Aleafia Health Inc. et al.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- application for wholly-owed subsidiary (Amalco) of parent company (Parent) for a decision under section 13.1 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) exempting Amalco from the requirements of NI 51-102; for a decision under Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (MI 52-109) exempting Amalco from the requirements of MI 52-109; for a decision under National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) exempting the insider of Amalco from the insider reporting requirements; for a decision under section 121(2)(a)(ii) of the Securities Act (Ontario) (Act) exempting the insiders of Amalco from the insider reporting requirements of the Act; and for a decision under National Instrument 55-102 System for Electronic Disclosure by Insiders exempting the insiders of Amalco from the requirement to file an insider profile; Amalco is a wholly-owned subsidiary of Parent; Amalco is a reporting issuer and has convertible securities outstanding; convertible securities entitle holder to acquire common shares of Parent; convertible securities do not qualify as "designated exchangeable securities" under exemption in section 13.3 of NI 51-102; relief granted on conditions substantially similar to the conditions contained in section 13.3 of NI 51-102.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 107, 121(2)(a)(ii).

National Instrument 51-102 Continuous Disclosure Obligations, ss. 13.1, 13.3.

Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, s. 4.5.

National Instrument 55-102 System for Electronic Disclosure by Insiders, s. 6.1.

National Instrument 55-104 Insider Reporting Requirements and Exemptions, s. 10.1.

April 26, 2019

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
ALEAFIA HEALTH INC. (ALEAFIA),
EMBLEM CORP. (EMBLEM),
11208578 CANADA INC. (ALEAFIA SUBCO) AND
EMBLEM CORP.
(AMALCO, AND TOGETHER WITH ALEAFIA, EMBLEM AND ALEAFIA SUBCO, THE FILERS)

DECISION

Background

The securities regulatory authority in Ontario (Decision Maker) has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that:

• Amalco be exempt from the continuous disclosure obligations under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) (the Continuous Disclosure Requirements);

• Amalco be exempt from the requirements for certification of disclosure in annual and interim filings under Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (MI 52-109) (the Certification Requirements);

• the insiders of Amalco be exempt from the requirement to file an insider profile under National Instrument 55-102 System for Electronic Disclosure by Insiders (NI 55-102) in respect of securities of Amalco (the Insider Profile Requirements); and

• the insiders of Amalco be exempt from the insider reporting requirements under National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) and related Legislation in respect of securities of Amalco (the Insider Reporting Requirements)

(collectively, 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;

(b) the Filers have provided notice that Section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador; and

(c) the decision is the decision of the principal regulator and evidences that decision of the securities regulatory authority or regulator in each of the other Jurisdictions.

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. For greater certainty, references to Emblem shall be read to include its successor entities.

Representations

1. This decision is based on the following facts represented by the Filers:

Emblem

2. On December 5, 2016, in connection with the completion of a business combination between Saber Capital Co. (now Emblem), Saber Acquisition Corp. and 9045538 Canada Inc. pursuant to a statutory plan of arrangement, Emblem was continued under the Canada Business Corporations Act (the CBCA).

3. The head office of Emblem was located at 36 York Mills Road, Suite 500, Toronto, Ontario M2P 2E9.

4. As of March 13, 2019, Emblem was a reporting issuer under the securities legislation of the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador.

5. As of March 13, 2019, Emblem was an electronic filer under National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR) (NI 13-101).

6. As of March 13, 2019, the authorized share capital of Emblem consisted of an unlimited number of common shares (Emblem Shares). As of March 13, 2019, there were 132,294,852 Emblem Shares issued and outstanding.

7. As of March 13, 2019, there were also issued and outstanding:

(i) options to purchase an aggregate of 5,343,333 Emblem Shares (Emblem Options);

(ii) 10,916,599 warrants to purchase Emblem Shares at an exercise price of $1.75 with an expiry date of December 6, 2019 issued pursuant to a warrant indenture (the 2019 Warrant Indenture) between Emblem and Computershare Trust Company of Canada (Computershare) dated December 6, 2016 (the 2019 Warrants);

(iii) 7,785,734 warrants to purchase Emblem Shares at an exercise price of $2.15 with an expiry date of November 16, 2020 issued pursuant to a warrant indenture (the November 2020 Warrant Indenture) between Emblem and Computershare dated November 16, 2017 (the November 2020 Warrants);

(iv) 14,024,391 warrants to purchase Emblem Shares at an exercise price of $2.70 with an expiry date of February 2, 2020 issued pursuant to a warrant indenture (the February 2020 Warrant Indenture) between Emblem and Computershare dated February 2, 2018 (the February 2020 Warrants, and together with the 2019 Warrants and the November 2020 Warrants, the Listed Emblem Warrants);

