Clairvest Group Inc. - s. 104(1)(c)

Headnote

Relief from issuer bid requirements -- Key investor in private equity fund product of a reporting issuer sought to sell, in exchange for unsecured debt consideration, 934,200 common shares (5.6% of total outstanding) at a discount to market price and 2,230,954 non-voting shares (100% of total outstanding) at a discount to book value -- Reasonable grounds for issuer concern that willingness of selling shareholder to commit to a successor private equity fund product of issuer conditional on sale of shares -- Common shares listed for trading on TSX and non-voting shares not traded on any stock exchange -- Sophisticated selling shareholder does not need the protections afforded by the issuer bid requirements -- Other shareholders able to sell their common shares on the TSX at a price higher than the price received by the selling shareholder under the transaction -- Other shareholders also able to sell their common shares to the issuer under its recently renewed normal course issuer bid -- Relief granted under clause 104(2)(c) of the Securities Act (Ontario).

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 95, 96, 97, 98, 104(2)(c)

April 4, 2006

IN THE MATTER OF

THE SECURITIES ACT, R.S.O. 1990, CHAPTER S.5,

AS AMENDED (the "Act")

AND

IN THE MATTER OF

CLAIRVEST GROUP INC.

ORDER

(Clause 104(2)(c) of the Act)

UPON the application of Clairvest Group Inc. (the "Applicant") to the Ontario Securities Commission (the "Commission") for an order pursuant to clause 104(2)(c) of the Act exempting the Applicant from the requirements of sections 95 through 98 and 100 of the Act, and the related provisions of the regulations set out in the Act (the "Issuer Bid Requirements"), in connection with the proposed purchase for cancellation (the "Proposed Purchase") by the Applicant of the issued and outstanding shares of the Applicant owned by the Canada Pension Plan Investment Board or one of its wholly-owned subsidiaries, (collectively, "CPP Investment Board");

AND UPON considering the Application and the recommendation of the staff of the Commission;

AND UPON the Applicant having represented to the Commission as follows:

1. The Applicant is incorporated under the laws of the Province of Ontario and has its head office located in Toronto, Ontario. The Applicant is a Canadian merchant bank that invests its own capital, and that of a private equity fund it manages, in various businesses. The Applicant is a reporting issuer in Ontario and is not on the list of defaulting reporting issuers maintained pursuant to section 72(9) of the Act.

2. The Applicant's authorized capital consists of an unlimited number of common shares (the "Common Shares") and an unlimited number of preference shares issuable in series of which one series of 10,000,000 non-voting shares (the "Non-Voting Shares") has been created.

3. The Non-Voting Shares are not traded on any stock exchange, nor is there a published market for such shares. The Non-Voting Shares have a $0.01 priority on liquidation ahead of the Common Shares, following which they rank pari passu with the Common Shares on liquidation. The Non-Voting Shares rank pari passu with the Common Shares with respect to the payment of dividends and do not entitle the holder thereof to vote. The Non-Voting Shares are convertible into Common Shares in 2011. The Non-Voting Shares are not redeemable at the option of the holder or the issuer. Prior to the issuance of the Non-Voting Shares in 2001, the Commission granted the Applicant an order exempting the Applicant from the requirements of Part 3 of Commission Rule 56-501- Restricted Shares, in connection with the distribution by way of private placement of the Non-Voting Shares to CPP Investment Board.

4. The Non-Voting Shares were created specifically for the investment by CPP Investment Board in the Applicant. On August 21, 2001, CPP Investment Board subscribed for 2,230,954 Non-Voting Shares for an aggregate purchase price of $16,866,012.24 (the issue price of each Non-Voting Share was $7.56 representing a 10% discount to the $8.40 book value of each Common Share at the time). On August 14, 2001 which was the last day on which the Common Shares traded prior to the issuance of the Non-Voting Shares, the closing price of the Common Shares on the Toronto Stock Exchange ("TSX") was $4.75; thus the Non-Voting Shares were issued at a significant premium to the trading price of the Common Shares. Contemporaneously with CPP Investment Board's purchase of the Non-Voting Shares, CPP Investment Board agreed to commit $50 million to Clairvest Equity Partners Limited Partnership ("CEP"), a private equity fund managed by the Applicant which was at the time seeking capital commitments.

5. At the time of CPP Investment Board's subscription for the Non-Voting Shares, CPP Investment Board entered into an investment agreement with the Applicant which contemplated, among other things, the possibility of CPP Investment Board acquiring Common Shares, subject to specified limitations (The CPP Investment Board's interest in Non-Voting Shares and Common Shares, collectively, the "CPPIB Interest").

