Starlight U.S. Multi-Family (No. 5) Core Fund

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), 9.1(2).

April 9, 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. 5) CORE 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 a plan of arrangement involving, among others, the Filer and Tricon Capital Group Inc. ("Tricon"), pursuant to which Tricon will acquire all of issued and outstanding limited partnership units of the Filer, as well as the general partnership units of the Filer, 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 August 26, 2016 under the laws of the Province of Ontario and is governed by an amended and restated limited partnership agreement dated October 12, 2016 (the "LPA").

3. The Filer's investment objectives are to: (a) indirectly acquire, own, and operate a portfolio comprised of recently constructed, stabilized, Class "A", income-producing multi-family real estate properties primarily in the States of Arizona, Colorado, Florida, Georgia, Nevada, North Carolina, Tennessee and Texas; (b) make stable monthly cash distributions; and (c) enhance the operating income and property values of the Filer's assets through active management, with the goal of ultimately directly or indirectly disposing of its interests in the assets at a gain 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 7,289 suites in 23 properties located in the United States.

5. The Filer initially acquired its business by completing a plan of arrangement (the "Reorganization") pursuant to which, among other things, it acquired: (a) all of the outstanding securities of Starlight U.S. Multi-Family Core Fund, Starlight U.S. Multi-Family (No. 2) Core Fund, Starlight U.S. Multi-Family (No. 3) Core Fund, Starlight U.S. Multi-Family (No. 4) Core Fund (collectively, the "Predecessor Funds"); (b) all of the outstanding common shares of Campar Capital Corp. ("Campar"); (c) all of the outstanding limited partnership units of Starlight U.S. Multi-Family (No. 5) Core Investment L.P. (then called Boardwalk Acquisition Partnership); and (d) all of the outstanding shares of the general partners of the Predecessor Funds.

6. As consideration for the acquisition of the outstanding securities of the Predecessor Funds and all of the outstanding shares of Campar, the Filer issued limited partnership units to the former unitholders of the Predecessor Funds and the former shareholders of Campar, in proportion to their respective entitlements and the relative appraised value of the interests in the multi-family real estate properties that were transferred to the Filer by each of the Predecessor Funds and Campar.

7. 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 U units ("Class U 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 C units ("Class C Units").

8. As at February 28, 2019, there were 48,967,666 Units outstanding, consisting of 13,650,891 Class A Units, 1,519,295 Class U Units, 14,373,555 Class D Units, 2,667,856 Class E Units, 3,094,683 Class F Units, 149,614 Class H Units and 13,511,772 Class C Units issued and outstanding.

9. The holders of the Class A Units, Class U Units, Class D Units, Class E Units, Class F Units, Class H Units and Class C 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 A Units differ from the Class C Units, Class D Units, Class F Units and Class H Units in that the Class A Units are required to account for an annual service fee payable to registered dealers (the "Service Fee"). However, the Class H Units are required to account for the costs of any hedging instruments acquired by the Filer to provide the holders of Class H Units with some protection against any weakening of the U.S. dollar as compared to the Canadian dollar.

(c) The Class U Units differ from the Class E Units in that the Class U Units are required to account for the Service Fee.

(d) 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 aggregate of (i) the 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, net of agents' fees in connection with the initial public offering which varied from class to class, and (ii) 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 Reorganization, subject to certain adjustments (including for U.S. withholding tax).

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

(f) The Class A Units and Class U Units are listed on the TSX Venture Exchange under the symbols "STUS.A" and "STUS.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 (i) 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, and (ii) 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 Reorganization. The Class A Units are convertible into Class D Units on a similar basis.

(g) 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 (i) 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, and (ii) 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 Reorganization. The Filer publishes the conversion ratios for each class of Units on a quarterly basis for the subsequent quarter and such ratios may fluctuate based on the Unit exchange rates calculated in accordance with the LPA. The Class U Units are convertible into Class E Units on a similar basis.

(h) 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 (i) 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, and (ii) 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 Reorganization.

10. 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.

11. Tricon is a corporation governed by the Business Corporations Act (Ontario).

12. Tricon is a reporting issuer or the equivalent thereof in each of the provinces and territories of Canada and its common shares are listed on the Toronto Stock Exchange and trade under the symbol "TCN".

13. The head and registered office of Tricon is located at 7 St. Thomas Street, Suite 801 in Toronto, Ontario.

14. On April 2, 2019, the Filer entered into an arrangement agreement (the "Arrangement Agreement") with Tricon pursuant to which Tricon will acquire all of the issued and outstanding limited partnership units of the Filer, as well as the general partnership units of the Filer, thereby indirectly acquiring ownership of the interests in the multi-family real estate properties currently owned by the Filer (the "Transaction").

15. Tricon will satisfy the purchase price for the outstanding limited partnership units of the Filer through the issuance of common shares in the capital of Tricon ("Tricon Shares") to the current unitholders of the Filer, in proportion to their respective economic entitlements in the Filer (and in the case of U.S. dollar-denominated limited partnership units, using a to be determined reference USD:CAD exchange rate) and based on the appraised value of the interests in the multi-family real estate properties held by the Filer.

