Russel Metals Inc. et al. - MRRS Decision

Headnote

Mutual Reliance Review System for ExemptiveRelief Applications -- take-over bid offers and collateral benefits-- offerors entering into a non-competition agreement with theprincipal shareholder of the offeree issuer -- non-competitionagreement negotiated at arm's length and on terms that are commerciallyreasonable and consistent with industry practice -- offers wouldnot have been made if the non-competition agreement had notbeen entered into -- non-competition agreement entered intofor reasons other than to increase the value of the considerationpaid to the principal shareholder for his shares -- non-competitionagreement may be entered into notwithstanding the prohibitionon collateral benefits.

Applicable Statutory Provisions

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

IN THE MATTER OF

THE SECURITIES LEGISLATIONOF

BRITISH COLUMBIA, ALBERTA,SASKATCHEWAN, MANITOBA, ONTARIO, QUÉBEC,

NOVA SCOTIA, AND NEWFOUNDLANDAND LABRADOR

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEWSYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

RUSSEL METALS INC.

AND

RUSSEL ACQUISITION INC.

AND

ACIER LEROUX INC./LEROUX STEELINC.

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") in eachof British Columbia, Alberta, Saskatchewan, Manitoba, Ontario,Québec, Nova Scotia, and Newfoundland and Labrador (the"Jurisdictions") has received an application fromRussel Metals Inc. ("Russel"), for a decision pursuantto securities legislation of the Jurisdictions (the "Legislation"),in connection with a take-over bid (the "Offers")dated May 15, 2003 made by Russel and/or its wholly-owned subsidiary,Russel Acquisition Inc. ("RAI", and collectively withRussel, the "Offerors") to acquire all of the issuedand outstanding shares (the "Shares") and debentures(the "Debentures", and collectively with the Shares,the "Securities") of Acier Leroux Inc./Leroux SteelInc. ("Leroux Steel"), that the non-competition agreementand related letter agreement (the "Non-Competition Agreement")which the Offerors have entered into with Gilles Leroux ("Leroux"),Chairman of the Board, President, Chief Executive Officer andprincipal shareholder of Leroux Steel, is made for reasons otherthan to increase the value of the consideration paid to Lerouxfor his Securities and that the Non-Competition Agreement maybe entered into despite the Legislation;

AND WHEREAS under the Mutual RelianceReview System for Exemptive Relief Applications (the "System"),the Ontario Securities Commission is the principal regulatorfor this application;

AND WHEREAS, unless otherwise defined,the terms herein have the meaning set out in National Instrument14-101 or in Quebec Commission Notice 14-101;

AND WHEREAS the Offerors having representedto the Decision Maker that:

1. Russel is a corporation existing underthe laws of Canada. Russel is a reporting issuer or the equivalentin each of the Jurisdictions and its common shares are listedand posted for trading on The Toronto Stock Exchange (the"TSX").

2. RAI is a wholly-owned subsidiary of Russelexisting under the Companies Act (Québec).

3. Leroux Steel is a corporation existingunder the Companies Act (Québec).

4. The authorized capital of Leroux Steelconsists of an unlimited number of Class A multiple votingshares (the "Class A Shares"), an unlimited numberof Class B subordinate voting shares (the "Class B Shares")and an unlimited number of preferred shares. As at May 20,2003, there were 3,550,567 Class A Shares, 6,918,446 ClassB Shares and no preferred shares issued and outstanding. Eachof the issued and outstanding Class A Shares carries 10 voteswhereas each issued and outstanding Class B Share carriesone vote. The Class A Shares and the Class B Shares have thesame rights in every other respect. The Class A Shares andClass B Shares are listed on the TSX under the symbols LER.Aand LER.B, respectively.

5. On July 21, 1994, Leroux Steel issued 8%unsecured subordinated debentures with a par value of $8,158,000convertible into Class B Shares at a price of $7.00 per shareand maturing on August 4, 2004 (the "8% Debentures").On May 16, 1996, Leroux Steel issued an aggregate amount of$19,000,000 in 7.25% unsecured subordinated debentures convertibleinto Class B Shares at a price of $7.75 per share and maturingon May 29, 2006 (the "7.25% Debentures"). As atMay 20, 2003, there was $7,658,800 aggregate principal amountof 8% Debentures and $11,184,500 aggregate principal amountof 7.25% Debentures outstanding. The 8% Debentures and the7.25% Debentures are listed on the TSX under the symbols LER.DBand LER.DB.A, respectively.

