Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- the issuer holds properties through numerous limited partnerships -- the units of the limited partnerships are exchangeable into and in all material respects economically equivalent to the issuer's publicly traded units -- the issuer may include the indirect interest in the issuer held by the holders of units of the relevant limited partnership when calculating the issuer's market capitalization for the purposes of the 25% market capitalization exemption for related party transactions -- the issuer may include the indirect interest in the issuer held by the holders of units of the all limited partnerships when calculating the issuer's market capitalization for the purposes of the 25% market capitalization exemption for certain related party transactions -- relief granted subject to conditions.

Applicable Legislative Provisions

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(1)(a), 9.1.

October 30, 2014

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 TRUE NORTH APARTMENT REAL ESTATE INVESTMENT TRUST (THE "FILER")

DECISION

Background

The securities regulatory authority or regulator in the Jurisdiction (the Decision Maker) has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) that the Filer be granted an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions (MI 61-101) from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to:

(a) any related party transaction of the Filer entered into indirectly through (i) True North Limited Partnership (TN LP), Blue-Starlight LP, Rocky (2013) Limited Partnership (Rocky LP), TN4 Limited Partnership (TN4 LP), TN5 Limited Partnership (TN5 LP) or TN6 Limited Partnership (TN6 LP) (collectively, the Existing Partnerships and each an Existing Partnership), (ii) any New Partnership (as defined below), or (iii) any other subsidiary entity (as such term is defined in MI 61-101) of an applicable Partnership (as defined below), if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect equity interests in the Filer held by holders of Exchangeable LP Units (as defined below) of the applicable Partnership through which, or through whose subsidiary entity, such transaction is entered into, (collectively, being referred to as the "subject Exchangeable LP Units") were included in the calculation of the Filer's market capitalization;

(b) any related party transaction of the Filer entered into indirectly through a Partnership, or any subsidiary entity of a Partnership, that is a (i) sale, transfer or disposition of an asset to a related party, (ii) assumption of a liability of a related party, or (iii) borrowing of money from a related party, in each case if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect equity interests in the Filer held by holders of Exchangeable LP Units of each of the Partnerships (also collectively, being referred to as the "subject Exchangeable LP Units"), were included in the calculation of the Filer's market capitalization; or

(c) any related party transaction of the Filer entered into directly by the Filer or indirectly through a Partnership, or any subsidiary entity of a Partnership that is a (i) purchase or acquisition of an asset from a related party for valuable consideration, or (ii) issuance of a security to a related party, in each case if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect equity interests in the Filer held by holders of Exchangeable LP Units of each of the Partnerships (also collectively, being referred to as the "subject Exchangeable LP Units"), were included in the calculation of the Filer's market capitalization.

(collectively, the Requested Relief).

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

(a) the Ontario Securities Commission (the Commission) is the principal regulator for the Application; and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in Quebec.

Interpretation

Terms defined in National Instrument 14-101 -- Definitions, MI 11-102 and MI 61-101 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1. The Filer is an unincorporated, open-end real estate investment trust established under, and governed by, the laws of the Province of Ontario. The Filer was established pursuant to a declaration of trust dated May 1, 2012, which was subsequently amended and restated as of June 5, 2012, September 28, 2012, and June 26, 2014 (the Declaration of Trust).

2. The Filer's head office is located at 3300 Bloor Street West, Suite 1801, West Tower, Toronto, Ontario, M8X 2X2.

3. The Filer is a reporting issuer (or equivalent thereof) in every province and territory in Canada (the Reporting Jurisdictions). The Filer is currently not in default of any applicable requirements under the securities legislation in the Reporting Jurisdictions.

4. The Filer is authorized to issue an unlimited number of trust units (Units) and an unlimited number of special voting units (Special Voting Units). As at September 31, 2014, the Filer had 18,832,947 Units and 13,561,599 Special Voting Units issued and outstanding. The number of Special Voting Units outstanding at any point in time is equivalent to, and accompanies, the number of Exchangeable LP Units (defined below) issued and outstanding.

