Middlefield Fund Management Limited and Middlefield Canadian Growth Class

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from the illiquid assets purchase restriction in National Instrument 81-102 Mutual Funds granted to mutual fund to permit the fund to purchase assets acquired under a rollover transaction with flow through limited partnership under common management -- rollover transaction will result in minimal increase of illiquid assets held by the mutual fund as a percentage of net assets -- substantially all of the shareholders of the mutual fund are former limited partners of flow-through limited partnerships established by the fund manager -- the mutual fund will be able to reduce its illiquid holdings in compliance with subsections 2.4(2) and (3) if the 15% limit in illiquid holdings is reached -- the increase in illiquid assets as a result of the rollover transaction will not impair the mutual fund's ability to meet redemptions on demand.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.4(1), 19.1.

December 16, 2008

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

MIDDLEFIELD FUND MANAGEMENT LIMITED

(the "Applicant")

AND

IN THE MATTER OF

MIDDLEFIELD CANADIAN GROWTH CLASS

("Growth Class")

(the Applicant and Growth Class are 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") for relief from the restriction contained in section 2.4(1) of National Instrument 81-102 -- Mutual Funds ("NI 81-102") in order to permit the Growth Class to acquire certain illiquid assets from MRF 2006 II Resource Limited Partnership ("MRF 2006 II") on or about December 16, 2008, notwithstanding that, immediately after such acquisition, more than 10% of the net assets of Growth Class, taken at market value at the time of the acquisition, will consist of illiquid assets (the "Exemption Sought").

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 Multilateral Instrument 11-102 -- Passport System ("MI 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon Territory, Nunavut and the Northwest Territories.

Interpretation

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

Representations

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

The Applicant

1. The Applicant is a corporation organized under the Business Corporations Act (Ontario). The head office of the Applicant is located at 1 First Canadian Place, 58th Floor, P.O. Box 192, Toronto, Ontario, M5X 1A6.

2. The Applicant is the manager of the Growth Class.

3. The Applicant is also the promoter and manager of certain flow-through limited partnerships, including MRF 2006 II.

The Growth Class

4. The Growth Class is a class of shares of Middlefield Mutual Funds Limited (the "Mutual Fund"), a mutual fund corporation established under the Business Corporations Act (Ontario).

5. The fundamental objective of the Growth Class is to provide investors long-term growth of capital through investment in equity and some debt securities. Investments are primarily in equity securities of issuers operating primarily in the Canadian resource sectors, including assets that are "illiquid assets" as defined in NI 81-102.

6. The Growth Class is a reporting issuer in each of the provinces and territories of Canada pursuant to a simplified prospectus filed on May 26, 2008 in each of the provinces and territories of Canada. The net assets of the Growth Class as at December 12, 2008 were approximately $77.4 million.

7. The Growth Class is not in default of any of the requirements of the securities legislation in any of the provinces or territories of Canada.

MRF 2006 II

8. MRF 2006 II is a flow-through limited partnership formed pursuant to the Limited Partnerships Act (Ontario) on August 18, 2006. MRF 2006 II is a reporting issuer in each of the provinces and territories of Canada (other than the Northwest Territories and Nunavut) pursuant to a prospectus filed on September 20, 2006 (the "Prospectus") offering for sale up to 2,000,000 limited partnership units of the Partnership at a price of $25 per unit.

9. MRF 2006 II was formed to achieve capital appreciation and significant tax benefits to enhance after-tax returns to its limited partners through investment in a diversified portfolio of equity securities, including flow-through shares and flow-through warrants to acquire shares (collectively, "Flow-Through Shares") of companies involved primarily in oil and gas, mining or renewable energy exploration, development and production ("Resource Companies").

10. MRF 2006 II is a short-term special purpose vehicle which is to be dissolved in February 2009. The primary investment purpose of MRF 2006 II is not to achieve capital appreciation, although this is a secondary benefit, but rather to obtain for limited partners the significant tax benefits that accrue when Resource Companies renounce resource exploration and development expenditures to MRF 2006 II through the Flow-Through Shares.

11. The limited partnership units of MRF 2006 II (the "Units") are not and will not be listed or quoted for trading on any stock exchange or market. The Units are not redeemable by the limited partners. Generally, the Units are not transferred by limited partners since limited partners must be holders of the Units on the last day of each fiscal year of MRF 2006 II in order to obtain the desired tax deduction.

