PDF

Income Funds
in Perspective
20
06
Focus on
Income Fund
Governance
Barristers & Solicitors / goodmansincomefunds.com
This edition of Income Funds in Perspective:
• Outlines key events affecting income funds in 2005,
• Summarizes Goodmans’governance study for Industry Canada,
• Discusses prospectus disclosure of distributable cash,
• Outlines the results of the CAIF/REALpac governance study, and
• Highlights some of the IPOs, conversions and M&A deals
of the past year.
goodmansincomefunds.com
Eventful 2005 Prepares the Way for Focus
on Governance in 2006
Following 32 initial public offerings and 21 conversions, the income fund sector grew to 229
issuers while total market capitalization increased by $69 billion to $190 billion at the end of
2005. Mainly due to the strength of the energy sector, the S&P/TSX Capped Income Trust Total
Return Index increased by 31% during 2005, compared to 24% for the S&P/TSX Capped
Composite Total Return Index.
Income Fund Sector Growth: Number of Funds and Total Market Capitalization, 2000 - 2005
$190 Billion
229 Funds
$20 Billion
52 Funds
2000
$28 Billion
62 Funds
2001
$44 Billion
101 Funds
2002
$83 Billion
135 Funds
2003
$121 Billion
175 Funds
2004
2005
The sector’s growth and performance is particularly impressive in light of the uncertainty
created by the Canadian government’s announcement that it was launching a public consultation
on flow-through entities in the fall of 2005. On September 8, the Department of Finance
released a consultation paper inviting submissions until December 31, 2005. Although the
income fund market’s reaction to this paper was benign, the suspension of advance tax rulings
on flow-through entity structures by Canada’s Minister of Finance on September 19 sent income
fund indices plunging and brought the market for income fund IPOs to a virtual standstill.
Meanwhile, there was vigorous debate in the media about the impact of income funds on both
Canada’s tax base and the country’s economy and business environment.
In anticipation of a general election, the Minister of Finance ended the consultation process
early on November 23, lifted the ban on advance tax rulings, proposed a reduction of the tax
on corporate dividends and confirmed to the media that he would not propose taxing income
funds. The Conservative Party, which won the January 2006 election and formed Canada’s
new government, pledged that it would not tax income funds. (See more information on the
consultation process and outcomes on Page 3.)
1
This positive policy outcome, together with the long-awaited initial inclusion of income funds
in the S&P/TSX Composite Index in December (see Page 3), led to the sector completing the
year on a strong note. At the same time, a number of income funds that had reduced or
eliminated their distributions performed very poorly in 2005. The combination of all of these
factors – the overall growth and success of the sector, the government consultation process,
the S&P index inclusion and some poor performers – together with heightened concern about
governance in the capital markets generally set the stage for a spotlight to be focused on
income fund governance.
Developments in Governance
This edition of Income Funds in Perspective sketches the backdrop against which the focus on
governance is occurring – including some of the interesting IPO, conversion and M&A stories
of the past year – and discusses several recent developments in income fund governance:
• Unitholder protections and external management. Goodmans was retained last year by
Industry Canada to examine protections afforded to unitholders of income funds compared
to shareholders under the Canada Business Corporations Act. At Industry Canada’s request,
the Goodmans study also examined the extent and nature of external management in the
various income fund sub-sectors. There has been widespread interest in this report since
its release in January. We provide highlights of the findings on Page 5.
• Distributable cash. Transparent financial disclosure is often regarded as a key aspect of good
governance. In the income funds area, disclosure concerning distributable cash has attracted
much attention. In August 2005, the Canadian Securities Administrators published a notice
called Income Trusts: Prospectus Disclosure of Distributable Cash, which is discussed on Page 9.
Goodmans’ Income Funds Group continues to work closely with investment banking and
accounting professionals to develop practical approaches to the issues surrounding the
distributable cash concept in prospectuses and in continuous disclosure.
• Boards of Trustees. The Canadian Association of Income Funds (CAIF) and the Real Property
Association of Canada (REALpac) recently announced the results of a study comparing the
compliance by income funds and public corporations with the governance guidelines
established by the Canadian Securities Administrators. These guidelines focus on board
composition, structure and operation. The study was performed by SECOR Consulting,
Canada’s largest independent strategy consulting firm, and was supervised by CAIF’s
Governance Committee, chaired by the head of Goodmans’ Income Funds Group,
Stephen Pincus. The results are outlined on Page 10.
