Securities Law & Instruments


Relief from issuer bid requirements -- reporting issuer purchasing warrant exercisable into common shares of the issuer -- purchase price of the warrant is below the 'in the money' value of the warrant -- transaction was negotiated by a special committee of directors at arm's length to the selling security holder -- selling security holder does not need the protections afforded by the issuer bid requirements -- other security holders are unable to participate in a general offer -- purchase made in compliance with requirements regulating related party transactions -- relief granted from issuer bid requirements.

Applicable Ontario Statutory Provisions

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



AS AMENDED (the "Act")






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

UPON the application of MCAP Inc. ("MCAP") to the Ontario Securities Commission (the "Commission") for an order pursuant to clause 104(2)(c) of the Act exempting MCAP from the requirements of sections 95, 96, 97, 98 and 100 of the Act and the related provisions set out in the regulations to the Act (the "Issuer Bid Requirements") in connection with the proposed purchase for cancellation by MCAP of a warrant to acquire up to 3.4 million common shares of MCAP at a price of $7.50 per share until February 28, 2007 (the "Warrant") from Bentall Capital II Limited Partnership ("BCLP2");

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

AND UPON MCAP having represented and CDP Capital -- Real Estate Advisory Inc. ("CREA") having represented, to the extent such representations relate to CREA and its affiliates, to the Commission as follows:

1. MCAP is a loan company under the Trust and Loan Companies Act (Canada) and a mortgage investment corporation under the Income Tax Act (Canada). MCAP is headquartered in Toronto, Ontario, and is a reporting issuer in each of the provinces and territories of Canada.

2. At present, there are a total of 9,839,172 common shares of MCAP (the "MCAP Shares") issued and outstanding. The MCAP Shares are listed on the Toronto Stock Exchange under the symbol MKP.

3. Cadcap Inc. ("Cadcap") is a wholly owned subsidiary of CREA, which is a wholly owned subsidiary of Cadim Inc., itself a wholly owned subsidiary of the Caisse de dépôt et placement du Québec ("Caisse").

4. On February 28, 2002, Cadcap completed a transaction (the "Financing") providing capital financing of $27.2 million to MCAP and its wholly-owned subsidiary, MCAP Financial Corporation ("MCAP Financial"). At that time, MCAP Financial was the general partner of, and held a 50% interest in, MCAP Commercial Limited Partnership ("MCLP"), a limited partnership active in all areas of real estate lending in Canada, including residential and commercial mortgages, interim construction financing and mezzanine loans.

5. Pursuant to the Financing, BCLP2, then a partnership between Bentall Capital Limited Partnership ("Bentall Capital"), as general partner, and Cadcap, as limited partner, purchased:

(a) 960,000 MCAP Shares at $7.50 per share (the "Equity Investment");

(b) the Warrant at a price of $0.65 per share paid on the issuance of the Warrant. The Warrant is transferable and is subject to certain restrictions including that the warrantholder cannot exercise the Warrant without approval of the Office of the Superintendent of Financial Institutions if so doing would result in the holder owning or controlling more than 10% of the issued and outstanding MCAP Shares;

(c) BCLP2 secured the right to have nominated and elected two directors of MCAP provided it owns at least 9% of the MCAP Shares (the "Board Representation Right");

(d) a 15% unsecured, subordinated, convertible debenture of MCAP Financial in the amount of $20 million due 2017 (the "Debenture"); and

(e) 100 Class A shares of MCAP Financial (the "MFC Subscription").

6. As part of the Financing, certain agreements were entered into between MCAP and/or its shareholders, BCLP2 and certain other parties relating to the Equity Investment, the Warrant, the Debenture, the MFC Subscription and the Board Representation Right including a subscription and purchase agreement, an investor rights agreement, a priority agreement, a lock-up agreement, a registration rights agreement and an advisory services agreement.

7. Concurrent with the closing of the Financing, Cadcap purchased a 50% interest in MCLP from Crown Life Insurance Company and one of its affiliates.

