International Forest Products Ltd. & Primex Forest Products Ltd. - MRRS Decision

MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications - Employment agreements to be entered into betweenofferor and key executives of the offeree who are also selling securityholders of the offeree - Covenant granted by offerorin favour of the key executives relating to their appointment or election as directors of offeror - Agreement by seniorofficer of offeror to vote in favour of the election of the key executives as directors of the offeror - Decision made thatagreements being entered into for reasons other than to increase the value of the consideration paid to the sellingsecurityholders for their shares and that such agreements may be entered into notwithstanding the prohibition oncollateral benefits.

Applicable Statutory Provisions

Securities Act, R.S.O. 1990, c. S.5, as amended, ss. 97 and 104(2)(a).

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,

ONTARIO, QUÉBEC, NOVA SCOTIA AND NEWFOUNDLAND

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM FOR

EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

INTERNATIONAL FOREST PRODUCTS LIMITED AND

PRIMEX FOREST PRODUCTS LIMITED

WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of BritishColumbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Newfoundland (the "Jurisdictions") hasreceived an application (the "Application") from International Forest Products Limited ("Interfor") for a decision under thesecurities legislation of the Jurisdictions (the "Legislation") that, in connection with the offer (the "Offer") made by Interforto acquire all of the issued and outstanding common shares (the "Primex Shares") of Primex Forest Products Limited("Primex") not owned by Interfor or its affiliates, the following agreements are being made for reasons other than toincrease the value of the consideration that may be paid to George L. Malpass ("Malpass"), John P. Sullivan ("Sullivan"and, collectively with Malpass, the "Key Executives") for the Primex Shares they hold and may be entered into despitethe prohibition in the Legislation that prohibits an offeror who makes or intends to make a take-over bid or issuer bid andany person acting jointly or in concert with the offeror from entering into any agreement, commitment or understandingwith any holder or beneficial owner of securities of the offeree issuer that has the effect of providing to the holder orowner a consideration of greater value than that offered to other holders of the same class of securities (the "Prohibitionon Collateral Benefits"):

(i) certain employment agreements to be entered into with the Key Executives (collectively, the "InterforEmployment Agreements");

(ii) the covenant by Interfor in favour of the Key Executives relating to their appointment or election asdirectors of Interfor (the "Interfor Covenant"); and

(iii) an agreement by William L. Sauder ("Sauder") and Mountclair Investment Corporation ("Mountclair")to vote in favour of the election of the Key Executives as directors of Interfor (the "MountclairAgreement" and, collectively with the Interfor Employment Agreements and the Interfor Covenant, the"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 the Application;

AND WHEREAS Interfor has represented to the Decision Makers as follows:

1. Interfor is governed by the Company Act (British Columbia) (the "BCCA"), is a reporting issuer or the equivalentin each of the Jurisdictions and is not in default of any requirement of the Legislation in the Jurisdictions. Itshead office is located in Vancouver, British Columbia.

2. Interfor is engaged in the business of logging and sawmilling and is a producer of wood products.

3. Interfor's authorized capital consists of 100,000,000 Class "A" Subordinate Voting Shares without par value (the"Interfor SVS"), 1,700,000 Class "B" Common Shares (the "Interfor MVS" and, collectively with the Interfor SVS,the "Interfor Shares") and 5,000,000 Preference Shares. The holders of the Interfor SVS have the exclusiveright to elect one director of Interfor and the holders of the Interfor MVS have the exclusive right to elect all theremaining directors of Interfor.

4. As at December 31, 2000, there were 31,066,262 Interfor SVS and 1,015,779 Interfor MVS issued andoutstanding. The Interfor SVS are listed and posted for trading on The Toronto Stock Exchange (the "TSE").

5. Primex is governed by the BCCA and is a reporting issuer in each of British Columbia and Ontario. Its headoffice is located in Delta, British Columbia.

6. Primex is engaged in the business of sawmilling and is a producer of wood products.

7. As of March 12, 2001, there were 16,439,028 Primex Shares issued and outstanding. The Primex Shares arelisted and posted for trading on the TSE.

