Nylcap Canada II Genpar Inc. et al.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from take-over bid requirements in connection with purchases made pursuant to a liquidity option granted at the time of the initial distribution -- filers not reporting issuers but not limited to less than 50 security holders -- terms of option fully disclosed at time of initial distributions -- relief granted subject to conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am.

December 20, 2011

IN THE MATTER OF

THE SECURITIES LEGISLATION OF ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

NYLCAP CANADA II GENPAR INC. (NCG),

NYLCAP SELECT MANAGER CANADA FUND II, L.P. (the Fund),

NEWBURY EQUITY PARTNERS II L.P. (NEP)

(together, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that sections 95 through 100 inclusive of the Securities Act (Ontario) (the Take-Over Bid Provisions) shall not apply to purchases of limited partnership units (the Units) of the Fund by Newbury Equity Partners II L.P. pursuant to the proposed Liquidity Option (as defined below) of the Funds (the Requested Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) the Filers have provided notice that section 4.7(1) of MI 11-102 is being relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador (the Non-Principal Jurisdictions) for relief from sections 2.17 through 2.34 inclusive and 3.1 through 3.4 inclusive of MI 62-104 Takeover Bids and Issuer Bids, being the equivalent of the Take-Over Bid Provisions in the securities legislation of the Non-Principal Jurisdictions.

Interpretation

Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filers:

1. N CG is a corporation incorporated under the Business Corporations Act (New Brunswick).

2. The Fund is a limited partnership formed under the laws of the Province of Ontario.

3. The Fund will offer Units by private placement to accredited investors across Canada.

4. The investment objective of the Fund is to invest directly or indirectly as a limited partner in NYLCAP Select Manager Fund II, L.P., a foreign-based private equity fund of funds (the Bottom Fund). The Fund is to be a limited partner of the Bottom Fund.

5. The Fund is not and does not anticipate becoming a reporting issuer and there will be no published market for the Units.

6. The minimum investment in the Fund will be USD$250,000, which is to be paid as and when called for by NCG as the general partner of the Fund.

7. NEP is a private investment fund formed under the laws of Delaware that acquires limited partnership interests in established leveraged buyout, venture capital and mezzanine funds, primarily in secondary transactions. NEP is not in the business of creating a market for restricted securities.

8. As an added benefit for limited partners of the Fund (Limited Partners), whose Units will be restricted securities and would otherwise be highly illiquid, Limited Partners will be provided with a liquidity option pursuant to which NEP will agree to purchase Units from Limited Partners starting on the second anniversary of the initial closing of the Fund and continuing for approximately twelve years, subject to extension by agreement of NEP and NCG (the Liquidity Option).

9. The existence and terms of the Liquidity Option will be disclosed in the offering memorandum of the Fund (the OM).

10. The principal terms of the Liquidity Option are as follows:

(a) Limited Partners wishing to have the benefit of the Liquidity Option will be required to "opt in" to the Liquidity Option by checking the appropriate box on their subscription agreement and paying the Liquidity Fee (as defined below).

Fee:

(b) In consideration for providing the Liquidity Option, each participating Limited Partner will be required to pay to the Fund, which in turn, will pay to NEP, an annual fee (the Liquidity Fee) in respect of such Limited Partner equal to: the product of (x) such Limited Partner's commitment, subject to reduction of the portion of the commitment to be applied in the calculation as set out below, multiplied by (y) 0.10%. The aggregate annual Liquidity Fee payable by the Fund to NEP is the aggregate of such annual Liquidity Fees payable by all participating Limited Partners. Once a participating Limited Partner sells its Units to NEP, or defaults in its obligation to pay the Liquidity Fee, its investment will no longer be included in calculating the aggregate annual Liquidity Fee payable by the Fund. The obligation of a participating Limited Partner to pay the Liquidity Fee is an additional obligation of the Limited Partner, who will also be obligated to pay the full amount of the Limited Partner's investment (that is initially, US$1,000 per Unit).

(c) The Liquidity Fee will be payable commencing on the date that a subscriber becomes a Limited Partner in the Fund, and shall be calculated and payable on such date and each one-year anniversary thereafter.

