Photochannel Networks Inc. - MRRS Decision
IN THE MATTER OF
THE SECURITIES LEGISLATION OF BRITISH COLUMBIA,
ALBERTA, SASKATCHEWAN, MANITOBA, ONTARIO,
QUEBEC, NEW BRUNSWICK, NOVA SCOTIA, NEWFOUNDLAND
AND PRINCE EDWARD ISLAND
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
PHOTOCHANNEL NETWORKS INC.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of BritishColumbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Newfoundland and PrinceEdward Island (the "Jurisdictions") has received an application from PhotoChannel Networks Inc. ("PhotoChannel") fora decision under the securities legislation of the Jurisdictions (the "Legislation") that:
1. the requirements contained in the Legislation to be registered to trade in a security and to file and obtain areceipt for a preliminary prospectus and a prospectus (the "Registration and Prospectus Requirements") do notapply to:
(a) the distribution of the Call Option (defined below) by the limited partners (the "Partners") ofPhotoChannel.Com Limited Partnership (the "Partnership") to PhotoChannel;
(b) the distribution of Exchanged Shares (defined below) as consideration or partial consideration for theacquisition of Units (defined below) of the Partnership on the exercise of the Call Option; or
(c) the distribution of Units by the Partners to PhotoChannel on the exercise of the Call Option byPhotoChannel;
(collectively, the "Non-Exempt Trades");
2. the take-over bid requirements in the Legislation (collectively the "Take-Over Bid Requirements") shall not applyto the acquisition of Units by PhotoChannel on the exercise of the Call Option; and
3. the first trade in Exchanged Shares acquired by the Partners on the exercise of the Call Option will be deemedto be a distribution or, where applicable, a primary distribution to the public under the Legislation of theJurisdiction where such first trade takes place (the "Applicable Legislation") unless:
(a) PhotoChannel is a reporting issuer or the equivalent under the Applicable Legislation and was areporting issuer or the equivalent under the Applicable Legislation at the time of the grant of the CallOption;
(b) either:
(i) at the date of the distribution of the Call Option, PhotoChannel (i) complies with BCInstrument 45-506 In the Matter of the System for Shorter Hold Periods with an AnnualInformation Form ("BCI 45-506") and, if the trade occurs in Alberta, Alberta Rule 45-501 System for Shorter Hold Period for Issuers Filing an AIF ("Rule 45-501"), except for thecondition requiring PhotoChannel to distribute a security of its own issue and, (ii) signscertificates as required under BCI 45-506 and, if the trade occurs in Alberta, Rule 45-501,including that PhotoChannel is a "qualifying issuer" as defined in BCI 45-506 and Rule 45-501 (if applicable), provided that such certificates need not state that the Call Option is asecurity of PhotoChannel's own issue; and a 4 month period has elapsed from the date ofthe grant of the Call Option by the Partners; or
(ii) 12 month period has elapsed from the date of the grant of the Call Option by the Partners
(c) if the seller of the securities is an insider or officer of PhotoChannel, the seller has no reasonablegrounds to believe that PhotoChannel is in default of any requirement of the Applicable Legislation;
(d) except in Québec, the first trade is not from the holdings of a person or company who holds asufficient number of the voting rights attached to all outstanding voting securities of the issuer to affectmaterially the control of the issuer or each person or company in a combination of persons orcompanies, acting in concert by virtue of an agreement, arrangement, commitment or understanding,which holds in total a sufficient number of the voting rights attached to all outstanding voting securitiesof an issuer to affect materially the control of the issuer, and, if a person or company or combinationof persons or companies holds more than 20% of the voting rights attached to all outstanding votingsecurities of the issuer, the person or company or combination of persons or companies is deemed,in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affectmaterially the control of the issuer;
(e) no unusual effort is made to prepare the market or create a demand for the Exchanged Shares; and
(f) no extraordinary commission or other consideration is paid in respect of the trade;
(collectively, the "First Trade Conditions");
AND WHEREAS under the Mutual Reliance Review System for Exemptive Relief Applications (the "System"),the Executive Director of the British Columbia Securities Commission is the principal regulator for this application;
AND WHEREAS PhotoChannel has represented to the Decision Makers that:
1. PhotoChannel is a corporation incorporated under the laws of British Columbia and is in the business ofproviding online photo print services;
2. the authorized capital of PhotoChannel consists of an unlimited number of common shares, of which28,773,537 common shares were issued and outstanding as at June 6, 2000;
3. PhotoChannel is a "reporting issuer" within the meaning of the Legislation in British Columbia, Ontario, andQuebec and is not in default of any of the reporting requirements under such Legislation;
4. the common shares of PhotoChannel are listed on the Montreal Exchange (the "ME");
5. the Partnership is a limited partnership created on January 31, 2000 under the laws of British Columbia andwas formed to carry on an online photo print service business at an Internet website and to develop,manufacture and distribute related customized USB Card Readers;
6. PhotoChannel Management Inc. (the "General Partner"), an indirect wholly-owned subsidiary of PhotoChannelincorporated on January 25, 2000 under the laws of British Columbia, is the general partner of the Partnership;
7. the General Partner will not engage in any business other than acting as a general partner of the Partnershipand the Board of Directors of the General Partner consists of five members, three appointed by PhotoChanneland two independents;
8. the Partnership is authorized to issue an unlimited number of limited partnership units ("Units"), of which oneunit is issued and outstanding;
9. each Unit represents an equal interest in the Partnership, and is transferable only with the approval of theGeneral Partner and in accordance with the Legislation;
10. the Partnership has been registered as a tax shelter investment under the Canada Income Tax Act and it isexpected that Partners will be able to realize certain income tax deductions as a result of operating lossesexpected to be incurred by the Partnership during the development of the Partnership's e-commerce business;
