BMO Tier 1 Notes - Series A are outstanding and held by any person other than BMO, BMO will not take any action to cause the termination of the Trust, except in certain limited circumstances, as described in the Prospectus, and with the prior approval of the Superintendent;
(c) BMO will not create or issue any Class B Preferred Shares which, in the event of insolvency or winding-up of BMO, would rank in right of payment in priority to the Class B Preferred Shares Series 20 or the Class B Deferral Preferred Shares;
(d) BMO will not assign or otherwise transfer its obligations under the Share Exchange Agreement or the Assignment and Set-Off Agreement, except in the case of a merger, consolidation, amalgamation or reorganization or a sale of substantially all of the assets of BMO;
(e) if BMO Tier 1 Notes -- Series A have not exchanged for Class B Preferred Shares Series 20 pursuant to the Automatic Exchange, BMO will not, without the approval of the holders of BMO Tier 1 Notes -- Series A, delete or vary any terms attaching to the Class B Preferred Shares Series 20 other than the terms which may be amended without the approval of the holders of the series; and
(f) prior to the issue of any Class B Deferral Preferred Shares in respect of a Deferral Event, BMO will not, without the approval of the holders of BMO Tier 1 Notes -- Series A, delete or vary any terms attaching to the Class B Deferral Preferred Shares other than the terms which may be amended without the approval of the holders of each series thereof.
22. The Voting Trust Units will entitle BMO to vote with respect to certain matters regarding the Trust.
23. Pursuant to the Amended and Restated Administration Agreement dated December 18, 2008 (the "Administration Agreement") between the Trust and BMO, the Trustee has delegated to BMO certain of its obligations in relation to the administration of the Trust. BMO, as administrative agent, provides advice and counsel with respect to the administration of the day-to-day operations of the Trust and other matters as may be requested by the Trustee from time to time.
24. Because of the terms of the BMO Tier 1 Notes -- Series A, the Share Exchange Agreement, the Assignment and Set-Off Agreement and the various covenants of BMO, information about the affairs and financial performance of BMO, as opposed to that of the Trust, is meaningful to holders of BMO Tier 1 Notes -- Series A. BMO's filings will provide holders of BMO Tier 1 Notes -- Series A and the general investing public with all information required in order to make an informed decision relating to an investment in BMO Tier 1 Notes -- Series A and any other Trust Subordinated Notes that the Trust may issue from time to time. Information regarding BMO is relevant both to an investor's expectation of being paid the principal, interest or redemption price, if any, and any other amount on the BMO Tier 1 Notes -- Series A when due and payable.
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:
1. in respect of the Continuous Disclosure Obligations,
(a) BMO remains a reporting issuer under the Legislation and has filed all continuous disclosure documents it is required to file by the Legislation;
(b) BMO files with the securities regulatory authority or regulator in each Reporting Jurisdiction, in electronic format under the Trust's SEDAR profile, the continuous disclosure documents referred to in paragraph 1(a) above, at the same time as those documents are required under the Legislation to be filed by BMO;
(c) the Trust pays all filing fees that would otherwise be payable by the Trust in connection with the filing of the continuous disclosure documents under NI 51-102;
(d) the Trust sends or causes BMO to send BMO's interim and audited annual financial statements and interim and annual MD&A, as applicable, to holders of Trust's debt securities, at the same time and in the same manner as if the holders of Trust's debt securities were holders of BMO's Common Shares;
(e) all outstanding securities of the Trust are either BMO Tier 1 Notes - Series A, additional series of debt securities having terms substantially similar to the BMO Tier 1 Notes - Series A or Voting Trust Units;
(f) the rights and obligations of holders of additional series of debt securities are the same in all material respects as the rights and obligations of the holders of the BMO Tier 1 Notes - Series A, with the exceptions of economic terms such as the rate of interest, redemption dates and maturity dates;
(g) BMO is, directly or indirectly, the beneficial owner of all issued and outstanding voting securities of the Trust, including the Voting Trust Units;
(h) he Trust does not carry on any operating activity other than in connection with offerings of its securities and the Trust has minimal assets, operations, revenues or cash flows other than those related to the Bank Deposit Notes or the issuance, administration and repayment of the Trust Subordinated Notes;
(i) BMO, as holder of the Voting Trust Units, will not propose changes to the terms and conditions of any outstanding BMO Tier 1 Notes -- Series A that would result in BMO Tier 1 Notes -- Series A being exchangeable for securities other than BMO's Class B Preferred Shares;
(j) the Trust issues a news release and files a material change report in accordance with Part 7 of NI 51-102 as amended, supplemented or replaced from time to time, in respect of any material change in the affairs of the Trust that is not also a material change in the affairs of BMO;
(k) in any circumstances where the BMO Tier 1 Notes -- Series A (or any additional series of Trust's debt securities having terms substantially similar to the BMO Tier 1 Notes -- Series A) are voting, the Trust will comply with Part 9 of NI 51-102; and
(l) the Trust complies with Parts 4A, 4B, 11 and 12 of NI 51-102;
2. in respect of the Certification Obligations,
(a) the Trust is not required to, and does not, file its own interim filings and annual filings (as those terms are defined in NI 52-109);
(b) the Trust is and continues to be exempted from the Continuous Disclosure Obligations and BMO and the Trust are in compliance with the conditions set out in paragraph 1 above; and
(c) BMO files with the securities regulatory authority or regulator in each of the Reporting Jurisdictions, in electronic format under the Trust's SEDAR profile, the Officers' Certificates at the same time as such documents are required under the Legislation to be filed by BMO; and
3. this decision shall expire 30 days after the date a material adverse change occurs in the representations made by the Trust in this decision.