(d) Any Limited Partner that does not elect to participate in the Liquidity Option at closing will not have the opportunity thereafter to do so without obtaining NEP's and NCG's consent.

(e) The Liquidity Fee will be reduced as follows: (i) on the fifth anniversary of the final closing of the Fund (the Final Closing), the Liquidity Fee will reduced by an amount equal to 10% of the commitment of such participating Limited Partner, and (ii) on each anniversary thereafter, up to and including the eleventh anniversary of the Final Closing, the Liquidity Fee will be further reduced by an amount equal to 10% of such commitment.

(f) Any participating Limited Partner that defaults in paying the Liquidity Fee when due in a timely manner will automatically lose its right to sell its Units to NEP pursuant to the Liquidity Option and surrender any amounts already paid by it with respect to the Liquidity Fee.

Term:

(g) A participating Limited Partner may require NEP to purchase such Limited Partner's Units at any time commencing on the earlier of (i) the second anniversary of the Final Closing and (ii) any such time when the purchase price is greater than zero. The obligation of NEP to make such purchase will terminate on the earlier of the twelfth anniversary of the Final Closing and January 1, 2023.

Purchase Price:

(h) At the request of any Limited Partner electing in its subscription documents to the Fund to participate in the opportunity to take advantage of this Liquidity Option, NEP will provide a written offer to purchase such Limited Partner's Units at a US dollar price equal to 90% of a Limited Partner's Exposure, less its Remaining Commitment. "Exposure" means, in respect of a Unit, the net asset value (NAV) of the Unit plus such Limited Partner's Remaining Commitment. "Remaining Commitment" means the Limited Partner's original capital commitment to the Fund less capital contributions drawn down by the Fund. In the one year periods from the eighth, ninth, tenth and eleventh anniversaries of the Final Closing, the purchase price will be calculated as set forth above, except that rather than applying the 90% amount, 85%, 80%, 75% and 70% will be applied respectively. The purchase price paid for the Units will be adjusted upward on a dollar-for-dollar basis to account for any capital contributions made by the selling Limited Partner between the signing of the definitive sale agreement and the closing of the sale, and reduced downward on a dollar-for-dollar basis for any distributions made by the Fund to the selling Limited Partner between the signing of the definitive sale agreement and the closing of the sale.

Obligation to Purchase:

(i) NEP's obligation to purchase Units of the Fund will be capped at an aggregate purchase price of US$50 million. To reduce the likelihood that the Units subject to the Liquidity Option would exceed NEP's obligation to purchase Units, the Fund will not accept elections to participate in the Liquidity Option for more Units than the number of Units having an aggregate NAV of US$50 million.

(j) In the event that Limited Partners subscribing for Units having an aggregate NAV of more than US$50 million elect in their subscription documents to participate in the Liquidity Option, a prorated fraction of the Units of each electing Limited Partner will be accepted into the Liquidity Option at the initial closings of the Fund, such that the aggregate NAV of the Units subject to the Liquidity Option will initially equal US$50 million. If at the initial closings Limited Partners electing to participate in the Liquidity Option hold Units with an aggregate NAV of less than US$50 million of Units and one or more subsequent closings of the Fund occur, Limited Partners who subscribe for Units at a subsequent closing may elect in their subscription documents to participate in the Liquidity Option to the extent that the aggregate NAV of Units subject to the Liquidity Option is less than US$50 million, and participation in the Liquidity Option at any subsequent closing would be prorated as to that remaining availability only among those Limited Partners whose subscriptions are accepted at the particular subsequent closings. Notwithstanding any pro rata entitlement to exercise under the Liquidity Option, NEP's obligation will be to only purchase Units having an aggregate purchase price of US$50 million which may affect the number of Units that NEP is obligated to purchase depending on any increase or decrease in NAV of the Units.

(k) The Fund will notify NEP if Limited Partners holding Units having an aggregate NAV of more than US$50 million elect in their subscription documents to participate in the Liquidity Option with a view to the possibility of the Liquidity Option being extended by NEP above an aggregate purchase price of US$50 million, but there is no assurance that there would be any such extension.