8. As of March 30, 2001, Interfor and its associates beneficially owned, directly or indirectly, or exercised controlor direction over, 319,000 Primex Shares representing approximately 1.94% of the class.

9. Malpass is the Chief Executive Officer of Primex and Chairman of its board of directors (the "Primex Board").As of March 30, 2001, he beneficially owned, directly or indirectly, or exercised control or direction over,2,549,920 Primex Shares and options to acquire 200,000 Primex Shares (each, a "Primex Option")representing, in the aggregate, approximately 16.5% of the class (after giving effect to the exercise of PrimexOptions held by him).

10. Sullivan is the Vice President, Corporate Development, and a director of Primex. As of March 30, 2001, hebeneficially owned, directly or indirectly, or exercised control or direction over, 1,027,280 Primex Shares and120,000 Primex Options representing, in the aggregate, approximately 6.92% of the class (after giving effectto the exercise of Primex Options held by him).

11. In February 2001, Interfor contacted Primex to hold informal discussions about the merits of a merger orstrategic combination. On February 28, 2001, Primex entered into severance agreements (the "PrimexSeverance Agreements") with each of its senior officers, including the Key Executives. The Primex SeveranceAgreements provide, among other things, that if the officer's employment with Primex is terminated by Primexwithin 12 months after a change of control of Primex or by the officer within 12 months after a change of controlof Primex following the occurrence of a "Triggering Event" within such 12 month period, Primex will pay to theofficer an amount equal to the "Severance Factor" times the greater of:

(a) the monthly salary of the officer at the termination date; and

(b) one-twelfth of the aggregate of: (i) the salary of the officer for the last full fiscal year of Primex priorto the termination date; and (ii) an amount equal to one-third of the aggregate bonus payments paidor payable to the officer for the last three full fiscal years of Primex prior to the termination date.

The term "Severance Factor" means, in effect, with respect to any officer, the lesser of: (x) 24, if the officer hasbeen employed by Primex for fewer than 25 years, or the number of full years during which the officer has beenemployed by Primex if the officer has been employed by Primex for 25 years or more; and (y) the number ofmonths from the termination date until the officer attains the age of 65 years. A "Triggering Event" with respectto an officer means, in general terms, any acts, omissions or circumstances that would amount to constructivedismissal of the officer.

12. On March 30, 2001, Interfor made the Offer. Pursuant to the Offer, any holder of Primex Shares (a "PrimexShareholder") who accepts the Offer will receive, at the Primex Shareholder's election, for each Primex Sharevalidly tendered under the Offer, either $6.65 in cash (the "Cash Alternative"), 1.5647 Interfor SVS (the "ShareAlternative") or any combination of cash and Interfor SVS such that the total consideration to be received foreach Primex Share is $6.65, valuing each Interfor SVS at $4.25 (the "Split Alternative"), except that:

(a) the maximum number of Interfor SVS to be issued under the Offer is limited to 15% of the totalconsideration to be paid by Interfor under the Offer; and

(b) Primex Shareholders who are U.S. residents and who accept the Offer will be deemed to have electedthe Cash Alternative.

13. On March 28, 2001, Interfor entered into a support agreement (the "Support Agreement") with Primex. Pursuantto the Support Agreement, Primex represented, among other things, that:

(a) the Primex Board had determined that the Offer is fair to the Primex Shareholders and is in the bestinterests of Primex; and

(b) the Primex Shareholders and the Primex Board would recommend that the Primex Shareholdersaccept the Offer.

14. Under the Support Agreement:

(a) Primex agreed to use its best efforts to facilitate all persons holding Primex Options (collectively, the"Optionholders") to exercise the "Surrender Right", as that term is defined in Primex's stock option plan(the "Primex Stock Option Plan"), and surrender to Primex all of their Primex Options, at or prior toexpiry time of the Offer, conditional upon Interfor being bound to take up and pay for Primex Sharesunder the Offer;

(b) Primex agreed to pay the "Cash Surrender Amount" payable under the Primex Stock Option Plan inrespect of all Primex Options so surrendered, which Cash Surrender Amount equals the differencebetween the exercise price of a Primex Option and the market price of the Primex Shares on the TSE;

(c) Interfor agreed to permit Primex to seek the TSE's consent to amend the Primex Stock Option Planso that the Optionholders exercising the Surrender Right could receive cash from Primex equal to thedifference between the exercise price of a Primex Option and the value of the Cash Alternative; and

(d) Interfor agreed that, if the TSE's consent was not received, Primex could pay to each Optionholderan amount per Primex Option equal to the difference between the cash payable to such Optionholderpursuant to the Surrender Right and the cash amount that would have been received if the PrimexStock Option Plan had been amended as described above.