Our Income Funds Group is involved in a number of other governance initiatives and we
look forward to working with other interested parties to effectively address the challenges
in this area.
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Limited Liability Legislation Leads to Indexing of Income Funds
On January 26, 2005, Standard & Poor’s announced that income funds would qualify for inclusion
in the S&P/TSX Composite Index. In total, 68 income fund issuers were included at half weight
in December 2005 and at full weight in March 2006. Previously, income funds were only listed
in three separate indices: the S&P/TSX Capped Income Trust Index, the S&P/TSX Capped Energy
Trust Index and the S&P/TSX Capped REIT Index.
The long-awaited decision by S&P followed the implementation of limited liability legislation in
Alberta and Ontario in 2004, which clarified that investors in publicly traded funds are not exposed
to claims against the fund. The absence of limited liability legislation was considered by many to be
one of the primary hurdles to the inclusion of income funds in the S&P/TSX Composite Index.
During 2005, British Columbia introduced and Manitoba passed limited liability legislation for
publicly traded trusts. Since Quebec has had a form of limited liability legislation since 1994,
about 98% of income funds listed on the TSX (by market capitalization) as of December 30, 2005
are formed under the laws of a province with such protection.
Ottawa Begins and Ends Consultation on Income Funds
On September 8, 2005, the Department of Finance (Canada) released a consultation paper on tax
and other issues related to publicly listed flow-through entities such as income funds and limited
partnerships, and invited interested parties to make submissions prior to December 31, 2005.
12 Months Ended Feb. 28, 2006 S&P/TSX Capped Income Trust
vs. TSX Composite Index
20.00
Change (%)
A
D
10.00
B
C
0
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 06
Feb
A. September 8, 2005: Department of Finance releases consultation paper. B. September 19, 2005: Minister of Finance suspends advance tax ruling on flow-through
entities. C. November 23, 2005: Minister of Finance confirms there will be no changes to taxation of income funds. D. December 17, 2005: First inclusion of income
funds in TSX Composite Index. (Compiled with information from Globeinvestor.com)
3
The stated focus of the consultation paper was to assess the tax and economic efficiency
implications of flow-through entities to determine whether the current tax system is appropriate
or should be modified. Although not an exhaustive list, three possible policy approaches were
identified in the consultation paper to address the issues relating to flow-through entities:
• Limiting deductibility of interest expense by operating entities;
• Taxing flow-through entities in a manner similar to corporations; and
• Making the tax system more neutral with respect to all forms of business organizations by
better integrating the personal and corporate tax system.
On September 19, 2005, the Minister of Finance announced: that he had requested that the
Canada Revenue Agency postpone providing advance rulings respecting flow-through entity
structures pending the consultations; that the Department of Finance (Canada) was closely
monitoring developments in the flow-through entity market with a view to proposing measures
in response to the consultations; and, that consideration would be given to what, if any,
transitional measures were appropriate.
On November 23, 2005, the Minister of Finance issued a press release stating that the consultation
process had ended, that the Canada Revenue Agency would resume providing advance tax
rulings on flow-through entity structures and that the government would reduce personal
income taxes and dividends. The Minister of Finance also confirmed to the media that he
would not propose any tax on income funds. The new Conservative government has also stated
that it will not impose any tax on income funds.
Income Funds: The Governance Framework
Governance refers broadly to the framework of rights and obligations between key stakeholders
as depicted in the following chart.
Public Unitholders
Board
Management
Existing Investors
The Goodmans’ governance study for Industry Canada (see next page) focused on certain issues
relating to two of these stakeholder groups, public unitholders and management. The CAIF/REALpac
Study (Page 10) focused on compliance with guidelines relating to income fund boards.
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Goodmans’Governance Study for Industry Canada
The Goodmans Income Funds Group was retained by Industry Canada in the fall of 2005 to
conduct a study of two important aspects of income fund governance: unitholder protections
afforded by declarations of trust (DOTs) and external management structures.
Unitholder Protections
In the first part of the study, we reviewed the DOTs of a representative sample of income funds
and compared them with provisions of the CBCA corresponding to the protection of unitholders:
the duties and liabilities of trustees, disclosure and communication with unitholders, and rights
and remedies of unitholders.
The DOTs studied were a random selection of 54 publicly traded Canadian income funds from
each industry sector: real estate, power and pipelines, oil and gas, consumer products, retail,
restaurants and leisure, media, industrial products, transportation, raw materials, energy services,
and others. Within each sector, we also selected by size – small, medium and large.
