Montfort Capital Corp. – s. 6.1 of NI 62-104

Headnote

Section 6.1 of NI 62-104 -- Issuer bid -- relief from requirements applicable to issuer bids in Part 2 of NI 62-104 -- issuer proposes to repurchase a specified number of its securities from one of its securityholders as part of an unwinding transaction for a per share purchase price equal to 95% of the market price of those securities at the time of the repurchase -- the purchaser is a related party of the issuer -- the issuer is able to satisfy, and is relying on, the financial hardship exemption from the minority approval requirements of MI 61-101 and the specified markets exemption from the formal valuation requirements of MI 61-101 -- parties to the original transaction being unwound but whose securities are not being repurchased have each provided consents pursuant to which they have represented that they are familiar with the terms of the unwinding transaction, have no interest in participating in the unwinding transaction, and consent to the unwinding transaction and are in favour of relief being granted to facilitate the unwinding transaction -- terms of the unwinding transaction were negotiated by a special committee of independent directors -- each of the issuer's board and special committee have unanimously determined that the repurchase is in the best interests of the issuer and its shareholders (other than the selling shareholder), is on terms that are fair and reasonable, will not adversely affect the issuer's financial position, and will not cause the market for the issuer's securities to be materially less liquid than the market that existed at the time the repurchase was agreed to -- share repurchase is exempt from the requirements applicable to issuer bids in Part 2 of NI 62-104, subject to conditions.

Statutes Cited

National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2 and s. 6.1.

IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990, c. S.5,
AS AMENDED

AND

IN THE MATTER OF
MONTFORT CAPITAL CORP.

ORDER

(Section 6.1 of National Instrument 62-104)

UPON the application (the "Application") of Montfort Capital Corp. (the "Filer") to the Ontario Securities Commission (the "Commission") for an order pursuant to section 6.1 of National Instrument 62-104 Take-Over Bids and Issuer Bids ("NI 62-104") exempting the Filer from the requirements applicable to issuer bids in Part 2 of NI 62-104 (the "Issuer Bid Requirements") in respect of the proposed purchase by the Filer of up to 17,500,000 common shares of the Filer (collectively, the "Subject Common Shares") and 8,000,000 8% Class A preferred shares of the Filer (collectively, the "Subject Preferred Shares", and together with the Subject Common Shares, the "Subject Securities") from Brightpath Holdings Corporation (the "Buyer", and such purchase, the "Share Repurchase") pursuant to an unwinding transaction;

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

AND UPON the Filer having represented to the Commission that:

1. The Filer is a corporation existing under the Business Corporations Act (British Columbia) and is in good standing.

2. The head office of the Filer is located at 181 Bay Street, Bay Wellington Tower, Suite 2920, Toronto, Ontario, M5J 2T3 and its registered office is located at 789 West Pender Street, Suite 1530, Vancouver, British Columbia, V6B 1E5.

3. The Filer is a reporting issuer in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, and Ontario, and is not in default of any requirements of securities legislation in the jurisdictions in which it is a reporting issuer.

4. The authorized capital of the Filer consists of:

(a) an unlimited number of common shares of the Filer (the "Montfort Shares"), of which there were 99,817,282 Montfort Shares issued and outstanding as of February 28, 2025;

(b) an unlimited number of non-voting Series A Class A preferred shares (the "Montfort Series A Preferred Shares"), of which there were 28,485,994 Montfort Series A Preferred Shares issued and outstanding as of February 28, 2025; and

(c) an unlimited number of non-voting Series 1 Class C preferred shares (the "Montfort Series 1 Preferred Shares"), of which there were 498,800 Montfort Series 1 Preferred Shares issued and outstanding as of February 28, 2025.

5. As of February 28, 2025, the Filer also had issued and outstanding: (a) 6,262,063 stock options (the "Options"); (b) 1,881,050 restricted stock units (the "RSUs"); and (c) 4,450,000 performance share units (the "PSUs").

6. The Montfort Shares and Montfort Series A Preferred Shares are listed for trading on the TSX Venture Exchange (the "TSXV") under the symbols "MONT" and "MONT.PR.A", respectively. None of the other classes of securities of the Filer are listed for trading on any exchange.

7. The Filer is a provider of focused private credit strategies for institutional investors, family offices, and wealth managers. Brightpath Capital Corporation, Brightpath Servicing Corporation and Brightpath II Servicing Corporation (collectively, "Brightpath"), each of which is a wholly-owned subsidiary of the Filer, comprise the Filer's mortgage lending business. On a consolidated basis, Brightpath represents approximately 46% of the total assets and total liabilities of the Filer.

