Capital Power 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 -- issuer is a corporation with an underlying limited partnership operating entity -- related party holds units in limited partnership which are exchangeable into and are in all material respects the economic equivalent to the issuer's publicly traded common shares -- issuer may include related party's indirect interest in issuer when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5, 5.7, 6.3.
March 7, 2011
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
CAPITAL POWER CORPORATION
(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 (the "Legislation") that the Filer be granted an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") from the minority approval and formal valuation requirements under Part 5 of MI 61-101 in connection with:
(a) any equity investment in, or loan to, Capital Power L.P. (the "Partnership") or a subsidiary entity (as such term is defined in MI 61-101) of the Partnership by the Filer in connection with a financing by the Filer where such investment or loan would constitute a related party transaction for the Filer, or
(b) any related party transaction of the Filer entered into indirectly through the Partnership or a subsidiary entity (as such term is defined in MI 61-101) of the Partnership,
if such related party transactions specified in (a) and (b) above would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(a) of MI 61-101 if the indirect equity interest of EPCOR Utilities Inc. ("EPCOR") in the Filer, held in the form of exchangeable limited partnership units of the Partnership, were included in the calculation of the Filer's market capitalization (collectively, the "Requested Relief").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the "Decision Maker") is the principal regulator for this application; and
(b) the Filer 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 Quebec.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meanings if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer was incorporated under the Canada Business Corporations Act on May 1, 2009. The principal business office and registered office of the Filer is located at TD Tower, 5th Floor, 10088-102 Avenue, Edmonton, Alberta, Canada, T5J 2Z1.
2. The Filer's authorized capital consists of an unlimited number of common shares (the "Common Shares"), an unlimited number of preference shares issuable in series, an unlimited number of special voting shares (the "Special Voting Shares") and one special limited voting share. As of December 31, 2010, 30,980,500 Common Shares and 5,000,000 cumulative rate reset preference shares, series 1 (the "Series 1 Shares") are issued and outstanding and held by the public. As of December 31, 2010, 47,416,000 Special Voting Shares and one special limited voting share are issued and outstanding and held by EPCOR. The number of Special Voting Shares at any point in time is equal to, and accompanies, the number of Exchangeable LP Units (as defined below) issued and outstanding of the Partnership.
3. The Filer is a reporting issuer or the equivalent thereof in each province and territory of Canada and is not in default of any requirements of the Legislation. The Common Shares and the Series 1 Shares are listed and posted for trading on the Toronto Stock Exchange (the "TSX") under the symbols "CPX" and "CPX.PR.A", respectively.
4. The Partnership is a limited partnership established under the laws of the Province of Ontario on May 29, 2009. The general partner of the Partnership, Capital Power GP Holdings Inc. ("GP Holdings"), is controlled by the Filer and is wholly-owned by the Filer, except for one special limited voting share held indirectly by EPCOR. The principal business office and registered office of the Partnership and GP Holdings is located at TD Tower, 5th Floor, 10088-102 Avenue, Edmonton, Alberta, Canada, T5J 2Z1.
5. The Partnership is a reporting issuer or the equivalent thereof in each province and territory of Canada and is not in default of any requirements of the Legislation as modified by a decision document under NP 11-203 dated March 23, 2010 issued by the Alberta Securities Commission, as principal regulator. None of the securities of the Partnership are listed or posted for trading on any stock exchange or other market.
6. The authorized capital of the Partnership consists of an unlimited amount of common limited partnership units ("Common LP Units"), general partnership units ("GP Units") and exchangeable limited partnership units ("Exchangeable LP Units"), of which, as of December 31, 2010:
(a) 47,416,000 Exchangeable LP Units, representing approximately 60.5% of the equity of the Partnership, were issued and held indirectly by EPCOR; and
(b) 21,750,001 GP Units and 9,209,001 Common LP Units, representing approximately 39.5% of the equity of the Partnership, were issued and held indirectly by the Filer.
7. The principal business activity of the Partnership is the ownership and operation of power generation assets. The Filer conducts substantially all of its business through the Partnership.
8. EPCOR acquired its interests in the Filer, the Partnership and GP Holdings in connection with the sale of its power generation business to the Filer in 2009. EPCOR through its holding of Special Voting Shares of the Filer, is entitled to elect four board members (the remaining eight are elected by the public holders of Common Shares). As described above, EPCOR also holds one special limited voting share of the Filer and one special limited voting share of GP Holdings (together, the "Special Limited Voting Shares") which entitle it to receive notice of, and to attend any meeting of, shareholders but not to vote at any shareholder meeting, including the election of directors, except in certain limited circumstances. Neither the Special Voting Shares nor the Special Limited Voting Shares provide the holder with a right to receive dividends. The Filer regularly discloses its relationship with EPCOR in its public filings.
9. EPCOR holds 100% of the Exchangeable LP Units. The 47,416,000 Exchangeable LP Units represent, as of December 31, 2010, approximately 60.5% of the equity of the Partnership and approximately 60.5% of the total number of Common Shares of the Filer after giving effect to the exchange of the Exchangeable LP Units and 47,416,000 Special Voting Shares held by EPCOR (subject to the restrictions described in paragraph 10(a)).