6. In addition, as at May 20, 2003, therewere outstanding stock options (the "Stock Options")granted under the stock option plan of Leroux Steel providingfor the issuance of 369,000 Class B Shares upon the exercisethereof.

7. Leroux is the Chairman of the Board, Presidentand Chief Executive Officer of Leroux Steel.

8. Leroux holds, directly and indirectly,or exercises control or direction over 2,547,895 Class A Shares,8,100 Class B Shares, exercisable Stock Options to acquirean additional 131,000 Class B Shares and $5,500 aggregateprincipal amount of 8% Debentures. The aggregate 2,686,995Shares held by Leroux on a partially-diluted basis (aftergiving effect to the exercise of Stock Options but not tothe conversion of any Debentures) represent approximately24.8% of the outstanding Shares and carry approximately 59.9%of the votes attached to all outstanding Shares, in each caseon a partially-diluted basis (calculated in the same manner).

9. The Offerors made the Offers to acquireall of the issued and outstanding Securities, including anyClass B Shares issuable on the exercise of Stock Options oron the conversion of Debentures.

10. In the case of the Shares, the Offersare made on the basis of, at the option of each holder, (A)$6.30 cash, (B) $4.60 cash and one-third of one common sharein the capital of Russel (a "Russel Share") or (C)1.2353 Russel Shares for each Class A Share or Class B Share;provided, however, that Russel shall not be required to issuemore than 3,612,672 Russel Shares in the aggregate to allholders of Class A Shares and Class B Shares.

11. In the case of the Debentures, the purchaseprice payable under the Offers is a cash amount equal to theprincipal amount thereof plus accrued and unpaid interest.

12. The offer to acquire the Class A Sharesis subject to the following conditions, among others: (i)there shall have been validly deposited under the relevantOffers and not withdrawn as at the expiry time of the Offers:(A) such number of Class A Shares as represents at least two-thirdof the Class A Shares outstanding; and (B) such number ofClass B Shares as represents at least two-third of the ClassB Shares outstanding on a partially-diluted basis; and (ii)there shall have been validly deposited under the relevantOffers and not withdrawn as at the expiry time of the Offersfor the 8% Debentures and the 7.25% Debentures: (A) such aggregateprincipal amount of 8% Debentures as represents at least two-thirdof the aggregate principal amount of 8% Debentures outstanding;and (B) such aggregate principal amount of 7.25% Debenturesas represents at least two-third of the aggregate principalamount of 7.25% Debentures outstanding.

13. The offer to acquire the Debentures issubject to there having been validly deposited under the relevantOffers and not withdrawn as at the expiry time of the Offers:(i) such number of Class A Shares as represents at least two-thirdof the Class A Shares outstanding; (ii) such number of ClassB Shares as represents at least two-third of the Class B Sharesoutstanding on a partially-diluted basis; (iii) such aggregateprincipal amount of 8% Debentures as represents at least two-thirdof the aggregate principal amount of 8% Debentures outstanding;and (iv) such aggregate principal amount of 7.25% Debenturesas represents at least two-third of the aggregate principalamount of 7.25% Debentures outstanding.

14. The Offerors have entered into an agreementwith Leroux and certain corporations controlled by him (the"Leroux Holding Companies") pursuant to which Lerouxand the Leroux Holding Companies have agreed to tender tothe Offers 2,547,895 Class A Shares, 139,100 Class B Shares(including the Class B Shares issuable upon the exercise ofStock Options) (representing approximately 24.8% of the Sharesoutstanding) and $5,500 aggregate principal amount of 8% Debentures.

15. The Offers provides that beneficial ownersof Shares may tender to the Offers, in lieu of Shares, allof the outstanding shares of a corporation incorporated onor after October 1, 1999 that is the registered and beneficialowner of Shares and that satisfies certain other conditions.

