Brookfield Infrastructure Partners L.P., and Brookfield Infrastructure Corporation
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- partnership creates corporation to provide investors with alternative way to hold its units -- corporation issues exchangeable shares whose terms are structured so that each exchangeable share is functionally and economically equivalent to a partnership unit -- each exchangeable share provides an equivalent economic return as a partnership unit -- both the partnership and the corporation are reporting issuers -- related party transactions between the partnership and the corporation are exempt from the related party transaction requirements, subject to conditions -- partnership may include corporation's exchangeable shares when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions, subject to conditions.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, Part 5, ss. 5.5(a), 5.7(1)(a) and 9.1.
March 11, 2020
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 BROOKFIELD INFRASTRUCTURE PARTNERS L.P., AND BROOKFIELD INFRASTRUCTURE CORPORATION
DECISION
Background
The principal regulator in the Jurisdiction has received an application from Brookfield Infrastructure Partners L.P. (BIP) and Brookfield Infrastructure Corporation (BIPC, and together with BIP, the Filers) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that:
(a) BIP be exempt from the requirements of Part 5 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101, and such requirements, the Related Party Transaction Requirements) in connection with any related party transaction of BIP with BIPC or any of BIPC's subsidiary entities (the BIP Related Party Relief);
(b) BIPC be exempt from the Related Party Transaction Requirements in connection with any related party transaction of BIPC with BIP or any of BIP's subsidiary entities (the BIPC Related Party Relief); and
(c) BIP be exempt from the requirements of sections 5.4 and 5.6 of MI 61-101 (the Valuation and Minority Approval Requirements) in connection with any related party transaction of BIP entered into indirectly through Holding LP (as defined below) or any subsidiary entity of Holding LP, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the class A exchangeable subordinate voting shares of BIPC (the Exchangeable Shares) were included in the calculation of BIP's market capitalization (the Transaction Size Relief, collectively with the BIP Related Party Relief and the BIPC Related Party Relief, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Manitoba, New Brunswick, Quebec, and Saskatchewan.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and MI 61-101 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filers:
BIP
1. BIP is an exempted limited partnership established, registered and in good standing under the laws of Bermuda. BIP's registered and head office is located at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.
2. BIP is a reporting issuer in all of the provinces and territories of Canada and is a SEC foreign issuer within the meaning of section 1.1 of National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers (NI 71-102). BIP satisfies its continuous disclosure obligations by complying with U.S. federal securities laws in accordance with NI 71-102. BIP is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.
3. The authorized capital of BIP consists of: (a) non-voting limited partnership units (the BIP Units); (b) Class A preferred limited partnership units, issuable in series; and (c) general partnership units.
4. The BIP Units are listed on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) under the symbols "BIP" and "BIP.UN", respectively.
5. BIP's sole asset is its managing general partnership interest and preferred limited partnership interest in Brookfield Infrastructure L.P. (Holding LP), a Bermuda exempted limited partnership that was established on August 17, 2007 and is in good standing under the laws of Bermuda.
6. Brookfield Infrastructure Partners Limited, a wholly-owned subsidiary of Brookfield Asset Management Inc. (Brookfield), holds the general partner interest in BIP.
Brookfield
7. Brookfield is a corporation existing and in good standing under the Business Corporations Act (Ontario). Brookfield's registered and head office is located at Suite 300, Brookfield Place, 181 Bay Street, Toronto, Ontario, M5J 2T3.
8. Brookfield is a reporting issuer in all of the provinces and territories of Canada and is not in default of any requirement of securities legislation in the jurisdictions in which it is a reporting issuer.
9. The Class A Limited Voting Shares of Brookfield are listed on the NYSE and the TSX under the symbols "BAM" and "BAM.A", respectively.
10. Brookfield indirectly holds an approximate 29.2% economic interest in BIP (on a fully-exchanged basis) through its ownership of redeemable partnership units of Holding LP (the Redeemable Partnership Units).
11. Brookfield indirectly holds all of the voting interests in BIP through its ownership of the general partner unit of BIP.
