Brookfield Business Partners L.P. and Brookfield Business Corporation
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- partnership creates corporation to provide investors with alternative way to hold its units -- corporation issues exchangeable shares whose terms are structured so that each exchangeable share is functionally and economically equivalent to a partnership unit -- each exchangeable share provides an equivalent economic return as a partnership unit -- both the partnership and the corporation are reporting issuers -- the corporation will, from time to time, enter into related party transactions with persons other than the partnership -- the partnership may not be party to each of these related party transactions but each such transaction will be treated by the partnership as a related party transaction -- the corporation is exempt from related party transaction requirements, subject to conditions, including that the partnership will comply with the related party transaction requirements for each of the corporation's related party transactions as though the partnership entered into such related party transaction directly.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, Part 5, and s. 9.1.
October 3, 2022
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 BROOKFIELD BUSINESS PARTNERS L.P. AND BROOKFIELD BUSINESS CORPORATION
DECISION
Background
The principal regulator in the Jurisdiction has received an application from Brookfield Business Partners L.P. (BBU) and Brookfield Business Corporation (BBUC, and together with BBU, the Filers) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that BBUC be exempt from the requirements of Part 5 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101, and the requirements of Part 5 of MI 61-101, the Related Party Transaction Requirements) in connection with related party transactions of BBUC entered into with persons other than BBU or subsidiary entities of BBU (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 Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Manitoba, New Brunswick, Québec and Saskatchewan.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and MI 61-101 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filers:
Relevant Entities
BBU
1. BBU is an exempted limited partnership established, registered and in good standing under the laws of Bermuda. BBU's registered and head office is located at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.
2. BBU is a reporting issuer in all of the provinces and territories of Canada and is an SEC foreign issuer within the meaning of section 1.1 of National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers (NI 71-102) and satisfies its continuous disclosure obligations by complying with U.S. federal securities laws as is permitted under NI 71-102. BBU is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.
3. The authorized capital of BBU consists of: (a) non-voting limited partnership units (BBU Units); and (b) general partnership units. As of August 30, 2022, there were 74,612,071 BBU Units (217,273,585 BBU Units assuming the exchange of redeemable partnership units of Holding LP (as defined below) and Exchangeable Shares) and 4 general partnership units issued and outstanding.
4. The BBU Units are listed on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) under the symbols "BBU" and "BBU.UN", respectively.
5. BBU's only substantial asset is its limited partnership interest in Brookfield Business L.P. (Holding LP), a Bermuda exempted limited partnership established, registered and in good standing under the laws of Bermuda.
6. Each director of the general partner of BBU is also a director of BBUC.
7. Brookfield Business Partners Limited, a wholly-owned subsidiary of Brookfield Asset Management Inc. (BAM), holds the general partnership interest in BBU.
BBUC
8. BBUC is a corporation existing and in good standing under the Business Corporations Act (British Columbia), and was incorporated on June 21, 2021. BBUC's registered office is located at 1500 Royal Centre, 1055 West Georgia Street, P.O. Box 11117, Vancouver, British Columbia, V6E 4N7. BBUC's head office is located at 250 Vesey Street, 15th Floor, New York, New York 10281, United States of America.
9. BBUC is a reporting issuer in all of the provinces and territories of Canada and is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.
10. The authorized share capital of BBUC consists of: (a) an unlimited number of class A exchangeable subordinate voting shares (the Exchangeable Shares); (b) an unlimited number of class B multiple voting shares (the Class B Shares); (c) an unlimited number of class C non-voting shares (the Class C Shares); (d) an unlimited number of class A senior preferred shares; and (e) an unlimited number of class B junior preferred shares (issuable in series). As of August 30, 2022, there were 72,956,017 Exchangeable Shares, 1 Class B Share, 25,934,120 Class C Shares, zero class A senior preferred shares, and zero class B junior preferred shares issued and outstanding.
11. The Exchangeable Shares are listed on the NYSE and the TSX under the symbol "BBUC".
12. BBUC's operations consist of services and industrial operations primarily located in Australia, the United Kingdom, the United States, and Brazil.
13. The board of directors of BBUC consists of each of the directors of the general partner of BBU and two additional directors.
