Chapters Inc. & Chapters Online Inc. - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications - retention agreements between offeror and certainkey officers and executives of offeree made for reasons other than to increase the value of the consideration paid to thekey officers and executives and may be entered into despite the prohibition on collateral agreements in the Legislation.
Applicable Ontario Statutory Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 97 and 104(2)(a).
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ONTARIO AND QUEBEC
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
CHAPTERS INC.
AND CHAPTERS ONLINE INC.
MRRS DECISION DOCUMENT
WHEREAS the securities regulatory authority or regulator (the "Decision Maker") in each of Ontario andQuebec (the "Jurisdictions") has received an application from Chapters Inc. (the "Offeror") for a decision pursuant to thesecurities legislation of the Jurisdictions (the "Legislation") that, in connection with an offer dated January 19, 2001 (the"Offer") by the Offeror to acquire all of the issued and outstanding common shares (the "Online Shares") of ChaptersOnline Inc. ("Online"), certain retention arrangements entered into between the Offeror and certain officers andexecutives of Online have been entered into for reasons other than to increase the value of the consideration paid tosuch officers executives of Online for their Online Shares and may be entered into despite the provision in the Legislationthat prohibits an offeror who makes or intends to make a take-over bid and any person acting jointly or in concert withthe offeror from entering into any collateral agreement, commitment or understanding with any holder or beneficial ownerof securities of the offeree issuer that has the effect of providing to the holder or owner a consideration of greater valuethan that offered to other holders of the same class of securities (the "Prohibition on Collateral Agreements");
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the"System"), the Ontario Securities Commission is the principal regulator for this application;
AND WHEREAS the Offeror has represented to the Decision Makers that:
1. The Offeror is a corporation incorporated under the Business Corporations Act (Ontario), with its head officelocated in Toronto, Ontario.
2. The Offeror is the largest book retailer in Canada, operating bookstores in all provinces under the names ofChapters, Coles, SmithBooks/ LibrairieSmith, The Book Company and World's Biggest Bookstore.
3. The Offeror is a reporting issuer or the equivalent in all provinces of Canada and its common shares are listedfor trading on The Toronto Stock Exchange (the "TSE") under the symbol "CHP".
4. Online is a corporation incorporated under the Business Corporations Act (New Brunswick).
5. Online is a leading online retailer in Canada of books, music CDs, videos, DVDs, software and video gamecartridges, as well as digital downloads and consumer electronics through its chapters.ca website. Online alsooperates the villa.ca website which features a wide selection of home and garden products.
6. The authorized capital of Online consists of an unlimited number of Online Shares and an unlimited numberof preference shares, issuable in series ("Preference Shares"). As of January 2, 2001, there were 17,814,574Online Shares and no Preference Shares issued and outstanding.
7. Online is a reporting issuer or the equivalent in all provinces of Canada and the Online Shares are listed andposted for trading on the TSE under the symbol "COL".
8. The Offeror is the majority owner of Online and currently holds 12,398,416 Online Shares, representingapproximately 69.6% of the issued and outstanding Online Shares.
9. Sequoia Capital Franchise Fund, Sequoia Capital Franchise Partners and Sequoia Capital Partners and eachof their respective affiliates and associates (collectively, "Sequoia") currently hold 2,080,000 Online Shares,representing approximately 11.7% of the issued and outstanding Online Shares.
10. Online has established an independent committee (the "Independent Committee") of its board of directors to,among other things, consider the Offer.
11. The Offer is for all of the issued and outstanding Online Shares, including any Online Shares which maybecome outstanding on the exercise of stock options or other rights, in exchange for $3.40, subject toconditions that are customary for transactions of this nature, including that there be validly deposited under theOffer and not withdrawn at the expiry time at least 50.1% of the outstanding Online Shares to which the Offerrelates, excluding Online Shares presently owned by the Offeror.
12. If the Offeror takes up and pays for not less than 50.1% of the Online Shares (excluding Online Shares heldby the Offeror and its associates and affiliates) but is unable to rely on the compulsory acquisition provisionsunder the Business Corporations Act (New Brunswick) or if the Offeror elects not to pursue such right, theOfferor intends to propose an amalgamation, statutory arrangement, merger, reorganization, liquidation or othertransaction with Online that constitutes a going-private transaction. The Offeror has sought exemptive relieffrom the Quebec Securities Commission in connection with such proposed going-private transaction.