(v) unlisted warrants to purchase an aggregate of 14,145,488 Emblem Shares (the Unlisted Emblem Warrants, and together with the Listed Emblem Warrants, the Emblem Warrants);

(vi) compensation options to purchase (A) an aggregate of 1,278,836 Emblem Shares and (B) warrants to purchase an aggregate of 1,278,836 Emblem Shares (the Compensation Options); and

(vii) debentures issued pursuant to a trust indenture (the Trust Indenture) between Emblem and Computershare dated February 2, 2018 convertible into an aggregate of 9,444,235 Emblem Shares (the Debentures).

8. As of March 13, 2019, the Emblem Shares were listed on the TSX Venture Exchange (TSXV) under the symbol "EMC" and the 2019 Warrants, November 2020 Warrants and February 2020 Warrants were listed on the TSXV under the symbols "EMC.WT", "EMC.WT.A" and "EMC.WT.B", respectively.

Aleafia

9. Aleafia was continued into Ontario under the Business Corporations Act (Ontario) on June 27, 2018.

10. The head office of Aleafia is located at 8810 Jane Street, 2nd Floor, Concord, Ontario L4K 2M9.

11. Aleafia is a reporting issuer in the provinces of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador.

12. Aleafia is an electronic filer under NI 13-101.

13. As of March 13, 2019, the authorized share capital of Aleafia consisted of an unlimited number of common shares (Aleafia Shares). As of March 13, 2019, there were 158,798,501 Aleafia Shares issued and outstanding.

14. As of March 13, 2019, there were also issued and outstanding:

(i) options to purchase an aggregate of 14,290,000 Aleafia Shares; and

(ii) warrants to purchase an aggregate of 8,372,190 Aleafia Shares

15. The Aleafia Shares are listed on the TSX under the symbol "ALEF".

The Plan of Arrangement

16. Aleafia entered into a definitive agreement (the Arrangement Agreement) with Emblem on December 18, 2018, which provided the terms and conditions under which Aleafia would acquire all of the issued and outstanding Emblem Shares. The acquisition was implemented by way of a court-approved plan of arrangement under the CBCA (the Arrangement). Under the Arrangement, in exchange for each Emblem Share, Aleafia issued to shareholders of Emblem (Emblem Shareholders) 0.8377 of an Aleafia Share (the Share Consideration), subject to the terms of the Arrangement. As a as a result of the Arrangement, Emblem became a wholly-owned subsidiary of Aleafia.

17. On January 30, 2019, Emblem obtained an interim order from the Ontario Superior Court of Justice (Commercial List) (the Court) specifying certain requirements and procedures for a special meeting of the Emblem Shareholders for the purpose of approving the Arrangement (Emblem Meeting).

18. On March 6, 2019, Emblem Shareholders approved the Arrangement with an affirmative vote of approximately 93.46% of the votes validly cast at the Emblem Meeting.

19. On March 8, 2019, Emblem received final approval of the Court for the Arrangement.

20. The Arrangement was completed on March 14, 2019.

21. Under the Arrangement, among other things, the following occurred:

(i) Aleafia acquired all of the issued and outstanding Emblem Shares held by dissenting Emblem Shareholders;

(ii) Emblem and Aleafia Subco amalgamated to form Amalco;

(iii) Aleafia received one common share of Amalco in exchange for each common share of Aleafia Subco previously held by it;

(iv) each Emblem Share (other than those held by dissenting Emblem Shareholders) entitled the holder thereof to receive the Share Consideration; and

(v) each Emblem Option was deemed to be exchanged for an option to purchase 0.8377 of an Aleafia Share (each a Replacement Aleafia Option) in accordance with the Arrangement and each such Emblem Option was cancelled.

22. On completion of the Arrangement and the associated amalgamation of Emblem and Aleafia Subco to form Amalco, Amalco became a reporting issuer in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador as Emblem, one of the amalgamating companies, was a reporting issuer in such jurisdictions, for a period of at least twelve months prior to the Arrangement. Consequently, Amalco and its insiders are required to comply with the Continuous Disclosure Requirements, the Certification Requirements, the Insider Profile Requirements and the Insider Reporting Requirements, respectively.

23. Upon completion of the Arrangement, the Emblem Warrants remain outstanding as warrants of Amalco that upon exercise entitle the holder thereof to receive the Share Consideration.

