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BACKGROUND

On December 3, 2004 the Canadian Securities Administrators (CSA) published and implemented National Policy 41-201 - Income Trusts and Other Indirect Offerings. The draft Policy was originally published for comment on October 24, 2003.

The stated purpose of the Policy is to provide guidance and clarification about income trusts and other indirect offerings with a view to ensuring that investors have sufficient information to make informed investment decisions. The Policy also aims to minimize inconsistent interpretations regarding the application of securities legislation to income trusts.

The CSA chose to proceed by way of a policy as opposed to a rule as they felt that the existing regulatory framework was suitable for the purpose of regulating income trusts and other indirect offerings. The only thing that was needed was clarification regarding the application of the existing rules, especially with respect to the underlying operating entity in any income trust structure that has a business which generates cash flows that are available for distribution, at the discretion of the income trust, to the income trust's unitholders.

PROSPECTUS DISCLOSURE

Part 2 of the Policy addresses disclosure issues. Much emphasis is placed on clarifying the concept of and risks associated with distributable cash and the fact that investing in an income trust is more like investing in an equity security that in debt given that, unlike debt, the unitholder of an income trust does not have a fixed right to receive distributions.

Specific prospectus disclosure relating to the distributable cash concept is achieved in these three ways:

1. prospectus cover page disclosure to make it clear that investment in an income trust is not comparable to investment in a fixed income security, highlighting risk factors associated with stability of distribution, and speaking to after-tax return;
2. disclosure regarding material debt that could affect a unitholder's entitlement to receive distributable cash, including risk factor disclosure; and
3. where obtained, cover page disclosure of stability ratings.

The Policy also provides guidance regarding other prospectus disclosure with the underlying theme being linked to issues that could ultimately affect distributable cash, including:

any third party valuation obtained of the interest of the operating entity to be acquired in an initial public offering;

• executive compensation of the executives of the operating entity as if it was a subsidiary of the income trust;
• material terms of management contracts and incentive plans; and
• risk factors with a focus on factors that could affect cash flow distribution.

CONTINUOUS DISCLOSURE

Part 3 of the Policy addresses continuous disclosure. The Policy makes it clear that notwithstanding that the underlying operating entity is not a reporting issuer, comprehensive information regarding that entity is important to ensure informed investment decisions. Accordingly, where securities legislation of the various provinces is not clear in terms of its application to the operating entity, the income trust will be required to file an undertaking with the securities authorities prior to receipt of the final prospectus that it will provide continuous disclosure information about the operating entity as if it were subject to such obligations directly. To ensure that this is the case, the income trust will need to comply with a number of requirements or suggested practices, as the case may be, including:

1. annually certifying that it has complied with the undertaking and filing the certificate on SEDAR at the time of filing its annual financial statements.
2. disclosing comparative financial information in respect of the underlying business during its interim and annual periods. If the operating entity's financial results are not consolidated in the financial statements of the income trust, the operating entity's financial statements must be provided to unitholders.
3. each person who would be considered an insider of the operating entity if it were a reporting issuer will be required to comply with insider reporting requirements as if they were an insider of the income trust. Again, where securities legislation of the various provinces is unclear on this point, the income trust will be required to file with the regulators, prior to issuance of a receipt for a prospectus, an undertaking that will take appropriate measures to require these persons to comply with insider reporting and insider trading requirements.
4. MD&A of the income trust should address specific risks and uncertainties relating to the operations of the underlying operating entity and the potential impact of those risks on future distributions of the income trust. It is also recommended that the MD&A include disclosure of the sources of funding for distributions made in the current period to unitholders and the breakdown between return on and return of capital for distributions.

PROSPECTUS LIABILITY

Part 4 of the Policy addresses prospectus liability and recognizes that unlike direct offerings, in the context of an income trust or other indirect offering the former owners of the underlying operating entity sell their ownership interest to the income trust effectively accessing the public markets to liquidate their holdings but are not technically considered to be "selling security holders" within the meaning of securities legislation, as they are not selling the securities being offered under the prospectus. Accordingly, unlike direct offerings, such persons would not attract statutory liability for a prospectus misrepresentation. To address this issue, the regulators make it clear that they believe that a vendor who receives, directly or indirectly, a significant portion of the offering proceeds as consideration for services or property in connection with the founding or organization of the business of the income trust will be viewed as a "promoter" under securities legislation and required to sign the prospectus as such. Whether a person is acting as a "promoter" is a question of fact and such determination is expected to be made by the income trust and the underwriters at the appropriate time. For an operating entity identified as the promoter, the prospectus should describe that notwithstanding the operating entity's statutory liability for misrepresentation in the prospectus, where the vendors of the operating entity either retain little or no interest, there will be little or no practical benefit to investors who choose to exercise their rights against the operating entity.