We compared 20 key provisions of each of these DOTs with the corresponding provisions of
the CBCA. In each case, the question was whether the DOT provided protection to unitholders
that was superior or roughly similar to the protection provided to shareholders of a publicly
traded CBCA corporation. See a summary of the study results in Table A on Pages 6 and 7.
As illustrated by Table A, the vast majority of DOTs surveyed have provisions superior or
substantially similar to most of the CBCA provisions considered. The main differences between
the CBCA provisions and the DOTs studied relate to unitholder rights and remedies. Income
fund DOTs do not generally provide equivalents to the CBCA rights and remedies of shareholder
proposals, oppression, dissent rights and derivative actions.
The Canadian Securities Administrators’ National Policy 41-201: Income Trusts and Other
Indirect Offerings, adopted on December 3, 2004, requires income funds to disclose that a
unitholder may not be afforded the same protections, rights and remedies as a shareholder of a
corporation. The policy recommends specific disclosure that a unitholder has substantially all of
the same protections, rights and remedies as a shareholder would have under the CBCA, with
descriptions of any protections, rights and remedies that are not available.
Given the rapid growth of income funds in recent years – a period of increased focus on
governance – many DOTs have been drafted to accommodate rising governance standards.
The Canadian Securities Administrators’ National Policy 58-201: Effective Corporate Governance
and National Instrument 58-101: Disclosure of Corporate Governance Practices came into force
on June 30, 2005. This instrument and policy explicitly apply to both income funds and
corporate issuers. (For a comparison of compliance by income funds and corporations with
the CSA guidelines see our discussion of the CAIF/REALpac study on Page 10).
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Table A: Comparison of CBCA Provisions with Equivalent Provisions in DOTs of Canadian Income Trusts
% of DOTs with Superior Protection*
% of DOTs with Substantially Similar Protection*
I. Structure, Composition and Operation of Board of Trustees
25% of directors must
be resident Canadians.
31.48%
68.52%
Comments:
We considered a
Total 100%
requirement that more
than 25% of trustees be Canadian to be
superior to the CBCA. We considered DOTs
with corporate trustees to be substantially
similar since ordinary corporate
requirements would apply to the board
of directors of a corporate trustee.
Quorum is a majority
of directors.
Comments:
We considered DOTs
Total 94.44%
with majority trustee
provisions and DOTs with corporate
trustees to be substantially similar
to the CBCA.
Shareholders may
remove directors by
ordinary resolution.
Comments:
Total 75.93%
Almost 25% of DOTs
require the vote of two-thirds of
unitholders to remove trustees.
II. Trustees’ Duties, Material Interest, Indemnification, Etc.
22.22%
Directors must act
77.78%
honestly, in good faith,
with a view to the
best interests of the
Total 100%
corporation and with
the care, diligence and
skill of a reasonably prudent person.
Comments: 22.22% of DOTs impose a
“reasonably prudent trustee” standard.
As this is theoretically higher than
“reasonably prudent person,” we have
classified these DOTs as superior
(although one Ontario court has suggested
that the standard should be the same).
Directors must
disclose material
interest and not vote.
Comments:
Total 68.52%
About 30% of DOTs do
not require trustees to disclose
interest and refrain from voting.
Corporation may
indemnify directors
who act in good faith.
29.63%
70.37%
Comments:
Total 100%
Almost 30% of DOTs deny
indemnification if trustees’ liabilities
arose out of their own negligence, wilful
default or fraud. This is theoretically a
higher threshold than in the CBCA.
Corporation may not
27.78%
72.22%
indemnify directors
in criminal or
administrative actions
Total 100%
unless the directors
had reasonable grounds for
believing their conduct was lawful.
Comments: 27.78% of DOTs provide no
indemnification if trustees were negligent,
theoretically a higher threshold for
indemnification than the one in the CBCA.
Corporation may buy
insurance to protect
directors.
Total 100%
*Percentages are based on the sample of 54 DOTs reviewed for our study.
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III. Disclosure Obligations and Unitholders’ Rights
Corporation must provide financial
statements before annual meeting and
make financial statements available to
be examined and copied free.
5% of shareholders may require directors
to call a meeting (with certain exceptions).
Total 92.59%
Comments: We considered DOTs substantially
similar to the CBCA if the trust was required to provide
additional disclosure by way of quarterly statements,
even without a right to examine and copy financials.
