Sprott Asset Management LP and Sprott Physical Uranium Trust
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from National Instrument 81-102 Investment Funds and conflict provisions in section 111 of the Securities Act (Ontario) to permit the continuation of a corporate issuer that invests in physical uranium as a non-redeemable investment fund in connection with a plan of arrangement where the continuing fund will obtain exposure to physical uranium through the legacy entity and its subsidiaries -- relief subject to conditions -- relief also granted from NI 81-102 custodial provisions to permit the appointment of multiple custodians that are specialized in the storage of physical uranium -- relief subject to conditions.
Applicable Legislative Provisions
Securities Act, RSO 1990, c. S.5, ss. 111(2), 111(4), and 113.
National Instrument 81-102 Investment Funds, ss. 2.1(1.1), 2.2(1), 2.4(4), 2.4(5), 2.4(6), 6.1(1) and 6.2, 6.3 and 19.1.
July 12, 2021
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF SPROTT ASSET MANAGEMENT LP (the Filer) AND SPROTT PHYSICAL URANIUM TRUST (the Trust)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, in its capacity as the manager of the Trust, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") in connection with the proposed plan of arrangement (the "Arrangement") involving the Filer, the Trust, and Uranium Participation Corporation ("UPC"), pursuant to section 182 of the Business Corporations Act (Ontario) and in accordance with the terms of an arrangement agreement dated April 27, 2021 (the "Arrangement Agreement") for relief from the following provisions:
(a) in respect of National Instrument 81-102 Investment Funds ("NI 81-102"), that the Trust be exempt:
(i) from subsection 2.1(1.1) of NI 81-102 (the "Concentration Restriction") to permit the Trust to acquire and hold securities of the UPC Subsidiaries (as defined below) as a result of the Arrangement even though, immediately after the Arrangement, more than 20% of the net asset value ("NAV") of the Trust would be invested, directly or indirectly, in securities of each of the UPC Subsidiaries (the "Concentration Relief");
(ii) from subsection 2.2(1) of NI 81-102 (the "Control Restriction") to permit the Trust to acquire and hold securities of the UPC Subsidiaries as a result of the Arrangement such that, immediately after the Arrangement, the Trust would hold securities representing more than 10% of (i) the votes attaching to the outstanding voting securities of the UPC Subsidiaries; or (ii) the outstanding equity securities of the UPC Subsidiaries (the "Control Relief");
(iii) from subsections 2.4(4), (5) and (6) of NI 81-102 (the "Illiquid Assets Restrictions") to permit the Trust to acquire and hold securities of the UPC Subsidiaries as a result of the Arrangement even though, immediately after the Arrangement and for as long as the Trust owns the securities of the UPC Subsidiaries, more than 20% of the Trust's NAV would be made up of illiquid assets (the "Illiquid Assets Relief");
(iv) from subsection 6.1(1) and sections 6.2 and 6.3 of NI 81-102, to permit various companies that are each a licensed uranium conversion facility operated by a duly licensed operator in the case of U3O8, or a duly licensed uranium enrichment facility in the case of UF6 or any other reputable entity that is licensed and authorized to store uranium (any one, a "Facility", collectively "Facilities") as custodian(s) of the Trust to hold the Trust's physical uranium (the "Custodian Relief"); and
(b) in Ontario only, section 113 of the Securities Act (Ontario) (the "OSA"), that the Filer and the Trust be exempt (i) from the restriction in subsection 111(2) of the OSA that prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial securityholder; and (ii) from the restriction in subsection 111(4) of the OSA that prohibits an investment fund, its management company or its distribution company, from knowingly holding an investment described under (i) above (collectively, the "Related Issuer Relief")
(collectively, the "Exemptions Sought").
Under National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application (the "Principal Regulator"); and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, collectively, the "Canadian Jurisdictions").
Interpretation
Terms defined in the OSA, NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
In this decision, the "total net assets" of the Trust means the NAV of the Trust determined in accordance with Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106").
Representations
This decision is based on the following facts represented by the Filer and the Trust:
UPC and the Arrangement
1. UPC is a specialized investment holding company incorporated under the laws of the Province of Ontario which buys and holds almost entirely physical uranium oxide in concentrates (U3O8) and uranium hexafluoride (UF6) (together, "Uranium").
2. UPC is a publicly listed company on Toronto Stock Exchange ("TSX") and is a reporting issuer in each of the provinces of Canada.
3. On February 22, 2013, UPC was reclassified as a corporate issuer. Prior to that date, UPC was classified as a non-redeemable investment fund.