5. The Units are listed and posted for trading on the Toronto Stock Exchange (the TSX) under the trading symbol "TN.UN". As at the date hereof, the Filer has $23 million aggregate principal amount of 5.75% extendible convertible unsecured subordinated debentures (Debentures) outstanding pursuant to a trust indenture dated June 16, 2014. The Debentures trade on the TSX under the symbol "TN.DB", are convertible into Units at the holder's option at a conversion price of $9.30 per Unit and mature on June 30, 2019.

6. The Filer was established to own multi-suite residential rental properties across Canada, the United States and in such other jurisdictions where opportunities may arise, subject to the terms set out in its Declaration of Trust. The Filer currently owns, through the Existing Partnerships, an aggregate of 8,826 residential suites located in Ontario, Québec, Nova Scotia, New Brunswick and Alberta. True North General Partner Corp. (True North GP), the general partner of each Existing Partnership and a wholly owned subsidiary of the Filer, manages and controls the operations and affairs of each Existing Partnership.

7. In addition to True North GP, the Filer currently has six additional subsidiary entities (as such is defined in MI 61-101), the Existing Partnerships, each a limited partnership formed under the laws of the Province of Ontario. Each Existing Partnership's head office is located at 3300 Bloor Street West, Suite 1801, West Tower, Toronto, Ontario, M8X 2X2. TN LP is governed by a limited partnership agreement dated May 3, 2012 and amended November 8, 2013, Blue-Starlight LP is governed by a second amended and restated limited partnership agreement dated November 8, 2013, Rocky LP is governed by an amended and restated limited partnership agreement dated February 20, 2013, which was further amended on November 8, 2013, TN4 LP is governed by an amended and restated limited partnership agreement dated June 27, 2014, TN5 LP is governed by an amended and restated limited partnership agreement dated June 27, 2014 and TN6 LP is governed by an amended and restated limited partnership agreement dated June 27, 2014 (collectively, the Existing Partnership Agreements and each an Existing Partnership Agreement).

8. The Filer may, from time to time, establish, form or acquire additional limited partnerships in the future (each of which would be a subsidiary entity of the Filer), in connection with future acquisitions (New Partnerships, and together with the Existing Partnerships, the Partnerships). Each New Partnership will be formed under the laws of the Province of Ontario and their head office will be located in the Province of Ontario. Each New Partnership will be governed by a partnership agreement (each a New Partnership Agreement and together with the Existing Partnership Agreements, thePartnership Agreements) that is identical to the Existing Partnership Agreements other than differences relating to the name, formation and capitalization amounts of each such Partnership, or which are administrative or clerical in nature.

9. The Filer holds all of its multi-suite residential rental properties and carries on its business through the Existing Partnerships. Each Partnership is, and will be, authorized to issue an unlimited number of general partnership units (GP Units), class A limited partnership units (Class A LP Units) and exchangeable Class B LP Units (Exchangeable LP Units). The rights and privileges attaching to the GP Units, Class A LP Units and Exchangeable LP Units, respectively, of each Partnership are, and will be, identical (other than differences relating to the name, formation and capitalization amounts of each Partnership, or which are administrative or clerical in nature).

10. 1 GP Unit, 3,056,250 Class A LP Units and 1,860,831 Exchangeable LP Units of TN LP are issued and outstanding as at the date hereof.

11. 1 GP Unit, 10,677,915 Class A LP Units and 1,405,151 Exchangeable LP Units of Blue-Starlight LP are issued and outstanding as at the date hereof.

12. 1,295 GP Units, 9,416,467 Class A LP Units and 1,405,150 Exchangeable LP Units of Rocky LP are issued and outstanding as at the date hereof.

13. 4,228 GP Units, 15,999,735 Class A LP Units and 4,696,900 Exchangeable LP Units of TN 4 LP are issued and outstanding as at the date hereof.

14. 203 GP Units, 1 Class A LP Unit and no Exchangeable LP Units of TN 5 LP are issued and outstanding as at the date hereof.

15. 3,775 GP Units, 1 Class A LP Unit and 4,193,567 Exchangeable LP Units of TN 6 LP are issued and outstanding as at the date hereof.