Comments: One DOT does not permit
unitholders to remove auditors.
Total 98.15%
Comments: 7.41% of DOTs permit trustees
to make certain changes without unitholder
approval.
Total 92.59%
Two-thirds of shareholders must approve a
sale, lease or exchange of all or substantially
all property of the corporation.
Notice of shareholder meeting must be sent
to shareholders 21-60 days before meeting.
Total 98.15%
Shareholders may submit notice of a
proposal and the corporation must include
it in the management proxy circular.
Comments: Only one DOT has a provision
equivalent to that in the CBCA.
Total 85.19%
Two-thirds of shareholders must approve
amendments to articles that change
share structure.
Shareholders appoint and remove auditors.
Comments: We considered DOTs similar
to the CBCA unless the time period was
substantially shorter.
Comments: We considered a 5% to 10%
threshold for requiring trustees to call a
unitholder meeting to be substantially similar
to the CBCA.
Total 1.85%
Comments: Some DOTs permit trustees to
Total 100%
sell all or substantially all assets in certain
very limited circumstances. We considered these
DOTs to be substantially similar to the CBCA.
Shareholders who oppose fundamental
changes are entitled to be paid fair value
for their shares.
Comments: Only one DOT has the same
provision as the CBCA.
Total 1.85%
Each share provides one vote.
Total 100%
Comments: DOTs do not provide for
Total 0%
derivative actions but, depending on the
circumstances, a trust remedy may be available.
Shareholders may examine list of voting
shareholders.
Comments: We considered provisions
similar to the CBCA even if a reasonable
fee is charged.
Shareholders may seek leave to bring
a derivative action on behalf of the
corporation.
Total 100%
Shareholders may appoint proxies to vote
on their behalf.
Total 100%
Shareholders may apply to court for remedy
if the corporation is run or directors’ powers
are exercised in a way that is oppressive or
unfairly prejudicial or unfairly disregards
their interest (the “oppression remedy”).
Total 0%
Comments: DOTs do not provide for an oppression remedy but,
depending on the circumstances, a trust remedy may be available.
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External Management
In the second part of the study, we reviewed 224 income funds and identified 25 (11.2%)
as being externally managed. (See Table B below for a breakdown of this sample by sector.)
We were also asked to examine the extent to which an external management structure presents
particular governance challenges.
DOTs often permit trustees to delegate all or part of the management of the business to thirdparty or “external” managers. This may be done where the fund is too small to support the
cost of an internal management team.
From a governance perspective, all activities undertaken pursuant to an external management
contract generally remain subject to the overriding supervision and direction of the trustees. Although
trustees’ supervision of the individuals in the external management team is indirect rather than direct,
it is otherwise similar to that of internal management by the board of directors of a corporation.
Management arrangements are usually negotiated by the underwriters in connection with an
income fund’s IPO and then reviewed and approved by the board of trustees. Subsequent
material amendments typically require the approval of the independent trustees and certain
amendments may be subject to unitholder approval.
External managers may be paid management fees based on assets, equity, revenue and/or
income and may also receive transaction fees for acquisitions, dispositions and financings.
External managers may also receive incentive fees based on the performance of the income
fund, such as increases in unitholders’ equity or distributable cash per unit. In other cases,
the external manager may receive only an incentive fee plus reimbursement of its costs.
External management agreements typically run for a fixed term with renewal options and provide
that the manager may be terminated at any time for cause. They may also provide for termination
without cause upon a certain period of notice and/or payment of a specified sum.
Where an external manager carries on other activities, it is customary for the management
agreement to restrict the manager’s activities. In addition, management agreements frequently
contain non-competition covenants and provisions to deal with conflicts of interest. Other
provisions range from personal service commitments on the part of senior officers of the external
manager, to commitments to allocate investment opportunities fairly among competing clients,
to more stringent restrictions on business activities.
Table B: Prevalence of External Management – Review of 224 Income Funds
Sector
Specialty Business
Oil and Gas
REITs
Power and Pipeline
8
% of Sector
5%
11%
11.5%
91%
No. of Funds Externally Managed
8
4
3
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goodmansincomefunds.com
Prospectus Disclosure of Distributable Cash
Distributable cash disclosure is an important governance issue and one which has attracted much
recent attention. In the context of an income fund offering, the calculation of distributable cash is
a key aspect of an income fund prospectus because it is at the heart of the pricing of an offering.