24. Upon completion of the Arrangement, the Compensation Options remain outstanding as compensation options of Amalco that upon exercise entitle the holder thereof to receive the Share Consideration and warrants exercisable to receive the Share Consideration.

25. Upon completion of the Arrangement, Aleafia assumed all of the covenants and obligations of the Debentures such that, upon conversion thereof, each holder is entitled to receive the Share Consideration

26. On March 15, 2019, the TSXV issued its final bulletin approving: (i) the listing of all Aleafia Shares issued or to be issued as a result of the Arrangement (including those Aleafia Shares to be issued upon exercise of Aleafia Replacement Options, Emblem Warrants, Compensation Options and upon conversion of the Debentures); and (ii) the continued listing of the Listed Emblem Warrants.

27. Aleafia has reserved 53,794,960 Aleafia Shares for issuance upon the exercise of the outstanding Aleafia Replacement Options, Emblem Warrants and Compensation Options and upon conversion of the Debentures.

28. In connection with the Arrangement, Emblem mailed to the Emblem Shareholders a management information circular (Circular) containing prospectus-level disclosure of the business and affairs of each of Emblem and Aleafia and information on the Arrangement, a copy of which has been posted on SEDAR under Emblem's profile.

29. Emblem also mailed the Circular to holders of Emblem Options, Emblem Warrants, Compensation Options and Debentures, providing them with prior notice of the Arrangement and the impact on such securities.

30. As a result of the Arrangement, the only securities of Amalco that are listed for trading on a published market are the Listed Emblem Warrants.

31. On March 18, 2019, the Emblem Shares were delisted from the TSXV.

32. On March 19, 2019, following the delisting of the Aleafia Shares from the TSXV on March 18, 2019, the Aleafia Shares commenced trading on the Toronto Stock Exchange.

33. As required by the terms of the 2019 Warrant Indenture, the November 2020 Warrant Indenture and the February 2020 Warrant Indenture, Aleafia and Amalco have entered into supplemental warrant indentures with Computershare Trust Company of Canada with respect to the Listed Emblem Warrants.

34. As required by the terms of the warrant indentures in respect of and/or certificates representing, as applicable, the Unlisted Emblem Warrants, Aleafia is bound by the terms and covenants thereof and upon exercise of such Unlisted Emblem Warrants, holders will also be entitled to receive the Share Consideration.

35. As required by the terms of the certificates representing the Compensation Options, Aleafia is bound by the terms and covenants thereof and upon exercise of such Compensation Options, holders will also be entitled to receive the Share Consideration and warrants exercisable to receive the Share Consideration.

36. As required by the terms of the Trust Indenture, Aleafia will be bound by the terms and covenants thereof and upon conversion of the Debentures, holders will be entitled to receive the Share Consideration.

37. As a result of the Arrangement, the only securities of Amalco that are held by persons other than Aleafia are the outstanding Emblem Warrants, Compensation Options and Debentures, which are exercisable for, or convertible into, the Share Consideration and warrants exercisable to receive the Share Consideration, as applicable.

38. Amalco cannot rely on the exemption available in s. 13.3 of NI 51-102 for issuers of exchangeable securities because the Emblem Warrants, Compensation Options and Debentures are not "designated exchangeable securities" as defined in NI 51-102; none of the holders of the Emblem Warrants, Compensation Options or Debentures will have voting rights in respect of Aleafia, in their capacity as warrantholders, compensation optionholders or debentureholders, respectively.

39. None of the warrant indentures, the supplemental warrant indentures or certificates governing the Emblem Warrants, certificates governing the Compensation Options or the Trust Indenture governing the Debentures requires Emblem or any successor to deliver to holders of Emblem Warrants, Compensation Options or Debentures, respectively, any continuous disclosure materials of Emblem or any successor.

40. Each of the Filers is not in default of any requirement under securities legislation in the jurisdictions in which it is a reporting issuer.

41. Amalco has no intention of accessing the capital markets in the future by issuing any further securities to the public and has no intention of issuing any securities to the public other than those that are outstanding on completion of the Arrangement.

42. It is information relating to Aleafia, and not to Amalco, that is of primary importance to holders of Emblem Warrants, Compensation Options and Debentures as outstanding Emblem Warrants, Compensation Options and Debentures shall be exercisable for/convertible into only the Share Consideration; in addition, as Amalco is a wholly-owned subsidiary of Aleafia, Aleafia will consolidate Amalco with Aleafia for the purposes of financial statement reporting; as such, the disclosure required by the Continuous Disclosure Requirements applicable to Amalco would not be meaningful or of any significant benefit to the holders of the Emblem Warrants, Compensation Options or Debentures and would impose a significant cost on Amalco.

