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Nexus Real Estate Investment Trust
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 -- issuer holds properties through several limited partnerships -- the units of the limited partnerships are exchangeable into, and in all material respects economically equivalent to, the issuer's publicly traded units -- the issuer may include the indirect interest in the issuer held by the holders of exchangeable units of the limited partnerships when calculating the issuer's market capitalization for the purposes of the 25% market capitalization exemption for related party transactions -- relief granted 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.
August 12, 2021
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 NEXUS REAL ESTATE INVESTMENT TRUST (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through: (a) Edgefront Limited Partnership (Edgefront), Edgefront Barrie Limited Partnership (Barrie), Nobel REIT LP (Nobel), or Nexus Richmond LP (Richmond, and together with Edgefront, Barrie and Nobel, the Existing Partnerships); (b) any New Partnership (as defined below); or (c) any subsidiary entity of an applicable Partnership (as defined below), 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 indirect equity interest in the Filer, which is held by holders of the Exchangeable LP Units (as defined below) of each of the Partnerships were included in the calculation of the Filer's market capitalization (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 Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Saskatchewan, Manitoba, Québec and New Brunswick.
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 Filer:
1. The Filer is an unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario. The Filer is governed pursuant to a declaration of trust dated May 10, 2013, as most recently amended and restated on August 13, 2020, (the Declaration of Trust) and as may be further amended and/or restated from time to time.
2. The Filer's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
3. The Filer is a reporting issuer in each province and territory of Canada and is not in default of any applicable requirements under the securities legislation thereunder.
4. The Filer is authorized to issue an unlimited number of trust units (the Trust Units) and an unlimited number of special voting units (the Special Voting Units). As at August 6, 2021, the Filer had 33,788,421 Trust Units and 16,442,442 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equal to, and accompanies, the number of issued and outstanding Exchangeable LP Units.
5. The Trust Units are listed and posted for trading on the Toronto Stock Exchange (the TSX) under the symbol "NXR.UN".
6. Edgefront is a limited partnership existing under the laws of the Province of Ontario and is governed by an amended and restated limited partnership agreement dated December 4, 2013, as amended as of April 2, 2017 (the Edgefront LP Agreement). Edgefront's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
7. Barrie is a limited partnership existing under the laws of the Province of Ontario and is governed by a limited partnership agreement dated July 7, 2015, as amended as of April 2, 2017 and January 14, 2021 (the Barrie LP Agreement). Barrie's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
8. Nobel is a limited partnership existing under the laws of the Province of Québec and is governed by an amended and restated limited partnership agreement dated August 31, 2018, as amended as of January 15, 2021 (the Nobel LP Agreement). Nobel's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
9. Richmond is a limited partnership existing under the laws of the Province of Ontario and is governed by a limited partnership agreement dated April 12, 2018, as amended as of November 2, 2020 (the Richmond LP Agreement, and collectively with the Edgefront LP Agreement, Barrie LP Agreement and the Nobel LP Agreement, the Existing Partnership Agreements). Richmond's head office is located at 211-1540 Cornwall Road, Oakville, Ontario, L6J 7W5.
10. The operating business of the Filer is carried on through the Existing Partnerships and other subsidiaries of the Filer. As of August 6, 2021, through the Existing Partnerships and other subsidiaries of the Filer, the Filer owns and operates a portfolio of 89 commercial properties, of which 34 industrial properties and 1 retail property are located in Western Canada, 11 industrial properties and 1 retail property are located in Ontario, 8 industrial properties, 19 retail properties and 12 office properties are located in Québec, and 1 industrial property, 1 office property and 1 retail property are located in Atlantic Canada. The total gross leasable area of the properties comprising the Filer's portfolio is approximately 6.6 million square feet.
11. Other than (a) differences relating to the name, formation and capitalization amounts, or which are administrative or clerical in nature, and (b) the fact that Nobel, a wholly-owned subsidiary of the Filer, is the holder of Class A limited partnership units (the Class A Units) of Richmond (whereas the Filer is the holder of the Class A Units of Edgefront and Barrie), the Edgefront LP Agreement, the Barrie LP Agreement, and the Richmond LP Agreement (collectively, the Ontario LP Agreements) are identical.
12. The Nobel LP Agreement is substantively the same as the Ontario LP Agreements, other than differences reflecting the formation of Nobel under the laws of Québec and its ownership by Nobel Real Estate Investment Trust prior to its acquisition by the Filer, along with certain other administrative matters.
