First Capital Realty Inc. – s. 6.1 of NI 62-104 Take-Over Bids and Issuer Bids

Headnote

Section 6.1 of NI 62-104 – Issuer bid – relief from the requirements applicable to issuer bids in Part 2 of NI 62-104 – issuer to repurchase block of shares from shareholder – repurchase conditional on concurrent secondary offering of block of shares by shareholder – purchase price for buyback and secondary offering will be equal – purchase price will be at a discount to the current market price of the shares on the close of business on the date that the transactions are entered into, as well as the 20-day volume weighted average trading price of the shares as of the day prior to the date that the transactions are entered into – transaction will not proceed unless recommended by special committee to board and shareholders – issuer to receive fairness opinions from financial advisers, including financial advisor not involved in secondary offering – proposed purchase to be approved by a majority of shareholders, excluding votes held by selling securityholder.

Applicable Legislative Provisions

National Instrument 62-104 Take-Over Bids and Issuer Bids, Parts 2 and s. 6.1.

IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF
FIRST CAPITAL REALTY INC.

ORDER
(Section 6.1 of National Instrument 62-104)

UPON the application (the “Application”) of First Capital Realty Inc. (the “Issuer”) to the Ontario Securities Commission (the "Commission") for an order pursuant to section 6.1 of National Instrument 62-104 Take-Over Bids and Issuer Bids (“NI 62-104”) exempting the Issuer from the requirements applicable to issuer bids in Part 2 of NI 62-104 (the “Issuer Bid Requirements”) in respect of the proposed purchase by the Issuer of certain of its common shares from Gazit Canada Inc. (“Gazit Canada”);

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Issuer having represented to the Commission that:

1.             The Issuer is a corporation existing under the Business Corporations Act (Ontario) (the “OBCA”) with its head office located at 85 Hanna Avenue, Suite 400, Toronto, Ontario, M6K 3S3.

2.             The Issuer was originally incorporated as Centrefund Realty Corporation under the OBCA on November 10, 1993. On each of January 1, 1996 and January 1, 1998, the Issuer amal-gamated with one or more of its wholly-owned Canadian subsidiaries and continued as Centrefund Realty Corporation.

3.             On September 7, 2001, the shareholders of the Issuer approved the change of name of the Issuer from Centrefund Realty Corporation to First Capital Realty Inc. Pursuant to articles of amendment dated September 7, 2001, the name of the Issuer was changed accordingly.

4.             The Issuer is a reporting issuer in each of the provinces of Canada and is not in default of any requirement of the securities legislation in those jurisdictions.

5.             The authorized share capital of the Issuer consists of an unlimited number of common shares (“Common Shares”) and an unlimited number of preferred shares (“Preference Shares”), issuable in series. As at the close of business on February 20, 2019 there were 254,883,984 Common Shares outstanding and there were no Preference Shares outstanding. The Common Shares trade under the symbol “FCR” on the Toronto Stock Exchange (“TSX”).

6.             The Common Shares are “highly liquid securities” within the meaning of section 1.1 of Ontario Securities Commission Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions and section 1.1 of the Universal Market Integrity Rules.

7.             To the knowledge of the Issuer, as at the date hereof, the only person who owns, directly or indirectly, more than 10% of the outstanding Common Shares is Gazit Canada. Gazit Canada is, as at the date hereof, the registered holder of approximately 79,636,749 Common Shares, representing approximately 31.3% of the outstanding Common Shares.

8.             Gazit Canada is a wholly-owned subsidiary of Gazit-Globe Ltd. (“Gazit”).

9.             Gazit is a public company, with its shares listed on the Tel Aviv Stock Exchange. In late 2000, the Issuer’s two major shareholders (Gazit and Alony-Hetz Properties & Investments Ltd.) took control of the Issuer, which at that time was operating under its previous name Centrefund Realty Corporation.

10.          Gazit’s ownership in the Issuer has declined over the years, from a peak of approximately 55% in January 2008 to approximately 31.3% as of the date hereof. The decline was due to the Issuer’s equity offerings, as well as two secondary offerings by Gazit (January 2016 and March 2017). In particular, in March of 2017 Gazit completed a secondary offering of 9,000,000 Common Shares at a price of $20.60 per share, taking its position from approximately 37% to 33%, resulting in a deconsolidation of the Issuer from the financial statements of Gazit.

11.          Gazit has and had substantial investments in other public real estate companies. Over the past years it has demonstrated evidence of a change in overall strategy, recycling capital from equity investments into direct real estate holdings. This has, management of the Issuer believes, created an “overhang” in the Common Shares. Evidence of an overhang has become more prominent since Gazit’s July 26, 2018 press release in which Gazit announced the completion of its 17 month divestiture program for its 13.2% investment in Regency Centers, a U.S. retail REIT, and reiterated Gazit’s intention to shift its capital from investment in public securities to direct ownership of property. The Issuer believes that the market price of its Common Shares has been adversely affected by this overhang.

