Allbanc Split Corp. and Scotia Capital Inc. - MRRS Decision
Headnote
Mutual Reliance Review System for ExemptiveRelief Applications - subdivided offering. The issuer's portfolioconsists of common shares of five Canadian chartered banks.The prohibitions contained in the Legislation prohibiting tradingin portfolio shares by persons or companies having informationconcerning the trading programs of mutual funds shall not applyto the promoter/agent with respect to certain principal purchasesof Portfolio Shares by the promoter/ agent.
Market making trades by promoter/agent shallnot be subject to requirements to file and obtain a receiptfor a preliminary and final prospectus provided that the promoter/agentand its affiliates do not beneficially own or have the powerto exercise control of a sufficient number of voting securitiesof an issuer of the securities comprising the issuer's portfolioto permit the promoter/agent to affect materially the controlof such issuer.
Applicable Ontario Statutes
Securities Act, R.S.O. 1990, c. S.5, as amended,ss. 1(1), 53(1), 74(1), 119, 121(2)(a)(ii).
IN THE MATTER OF
THE SECURITIES LEGISLATIONOF
ONTARIO, BRITISH COLUMBIA,ALBERTA, SASKATCHEWAN,
NOVA SCOTIA, NEWFOUNDLANDAND LABRADOR, NEW BRUNSWICK AND
PRINCE EDWARD ISLAND
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEWSYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
ALLBANC SPLIT CORP.
AND
IN THE MATTER OF
SCOTIA CAPITAL INC.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") in eachof Ontario, British Columbia, Alberta, Saskatchewan, Nova Scotia,Newfoundland and Labrador, New Brunswick and Prince Edward Island(the "Jurisdictions") has received an applicationfrom Allbanc Split Corp. (the "Issuer") and ScotiaCapital Inc. ("Scotia Capital") for decisions underthe securities legislation (the "Legislation") ofthe Jurisdictions that:
(a) the requirements contained therein forthe filing and obtaining of a receipt for a preliminaryprospectus and final prospectus (the "Prospectus Requirements")shall not apply to Market Making Trades (as hereinafterdefined) by Scotia Capital in the Class A Capital Sharesand Class A Preferred Shares of the Issuer; and
(b) the restrictions contained therein prohibitingtrading in portfolio shares by persons or companies havinginformation regarding the trading program of mutual funds(the "Principal Trading Prohibitions") shall notapply to Scotia Capital in connection with the PrincipalPurchases (defined below).
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 Definitions or in Quebec Commission Notice 14-101;
AND WHEREAS the Issuer has representedto the Decision Makers that:
1. Scotia Capital is a direct, wholly-ownedsubsidiary of The Bank of Nova Scotia ("BNS") andis registered under the Legislation as a dealer in the categoriesof "broker" and "investment dealer" andis a member of the Investment Dealers Association of Canadaand The Toronto Stock Exchange.
2. The Issuer was incorporated on December17, 1997 under the laws of the Province of Ontario.
3. The authorized capital of the Issuer consistsof an unlimited number of Capital Shares, an unlimited numberof Preferred Shares, an unlimited number of Class A CapitalShares, an unlimited number of Class A Preferred Shares andan unlimited number of Class A Shares, having the attributesset forth under the headings "Description of Share Capital"and "Details of the Offerings" commencing on page19 of the Preliminary Prospectus.
4. The Issuer became a reporting issuer underthe Act by filing a final prospectus dated February 17, 1997relating to an initial public offering of Capital Shares andPreferred Shares (the "Initial Public Offering").
5. On January 14, 2003, the holders of theCapital Shares approved a share capital reorganization (the"Reorganization") which permitted holders of CapitalShares, at their option, to retain their investment in theCompany after the scheduled redemption date of March 10, 2003,by converting their Capital Shares into Class A Capital Shares.
6. On January 17, 2003, the holders of 897,444Capital Shares converted such Capital Shares on a one-for-onebasis into 897,444 Class A Capital Shares. All of the issuedand outstanding Capital Shares and Preferred Shares will beredeemed by the Company on March 10, 2003.
7. The Class A Preferred Shares are beingoffered in order to maintain the leveraged "split share"structure of the Company and will be issued on the scheduledredemption date of the Capital Shares and the Preferred Sharessuch that there will be an equal number of Class A CapitalShares and Class A Preferred Shares outstanding.
8. The Issuer has filed with the securitiesregulatory authorities of each Province of Canada a preliminaryprospectus dated January 24, 2003 (the "Preliminary Prospectus")in respect of the offering of Class A Preferred Shares (the"Offering").
