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www.lexpert.ca/usguide-corporate/ | LEXPERT • June 2015 | 27 EXCHANGEABLE SHARE STRUCTURES » ing control proportionate to their economic interest in the partnership. By preserving the partnership under the public corporation, in- come can continue to be passed through to the historical partners and taxed directly to the partners. Corporate tax at the public cor- poration level is limited to the corporation's proportionate interest in the partnership. Consistent with a conventional Canadian structure, an exchange- able unit of the Partnership affords its holders voting rights equiva- lent to those they would have had holding a QSR common share. Such voting rights are achieved through a special voting share of QSR (held by a trustee) and a voting trust agreement. The exchange- able units are also entitled to distributions from the Partnership in an amount equal to, and at the same time as, dividends and other distri- butions declared on QSR common shares. However, there are some differences in the economic rights of ex- changeable units and QSR common shares that are not present in a conventional exchangeable structure. Some of these differences are a function of US tax law imperatives that are ref lected in the US Up-C structure. The following are the key differences: • While a typical Canadian exchangeable share issuer is a "shell" com- pany, the Partnership is instead a direct subsidiary of QSR, indirectly holding all the assets and business of the consolidated enterprise. • In a Canadian structure, the exchangeable share is immediately exchangeable for common shares; here the exchange right is not exercisable during the first year. • Unlike a Canadian exchangeable share, the exchangeable units are not automatically exchangeable for QSR shares upon a dissolution or winding up of the Partnership or QSR. • QSR has the ability to settle the exchangeable units in cash instead of in QSR shares. Thinking Outside the Box As a result of these differences, a considered approach was therefore needed to impose structural limits on the potential for meaningful economic differences between an exchangeable unit and the QSR "Under section 13.3 of National Instrument 51-102, typical exchangeable issuers are afforded exemptions from most of their continuous disclosure and reporting obligations under Canadian securities law on the basis that the reports fi led by their parent companies provide suffi cient disclosure." shares and provide exchangeable unit holders with economic rights that were substantially equivalent to those afforded to holders of QSR common shares. Central to this approach were distribution features that guard against disproportionate assets or liabilities at QSR relative to the Partnership, such as the requirement that QSR contribute its net proceeds from any equity issuance to the Partnership. In addition, the Partnership is permitted to make distributions to QSR for only two purposes: to fund distributions on the QSR common shares (for which the Partnership will make equivalent distributions on the exchangeable units) and the QSR preferred shares and to fund QSR expenses incurred to manage the Partnership and its businesses. Further, on any dissolution of the Partnership, those QSR expenses would be funded prior to any common-equity distributions at the Partnership or QSR. In addition to these structural limits, the QSR structure also improves on the conventional exchangeable share structure in sev- eral ways. For example, it confers contractually on exchangeable unit holders a number of the additional statutory rights they would have had as a QSR shareholder that are missing in a conventional struc- ture. Such statutory rights complement a shareholder's voting rights, such as the right to call a shareholders' meeting, make a shareholder proposal or request a shareholders list. Getting Novel Regulatory Relief Under section 13.3 of National Instrument 51-102, typical exchange- able issuers are afforded exemptions from most of their continuous disclosure and reporting obligations under Canadian securities law on the basis that the reports filed by their parent companies provide sufficient disclosure. However, these exemptions are premised on a conventional exchangeable structure in which the exchangeable se- curity provides its holder with "economic and voting rights which are, as nearly as possible except for tax implications, equivalent to the underlying securities." As a result of the differences noted above, the Partnership did not qualify for these exemptions. In order to obtain equivalent relief, it was necessary to demonstrate to Commission staff that, due to the