Growmark, Inc. -- s. 74(1)

Headnote

Application for relief from the registration and prospectus requirements -- Applicant operates as a federated agricultural co-operative, primarily in Illinois, Wisconsin, Iowa and Ontario -- Applicant's business includes operations in agronomy, seed, energy, grain, retail supplies and facility planning and supply -- Applicant proposes to make qualifying Farmcos and qualifying Farmers members of the Applicant in order to build stronger commercial relationships and related goodwill between the Applicant and the Farmers, and to make Farmers eligible for patronage distributions -- In order to qualify as a member of the Applicant under its constating documents, eligible Farmcos and Farmers must be an agricultural producer, sign a membership agreement and hold a common share for a nominal amount upon entering into a membership agreement -- The Applicant will also issue one or more shares of Class D Preferred Stock to eligible Farmcos and Farmers for purposes of the patronage provisions of the Income Tax Act -- Farmcos and Farmers are not investors in a conventional sense and share issuance not a financing -- Relief granted.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1).

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S. 5, AS AMENDED

(THE "ACT")

AND

IN THE MATTER OF

GROWMARK, INC.

(the "Applicant")

ORDER

(Section 74(1))

WHEREAS the Applicant has filed an application (the "Application") with the Ontario Securities Commission (the "Commission") for an order pursuant to subsection 74(1) of the Act that the following transactions shall not be subject to the registration and prospectus requirements arising pursuant to sections 25 and 53 of the Act:

(a) the issuance by the Applicant to qualifying Farmcos (as defined below) resident in Ontario and qualifying Farmers (as defined below) of GROWMARK Membership Interests (as defined below) resident in Ontario and shares of Class D Stock; and

(b) subsequent patronage distributions by the Applicant to Farmcos and Farmers of shares of Class D Stock issued in satisfaction of patronage distributions made from time to time by the Applicant.

AND WHEREAS such order would replace the order issued by the Commission the Applicant on April 28, 2009 pursuant to subsection 74(1) of the Act (the "2009 Order").

AND WHEREAS the Commission may, pursuant to subsection 74(1) of the Act, the rule that any trade, intended trade, security, person or company is not subject to section 25 or 53 of the Act (the "Registration and Prospectus Requirements") where it is satisfied that to do so would not be prejudicial to the public interest;

AND WHEREAS in this decision:

"Farmco" means (i) a corporation, all of the shares of which are owned by a farmer and/or one or more members of the farmer's immediate family, (ii) a partnership, all of the units of which are owned by a farmer and/or one or more members of the farmer's immediate family, or (iii) a trust established for the benefit of a farmer and/or one or more members of the farmer's immediate family;

"Farmer" means an individual engaged, through a Farmco or otherwise, in the raising of field crops (including produce and grain) and/or livestock; and

"immediate family" means a Farmer's spouse, parent, child, sibling, mother or father-in-law, son or daughter-in-law, brother or sister-in-law, and anyone (other than an employee of either the Farmer or the Farmer's immediate family) who shares the Farmer's home.

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

AND UPON it being represented by the Applicant to the Commission that:

1. The Applicant was incorporated in 1962 under the laws of Delaware under the name "FS Services Inc.". In 1980, its name was changed to "GROWMARK, Inc.". The Applicant operates on a co-operative basis, carrying on business as a federated agricultural co-operative, primarily in Illinois, Wisconsin, Iowa and Ontario. The Applicant's business includes operations in agronomy, seed, energy, grain, retail supplies and facility planning and supply.

2. The Applicant is not a reporting issuer in the Province of Ontario or in any other province or territory of Canada, and has no present intention of becoming a reporting issuer in Ontario. The Applicant files federal and provincial tax returns in Canada and is subject to income tax under the Income Tax Act (Canada) (the "ITA") on its taxable income earned in Canada (and under the corresponding provisions of applicable provincial income tax statutes).

3. Currently, all of the Applicant's Ontario members are corporations governed by the Co-operative Corporations Act (Ontario) ("Corporate Members"). Such Corporate Members are eligible to receive annual distributions ("Patronage Distributions") on the basis of the business they conduct with the Applicant during the year (i.e., purchasing or selling products or services). The amount of any such Patronage Distributions is equal to the net earnings of the Applicant for the year, after setting aside sufficient funds to pay any preferred share dividends and such reasonable reserves and surplus funds as the board of directors of the Applicant determines to be necessary for its business. As described in further detail below, under the ITA, subject to certain limitations, the Applicant is entitled to deduct in computing its taxable income earned in Canada for a taxation year the total of all payments made by it pursuant to allocations in proportion to patronage to its customers for the year.