Specific disclosure has been recommended to be inserted into the prospectus to address concerns associated with vendors of interests in the operating entity not retaining sufficient interest in those entities, including a summary of the relevant acquisition agreement to provide investors with a clear description of the extent to which the vendors are supporting, with meaningful indemnities, the representations and warranties given by the vendors. Highlighting their concern regarding the vendors taking appropriate responsibility for the information provided in the prospectus, the regulators will assess the entire framework of representations, warranties and indemnities provided by the vendors as a group, as opposed to the vendors individually.

SALES AND MARKETING MATERIALS

Part 5 of the Policy addresses sales and marketing materials. The Policy makes it clear that the normal rules relating to marketing in the context of a prospectus offering, including green sheets, apply to income trust and other indirect offerings. To the extent that the marketing materials contain an expression of yield it is expected that be tied to the prospectus disclosure. Income trusts are expected to provide copies of all green sheets to the securities regulators when filing the preliminary prospectus.

CORPORATE GOVERNANCE

Part 6 of the Policy addresses corporate governance and makes it clear that issuers should disclose in the prospectus how they will comply with identified corporate governance requirements, such as CEO/CFO certification and audit committee rules. Specific disclosure is also suggested to address broader corporate law concerns and more specifically, that unitholders of an income trust may not have the full spectrum of remedies available to shareholders of a corporation. The suggested disclosure makes it clear that the declaration of trust establishing the income trust will need to provide the same protections to unitholders as the corporate statutes.

LIMITED LIABILITY FOR UNITHOLDERS

On a related note, in December, 2004 the Ontario government proclaimed legislation to address the uncertainty of whether unitholders could benefit from limited liability. Under the Liability Act, 2004, unitholders of any trust that is a reporting issuer under the Ontario Securities Act and provided its declaration of trust selects Ontario as its governing law, will not be liable for any act, default, obligation or liability of the trust or any of its trustees in respect of obligations or activities that arise after December 16, 2004.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

For further information, please contact one of the following lawyers:

