Exemption Orders (Discretionary)
HÉROUX INC.
2001 BCSECCOM 262
Headnote
Mutual Reliance Review System for Exemptive Relief Applications - Relief granted from the identical consideration requirements of the legislation in connection with a take over bid, to allow the offeror to offer the proceeds of a sale of securities to non-Canadians, relief also granted from the collateral benefits prohibition in the context of a take over bid offer where certain key executives enter into employment agreements, and relief granted from certain valuation requirements.
Applicable British Columbia Provisions
Securities Act, R.S.B.C. 1996, c. 418, ss. 107(1), 107(2), 114(2)(a), 114(2)(c)
Securities Rules, R.B.C. Reg. 194/97, s. 162(3)
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, ONTARIO, QUEBEC AND NOVA SCOTIA
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF , 1410740 ONTARIO LIMITED AND DEVTEK CORPORATION
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the “Decision Maker”) in each of British Columbia, Alberta, Ontario, Québec and Nova Scotia (the “Jurisdictions”) has received an application (the “Application”) from Héroux Inc. (“Héroux”) and 1410740 Ontario Limited (“Bidco”) for a decision pursuant to the applicable Securities Legislation of the Jurisdictions (the “Legislation”) that, in connection with the offer (the “Offer”) by Héroux and Bidco to purchase all of the Subordinate Voting Shares (the “Devtek SV Shares”), outstanding options to purchase Devtek SV Shares and all of the Multiple Voting Shares (the “Devtek MV Shares” and, collectively with the Devtek SV Shares, the “Devtek Shares”) of Devtek Corporation (“Devtek”):
(1) Bidco and Héroux shall be exempt from the requirement in the Legislation to offer all holders of the same class of securities identical consideration (the “Identical Consideration Requirement”), insofar as holders of Devtek-Shares (the “Shareholders”) who are residing in the United States (collectively, the “U.S. Shareholders”) who accept the Offer and otherwise would be entitled to receive common shares of Héroux (the “Héroux Common Shares”) under the Offer will receive the cash proceeds from the sale of Héroux Common Shares in accordance with the procedure described in paragraph 15 below, instead of receiving Héroux Common Shares;
(2) despite the provision in the Legislation that prohibits an offeror who makes or intends to make a take-over-bid or issuer bid and any person acting jointly or in concert with the offeror from entering into an agreement, commitment or understanding with any holder or beneficial owner of securities of the offeree issuer that has the effect of providing to the holder or owner a consideration of greater value than that offered to other holders of the same class of securities (the “Prohibition on Collateral Agreements”), the New Services Agreement (as hereinafter defined) to be entered into with Mr. Helmut Hofmann (“Mr. Hofmann”) and the Amended Consulting Agreement (as hereinafter defined) to be entered into with Mr. Donald Green (“Mr. Green”) (Mr. Hofmann and, together with Mr. Green, the “Principals”), who both hold Devtek Shares, are made for reasons other than to increase the value of the consideration that the Principals will receive for their Devtek Shares under the Offer and, as such, the New Services Agreement and the Amended Consulting Agreement (collectively, the “Agreements”) may be entered into;
(3) despite the provision in the Legislation in British Columbia, Alberta, Quebec and Nova Scotia (collectively, the “Valuation Requirement Jurisdictions”) Bidco shall be exempted, in connection with the Offer, from the requirement to prepare a formal valuation of the Devtek Common Shares and to provide disclosure in the take-over bid circular (the “Circular”) to be provided to Shareholders in connection with the Offer of such valuation, or a summary thereof (the “Valuation Requirement”); and
(4) despite the provision in the Legislation in Quebec and Ontario requiring an issuer that proposes to effect a going-private transaction to exclude the votes attached to securities tendered to a preceding formal bid by certain securityholders in determining whether minority approval for the going-private transaction has been obtained, the Devtek Shares to be tendered to the Offer by the Principals may be counted as part of the minority in determining whether minority approval for the Subsequent Acquisition Transaction (as hereinafter) has been obtained;
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Application (the “System”) the Commission des valeurs mobilières du Québec is the principal regulator for the Application;
AND WHEREAS Bidco and Héroux have represented to the Decision Makers as follows:
1. Héroux is governed by the Companies Act (Québec), is a reporting issuer in Québec and Ontario and is not in default of the Legislation in those Jurisdictions. Its head office is located in Québec.