In August 2005, the Canadian Securities Administrators (CSA) issued Staff Notice 41-304: Income
Trusts: Prospectus Disclosure of Distributable Cash. This notice provides guidance on the CSA’s
expectations about the nature and extent of disclosure necessary to ensure transparency when
an income fund issuer presents information about estimated distributable cash in a prospectus.
To achieve adequate transparency, the reconciliation of estimated distributable cash to the most
directly comparable GAAP measure should be accompanied by detailed disclosure that:
• Explains the purpose and relevance of the estimated distributable cash information;
• Describes the extent to which actual financial results are incorporated into the reconciliation;
• Explicitly states that the reconciliation has been prepared using reasonable and supportable
assumptions, all of which reflect the fund’s planned courses of action given management’s
judgment about the most probable set of economic conditions; and
• Cautions investors that actual results may vary, perhaps materially, from the forward-looking
adjustments.
The CSA expect adjustments made in the reconciliation of estimated distributable cash to the
most directly comparable GAAP measure to be supported by:
• A detailed discussion of the nature of the adjustments;
• A description of the underlying assumptions used in preparing each element of the forwardlooking information and the forward-looking information as a whole, including how those
assumptions are supported; and
• A discussion of the specific risks and uncertainties that may affect each individual assumption
and that may cause actual results to differ materially from the estimated distributable cash.
The CSA notice states that if the estimated distributable cash information includes forwardlooking adjustments that are based on significant assumptions, and those adjustments materially
affect estimated distributable cash, the CSA expect the quantitative reconciliation to begin with
a GAAP measure that is derived from a forecast. Such forward-looking adjustments should be
integrated into the forecast, and the forecast should be included in the prospectus.
In light of Staff Notice 41-304, distributable cash disclosure may present a number of challenges
in an initial public offering, particularly where the effects of the sponsor’s investment in a business,
or synergies or savings to be realized after closing, are not reflected in historical financial
information. Goodmans’ Income Funds Group works closely with investment banking and
accounting professionals to develop practical approaches to these and other issues relating to
distributable cash in a prospectus, as well as in the context of the continuous disclosure.
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The CAIF/REALpac Study
In light of the growth of the income fund sector and the increased focus on corporate
governance, CAIF and REALpac recently retained SECOR Consulting, an independent consulting
company, to conduct a study comparing the compliance by income funds and public
corporations with the governance guidelines established by the Canadian Securities Administrators.
As noted above, this project was supervised by CAIF’s Governance Committee. In addition
to the issues canvassed in the SECOR study and Goodmans’ study for Industry Canada, the
Committee has identified a number of other governance issues particular to income funds that
warrant further investigation.
SECOR assessed 202 income funds, which were categorized by industry (real estate, power and
pipeline, oil and gas and specialty business), and compared them to a representative sample of
public companies listed on the Toronto Stock Exchange based on their respective compliance
with the governance guidelines set out in National Policy 58-201. These guidelines focus on
core governance issues relating to board composition, structure and operation.
The study is based on publicly available information disclosed as of July 31, 2005 (primarily
management information circulars, although prospectuses, annual reports and annual
information forms were reviewed as required). In some circumstances, SECOR analyzed the
composition and activities of the board of an entity underlying an income fund (i.e., where the
board of the underlying entity was significant and differed from the composition of the board
of trustees). On average, the income funds surveyed were four years old, while approximately
75% of the funds analyzed were less than five years old. Almost two-thirds were categorized
as specialty business funds.
SECOR found that income funds generally compare favourably with public companies: 67% of
funds reporting are explicitly compliant with over 90% of the guidelines, compared with 71%
of public companies. In addition, 88% of funds reporting are explicitly compliant with over 75%
of the guidelines, compared with 92% of public companies.
In particular, SECOR found that income funds demonstrate board independence across a
number of factors. For example:
• The average number of unrelated directors on income fund boards is five out of an average
total of seven directors, which is similar to public company boards, with an average of six
unrelated directors out of eight;
• 61% of income funds reporting indicate that their Chair is not a member of management, and
an additional eight per cent disclose that they have a Lead Director who is not a member of
management. In comparison, 60% of public companies reporting have an independent Chair
and 21% have an independent Lead Director.
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SECOR also found that income fund boards have widely incorporated planning and control
mechanisms. For instance, 94% of income funds reporting have adopted a strategic planning
process, compared to 100% of public companies.