4. The Corporate Members also have members (holders of membership shares of the Corporate Members) who are also generally eligible to receive patronage distributions from the Corporate Members on the basis of the business they conduct with the Corporate Members (if and when declared by the board of directors of the Corporate Members).

5. During the period between January 1, 1995 and December 31, 2009, the Applicant made Patronage Distributions to the Corporate Members (including their respective predecessor corporations) totalling approximately US$35.4 million.

6. On May 27, 2008, Simcoe District Co-operative Services ("Simcoe"), then a Corporate Member of the Applicant, filed an assignment in bankruptcy under the Bankruptcy and Insolvency Act (Canada). Simcoe was subsequently liquidated and is no longer a Corporate Member or entitled to receive Patronage Distributions.

7. On January 23, 2009, RSM Richter Inc. was appointed interim receiver and receiver of the undertakings, properties and assets of Norfolk Co-operative Company, Limited ("Norfolk"). Norfolk is in the process of being liquidated and is no longer a Corporate Member or entitled to receive Patronage Distributions.

8. On March 26, 2009, the Applicant completed transactions with two other financial distressed Corporate Members, Inland Co-operative Inc. ("Inland") and Waterloo-Oxford Co-operative Inc. ("Waterloo-Oxford"), resulting in the sale by such corporations of substantially all of their respective assets to the Applicant for a purchase price that allows each of Inland and Waterloo-Oxford to repay all of their respective debt and distribute a certain amount of equity to their respective members. As of March 26, 2009, each of Inland and Waterloo-Oxford also ceased to be Corporate Members entitled to receive Patronage Distributions. Inland and Waterloo-Oxford is each in the process of being wound-down and dissolved.

9. During the period between January 1, 1995 and December 31, 2008, the Applicant made Patronage Distributions to Inland, Waterloo-Oxford, Simcoe and Norfolk (and their respective predecessor corporations) totalling approximately US$5.1 million.

10. As a result of transactions completed on May 1, 2009, the Applicant began as of such date to conduct the grain business in Ontario through a new general partnership (the "GLG Partnership") registered under the laws of Ontario. The Applicant and AGRIS Co-operative Inc. ("AGRIS") are the two general partners of the GLG Partnership.

11. In order to build stronger commercial relationships and related goodwill between the Applicant and the Farmcos, and to make Farmcos eligible for Patronage Distributions, it is proposed that the Applicant would make qualifying Farmcos (who conduct business with the Applicant) members of the Applicant. In order to qualify as a member of the Applicant under its constating documents, it would be necessary that the Farmco be an agricultural producer, sign a membership agreement and hold a share of, or a fractional interest in a share of, Common Stock of the Applicant. It is proposed that the Applicant would issue a 1/10,000 fractional interest in a share of Common Stock of the Applicant (a "GROWMARK Membership Interest") to a Farmco for a nominal amount at the time the Farmco signs a membership agreement. Agricultural producers resident in the United States have in the past qualified as members of the Applicant through the holding a 1/10,000 fractional interest in a share of Common Stock of the Applicant.

12. Holders of Common Stock of the Applicant, or of a fractional interest therein, have no rights to vote, no rights to dividends (other than Patronage Distributions) and no preferences on liquidation, dissolution or winding up, but would be eligible under the Applicant's constating documents to Patronage Distributions. Pursuant to the Applicant's constating documents, shares of Common Stock can only be transferred with the prior written consent of the Applicant. This restriction will also be contained in the membership agreement signed by a Farmco and will apply in respect of such Membership Interest.

13. Under the ITA, subject to certain limitations, the Applicant is entitled to deduct in computing its taxable income earned in Canada for a taxation year the total of all payments made by it pursuant to allocations in proportion to patronage to its customers for the year. In general terms, patronage payments made by the Applicant will be deductible if made at the same rate in relation to the amount of business conducted with the Applicant by each customer of the Applicant who is also a member of the Applicant or by each customer of the Applicant who is not a member of the Applicant. The policy of the Applicant in Canada is to pay patronage only to customers who are members of the Applicant. For purposes of the ITA, "member" means "a person who is entitled as a member or shareholder to full voting rights in the conduct or affairs of the taxpayer (being a corporation) ...". The holding by a Farmco of a GROWMARK Membership Interest, although sufficient to qualify the Farmco as a member of the Applicant under its constating documents, would not qualify such Farmco as a member of the Applicant for purposes of the patronage provisions of the ITA (which latter qualification would be necessary to allow the Applicant to make Patronage Distributions to the Farmco that would be eligible for the deduction in computing the taxable income of the Applicant earned in Canada as described above). For this reason, it is proposed that the Applicant also issue one or more shares of Class D Preferred Stock of the Applicant ("Class D Stock") to the Farmco. Such Class D Stock would be issued to Farmco prior to the declaration by the board of directors of the Applicant of any Patronage Distributions (such issuance would occur at the time the Membership Interest is issued to the Farmco or later). The shares of Class D Stock have a par value of US$100 per share. Holders of Class D Stock are entitled to one vote per share at any meeting of the stockholders of the Applicant.