Decision

The Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

1. The decision of the Decision Maker under the Legislation is that the Continuous Disclosure Requirements do not apply to Amalco provided that:

(a) Aleafia is the beneficial owner of all of the issued and outstanding voting securities of Amalco;

(b) Aleafia is a reporting issuer in a designated Canadian jurisdiction (as defined in NI 51-102) and has filed all documents it is required to file under NI 51-102;

(c) Amalco does not issue any securities, and does not have any securities outstanding other than:

(i) the Emblem Warrants;

(ii) the Compensation Options;

(iii) the Debentures;

(iv) securities issued to and held by Aleafia or an affiliate of Aleafia;

(v) debt securities issued to and held by banks, loan corporations, loan and investment corporations, savings companies, trust corporations, treasury branches, savings or credit unions, financial services cooperatives, insurance companies or other financial institutions; or

(vi) securities issued under exemptions from the prospectus requirement in section 2.35 of National Instrument 45-106 Prospectus Exemptions;

(d) Amalco files in electronic format:

(i) if Aleafia is a reporting issuer in the local jurisdiction, a notice indicating that it is relying on the continuous disclosure documents filed by Aleafia and setting out where those documents can be found in electronic format; or

(ii) copies of all documents Aleafia is required to file under securities legislation, other than in connection with a distribution, at the same time as the filing by Aleafia of those documents with a securities regulatory authority or regulator;

(e) Aleafia concurrently sends to all holders of Emblem Warrants, Compensation Options and Debentures all disclosure materials that would be required to be sent to holders of similar warrants, compensation options or debentures of Aleafia in the manner and at the time required by securities legislation;

(f) Aleafia complies with securities legislation in respect of making public disclosure of material information on a timely basis; and

(g) Aleafia immediately issues in Canada and files any news release that discloses a material change in its affairs.

2. The further decision of the Decision Maker under the Legislation is that the Certification Requirements do not apply to Amalco provided that:

(a) Amalco is not required to, and does not, file its own Interim Filings and Annual Filings (as those terms are defined under NI 52-109);

(b) Amalco files in electronic format under its SEDAR profile either: (i) copies of Aleafia's annual certificates and interim certificates at the same time as Aleafia is required under NI 52-109 to file such documents; or (ii) a notice indicating that it is relying on Aleafia's annual certificates and interim certificates and setting out where those documents can be found for viewing on SEDAR; and

(c) Amalco is exempt from or otherwise not subject to the Continuous Disclosure Requirements and Amalco and Aleafia are in compliance with the conditions set out in paragraph 1 above.

3. The further decision of the Decision Maker under the Legislation is that the Insider Profile Requirements and Insider Reporting Requirements do not apply to any insider of Amalco in respect of securities of Amalco provided that:

(a) if the insider is not Aleafia;

(i) the insider does not receive, in the ordinary course, information as to material facts or material changes concerning Amalco before the material facts or material changes are generally disclosed; and

(ii) the insider is not an insider of Aleafia in any capacity other than by virtue of being an insider of Amalco;

(b) Aleafia is the beneficial owner of all of the issued and outstanding voting securities of Amalco;

(c) if the insider is Aleafia, the insider does not beneficially own any Emblem Warrants, Compensation Options or Debentures other than securities acquired through the exercise of the Emblem Warrants or Compensation Options or conversion of the Debentures and not subsequently traded by the insider or those beneficially owned as of the closing of the Arrangement;

(d) Aleafia is a reporting issuer in a designated Canadian jurisdiction;

(e) Amalco has not issued any securities, and does not have any securities outstanding, other than:

(i) the Emblem Warrants;

(ii) the Compensation Options;

(iii) the Debentures;

(iv) securities issued to and held by Aleafia or an affiliate of Aleafia;

(v) debt securities issued to and held by banks, loan corporations, loan and investment corporations, savings companies, trust corporations, treasury branches, savings or credit unions, financial services cooperatives, insurance companies or other financial institutions; or

(vi) securities issued under exemptions from the prospectus requirement in Section 2.35 of NI 45-106; and

(f) Amalco is exempt from or otherwise not subject to the Continuous Disclosure Requirements and Amalco and Aleafia are in compliance with the conditions set out in paragraph 1 above.

As to the Exemption Sought (other than from the statutory Insider Reporting Requirements):

"Winnie Sanjoto"
Manager, Corporate Finance

As to the Exemption Sought from the statutory Insider Reporting Requirements:

"Cecilia Williams"
"Lawrence Haber"
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission