Falconbridge Limited - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- exemptive relief from related party transaction requirements -- issuer to enter into inter-company debt reorganization with related parties, including entering into a loan agreement and subscription for redeemable preferred shares by issuer -- borrowing and subscription are related party transactions -- wholly-owned subsidiary exemption not technically available to issuer because it has issued and outstanding a series of preferred shares that are convertible into common shares of issuer at option of holder -- exemptive relief granted since issuer has right to prevent and will not permit conversion of preferred shares into common shares -- Ontario de minimis exemption technically not available because issuer's parent is an Ontario corporation owning 100% of the equity securities of issuer -- exemptive relief granted since issuer's parent is the only holder of affected securities in Ontario and does not require protections afforded under related party transaction requirements.
Applicable Legislative Provisions
OSC Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions, ss. 5.1(c) and (d), 5.4, 9.1.
February 14, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO AND QUEBEC
(the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
FALCONBRIDGE LIMITED
("Falconbridge")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Falconbridge for a decision under the securities legislation of the applicable Jurisdictions (the "Legislation") that Falconbridge be exempt from the application of Part 5 of each of Ontario Securities Commission Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions ("Rule 61-501") and Regulation Q-27 Respecting Protection of Minority Securityholders in the Course of Certain Transactions ("Q-27") (the "Requested Relief").
Under the Mutual Reliance Review System for Exemptive Relief Applications:
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are otherwise defined in this decision
Representations
This decision is based on the following facts represented by Falconbridge:
Background
1. Falconbridge is a corporation existing and incorporated under the laws of the Province of Ontario with its principal executive offices located in Toronto, Ontario.
2. Falconbridge is a reporting issuer or its equivalent in each of the provinces and territories of Canada where such status exists and is not in default of any of its reporting issuer obligations.
3. Xstrata plc ("Xstrata") is a corporation existing and incorporated under the laws of England and Wales with its principal executive offices in Zug, Switzerland. Xstrata's ordinary shares are listed on the London and Swiss stock exchanges.
4. Xstrata Canada Inc. ("Xstrata Canada") is a corporation existing and incorporated under the laws of the Province of Ontario. Xstrata Canada is a wholly-owned indirect subsidiary of Xstrata and was incorporated for the purpose of acquiring Falconbridge. On May 18, 2006, Xstrata Canada made an offer as varied, amended, and supplemented by a notice of extension dated July 7, 2006, a notice of variation dated July 11, 2006, a notice of variation dated July 21, 2006 and a notice of extension dated August 15, 2006 (the "Offer"), to purchase all of the issued and outstanding common shares of Falconbridge (the "Common Shares"), other than any Common Shares owned directly or indirectly by Xstrata or its affiliates, on the basis of Cdn.$62.50 per Common Share. The Offer expired at midnight (Vancouver time) on August 25, 2006.
5. Xstrata Canada currently beneficially owns 100% of the issued and outstanding Common Shares.
6. The authorized capital of Falconbridge consists of an unlimited number of Common Shares, an unlimited number of preferred shares issuable in series and an unlimited number of participating shares issuable in series. As of the close of business on December 31, 2006, there were issued and outstanding:
(a) 377,994,397 Common Shares, all of which are owned indirectly by Xstrata;
(b) 6,000,000 cumulative redeemable preferred shares, Series H (the "Series H Preferred Shares")
(c) 4,787,283 cumulative preferred shares, Series 2 (the "Series 2 Preferred Shares"); and
(d) 3,122,822 cumulative preferred shares, Series 3 (the "Series 3 Preferred Shares" and together with the Series H Preferred Shares and the Series 2 Preferred Shares, the "Preferred Shares").
7. The Common Shares were delisted from the Toronto Stock Exchange (the "TSX") on November 1, 2006 and from the New York Stock Exchange on August 17, 2006. The Preferred Shares are owned by the public and are listed on the TSX. No other securities of Falconbridge are listed on a securities exchange.
8. Falconbridge may redeem all, but not less than all, of the Series H Preferred Shares commencing on March 31, 2008 for $25.00 per share plus accrued and unpaid dividends, including any shares that have been submitted for conversion.
9. The Series H Preferred Shares are convertible at the option of the holders into Common Shares after June 30, 2008 on the last day of March, June, September and December in each year. Upon conversion, the holder is entitled to receive the number of Common Shares determined by dividing $25.00 (plus any accrued and unpaid dividends) by the market price of the Common Shares at such time. Falconbridge has the right to convert the Series H Preferred Shares into Common Shares on or after March 30, 2008.
10. Falconbridge has the right to prevent, and will not permit, the conversion of any Series H Preferred Shares into Common Shares. The right of the holders of Series H Preferred Shares to convert their shares into Common Shares is expressly subject to Falconbridge's right to redeem for $25.00 per share, plus accrued and unpaid dividends, any Series H Preferred Shares submitted for conversion.
11. Aside from the Series H Preferred Shares, there are no other Falconbridge securities outstanding that are convertible into voting or equity securities of Falconbridge.
12. Falconbridge may redeem all, but not less than all, of the Series 2 Preferred Shares at any time on payment of $25.50 per share plus accrued and unpaid dividends.
13. Holders of Series 2 Preferred Shares may, at their option, every five years on March 1, commencing March 1, 2004, convert all or any of their Series 2 Preferred Shares into Series 3 Preferred Shares.
14. Falconbridge may redeem all, but not less than all, of the Series 3 Preferred Shares upon 45 days notice only on March 1, 2009 and on each five year anniversary thereafter on payment of $25.00 per share plus accrued and unpaid dividends.