15. On the same date, Interfor entered into lock-up agreements (collectively, the "Lock-up Agreements") with eachof the Key Executives, among others (collectively, the "Locked-up Shareholders"). Pursuant to the Lock-upAgreements, the Locked-up Shareholders agreed, among other things, to tender or cause to be tendered tothe Offer and, except in certain circumstances, not withdraw, an aggregate of 4,555,280 Primex Sharesrepresenting approximately 28% of the class.

16. In addition, pursuant to the Lock-up Agreements, each of the Key Executives agreed to:

(a) enter into an Interfor Employment Agreement, conditional upon and effective from the date Interfortakes up and pays for the Primex Shares tendered to the Offer by him;

(b) exercise the Surrender Right and surrender all of his Primex Options to Primex for cash considerationper Primex Option as contemplated by the Primex Stock Option Plan and the Support Agreement,subject to the condition that such surrender would take effect only upon Interfor becoming bound totake up and pay for Primex Shares tendered under the Offer; and

(c) elect or cause to be elected the Share Alternative or the Split Alternative in respect of some or all ofthe Primex Shares beneficially owned or controlled by him, directly or indirectly, such that a minimumof 15% of the total consideration elected to be received by him under the Offer shall be in the form ofInterfor SVS.

17. Interfor has been advised that all Primex Options have been unconditionally surrendered to Primex for cashconsideration as provided for in the Primex Stock Option Plan, which has not been amended, and that noadditional cash payment, as contemplated by the Support Agreement, will be made to Optionholders in respectof their Primex Options.

18. The principal terms of the existing, unwritten employment arrangements between Primex and each of the KeyExecutives are as follows:

(a) Malpass is employed as the President and Chief Executive Officer of Primex and Sullivan is employedas the Vice President, Corporate Development, of Primex. Each Key Executive is a director of Primexand Malpass ordinarily acts as Chair of the Primex Board.

(b) Malpass' current, annualized salary is $199,440 and Sullivan's current, annualized salary is $125,940.

(c) The Key Executives, together with ten other senior officers and managers of Primex, participate in abonus plan (the "Primex Bonus Plan"), which provides for the payment to such participants of aperformance bonus having an aggregate value of up to 5% of Primex's annual cash profit. The exactamount of the performance bonus is determined by the Primex Board's compensation committee, theamount of the bonus pool is accrued monthly and the payout, if any, to each participant in the bonuspool is determined at the end of the year based on a variety of criteria, including corporate, divisionaland individual performance.

(d) Each of the Key Executives is entitled to participate in the Primex Stock Option Plan. No PrimexOptions were granted to any executive officers of Primex within the two fiscal years of Primexpreceding the Offer.

(e) Each of the Key Executives receives certain other benefits, including the right to participate in Primex'sdefined contribution pension plan, vacation time, extended medical and dental coverage, short andlong term disability insurance, group life insurance, a business expense account and relatedprivileges.

(f) There are no provisions or covenants relating to non-competition or non-solicitation.

(g) Since the Key Executives are employees and officers of Primex, neither is entitled to receive directors'fees in respect of his service as a director of Primex.

19. In 2000, Malpass received an annual salary of $188,270, a performance bonus of $180,000 and other annualcompensation of $40,170 and Sullivan received an annual salary of $124,505, a performance bonus of$120,000 and other annual compensation of $21,417.

20. The principal terms of the Interfor Employment Agreements will be as follows:

(a) Each Interfor Employment Agreement will be for an initial term of two years and may be extendedupon mutual consent.