4. UPC currently has two wholly-owned subsidiaries: Uranium Participation Bermuda Limited ("UPBL") and Uranium Participation Bermuda 2 Limited ("UPBL2"). Collectively, UPC, UPBL, and UPBL2 and any of their successors are referred to as the "UPC Subsidiaries". The UPC Subsidiaries are not investment funds, are not or will not be otherwise public issuers and their securities are not or will not be traded on any public market or exchange.
5. UPC holds Uranium directly or indirectly through the UPC Subsidiaries. As of May 31, 2021, UPC held approximately 98% of its Uranium assets through UPBL and UPBL2. All Uranium, whether held directly by UPC, or indirectly by UPBL or UPBL2, is stored at one or more Facilities.
6. The UPC Subsidiaries do not, and will not, have other investors in addition to the Trust or another UPC Subsidiary, as applicable.
7. Holders of outstanding common shares of UPC ("Common Shares") approved the Arrangement at a special meeting held on July 7, 2021. A management information circular (the "Circular") describing the details of the Arrangement and providing prospectus-level disclosure with respect to the Trust was sent to holders of Common Shares on or about June 16, 2021 and posted to the System for Electronic Document Analysis and Retrieval.
8. As disclosed in the Circular, the board of directors of UPC (the "UPC Board") received an opinion of Cormark Securities Inc. (the "Fairness Opinion") to the effect that the consideration to be received by the holders of Common Shares (the "Shareholders") under the Arrangement is fair, from a financial point of view, to the Shareholders. Further, as disclosed on the Circular, the UPC Board unanimously determined, after receiving the Fairness Opinion and legal and financial advice, that the Arrangement is in the best interests of UPC and recommended that the Shareholders vote in favour of the resolution to approve the Arrangement.
9. Pursuant to the Arrangement, the Common Shares will be exchanged for units of beneficial interest of the Trust ("Units") on a 2-for-1 basis.
10. Immediately after the Arrangement is completed, the UPC Subsidiaries will become direct or indirect wholly-owned subsidiaries of the Trust. As a result of the Arrangement, the Trust will own 100% of the issued and outstanding voting securities of each of the UPC Subsidiaries. Absent the Control Relief, following completion of the Arrangement, the Trust would, as a result of the Control Restriction, be prohibited from maintaining the holdings in theUPC Subsidiaries, because it would hold, as a result of the Arrangement more than 10% of the voting securities of each UPC Subsidiary, as described above, and would not qualify for any of the exemptions contained in subsection 2.1(1.1) of NI 81-102.
11. As a result of the Arrangement, the Trust will become a direct or indirect, substantial securityholder of the UPC Subsidiaries. The Trust and the UPC Subsidiaries will be related issuers under applicable securities legislation by virtue of the Trust holding directly or indirectly all voting securities of the UPC Subsidiaries and of their common management by the Filer. In the absence of the Related Issuer Relief, the Trust will be precluded from effecting the Arrangement due to the Related Issuer Restriction. Since the UPC Subsidiaries are not investment funds subject to NI 81-102, they are unable to rely on the exemption codified for similar fund-on-fund investments under section 2.5 of NI 81-102.
12. The securities of the UPC Subsidiaries are not available for purchase or issuance and it is currently anticipated that no additional securities of the UPC Subsidiaries will be issued in the future, except for securities that will be issued to the Trust or another UPC Subsidiary.
13. The Filer does not and will not obtain any direct benefit from the continued existence of the UPC Subsidiaries, or from the continued investment by the Trust in their securities. Any value that may ultimately be realized through the UPC Subsidiaries shall be for the benefit of the Trust and the Trust's unitholders (the "Unitholders").
14. The Trust is currently unable to unwind the structure so as to divest itself of the securities of the UPC Subsidiaries held in excess of the limits prescribed in subsection 2.1(1.1) and paragraph 2.2(1)(a) of NI 81-102 in a commercially reasonable manner that would preserve the value of the UPC Subsidiaries' underlying assets. Winding up the UPC Subsidiaries would effectively impede the fulfilment of the Trust's investment objectives to the detriment of its Unitholders, as the Trust would be eliminating certain current commercial, contractual and tax objectives to the detriment of the Unitholders.