12. BIP, Holding LP and certain of their subsidiaries have retained Brookfield and its related entities to provide management, administrative and advisory services under a master services agreement.
BIPC
13. BIPC is a corporation existing and in good standing under the Business Corporations Act (British Columbia). BIPC was incorporated on August 30, 2019. BIPC's registered office is located at 1500 Royal Centre, 1055 West Georgia Street, P.O. Box 11117, Vancouver, British Columbia, V6E 4N7. BIPC's head office is located at 250 Vesey Street, 15th Floor, New York, New York, 10281, United States of America.
14. The authorized share capital of BIPC consists of an unlimited number of common shares (the BIPC Common Shares).
15. All of the BIPC Common Shares are held by Brookfield Instructure Holdings (Canada) Inc., a wholly-owned subsidiary of BIP.
16. BIPC's principal investments are expected to initially consist of indirect interests in utilities businesses in Europe and South America.
17. BIPC is not a reporting issuer in any jurisdiction and is not in default of any applicable requirement of securities legislation.
The Special Distribution
18. BIP believes that certain investors in certain jurisdictions may be dissuaded from investing in BIP because of the tax reporting framework that results from investing in units of a Bermuda exempted limited partnership.
19. BIPC was created, in part, to provide investors that would not otherwise invest in BIP with an opportunity to gain access to BIP's portfolio of infrastructure assets, and to provide investors with the flexibility to own, through the ownership of an Exchangeable Share, the economic equivalent of a BIP Unit.
20. BIP will be distributing Exchangeable Shares to holders of BIP Units (the Special Distribution). The Special Distribution is, in effect, a stock split of the BIP Units.
21. On November 13, 2019, (i) BIPC filed a preliminary long form prospectus to qualify the distribution of the Exchangeable Shares to be distributed pursuant to the Special Distribution, and (ii) BIP filed a preliminary short form prospectus to qualify the BIP Units issuable or deliverable upon the exchange, redemption or purchase of Exchangeable Shares pursuant to their terms.
22. Upon obtaining a receipt for the final prospectus, BIPC will become a reporting issuer in each of the provinces and territories of Canada.
23. BIPC has applied to have the Exchangeable Shares listed on the NYSE and TSX.
24. BIPC filed a registration statement on Form F-1 with the U.S. Securities and Exchange Commission (the SEC), as amended, to register the Exchangeable Shares that will be distributed pursuant to the Special Distribution, and BIP filed a registration statement of Form F-3 with the SEC, as amended, to register the BIP Units issuable or deliverable upon the exchange, redemption or purchase of Exchangeable Shares pursuant to their terms.
25. Prior to the closing of the Special Distribution:
(a) BIPC will reclassify its share structure such that, following the reclassification, BIPC's authorized share capital will consist of: (i) an unlimited number of Exchangeable Shares; (ii) an unlimited number of class B multiple voting shares (the Class B Shares); (iii) an unlimited number of class C non-voting shares (the Class C Shares); (iv) an unlimited number of class A senior preferred shares (issuable in series); and (v) an unlimited number of class B junior preferred shares (issuable in series);
(b) the following ownership interests will be contributed or transferred by BIP, or subsidiaries thereof, to BIPC:
(i) approximately 80% of BUUK Infrastructure Holdings Limited, a gas distribution business located in the United Kingdom; and
(ii) approximately 28% of Nova Transportadora do Sudeste S.A., a gas transportation business located in Brazil; and
(c) BIP will receive Exchangeable Shares through a distribution by Holding LP of Exchangeable Shares to all the holders of equity units of Holding LP, including Brookfield through its indirect ownership of Redeemable Partnership Units and special general partner units in Brookfield Infrastructure Special LP.
26. The distribution ratio of Exchangeable Shares for each BIP Unit held will be based on the fair market value of the businesses to be transferred by BIP to BIPC, the number of BIP Units outstanding at the time of the Special Distribution (assuming exchange of the Redeemable Partnership Units), and the market capitalization of BIP. It is expected that holders of BIP Units will receive one (1) Exchangeable Share (less any Exchangeable Shares withheld to satisfy withholding tax obligations) for every nine (9) BIP Units held as of the record date of the Special Distribution.
