indebtedness is or has been the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Fund, the Trust, Keg GP or the Partnership, other than routine indebtedness.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
Other than as set forth below or elsewhere in this Information Circular, to the knowledge of the Trustees, no “informed person” has any material interest, direct or indirect, by way of beneficial ownership or otherwise, in any transaction with the Fund since the commencement of the Fund’s last financial year or in any proposed transaction which has materially affected or would materially affect the Fund, the Trust, the Partnership or Keg GP. An “informed person” means (a) a Trustee; (b) a trustee, director or executive officer of the Trust, the Partnership, Keg GP or a person or company that is itself an informed person; (c) any person or company who beneficially owns, directly or indirectly, voting securities of the Fund or who exercises control or direction over voting securities of the Fund or a combination of both carrying more than 10% of the voting rights attached to all Units; and (d) the Fund, if it has purchased, redeemed or otherwise acquired any of its securities, for so long as it holds any of its securities.
On May 31, 2002, pursuant to an acquisition agreement (the “Acquisition Agreement”), KRL, an insider of the Fund, transferred the Keg Rights to the Partnership for a total purchase price of $113,546,820. The purchase price was paid (i) as to $30,487,380, by a cash payment; and (ii) as to $83,059,440, by the issue of 905,944 Class A Units, 3,376,700 Class B Units and 5,700,000 Class C general partner units of the Partnership.
Concurrently with the transfer of the Keg Rights to the Partnership, the Partnership pursuant to a licence and royalty agreement (the “Licence and Royalty Agreement”) granted KRL an exclusive and unlimited licence to use the Keg Rights for a period of 99 years, for which KRL agreed to pay the Partnership the Royalty. In connection with the Licence and Royalty Agreement, KRL granted to the Partnership a general security agreement (the “Partnership General Security Agreement”) to secure payment of the Royalty and all of its obligations under the Licence and Royalty Agreement. The number of Keg steakhouses included in the Royalty Pool is amended annually.
As described above, on January 1st, the pool of Keg restaurants on which KRL pays a royalty to the Partnership (the “Royalty Pool”) is adjusted to include the gross sales from new Keg restaurants that have opened on or before October 2nd of the prior year, less gross sales from any Keg restaurants that have permanently closed during the year. In return for adding these net sales to the Royalty Pool, KRL receives the right to indirectly acquire additional Fund units (the “Additional Entitlement”). The Additional Entitlement is currently determined based on 92.5% of the royalty revenue added to the Royalty Pool, divided by the yield of the Fund units divided by the weighted average unit price of the Fund units. KRL receives 80% of the estimated Additional Entitlement initially, with the balance received on December 31st of each year when the actual full year performance of the new restaurants is known with certainty.
During 2005, it was determined that the roll-in formula used to calculate the Additional Entitlement was inconsistent with other restaurant royalty funds in the Fund’s peer group such that the accretion that was intended to result from the addition of new sales to the Royalty Pool was affected by the Fund’s Unit price at the time of the roll- in. If the Unit price was above $10, the addition of new restaurant sales to the Royalty Pool would be less accretive to unitholders than intended and conversely, if the Unit price was below $10, the addition of new restaurant sales would be more accretive than intended.
As a result, on December 12, 2005, the Fund’s Trustees and KRL’s management amended the arrangements between KRL and the Fund (with effect as if the amendments had been made on May 31, 2002, the date of the Fund’s initial public offering (“IPO”)) to ensure that the intended accretion to unitholders continues regardless of the Fund’s Unit price. As part of these new arrangements, KRL agreed to waive its entitlement to receive approximately 43,718 Units in connection with the Additional Entitlement for the January 1, 2005 pursuant to the existing formula.
On December 21, 2010, the Fund announced its intention to remain an income trust in connection with the introduction of the specified investment flow-through trust tax (the “SIFT tax”) which became effective on January 1, 2011. Further to this determination, during the first quarter of 2011 the Trustees of the Fund and KRL determined that the SIFT tax would have a negative and unintended impact on the economics associated with the roll-in mechanism for the Additional Entitlements on January 1, 2012 and thereafter. Specifically, if no change was made to the terms of the Limited Partnership Agreement, further additions to the Royalty Pool (and the compensation paid to KRL for creating additional Royalty revenue for the Partnership) would not be accretive to the Fund and its