15. The UPC Subsidiaries are not in default of securities legislation in the Canadian Jurisdictions.
The Filer and the Trust
16. The Filer is a limited partnership formed and organized under the laws of the Province of Ontario and maintains its head office in Toronto, Ontario. The general partner of the Filer is Sprott Asset Management GP Inc. (the "General Partner"), which is a corporation incorporated under the laws of the Province of Ontario. The General Partner is a wholly-owned, direct subsidiary of Sprott Inc. ("SII"). SII is a corporation incorporated under the laws of the Province of Ontario and is a public company with its common shares listed on the TSX and the New York Stock Exchange. SII is the sole limited partner of the Filer and the sole shareholder of the General Partner.
17. The Filer is registered under the securities legislation in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as an adviser in the category of portfolio manager and in Ontario as an investment fund manager.
18. The Trust is a non-redeemable investment fund trust established under the laws of the Province of Ontario pursuant to a trust agreement (the "Trust Agreement"). RBC Investor Services Trust and the Filer will be the trustee ("Trustee") and the manager ("Manager"), respectively, of the Trust. The Trust has been formed solely for the purposes of participating in the Arrangement and the holders of Units immediately following the completion of the Arrangement will be the same as the holders of Common Shares immediately prior to the completion of the Arrangement (other than eligible holders of Common Shares that elect to receive Exchangeable Shares).
19. In connection with the Arrangement and the exchange of the Common Shares for the Units, the Trust will become a reporting issuer, or the equivalent thereof, in the Canadian Jurisdictions following the completion of the Arrangement. The Filer has applied to list units of the Trust on the Toronto Stock Exchange.
20. The Filer has not filed a preliminary prospectus for the Trust prior to the completion of the Arrangement. A preliminary prospectus for the Trust is not required to complete the Arrangement as distributions of units of the Trust are being made in connection with an arrangement, and such distributions are exempt from the prospectus requirement under subsection 2.11(b) of National Instrument 45-106 Prospectus Exempt Distributions. The Arrangement is described in an information circular that was delivered to holders of the Common Shares. UPC has a disclosure record. Holders of Common Shares were also provided with prospectus-level disclosure.
21. The Trust expects to offer securities under a prospectus in the future and intends to be qualified to file a short form prospectus under National Instrument 44-101 -- Short Form Prospectus Distributions.
22. Following completion of the Arrangement, the Trust will be managed by the Filer, a registered investment fund manager. The Filer currently manages other investment funds and physical commodity funds, such as the Sprott Physical Gold Trust, Sprott Physical Silver Trust, Sprott Physical Platinum and Palladium Trust, and Sprott Physical Gold and Silver Trust.
23. The Filer acts as the Manager of the Trust pursuant to the Trust Agreement and will continue to act as Manager as of the effective date of the Arrangement pursuant to a management agreement between the Trust and the Filer to be entered into prior to the effective date of the Arrangement, (the "Management Agreement").
24. TSX Trust Company will be the registrar and transfer agent of the Trust pursuant to a transfer agent, registrar and disbursing agent agreement to be entered into prior to the effective date of the Arrangement.
25. The Trust will prepare annual audited financial statements and interim unaudited financial statements on a consolidated basis with the UPC Subsidiaries and the other subsidiaries of the Trust from time to time in accordance with NI 81-106.
26. The Trust is a "non-redeemable investment fund" as such term is defined in the OSA and is subject to the investment restrictions applicable to such funds that are reporting issuers that are prescribed by NI 81-102. The Filer has established an independent review committee for the Trust in accordance with the requirements under National Instrument 81-107 -- Independent Review Committee for Investment Funds.
27. The Trust does not currently offer a redemption feature. Unitholders will not be permitted to redeem their Units for either cash or physical Uranium following the completion of the Arrangement.
28. The Filer and the Trust are not in default of securities legislation in the Canadian Jurisdictions.
The Trust's Investment Objective, Strategy, and Investment and Operating Restrictions
29. Prior to the Arrangement, UPC implemented its investment strategy by obtaining exposure to investments in Uranium directly and through the other UPC Subsidiaries for commercial purposes.
30. The Trust has been created as a non-redeemable investment fund, whose investment strategy is to invest and hold, directly or indirectly, substantially all of its assets in physical Uranium. The Trust will seek to provide a convenient and exchange-traded investment alternative for investors interested in holding physical Uranium. The Trust does not anticipate making regular cash distributions to Unitholders.
31. The Trust intends to achieve its objective by investing primarily in long-term holdings of unencumbered physical Uranium and will not speculate with regard to short-term changes in Uranium prices. The Trust does not and will generally not invest in financial instruments that represent Uranium or that may be exchanged for Uranium, other than through forward contracts for the sole purpose of purchasing physical Uranium for future delivery.
