TSAG ESOP Co
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- passport application filed by issuer for relief from the prospectus requirement in connection with the distribution of securities of the issuer to employees, directors, executive officers, consultants and associates of a partnership or a related entity of the partnership -- the issuer's only business is to hold an interest in the partnership -- Relief granted subject to certain conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53(1) and 74(1).
November 28, 2022
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 TSAG ESOP INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that the prospectus requirement under section 53 of the Securities Act (Ontario) and the equivalent provision under the securities legislation of each of the other provinces and territories of Canada does not apply to issuances of the Filer's common shares (the Common Shares) to Calgary Employees (as defined below)(the Requested Exemptive Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the Commission) is the principal regulator for this application; and
(b) the Filer has provided notice that section 5.4(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.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
TSAG and the Smith + Andersen Group
1. The Smith + Andersen Group (TSAG) is an Ontario partnership, that owns and operates a Canadian engineering firm primarily through "local partnerships" or other entities (the Local Partnerships and each, a Local Partnership) which have been formed to serve as the principal contracting and operating entities for the delivery of engineering services for projects located in particular geographic locales by TSAG (TSAG and such local entities collectively, the Group).
2. Local partnerships are currently in place for Vancouver, Edmonton, Winnipeg, London (Ontario), Toronto, Ottawa and Halifax.
3. Each Local Partnership is intended to have one or more "local" partner(s), each being a corporation owned by a professional engineer or principal who works out of an office located in the locale of the particular Local Partnership. The Edmonton, Winnipeg and Halifax Local Partnerships currently do not have a local partner in place.
4. In each instance, an applicable local partnership agreement between TSAG and each Local Partnership provides for TSAG to be constituted as the managing partner with authority to direct the activities of the Local Partnership. In addition, TSAG is entitled to exercise a majority of the votes held of each Local Partnership and, as such, each Local Partnership is "controlled" by TSAG and is an "affiliate" of TSAG.
5. Contract and administrative (for example, back office) services for each Local Partnership and, as required, additional professional services, are provided to the Local Partnership by the Toronto Local Partnership (Smith and Andersen Consulting Engineering) which is the most significant local partnership in the Group. There are approximately 600 individuals employed by members of the Group (the Employees).
6. The business of the Group in and around the City of Calgary is not conducted through a Local Partnership but rather is carried on by Smith + Andersen (Calgary) Ltd. (Calgary Co.) which is an Alberta corporation that employs a total of approximately 50 people who are resident in Alberta (the Calgary Employees).
7. Calgary Co. was originally formed as a spin-off from the Toronto office of TSAG's predecessor (which was then the only locale where the business was operating) when one of the employees of the predecessor left the Toronto office to form a branch in Calgary. This occured before the formation of TSAG and the Group structure under Local Partnerships, including Smith and Anderson Consulting Engineering.
8. Calgary Co.'s corporate name originally included the name of the principal of the TSAG predecessor partner who remained in Toronto (the Toronto Principal) and the TSAG predecessor employee who left the Toronto office to form a branch in Calgary (the Calgary Principal, and together with the Toronto Principal, theOriginal Shareholders).
9. Upon the retirement of the Calgary Principal, the corporate name was changed to the current name of Calgary Co. The continuing use by Calgary Co. of "Smith + Andersen" as part of its corporate name is authorized by a license agreement between TSAG and Calgary Co. dated May 25, 2022.
10. Share ownership of Calgary Co. was originally shared between the Original Shareholders. The Toronto Principal subsequently joined with others to form Smith and Andersen Consulting Engineering and later TSAG. The shares originally held by the Toronto Principal are now held in JSA Energy Analysts Inc. (JSA), which is owned by certain corporate partners of TSAG (as described below).
11. Over the years, as new engineers or principals joined Calgary Co., Calgary Co. issued additional shares to shareholders thereby diluting the interests of the Original Sharheolders. Collectively, holding companies for local engineer or principals now hold 80% of the issued shares of Calgary Co. with JSA now holding 20% of the issued shares of Calgary Co..