13. The Filer may, from time to time, establish, form or acquire additional limited partnerships in the future (each of which would be a subsidiary entity of the Filer), in connection with future acquisitions (the New Partnerships, and together with the Existing Partnerships, the Partnerships). Each New Partnership will be formed under the laws of the Province of Ontario and their head office will be located in the Province of Ontario. Each New Partnership will be governed by a partnership agreement (each a New Partnership Agreement and together with the Existing Partnership Agreements, the Partnership Agreements) that is identical to the Ontario LP Agreements, other than differences relating to the name, formation and capitalization amounts of each such Partnership, or which are administrative or clerical in nature.
14. Each Partnership is, and will be, authorized to issue an unlimited amount of general partnership units or interests (the GP Units), Class A Units, and exchangeable Class B limited partnership units (the Exchangeable LP Units).
15. All of the outstanding GP Units of the Partnerships are, and will be, held by a wholly-owned subsidiary of the Filer which manages and controls the operations and affairs of the applicable Partnership and makes all decisions regarding the business and activities of such Partnership. All of the outstanding Class A Units are, and will be, held directly or indirectly by the Filer. All of the Exchangeable LP Units are, and will be, held by parties that have vended assets indirectly to the Filer. As at August 6, 2021, the holders of the Exchangeable LP Units hold, in the aggregate, 16,442,442 Exchangeable LP Units, representing an approximate 32.73% effective interest in the Filer assuming that all of the Exchangeable LP Units are exchanged for Trust Units.
16. As at August 6, 2021,
(a) Edgefront's GP Units and Class A Units are 100% owned, directly or indirectly, by the Filer, and Edgefront has 2,500 Exchangeable LP Units issued and outstanding;
(b) Barrie's GP Units and Class A Units are 100% owned, directly or indirectly, by the Filer, and Barrie has 867,746 Exchangeable LP Units issued and outstanding;
(c) Nobel's GP Units and Class A Units are 100% owned, directly or indirectly, by the Filer, and Nobel has 15,451,364 Exchangeable LP Units issued and outstanding; and
(d) Richmond's GP Units and Class A Units are 100% owned, directly or indirectly, by Nobel, and Richmond has 120,832 Exchangeable LP Units issued and outstanding.
17. None of the Partnerships are, or will be, a reporting issuer in any jurisdiction and none of the securities of the Partnerships are, or will be, listed or posted for trading on any stock exchange or other market.
18. The rights and privileges attaching to the GP Units, Class A Units and Exchangeable LP Units, respectively, of each Partnership are, and will be, substantively identical (other than differences relating to the name, formation and capitalization amounts of each Partnership, or which are administrative or clerical in nature).
19. The Exchangeable LP Units are, and will be, in all material respects, economically equivalent to the Trust Units on a per unit basis. Each of the Partnerships is, or will be, party to an exchange agreement with the Filer (the Exchange Agreements) that expressly provides that Exchangeable LP Units are, and will be, treated economically equivalent to the Trust Units and ensures that Exchangeable LP Units are treated as identically as possible to holders of Trust Units, such that holders of Exchangeable LP Units (regardless of the Partnership that issued such Exchangeable LP Units) are, in effect, holding the equivalent of a Trust Unit in all but name. Each New Partnership will enter into an Exchange Agreement that is identical to the Exchange Agreements entered into by Edgefront, Barrie and Richmond (collectively, the Ontario LPs) other than differences relating to the name of each such Partnership, or which are administrative or clerical in nature.
20. Holders of Exchangeable LP Units are, and will be, entitled to receive distributions, on a per unit basis, from their respective Partnerships equal to, and at the same time as, those paid by (a) the Filer to the holders of Trust Units on a per unit basis, and (b) each of the other Partnerships to the holders of Exchangeable LP Units of each of their respective Partnerships, on a per unit basis. Other than these distributions, the holders of Exchangeable LP Units have no economic rights or interests in respect of the Partnerships to which the Exchangeable LP Units relate.
21. Pursuant to the applicable Partnership Agreement and its associated Exchange Agreement, each Exchangeable LP Unit is, and will be, exchangeable at the option of the holder for one Trust Unit (subject to customary anti-dilution adjustments) and is, and will be, accompanied by a Special Voting Unit that entitles the holder to receive notice of, attend and to vote together with the holders of Trust Units at all meetings of voting unitholders of the Filer. Other than in a circumstances where a matter would affect the rights, benefits or entitlements of the holders of the Exchangeable LP Units, or where required by applicable law, the holders of Exchangeable LP Units have no voting rights in respect of the Partnerships to which they relate and are non-voting units of such Partnerships.
22. The Exchangeable LP Units are, and will be, subject to limitations on transfer set out in the applicable Partnership Agreement, and each Partnership Agreement requires, and will require, that the holders of Exchangeable LP Units not to take any action that would result in the Exchangeable LP Units being held by a non-resident of Canada.