6. The 2,230,954 Non-Voting Shares owned by CPP Investment Board are the only Non-Voting Shares that are or which have ever been issued.

7. There are currently 16,841,966 Common Shares outstanding. The Common Shares are listed on the TSX. The closing price of the Common Shares on the TSX on April 3, 2006 was $9.90. On February 9, 2006, the Applicant announced its third quarter results for the period ended December 31, 2005. The book value per share of the Applicant disclosed in the quarterly release was $12.50 per share. Since March 4, 2003, the Applicant has purchased 2,490,224 Common Shares pursuant to normal course issuer bids made pursuant to the rules of the TSX.

8. Those persons who own or control more than 10% of the Common Shares are as follows: Kenneth B. Rotman, 4,725,000 Common Shares (28.1%); Gerald R. Heffernan, O.C, 2,656,127 Common Shares (15.8%); Joseph L. Rotman, O.C, 2,644,200 Common Shares (15.7%). Other members of the Applicant's Board of Directors own or control an additional 2,552,189 Common Shares representing 15.2% of the outstanding Common Shares for a total of 74.7% owned or controlled by members of the Board of Directors.

9. CPP Investment Board owns 934,200 Common Shares. CPP Investment Board has advised the Applicant that these Common Shares were purchased in two tranches on October 9, 2001 and October 16, 2001 at prices of $5.125 and $5.00 per share, respectively. Such shares were acquired from corporations controlled by two former directors of the Applicant and thus were never considered part of the Applicant's public float.

10. The investment period for CEP is five years, meaning that after August 2006, CEP will not be able to fund new investments. Consistent with the practice in the private equity sector, the Applicant has commenced discussions with the partners of CEP, including CPP Investment Board, respecting the formation of a successor fund to CEP that the Applicant will form and manage (the "Successor Fund").

11. CPP Investment Board has indicated to the Applicant that its willingness to commit to the Successor Fund is conditional on the disposition of the CPPIB Interest. The Applicant believes that the commitment of CPP Investment Board to the Successor Fund is critical to the successful fundraising for the Successor Fund which in turn is an important element of the Applicant's continued growth, further success and enhancement of value for the Applicant's shareholders.

12. Any commitment by CPP Investment Board to the Successor Fund would be on the same economic terms as the commitment of any limited partner making a commitment of similar size.

13. In considering the parameters of a disposition of CPP Investment Board's interests in the Applicant, CPP Investment Board and the Applicant both recognized that there is no published market for the Non-Voting Shares and that the sale by CPP Investment Board of its Common Shares over the TSX would likely depress the trading price of the Common Shares (to the detriment of all holders of Common Shares who will see a decline in share price). Thus, both CPP Investment Board and the Applicant have determined that it would be mutually advantageous if CPP Investment Board could divest its interest in the Applicant by way of a purchase by the Applicant of the CPPIB Interest for cancellation.

14. CPP Investment Board and the Applicant are discussing a transaction whereby the Applicant would purchase the CPPIB Interest for an aggregate purchase price of $33 million (the "Purchase Price").

15. The Purchase Price is expected to be satisfied entirely by a promissory note (the "Note"). The terms of the Note are expected to include the following:

(a) Term of 10 years.

(b) Floating rate of interest equal to 3 month bankers acceptance rate (reset quarterly) plus 150 basis points (the "Spread") for the first four years (provided that the Spread will be increased by one percent if the Note is not prepaid by $10 million or more by the first anniversary of issuance, a further one percent if the Note is not prepaid by a total of $20 million or more by the second anniversary of issuance and a further one percent if the Note is not prepaid by a total of $30 million or more by the third anniversary of issuance). In addition, the Spread will not be increased following a year in which the Note has been prepaid by $10 million or more. On the fourth anniversary and thereafter, the then Spread shall increase one percent per annum. Interest shall be payable quarterly.

(c) Prepayable by the Applicant in whole or in part at any time without penalty. The Applicant must prepay the Note from a portion of the net after tax proceeds of the disposition of investments held by the Applicant.

(d) The note will be unsecured.

16. The Purchase Price is proposed to be allocated as to $25,098,233 for the Non-Voting Shares ($11.25 per share) and $7,901,767 for the Common Shares ($8.46 per share).

17. Should a record date for a dividend occur prior to closing, the amount of the dividend shall reduce the purchase price.

18. The purchase price for the CPPIB Interest will be an amount negotiated at arm's length between CPP Investment Board, a sophisticated investor, and the Applicant.

19. CPP Investment Board is not a related party to the Applicant as defined in Commission Rule 61-501- Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions.