(l) The Liquidity Option is the obligation of NEP. Neither the Fund, NCG, nor any Person, other than NEP, is under any obligation in connection with the Liquidity Option and none of them is responsible for, or has any obligations to the Limited Partners electing to participate in the Liquidity Option in the event of the failure of NEP to provide such liquidity. Neither the Fund, NCG, nor any other Person makes any representation or warranty with respect to the creditworthiness of NEP and/or its ability to fulfill its obligations to provide such liquidity to the Limited Partners.

Expenses:

(m) A Limited Partner will be responsible for its own expenses incurred in connection with a sale to NEP pursuant to the Liquidity Option.

Timing:

(n) The closing of the sale of Units on the exercise of the Liquidity Option will not occur until NAV is finally determined, which could be as long as 190 days following the execution of the purchase and sale agreement, a form of which has been approved by NCG and NEP.

11. Participation in the Liquidity Option is voluntary. The entitlement to participate in the Liquidity Option will be offered to all Limited Partners whose subscriptions are accepted at the initial closings of the Fund on equal terms. As the Liquidity Option is of limited size, the availability of the entitlement to participate in Liquidity Option for Limited Partners whose subscriptions are accepted at subsequent closings will depend on the extent to which Limited Partners whose subscriptions were accepted at the prior closings for the Fund elected to participate in the Liquidity Option; however, the then-remaining availability of the Liquidity Option will be offered to all Limited Partners whose subscriptions are accepted at the subsequent closing for the Fund on equal terms.

12. At such time as there remains 25% of NEP's obligation to purchase Units under the Liquidity Option, NCG will deliver a notice to each participating Limited Partner setting out the Units' NAV and the amount of capacity remaining for purchase under the Liquidity Option.

13. In the event of more than one closing in respect of the sale of Units of the Fund, prospective Limited Partners will be provided with notice of the Units' NAV and the amount of capacity remaining for purchase under the Liquidity Option as at the time of each subsequent closing. In addition, in the event of more than one closing in respect of the sale of the Units of the Fund, the OM will be supplemented with disclosure outlining the availability of the Liquidity Option as at the latest practicable date prior to the distribution to potential investors in the Fund.

14. NEP has indicated that it intends to hold the purchased Units until dissolution of the Fund. Consequently, as a result of such purchase, NEP will be obligated as a Limited Partner to make capital contributions to and be entitled to receive distributions from the Fund with respect to such purchased Units.

15. While there is no direct relationship between NEP and the Fund, an affiliate of the Bottom Fund's investment manager is an investor in NEP. Notwithstanding this relationship, the terms of the Liquidity Option reflect arms' length negotiations and bona fide terms and conditions.

16. The exercise of the Liquidity Option by a number of Limited Partners could result in NEP acquiring 20% or more of the outstanding Units of the Fund and as a result the making available of the Liquidity Option would be a take-over bid for the purposes of the Take-Over Bid Provisions.

17. Legislation in the Jurisdiction provides an exemption from the Take-Over Bid Provisions with respect to non-reporting issuers if:

(a) the offeree issuer is not a reporting issuer,

(b) there is not a published market in respect of the securities that are the subject of the bid, and

(c) the number of holders of securities of that class is not more than fifty, exclusive of holders who are in the employment of the offeree issuer or any affiliate of the offeree issuer, and exclusive of holders who were formerly in the employment of the offeree issuer or an affiliate of the offeree issuer and who while in employment were, and have continued after that employment to be, security holders of the offeree issuer.

While the Fund will not be a reporting issuer and there will be no published market in respect of the Units, as there is no restriction on the number of Limited Partners in the Fund, there is no assurance that the Fund will have fewer than fifty security holders, and for this reason the Non-Reporting Issuer Exemption will likely not be available in respect of the Liquidity Option.

Decision

The principal regulator is satisfied that the test contained in the Legislation that provides the principal regulator with the jurisdiction to make the decision has been met.

The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:

(a) the principal terms of the Liquidity Option are as described above and such terms are not amended or extended other than as contemplated in paragraphs 8 and 10(k) above,

(b) the features of the Liquidity Option will be fully disclosed in the OM of the Fund,

(c) there continues to be no published market for Units,

(d) the Fund is not and does not become a reporting issuer, and

(e) each Limited Partner is an accredited investor at the time of its purchase of Units.

"Judith Robertson"
Commissioner
 
"Vern Krishna"
Commissioner