12. The issued shares of JSA are held by D. I. Smith Engineering Inc., Farbridge Engineering Inc. and Kevin Sharples Engineering Inc. being the partners of TSAG which collectively hold 65% of the voting partnership interests of TSAG and thus exercise control over TSAG.
13. JSA has agreed to the transfer of its 20% ownership interest in Calgary Co. to TSAG at fair market value, effective June 1, 2022 (the JSA Transaction). The JSA Transaction is anticipated to be completed by no later than November, 2022.
14. Neither JSA, while a shareholder of Calgary Co., nor TSAG, upon its acquisition of the shares of Calgary Co. currently held by JSA, exercise or will exercise de facto control over Calgary Co. Calgary Co. is not currently a related entity or affiliate of TSAG or of the Filer, nor is it expected to be following completion of the JSA Transaction. .
15. Calgary Co. markets its services and operates its business of the Group in and around the City of Calgary, using intellectual property consisting of trademarks and trade names licensed by TSAG as well as the same contract and administrative (back office) services and, as required, additional professional services, provided by Smith and Andersen Consulting Engineering. Calgary Employees are given access to the same TSAG and Group information database/platform which is accessible by all other Employees and are treated in all material respects in a manner equivalent to other Employees. . Calgary Employees have been informed of and have familiarity with TSAG generally. Included in the package of material made available to Eligible Participants, including Eligible Calgary Co. Employees, is general information about TSAG, its business operations and legal structure.
16. With a view to realizing the benefits of better aligning the interests of the Employees, management and principals of each Local Partnership with the business of the Group, as well as the Calgary Employees with the Group, TSAG has implemented the TSAG ESOP Inc. EMPLOYEE SHARE OWNERSHIP PLAN 2022 (the Plan). The Plan is intended to enable all eligible Employees, including eligible Calgary Employees (together, the Eligible Participants), to acquire shares of the Filer and thereby indirectly acquire and hold an equity interest in TSAG.
17. None of TSAG or its affiliates or the Local Partnerships is a reporting issuer in any jurisdiction in Canada and none of TSAG or its affiliates or the Local Partnerships intends to become a reporting issuer in any jurisdiction in Canada.
The Filer
18. The Filer is a corporation formed under the laws of Ontario and is authorized to issue an unlimited number of common shares and an unlimited number of control shares.
19. The Filer is not in default under the Legislation or the securities legislation of any of the other provinces and territories of Canada.
20. The Filer does not intend to become a reporting issuer in any jurisdiction in Canada.
21. The Filer is not a related entity (as defined in section 2.22 of National Instrument 45-106 Prospectus Exemptions) of Calgary Co. or an affiliate (as defined in section 1.3 of Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids) of Calgary Co.
22. In order for the participation by Eligible Participants in the equity of TSAG to be attractive, effective and efficient from both a tax and limitation-of-liability perspective, the Filer, a newly incorporated entity, was formed to offer its Common Shares to Eligible Participants pursuant to the terms of the Plan.
23. As contemplated in the Plan, the equity participation by Eligible Participants is to be effected by the voluntary subscription for and acquisition of Common Shares of the Filer by Eligible Participants. The subscription proceeds are then used by the Filer to acquire a partnership interest in TSAG. This corporate structure for the holding of the equity interest by the Filer in TSAG mirrors that used by the other holders of partnership interests in TSAG.
24. The Filer is anticipated to acquire and hold up to a 5% partnership interest in TSAG. The Filer's sole business is participating as a partner in TSAG.
25. The sole asset of the Filer will be its partnership interest in TSAG.
26. Eligible Participants that subscribe for Common Shares of the Filer pursuant to the Plan become shareholders of the Filer (each, a Shareholder, and collectively, Shareholders) and will become parties to a unanimous shareholder agreement (the USA) with the Filer that, among other things, restricts the transfer and ownership of the securities of the Filer acquired pursuant to the Plan.
