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 -- application for relief from requirement to obtain separate minority approval for each class of units -- no difference of interest between holders of each class of units in connection with the proposed business combination transaction -- safeguards include independent committee, fairness opinions -- limited partnership agreement provides that unitholders will vote as a single class unless the nature of the business affects holders of one class of units in a manner materially different from another class -- requiring a class-by-class vote could give a de facto veto right to a very small group of unitholders.

Applicable Legislative Provisions

National Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 8.1(1) and 9.1(2).

November 21, 2019

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 STARLIGHT U.S. MULTI-FAMILY (NO. 1) VALUE-ADD FUND (the "Filer")

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the "Application") from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") exempting the Filer, pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101"), from the requirement in subsection 8.1(1) of MI 61-101 to obtain minority approval for the Transaction (as defined below) from the unitholders of every class of affected securities of the Filer voting separately as a class, and requiring instead that minority approval be obtained from all Disinterested Unitholders (as defined below) voting together as single class (the "Exemption Sought"). The Application is being made in connection with an acquisition agreement between the Filer and Clearwater U.S. Multi-Family (No. 2) Holding LP (the "Purchaser"), among others, pursuant to which the Purchaser will acquire all of issued and outstanding limited partnership interests and membership interests in certain of the Filer's subsidiaries, thereby indirectly acquiring ownership of the interests in the multi-family real estate properties currently owned by the Filer.

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 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 Québec, Alberta, Manitoba, and New Brunswick.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 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 a reporting issuer or the equivalent thereof in each province of Canada. The Filer is not in default of any requirement of the securities legislation in any jurisdiction in which it is a reporting issuer.

2. The Filer is a limited partnership established on April 24, 2017 under the laws of the Province of Ontario and is governed by an amended and restated limited partnership agreement dated June 12, 2017 (the "LPA").

3. The Filer's investment objectives are to: (a) indirectly acquire, own, and operate a portfolio primarily comprised of value-add, income-producing multi-family properties that can achieve significant increases in rental rates as a result of undertaking high return, light value-add capital expenditures and active asset management, and are located primarily in the States of Arizona, Colorado, Florida, Georgia, Nevada, North Carolina, Tennessee and Texas; (b) make stable monthly cash distributions; and (c) increase rental rates through light value-add capital expenditures, revenue management software, enhance revenue through ancillary income opportunities and reduce operating expenses through active asset management, best-in-class property management and economies of scale, with the goal of ultimately directly or indirectly disposing of its interests in the assets by the end of the Filer's pre-determined term of existence unless extended in accordance with the terms of the LPA.

4. The Filer currently owns interests in a portfolio of 1,193 suites in three properties located in the United States.

5. The Filer completed its initial public offering on June 16, 2017.

6. The limited partnership interests in the Filer are divided into seven classes of limited partnership units (collectively, the "Units"): Class A units ("Class A Units"), Class C units ("Class C Units"), Class D units ("Class D Units"), Class E units ("Class E Units"), Class F units ("Class F Units"), Class H units ("Class H Units") and Class U units ("Class U Units").

7. As at September 30, 2019, there were 8,182,469 Units issued and outstanding, comprised of 1,729,193 Class A Units, 1,622,500 Class C Units, 1,797,286 Class D Units, 1,082,800 Class E Units, 1,724,710 Class F Units, 0 Class H Units and 225,980 Class U Units.

8. The holders of the Class A Units, Class C Units, Class D Units, Class E Units, Class F Units, Class H Units and Class U Units have the same rights and obligations, and no holder of Units is entitled to any privilege, priority or preference in relation to any other such holder, subject to the following:

(a) The Class A Units, Class C Units, Class D Units, Class F Units and Class H Units are denominated in Canadian dollars, while the Class U Units and Class E Units are denominated in U.S. dollars.

(b) The Class H Units are required to account for the costs of any hedging instruments acquired by the Filer to provide holders of Class H Units with some protection against the weakening of the U.S. dollar as compared to the Canadian dollar.

(c) The proportionate entitlement of the holders of Class A Units, Class C Units, Class D Units, Class E Units, Class F Units, Class H Units and Class U Units to participate in distributions made by the Filer and to receive proceeds upon termination or dissolution of the Filer is determined based on the net U.S. dollar proceeds received by the Filer in respect of such class of Units at the time of the Filer's initial public offering.

(d) The proportionate allocation of income or loss of the Filer is determined in accordance with the LPA.