14. The only voting securities of BBUC are the Exchangeable Shares and the Class B Shares. Holders of Exchangeable Shares are entitled to one (1) vote per Exchangeable Share held and holders of Class B Shares are entitled to cast, in the aggregate, a number of votes equal to three (3) times the number of votes attached to the Exchangeable Shares. Accordingly, the Exchangeable Shares collectively represent a 25% voting interest in BBUC and the Class B Shares collectively represent a 75% voting interest in BBUC.
15. Neither the Exchangeable Shares nor the Class B Shares carry a residual right to participate in the assets of BBUC upon liquidation or winding-up of BBUC, and accordingly, are not equity securities under the Legislation. The Class C Shares are the only equity securities of BBUC.
16. BBU, indirectly through wholly-owned subsidiaries, owns 100% of the issued and outstanding Class B Shares and 100% of the Class C Shares. Through its ownership of these securities, BBU has a 75% voting interest in BBUC, thereby controlling BBUC and the appointment and removal of directors of BBUC, and is entitled to all of the residual value in BBUC after payment in full of the amount due to holders of Exchangeable Shares and Class B Shares and subject to the prior rights of holders of preferred shares. The Class B Shares and the Class C Shares are not transferable except to an affiliate of BBU.
BAM
17. BAM is a corporation existing and in good standing under the Business Corporations Act (Ontario). BAM's registered and head office is located at Suite 300, Brookfield Place, 181 Bay Street, Toronto, Ontario M5J 2T3.
18. BAM is a reporting issuer in all of the provinces and territories of Canada and is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.
19. The Class A Limited Voting Shares of BAM are listed on the NYSE and the TSX under the symbols "BAM" and "BAM.A", respectively.
20. BAM holds an approximate 64% economic interest in BBU on a fully-exchanged basis through its indirect ownership of redeemable partnership units of Holding LP and Exchangeable Shares.
21. BAM indirectly holds a 100% voting interest in BBU through its ownership of the general partner interest of BBU.
22. BBU, Holding LP and certain of their subsidiaries have retained BAM and its related entities to provide management, administrative and advisory services under a master services agreement.
The Exchangeable Shares
23. BBU believes that certain investors in certain jurisdictions may be dissuaded from investing in BBU because of the tax reporting framework that results from investing in units of a Bermuda exempted limited partnership.
24. BBUC was created, in part, to provide investors that would not otherwise invest in BBU with an opportunity to gain access to BBU's portfolio of services and industrial operations and their associated returns, and to provide investors with the flexibility to own, through the ownership of an Exchangeable Share, the economic equivalent of a BBU Unit.
25. On March 15, 2022, BBU completed a special distribution of Exchangeable Shares to holders of BBU Units (the Special Distribution). Each Exchangeable Share has been structured with the intention of providing an economic return equivalent to a BBU Unit and the rights, privileges, restrictions and conditions attached to each Exchangeable Share (the Exchangeable Share Provisions) are such that each Exchangeable Share is, as nearly as practicable, functionally and economically, equivalent to a BBU Unit. In particular:
(a) each Exchangeable Share is exchangeable at the option of a holder for one (1) BBU Unit (subject to adjustment to reflect certain capital events) or its cash equivalent (the form of payment to be determined at the election of BBUC) (an Exchange);
(b) the Exchangeable Shares are redeemable by BBUC at any time for BBU Units (or its cash equivalent, at BBUC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) (a Redemption);
(c) upon a liquidation, dissolution or winding up of BBUC, holders of Exchangeable Shares will be entitled to receive BBU Units (or its cash equivalent, at BBUC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) and not any remaining property or assets of BBUC following such payment (a BBUC Liquidation);
(d) upon a liquidation, dissolution or winding up of BBU, including where substantially concurrent with a BBUC Liquidation, all of the Exchangeable Shares will be automatically redeemed for BBU Units (or its cash equivalent, at BBUC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) (a BBU Liquidation); and
(e) subject to applicable law and in accordance with the Exchangeable Share Provisions, each Exchangeable Share entitles the holder to dividends from BBUC payable at the same time as, and equivalent to, each distribution on a BBU Unit. The Exchangeable Share Provisions also provide that if a distribution is declared on the BBU Units and an equivalent dividend is not declared and paid concurrently on the Exchangeable Shares, then the undeclared or unpaid amount of such dividend accrues and accumulates and is to be paid upon the first to occur of any of the circumstances contemplated by paragraphs (a) to (d) above, if not yet paid.