2. The authorized capital of Héroux consists of an unlimited number of Héroux Common Shares, an unlimited number of First Preferred Shares and an unlimited number of Second Preferred Shares. As of May 5, 2000, there were 14,908,267 Héroux Common Shares, no First Preferred Shares and no Second Preferred Shares outstanding.
3. The Héroux Common Shares are listed and posted for trading on the Toronto Stock Exchange (the “TSE”).
4. Bidco was incorporated under the Business Corporations Act (Ontario) (the “OBCA”) solely for the purpose of acting as a co-offeror in respect of the Offer. Bidco’s head office is located in Ontario. Héroux is Bidco’s sole shareholder.
5. Devtek is governed by the OBCA and is a reporting issuer in each of the Jurisdictions. Devtek’s head office is located in Ontario.
6. Devtek’s authorized capital consists of an unlimited number of Preferred Shares, 40,000,000 Devtek SV Shares and 4,000,000 Devtek MV Shares. To the knowledge of Héroux, as of May 5, 2000, the outstanding capital of Devtek was made up of no Preferred Shares, 17,108,810 Devtek SV Shares, outstanding options to purchase 907,400 Devtek SV Shares and 2,845,805 Devtek MV Shares.
7. The Devtek SV Shares and Devtek MV Shares are listed and posted for trading on the TSE.
8. To the knowledge of Héroux, after reasonable inquiry, the only persons or companies who beneficially own or exercise control or direction over securities carrying more than 10% of the voting rights attached to any class of outstanding voting securities of Devtek are Mr. Hofmann, who, together with members of his immediate family, beneficially owns or exercises control or direction over 30.2% of the Devtek MV Shares and 1.5% of the Devtek SV Shares, and Greenfleet Limited (“Greenfleet”), which beneficially owns or exercises control or direction over 3.6% of the Devtek MV Shares and 10.7% of the Subordinate Voting Shares. Greenfleet is controlled by Mr. Green.
9. On May 5, 2000, Héroux and Devtek announced they had entered into an agreement (the “Support Agreement”) pursuant to which Héroux agreed, among other things, to make the Offer, subject to certain conditions, including making the Offer on or before May 19, 2000 and Devtek agreed to recommend to the holders of Devtek Shares to accept the Offer. The Support Agreement provides that Devtek may withdraw its recommendation in certain circumstances.
10. On May 5, 2000, Héroux entered into agreements (the “Lock-up Agreements”) with certain Shareholders (the “Locked-up Shareholders”), including, among others, the Principals, pursuant to which the Locked-up Shareholders agreed to tender their Devtek Shares to the Offer and, except in certain permitted circumstances, not to withdraw them prior to the Offer’s expiry.
11. On May 19, 2000, Héroux and Bidco sent the Offer and the related documents to the Shareholders of Devtek.
12. Pursuant to the Offer, Héroux and Bidco have offered to purchase all of the issued and outstanding Devtek Shares, as well as outstanding options to purchase Devtek SV Shares, at a price per Devtek Share, at the option of each Shareholder, of either $3.50 in cash (the “Cash Option”) or 0.833 Héroux Common Share (the “Share Option”) for each Devtek Share accepted for purchase under the Offer, with each Shareholder’s election subject to proration in the event that:
(a) Shareholders elect to receive cash exceeding $36,508,526 (the “Maximum Cash Consideration”) payable under the Offer; or
(b) Shareholders elect to receive a number of Héroux Common Shares exceeding 8,689,029 Héroux Common Shares (the “Maximum Share Consideration”) issuable under the Offer.