32. Physical ownership of Uranium, as a commodity, is heavily regulated. There is no public market or exchange for the sale of Uranium, but there are a number of private trading platforms that act to facilitate the introduction of buyers to sellers. Uranium is typically traded directly (or via brokers) between buyers and sellers by way of agreements for delivery via book transfer within a duly licensed facility. As such, the uranium does not physically leave the licensed facility, but is rather transferred between accounts of each counterparty at the facility.
33. Uranium price indicators have been developed by a number of private business organizations that offer subscription services to which most uranium market participants subscribe. The Filer is in the process of negotiating subscription service terms with, and expects to engage, three different organizations, namely UxC, LLC ("UxC"), S&P Global Platts ("Platts") and Numerco Limited ("Numerco").
34. The quoted spot prices are from industry price reporters (UxC, Platts and Numerco), who take all reported transactions into account when determining the spot price. Similar to how other physical commodities are traded, in most cases the spot price reflects the most recently traded price and/or anticipated next transaction, but the spot price may deviate from the trade price as a result of a number of factors, including delivery location, origin, quantity, counterparty and other factors.
35. The Trust Agreement will provide that the value of physical uranium shall be its market value based on the prices of such uranium provided by a widely recognized pricing service or an average of such services as directed by the Filer or a Technical Advisor and, if such service is not available, such uranium shall be valued at prices provided by another pricing service as determined by the Filer or a Technical Advisor in consultation with the Trust's valuation agent. A "Technical Advisor" is a person appointed by the Filer, on behalf of the Trust and each UPC Subsidiary, as applicable, from time to time pursuant to the provisions of the Trust Agreement and any technical advisory, consulting or other similar agreement, to provide advisory services to the Filer, including, but not limited to, commercial services with respect to: (a) the management of the movement and storage of uranium assets in accordance with reasonable standard industry practice; (b) all of the Trust's and its subsidiaries' transactions involving the purchase and sale of uranium, lending or relocation of uranium, and (c) other means of optimizing the Trust's portfolio value.
36. Following the Arrangement, the Trust will hold 100% of its Uranium assets indirectly through the UPC Subsidiaries, which will become the wholly-owned subsidiaries of the Trust as a result of the Arrangement. The Trust will hold more than 20% of its NAV in one or more of the UPC Subsidiaries.
37. Notwithstanding that the UPC Subsidiaries are not subject to NI 81-102, they will be indirectly managed by the Filer, as the manager of the Trust, to ensure compliance with the investment restrictions in NI 81-102, as modified by the Exemptions Sought. The Trust will only hold securities of the UPC Subsidiaries to gain exposure to the underlying Uranium they hold, in accordance with its investment strategies and investment restrictions.
38. The securities of the UPC Subsidiaries are considered "illiquid assets", as such term is defined in NI 81-102. However, the Trust's NAV is calculated through the value of physical Uranium that the Trust indirectly holds through the UPC Subsidiaries. Uranium is a commodity that can be readily disposed of through market facilities and therefore is not an "illiquid asset". The Trust expects to maintain the UPC Subsidiary structure for at least a period of time, as a result of contractual and tax considerations. However new purchases of Uranium may occur through the Trust as opposed to through any UPC Subsidiary.
39. The Trust will comply with the disclosure requirements under NI 81-106 and Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance ("Form 81-106F1") as if the Trust was investing directly in the Uranium, measured by the consolidated quantity of physical Uranium units that are held by a UPC Subsidiary and the Trust.
40. Absent the Illiquid Assets Relief, the Trust will not be able to hold securities of the UPC Subsidiaries above the levels permitted under section 2.4 of NI 81-102. The Illiquid Assets Restrictions may negatively impact the Filer's ability to manage the Trust's portfolio, as the Trust may not be able to unwind the UPC Subsidiaries structure to a degree required under section 2.4 of NI 81-102 without potential detrimental effect on the NAV of Units and consequently on the Unitholders' investment in the Trust.
41. The Trust, acting through its Manager, will be able to dispose of Uranium held by the Trust, either directly or indirectly through the UPC Subsidiaries, to satisfy any liquidity needs. Accordingly, the Filer believes that it can manage the Trust's liquidity requirements despite its holding of the securities of the UPC Subsidiaries. Consequently, it would not be contrary to the policy underlying the Illiquid Assets Restrictions to grant the requested Illiquid Assets Relief.
