Colabor Group Inc.

Headnote

Dual application for Exemptive Relief Applications – Appli-cation for relief from the requirement that the subscription price for a security to be issued upon the exercise of a right is lower than the market price of the security on the date of the final prospectus – Offering price would be set at discount to market price at time of announcement of trans-actions comprising possible recapitalization – Application for relief from the requirements relating to granting addi-tional subscription privilege to holders of rights – Restriction on additional subscription privilege required in order to not trigger poison pill – Terms of rights offering will be approved at shareholders meeting – Relief granted, subject to conditions.

Applicable Legislative Provisions

National Instrument 41-101 General Prospectus Require-ments, ss. 8A.2, 8A.3.

TRANSLATION

July 13, 2016

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the “Jurisdictions”)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
COLABOR GROUP INC.
(the “Filer”)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a “Decision Maker”) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the “Legislation”) for:

(i)            relief from the requirement that the sub-scription price for a security to be issued upon the exercise of a right under a proposed rights offering be lower than the market price of such security on the date of the final prospectus in connection with such rights offering, as required under subparagraph 8A.2(1)(d)(i) of National Instrument 41-101 – General Prospectus Requirements (“NI 41-101”) (the “Pricing Relief”); and

(ii)           relief from the criteria to determine the additional subscription privilege under a rights offering under section 8A.3 of NI 41-101 to provide for the introduction of a restriction on the maximum number of common shares of the Filer (the “Com-mon Shares”) that can be issued pursuant to such additional subscription privilege in order to avoid for any subscriber to receive Common Shares granting it beneficial ownership of 20% or more of the then outstanding Common Shares (the “Additional Subscription Relief” and collectively with the Pricing Relief, the “Exemptions Sought”).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a)           the Autorité des marchés financiers is the principal regulator for this Application;

(b)           the Filer has provided notice that sub-section 4.7(1) of Multilateral Instrument 11-102 – Passport System (“MI 11-102”) is intended to be relied upon by the Filer in British Columbia, Alberta, Saskatch-ewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador (the “Pass-port Jurisdictions”); and

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

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:

2.             The Filer is incorporated under the Canada Business Corporations Act.

3.             The Filer’s head office is located in Boucherville, Province of Québec.

4.             The Filer is a reporting issuer in the provinces of British Columbia, Alberta, Saskatchewan, Mani-toba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland.

5.             The Filer is not in default of any of its obligations as a reporting issuer under the Legislation of British Columbia, Alberta, Saskatchewan, Mani-toba, Ontario, Québec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland, including its obligation to remit all filing fees in such jurisdictions.

6.             The Filer is eligible to use the “short form” prospectus regime set forth in National Instrument 44-101 – Short Form Prospectus Distributions.

7.             The Common Shares and the Convertible Debentures (as defined below) are currently traded on the Toronto Stock Exchange (“TSX”) under the ticker “GCL” and “GCL.DB.A”, respectively.

8.             The Filer has entered in a non-binding term sheet dated June 22, 2016 (the “Term Sheet”) with the Standby Providers (as defined below) in connection with a possible recapitalization pursuant to which the Filer would:

(a)           complete by way of a prospectus an offering of rights to subscribe for Common Shares for proceeds of $50 million (the “Rights Offering”), at a price equal to 80% of the volume weighted average trading price of the Common Shares on the TSX for the five trading day period prior to the date of execution of definitive agreements and announce-ment of the Possible Recapitalization (the “Offering Price”);

(b)           use a portion of the proceeds derived from the Rights Offering ($17.5 million) to repay a portion of its subordinated debt under a loan agreement (the “Subordi-nated Loan Agreement”) and provide for certain amendments to the Subordi-nated Loan Agreement (including an extension of its term);

(c)           provide for certain amendments to the terms of the Filer’s convertible unsecured subordinated debentures that have been issued to the public by way of a prospectus (the “Convertible Deben-tures”) (including an extension of their term by 5 years from the closing of the Possible Recapitalization, an increased interest rate to 6% and a reduced conversion price at $2.50 (the “Conver-sion Price”)); and

(d)           use a portion of the proceeds derived from the Rights Offering (approximately $30 million) to reduce the outstanding balance of the Filer’s credit facilities and provide for a renewal of the credit faci-lities, with the balance of the proceeds derived from the Rights Offering (approximately $2.5 million) to be used to pay transaction costs and other general corporate purposes;

(collectively, the “Possible Recapitalization”).