27. Each Exchangeable Share has been structured with the intention of providing an economic return equivalent to a BIP Unit and the rights, privileges, restrictions and conditions attached to each Exchangeable Share (the Exchangeable Share Provisions) are such that each Exchangeable Share is as nearly as practicable, functionally and economically, equivalent to a BIP Unit. In particular:
(a) each Exchangeable Share will be exchangeable at the option of a holder for one (1) BIP Unit (subject to adjustment to reflect certain capital events) or its cash equivalent (the form of payment to be determined at the election of BIPC) (an Exchange);
(b) the Exchangeable Shares are redeemable by BIPC for BIP Units (or its cash equivalent, at BIPC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) (a Redemption);
(c) upon a liquidation, dissolution or winding up of BIPC, holders of Exchangeable Shares will be entitled to receive BIP Units (or its cash equivalent, at BIPC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) and not any remaining property or assets of BIPC following such payment (a BIPC Liquidation);
(d) upon a liquidation, dissolution or winding up of BIP, including where substantially concurrent with a BIPC Liquidation, all of the Exchangeable Shares will be automatically redeemed for BIP Units (or its cash equivalent, at BIPC's election) on a one-for-one basis (subject to adjustment to reflect certain capital events) (a BIP Liquidation); and
(e) subject to applicable law and in accordance with the Exchangeable Share Provisions, each Exchangeable Share will entitle the holder to dividends from BIPC payable at the same time as, and equivalent to, each distribution on a BIP Unit. The Exchangeable Share Provisions also provide that if a distribution is declared on the BIP Units and an equivalent dividend is not declared and paid concurrently on the Exchangeable Shares, then the undeclared or unpaid amount of such dividend accrues and accumulates and is to be paid upon the first to occur of any of the circumstances contemplated by paragraphs (a) to (d) above, if not yet paid.
28. Upon being notified by BIPC that BIPC has received a request for an Exchange, BIP has an overriding call right to purchase (or have one of its affiliates purchase) all of the Exchangeable Shares that are the subject of the Exchange notice from the holder of Exchangeable Shares for BIP Units (or its cash equivalent, at BIP's election) on a one-for-one basis (subject to adjustment to reflect certain capital events).
29. Upon being notified by BIPC that it intends to conduct a Redemption, BIP has an overriding call right to purchase (or have one of its affiliates purchase) all but not less than all of the then outstanding Exchangeable Shares for BIP Units (or its cash equivalent, at BIP's election) on a one-for-one basis (subject to adjustment to reflect certain capital events).
30. Upon the occurrence of a BIP Liquidation or BIPC Liquidation, BIP will have an overriding liquidation call right to purchase (or have one of its affiliates purchase) all but not less than all of the then outstanding Exchangeable Shares on the day prior to the effective date of such BIP Liquidation or BIPC Liquidation for BIP Units on a one-for-one basis (subject to adjustment to reflect certain capital events).
31. Prior to the Special Distribution, Brookfield will enter into a rights agreement (the Rights Agreement) pursuant to which it will agree that, for the five-year period beginning on the date of the Special Distribution, Brookfield will guarantee BIPC's obligation to deliver BIP Units or its cash equivalent in connection with an Exchange.
32. An investment in Exchangeable Shares will be as nearly as practicable, functionally and economically, equivalent to an investment in BIP Units. BIP expects that:
(a) investors of Exchangeable Shares will purchase Exchangeable Shares as an alternative way of owning BIP Units rather than a separate and distinct investment; and
(b) the market price of the Exchangeable Shares will be significantly impacted by (i) the combined business performance of BIPC and BIP as a single economic unit, and (ii) the market price of the BIP Units, in a manner that should result in the market price of the Exchangeable Shares closely tracking the market price of the BIP Units.
33. BIPC is intended to be an entity through which persons who do not wish to hold BIP Units directly, may hold their interests in BIP, and BIP is the entity through which holders of Exchangeable Shares and BIP Units hold their interests in the collective operations of BIP and its subsidiaries, including BIPC and its subsidiaries.