16. All of the outstanding GP Units of the Partnerships are, and will be, held by True North GP or such other general partner that is a wholly-owned subsidiary of the Filer. All the outstanding Class A LP Units are, and will be, held by the Filer and all the outstanding Exchangeable LP Units are held by persons other than the Filer (the Exchangeable Unitholders), including Mr. Daniel Drimmer, a trustee and the Chairman of the Board of the Filer. As at the date hereof, Mr. Drimmer beneficially owns or exercises control and direction over 933,212 Units, 12,388,267 Special Voting Units, 687,499 Exchangeable LP Units of TN LP, 1,405,151 Exchangeable LP Units of Blue-Starlight LP, 1,405,150 Exchangeable LP Units of Rocky LP, 4,696,900 Exchangeable LP Units of TN 4 LP, 0 Exchangeable LP Units of TN 5 LP, 4,193,567 Exchangeable LP Units of TN 6 LP, representing an approximate 41.1% effective interest in the Filer on an issued and outstanding basis, assuming all Exchangeable LP Units beneficially owned or controlled by him are exchanged for Units. Mr. Drimmer is also the sole shareholder of Starlight Investments Ltd. (Starlight), the asset manager of the Filer.

17. None of the Partnerships is, or will be, a reporting issuer (or the equivalent thereof) in any jurisdiction and none of the securities of the Partnerships are, or will be, listed or posted for trading on any stock exchange or other market.

18. Pursuant to the terms of an asset management agreement effective as of January 1, 2013 between Starlight and the Filer, Starlight is the external asset manager of the properties directly or indirectly owned by the Filer and provides the Filer with asset management, advisory and administrative services, including the services of the Chief Executive Officer and Chief Financial Officer of the Filer, on the terms and conditions set forth therein. The Filer has regularly disclosed its relationship with Starlight in its public filings.

19. The Exchangeable LP Units are, and will be, in all material respects, the economic equivalent of the Units on a per unit basis. Holders of Exchangeable LP Units are, and will be, entitled to receive distributions equal to those paid by the Filer to holders of Units. The Exchangeable LP Units are, and will be, exchangeable into Units on a one-for-one basis subject to customary anti-dilution adjustments and each is, and will be, accompanied by a Special Voting Unit that entitles the holder to receive notice of, attend and vote together with the holders of Units at all meetings of voting unitholders of the Filer. The Exchangeable LP Units are, and will be, transferable, subject to the satisfaction of certain applicable conditions set forth in section 3.14 and 3.15 of the applicable Partnership Agreement. The Exchangeable LP Units are, or will be, neither exchangeable for securities other than Units nor redeemable for cash.

20. Each Partnership Agreement contains, or will contain, at subsection 5.6(b), a provision (each an Additional Distribution Provision) permitting the applicable Partnership to make a distribution at any time. An Additional Distribution Provision has not, at any time since the Filer's inception, been used to make a distribution to holders of Exchangeable LP Units.

21. It is anticipated that the Filer may from time to time enter into transactions with entities owned or controlled by Mr. Drimmer, including Starlight and its affiliates, each of which would constitute a "related party transaction" within the meaning of MI 61-101.

22. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:

a. the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 by an independent valuator; and

b. the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (requirements (a) and (b) are collectively referred to as the Minority Protections).

23. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, exceeds 25% of the issuer's market capitalization (the Transaction Size Exemption).

24. The Filer may not be entitled to rely on the Transaction Size Exemption available under the Legislation from the requirements relating to related party transactions in the Legislation because the definition of "market capitalization" in the Legislation does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.

25. The Exchangeable LP Units represent, or will represent, part of the equity value of the Filer and provide, or will provide, the holder of the Exchangeable LP Units with economic rights which are, in all material respects, equivalent to the Units. The effect of the exchange right is that the Exchangeable Unitholders will receive Units upon the exchange of the Exchangeable LP Units.

26. If the Exchangeable LP Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of the approximate 41.1% interest in the Filer represented by the Exchangeable LP Units (as at September 30, 2014). As a result, related party transactions by the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer.

27. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 -- Income Trusts and Other Indirect Offerings (NP 41-201), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and which transaction MI 61-101 should apply to. Section 1.2 of NP 41-201 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Therefore, it is consistent with MI 61-101 that, in connection with certain related party transactions, securities of the operating entity, such as the Exchangeable LP Units, be treated on a consolidated basis for the purposes of the Transaction Size Exemption.

28. The inclusion of the Exchangeable LP Units in connection with certain related party transactions when determining the Filer's market capitalization pursuant to MI 61-101 is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.

Decision

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

The decision of the Decision Maker under the Legislation is that the Requested Relief be granted provided that:

(a) the applicable transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the subject Exchangeable LP Units were considered an outstanding class of equity securities of the Filer that were convertible into Units;

(b) there be no change to the terms of (i) the GP Units, the Exchangeable LP Units and the Special Voting Units, including the exchange rights associated with the Exchangeable LP Units, as described above and in the Declaration of Trust and the Exchange Agreement, dated June 5, 2012 (the Exchange Agreement), (ii) other than differences relating to the name, formation and capitalization amounts of each Partnership, or which are administrative or clerical in nature, the Existing Partnership Agreements and (iii) Articles 2 -- 4 of the Exchange Agreement; in each case whether by amendment to, or waiver of, such documents, contractual agreement or otherwise;

(c) the terms of the Exchangeable LP Units of any New Partnership, including the terms of any New Partnership Agreement are identical to those of the Existing Partnerships and Existing Partnership Agreements (other than differences relating to the name, formation and capitalization amounts of such New Partnership, or which are administrative or clerical in nature);

(d) any Additional Distribution Provision has not been used, and will not be used in connection with the applicable transaction, to make a distribution to holders of Exchangeable LP Units;

(e) the Filer has not permitted, and will not permit in connection with the applicable transaction, in either case directly or indirectly, the transfer of Exchangeable LP Units at a price greater than the lower of (i) the market price per Unit (being determined mutatis mutandis to the determination in subparagraph (a) of the definition of "market capitalization" in MI 61-101), and (ii) the closing price per Unit on the TSX on the trading day prior to the date of the transfer;

(f) upon the issuance of any Exchangeable LP Units of a New Partnership to which the Requested Relief would apply, the Filer will promptly issue a press release disclosing the issuance of such Exchangeable LP Units and which contains the following disclosure, with any immaterial modifications as the context may require;

"Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction does not exceed 25% of the market capitalization of the issuer. [The Filer] has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for certain transactions that would have a value of less than 25% of the [Filer's] market capitalization, if the [Exchangeable LP Units] of one or more Partnerships (dependent on the nature of the applicable transaction) are included in the calculation of the [Filer's] market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements would apply, is dependent on the nature of the applicable transaction. Following the issuance of the [Exchangeable LP Units of the New Partnership] such threshold will be increased to include up to approximately [X]% indirect exchangeable equity interest in the [Filer] held in the form of [Exchangeable LP Units] of the Partnerships."

(g) the applicable transaction is made in compliance with the rules and policies of the TSX or such other exchange upon which the Filer's securities trade;

(h) any annual information form or equivalent of the Filer that is required to be filed in accordance with applicable Canadian securities law contain the following disclosure, with any immaterial modifications as the context may require;

"Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction does not exceed 25% of the market capitalization of the issuer. [The Filer] has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for certain transactions that would have a value of less than 25% of the [Filer's] market capitalization, if the [Exchangeable LP Units] of one or more Partnerships (dependent on the nature of the applicable transaction) are included in the calculation of the [Filer's] market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements would apply, is dependent on the nature of the applicable transaction increased to include up to approximately [X]% indirect exchangeable equity interest in the [Filer] held in the form of [Exchangeable LP Units] of the Partnerships."; and

(i) the Requested Relief terminates on the date that is three years from the date of this Decision.

"Naizam Kanji"
Deputy Director, Corporate Finance
Ontario Securities Commission