15. Holders of Series 3 Preferred Shares may at their option every five years on March 1, commencing March 1, 2009, convert all or any of their Series 3 Preferred Shares into Series 2 Preferred Shares.
16. On December 11, 2006, Falconbridge announced that Xstrata has fully and unconditionally guaranteed the Preferred Shares and Falconbridge's senior debt.
The Proposed Transaction
17. Prior to the commencement of the proposed reorganization of the debt incurred by Xstrata in connection with the Offer (the "Proposed Transaction"), Xstrata Canada will incorporate a new subsidiary under the laws of the Province of Ontario ("Sisterco"). Sisterco will be owned and controlled by Xstrata Canada and will have been formed for the sole purpose of carrying out the Proposed Transaction.
18. The Proposed Transaction will consist of the following steps to occur in the following order:
(a) Falconbridge will borrow $9 billion to $12 billion (the "Debt Amount") under a daylight loan from an arm's length lender;
(b) Falconbridge will subscribe for redeemable preferred shares ("RPS") of Sisterco for a subscription price equal to the Debt Amount. The RPS are non-voting, redeemable, retractable preferred shares with a cumulative dividend payable at a fixed or floating rate semi-annually or annually;
(c) Sisterco will lend the proceeds from the subscription of the RPS, equal to the Debt Amount, to Xstrata Canada pursuant to a non-interest bearing demand loan ("Loan A");
(d) Xstrata Canada will lend to Falconbridge the principal amount under Loan A, which is equal to the Debt Amount, pursuant to an interest bearing demand loan ("Loan B"). The interest rate payable under Loan B will be slightly lower than the dividend rate payable by Sisterco to Falconbridge on the RPS;
(e) Falconbridge will repay the daylight loan.
Alternatively, Falconbridge may borrow some fraction of the Debt Amount and complete the above-noted steps multiple times so the aggregated subscription prices for RPS and amount of Loan A and Loan B will be equal to the Debt Amount.
19. Following the Proposed Transaction, Xstrata Canada intends to periodically fund Sisterco with sufficient funds to satisfy its dividend obligations in respect of the RPS.
20. In general terms, the Proposed Transaction will permit Falconbridge to deduct the losses that would otherwise be incurred by Xstrata Canada in respect of interest payable on borrowed money, the proceeds of which were used to partly finance the acquisition of the shares of Falconbridge. The purpose of the Proposed Transaction is to allow for the consolidation of the non-capital losses of Xstrata Canada that would have been created by the interest expense on the acquisition debt, if it was not for the Proposed Transaction, with the taxable income of Falconbridge.
The Related Party Transaction
21. Each of Xstrata, Xstrata Canada and Sisterco (once it is incorporated) is a "related party" of Falconbridge, for the purposes of the Legislation.
22. The Proposed Transaction is a "related party transaction" within the meaning of the Legislation because it is a transaction pursuant to which (i) Falconbridge will subscribe for RPS of Sisterco; and (ii) Falconbridge will enter into a loan agreement with and borrow funds from Xstrata Canada.
23. Section 5.1(c) and 5.1(d) of Rule 61-501 provide that the requirements relating to related party transactions under Part 5 of Rule 61-501 do not apply to an issuer that is carrying out a related party transaction if, among other exemptions:
(a) at the time the related party transaction is agreed to: (i) persons or companies whose last address as shown on the books of the issuer is in Ontario hold less than two per cent of the outstanding securities of each class of affected securities of the issuer; and (ii) the issuer reasonably believes that persons or companies who are in Ontario beneficially own less than two per cent of the outstanding securities of each class of affected securities of the issuer, and all documents concerning the related party transaction that are sent generally to other holders of affected securities of the issuer are concurrently sent to all holders of the securities whose last address as shown on the books of the issuer is in Ontario (the "Ontario De Minimis Exemption"); or
(b) the parties to the transaction consist solely of: (i) an entity and one or more of its wholly-owned subsidiary entities, or (ii) wholly-owned subsidiary entities of the same entity (the "Subsidiary Exemption").
24. Section 5.1(c) of Q-27 provides that the requirements relating to related party transactions under Part 5 of Q-27 do not apply to an issuer that is carrying out a related party transaction if, among other exemptions, there are fewer than 50 registered securityholders resident in Quebec according to the addresses entered in the records of the issuer or in the records of the dealers acting as nominee, such securityholders hold less than 2% of each class of affected securities and all documents concerning the transaction that are sent generally to other holders of affected securities are concurrently sent to such securityholders (the "Quebec De Minimis Exemption").
25. The sole reason the Proposed Transaction is not exempted by the Ontario De Minimis Exemption is that Xstrata Canada is resident in Ontario and beneficially owns greater than two per cent of the affected securities (Common Shares) of Falconbridge. Xstrata Canada, a transaction proponent, owns all of the affected securities.
26. The sole reason the Proposed Transaction is not exempted by the Quebec De Minimis Exemption is that there are more than 50 holders of Preferred Shares resident in Quebec.
27. The sole reason the Proposed Transaction is not exempted by the Subsidiary Exemption is that the Series H Preferred Shares are convertible into Common Shares at the option of the holder on or after June 30, 2008, unless earlier redeemed by Falconbridge and, therefore, Falconbridge is not a wholly-owned subsidiary entity, as defined by Rule 61-501, of Xstrata Canada.
28. Unless discretionary relief is granted, Falconbridge will be required to obtain and deliver to all holders of Common Shares and Preferred Shares a formal valuation of the non-cash assets involved in the Proposed Transaction pursuant to the Legislation, which assets will consist exclusively of the RPS for which Falconbridge intends to subscribe.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the relevant Decision Makers with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that all voting and equity securities of Falconbridge continue to be held by Xstrata or an affiliate of Xstrata.