20. Prior to the Applicant agreeing to purchase the CPPIB Interest, the Board of Directors of the Applicant will approve of the transaction. Eight of the Applicant's eleven directors would be considered independent as such term is defined in Multilateral Instrument 52-110 -- Audit Committees. Three of the eleven directors own or control more than 10% of the Common Shares. The remaining directors own or control 2,552,189 Common Shares with the result that the members of the Board of Directors own or control 74.7% of the Common Shares. In approving the transaction, the directors will need to conclude that it is in the best interests of the Applicant and its shareholders.

21. The Applicant commenced a new normal course issuer bid on March 6, 2006 pursuant to which the Applicant is able to purchase 840,959 Common Shares. This normal course issuer bid will provide a continued source of liquidity to the Applicant's shareholders as the Applicant is committed to continuing to purchase Common Shares under its normal course issuer bid (subject to any unforeseen changes in the Applicant's available cash resources).

22. The Applicant is genuinely concerned that if the proposed transaction is not completed, CPP Investment Board will not commit to the Successor Fund. This would have a serious adverse impact on the Applicant. As one of the leading private equity investors in Canada, and as a limited partner in CEP, the continued commitment of CPP Investment Board to the Successor Fund is very important to the Applicant and to the success of the Successor Fund.

23. The Applicant believes that the proposed Purchase Price for the CPPIB Interest is extremely favourable to the Applicant given that it reflects a 10% discount to the book value of the Non-Voting Shares and a 14% discount to the current trading price of the Common Shares. Moreover, the Purchase Price is payable entirely in the form of the Note which, in the Applicant's view, is on favourable terms including an interest rate when the note is issued which is lower than the rate the Applicant would pay if the Purchase Price were paid from cash borrowed under the Applicant's bank line.

24. The Applicant does not believe that any other holder of Common Shares would wish to sell its Common Shares on the same terms since it believes that any other shareholder would likely hold significantly fewer shares than the number held by CPP Investment Board and could sell them over the TSX entirely for cash (and not at a discount to market price).

25. The Applicant is not aware of any shareholder holding a significant number of Common Shares who has expressed any interest in selling Common Shares.

26. Both CPP Investment Board and the Applicant wish to pursue the transaction only if the entire CPPIB Interest is purchased.

27. Clairvest reports quarterly its book value per share and believes that its shares trade in part based on this underlying book value. The book value per share as at December 31, 2005 was $12.50. Should the Applicant purchase the CPPIB Interest for the Purchase Price, the book value per share would immediately increase to approximately $12.91. The Applicant believes this result is extremely favourable to the corporation and would be well received by the Applicant's shareholders and the capital markets generally. The Common Shares currently trade at an approximately 21% discount to book value. Assuming this discount remains unchanged, should the book value per share increase by $0.41, then the market price per share could increase by $0.32 (a 3.3% increase over the current market price of $9.84).

28. The sale by CPP Investment Board of its Common Shares over the TSX may depress the trading price of the Common Shares, which would be detrimental to all of the holders of Common Shares.

29. The Common Shares are not liquid and thus the purchase by the Applicant of the Common Shares from CPP Investment Board would not cause the shares to be any less liquid. Moreover, the Applicant's commitment to continue to purchase Common Shares pursuant to the normal course issuer bid will provide a continuing source of liquidity for the Applicant's shareholders.

30. The purchase of the CPPIB Interest will not materially affect the control of the Applicant.

31. By purchasing the Non-Voting Shares today, the risk of dilution when these shares become convertible in 2011 is eliminated. Should the market price of the Common Shares at the time of conversion be at a greater discount to the book value per share than it is today, then the dilution resulting from the conversion will be increased to the detriment of the holders of the Common Shares. The uncertainty of that future dilution would be eliminated by the Applicant purchasing the CPPIB Interest. Further, the purchase will simplify the share capital structure of the Applicant in that the only issued and outstanding securities will be Common Shares.

32. The Applicant pays an annual dividend of 10 cents per share on the Common Shares and the Non-Voting Shares. By purchasing the CPPIB Interest, the aggregate expense of paying the dividend will be reduced by $316,515.40.

33. The Note will not be on terms or of a magnitude that in any way would impair the operations of the Applicant.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to clause 104(2)(c) of the Act that the purchase for cancellation by the Applicant of all of its issued and outstanding shares owned by CPP Investment Board is exempt from the Issuer Bid Requirements, provided that:

(a) the transaction is completed within 90 days of the date of this order; and

(b) the Purchase Price per Common Share (assuming the conversion of the Non-Voting Shares on the same terms as they would be convertible in 2011) is not less than a 5% discount to the volume weighted average closing price for the Common Shares traded on the TSX for the three days on which the Common Shares traded immediately prior to the closing of the proposed acquisition of the CPPIB Interest.