(e) The Class A Units and Class U Units are listed on the TSX Venture Exchange under the symbols "SUVA.A" and "SUVA.U" respectively. The Class C Units, Class D Units, Class F Units and Class H Units are not listed on any stock exchange, but may be converted into Class A Units at the option of the holders thereof at a rate determined by the relative net U.S. dollar proceeds received by the Filer for each Unit, by class, at the time of its initial public offering. The Class A Units are convertible into Class D Units on a similar basis.

(f) The Class E Units are not listed on any stock exchange, but may be converted into Class U Units at the option of the holders thereof at a rate determined by the relative net U.S. dollar proceeds received by the Filer for each Unit, by class, at the time of its initial public offering. The Class U Units are convertible into Class E Units on a similar basis.

(g) If a formal take-over bid is made for a class of Units other than the Class A Units and the Class U Units, then the Class A Units and the Class U Units have coattail rights to convert into the class of Units that are the subject of the formal take-over bid at a rate determined by the relative net U.S. dollar proceeds received by the Filer for each Unit, by class, at the time of its initial public offering.

9. The LPA provides that the unitholders vote as a single class in respect of any matter to be voted upon unless the nature of the business to be transacted at the meeting affects holders of one class of Units in a manner materially different from its effect on holders of another class of Units, in which case the Units of the affected class will vote separately as a class.

10. The Purchaser is a limited partnership governed by the laws of the State of Delaware, with its head and registered office located in Wilmington, Delaware.

11. Starlight Group Property Holdings Inc. ("Starlight Group"), a corporation which is wholly-owned by Daniel Drimmer, who is an officer and director of Starlight U.S. Multi-Family (No. 1) Value-Add GP, Inc., the general partner of the Filer ("General Partner"), together with one or more of its affiliates, established the Purchaser, with a subsidiary of Starlight Group initially being the sole general partner of the Purchaser.

12. At the time of the Transaction (as defined below) closing, the Public Sector Pension Investment Board ("PSP"), an arm's length unrelated third party to the Filer, will beneficially own and control 90% of the limited partnership interest in the Purchaser and Mr. Drimmer will beneficially own and control the remaining 10% limited partnership interest in the Purchaser.

13. The Purchaser and the Filer entered into an acquisition agreement (the "Acquisition Agreement"), pursuant to which the Purchaser will acquire all of the issued and outstanding limited partnership interests and membership interests in certain of the Filer's subsidiaries (the "Interests"), thereby indirectly acquiring ownership of the interests in the multi-family real estate properties currently owned by the Filer (the "Transaction").

14. The Purchaser intends to satisfy the purchase price for the Interests with a cash payment to the selling subsidiaries of the Filer in an amount that is in part based on the appraised value of the interest in the multi-family real estate properties held, indirectly, by the Filer. Following closing of the Transaction, the General Partner will distribute the net, after tax proceeds from the sale of the Interests to unitholders of the Filer and in connection therewith, the Filer will cancel all issued and outstanding Units and dissolve, all in accordance with and pursuant to the dissolution provisions provided in the LPA.

15. Mr. Drimmer, as principal of Starlight Investments US AM Group LP (the "Manager"), the manager of the Filer, together with Evan Kirsh, Martin Liddell and David Hanick, who are officers of the General Partner, each have direct or indirect interests in the "carried interest" that provides for a portion (25%) of an amount related to the Filer's distributable cash to be paid to the holders of interests in the "carried interest" provided that the Filer has sufficient distributable cash to provide unitholders with a return of their capital, a reference internal rate of return has been met (7.5% per annum) and the remaining percentage (75%) is distributed to the Filer's unitholders. In connection with the Transaction, the accumulated value of "carried interest" will be monetized based on the agreed Transaction value and extinguished in exchange for (i) cash payable to Messrs. Kirsh, Liddell and Hanick, and (ii) limited partnership units of the Purchaser issuable to or at the direction of Mr. Drimmer, subject to adjustment based on the terms of the arrangements between such parties and PSP.

16. The Transaction is a "business combination" as such term is defined in MI 61-101 and is therefore subject to the applicable requirements of MI 61-101. Such requirements include, among other things, obtaining approval for the Transaction by a majority of votes cast by the holders of each class of Units, excluding the votes attached to Units beneficially owned, or over which control or direction is exercised, by any party specified in subsection 8.1(2) of MI 61-101 (the "Disinterested Unitholders"), at a unitholder meeting held by the Filer. The Disinterested Unitholders in respect of the Transaction include all of the unitholders of the Filer with the exception of Mr. Drimmer and the directors and officers of each of the General Partner and the Manager.