Finally, income fund boards generally play a significant role in developing roles and structure:
• 74% have developed a position description for their CEO and 92% explicitly set the CEO’s
objectives. In comparison, 82% of public company boards reporting have formal position
descriptions and 95% set the CEO’s objectives;
• 85% of all income fund boards reporting have adopted a written code of conduct and ethics,
compared to 98% of public companies reporting.
SECOR also found that corporate governance practices can vary by size of fund. For example,
75% of small-cap income funds reporting have adopted a written code of conduct and ethics,
compared to 85% of medium-cap income funds and 90% of large-cap income funds.
Table C compares the SECOR study results for income funds and public corporations.
Table C: Compliance With Governance Guidelines
Income Funds
Public Corporations
100
% “Yes”
80
60
40
20
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
1. Board explicitly assumes responsibility for
stewardship.
9. Nominating Committee responsibilities delegated
to other committee.
19. Specific position description for Chair.
2. Board has adopted a written mandate.
10. Formal evaluation system for board effectiveness.
3. Board assumes responsibility for strategic planning.
11. Formal contribution of individual directors
reviewed by committee.
21. Board independence: Chair is not member of
management.
4. Board has identified the main risks of the
corporation’s business and ensures implementation
of appropriate risk management systems.
12. Orientation program for new directors.
13. Continuing education opportunities for directors.
20. Development of CEO objectives.
22. Chair or Lead Director is not member of management.
23. Board can function independently of management
(processes, i.e., in camera meetings).
5. Board assumes responsibility for succession planning.
14. Compensation of directors: retainer.
6. Board assumes responsibility for establishing
communications policy.
15. Compensation of directors: meeting fee.
24. Audit Committee is composed of only outside
directors.
16. Existence of Compensation/HR Committee.
25. Audit Committee roles are clearly defined.
17. Existence of Governance Committee.
26. Board can enlist outside advisors.
18. Specific position description for CEO.
27. Board has adopted a written code of
conduct and ethics.
7. Board assumes responsibility for the integrity of
internal control/management information systems.
8. Existence of a Nominating Committee.
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Year in Review: Transaction Highlights
As discussed earlier, 2005 was another year of significant growth for Canadian income funds.
Income fund issuances totalled approximately $17.5 billion over the year, compared to $14.6
billion in 2004. The market capitalization of TSX-listed income funds increased 60% to $190
billion, representing a total of 229 income funds.
The increase in income funds included 32 initial public offerings, 100 follow-on offerings and
21 conversions of public companies into income funds. The mergers and acquisitions market
was also active in 2005, with the announcement of 112 M&A deals representing an aggregate
transaction value of approximately $23 billion.
Goodmans’ Income Funds Group advised on many of Canada’s income fund IPOs, conversions,
follow-on offerings and income fund M&A transactions over the past year. A sample of these
transactions are summarized below.
Initial Public Offerings
On February 8, 2005, Keystone completed a $171 million IPO using the “dual-issuer” income
securities structure. Keystone North America is a leading owner and operator of funeral homes
across the U.S. with 177 funeral homes and nine cemeteries around the country. Keystone’s
funeral homes provide a full range of services, both at time of death and on a pre-planned
basis. The IPO transaction involved the combination of two businesses, since Keystone acquired
subsidiaries of Hamilton Federal Service Centres, another major owner and operator of funeral
homes, concurrently with the IPO closing.
Altus Group Income Fund completed a $75 million initial public offering in May 2005. Through
the initial public offering, companies engaged in the provision of professional real estate services
and operating under the Altus, Helyar and Derbyshire Viceroy brand names were combined to form
the leading independent multidisciplinary provider of professional real estate consulting and
advisory services in Canada. The group’s business is conducted through three primary real estaterelated practice areas (valuation and research, cost consulting and development cost management,
and realty tax management) by over 300 professionals located in offices throughout Canada.
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In May 2005, VOXCOM Income Fund completed a $57.5 million initial public offering. The
proceeds of the IPO were used to purchase VOXCOM Incorporated, which had been a public
company prior to being taken private in May 2004. VOXCOM is a national leader of security
alarm installation and monitoring services in Canada, serving more than 106,000 residential and
commercial customers. VOXCOM provides monitoring services for security alarm systems and
LifeCall emergency response systems to all provinces from its head office and call centre in
Edmonton and branch offices in major centres across the country. VOXCOM also maintains an
extensive marketing partnership and a network of authorized dealers throughout Canada.