9. The Class A Shares are the only votingshares in the capital of the Issuer. There are currently,and will be at the time of the filing of the final prospectus(the "Final Prospectus") relating to the Offering,100 Class A Shares issued and outstanding. Allbanc Split HoldingsCorp. and Scotia Capital each own 50% of the issued and outstandingClass A Shares of the Issuer.
10. The Class A Capital Shares and Class APreferred Shares may be surrendered for retraction at anytime in the manner described in the Preliminary Prospectus.
11. The Class A Capital Shares are listedon the Toronto Stock Exchange (the "TSX") and theTSX has granted conditional approval to list the Class A PreferredShares.
12. The Issuer has a board of directors whichcurrently consists of five directors. Three of the directorsare employees of Scotia Capital. In addition, the Presidentand Chief Executive Officer and the Chief Financial Officerand Secretary of the Issuer are also employees of Scotia Capital.
13. Pursuant to an agreement (the "AgencyAgreement") to be made between the Issuer and ScotiaCapital, BMO Nesbitt Burns Inc., CIBC World Markets Inc. andRBC Dominion Securities Inc. (collectively, the "Agents"and individually, an "Agent"), the Issuer will appointthe Agents, as its agents, to offer the Class A PreferredShares of the Issuer on a best efforts basis and the FinalProspectus qualifying the Offering will contain a certificatesigned by each of the Agents in accordance with the Legislation.
14. The Issuer is considered to be a mutualfund but does not operate as a conventional mutual fund andin connection with its Initial Public Offering applied forand obtained a waiver under National Policy No. 39 from certainof its requirements.
15. The Issuer is a passive investment companywhose principal undertaking is to invest in a portfolio (the"Portfolio") of publicly listed common shares (the"Portfolio Shares") of the five largest Canadianbanks in order to generate dividend income for the holdersof the Class A Preferred Shares and to enable the holdersof the Class A Capital Shares to participate in capital appreciationin the Portfolio Shares after payment of operating expenses.
16. The fixed distributions on the Class APreferred Shares will be funded from the dividends receivedon the Portfolio Shares. If necessary, any shortfall in thedistributions on the Class A Preferred Shares will be fundedby proceeds from the sale of, or if determined appropriateby the issuer's board of directors, premiums from writingcovered call options on, Portfolio Shares. Based on the currentdividends paid on the Portfolio Shares, it is not expectedthat the Issuer would have to sell any Portfolio Shares orwrite any call options to fund the Class A Preferred Sharedistributions. The Issuer intends to establish a revolvingcredit facility, likely with Scotia Capital, which may beused by the Issuer to fund the payment of a portion of thefixed distribution on the Class A Preferred Shares on a temporarybasis, if necessary.
17. The Portfolio Shares are currently listedand traded on the TSX.
18. The Issuer is not, and will not upon thecompletion of the Offering, be an insider of the issuers ofthe Portfolio Shares within the meaning of the Legislation.
19. Scotia Capital's economic interest inthe Issuer and in the material transactions involving theIssuer are disclosed in the Preliminary Prospectus and willbe disclosed in the Final Prospectus under the heading "Interestof Management and Others in Material Transactions". ScotiaCapital is the promoter of the Issuer.
20. The net proceeds from the sale of theClass A Preferred Shares under the Final Prospectus, afterpayment of commissions to the Agents and expenses of issuewill be used by the Issuer to fund the redemption of all ofthe issued and outstanding Capital Shares and Preferred Shareson March 10, 2003.
21. All Class A Capital Shares and Class APreferred Shares outstanding on March 10, 2008 will be redeemedby the Issuer on such date and the Class A Preferred Shareswill be redeemable at the option of the Issuer on any AnnualRetraction Payment Date (as described in the Preliminary Prospectus).
22. It will be the policy of the Issuer tohold the Portfolio Shares and to not engage in any tradingof the Portfolio Shares, except:
(a) to fund the redemption of all CapitalShares and Preferred Shares on March 10, 2003;
(b) to fund retractions or redemptions ofthe Class A Capital Shares and the Class A Preferred Shares;
(c) following receipt of stock dividendson Portfolio Shares; or
(d) in certain other limited circumstancesdescribed in the Preliminary Prospectus.
23. Pursuant to an administration agreement(the "Administration Agreement") to be entered into,Scotia Capital will continue to administer the ongoing operationsof the Issuer and the Issuer will pay Scotia Capital a feeequal to:
(a) a monthly fee of 1/12 of 0.15% of themarket value of the Portfolio Shares;
(b) any interest income earned by the Issuerfrom time to time, excluding interest earned on any investmentof excess dividends received on the Portfolio Shares (whichare for the benefit of the Class A Capital Shares).