13. On December 7, 2000, the Offeror and SCFF Management LLC, as general partner of Sequoia, entered intoan agreement (the "Lock-Up Agreement") pursuant to which, among other things, Sequoia agreed to depositall of 2,080,000 Online Share held by Sequoia, together with any additional Online Shares acquired after thedate of the Lock-Up Agreement and prior to the expiry of the Offer, to the Offer.
14. On December 27, 2000, the Offeror and Online entered into an agreement (the "Support Agreement") pursuantto which, among other things, the Offeror agreed to make the Offer on certain terms and conditions, includingrepresentations and warranties by Online that the Independent Committee recommend to its directors that ithad determined that it would be in the best interests of Online for its board of directors to recommendacceptance of the Offer to holders of the Online Shares and for Online to co-operate with the Offeror inconnection with the Offer and to take all reasonable actions to support the Offer.
15. Heather Nicol ("Nicol") is the Chief Financial Officer of Online. Nicol holds, directly and indirectly, or exercisescontrol or direction over 2,300 Online Shares. Nicol also currently holds options to purchase 130,000 OnlineShares pursuant to the Online stock option incentive plan (the "Online Stock Option Plan").
16. Doug Caldwell ("Caldwell") is the Chief Technical Officer of Online. Caldwell holds, directly and indirectly, orexercises control or direction over no Online Shares. Caldwell currently holds options to purchase 130,000Online Shares pursuant to the Online Stock Option Plan.
17. Graham Coulson ("Coulson") is the Director of Web Operations of Online. Coulson holds, directly andindirectly, or exercises control or direction over 500 Online Shares. Coulson also currently holds options topurchase 30,000 Online Shares pursuant to the Online Stock Option Plan.
18. Warren Cable ("Cable") is the Director of Merchandising of Online. Cable holds, directly and indirectly, orexercises control or direction over 500 Online Shares. Cable also currently holds options to purchase 16,000Online Shares pursuant to the Online Stock Option Plan.
19. David Hainline ("Hainline") is the Executive Vice-President and Chief Operating Officer of Online. Hainlineholds, directly and indirectly, or exercises control or direction over no Online Shares. Hainline currently holdsoptions to purchase 245,000 Online Shares pursuant to the Online Stock Option Plan.
20. Online currently has employment agreements (the "Current Employment Agreements") with each of Cable,Caldwell, Coulson, Hainline and Nicol (collectively referred to herein as, the "Executives", unless specificallyreferenced) on terms and conditions that are typical of employment agreements with similarly situatedexecutives of companies with comparable businesses to Online and the Offeror. The annual base salaries paidunder the Current Employment Agreements to Cable, Caldwell, Coulson, Hainline and Nicol are $100,000,$160,000, $100,000, $195,000 and $145,000, respectively. Cable, Caldwell, Coulson, Hainline and Nicol arealso eligible to receive performance bonuses for each fiscal year of up to $12,000, $60,000, $25,000, $100,000and $50,000, respectively. The Current Employment Agreements also provide for participation in the OnlineStock Option Plan and other benefit plans, as well as certain other non-material perquisites.
21. In addition, the Current Employment Agreements provide in some cases for certain consequences in the eventthat the respective Executive is terminated in certain circumstances. The Current Employment Agreementsalso provide in some cases that upon the termination of the respective Executive's employment, such Executivewill not in Canada directly or indirectly provide services to certain competitors and their affiliates or to anyCanadian controlled entity in which they have a minority interests or a joint venture agreement for a period ofone year following such termination. The acquisition of Online Shares by the Offeror pursuant to the Offer willnot give rise to any termination rights by any of the Executives under the Current Employment Agreements withOnline.
22. The Offeror has entered into certain retention and severance arrangements (the "Retention Arrangements")with each of the Executives, the principal terms of which are set forth below.
23. The principal terms of the Current Employment Agreements with the Executives other than Hainline will not beaffected by the Retention Arrangements, subject to the following modifications:
(a) if, following the completion of the Offer, such Executive is terminated within twelve months after thedate upon which the Offer is completed, including constructive termination where there is a materialreduction in annual compensation or the assignment of materially reduced duties or responsibilitiesto such Executive without mutual agreement, but other than for cause or as a result of suchExecutive's death or disability or resignation, such Executive shall receive a lump sum cash paymentin an amount equal to six-twelves of the Executive's annual base salary at the rate in effect at suchExecutive's date of termination, plus all benefits, quantified as 10% of the Executive's annual basesalary, paid or payable excluding bonuses (the "Annual Compensation") and, in the case of Nicol,benefits for one year, and the bonus received by the Executive in the year preceding the Executive'stermination (the "Target Bonus");
(b) if following the completion of the Offer, the Executive's employment is terminated for cause, or as aresult of such Executive's death or disability or resignation, the Executive shall receive the Executive'sfull base salary to the effective date of such termination at the rate in effect on the date the Executiveis notified of such termination or at the rate approved prior to the date of such termination; and
(c) for Executives other than Nicol, if following the completion of the Offer, an Executive's employmentis continued, Chapters shall, subject to the Offeror's board and regulatory approval, grant stockoptions to such Executives on the basis of one stock option to purchase common shares of the Offeror("Offeror Options") for each five stock options to purchase Online Shares ("Online Options") previouslygranted to such Executives prior to November 28, 2000 to be priced in accordance with the guidelinesof the TSE and the Offeror's existing employee stock option plan.