14. Holders of Class D Stock are also entitled to receive payment of the par value of such shares upon liquidation, dissolution or winding up of the Applicant, subject to the rights of holders of Class B Preferred Stock and Class C Preferred Stock of the Applicant. No dividends or distributions of earnings, including patronage distributions, are payable to holders of shares of Class D Stock (except that a holder of Class D Stock who is also a holder of a share of Common Stock, or a fractional interest therein, is entitled to patronage distributions if and when declared by the board of directors of the Applicant in respect of such share of Common Stock or fractional interest therein). Shares of Class D Stock held by a member located in Ontario can only be transferred with the prior written consent of the Applicant. This restriction will also be contained in the membership agreement signed by a Farmco and will apply in respect of such Class D Stock.

15. The holding by a Farmer of a GROWMARK Membership Interest and one or more shares of Class D Stock will qualify the Farmer as a member of the Applicant under its constating documents and a member of the Applicant for purposes of the patronage provisions of the ITA.

16. On July 28, 2000, the Commission issued an order, in favour of the Applicant, granting an exemption pursuant to subsection 74(1) of the Act from the Registration and Prospectus Requirements respecting:

(a) the issuance to Corporate Members of one share of Common Stock and Class D Stock, Series A to such Corporate Members as part of a reorganization of the share capital of the Applicant; and

(b) subsequent patronage distributions by the Applicant to such Corporate Members of shares of Class D Stock, Series A as part of any patronage distributions to such Corporate Members.

17. On April 29, 2009, the Commission issued the 2009 Order in favour of the Applicant, granting an exemption pursuant to subsection 74(1) of the Act from the Registration and Prospectus Requirements respecting:

(a) the issuance by the Applicant to qualifying individual farmers resident in Ontario of GROWMARK Membership Interests and shares of Class D Stock; and

(b) subsequent patronage distributions by the Applicant to farmers of shares of Class D Stock issued in satisfaction of patronage distributions which may be made from time to time by the Applicant.

18. The Applicant wishes to extend the 2009 Order to a Farmco, as many farmers in Ontario carry on business through a Farmco and should be given the same opportunity to benefit from a membership relationship with the Applicant as the individual farmers and the Corporate Members.

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

IT IS RULED pursuant to subsection 74(1) of the Act that the following transactions shall not be subject to section 25 and 53 of the Act:

(a) the issuance by the Applicant to Farmcos resident in Ontario and Farmers resident in Ontario of GROWMARK Membership Interests and shares of Class D Stock; and

(b) subsequent patronage distributions by the Applicant to Farmcos and Farmers of shares of Class D Stock issued in satisfaction of patronage distributions which may be made from time to time by the Applicant.

provided that:

(a) before the issuance of a GROWMARK Membership Interest and shares of Class D Stock under paragraph (a), each Farmer or Farmco, as applicable, is provided with a copy of a written statement to the effect that certain protections, rights and remedies provided by the Act, including statutory rights of rescission and damages, will be unavailable to that Farmer or Farmco and that there are restrictions imposed on the disposition or transfer of the GROWMARK Membership Interests and shares of Class D Stock;

(b) the Applicant will provide to the Farmer or Farmco, as applicable, the following materials:

(i) this decision;

(ii) the articles and by-laws of the Applicant, and all amendments thereto; and

(iii) the most recent annual audited financial statements of the Applicant;

(c) the Applicant will prepare and make available to each Farmer or Farmco, as applicable, on its website a copy of its annual report containing audited financial statements and quarterly unaudited financial statements;

(d) the transfer restrictions applicable to the GROWMARK Membership Interests and shares of Class D Stock held by a Farmer or Farmco (i.e., that such shares may only be transferred with the prior written consent of the Applicant) will continue to apply -- it being understood that the exemptions contained in any order issued by the Commission would cease to be effective if such transfer restrictions are amended in any material respect without written notice to, and the consent of, the Commission; and

(e) the first trade of a GROWMARK Membership Interest of shares of Class D Stock issued in reliance upon the order will be deemed to be a distribution of such securities within the meaning of the Act.

This decision will come into effect on the date hereof and will supersede and replace the 2009 Order in its entirety, effective that date.

DATED at Toronto this 12th day of November, 2010.