10. The Exchangeable LP Units are, in all material respects, economically equivalent to the Common Shares of the Filer:
(a) The Exchangeable LP Units are not transferable (except for certain permitted transfers among affiliates) but are exchangeable on a one-for-one basis for Common Shares at any time at the option of the holder thereof, subject to customary anti-dilution protections and adjustment provisions and to a limitation that the maximum number of Common Shares for which Exchangeable LP Units may be exchanged at any time is the largest whole number of Common Shares that, when added to the aggregate number of Common Shares outstanding at that time owned or whose voting rights are controlled by the holder or persons who, for purposes of the Income Tax Act (Canada), do not deal at arm's length with the holder, does not exceed 49% of the aggregate number of Common Shares that would be outstanding immediately following such exchange.
(b) The distributions to be made on the Exchangeable LP Units are equal to the dividends that the holder of the Exchangeable LP Units would have received if it was holding Common Shares that may be obtained upon the exchange of such Exchangeable LP Units plus any tax that would be required to be paid or withheld by the Filer in connection with such dividends.
(c) Each Exchangeable LP Unit is accompanied by a Special Voting Share of the Filer so that the holder of the Exchangeable LP Units are provided with voting rights on matters respecting the Filer equal to the number of Common Shares that may be obtained upon the exchange of the Exchangeable LP Unit to which such Special Voting Share is attached, subject to the restriction that such Special Voting Shares must at all times represent not more than 49% of the votes attached to all Common Shares and Special Voting Shares, taken together.
11. Any equity investment in, or loan to, the Partnership or a subsidiary entity of the Partnership by the Filer in connection with a financing by the Filer would constitute a "related party transaction" under MI 61-101. Section 5.1(g) of MI 61-101 provides that Part 5 of MI 61-101 does not apply to an issuer carrying out a related party transaction if the transaction is a "downstream transaction" for the issuer. Such equity investment or loan would constitute a "down stream transaction" within the meaning of MI 61-101, but for the fact that EPCOR is a related party of the Filer (as a result of its holdings of Special Voting Shares) and holds more than 5% of the limited partnership units of the Partnership. The Partnership would be a "wholly-owned subsidiary entity" of the Filer within the meaning of MI 61-101, but for the fact that EPCOR holds Exchangeable LP Units of the Partnership.
12. Although EPCOR maintains an interest in the Partnership through its Exchangeable LP Units, it does so as a passive investor. Any potential equity investment, or loan to, the Partnership would be negotiated solely between the Filer and the general partner of the Partnership, and EPCOR would have no involvement in respect of the negotiation of, or ability to otherwise influence, the terms and conditions of any such transactions.
13. If MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
(a) the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and
(b) the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (together, requirements (a) and (b) are referred to as the "Minority Protections").
14. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization.
15. The Filer cannot rely on the automatic transaction size exemptions available under the Legislation from the requirements relating to related party transactions in the Legislation because the definition of market capitalization in the Legislation does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.
16. The Exchangeable LP Units represent part of the equity value of the Filer and provide the holder of the Exchangeable LP Units with economic rights which are, as nearly as practicable, equivalent to the Common Shares. The effect of EPCOR's exchange right is that EPCOR will receive Common Shares upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical in all material respects to those underlying the Common Shares; namely, the assets and operations held directly or indirectly by the Partnership. The business of the Filer is substantially the same as the business of the Partnership, in that the Filer has no operations, assets or liabilities other than its investment in the Partnership and the general partner of the Partnership that are material relative to the consolidated operations, assets and liabilities of the Filer.
17. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of EPCOR's limited partnership interest in the Partnership (currently, approximately 60.5%). As a result, related party transactions by the Filer that are entered into with the Partnership or a subsidiary entity of the Partnership for the purposes of financing the business of the Filer or indirectly through the Partnership or a subsidiary entity of the Partnership may be subject to the Minority Protections in circumstances where the fair market value of the transactions are effectively less than 25% of the fully diluted market capitalization of the Filer.
18. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 Income Trusts and Other Indirect Offerings (NP 41-201), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and what transactions MI 61-101 should apply to. Section 1.2 of NP 41-201 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Accordingly, it is consistent that securities of the operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of determining the market value of the Filer under MI 61-101.
19. The inclusion of the Exchangeable LP Units when determining the Filer's market capitalization is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.
Decision
The Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Maker under the Legislation is that the Requested Relief is granted provided that:
(a) the transaction would qualify for the market capitalization exemption contained in the Legislation if the Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Common Shares;
(b) there be no material change to the terms of the Exchangeable LP Units and the Special Voting Shares, including the exchange rights associated therewith, as described above and in the prospectus dated June 25, 2009, filed in connection with the Filer's initial public offering;
(c) EPCOR will not directly or indirectly participate in, nor benefit from, any investment in, or loan to, the Partnership or a subsidiary entity of the Partnership by the Filer in connection with a financing by the Filer other than through its holdings of Exchangeable LP Units, Special Voting Shares and Common Shares, if any; and
(d) the Filer's annual information form filings for so long as the Filer intends to rely on the Requested Relief, contain the following disclosure, with any immaterial modifications as the context may require:
"Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. Capital Power Corporation ("CPC") has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of CPC's market capitalization, if EPCOR Utilities Inc.'s ("EPCOR") indirect equity interest in CPC, through its ownership of Exchangeable LP Units of Capital Power L.P. (the "Partnership"), is included in the calculation of CPC's market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements apply, is increased to include the approximately 60.5% indirect interest in CPC held by EPCOR through its ownership of Exchangeable LP Units of the Partnership."