Ownership and Control of BIPC
34. The Related Party Transaction Requirements do not apply to an issuer carrying out a related party transaction if:
(a) as provided under paragraph 5.1(d) of MI 61-101, the parties to the transaction consist solely of (i) an issuer and one or more of its wholly-owned subsidiary entities, or (ii) wholly-owned subsidiary entities of the same issuer. A person is considered to be a "wholly-owned subsidiary entity" of an issuer if the issuer owns, directly or indirectly, all of the voting and equity securities and securities convertible into voting and equity securities of the person; and/or
(b) as provided under paragraph 5.1(g) of MI 61-101 (the Downstream Transaction Carve-Out), the transaction is a downstream transaction for the issuer. A "downstream transaction" means, for an issuer, a transaction between the issuer and a related party of the issuer if, at the time the transaction is agreed to, (i) the issuer is a control person of the related party, and (ii) to the knowledge of the issuer after reasonable inquiry, no related party of the issuer, other than a wholly-owned subsidiary entity of the issuer, beneficially owns or exercises control or direction over, other than through its interest in the issuer, more than five per cent of any class of voting or equity securities of the related party that is a party to the transaction.
35. Section 1.3 of MI 61-101 provides that, for the purposes of MI 61-101, a transaction of a wholly-owned subsidiary entity of an issuer is deemed to be a transaction of the issuer.
36. Related party transactions among BIP and BIPC will be required for the operation of the Exchangeable Share Provisions and in connection with ordinary course financial support arrangements which may be entered into from time to time.
37. The only voting securities of BIPC are the Exchangeable Shares and the Class B Shares. Holders of Exchangeable Shares are entitled to one (1) vote per Exchangeable Share held and holders of Class B Shares are entitled to cast, in the aggregate, a number of votes equal to three (3) times the number of votes attached to the Exchangeable Shares.
38. Neither the Exchangeable Shares nor the Class B Shares carry a residual right to participate in the assets of BIPC upon liquidation or winding-up of BIPC, and accordingly, are not equity securities under the Legislation. The Class C Shares are the only equity securities of BIPC.
39. All of the Class B Shares and the Class C Shares will be indirectly owned by BIP and none of them will be transferable except to an affiliate of BIP. Accordingly, all of the equity securities of BIPC are held indirectly by BIP.
40. BIPC is not a wholly-owned subsidiary of BIP; BIP will not own, directly or indirectly, all of the voting securities of BIPC because Brookfield and members of the public will hold Exchangeable Shares. However, by virtue of the terms of the Class B Shares, BIP holds a 75% voting interest in BIPC, will control BIPC and the appointment and removal of directors of BIPC; the voting rights attached to the Exchangeable Shares do not allow holders of Exchangeable Shares to affect the control of BIPC. The voting right attached to each Exchangeable Share is expected to assist with index inclusion.
41. BIP is not able to rely on the Downstream Transaction Carve-Out because, upon completion of the Special Distribution, Brookfield will beneficially own or exercise control or direction over, more than five per cent of the Exchangeable Shares, as it will hold, directly or indirectly, approximately 29.6% of the Exchangeable Shares. Brookfield will accordingly have a 7.4% voting interest in BIPC.
42. BIPC is a controlled subsidiary of BIP and BIP will consolidate BIPC and its businesses in BIP's financial statements.
43. By virtue of the Exchangeable Share Provisions, the economic rights of the holders of the Exchangeable Shares will not be affected by transactions between BIP and BIPC. BIP, as the sole holder of equity securities of BIPC, will receive any benefit and/or bear any detriment from related party transactions between BIP and BIPC.
44. Minority approval is required of every class of affected securities, being equity securities of the issuer. For BIPC, minority approval of a related party transaction of BIPC with BIP would be sought from the holders of its Class C Shares, all of which are held by BIP. BIP, as the counterparty to such a related party transaction, does not require the protections of MI 61-101.