17. As at September 30, 2019, Mr. Drimmer, Director and Chief Executive Officer of the General Partner and principal of the Manager, beneficially owned, or exercised control or direction over: 500,000 Class C Units and 2,100 Class U Units, representing a voting interest in the Filer of approximately 6.14%.

18. As at September 30, 2019, Mr. Kirsh, President of the General Partner, beneficially owned, or exercised control or direction over: 11,000 Class A Units, 40,000 Class C Units and 500 Class U Units, representing a voting interest in the Filer of approximately 0.63%.

19. As at September 30, 2019, Mr. Liddell, Chief Financial Officer of the General Partner, beneficially owned, or exercised control or direction over: 40,000 Class C Units, representing a voting interest in the Filer of approximately 0.49%.

20. As at September 30, 2019, Mr. Hanick, Corporate Secretary of the General Partner, beneficially owned, or exercised control or direction over: 3,000 Class A Units, representing a voting interest in the Filer of less than 0.04%.

21. As at September 30, 2019, Graham Rosenberg, Director of the General Partner, beneficially owned, or exercised control or direction over 25,000 Class F Units, representing a voting interest in the Filer of approximately 0.31%.

22. As at September 30, 2019, Harry Rosenbaum, Director of the General Partner, beneficially owned, or exercised control or direction over 26,500 Class A Units, representing a voting interest in the Filer of approximately 0.32%.

23. As at September 30, 2019, the Disinterested Unitholders held:

(a) 1,688,693 Class A Units (or approximately 97.66% of the Class A Units);

(b) 223,800 Class U Units (or approximately 98.85% of the Class U Units);

(c) 1,797,286 Class D Units (or 100% of the Class D Units);

(d) 1,082,800 Class E Units (or 100% of the Class E Units);

(e) 1,699,170 Class F Units (or approximately 98.55% of the Class F Units);

(f) 1,042,500 Class C Units (or approximately 64.25% of the Class C Units).

24. MI 61-101 was adopted to ensure the fair treatment of all security holders and the perception of such in the context of insider bids, issuer bids, business combinations and related party transactions.

25. The Transaction is subject to a number of mechanisms to ensure that the collective interests of the Filer's unitholders are protected, including the following:

(a) Negotiation of the Transaction was overseen by an independent committee of the board of directors of the General Partner (the "Independent Committee"), which is comprised solely of directors that are independent of the Filer, the Manager and PSP, being Messrs. Rosenberg and Rosenbaum.

(b) Origin Merchant Partners ("Origin") provided the Independent Committee and the board of directors of the General Partner with a fairness opinion (the "Fairness Opinion") concluding that, as of the date of such opinion and based upon and subject to the limitations, qualifications, assumptions and other matters set out therein, the consideration to be received by public unitholders (which excludes, among others, directors and senior officers of the Filer, the General Partner and their affiliates, as well as the Purchaser and its affiliates) pursuant to the Transaction and the related special distribution to unitholders is fair, from a financial point of view to the public unitholders of the Filer, which will be included in the Information Circular (as defined below). Such opinion complies with and the associated disclosure will comply with the provisions of CSA Multilateral Staff Notice 61-302 -- Staff Review and Commentary on Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions.

(c) The Independent Committee has retained Wildeboer Dellelce LLP to act as counsel for the Independent Committee.

(d) The General Partner exercised the requisite standard of care in accordance with the terms of the LPA with respect to the Transaction, with Mr. Drimmer recusing himself from any resolutions passed by the directors of the General Partner.

(e) The Filer will hold a special meeting of all unitholders of the Filer in order for the Filer's unitholders to consider and, if deemed advisable, approve the Transaction by a majority of votes cast by the Disinterested Unitholders (which, for greater clarity, will exclude the votes attached to all of the Units beneficially owned, or over which control or direction is exercised, by Messrs. Drimmer, Kirsh, Liddell, Hanick, Rosenbaum and Rosenberg), voting together as a single class of the Filer.

(f) The preparation and delivery by the Filer to its unitholders of an information circular (the "Information Circular") prepared in accordance with the applicable securities law requirements in order to provide sufficient information to allow the unitholders to make an informed decision in respect of the Transaction.

(g) The filing on SEDAR of appraisals, by an independent appraiser obtained by the Filer in contemplation of the Transaction, concerning each of the multi-family real estate properties currently owned by the Filer, which appraisals will be summarized in the Information Circular.

