Energy Split Corp. Inc. - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- subdivided offering exempted from certain requirements of National Instrument 81-102 Mutual Funds since issuer is fundamentally different from a conventional mutual fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 10.3, 10.4, 14.1.
September 8, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC,
NEWFOUNDLAND AND LABRADOR,
NEW BRUNSWICK, NOVA SCOTIA,
PRINCE EDWARD ISLAND,
NORTHWEST TERRITORIES, YUKON,
AND NUNAVUT (the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
ENERGY SPLIT CORP. INC.
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from Energy Split Corp. Inc. (the Filer) for a decision under the securities legislation of the Jurisdictions (the Legislation) that exempts the Filer from the following requirements of National Instrument 81-102 Mutual Funds (NI-102) in connection with the Class B Preferred Shares (the Preferred Shares) to be issued by the Filer and described in its preliminary prospectus dated August 10, 2006 (the Preliminary Prospectus) (collectively, the Requested Relief):
(a) section 10.3, which requires that the redemption price of a security of a mutual fund to which a redemption order pertains shall be the net asset value of a security of that class, or series of class, next determined after the receipt by the mutual fund of the order;
(b) section 10.4, which requires that a mutual fund shall pay the redemption price for securities that are the subject of a redemption order within three business days after the date of calculation of the net asset value per security used in establishing the redemption price; and
(c) section 14.1, which requires that the record date for determining the right of securityholders of a mutual fund to receive a dividend or distribution by the mutual fund shall be calculated in accordance with section 14.1.
Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a passive investment company whose principal undertaking is the holding of a portfolio of common shares of Canadian public companies (the Common Share Portfolio). The Filer has entered into a forward purchase and sale agreement (the Forward Agreement) on the Common Share Portfolio with a Canadian chartered bank (the Counterparty) pursuant to which the Counterparty has agreed to pay the Filer on the Redemption Date the economic return provided by a fixed portfolio of selected oil and gas royalty trusts (the Royalty Trust Portfolio) listed on the Toronto Stock Exchange (the TSX) which are held by an underlying fund (the Royalty Fund). The Common Share Portfolio and the Forward Agreement are the only material assets of the Filer.
2. The Filer completed its initial public offering of Capital Yield Shares (the Capital Yield Shares) and ROC Preferred Shares (the Previous ROC Preferred Shares) in September 2003. The Filer used the net proceeds of its initial public offering to acquire the Common Share Portfolio. In connection with its initial public offering, the Filer applied for and obtained an exemption (the Original Exemption) from certain provisions of NI-81-102. A copy of the letter granting the exemption is enclosed. Some aspects of the Original Exemption are based on facts and share attributes which have changed.
3. The Filer is in the process of a capital reorganization (the Reorganization) which will result in the issuance of the Preferred Shares. The Reorganization was approved by the holders of Capital Yield Shares of the Filer on July 28, 2006. The Reorganization will only be implemented if at least 1,165,500 Capital Yield Shares remain issued and outstanding following the exercise of the Special Retraction Right on or before August 4, 2006. By the close of business on August 4, 2006, 492,266 Capital Yield Shares had been tendered for retraction under the Special Retraction Right. As a result, 2,419,984 Capital Yield Shares will remain outstanding following September 16, 2006. All of the outstanding Previous ROC Preferred Shares will be redeemed on September 15, 2006 in accordance with their terms.
4. The Filer filed the Preliminary Prospectus on August 10, 2006 in respect of the offering (the Offering) of Preferred Shares. The Filer expects to file the final prospectus in respect of the Offering (the Final Prospectus) on or about September 7, 2006 and to close the Offering on or about September 14, 2006.
5. The Original Exemption does not deal with the Preferred Shares and the date by which shares must be surrendered for retraction has been changed pursuant to the Reorganization.
6. Upon the issuance of the Preferred Shares by the Filer, the Filer will be an issuer of securities which entitle the holder to receive an amount computed by reference to the value of a proportionate interest in the whole or part of the net assets of the Filer, within a specified period after demand. The Capital Yield Shares and the Preferred Shares may be surrendered for retraction at any time for a price based on "Unit Value" which is derived from a formula that is similar to a net asset value computation. Since the value of the Company's rights and obligations under the Forward Agreement is determined by reference to the value of the Royalty Fund, the Unit Value is linked to the value of the Royalty Fund.
7. It is the policy of the Royalty Fund to hold the royalty trusts comprising the Royalty Trust Portfolio and not to sell any such royalty trusts except as described in the Preliminary Prospectus.
8. It is expected that no additional Preferred Shares will be issued once the Filer is out of primary distribution.
9. The Preferred Shares are expected to be, and the Capital Yield Shares are, listed and posted for trading on the TSX. As a result, the holders of such shares will not have to rely exclusively (or even primarily) on the retraction privileges to provide liquidity for their investment.
10. The Filer will partially settle the Forward Agreement prior to the Redemption Date in order to fund: (i) quarterly distributions on the Preferred Shares and the Capital Yield Shares; (ii) retractions, redemptions and repurchases of Preferred Shares and Capital Yield Shares from time to time; and (iii) operating expenses and other liabilities of the Filer.
11. The Preferred Shares and Capital Yield Shares may be surrendered for retraction at any time. Retraction payments for Preferred Shares and Capital Yield Shares will be made on the Retraction Payment Date (as defined in the Preliminary Prospectus and the Final Prospectus) provided the Preferred Shares and Capital Yield Shares have been surrendered for retraction on or before ten business days prior to the relevant Valuation Date (as defined in the Preliminary Prospectus and the Final Prospectus).
12. The Filer will redeem any Capital Yield Shares and Preferred Shares outstanding on September 16, 2011.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted from the following requirements of NI 81-102:
(a) Section 10.3 -- to permit the Filer to calculate the retraction price for the Preferred Shares and Capital Yield Shares in the manner described in the Preliminary Prospectus and the Final Prospectus and on the applicable Valuation Date as defined in the Preliminary Prospectus and the Final Prospectus;
(b) Section 10.4 -- to permit the Filer to pay the retraction price for the Preferred Shares and Capital Yield Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus and the Final Prospectus; and
(c) Section 14.1 -- to relieve the Filer from the requirement relating to the record date for payment of dividends or other distributions of the Filer, provided that it complies with the applicable requirements of the TSX.