12. As at December 12, 2008, the net assets of MRF 2006 II were approximately $25 million.

Roll-Over Transaction

13. All of the assets of MRF 2006 II, including certain common shares of resource issuers that are Flow-Through Shares will, pursuant to a transfer agreement entered into with the Growth Class, be transferred to the Growth Class on a tax-deferred "rollover" basis in exchange for redeemable shares of the Growth Class of the Mutual Fund (the "Roll-Over Transaction"). Under the terms of the partnership agreement, MRF 2006 II is authorized to enter into the Roll-Over Transaction on or before December 16, 2008. The Roll-Over Transaction is intended to provide the limited partners of MRF 2006 II with enhanced liquidity and the potential for long-term growth of capital and income.

14. The portfolio assets of the Growth Class and MRF 2006 II are valued using the same valuation policies and procedures.

15. Following the transfer of its assets to the Growth Class, MRF 2006 II will be dissolved and upon dissolution, the limited partners will receive their pro rata interest in the redeemable shares of the Growth Class on a tax-deferred basis.

16. Details surrounding the transfer of the assets of MRF 2006 II to the Growth Class were disclosed in the Prospectus and in the Growth Class's simplified prospectus. In addition, the Prospectus disclosed the fact that the Roll-Over Transaction would be subject to the receipt of any regulatory approvals that may be necessary.

17. The illiquid assets held by MRF 2006 II consist of shares of Laricina Energy Ltd. ("Laricina"), a private company. At the time of purchase, the shares of Laricina constituted approximately 3.4% of the net assets of MRF 2006 II. As of December 12, 2008, the shares of Laricina constituted 13.7% of the net assets of MRF 2006 II.

18. The valuation of the shares of Laricina is based on the most recent trade in shares of Laricina and other factors determined by the Applicant in accordance with its valuation policies for valuing private company shares. Both the Growth Class and MRF 2006 II currently hold shares of Laricina which are valued at the same amount per share.

19. As of December 12, 2008, 10.6% of the net assets of Growth Class consisted of illiquid assets.

20. It is expected that, based on the net assets of MRF 2006 II and the Growth Class as at December 12, 2008, immediately after the transfer of the assets of MRF 2006 II to the Growth Class, the combined illiquid assets held by the Growth Class will represent approximately 11.3% of the net assets of the Growth Class, taken at market value at the time of the Roll-Over Transaction.

21. The increased volatility of equity markets in the last number of months has contributed to the increase in the percentage of illiquid assets held by the Growth Class and MRF 2006 II. Due to recent market conditions, MRF 2006 II was unable to sell its Laricina shares prior to the Roll-Over Transaction despite efforts to do so.

22. Substantially all the shareholders of the Growth Class are former limited partners of flow-through limited partnerships established by the Applicant and will have had exposure to illiquid assets prior to becoming shareholders of the Growth Class.

23. The Applicant will ensure that the Growth Class maintains, at all times, liquid assets sufficient to fund potential redemption requests. The increase in the Growth Class's illiquid assets as a result of the Roll-Over Transaction will not impair the ability of Growth Class to meet redemptions on demand.

24. The Applicant is of the view that it will be able to reduce the Growth Class's illiquid holdings within 90 days to 15% or less of the fund's net assets if the 15% investment limit in section 2.4(2) of NI 81-102 is exceeded.

25. The Applicant is of the view that the Roll-Over Transaction will benefit Growth Class shareholders by increasing the size of the Growth Class, which will reduce the management expense ratio since the fixed expenses of the Growth Class will be spread across a larger base.

26. The Applicant believes that Laricina has the potential for significant capital appreciation. The acquisition of the assets of MRF 2006 II is in compliance with the investment objectives and strategies of the Growth Class.

27. In the absence of the Exemption Sought, the Growth Class would be prohibited from purchasing the illiquid assets from MRF 2006 II pursuant to section 2.4(1) of NI 81-102 in connection with the Roll-Over Transaction as, immediately after the purchase, more than 10% of the net assets of the Growth Class, taken at market value at the time of the purchase, would consist of illiquid assets.

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.