42. As provided in the Trust Agreement, the investment and operating restrictions of the Trust provide that, among other things, the Trust will invest in and hold, directly or indirectly, a minimum of 90% of the total net assets of the Trust in Uranium and invest in and hold, directly or indirectly, no more than 10% of the total net assets of the Trust, at the discretion of the Filer, in debt obligations of or guaranteed by the Government of Canada or a province thereof, or by the Government of the United States of America or a state thereof, short-term commercial paper obligations of a corporation or other person whose short-term commercial paper is rated R-1 (or its equivalent, or higher) by DBRS Limited or its successors or assigns or F-1 (or its equivalent, or higher) by Fitch Ratings or its successors or assigns or A-1 (or its equivalent, or higher) by Standard & Poor's or its successors or assigns or P-1 (or its equivalent, or higher) by Moody's Investor Service or its successors or assigns, interest-bearing accounts and short-term certificates of deposit issued or guaranteed by a Canadian chartered bank or trust company, money market mutual funds, short-term government debt or short-term investment grade corporate debt, or other short-term debt obligations approved by the Filer from time to time, having a date of maturity or call for payment not more than 182 days from the date on which the investment is made, except during the 60-day period following the closing of the Arrangement or additional offerings or prior to the distribution of the assets of the Trust.
43. The Trust may either invest directly in Uranium as an underlying asset, indirectly through the UPC Subsidiaries or a combination of any of the above. The returns generated by the Trust will be based solely on the performance of the Trust's underlying assets, including the direct and indirect investments in Uranium. The Filer will direct the affairs of each of the UPC Subsidiaries and will actively manage the underlying Uranium assets (whether held directly by the Trust or through a UPC Subsidiary). All UPC Subsidiaries are vehicles through which the Trust will seek to achieve its investment objective and will be managed with the same investment strategy as the Trust (subject to the investment restrictions set out in NI 81-102 as modified by any exemptions therefrom obtained by the Trust). The Filer will have complete discretion to invest the direct and indirect assets of the Trust and each UPC Subsidiary and will be responsible for executing all portfolio transactions (whether executed by the Trust or through a UPC Subsidiary).
Net Asset Value of the Trust and Net Asset Value per Unit
44. NAV of the Trust and NAV per Unit will be calculated on a daily basis as of 4:00 p.m. (Toronto time) (the "Valuation Time") on each day on which the TSX, or any U.S. stock exchange on which the Units are listed, is open for trading (the "Valuation Date"), by the Manager. NAV of the Trust as at the Valuation Time on each Valuation Date shall be the amount obtained by deducting from the aggregate fair market value of the assets of the Trust as of such Valuation Date an amount equal to the fair value of the liabilities of the Trust (excluding all liabilities represented by outstanding Units) as of such Valuation Date. The NAV per Unit shall be determined by dividing the NAV of the Trust on a Valuation Date by the total number of Units then outstanding assuming that all Exchangeable Shares have been exchanged for Units in accordance with their terms.
45. The Trust will only issue additional Units following the completion of the Arrangement in accordance with applicable securities laws, including NI 81-102, and: (i) where the net proceeds per Unit to be received by the Trust are not less than 100% of the most recently calculated NAV per Unit prior to, or upon, the determination of the pricing of such issuance; or (ii) by way of Unit distribution in connection with an income distribution. In connection with any such allotment and issuance of Units, the Filer, as manager of the Trust, shall also give due consideration to the expected costs and benefits associated with any planned future acquisition of Uranium, where applicable, that is to be funded with the net proceeds of such allotment and issuance of Units.
The Trust's Custody Arrangements
46. The Trustee acts as the custodian of the assets of the Trust other than Uranium pursuant to the Trust Agreement. The Trustee will only be responsible for the assets of the Trust that are directly held by it, its affiliates or its appointed sub-custodians.
47. The Trust expects to own, directly or indirectly, only Uranium that is in physical form, stored on its behalf at Facilities appointed by the Manager, pursuant to storage agreements or other type of contracts or arrangements consistent with industry standards (each such agreement, contract or arrangement, a "Storage Agreement").
48. The Trust anticipates that Uranium will constitute in excess of 90% of the Trust's NAV and, consequently, the Facilities will hold substantially all of the assets of the Trust. The Trustee, as custodian of the Trust, will hold only the assets of the Trust other than Uranium and, consequently, the division of the assets of the Trust will be clearly distinguished and will be separated by the respective areas of expertise of these custodians. As the investment objective and strategy of the Trust is to invest primarily in long-term holdings of Uranium, and to sell such Uranium only in order to pay the ongoing expenses of the Trust, the Trust will not be actively buying or selling Uranium held in the custody of the Facilities. Accordingly, the Trust's Uranium held in the custody of the Facilities will generally remain fixed from day-to-day.