9.             The Possible Recapitalization would proceed only if determined to be in the best interests of the Filer as an alternative to rebalance the capital structure of the Filer, which has a substantial amount of debt to be refinanced due within the next twelve months, and definitive agreements are finalized and entered into. As part of this process, the board of directors of the Filer (the “Board”) would evaluate whether the Possible Recapitalization is in the best interests of the Filer (taking into account the interests of its shareholders (the “Shareholders”) and other stakeholders) versus any other available alternatives having been considered as part of a strategic review process by the Filer under the supervision of a committee comprised of independent members (the “Ad Hoc Committee”). The Filer is being assisted by outside legal and financial advisors in its assessment of available alternatives from a legal and financial standpoint.

10.          In light of the high level of dilution, the Board and Ad Hoc Committee wish to allow the opportunity to Shareholders as of the record date for the Rights Offering to participate in the Rights Offering and maintain their pro rata equity interests in the Filer at the Offering Price being negotiated with four arm’s length Standby Providers.

11.          The amendments to the terms of the Convertible Debentures must be approved, in accordance with the indenture governing the Convertible Deben-tures, by holders of not less than 66 2/3% of the principal amount of the Convertible Debentures, present in person or represented by proxy at a Debentureholders meeting (the “Debenture-holders Meeting”) and entitled to vote. It is contemplated that the Debentureholders Meeting would be held on the same day as the meeting of Shareholders (the “Shareholders Meeting”) required to approve the Rights Offering (including the Offering Price), within approximately 45 days after the announcement of the Possible Recapitalization.

12.          In order to ensure that the short-form prospectus to be filed in connection with the Rights Offering (the “Prospectus”) contains full, true and plain disclosure of all relevant facts with no possible amendments relating to components of the Possible Recapitalization, it is contemplated that the Filer would hold the Debentureholders Meeting and Shareholders Meeting first and subsequently proceed with the filing of the preliminary Prospectus as soon as possible after securing the vote of Debentureholders and Shareholders. The effectiveness of the amend-ments to the Convertible Debentures and all other transactions forming part of the Possible Recapitalization would be conditional on the completion of each other (including completion of the Rights Offering).

13.          The Filer has a shareholders rights plan (“Poison Pill”) approved by Shareholders which provides for certain highly potential dilutive flip-in-events in the event a person becomes the beneficial owner of 20% or more of the outstanding Common Shares (calculation of beneficial ownership includes any Common Shares as to which such person has the right to become the owner within 60 days upon the exercise of any conversion right, warrant or option (including underlying the Convertible Debentures)).

14.          Five persons (the “Standby Providers”), each for up to $10 million, have agreed in principle pursuant to the Term Sheet to subscribe for all Common Shares offered under the Rights Offering that are not otherwise purchased, subject to entering into a definitive agreement containing terms and conditions to the satisfaction of all parties including the Board; provided that none of the Standby Providers shall purchase a number of Common Shares that, when aggregated with the Common Shares over which the Standby Provider exercises, directly or indirectly, control or direction after giving effect to the Rights Offering, is equal to or exceeds 20% of the number of Common Shares outstanding at that time (the “Maximum Holding”). The subscription by the Standby Providers shall be made on a pro rata basis (or in such proportion to be agreed to by the parties in the definitive documentation) up to a maximum of $10 million by each Standby Provider (the “Maximum Participation”). In the event that a particular Standby Provider (the “Standby Provider having reached the Maximum Holding”) reaches the Maximum Holding, the other Standby Providers shall collectively (on a pro rata basis between them or in such proportion to be agreed to by the parties to the definitive documentation) subscribe for the number of Common Shares not purchased by the Standby Provider having reached the Maximum Holding, up to the Maximum Participation.

15.          One of the Standby Providers currently holds approximately 11.8% of the outstanding Common Shares and approximately 3% of the outstanding Convertible Debentures and is therefore an insider of the Filer under the Legislation and a “related party” of the Filer within the meaning of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). All other Standby Providers and participants in the Possible Recapitalization are at arm’s length with the Filer and none of them is an insider within the meaning of the Legislation or a “related party” of the Filer within the meaning of MI 61-101.