8. BCLP2 currently holds approximately 9.76% of the issued and outstanding MCAP Shares and approximately 32.93% of the MCAP Shares on a fully diluted basis.

9. On November 6, 2003, MCAP entered into a memorandum of understanding (the "MOU") with CREA setting out the terms of a proposed combination of the respective mortgage origination and servicing businesses of MCAP's operating subsidiaries and the Caisse (the "Combination").

10. On October 28, 2003, the board of directors of MCAP (the "Board") appointed a special committee (the "Special Committee") to review, consider and negotiate all aspects of the Combination and to provide a recommendation to the Board of whether to accept or reject the transaction. The Special Committee retained KPMG LLP to provide a valuation of the Caisse's mortgage origination and servicing business.

11. On April 19, 2004, the closing of Combination occurred (the "Closing"). Under the terms of the definitive transaction agreement, CREA acquired an additional 25% interest in MCLP in consideration of the contribution of the commercial mortgage origination, underwriting, management and servicing business of Prêts Hypothécaires CDPQ Inc., Hypothèques CDPQ Inc., CDPQ Mortgage Corporation, Placements P.H.C. Inc., Gespa CDPQ Inc. and 3097-1618 Québec Inc., direct or indirect subsidiaries of the Caisse.

12. Immediately prior to Closing, Cadcap acquired all of Bentall Capital's interest in BCLP2.

13. As a result of the Combination, CREA's interest in MCLP has increased to 75% and MCAP's has decreased from 50% to 25%, MCAP Financial has become a wholly-owned subsidiary of MCLP and the new general partner of MCLP is now an affiliate of CREA.

14. As part of the Closing, all amounts owing under the Debenture were repaid and the Debenture was terminated. In addition, the Class A shares of MCAP Financial were purchased for cancellation for nominal consideration. The investor rights agreement, priority agreement, lock-up agreement and advisory services agreement were also terminated. In addition, the Board Representation Right was amended to provide BCLP2 the right to nominate and have elected only one director to the Board provided it owns at least 5% of the MCAP Shares. The registration rights agreement which provides BCLP2 with demand and piggyback registration rights remains outstanding.

15. The terms of the MOU provided that, as part of the Closing, BCLP2 would surrender the Warrant in exchange for the payment by MCAP of $1.7 million. However, because subsection 93(3) of the Act provides no exemption from the Issuer Bid Requirements, it was agreed that the purchase of the Warrant would be completed as a post closing matter, subject to regulatory approval.

16. The $1.7 million purchase price for the cancellation of the Warrant is $646,000 less than the in the money value of the Warrant at the time the MOU was negotiated and $3,094,000 less than the in the money value of the Warrant at Closing. The 'market price' (as defined by subsection 183(1) of the regulations to the Act) per MCAP Share was approximately $8.19 as at the date of the MOU and was approximately $8.91 as at Closing.

17. Part 5 - Related Party Transactions of Commission Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions is not applicable to the Combination, including the purchase of the Warrant, because MCAP is subject to the requirements of Part XI of the Trust and Loan Companies Act (Canada) and has complied with those requirements. The Combination, including the purchase of the Warrant, is not a "transaction" with a "related party" for the purposes of the Trust and Loan Companies Act (Canada).

18. The terms of the Warrant provide that so long as BCLP2 complies with applicable securities laws, it can transfer the Warrant. As part of the Combination, BCLP2 agreed with MCAP not to transfer the Warrant before June 30, 2004, pending regulatory approval of the purchase of the Warrant by MCAP.

19. The Special Committee, whose mandate was to ensure that all aspects of the proposed transaction were fair to all shareholders, including public shareholders, recommended the Board accept the Combination, including the purchase of the Warrant. In addition, the Board (minus directors in a conflict of interest) also determined that the surrender of the Warrant, on the terms outlined above, would be in the best interests of MCAP in that it would eliminate the dilution risk that the Warrant currently poses.

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 of the Warrant on the terms set out above is exempt from the Issuer Bid Requirements.

July 16, 2004.

"Susan Wolburgh Jenah"
"Paul K. Bates"