49. Immediately after completion of the Arrangement, the Filer retains the discretion, pursuant to the Trust Agreement and the Management Agreement, to change the Facilities at which Uranium is stored. Under sections 6.2 and 6.3 of NI 81-102 in the case of the Facilities, the Trust is unable to appoint any Facility as the sole custodian of its assets, as such Facilities do not meet the criteria in sections 6.2 and 6.3 and cannot hold the cash or securities owned by the Trust. However, all Facilities where the Filer will store the Uranium directly or indirectly owned by the Trust, will be uranium conversion facilities operated by duly licensed operators in the case of U3O8, or duly licensed uranium enrichment facilities in the case of UF6.
50. Uranium owned, directly or indirectly, by the Trust will be held under the terms and conditions of a Storage Agreement with each Facility.
51. Prior to the closing of the Arrangement, the UPC Subsidiaries' Uranium was held in Facilities in Canada, France and the United States, with the UPC Subsidiaries having entered into a separate Storage Agreement with each Facility. It is intended that the Trust will continue to store the Uranium in the same quantities at the same Facilities, details of which were provided to the Principal Regulator (the "Existing Facilities"), upon assuming indirect ownership of the Uranium from UPC Subsidiaries following the completion of the Arrangement.
52. One or more of the Existing Facilities have stored Uranium on behalf of the UPC Subsidiaries since UPC's inception. None of the UPC Subsidiaries have ever experienced an event of loss as a result of its arrangements with the Existing Facilities.
53. The safekeeping of Uranium is a specialized business in respect of which the Facilities have specialized knowledge, expertise, and experience. Globally, there are a limited number of licensed Facilities available to commercial nuclear fuel cycle participants. The Facilities that store the Uranium represent most of the viable sources of storage and are also used by global nuclear energy utilities, global uranium mining companies and commodity traders for their storage needs. Accordingly, the Trust's risk in respect of its direct or indirect ownership and storage of Uranium is considered largely similar to that of any participant in the nuclear energy industry.
54. The Uranium industry is subject to extensive government regulation both in Canada and internationally, intended to ensure safe and secure handling and storage of Uranium. The control of the storage, use and export of Uranium in Canada is governed by the Nuclear Safety and Control Act (Canada) ("NSCA"), which authorizes the Canadian Nuclear Safety Commission ("CNSC") to make regulations governing all aspects of the development and application of nuclear energy, including uranium mining, milling, conversion and transportation. The NSCA gives the CNSC order-making powers, the power to act as a court of record, and the right to impose monetary penalties.
55. In Canada, a person may only possess or dispose of nuclear substances and construct, operate and decommission its nuclear facilities in accordance with the terms of a CNSC licence. As part of the licensing process, the CNSC assesses whether applicants are (i) qualified to undertake the proposed licensed activity; (ii) will make adequate provisions for the health and safety of persons, the protection of the environment and maintenance of national security; and (iii) will take measures necessary to implement international obligations to which Canada has agreed. In addition, applicants must include in their application for a license information on the methods used to secure nuclear substances and radiation devices and for the detection of unauthorized use, loss or theft of these materials. As a condition of granting a license, the CNSC may request a financial guarantee from the applicant.
56. The Facilities used by the UPC Subsidiaries to store Uranium are located in advanced economies with extensive regulations on the use and storage of materials used in the nuclear fuel cycle, such as Uranium. Regulations in countries in which such Facilities are located are similar to those in Canada, and require that facilities storing such materials as Uranium be duly licensed. Analogous regulators to the CNSC in countries where the Trust's Facilities will be located include the Nuclear Regulatory Commission ("NRC") in the United States and the Autorité de sûreté nucléaire ("ASU") in France.
57. The Storage Agreements generally provide for an indemnity from the Facility in favour of the applicable UPC Subsidiary on industry standard terms.
58. If the Filer decides to replace any Facility, the Manager will have to, directly or indirectly, negotiate the specific terms and conditions of the Storage Agreement with such Facility.
59. Under each existing Storage Agreement, the Uranium stored with each Facility is required to be evidenced in an account maintained by the Facility for the UPC Subsidiary, and the Facility is required to provide a written settlement statement no less frequently than each quarter indicating the amount of Uranium owned by the UPC Subsidiary.