12.          In order to, among other things, address the existing market overhang, the Issuer proposes to enter into a definitive agreement (the “Trans-action Agreement”) with Gazit Canada pursuant to which it would agree to purchase for cancellation from Gazit Canada up to 37 million of its Common Shares (the “Proposed Buyback”). As a condition of the Proposed Buyback, and in order to sufficiently reduce the total share ownership position of Gazit Canada, Gazit Canada would also concurrently enter into an agreement with a syndicate of underwriters led by RBC Capital Markets pursuant to which the underwriters would agree to sell, on a bought deal basis, up to 23 million of Gazit Canada’s Common Shares represented by instalment receipts (the “Secondary Offering”).

13.          The Issuer would not enter into the Proposed Buyback unless Gazit Canada also undertook the Secondary Offering, as only in combination will a sufficient number of Common Shares be disposed of by Gazit Canada to address the existing overhang in the Common Shares.

14.          The price per Common Share payable by the Issuer under the Proposed Buyback (the “Buy-back Price”) will be equal to the offering price per Common Share in connection with the Secondary Offering, and each will be at a discount to the current market price of the Common Shares on the close of business on the date that the transactions are entered into, as well as the 20-day volume weighted average trading price of the Common Shares as of the day prior to the date that the transactions are entered into. In addition, in connection with the Proposed Buyback the Issuer will agree to pay one-half of the under-writers’ fee payable by Gazit Canada under the Secondary Offering, which fee will be paid by the Issuer regardless of whether the Proposed Buyback is completed. The Buyback Price, even if grossed up for the portion of the underwriters’ fee to be paid by the Issuer in connection with the Secondary Offering, will be at a discount to the current market price of the Common Shares on the close of business on the date that the transactions are entered into, as well as the 20-day volume weighted average trading price of the Common Shares as of the day prior to the date that the transactions are entered into.

15.          Under the terms of the Transaction Agreement, the Issuer will also agree to pay to Gazit, on signing, the amount of $3 million for expense reimbursement. This amount will be credited to the aggregate Buyback Price on closing of the Proposed Buyback, and will be retained by Gazit if the Transaction Agreement is terminated in certain circumstances.

16.          Management of the Issuer believes that the Proposed Buyback would be financially accretive to the Issuer, and also presents an opportunity for the Issuer to purchase a large amount of Common Shares at a discount where those shares would not otherwise be available for purchase in the market and will ultimately eliminate the overhang associated with the Common Shares.

17.          The Issuer believes that the removal of the overhang pursuant to the Proposed Buyback and the Secondary Offering will be in the best interests of the Issuer and its shareholders, and that after completion of the Proposed Buyback and the Secondary Offering there would be increased liquidity in the market for the Common Shares.

18.          The Issuer believes that the Proposed Buyback, including the incurrence of indebtedness to fund the Proposed Buyback, would not have a material adverse effect on the Issuer, its financial position or its ability to achieve its business objectives.

19.          To the knowledge of the Issuer, immediately following closing of the Proposed Buyback and Secondary Offering (assuming payment of all instalments in connection with the Secondary Offering), no shareholder of the Issuer will hold more than 10% of the outstanding Common Shares.

20.          The Issuer has established a special committee of the Board (the “Special Committee”) consisting of the Issuer’s five independent directors to review the Proposed Buyback and Secondary Offering. The Issuer will not proceed with the Proposed Buyback unless the Special Committee has recommended that the Board approve the Proposed Buyback and recommend to the Issuer’s shareholders that they vote in favour of the Proposed Buyback.

21.          The Issuer expects to receive from each of RBC Capital Markets Inc. and Blair Franklin Capital Partners Inc. fairness opinions (and in the case of Blair Franklin Capital Partners Inc., a “long form fairness opinion”) (collectively, the “Fairness Opinions”) stating that, in its opinion and subject to the assumptions, limitations and qualifications contained in each fairness opinion, as of the date of the fairness opinion, the consideration payable by the Issuer under the Proposed Buyback is fair, from a financial point of view, to the Issuer.

22.          The Issuer will not proceed with the Proposed Buyback unless the Board, after consultation with financial and legal advisors, and based on the recommendation of the Special Committee, has determined that the Proposed Buyback is in the best interests of the Issuer, and recommended that the Issuer’s shareholders vote in favour of the Proposed Buyback.

23.          The Issuer will not proceed with the Proposed Buyback unless it receives approval of the Proposed Buyback by its shareholders at a special meeting (the “Special Meeting”). The required level of approval will be a simple majority of the votes attached to Common Shares held by the Issuer’s shareholders present in person or represented by proxy and entitled to vote at the Special Meeting, excluding for this purpose votes attached to Common Shares held by Gazit Canada and its related parties and joint actors.

24.          The Fairness Opinions will be provided to the Issuer’s shareholders in the information circular to be filed and mailed to shareholders in connection with the Special Meeting.

25.          The independent directors of the Board have no actual knowledge that the Proposed Buyback will be prejudicial to the interests of any of the Issuer’s shareholders.

26.          At the time the purchase price payable for the Common Shares under the Proposed Buyback is agreed to, Gazit will not be aware of any undisclosed material information in respect of the Issuer.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to section 6.1 of NI 62-104 that the Issuer be exempt from the Issuer Bid Requirements in respect of the Proposed Buyback.

DATED at Toronto, Ontario, this 28th day of February, 2019.

“Naizam Kanji”
Director, Office of Mergers & Acquisitions
Ontario Securities Commission