24. In addition to the foregoing, the Offeror has agreed to pay Nicol the sum of approximately 10% of her AnnualCompensation in the event that the Offer is successful and Nicol remains in the employment of the Offeror orOnline until at least March 1, 2001.
25. The principal terms of the Current Employment Agreement with Hainline will not be affected by the RetentionArrangement proposed with respect to Hainline, subject to the following modifications:
(a) if following the completion of the Offer, Hainline is terminated within twelve months after the date uponwhich the Offer is completed, including termination as a result of the position of Hainline beingrendered redundant, but other than for cause or as a result of the Hainline's death or disability orresignation, or Hainline is terminated following both the completion of the Offer and a subsequentchange of control of the Offeror within twelve months after the date upon which such change ofcontrol occurs other than for cause or as a result of death or disability or resignation (other than atriggering event, which would include an adverse change in the duties, powers and rights of Hainline,a diminution of title and change in the person or body to whom Hainline reports, all without hisconsent), or if as a result of a change of control, Hainline shall resign his employment following atriggering event within twelve months after the date upon which such change of control occurs, andwithin six months of such triggering event (a "Termination Event"), then Hainline shall receive a lumpsum cash payment in an amount equal to:
(i) if Hainline has been employed for less than five full years in the aggregate at the time of theTermination Event, his Annual Compensation and Target Bonus, or
(ii) if Hainline has been employed for five full years but less than six full years in the aggregate,seventeen-twelves of the amount due referred to under clause 25(a)(i) above, increasing byone-twelfth for each completed sixth and subsequent year, to a maximum of twenty-four-twelfths or an amount equal to two times his Annual Compensation and Target Bonus.
(b) if following the completion of the Offer, Hainline's employment is continued, the Offeror proposes togrant, subject to the Offeror's board and regulatory approval, stock options to Hainline on the basisof one Offeror Option for each five Online Options previously granted to Hainline prior to November28, 2000 to be priced in accordance with the guidelines of the TSE and the Offeror's employee stockoption plan. Upon a Termination Event, all Offeror Options held by Hainline shall become immediatelyexercisable in full until the expiry of their original term (without regard to early termination provisionsattaching to the options relating to cessation of office or employment). The Offeror shall also pay allreasonable legal fees and expenses incurred by Hainline as a result of such termination; and
(c) if following the completion of the Offer and, if applicable, a subsequent a change of control, Hainline'semployment is terminated for cause, or as a result of the Hainline's death or disability or resignation(other than following a triggering event in the event of a change of control), Hainline shall receive hisfull base salary to the effective date of such termination at the rate in effect on the date Hainline isnotified of such termination or at the rate approved prior to the date of such termination.
26. The Retention Agreements have been negotiated at arm's length and are on terms and conditions that arecommercially reasonable. The severance provisions in respect of cash payments, stock options and otherbenefit entitlements for the Executives are commensurate with the entitlements of similarly situated executivesof the Offeror in the case of a termination.
27. The Offeror believes that the Executives have been an integral part of the successful development andoperation of Online and have substantial and valuable experience and expertise in the online retail business.The Offeror views the retention of the Executives as critical to making the Offer.
AND WHEREAS pursuant to the System, this MRRS Decision Document evidences the decision of eachDecision Maker (the "Decision").
AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that providesthe Decision Maker with the jurisdiction to make the Decision has been met; and
THE DECISION of the Decision Makers, under the Legislation, is that the Retention Arrangements are beingmade for reasons other than to increase the value of the consideration to be paid to the Executives for their OnlineShares and that the Retention Arrangements may become effective notwithstanding the Prohibition on Collateral Benefitscontained in the Legislation.
February 5, 2001.
"Howard I. Wetston" "J.A. Geller"