(b) Malpass will be employed as Vice-Chairman of Interfor's board of directors (the "Interfor Board") withthe understanding that he will be acting as a senior executive and officer of Interfor. Sullivan will beemployed as a Vice-President of Interfor. Unless prevented by ill health or injury, each Key Executivewill devote the whole of his working time to Interfor's business.

(c) Each Key Executive will be entitled to receive an annual base salary equal to that paid by Primex tothe Key Executive as at March 28, 2001.

(d) Each Key Executive will receive an annual bonus equal to the greater of the bonus he would havebeen entitled to receive under the Primex Bonus Plan (using the policies in place as at March 28,2001) for that year had the Key Executive been employed by Primex and the bonus an executive ofcommensurate status and position at Interfor would receive in that year.

(e) Each Key Executive will be entitled to receive the same benefits he received at Primex.

(f) Each Key Executive will receive the same annual directors' fee payable to directors of Interfor who arealso employees. In 2000, each Interfor director who was an employee of Interfor received a director'sfee of $6,000.

(g) Malpass will receive options to purchase 150,000 Interfor SVS (each, an "Interfor Option") and Sullivanwill receive 100,000 Interfor Options. The Interfor Options to be granted pursuant to the InterforEmployment Agreements will be subject to the standard terms of Interfor's stock option plan (the"Interfor Stock Option Plan"), with 40% of the Interfor Options vesting on the date that is two yearsfrom the date of grant and an additional 20% of the Interfor Options vesting at the end of each yearthereafter until all of the Interfor Options have vested. The exercise price for the Interfor Optionsgranted to the Key Executives will be equal to the closing price of the Interfor SVS on the TSE on theday prior to the date of grant. The number of Interfor Options granted to each Key Executive isconsistent with the aggregate number of Interfor Options held by Interfor executives with similar statusand responsibilities.

(h) Interfor will acknowledge that the Primex Severance Agreement between Primex and each KeyExecutive shall remain in full force and effect and that Interfor's acquisition of a majority of the PrimexShares constitutes a "Change of Control" within the meaning of such Primex Severance Agreements.Each Key Executive will acknowledge that none of the execution of the Interfor EmploymentAgreement, the change of his employer from Primex to Interfor or the implementation of Schedule Ato the Interfor Employment Agreement (specifying, among other things, the Key Executive's salary,bonus entitlement, benefits and vacation entitlement) constitutes, in and of itself, a "Triggering Event"under his Primex Severance Agreement. As provided for in the Primex Severance Agreement witheach Key Executive, if Interfor terminates a Key Executive's employment within twelve months of theeffective date of his Interfor Employment Agreement or the Key Executive terminates his employmentwithin twelve months of the effective date of his Interfor Employment Agreement following theoccurrence of a Triggering Event, the Key Executive will be entitled to all payments and arrangementsprovided for in his Primex Severance Agreement.

(i) The Interfor Employment Agreements also will provide that each Key Executive is entitled toparticipate in Interfor's change of control arrangements (the "Interfor Change of ControlArrangements"). The Interfor Change of Control Arrangements as they apply to the Key Executivesprovide that, if within 24 months after a change of control with respect to Interfor, the Key Executive'semployment is terminated without cause, such Key Executive will be entitled to compensation equalto his salary plus a profit-sharing bonus for a stipulated period not to exceed 36 months. Otheremployee benefits would be continued during this period.

(j) In addition, if Interfor terminates the Key Executive's employment any time after twelve months haveexpired from the date the Interfor Employment Agreement takes effect but prior to the expiry of itsterm, Interfor will pay the Key Executive a lump sum equal to the total compensation payable to himfor the remainder of the term of such Interfor Employment Agreement and continue all benefits,perquisites and privileges referred to in such agreement for the remainder of its term.

(k) Without Interfor's prior consent, which shall not be unreasonably withheld, neither Key Executive willengage in any other business or become an officer, employee, agent, representative or contractor forservice for any other enterprise where that engagement or position conflicts or interferes, or couldreasonably conflict or interfere at some future date, with such Key Executive's performance of hisobligations to Interfor, except that Malpass may continue as a director of the public corporation ofwhich he is presently a director.