Market Capitalization Calculation
45. It is anticipated that BIP will, from time to time, enter into transactions with certain related parties, including Brookfield and its affiliates (other than BIP and its related entities, including BIPC) indirectly through Holding LP and its subsidiaries (including BIPC and its subsidiaries).
46. The Valuation and Minority Approval Requirements require, subject to the availability of an exemption, that an issuer obtain: (a) a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and (b) approval of the transaction by disinterested holders of the affected securities of the issuer.
47. A related party transaction that is subject to MI 61-101 may be exempt from the Valuation and Minority Approval Requirements if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization (the Market Cap Exemption).
48. It is unclear whether BIP would be entitled to rely on the Market Cap Exemption available under the Legislation because the definition of market capitalization in the Legislation does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.
49. The Exchangeable Shares represent part of the equity value of BIP and are functionally and economically equivalent to the BIP Units. As a result of the Exchangeable Share Provisions, holders of Exchangeable Shares have the ability to receive a BIP Unit or its cash equivalent (the form of payment to be determined at the election of BIPC) and will receive identical distributions to the BIP Units, as and when declared by the board of directors of BIPC. Moreover, the economic interests that underlie the Exchangeable Shares are identical to those underlying the BIP Units; namely, the assets and operations held directly or indirectly by BIP.
50. Any costs related to a transaction occurring within the BIPC group would be borne by BIP as the sole holder of the equity securities of BIPC. BIP will consolidate BIP and its businesses in its financial statements and the business of BIP (including BIPC and its subsidiaries) will be the same as it was before the creation of BIPC and the transactions conducted in connection with, and to facilitate, the Special Distribution.
51. If the Exchangeable Shares are not included in the market capitalization of BIP, the equity value of BIP will be understated initially by the value of the Exchangeable Shares, being approximately 11% (assuming a one-for-nine distribution ratio). As a result, related party transactions of BIP that are entered into through a subsidiary entity of BIPC may be subject to the Valuation and Minority Approval Requirements in circumstances where the fair market value of the transactions are effectively less than 25% of the fully diluted market capitalization of BIP.
52. BIP has already received relief similar to the Transaction Size Relief in respect of the Redeemable Partnership Units. On December 21, 2007, the Ontario Securities Commission granted BIP an exemption from the Valuation and Minority Approval Requirements in connection with any related party transaction of BIP entered into indirectly through Holding LP and its subsidiaries if that transaction would qualify for the Market Cap Exemption if the Redeemable Partnership Units were included in the calculation of BIP's market capitalization.
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 Exemption Sought is granted provided that:
1. in respect of the BIP Related Party Relief and BIPC Related Party Relief:
(a) all of the equity securities of BIPC are owned, directly or indirectly, by BIP;
(b) all of the voting securities of BIPC (other than the Exchangeable Shares) are owned, directly or indirectly, by BIP;
(c) there are no material changes to the Exchangeable Share Provisions, as described above; and
(d) BIP consolidates BIPC and its businesses in BIP's financial statements;
2. in respect of the Transaction Size Relief:
(a) the transaction would qualify for the Market Cap Exemption if the Exchangeable Shares were considered an outstanding class of equity securities of BIP that were convertible into BIP Units;
(b) there are no material changes to the Exchangeable Share Provisions, as described above; and
(c) any annual information form or equivalent of BIP that is required to be filed in accordance with applicable securities laws contain the following disclosure, with any immaterial modifications as the context may require:
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. Brookfield Infrastructure Partners L.P. ("BIP") has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of BIP's market capitalization, if Brookfield's indirect equity interest in BIP and the class A exchangeable subordinate voting shares of Brookfield Infrastructure Corporation ("BIPC") are included in the calculation of BIP's market capitalization. As a result, the 25% threshold above which the minority approval and valuation requirements would apply is increased to include the approximately 29.2% indirect interest in BIP in the form of redeemable partnership units of Brookfield Infrastructure L.P. held by Brookfield and the approximately 11.1% indirect interest in BIP in the form of class A exchangeable subordinate voting shares of BIPC held by Brookfield and the public.