11. the Partnership is not, and has no current intention to become, a reporting issuer or the equivalent under theLegislation in any of the Jurisdictions;
12. the Partnership intends to offer a maximum of 2,500,000 and a minimum of 750,000 Units (the "Offering") ata price of $10.00 per Unit under exemptions from the Registration and Prospectus Requirements in each of theJurisdictions, with the proceeds of the Offering to be used to develop and operate the Partnership's e-commerce business;
13. all subscribers for Units will purchase under the registration and prospectus exemptions contained in theLegislation applicable to purchases of securities with an aggregate acquisition cost of not less than $25,000in British Columbia and $97,000 (or $150,000) in the other Jurisdictions and, prior to the purchase of Units, willreceive an offering memorandum containing prospectus-level disclosure regarding the Partnership and itsbusiness;
14. prior to the distribution of any Units in a Jurisdiction, PhotoChannel will become a reporting issuer, or theequivalent, under the Legislation of such Jurisdiction;
15. in connection with each subscription agreement for Units and as confirmed under the partnership agreementestablishing the Partnership, each Partner will grant to PhotoChannel an option (the "Call Option") to purchaseall, but not less than all, of the Units;
16. PhotoChannel will have the right, but not the obligation, to exercise the Call Option at any time during the periodcommencing on February 28, 2001 and ending April 30, 2001 (the "First Call Period") or during the periodcommencing on January 1, 2002 and ending February 28, 2002 (the "Second Call Period"); in the eventPhotoChannel undergoes a "change of control" prior to the commencement of the First Call Period or after theexpiry of the First Call Period but prior to the commencement of the Second Call Period, PhotoChannel mayexercise the Call Option during the period commencing on the occurrence of such change of control and ending45 days thereafter (an "Accelerated Call Period");
17. the purchase price payable for the Units on the exercise of the Call Option by PhotoChannel will be as follows:
(a) if the Call Option is exercised during the First Call Period, that number of freely-tradable commonshares of PhotoChannel (the "Exchanged Shares") determined by dividing $10.00 by the "currentmarket price" of PhotoChannel's common shares, with "current market price" being calculated as 95%of the weighted average trading price of PhotoChannel's common shares on the ME for the 20consecutive trading days ending five trading days before the date fixed for completion under the CallOption, subject to certain deemed maximum and minimum values;
(b) if the Call Option is exercised during the Second Call Period, the Exchanged Shares as calculated inclause 17(a) together with a call payment per Unit of the greater of (i) $20.00 per Unit and (ii) eighttimes the earnings before interest, taxes, depreciation and amortization for the Partnership for the 12month period ending December 31, 2001 divided by the number of Units then outstanding, less$10.00; and
(c) if the Call Option is exercised during an Accelerated Call Period that occurs (i) prior to thecommencement of the First Call Period, $12.50 per Unit, or (ii) after the expiry of the First Call Periodbut before the commencement of the Second Call Period, $20.00 per Unit;
18. until the Call Options are exercised or expire, PhotoChannel will send each Partner all disclosure materialfurnished to holders of PhotoChannel common shares, including but not limited to, copies of its annual report,interim financial statements and all proxy solicitation materials;
19. the registration and prospectus exemptions contained in the Legislation relating to trades in securities issuedby "private issuers" or "private companies" cannot be relied on in relation to the grant of the Call Options by thePartners to PhotoChannel because in order to rely on such exemptions PhotoChannel would be required toundertake a significant review of the business and affairs of each subscriber for Units sufficient to satisfy itselfthat such subscriber in fact meets the definition of "private issuer" or "private company" under the Legislation;
20. the registration and prospectus exemptions contained in the Legislation relating to the issuance of securitieson the exercise of a right to purchase or otherwise acquire securities in accordance with the terms andconditions of a previously issued security of the issuer are not available for the issuance of the ExchangedShares to the Partners on the exercise of the Call Option because none of the Units or the Call Option aresecurities of PhotoChannel's own issue;
21. if the Partnership is not a reporting issuer or the equivalent under the Legislation and has not been a reportingissuer or the equivalent for the 12 months preceding the trade of the Units, the trade by the Partners of the Unitsto PhotoChannel on the exercise of the Call Option will be a distribution under the Legislation; and
22. in the event that PhotoChannel exercises the Call Option and offers to acquire at least 20% of the outstandingUnits or where the number of Units to be acquired by PhotoChannel on the exercise of the Call Option whencombined with the number of Units then held by PhotoChannel would represent at least 20% of the outstandingUnits, such exercise of the Call Option would constitute a take-over bid for the Units for the purposes of theLegislation requiring compliance with the Take-Over Bid Requirements;
AND WHEREAS under the System this MRRS Decision Document evidences the decision of each DecisionMaker (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 under the Legislation is that:
1. the Registration and Prospectus Requirements do not apply to the Non-Exempt Trades provided that, prior tothe distribution of any Units in a Jurisdiction, PhotoChannel is a reporting issuer, or the equivalent, under theLegislation of such Jurisdiction;
2. the Take-Over Bid Requirements do not apply to the acquisition of Units by PhotoChannel on the exercise ofthe Call Option; and
3. the first trade in Exchanged Shares acquired by the Partners on the exercise of the Call Option will be deemedto be a distribution or, where applicable, a primary distribution to the public under the Applicable Legislation,unless the First Trade Conditions are satisfied;
PROVIDED THAT until the Call Options are exercised or expire, PhotoChannel will send to each Partner alldisclosure material furnished to holders of PhotoChannel common shares, including but not limited to, copies of itsannual report, interim financial statements and all proxy solicitation materials.
January 24, 2001.
"Brenda Leong"