16. Leroux is party to an employment agreement(the "Existing Employment Agreement") with LerouxSteel dated December 12, 2002 pursuant to which Leroux isentitled to receive, among other things, a base salary of$450,000 per year, an annual bonus equal to 2% of the annualconsolidated profits of Leroux Steel and certain additionaland customary benefits.

17. The Existing Employment Agreement providesthat in the event of a Change of Control of Leroux Steel (asdefined in the Existing Employment Agreement), Leroux shallbe entitled to receive the equivalent of three times his annualsalary (the "Change of Control Payment"), payableon the Change of Control, in one lump sum, for a one-timeChange of Control Payment of $1,350,000. The completion ofthe Offers will constitute a Change of Control for purposesof the Existing Employment Agreement.

18. Russel has been advised that the ExistingEmployment Agreement was approved by the Corporate GovernanceCommittee of Leroux Steel at a meeting held on December 12,2002. According to the Management Proxy Circular of LerouxSteel dated March 18, 2003, the Corporate Governance Committeeis comprised solely of "unrelated" directors withinthe meaning of the Corporate Governance Guidelines adoptedby the TSX.

19. The Offerors have entered into the Non-CompetitionAgreement with Leroux. The Non-Competition Agreement providesthat:

(a) subject to certain exceptions, Lerouxshall not deal in the business of procurement, warehousing,processing or distribution of steel or steel products inCanada or the United States for a period of three yearsfrom the first date on which the Offerors take up and payfor Shares or Debentures tendered under the Offers;

(b) conditional upon:

(i) the Existing Employment Agreementhaving been terminated without payment of any amount (includingthe Change of Control Payment) as a result of or in connectionwith (A) the termination of such agreement, (B) the terminationof Leroux's employment by Leroux Steel or any of its affiliatesor (C) the termination of Leroux's position as a directorand officer of Leroux Steel or any of its affiliates;and

(ii) Leroux having unconditionally andirrevocably released Leroux Steel and each of its affiliatesfrom all liabilities or obligations of any nature whatsoeverthey may have in connection with (A) the Existing EmploymentAgreement, (B) the termination of such agreement, (C)the termination of Leroux's employment by Leroux Steelor any of its affiliates or (D) the termination of Leroux'sposition as a director and officer of Leroux Steel orany of its affiliates and from all manner of action, causesof action, claims or demands whatsoever which Leroux mayhave in connection therewith,

then on each of (x) the business day nextfollowing the date on which the Offerors take up and payfor Shares under the Offers and (y) each monthly anniversarythereof ending on the thirty-fifth such anniversary, Russelshall pay or shall cause one of its affiliates (which mayinclude Leroux Steel) to pay to Leroux by cheque in immediatelyavailable funds the amount of $37,500 (the "Non-CompetitionPayments") for an aggregate amount of $1,350,000 overthe term of such agreement; and

(c) in the event of a breach by Leroux ofhis non-competition or non-solicitation covenants, he shallcease to be entitled to any further Non-Competition Paymentsfrom and after the date of such breach.

20. The Non-Competition Agreement, includingthe structuring of the Non-Competition Payments, has beennegotiated at arm's length and is on terms that are commerciallyreasonable and consistent with industry standards. The Non-CompetitionPayments are intended to provide an incentive for Leroux tocomply with the Non-Competition Agreement.

21. The Offerors would not have agreed tomake the Offers if Leroux had not entered into the Non-CompetitionAgreement.

22. The Non-Competition Agreement has beenentered into for valid business reasons unrelated to Leroux'sholdings of Securities and not for the purpose of Russel orthe Offeror conferring an economic or collateral benefit onLeroux that the other securityholders of Leroux Steel do notenjoy.

AND WHEREAS pursuant to the System, thisMRRS Decision Document evidences the decision of each DecisionMaker (collectively, the "Decision");

AND WHEREAS each of the Decision Makersis satisfied that the test contained in the Legislation thatprovides the Decision Maker with the jurisdiction to make theDecision has been met;

THE DECISION of the Decision Makers underthe Legislation is that, in connection with the Offers, theNon-Competition Agreement is being entered into for reasonsother than to increase the value of the consideration paid toLeroux for his Securities and the Non-Competition Agreementmay be entered into despite the Legislation.

June 11, 2003.