26. The General Partner and the Manager are of the view that these are the optimal mechanisms to ensure that the public interest is well protected and that the unitholders of the Filer are treated fairly and in accordance with their voting and economic entitlements under the LPA.

27. The LPA provides that unitholders vote as a single class in respect of any matter to be voted upon unless the nature of the business to be transacted at the meeting affects holders of one class of units in a manner materially different from its effect on holders of another class of units, in which case the units of the affected class will vote separately as a class. Each of the General Partner, the Manager and the Independent Committee have determined that the Transaction does not affect holders of one class of Units in a manner materially different from its effect on holders of another class of Units.

28. The division of the Filer's limited partnership units into various classes was related to the use of different currencies, to accommodate a number investment account differences, and the establishment of differing economic entitlements to participate in distributions made by the Filer and to receive proceeds upon termination or dissolution of the Filer, in each case, strictly pursuant to formulas determined at the time of the issuance of the Units pursuant to the initial public offering of the Filer and provided for in the LPA.

29. Each Unit entitles the holder to the same rights and obligations and no unitholder of the Filer is entitled to any privilege, priority or preference in relation to any other holder of Units, subject to: (a) the proportionate entitlement of each holder to participate in distributions made by the Filer and to receive proceeds upon termination of the Filer, is based on such holder's share of the "Proportionate Class Interest"; and (b) a proportionate allocation of income or loss of the Filer in accordance with the terms of the LPA. The Proportionate Class Interest is essentially the proportion of: (a) the aggregate net proceeds of the initial public offering (being the gross proceeds less the agents' fee) for all classes of Units; and (b) the aggregate subscription amount deemed to have been received by the Filer for the issuance of such class of Units at the time of the Filer's initial public offering that is attributable to a specific class of Units. A specific class' proportionate interest would be greater than another class' if Units of that first class had a lower applicable agents' fee in the initial public offering.

30. The relative returns as between classes within the Filer are fixed pursuant to a formula for the Filer that was determined at the time of the Filer's initial public offering when investors selected their preferred class and purchased their Units. The economic impact of the Transaction will be determined pursuant to the formulas established in the LPA, and the Transaction will not alter such entitlements or otherwise provide for the payment of cash or assets to unitholders in a manner that differs from the pre-established entitlements in the LPA, as each holder of a class of Units will receive distribution proceeds representative of its proportionate interest. Therefore, the interests of the holders of each class of Units are aligned in respect of the Transaction.

31. Each of the Filer' unlisted classes of Units may be converted into a listed class, as follows: the Class D Units, Class F Units, Class H Units and Class C Units can be converted at any time into Class A Units at the option of the holders thereof, while the Class E Units can be converted at any time into Class U Units at the option of the holders thereof. Each of the Filer's listed classes of Units (being the Class A Units and Class U Units) can be converted at any time into an unlisted class of Units, being the Class D Units and Class E Units, respectively.

32. Separate class votes by the unitholders of the Filer would have the effect of granting disproportionate importance to a small group of Disinterested Unitholders of each of the Class U Units (2.76% of issued and outstanding Units), Class E Units (13.23% of issued and outstanding Units) and Class C Units (19.83% of issued and outstanding Units). Despite their relatively small holdings, voting unitholders in each of these groups would be afforded a de facto veto right in respect of the Transaction that could be exercised against all other unitholders of the Filer. Because the quorum for a meeting of a class of unitholders is only 10% for each class, it is possible that a holder of less than 1% of the Units could "veto" the Transaction. Such an outcome would not be in accordance with the reasonable expectations of the unitholders of the Filer.

33. To the best of the knowledge of the Manager and the General Partner, there is no reason to believe that the Filer's unitholders of any particular class would not approve the Transaction.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that the following mechanisms are implemented and remain in place:

1. a special meeting of the unitholders of the Filer is held in order for the Disinterested Unitholders of the Filer to consider and, if deemed advisable, approve the Transaction, such approval to be obtained with the Disinterested Unitholders of the Filer voting together as a single class of the Filer;

2. the Information Circular is prepared and delivered by the Filer to its unitholders in accordance with applicable securities law requirements; and

3. the Fairness Opinion prepared by Origin concluding that the consideration to be received by the Filer is fair from a financial point of view to the Disinterested Unitholders is included in its entirety in the Information Circular.

"Naizam Kanji"
Director, Office of Mergers & Acquisitions
Ontario Securities Commission