60. The Filer, on behalf of the Trust and each applicable UPC Subsidiary, will ensure that each storage agreement contains provisions as to who bears the responsibility for loss that are consistent with industry practice. The Filer, on behalf of the Trust and each applicable UPC Subsidiary, will use reasonable commercial efforts to ensure that pursuant to each Storage Agreement, the terms with respect to liability and indemnification of the parties continue to apply after the termination of the Storage Agreement until all Uranium is transferred from the UPC Subsidiary's account with a time limitation of at least six months.
61. The Filer has determined that the existing Storage Agreements impose a standard of care on each Facility such that each Facility is required to exercise the same degree of care and diligence in safeguarding the Uranium as any reasonably prudent person acting as custodian of the Uranium would exercise in the circumstance.
62. The existing Storage Agreements may be terminated by either party by giving (90 days or six months, as applicable) written notice to the other party of its intent to terminate the Storage Agreement without reason and in most cases for material breach of the Agreement that is not cured within five or thirty days following the giving of the written notice to the party in breach of such material breach.
63. Facilities carry such insurance as they deem appropriate for their businesses including their position as custodian of the Uranium.
64. The Filer will ensure that no part of the stored Uranium may be delivered out of safekeeping by a Facility (except to an authorized sub-custodian thereof) or, if Uranium is held by another custodian, that custodian (except to an authorized sub-custodian thereof), without receipt of an instruction from the Filer in the form specified by such Facility or such custodian indicating the purpose of the delivery and giving direction with respect to the specific amount.
65. The Filer and the Trust believe that the storage arrangements with respect to the Trust's indirectly owned Uranium are consistent with industry practice. The existing Storage Agreements provide that the Facility will store and manage the Uranium owned by the UPC Subsidiary in accordance with all applicable regulations. Each Storage Agreement will generally contain terms with respect to the bearing of risk and indemnification that are consistent with industry standard terms. This standard of care satisfies the requirement in Section 6.6 of NI 81-102 that each custodian of an investment fund exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances, or at least the same degree of care they exercise with respect to their own property of a similar kind, if this is a higher degree of care.
66. The Filer will not be responsible for any losses or damages to the Trust arising out of any action or inaction by the Trust's custodians or any sub-custodians holding the assets of the Trust, including the Trustee or its sub-custodians holding the assets of the Trust other than Uranium, and a Facility holding Uranium directly or indirectly owned by the Trust.
67. The Filer, with the consent of the Trustee, will have the authority to change the storage arrangements described above including, but not limited to, the appointment of a replacement custodian or sub-custodian and/or additional custodians or sub-custodians subject to the requirements under NI 81-102, as modified by the Exemptions Sought.
Requested Relief
68. The indirect investment by the Trust, through the UPC Subsidiaries, in Uranium as an underlying asset represents the business judgement of responsible persons uninfluenced by the considerations other than the best interest of the Trust and its Unitholders. Leaving the UPC Subsidiaries and their assets (holdings of Uranium) in place after completion of the Arrangement is necessary for the Trust to achieve certain commercial, contractual and tax objectives and is beneficial to Unitholders of the Trust. The investment objectives and strategies of the Trust and the UPC Subsidiaries will permit each of them to have exposure to Uranium as an underlying asset, subject to the investment restrictions contained in NI 81-102.
69. The Trust's indirect investment in underlying Uranium held through the UPC Subsidiaries would, if held directly by the Trust, otherwise comply with the investment restrictions in Part 2 of NI 81-102 applicable to non-redeemable investment funds. The granting of the Concentration Relief, the Control Relief and the Illiquid Assets Relief will not expose the Trust or its Unitholders to additional risks as the Trust will continue to have the same investment exposure as UPC had prior to the implementation of the Arrangement.
70. There is limited or no downside risk to Unitholders of the Trust in permitting the Trust to hold all or substantially all of its NAV in the securities of the UPC Subsidiaries, because the Trust will be the sole direct or indirect holder of voting securities of each of the UPC Subsidiaries, the main underlying asset of the UPC Subsidiaries is physical Uranium and the UPC Subsidiaries will carry on business in accordance with investment restrictions set out in NI 81-102 and will continue to invest only in physical Uranium. The UPC Subsidiaries will be, directly or indirectly, managed by the Filer, as Manager of the Trust, ensuring that the UPC Subsidiaries comply with such investment restrictions.
71. It would not be contrary to the policy underlying the Illiquid Assets Restrictions to grant the requested Illiquid Assets Relief, as the Filer will be able to dispose of Uranium held by the Trust, either directly or indirectly through the UPC Subsidiaries, to satisfy any liquidity needs.
72. Holding Uranium directly or indirectly owned by the Trust with the Facilities and the other assets of the Trust with the Trustee will not detract from the objectives of subsection 6.1(1) of NI 81-102 to ensure effective custody of the portfolio assets of an investment fund, and it will not be prejudicial to the Unitholders to grant the Custodian Relief. The Facilities have the expertise to store physical Uranium safely and have the resources and experience required to act as the custodian for the Trust's Uranium held both inside and outside Canada. The Facilities are also subject to extensive government regulation and licensing processes, intended to ensure safe and secure handling and storage of Uranium. The Trustee, as custodian of the Trust, will hold only the assets of the Trust other than Uranium and, consequently, the division of the assets of the Trust will be clearly distinguished and will be separated by the respective areas of expertise of these custodians.
Decision
The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.
The decision of the Principal Regulator under the Legislation is that the Exemptions Sought under the OSA and NI 81-102 are granted provided that:
a) the Trust is a non-redeemable investment fund subject to NI 81-102;
b) the investment by the Trust in the UPC Subsidiaries is compatible with the fundamental investment objectives of the Trust;
c) no securities of the UPC Subsidiaries are distributed other than to the Trust or another UPC Subsidiary;
d) the investment by the Trust in securities of the UPC Subsidiaries to gain indirect exposure to Uranium is made in compliance with each provision of NI 81-102, except subsection 2.1(1.1), 2.2(1) and 2.4;
e) the annual information form or other disclosure document of the Trust will disclose that:
(i) the Trust holds securities of the UPC Subsidiaries;
(ii) the Filer, as investment fund manager of the Trust, has control and direction over each of the UPC Subsidiaries;
(iii) the financial statements of the Trust are prepared on a consolidated basis with the UPC Subsidiaries;
(iv) the securities of the UPC Subsidiaries held by the Trust may be illiquid due to resale and other restrictions under applicable securities laws;
(v) there are material risks to investors associated with the Trust's holding of such illiquid assets, if any;
(vi) there are unique risks to investors associated with an investment in the Trust that may impact the performance of the Trust;
(vii) the Filer and Trust have obtained the Exemptions Sought;
f) no fees are or will be payable by the Trust that, to a reasonable investor, would duplicate a fee payable by a UPC Subsidiary;
g) no sales fees or redemption fees are payable by the Trust in relation to its purchases, redemptions or sales of securities of a UPC Subsidiary;
h) when acquiring or disposing of securities of a UPC Subsidiary, the Filer shall, as investment fund manager of the Trust, act honestly, in good faith, and in the best interest of the Trust and shall exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;
i) the Trust complies with the disclosure requirements under NI 81-106 and Form 81-106F1 as if the Trust was investing directly in the Uranium;
j) the sole purpose of the UPC Subsidiaries is to achieve the Trust's investment objective and to implement the Trust's investment strategy by obtaining exposure to investments in Uranium;
k) Uranium will be stored at one or more of the Existing Facilities, a duly licensed successor of an Existing Facility, or another Facility that is duly licensed operator in the case of U3O8, or a duly licensed uranium enrichment facility in the case of UF6 that is licensed either by the CNSC in Canada, the NRC in the United States, or the ASU in France;
l) each Facility has, to the best of the knowledge of the Filer based on available information after reasonable inquiry, in excess of the highest minimum capitalization amount of shareholders' equity required under NI 81-102 for entities qualified to act as a custodian or sub-custodian for assets held in or outside of Canada, as applicable;
m) in the event that the Trust files a prospectus, the disclosure noted in paragraph (e) will be set out, or incorporated by reference, therein;
n) each of the UPC Subsidiaries is wholly-owned, directly or indirectly, by the Trust; and
o) notwithstanding that the UPC Subsidiaries are not subject to NI 81-102, they will be indirectly managed by the Filer, as the manager of the Trust, to ensure compliance with the investment restrictions in NI 81-102, as modified by the Exemptions Sought. The Trust will only hold securities of the UPC Subsidiaries to gain exposure to the underlying Uranium they hold, in accordance with its investment strategies and investment restrictions.
As to the Concentration Relief, Control Relief, Illiquid Assets Relief and Custodian Relief:
"Darren McKall"Manager, Investment Funds and Structured Products BranchOntario Securities Commission
As to the Related Issuer Relief:
"Lawrence P. Haber"CommissionerOntario Securities Commission"Craig Hayman"CommissionerOntario Securities CommissionApplication File #: 2021/0321Sedar No. 3250875