Montréal

Lise Bergeron (514) 847-4506   lbergeron@ogilvyrenault.com

Andrew Bleau (514) 847-4505   ableau@ogilvyrenault.com

Luc Boucher (514) 847-4824   lboucher@ogilvyrenault.com

Renaud Coulombe (514) 847-4831   rcoulombe@ogilvyrenault.com

Raymond Crevier, Q.C. (514) 847-4429    rcrevier@ogilvyrenault.com

Jean Daigle (514) 847-4496    jdaigle@ogilvyrenault.com

Christine Dubé (514) 847-4829   cdube@ogilvyrenault.com

Marc Duquette (514) 847-4508   mduquette@ogilvyrenault.com

Claude Fontaine, Q.C. (514) 847-4432   cfontaine@ogilvyrenault.com

Dominique Fortin (514) 847-4526   dfortin@ogilvyrenault.com

Marc Lacourcière (514) 847-4885   mlacourciere@ogilvyrenault.com

Amar Leclair-Ghosh (514) 847-4612   aghosh@ogilvyrenault.com

Francis R. Legault (514) 847-4495   flegault@ogilvyrenault.com

Steve Malas (514) 847-4792   smalas@ogilvyrenault.com

Clemens Mayr (514) 847-4543   cmayr@ogilvyrenault.com

Marie-France Nantel (514) 847-4937   mnantel@ogilvyrenault.com

Frank L. Picciola (514) 847-4330   fpicciola@ogilvyrenault.com

Paul Raymond (514) 847-4479   praymond@ogilvyrenault.com

Solomon Sananes (514) 847-4411   ssananes@ogilvyrenault.com

Michelle Setlakwe (514) 847-4454   msetlakwe@ogilvyrenault.com

Norman M. Steinberg (514) 847-4521   nsteinberg@ogilvyrenault.com

Québec

Claude A. Blanchard (418) 640-5008   cblanchard@ogilvyrenault.com

Pierre Déry (418) 640-5009   pdery@ogilvyrenault.com

Anne-Marie Naud (418) 640-5058   anaud@ogilvyrenault.com

Carl Tremblay (418) 640-5013   ctremblay@ogilvyrenault.com

Louis Vaillancourt (418) 640-5005   lvaillancourt@ogilvyrenault.com

Ottawa

Grant A. Jameson (613) 780-1530   gjameson@ogilvyrenault.com

Toronto

Thomas I.A. Allen, Q.C. (416) 216-3913   tallen@ogilvyrenault.com

Michael Bennett (416) 216-4017   mbennett@ogilvyrenault.com

Mark A. Convery (416) 216-4803   mconvery@ogilvyrenault.com

Terence S. Dobbin (416) 216-3935   tdobbin@ogilvyrenault.com

Andrew Fleming (416) 216-4007   afleming@ogilvyrenault.com

Michael J. Lang (416) 216-3939   mlang@ogilvyrenault.com

James A. Riley (416) 216-3912   jriley@ogilvyrenault.com

Cathy Singer (416) 216-4053   csinger@ogilvyrenault.com

Pierre L. Soulard (416) 216-4806   psoulard@ogilvyrenault.com

Richard S. Sutin (416) 216-4821   rsutin@ogilvyrenault.com

Dawn P. Whittaker (416) 216-1895   dwhittaker@ogilvyrenault.com

Ava G. Yaskiel (416) 216-3902   ayaskiel@ogilvyrenault.com

Vancouver

Catherine Elaine Wade (604) 806-3865   cwade@ogilvyrenault.com

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Lise Bergeron
Montréal
514.847.4506
lbergeron@ogilvyrenault.com
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Andrew Bleau
Montréal
514.847.4505
ableau@ogilvyrenault.com
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Chantale Coulombe
Québec
418.640.5263
ccoulombe@ogilvyrenault.com
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Jean Daigle
Montréal
514.847.4496
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Christine Dubé
Montréal
514.847.4829
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Marc Duquette
Montréal
514.847.4508
mduquette@ogilvyrenault.com
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Marc Lacourcière
Montréal
514.847.4885
mlacourciere@ogilvyrenault.com
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Amar Leclair-Ghosh
Montréal
514.847.4612
aghosh@ogilvyrenault.com
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Francis R. Legault
Montréal
514.847.4495
flegault@ogilvyrenault.com
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Steve Malas
Montréal
514.847.4792
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Frank L. Picciola
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514.847.4330
fpicciola@ogilvyrenault.com
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Paul Raymond
Montréal
514.847.4479
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Solomon Sananes
Montréal
514.847.4411
ssananes@ogilvyrenault.com
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Norman M. Steinberg
Montréal
514.847.4521
nsteinberg@ogilvyrenault.com
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Pierre Déry
Québec
418.640.5009
pdery@ogilvyrenault.com
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Anne-Marie Naud
Québec
418.640.5058
anaud@ogilvyrenault.com
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Carl Tremblay
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418.640.5013
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Louis Vaillancourt
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418.640.5005
lvaillancourt@ogilvyrenault.com
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Grant Jameson
Ottawa
613.780.1530
gjameson@ogilvyrenault.com
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Thomas I.A. Allen
Toronto
416.216.3913
London
+44 (0)20 7444 1910
tallen@ogilvyrenault.com
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Mark A. Convery
Toronto
416.216.4803
mconvery@ogilvyrenault.com
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Terence S. Dobbin
Toronto
416.216.3935
tdobbin@ogilvyrenault.com
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Andrew Fleming
Toronto
416.216.4007
afleming@ogilvyrenault.com
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Michael J. Lang
Toronto
416.216.3939
mlang@ogilvyrenault.com
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Cathy Singer
Toronto
416.216.4053
csinger@ogilvyrenault.com
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Pierre Soulard
Toronto
416.216.4806
psoulard@ogilvyrenault.com
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Richard S. Sutin
Toronto
416.216.4821
rsutin@ogilvyrenault.com
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Dawn P. Whittaker
Toronto
416.216.1895
dwhittaker@ogilvyrenault.com
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Ava G. Yaskiel
Toronto
416.216.3902
ayaskiel@ogilvyrenault.com
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