27. In certain circumstances, including in the case of termination of employment, Shareholders may be required under the USA to sell their Common Shares of the Filer to the Filer for cancellation. The price for Common Shares sold by departing Employees and Calgary Employees is established annually by the management of TSAG in reliance on the book value of TSAG as determined by TSAG's accountants.
28. Under the Plan, in May of each year that Common Shares of the Filer are made available for purchase, Eligible Participants who express an interest in subscribing for such shares will receive electronically from the Filer the following materials:
a. a Group overview document
b. a copy of the Plan
c. a summary of the income tax implications of subscribing for Common Shares of the Filer
d. an intent to subscribe and deposit agreement
e. a copy of the USA
In addition, in November of each year, Eligible Participants who agree to subscribe for Common Shares of the Filer will receive electronically from the Filer the following materials:
a. shareholder agreement joinder
b. subscription agreement
c. receipt for balance of subscription funds
29. Prior to subscribing for Common Shares of the Filer under the Plan, Eligible Participants will receive electronically from the Filer a package of information that includes, at minimum:
a. a Group overview document
b. a copy of the Plan
c. a summary of the income tax implications of subscribing for Common Shares of the Filer under the Plan
d. a copy of the USA
30. Under the Plan, Shareholders of the Filer will receive the annual financial statements of the Filer on an ongoing basis.
31. The equity participation structure afforded by the Plan is anticipated to be an effective means to attract, incentivize and retain Eligible Participants who are critical to the overall success of TSAG and the Group as a whole.
32. TSAG and the Filer believe that allowing all Eligible Participants to participate in the equity of the TSAG is critical to the ongoing success of TSAG and the Group as a whole.
33. The issuance of Common Shares by the Filer to Calgary Employees pursuant to the Plan will be deemed to be a "distribution" requiring the filing of a prospectus unless an exemption from the prospectus requirements is available under the Legislation. There is no exemption available to the issuance of the Common Shares of the Filer to the Calgary Employees since Calgary Co. is not a related party to or an affiliate of the Filer. In contrast, since all other Employees are employed by related entities or affiliates of TSAG/the Filer by virtue of the current ownership structure, issuances to such Employees will be exempt from the prospectus requirement.
34. The Filer has considered whether under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the Legislation, it could be considered to be engaged in or holding itself out as engaging in the business of trading in securities and therefore required to register as a dealer, rely on an exemption from the dealer registration requirement or seek exemptive relief from the dealer registration requirement. In light of the particular facts and circumstances of the Filer, including the fact that it does not trade in securities frequently, does not receive any remuneration for trading in securities, does not act in an intermediary capacity, does not produce or intend to produce a distinct profit from trading in securities, and does not employ or otherwise contract with persons to perform activities on its behalf that are similar to those performed by a registrant, and having considered the guidance in section 1.3 of the Companion Policy to NI 31-103, the Filer has concluded that it should not be considered to be engaged in registrable activities and therefore does not require relief from the dealer registration requirement of the Legislation.
Decision
The principal regulator is satisfied that the exemptive relief application 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 Requested Exemptive Relief is granted provided that:
1. Calgary Employees are not induced to purchase Common Shares by expectation of employment or continued employment with Calgary Co. or a related entity of TSAG or the Filer;
2. the Filer and TSAG, as applicable, comply with paragraphs 28, 29 and 30 above, as applicable;
3. the sole business of the Filer is restricted to having an interest in TSAG and exercising its rights and obligations as a partner of TSAG;
4. the Filer and TSAG are not reporting issuers in any jurisdiction of Canada;
5. securities of the Filer are not traded on a marketplace as defined in National Instrument 21-101 Marketplace Operation;
6. any subsequent trade of Common Shares of the Filer is a distribution unless the trade is to a Eligible Participant; and
7. prior to the issuance of or trade in Common Shares of the Filer to eligible Calgary Employees, the Filer will deliver to such Eligible Participant a copy of this decision.