23. The Exchangeable LP Units are, or will be, neither exchangeable for any other securities other than Trust Units, nor for cash.
24. The Exchangeable LP Units represent, or will represent, part of the equity value of the Filer and provide, or will provide, the holder of the Exchangeable LP Units with the economic rights which are, in all material respects, equivalent to the Trust Units. The effect of the holders' exchange rights are that holders of Exchangeable LP Units will receive Trust Units upon the exchange of the Exchangeable LP Units. Moreover, the economic interests that underlie the Exchangeable LP Units are identical to those underlying the Trust Units; namely, the assets and operations held directly or indirectly by the Partnerships and the Filer's other subsidiaries.
25. It is anticipated that the Filer may from time to time enter into transactions with certain related parties indirectly through the Partnerships and/or a subsidiary entity of an applicable Partnership.
26. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:
(a) the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and
(b) the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (together, requirements (a) and (b) are referred to as the Minority Protections).
27. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections 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 Transaction Size Exemption).
28. The Filer may not be entitled to rely on the Transaction Size 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.
29. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of the interests in the Filer represented by the outstanding Exchangeable LP Units (approximately 32.73% as at August 6, 2021). As a result, related party transactions of the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer.
30. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 Income Trusts and Other Indirect Offerings (NP 41-201), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and to which transactions MI 61-101 should apply. Section 1.2 of NP 41-201 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Accordingly, it is consistent with MI 61-101 that securities of an operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.
31. The inclusion of the Exchangeable LP Units when determining the Filer's market capitalization is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.
32. Although the Exchangeable LP Units are not securities of the Filer, they are, or will be, as a result of the rights, privileges and restrictions attaching to such Exchangeable LP Units and the various material agreements relating to and governing the Exchangeable LP Units, equivalent to the Trust Units in all material respects, in that:
(a) they are, or will be, exchangeable into Trust Units on a one-for-one basis;
(b) they have, or will have, the same economic rights as Trust Units;
(c) together with the Special Voting Units, they carry, or will carry, the same voting rights as Trust Units; and
(d) any additional rights attached to the Exchangeable LP Units arise, or will arise, solely by virtue of the Exchangeable LP Units being limited partnership units and are customary rights associated with limited partnership units.
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:
(a) the applicable transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Trust Units;
(b) the applicable transaction is made in compliance with the rules and policies of the TSX or such other exchange upon which the Filer's securities trade;
(c) there are no changes to the rights, privileges and restrictions attached to the GP Units, the Exchangeable LP Units and/or the Special Voting Units, including the exchange rights associated therewith, as described above and in the Declaration of Trust, the Existing Partnership Agreements, and the Exchange Agreements, whether by amendment to, or waiver of, such documents, contractual agreement or otherwise;
(d) there are no material changes to the terms of the Existing Partnership Agreements or the Exchange Agreements, other than those which are administrative or clerical in nature, whether by amendment to, or waiver of, such documents, contractual agreement or otherwise;
(e) the terms of the Exchangeable LP Units of any New Partnership, including the terms of any New Partnership Agreement relating thereto, are identical to those of the Ontario LP Agreements and the Exchange Agreements entered into by the Ontario LPs (other than differences relating to the name, formation and capitalization amounts of such New Partnership, or which are administrative or clerical in nature);
(f) upon the issuance of any Exchangeable LP Units of a New Partnership to which the Exemption Sought would apply, the Filer will promptly issue a press release disclosing the issuance of such Exchangeable LP Units and which contains 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 does not exceed 25% of the market capitalization of the issuer. Nexus Real Estate Investment Trust (the REIT) 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 the REIT's market capitalization, if the exchangeable Class B limited partnership units (the Class B LP Units) of certain of the REIT's subsidiary limited partnerships are included in the calculation of the REIT's market capitalization. Following the issuance of the Class B LP Units of [the New Partnership], the 25% threshold, above which the minority approval and valuation requirements would apply, has now been increased by approximately [x]% to reflect the inclusion of the Class B LP Units of [the New Partnership] and an aggregate of approximately [x]% indirect exchangeable interest in the REIT held by the holders of Class B LP Units of the REIT's various subsidiary limited partnerships."
(g) any annual information form of the Filer that is required to be filed in accordance with applicable Canadian securities law 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 does not exceed 25% of the market capitalization of the issuer. Nexus Real Estate Investment Trust (the REIT) 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 the REIT's market capitalization, if the exchangeable Class B limited partnership units (the Class B LP Units) of certain of the REIT's subsidiary limited partnerships are included in the calculation of the REIT'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 [x]% indirect exchangeable interest in the REIT held by the holders of Class B LP Units of the REIT's various subsidiary limited partnerships."