13. The issuance of Héroux Common Shares so as to satisfy the Share Option will be made in reliance upon the applicable prospectus and registration exemptions. In addition, Héroux has initiated the required steps with the TSE so as to ensure the availability of the Héroux Common Shares to be issued pursuant to the Share Option.
14. Héroux will not issue Héroux Common Shares to U.S. Shareholders.
15. Héroux proposes instead to deliver Héroux Common Shares to Montreal Trust Company (the “Depositary”) for sale of such Héroux Common Shares by the Depositary on behalf of U.S. Shareholders. All Héroux Common Shares that the Depositary is required to sell on behalf of U.S. Shareholders will be pooled and sold by private sale or on the TSE as soon as practicable after Héroux first takes up any Devtek Shares from any U.S. Shareholders and, simultaneously or as soon as practicable with the payment of the consideration under the Offer to the Shareholders other than the U.S. Shareholders, the Depositary will forward to each U.S. Shareholder whose Héroux Common Shares have been sold by the Depositary a cheque in Canadian dollars in an amount equal to such U.S. Shareholder's pro rata share of the net proceeds of sale of all Héroux Common Shares.
16. The Héroux Common Shares that may be issued under the Offer have not and will not be registered or otherwise qualified for distribution pursuant to the securities legislation of the United States. Accordingly, the delivery of Héroux Common Shares to a U.S. Shareholder may constitute a violation of the securities legislation of the United States.
17. To the knowledge of Héroux after reasonable inquiry and based on independent search reports, as of April 25, 2000, there were fewer than 25 U.S. Shareholders who owned Devtek SV Shares representing less than 5.00% of the outstanding Devtek SV Shares and two U.S. Shareholders who owned Devtek MV Shares representing less than 1% of the Devtek MV Shares outstanding.
18. The consideration offered to U.S. Shareholders is in all other respect identical to the consideration offered to the other Shareholders. The Shareholders are not disadvantaged by the proposed treatment of U.S. Shareholders.
19. The Offer is subject to usual take-over bid conditions, including that the Offer be accepted by:
(a) persons holding at least 662/3% of the Devtek SV Shares (on a fully diluted basis) and persons holding at least 662/3% of the Devtek MV Shares (the "2/3 Condition"); and
(b) persons holding at least 50.01% of the Devtek MV Shares and persons holding at least 50.01% of the Devtek SV Shares (on a fully diluted basis) other than those held by Bidco and Héroux and their associates and affiliates or by persons whose Devtek Shares would not be included as part of the minority in the context of a minority approval vote (the "½ Condition").
20. Should the ½ Condition or the 2/3 Condition not be met, Héroux and Bidco will be entitled either to withdraw or extend the Offer.
21. Should persons holding at least 90% of Devtek SV Shares and persons holding at least 90% of Devtek MV Shares accept the Offer, and provided the ½ Condition is met, Héroux and Bidco intend to proceed with the compulsory acquisition of the remaining Devtek-Shares (the "Statutory Acquisition").
22. Should the 2/3 Condition be met but Shareholders holding fewer than 90% of Subordinate Voting Shares or of Multiple Voting Shares accept the Offer, and provided the ½ Condition is met, Héroux and Bidco intend to proceed with a subsequent acquisition transaction whereby Bidco and Devtek would be amalgamated under the OBCA (the "Subsequent Acquisition Transaction") to form a new company ("Amalco").
23. Pursuant to the Subsequent Acquisition Transaction, it is contemplated that all the shares held by Bidco in the share capital of Devtek would be cancelled, all the shares held by Héroux in the share capital of Bidco and Devtek would become voting shares of Amalco and all the shares held by the Shareholders who have not tendered to the Offer would be exchanged for non-voting, redeemable shares of Amalco, which would be redeemed promptly thereafter for a consideration identical to that offered under the Offer.
24. The OBCA provides a right of dissent to holders of shares of Amalco who would wish to apply to the Court to determine the fair value of the shares of Devtek held by such holders pursuant to the Subsequent Acquisition Transaction.
25. The Offer has been effected, and it is intended that the Subsequent Acquisition Transaction will be effected, in a manner that would satisfy the criteria in paragraph 4 of subsection 4.5(1) of Ontario Securities Commission Rule 61-501 for an exemption from the formal valuation requirements.
26. On December 10, 1996, Mr. Hofmann and Devtek entered into a 10-year services agreement negotiated at arm’s length (the “Services Agreement”) pursuant to which Mr. Hofmann was to act as Chairman of the Board of Directors (the “Board”) of Devtek until December 31, 2006. The Services Agreement provides for annual compensation, excluding bonuses and perquisites, of $300,000 until May 2002 and of $160,000 per year from June 2002 until December 31, 2006. Pursuant to the Services Agreement, Mr. Hofmann is entitled to receive an annual bonus equal to that of the Chief Executive Officer of Devtek until May 2002 and, from June 2002 until December 31, 2006, Mr. Hofmann is entitled to receive an annual bonus equal to half of that of the Chief Executive Officer of Devtek. The terms of the Services Agreement do not provide for any penalty nor any other amount payable to Mr. Hofmann upon a change of control or upon termination of his employment and there is no golden parachute provision.
27. If the Offer is successful, Héroux will be renamed Héroux-Devtek Inc. and its Board of Directors will be increased from seven to 11 directors, including four nominees of Devtek, two of which are the Principals.
28. Héroux and Mr. Hofmann agreed that:
(a) the Services Agreement will be terminated;
(b) Mr. Hofmann will be nominated as a director of Héroux-Devtek until 2006 and, if elected, will serve as Chairman of the Board of Directors of Héroux-Devtek for at least the first two years;
(c) the parties will give effect to a services agreement dated May 5, 2000 (the “New Services Agreement”) which provides that Mr. Hofmann will be entitled to receive an annual compensation, excluding perquisites, of $175,000 until May 2002 and of $75,000 from June 2002 until December 31, 2006. The perquisites provided for in the New Services Agreement will be identical to those included in the Services Agreement and no bonuses will be payable to Mr. Hoffman; and
(d) Mr. Hofmann will receive, as compensation for the reduction in the annual compensation, a lump sum equal to the present value, discounted at a rate of 6%, of the difference between the future cash flows payable under the Services Agreement and the New Services Agreement, inclusive of salary and bonuses. This discount rate of 6% was negotiated at arm's length between Héroux and Mr. Hofmann.
29. The purpose of the New Services Agreement is to align Mr. Hofmann's compensation with Héroux's compensation policies while ensuring that Mr. Hofmann is not penalized by such re-arrangement of the compensation to which he would otherwise have been entitled to receive pursuant to the Services Agreement. Mr. Hofmann's role at the new Héroux-Devtek is seen as crucial not only in terms of integrating the operations of both entities but also in terms of ensuring the successful transition of Devtek's commercial relations with its customers to Héroux-Devtek. The New Services Agreement will thus be entered into for commercial reasons. Entering into the New Services Agreements will also have the affect of avoiding the payment of any amount as a result of a change of control or of the termination of the Services Agreement.
30. Mr. Green is a director of Devtek. On September 8, 1995, Mr. Green and Devtek entered into a consulting agreement (the “Consulting Agreement”), which was amended in 1999 to adjust the compensation payable and to extend its term until 2002. This agreement provides that Mr. Green is entitled to annual compensation of $150,000 payable in equal quarterly instalments of $37,500. This Consulting Agreement terminates whenever Mr. Green ceases to hold at least 800,000 Devtek-Shares. The terms of this agreement do not provide for any penalty nor any other amount payable to Mr. Green upon a change of control or upon termination of his agreement and there is no golden parachute provision.
31. Pursuant to a letter of the Chief Executive Officer of Héroux addressed to Mr. Green, it has been agreed that:
(a) Héroux will appoint Mr. Green to the board of directors of Héroux-Devtek and will nominate and solicit proxies in favour of the election of Mr. Green as a member of the board of Héroux-Devtek for at least the next two annual elections, provided that Mr. Green continues to hold at least 800,000 Héroux Common Shares; and
(b) the Consulting Agreement will be amended (the “Amended Consulting Agreement”) to mention that it will remain in force provided that Mr. Green holds at least 800,000 Héroux Common Shares rather than 800,000 Devtek Shares as is currently provided for in the Consulting Agreement. The Amended Consulting Agreement will be entered into between Devtek and Mr. Green and neither Héroux nor Héroux-Devtek will be party to this agreement. It will be Mr. Green’s responsibility to ensure compliance with the terms of the Consulting Agreement, especially in respect of the number of shares to be held.
32. The New Services Agreement and the Amended Consulting Agreement will be entered into for valid business purposes unrelated to the Principals’ ownership of Devtek Shares and not for the purposes of: (i) providing the Principals with greater consideration for their Devtek Shares than the consideration to be received by Shareholders other than the Principals; (ii) soliciting the tender of the Principals’ Devtek Shares; or (iii) influencing their recommendations as members of the Board in connection with the Offer.
33. Héroux proposes to enter into the New Services Agreement and the Amended Consulting Agreement in order to ensure the continued presence of the Principals during the period in which Devtek's operations will be integrated with those of Héroux as well as to ensure the successful post-integration activities of the new Héroux-Devtek. In particular, Héroux believes that the continued presence of the Principals is necessary in order to successfully give effect to the business combination of Devtek and Héroux, which is premised on the capacity of Héroux to ensure the viability of Devtek's activities within Héroux-Devtek which, in the eyes of Héroux, requires the contribution and loyalty of each of the Principals.
34. The terms of both the New Services Agreement and the Amended Consulting Agreement have been negotiated with the Principals on an arm's length basis. The terms of these arrangements are consistent with Héroux internal compensation policies and are reasonable in light of the services to be provided to Héroux-Devtek by the Principals. The New Services Agreement and the Amended Consulting Agreement are being entered into by Héroux for business purposes unrelated to the Principals' ownership of Devtek Shares and not for the purpose of providing the Principals with greater consideration for their Devtek Shares than the consideration to be received by Shareholders other than the Principals. Each of the New Services Agreement and the Amended Consulting Agreement requires its respective Principal to provide value to Héroux in consideration for the compensation to be received by each of them.
AND WHEREAS pursuant to the System, this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the “Decision”);
AND WHEREAS each of the Decision Makers is satisfied that the tests contained in the Legislation that provides the Decision Maker with the Jurisdiction to make the Decision in respect of the Application have been met;
THE DECISION of the Decision Makers in the Jurisdictions pursuant to the Legislation is that:
(a) Héroux and Bidco are exempt from the Identical Consideration Requirement, insofar as U.S. Shareholders who accept the Offer will receive the cash proceeds from the Depositary’s sale of the Héroux Common Shares in accordance with the procedure set out in paragraph 15 above, instead of receiving the Héroux Common Shares;
(b) the New Services Agreement and the Amended Consulting Agreement are being entered into for reasons other than to increase the value of the consideration payable to the Principals in respect of their Devtek Shares and, as such, these agreements may be entered into despite the Prohibition on Collateral Agreements; and
AND THE DECISION of the Decision Makers in the Valuation Requirements Jurisdictions, pursuant to the Legislation in those Jurisdictions, is that Héroux and Bidco are exempt from the Valuation Requirement.
DATED this 11th day of June 2000.
Guy Lemoine Viateur Gagnon
AND THE DECISION of the Decision Makers in Quebec and Ontario pursuant to the Legislation is that Devtek Shares to be tendered to the Offer by the Principals may be counted as part of the minority in determining whether minority approval for the Subsequent Acquisition Transaction has been obtained.
DATED this 11th day of June, 2000.
Guy Lemoine Viateur Gagnon