(l) Each Key Executive will enter into a non-solicitation covenant with respect to Interfor's customers,accounts and employees, which covenant shall apply during the term of the Key Executive's InterforEmployment Agreement and for a period of twelve months after its termination.

21. Pursuant to the Interfor Covenant, which is included in the Lock-up Agreements, Interfor covenanted, subjectto certain conditions, to exercise its best efforts to cause each of the Key Executives to be elected or appointedas directors of Interfor and, thereafter, to nominate each of the Key Executives for election or appointment tothe Interfor Board at each election for or appointment of directors of Interfor until, considering each KeyExecutive separately, the earliest of the date:

(a) that is five years from the date of the Lock-up Agreements;

(b) on which the Key Executive owns less than 50% of the Interfor SVS he acquired pursuant to the Offer;and

(c) that the Interfor Board, acting reasonably, determines that the Key Executive is acting in any capacitythat is competitive with the business then conducted by Interfor.

22. Sauder is the Chairman of the Interfor Board and owns, directly or indirectly, or exercises control or directionover, 1,124,271 Interfor SVS (representing approximately 3.62% of the class) and and 1,011,735 Interfor MVS(representing approximately 99.6% of the class). Some of the Interfor Shares that Sauder owns directly orindirectly or exercises control or direction over are registered in the name of Mountclair. On March 28, 2001,Sauder and Mountclair executed the Mountclair Agreement pursuant to which they committed, subject to certainrestrictions, to vote their Interfor Shares in favour of any election or appointment of either of the Key Executivesto the Interfor Board until, considering each Key Executive separately, the earliest of the date:

(a) that is five years from the date of the Lock-up Agreements;

(b) on which the Key Executive owns less than 50% of the Interfor SVS he acquired pursuant to the Offer;and

(c) that the Interfor Board, acting reasonably, determines that the Key Executive is acting in any capacitythat is competitive with the business then conducted by Interfor.

23. Interfor's ability to retain the Key Executives was critical to its decision to make the Offer. Interfor believes thatthe Key Executives have played an integral role in the successful development of Primex's business and thatthey have substantial and valuable experience and expertise in the business of sawmilling and wood products.The Agreements were negotiated in order to ensure the Key Executives' participation in the development ofInterfor and the integration of Primex with Interfor.

24. The Interfor Employment Agreements and the Interfor Covenant were negotiated between Interfor and the KeyExecutives on an arm's-length basis and reflect commercially reasonable terms. The consideration and otherbenefits to be received by the Key Executives under the Agreements are reasonable in light of the services tobe rendered by the Key Executives to Interfor following completion of the Offer.

25. A special committee of independent directors of Primex (the "Special Commitee") established to, among otherthings, make recommendations to the Primex Board regarding the Offer, reviewed and considered, among otherthings: (i) Interfor's requirement that the Key Executives enter into employment agreements with Interfor; (ii)the Agreements; and (iii) the advantages and disadvantages to Shareholders, other than the Locked-upShareholders, of accepting the Offer. The Special Committee concluded that the Offer is fair to theShareholders and in the best interests of Primex and the Shareholders and recommended to the Primex Boardthat the Primex Board recommend acceptance of the Offer.

26. The Agreements have been or are being entered into for valid business reasons unrelated to the KeyExecutives' ownership of Primex Shares and not for the purpose of providing the Key Executives with greaterconsideration for their Primex Shares than the consideration that may be received by Primex Shareholdersother than the Key Executives in connection with the Offer.

AND WHEREAS pursuant to the System this MRRS Decision Document evidences the decision of eachDecision Maker (collectively, 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;

THE DECISION of the Decision Makers in the Jurisdictions under the Legislation, is that, in connection with theOffer, the Agreements are being entered into for reasons other than to increase the value of the consideration paid tothe Key Executives in respect of their Primex Shares and may be entered into notwithstanding the Prohibition onCollateral Benefits.

April 30, 2001.

"Paul M. Moore" "R. Stephen Paddon"