16. Starlight Group Property Holdings Inc., a corporation which is wholly owned by Daniel Drimmer, who is an officer and director of the General Partner, 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" of the Filer 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 (6.5% per annum) and the remaining percentage (75%) is distributed to the Filer's unitholders. Pursuant to the Transaction, the accumulated value of "carried interest" will be monetized based on the agreed Transaction value and extinguished in exchange for Tricon Shares with an equivalent value. The value of the "carried interest" is subject to a maximum adjustment in connection with the price of the Tricon Shares at the effective date of the Transaction as set forth in the Arrangement Agreement.

17. 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 Daniel Drimmer, Starlight Group Property Holdings Inc. and the directors and officers of each of the General Partner and Starlight Investments US AM Group LP (the "Manager").

18. As at February 28, 2019, Mr. Drimmer beneficially owned, or exercised control or direction over: 9,628,841 Class C Units, 345,103 Class D Units and 238,868 Class E Units, representing a voting interest in the Filer of approximately 20.9%.

19. As at February 28, 2019, Mr. Kirsh beneficially owned, or exercised control or direction over: 65,051 Class A Units, 1,313,483 Class C Units, 24,149 Class F Units and 7,095 Class U Units, representing a voting interest in the Filer of approximately 2.9%.

20. As at February 28, 2019, Mr. Liddell beneficially owned, or exercised control or direction over: 57,057 Class C Units and 140 Class U Units, representing a voting interest in the Filer of approximately 0.1%.

21. As at February 28, 2019, Mr. Hanick beneficially owned, or exercised control or direction over: 5,896 Class A Units, 7,436 Class C Units and 2,686 Class U Units, representing a voting interest in the Filer of less than 0.1%.

22. As at February 28, 2019, Mr. Harry Rosenbaum beneficially owned, or exercised control or direction over 24,941 Class F Units, representing a voting interest in the Filer of less than 0.1%.

23. As at February 28, 2019, Mr. Graham Rosenberg beneficially owned, or exercised control or direction over 25,000 Class A Units, representing a voting interest in the Filer of less than 0.1%.

24. As at February 28, 2019, the Disinterested Holders held:

(a) 13,554,944 Class A Units (or 99.3% of the Class A Units);

(b) 1,500,585 Class U Units (or 99.3% of the Class U Units);

(c) 14,028,452 Class D Units (or 97.6% of the Class D Units);

(d) 2,438,988 Class E Units (or 91.0% of the Class E Units);

(e) 3,045,593 Class F Units (or 98.4% of the Class F Units);

(f) 149,614 Class H Units (or 100% of the Class H Units); and

(g) 2,504,955 Class C Units (or 18.5% of the Class C Units).

25. Prior to the completion of the Transaction, Messrs. Drimmer, Kirsh, Liddell, Hanick, Rosenbaum and Rosenberg held, in aggregate, 11,745,746 Units, or approximately 24% of the outstanding Units. Upon completion of the Transaction, Messrs. Drimmer, Kirsh, Liddell, Hanick, Rosenbaum and Rosenberg are expected to hold, in aggregate, 13,470,683 Tricon Shares, or approximately 7% of the outstanding Tricon Shares, assuming no increase in the value of the "carried interest" as described above.

26. 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.

27. 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 Tricon. The Independent Committee has retained Wildeboer Dellelce LLP to act as counsel for the Independent Committee.

(b) Dissent rights will be provided to unitholders as if the Filer were subject to a Canadian corporate statute.

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

(d) 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 the 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.

(e) The Filer will prepare and deliver to its unitholders an information circular (the "Information Circular") in accordance with applicable securities law requirements that will provide unitholders with sufficient information to enable them to make an informed decision in respect of the Transaction.

(f) The General Partner has retained CIBC Capital Markets and Origin Merchant Partners ("Origin") as financial advisors on behalf of the Filer in respect of the Transaction. Origin will provide the board of directors of the General Partner and the Independent Committee with a fairness opinion concluding that the Transaction is fair from a financial point of view to the public unitholders of the Filer, which will be included in the Information Circular. Such opinion and 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.

28. 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.

29. 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.

30. 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 Reorganization (which formulas also applied to the issuance of Units pursuant to the initial public offering of the Filer) and provided for in the LPA.

31. 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 and any concurrent private placement (being the gross proceeds less the underwriting 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 Reorganization that is attributable to a specific class of Units. The proportionate interest of a particular class would be greater than that of another class if Units of that first class had a lower applicable underwriting fee in the initial public offering and a greater deemed subscription amount at the time of the Reorganization.

32. 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 Reorganization, in accordance with the choice investors made when selecting their preferred class of limited partnership units of the Predecessor Funds, and the initial public offering of the Filer, 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 Tricon Shares representative of its proportionate interest. Therefore, the interests of the holders of each class of Units are aligned in respect of the Transaction.

33. Each of the Filer's 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.

34. 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 (3.1% of issued and outstanding Units), Class E Units (5.0% of issued and outstanding Units), Class F Units (6.2% of issued and outstanding Units), Class H Units (0.3% of issued and outstanding Units) and Class C Units (5.1% of issued and outstanding Units). Despite their relatively small holdings, voting unitholders in each of these classes could 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.

35. 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.