24. In connection with the services to beprovided by Scotia Capital to the Issuer pursuant to the AdministrationAgreement, Scotia Capital may sell Portfolio Shares to fundretractions of Class A Capital Shares and Class A PreferredShares prior to March 10, 2008 (the "Redemption Date")and upon liquidation of the Portfolio Shares prior to theRedemption Date. These sales will be made by Scotia Capitalas agent on behalf of the Issuer, but in certain circumstances,such as where a small number of Class A Capital Shares andClass A Preferred Shares have been surrendered for retraction,Scotia Capital may purchase Portfolio Shares as principal(the "Principal Purchases") subject to receipt ofall regulatory approvals.
25. In connection with any Principal Purchases,Scotia Capital will comply with the rules, procedures andpolicies of the applicable stock exchange of which it is amember and in accordance with orders obtained from all applicablesecurities regulatory authorities. The Final Prospectus willdisclose that Scotia Capital may realize a gain or loss onthe resale of such securities.
26. The Preliminary Prospectus discloses andthe Final Prospectus will disclose that any Principal Purchaseswill be made in accordance with the rules of the applicablestock exchange and the price payable by Scotia Capital (inclusiveof all transaction costs, if any) will not be less than theprice which would have been payable (inclusive of all transactioncosts, if any) if the sale had been made through the facilitiesof the principal stock exchange on which the Portfolio Sharesare listed and posted for trading at the time of the saleto Scotia Capital.
27. The Administration Agreement will providethat Scotia Capital must take reasonable steps, such as solicitingbids from other market participants or such other steps asScotia Capital, in its discretion, considers appropriate aftertaking into account prevailing market conditions and otherrelevant factors, to enable the Issuer to obtain the bestprice reasonably available for the Portfolio Shares so longas the price obtained (net of all transaction costs, if any)by the Issuer to Scotia Capital is more or at least as advantageousto the issuer as the price which is available (net of alltransaction costs, if any) through the facilities of the applicablestock exchange at the time of the trade.
28. Scotia Capital will not receive any commissionsfrom the Issuer in connection with the Principal Purchasesand, in carrying out the Principal Purchases, Scotia Capitalshall deal fairly, honestly and in good faith with the Issuer.
29. Scotia Capital will be a significant makerof markets for the Class A Capital Shares and Class A PreferredShares. As a result, as discussed above Scotia Capital will,from time to time, purchase and sell Class A Capital Sharesand Class A Preferred Shares and trade in such securitiesas agent on behalf of its clients, the primary purpose ofsuch trades (the "Market Making Trades") being toprovide liquidity to the holders of Class A Capital Sharesand Class A Preferred Shares. All trades made by Scotia Capitalas principal will be recorded daily by the TSX.
30. As Scotia Capital owns 50% of the ClassA Shares of the Issuer, Scotia Capital will be deemed to bein a position to affect materially the control of the Issuerand consequently, each Market Making Trade will be a "distribution"or "distribution to the public" within the meaningof the Legislation.
AND WHEREAS under the System, this MRRSDecision Document evidences the decision of each Decision Maker(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 pursuantto the Legislation is that:
(a) The Prospectus Requirements shall notapply to the Market Making Trades by Scotia Capital in theClass A Capital Shares and Class A Preferred Shares providedthat at the time of each Market Making Trade, Scotia Capitaland its affiliates do not beneficially own or have the powerto exercise control or direction over a sufficient numberof voting securities of the issuers of the Portfolio Shares,securities convertible into voting securities of the issuersof the Portfolio Shares, options to acquire voting securitiesof the issuers of the Portfolio Shares, or any other securitieswhich provide the holder with the right to exercise controlor direction over voting securities of the issuers of thePortfolio Shares which in the aggregate, permit Scotia Capitalto affect materially the control of the issuers of the PortfolioShares and without limiting the generality of the foregoing,the beneficial ownership of or the power to exercise controlor direction over securities representing in the aggregate20 percent or more of the votes attaching to all the thenissued and outstanding voting securities of the issuersof the Portfolio Shares shall, in the absence of evidenceto the contrary, be deemed to affect materially the controlof the issuers of the Portfolio Shares; and
(b) The Principal Trading Prohibitions shallnot apply to Scotia Capital in connection with the PrincipalPurchases.
March 6, 2003.
"Paul M. Moore" "HowardI. Wetston"