26. Upon being notified by BBUC that BBUC has received a request for an Exchange, BBU has an overriding call right to purchase (or have one of its affiliates purchase) all of the Exchangeable Shares that are the subject of the Exchange notice from the holder of Exchangeable Shares for BBU Units (or its cash equivalent, at BBU's election) on a one-for-one basis (subject to adjustment to reflect certain capital events).
27. Upon being notified by BBUC that it intends to conduct a Redemption, BBU has an overriding call right to purchase (or have one of its affiliates purchase) all but not less than all of the then outstanding Exchangeable Shares for BBU Units (or its cash equivalent, at BBU's election) on a one-for-one basis (subject to adjustment to reflect certain capital events).
28. Upon the occurrence of a BBU Liquidation or BBUC Liquidation, BBU will have an overriding liquidation call right to purchase (or have one of its affiliates purchase) all but not less than all of the then outstanding Exchangeable Shares on the day prior to the effective date of such BBU Liquidation or BBUC Liquidation for BBU Units on a one-for-one basis (subject to adjustment to reflect certain capital events).
29. In connection with the Special Distribution, BAM entered into a rights agreement pursuant to which it agreed that, for the five-year period beginning on March 15, 2022, BAM will guarantee BBUC's obligation to deliver BBU Units or its cash equivalent in connection with an Exchange.
Other BBUC Related Party Transactions
30. On March 1, 2022, in connection with the Special Distribution, the Ontario Securities Commission granted: (i) BBU relief from the Related Party Transaction Requirements in connection with any related party transaction of BBU with BBUC or any of BBUC's subsidiary entities; (ii) BBUC relief from the Related Party Transaction Requirements in connection with any related party transaction of BBUC with BBU or any of BBU's subsidiary entities (the BBUC Related Party Relief); and (iii) BBU relief from the requirements of sections 5.4 and 5.6 of MI 61-101 in connection with any related party transaction of BBU entered into indirectly through Holding LP or any subsidiary entity of Holding LP, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the Exchangeable Shares were included in the calculation of BBU's market capitalization.
31. It is anticipated that BBUC will, from time to time, enter into related party transactions with persons other than BBU or subsidiary entities of BBU (Other BBUC Related Party Transactions) in respect of which the BBUC Related Party Relief does not apply.
32. BBU may not be a party to each Other BBUC Related Party Transaction entered into. However, every Other BBUC Related Party Transaction will indirectly be a related party transaction for BBU and will be treated by BBU as a related party transaction of BBU.
33. Subject to the availability of an exemption, BBUC would be required to obtain: (i) a formal valuation in respect of the non-cash assets involved in the Other BBUC Related Party Transaction; and (ii) minority approval for the Other BBUC Related Party Transaction from the holders of every class of affected securities of BBUC voting separately as a class, excluding the votes attached to affected securities held by the persons enumerated in section 8.1(2) of MI 61-101.
34. Minority approval is required of every class of affected securities, being equity securities of the issuer. The Exchangeable Shares are not equity securities and thus are not entitled to vote for the purposes of minority approval under MI 61-101. The only equity securities of BBUC are the Class C Shares, all of which are held by BBU. BBU, as an entity for which each Other BBUC Related Party Transaction would also constitute a related party transaction, does not require the protections of MI 61-101.
35. By virtue of the Exchangeable Share Provisions, the economic rights of the holders of BBU Units and Exchangeable Shares will be affected in an identical manner in respect of any related party transaction entered into by either BBU or BBUC. A related party transaction for BBUC is, in effect, a related party transaction for BBU.
36. BBU, as the sole holder of the equity securities of BBUC, will receive any benefit and/or bear any detriment from any Other BBUC Related Party Transaction entered into.