Stephenson’s Rental Services Income Fund completed a $70 million initial public offering in
July 2005. In connection with this offering, the fund acquired a 76.2% interest in Stephenson’s
Rental Service Inc., which has grown from a single location into one of the top 10 equipment
rental businesses in Canada. Stephenson’s offers its customers a broad range of equipment,
tools and other merchandise for rent and sale, as well as a variety of complementary services.
In September 2005, Morneau Sobeco Income Fund completed a $200 million IPO, using the
proceeds to acquire an 80% interest in the Morneau Sobeco business. Morneau Sobeco is the
largest Canadian-owned pension and benefits consulting and outsourcing firm, providing services
to organizations across Canada and in the United States. With approximately 950 employees in
offices in 11 cities across North America, Morneau Sobeco has focused on the integrated design
and delivery of pension and benefit plans for over 40 years. Despite marketing the offering during
a time of uncertainty in the income fund market generally, the offering was over-subscribed
and Morneau Sobeco’s units have traded very well since closing.
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In 2002, Empire Company Limited reviewed the portion of its real estate holdings portfolio held
primarily in Crombie Developments Limited. Goodmans LLP was invited to be one of the advisors to help
Empire determine its strategic plan. Based on the input from various advisors, Empire decided to
aggressively leverage its significant commercial property expertise and position as market leader
in retail strip centers in Atlantic Canada and expand into Ontario. Subsequently, Empire decided
to transfer certain of its Atlantic properties into a Real Estate Investment Trust and retain a significant
interest. Goodmans played a leading role in helping Empire achieve its objectives in transferring
certain of its commericial properties to Crombie REIT. Crombie REIT filed a final prospectus
on March 10, 2006 with respect to the public offering of units worth $205 million, representing
a 51.5% interest in the REIT; Empire, through subsidiaries, retained a 49.5% interest in the REIT.
Conversions
On December 1, 2005, GMP Capital Corp. completed its conversion into an income fund by
way of a plan of arrangement. The conversion of GMP represents the first Canadian financial
services business to convert into an income fund. Approximately 29 million shares were
exchanged for units of GMP Capital Trust or exchangeable limited partner units of Griffiths
McBurney LP valued in aggregate at over $1 billion. During the same period, GMP Private
Client Ltd., the full-service investment subsidiary of GMP Capital Corp. focusing on high net
worth private individuals, was reorganized.
On March 2, 2006, Cinram International Inc. announced that its board of directors had unanimously
approved the conversion of Cinram from a corporation into an income trust, subject to shareholder
and court approvals and other conditions. Pursuant to the conversion, which is expected to be
completed in early May 2006, Cinram’s shareholders would exchange their common shares for
units of Cinram International Income Fund and/or for exchangeable limited partnership units
of a limited partnership owned by the fund, on a one-for-one basis. The structure of the Cinram
fund will take into account, among other things, Cinram’s multi-jurisdictional operations and cash
flows, which span Canada, the U.S. and Europe, and preserve Cinram’s program of substantial
capital reinvestment in its facilities and new technology to sustain its growth and profitability.
Cinram is the world’s largest independent provider of pre-recorded multimedia products and
related logistics services.
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goodmansincomefunds.com
On July 4, 2005, Vicwest Corporation completed its conversion into an income fund. The
conversion was completed by way of a corporate plan of arrangement, under which Vicwest’s
common shares were exchanged for units of Vicwest Income Fund. In structuring the fund,
special consideration was given to the particular nature of Vicwest’s business, specifically to the
cyclicality and seasonality of the business. Vicwest is Canada’s leading manufacturer of metal
roofing, siding and other metal building products with 15 manufacturing and sales facilities
strategically located across the country.
Mergers and Acquisitions
In March 2005, Somerset Entertainment Income Fund completed its $96 million IPO. The proceeds
were used to acquire 75% of Somerset Entertainment Limited Partnership, with the company’s two
founders retaining the remaining 25%. Somerset Entertainment is the leading North American
producer and distributor of speciality music sold internationally through non-traditional retailers
using interactive displays. The company’s extensive distribution network includes mass merchants,
specialty chains and independent gift stores in more than 20 countries. In December 2005,
Somerset Entertainment acquired the assets of Compass Productions Inc., a leading U.S.-based
producer and distributor of specialty music and compilations of hit recordings, solidifying
Somerset’s market-leading position. The acquisition was partially financed by a $32 million
public offering of trust units.