16.          Following closing of the Possible Recapitalization, there will be no agreement, commitment or understanding between the Standby Providers pursuant to which a Standby Provider may be deemed to be acting jointly or in concert with any of the other Standby Providers within the meaning and for the purposes of the Legislation.

17.          The grant by the Filer to the related party of the Filer of a right to propose one nominee for election to the Board on closing of the Possible Recapitalization and annually thereafter subject to holding at least 7.5% of outstanding Common Shares may constitute a “collateral benefit” under MI 61-101. The Rights Offering will therefore be submitted for approval by more than 50% of the votes cast by the Shareholders (excluding the related party of the Filer) who attend the Shareholders Meeting in person or by proxy and are entitled to vote in accordance with MI 61-101. The Filer will rely on a statutory exemption from the formal valuation requirement provided in MI 61-101.

18.          The Rights Offering documentation would include a requirement providing for a Maximum Holding preventing any increase in beneficial ownership of Common Shares at or above 20% in light of the terms of the Poison Pill approved by all Shareholders.

A.            PRICING RELIEF

19.          The Filer is requesting the Pricing Relief in order to provide potential dilution expectations to the holders of Convertible Debentures in connection with the proposed amendments to the Conversion Price of the Convertible Debentures, it is essential to crystallize the Offering Price under the Rights Offering on the date of the announcement of the Possible Recapitalization (without any subsequent potential further downward adjustments).

20.          In order to provide for a Maximum Holding to restrict the number of Common Shares that any person may be entitled to receive as a result of the Rights Offering to a maximum of 19.99% of beneficial ownership of the then issued and outstanding Common Shares under the Poison Pill, it is essential to crystallize the Offering Price under the Rights Offering on the date of the announcement of the Possible Recapitalization.

21.          All transactions under the Possible Recapitalization are conditional upon each other.

22.          On the date of announcement of the Possible Recapitalization, the Offering Price of the Rights Offering would be set based on the market price (as calculated under TSX rules) of the Common Shares less a 20% discount.

23.          The Possible Recapitalization is being negotiated at arm’s length with Standby Providers, except for the participation of the related party of the Filer as Standby Provider.

24.          The Rights Offering, including the Offering Price, will be submitted for approval by more than 50% of the votes cast by the Shareholders (excluding the related party of the Filer) who attend the Shareholders Meeting in person or by proxy and are entitled to vote in accordance with MI 61-101.

25.          Setting the Offering Price on the announcement date of the Possible Recapitalization will also allow the marketplace and Shareholders to trade on the basis of all relevant material facts once all proposed transactions comprising the Possible Recapitalization are announced and crystallized.

B.            ADDITIONAL SUBSCRIPTION RELIEF

26.          Section 8A.4 of NI 41-101 provides that if an issuer enters into a standby commitment for a distribution of rights, it must among other things grant an additional subscription privilege to all holders of rights.

27.          Section 8A.3 of NI 41-101 contemplates that in order to provide an additional subscription privi-lege to a holder of a right, each holder of a right must be entitled to receive a specific amount of securities determined according to a mathematic formula.

28.          In light of the standby commitments by the Standby Providers, the Filer will allow for an additional subscription privilege under the Rights Offering as set out in section 8A.3 of NI 41-101 but would provide for a Maximum Holding to restrict the number of Common Shares that any person may be entitled to receive as a result of the Rights Offering to a maximum of 19.99% of beneficial ownership of the then issued and outstanding Common Shares as per the terms and conditions of the Poison Pill approved by Shareholders.

29.          Such restriction is necessary to proceed with the Possible Recapitalization without triggering the application of the Poison Pill, and will equally apply to the Standby Providers.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemptions Sought are granted provided that:

1.             the Filer discloses the terms of the Exemptions Sought in the information circulars to be prepared and filed in connection with the Debentureholders Meeting and Shareholders Meeting, as well as in the Prospectus in connection with the Rights Offering;

2.             the Rights Offering, including the Offering Price, is approved by more than 50% of the votes cast by the Shareholders (excluding the related party of the Filer) who attend the Shareholders Meeting in person or by proxy and are entitled to vote in accordance with MI 61-101; and

3.             the information circular to be prepared and filed in connection with the Share-holders Meeting discloses the anticipated effect of the Possible Recapitalization on the Shareholders.

“Lucie J. Roy”
Senior Director, Corporate Finance