37. BBUC is a controlled subsidiary of BBU and BBU consolidates BBUC and its businesses in BBU's financial statements.
38. Any committee of directors of BBU that considers an Other BBUC Related Party Transaction will be comprised of directors who are also directors of BBUC.
39. Investments in Exchangeable Shares are as nearly as practicable, functionally and economically, equivalent to an investment in BBU Units. BBU and BBUC believe that:
(a) investors of Exchangeable Shares purchase Exchangeable Shares as an alternative way of owning BBU Units rather than a separate and distinct investment; and
(b) the market price of the Exchangeable Shares is significantly impacted by (i) the combined business performance of BBUC and BBU as a single economic unit, and (ii) the market price of the BBU Units, in a manner that results in the market price of the Exchangeable Shares closely tracking the market price of the BBU Units.
40. BBUC is the entity through which persons who do not wish to hold BBU Units directly may hold their interests in BBU, and BBU is the entity through which holders of Exchangeable Shares and BBU Units hold their interests in the collective operations of BBU and its subsidiaries, including BBUC and its subsidiaries. BBU and BBUC are a single economic entity.
41. BBU will comply with the Related Party Transaction Requirements for each Other BBUC Related Party Transaction as though BBU entered into the Other BBUC Related Party Transaction directly.
42. Other than where BBU or subsidiary entities of BBU are also party to the Other BBUC Related Party Transaction, in which case any formal valuation required to be obtained by BBU under the Related Party Transaction Requirements (including for the Other BBUC Related Party Transaction) will be in respect of BBU and its subsidiary entities (including BBUC and BBUC's subsidiary entities) on a consolidated basis:
(a) the subject matter of any formal valuation required to be obtained by BBU under the Related Party Transaction Requirements for an Other BBUC Related Party Transaction and the value or range of values of such subject matter would be identical to any formal valuation obtained by BBUC for the same Other BBUC Related Party Transaction; and
(b) the form and substance of any formal valuation required to be obtained by BBU under the Related Party Transaction Requirements for an Other BBUC Related Party Transaction would be identical, in all material respects, to any formal valuation obtained by BBUC for the same Other BBUC Related Party Transaction.
43. Any and all disclosure documents in connection with an Other BBUC Related Party Transaction, including any formal valuations, information circulars or material change reports, will be filed on the SEDAR profiles of both BBU and BBUC.
44. Holders of Exchangeable Shares who wish to vote at the BBU level may do so by conducting an Exchange of Exchangeable Shares for BBU Units.
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) all of the equity securities of BBUC are owned, directly or indirectly, by BBU;
(b) all of the voting securities of BBUC, other than the Exchangeable Shares, are owned, directly or indirectly, by BBU;
(c) there are no material changes to the Exchangeable Share Provisions, as described above;
(d) BBU consolidates BBUC and its businesses in BBU's financial statements;
(e) BBU will comply with the Related Party Transaction Requirements for each Other BBUC Related Party Transaction as though BBU entered into the Other BBUC Related Party Transaction directly;
(f) other than where BBU or subsidiary entities of BBU are also party to the Other BBUC Related Party Transaction, in which case any formal valuation required to be obtained by BBU under the Related Party Transaction Requirements (including for the Other BBUC Related Party Transaction) will be in respect of BBU and its subsidiary entities (including BBUC and BBUC's subdiary entities) on a consolidated basis:
(i) the subject matter of any formal valuation required to be obtained by BBU under the Related Party Transaction Requirements for an Other BBUC Related Party Transaction and the value or range of values of such subject matter would be identical to any formal valuation obtained by BBUC for the same Other BBUC Related Party Transaction; and
(ii) the form and substance of any formal valuation required to be obtained by BBU under the Related Party Transaction Requirements for an Other BBUC Related Party Transaction would be identical, in all material respects, to any formal valuation obtained by BBUC for the same Other BBUC Related Party Transaction; and
(g) any and all disclosure documents in connection with an Other BBUC Related Party Transaction, including any formal valuations, information circulars or material change reports, are filed on the SEDAR profiles of both BBU and BBUC.
"David Mendicino"
Manager, Office of Mergers & Acquisitions
Ontario Securities Commission