In May 2005, KCP Income Fund completed the acquisition of the Custom Manufacturing Division
of CCL Industries Corporation, transforming KCP from a manufacturer of private-label household
cleaning products for North America’s largest retailers to a custom manufacturer of a full line of
personal care, oral care and over-the-counter pharmaceutical products for many of the most
recognized brand companies in the world. The combined business almost triples the revenues
earned by KCP immediately prior to the transaction. The acquisition was financed in part by a
public offering of KCP units and convertible debentures.
15
A majority owner of three specialty surgical hospitals in South Dakota, Toronto-based MFC
completed its first post-IPO acquisition by acquiring a 51% interest in Oklahoma Spine Hospital
in Oklahoma City on June 14th, 2005 for approximately $66 million. This represented a significant
transaction for MFC and was the first follow-on offering of income securities in Canada. The
transaction is also in line with MFC’s business plan, one tenet of which is to acquire additional
high-quality hospitals from among the 3,500 alternative surgical facilities currently operated
throughout the United States.
In July 2005, Cineplex Entertainment Limited Partnership (50% owned by Cineplex Galaxy
Income Fund) acquired the Famous Players movie chain for approximately $500 million.
To finance part of the purchase, Cineplex Galaxy Income Fund completed a public offering of
$110 million of units and $105 million of convertible debentures. The remainder of the purchase
price was financed through a $340 million credit facility and the proceeds from the sale and
leaseback of certain theatres to RioCan Real Estate Investment Trust. Cineplex now owns,
operates or has an interest in 130 theatres with 1,270 screens and is the largest motion picture
exhibitor in Canada. Headquartered in Toronto, the business operates theatres under six
top-tier brands: Cineplex Odeon, Coliseum, Colossus, Famous Players, Galaxy and SilverCity.
For Further Information
Stephen Pincus
Chair, Income Funds Group
Tel: 416.597.4104
[email protected]
16
Seymour Temkin
Senior Business Advisor
Tel: 416.597.4120
[email protected]
Goodmans LLP
250 Yonge Street, Suite 2400
Toronto, Ontario, Canada M5B 2M6
Tel: 416.979.2211
goodmansincomefunds.com
Client Comments
“Goodmans has been a remarkable asset in helping us swiftly, professionally and creatively move forward as we
became Canada’s leading motion picture exhibition company. The depth of staff allowed us to deal with many complex
transactions simultaneously and it was great to have them on the team!”
– Ellis Jacob, President and CEO, Cineplex Entertainment Limited
“Goodmans has played a key role in helping us to structure and execute our transaction. Throughout the process they
have demonstrated their experience and expertise and clearly lived up to their outstanding reputation. They have been
a pleasure to work with.”
– Paul Beesley, Chief Financial Officer, Empire Company Ltd.
“Goodmans has played an integral role in the growth of KCP, having worked with us on every major transaction,
including acquisitions and financings. The people at Goodmans have always provided us with superior service, and we
have come to rely on them as members of our team.”
– David Cynamon, CEO, KCP Income Fund
“As a U.S. company transitioning to a public company in Canada, we relied heavily on our advisors. Goodmans’ entire
team was there with us every step of the way, guiding us through the intricacies of the income trust structure they
know so well, establishing our board and corporate governance, coordinating with the regulatory agencies, structuring
and orchestrating the transaction itself and making sure we stayed on track to make it happen.”
– Steve Shaffer, CFO, Keystone Group
“We were very pleased with the quality of the people and the service from our team at Goodmans. They were
instrumental in our successful IPO, bringing tax and business acumen that exceeded our expectations.”
– Bill Morneau, President and CEO, Morneau Sobeco
“In a busy year highlighted by our IPO and acquisition of our largest competitor, we were fortunate to have Goodmans
and their outstanding team guiding us through these intricate transactions.”
– Andy Burgess, CEO, Somerset Entertainment
“Stephenson’s Rental Services Inc. looked to Goodmans LLP to lead us through the challenging and intricate
process of our IPO – a landmark in the evolution of our company. With the public arena being new to Stephenson’s, it
was Goodmans’ thoroughness, responsiveness and unsurpassed commitment that brought ease and assurance to this
tremendous undertaking.”
– William D. Swisher, President & CEO, Stephenson’s Rental Services Inc.
Barristers & Solicitors / goodmansincomefunds.com