8. The Filer acquired Brightpath on August 16, 2022 from Kenneth Thomson ("Thomson"), Blake Albright ("Albright"), Sabrina Kyle ("Kyle"), and Fiona Elder ("Elder") pursuant to a definitive share purchase agreement for an aggregate of 31,250,000 Montfort Shares and 18,000,000 Montfort Series A Preferred Shares (the "Original Transaction"), issued as follows:

(a) 12,500,000 Montfort Shares and 4,000,000 Montfort Series A Preferred Shares to Thomson and his affiliates;

(b) 17,500,000 Montfort Shares and 8,000,000 Montfort Series A Preferred Shares to Albright and his affiliates;

(c) 6,000,000 Montfort Series A Preferred Shares to Kyle and her affiliates; and

(d) 1,250,000 Montfort Shares to Elder and her affiliates.

9. During a period of difficult conditions in the mortgage market:

(a) Brightpath has incurred a net loss of $2.7 million (for the nine months ended September 30, 2024), including realized losses on its loan book of $1.9 million;

(b) amortization of intangible assets related to Brightpath has contributed an additional $0.6 million to the Filer's consolidated net loss (year to date);

(c) Brightpath has an accumulated deficit of approximately $8.5 million (as of September 30, 2024), including a provision for credit losses of $8.1 million;

(d) Brightpath's total assets were approximately $183 million (as of September 30, 2024), consisting of a mortgage portfolio of approximately $154 million, interest and fees receivable of approximately $12 million, cash of approximately $4 million and amounts due from the Filer of approximately $12 million; and

(e) Brightpath's total liabilities (as of September 30, 2024) were approximately $192 million, substantially all of which represents borrowings used to finance mortgage assets.

As a result, Brightpath has had a material negative impact on the consolidated financial statements of the Filer.

10. The board of directors of the Filer (the "Board") determined that the continuation of Brightpath within the Filer's structure is not sustainable and established a committee comprised of all of its independent directors (the "Special Committee") to review and assess potential strategic transactions, with a focus on a potential sale of Brightpath. Following a consideration of the availability and relative benefits and risks of various potential strategic transactions, the status quo and conditions in the mortgage market, the Special Committee authorized and directed executives (other than Albright) (the "Executives") to explore a potential sale of Brightpath.

11. The Executives approached four (4) parties, including Albright, regarding a potential sale of Brightpath, its assets or other assets of the Filer. Other than Albright, none of the other parties approached by the Executives made an offer or were otherwise willing to engage in substantive negotiations regarding Brightpath, its assets or other assets of the Filer.

12. On November 26, 2024, the Filer issued and filed a news release disclosing, among other things, that the Filer had entered into a non-binding letter of intent with Albright to sell Brightpath to Albright in exchange for securities of the Filer held by him.

13. On February 3, 2025, the Filer entered into a share purchase agreement (the "Definitive Agreement") to sell Brightpath to the Buyer for an aggregate purchase price equal to (a) $13,000,000 of indebtedness owing from the Filer to Brightpath (the "Intercompany Indebtedness"), and (b) the aggregate value of the Subject Securities, determined on the basis of a per share price equal to 95% of the market price (as determined in accordance with section 1.11 of NI 62-104) ("Market Price") of the Montfort Shares and Montfort Series A Preferred Shares, as applicable, as of the closing time (the "Sale Transaction"). On the same day, the Filer issued and filed a news release and filed a material change report announcing the entering into of the Definitive Agreement, each of which described the terms of the Sale Transaction and the fact that the Sale Transaction is subject to obtaining exemptive relief from the Issuer Bid Requirements from the Commission.

14. The Buyer is a corporation validly existing under the laws of Canada. The registered office of the Buyer is located at 17 Benton Street, Kitchener, Ontario, N2G 3G9. The Buyer is not a reporting issuer in any jurisdiction.

15. The Buyer is controlled by Albright, who has beneficial ownership of, or control or direction over:

(a) the 17,500,000 Subject Common Shares, which represent approximately 17.5% of the issued and outstanding Montfort Shares;

(b) the 8,000,000 Subject Preferred Shares, which represent approximately 28.1% of the issued and outstanding Montfort Series A Preferred Shares; and

(c) 160,125 Options, 80,350 RSUs, and 1,200,000 PSUs (collectively, the "Albright Compensation Securities").

16. Prior to closing of the Sale Transaction, Albright will transfer all the Subject Securities and Albright Compensation Securities to the Buyer.

17. The Buyer will satisfy the purchase price for the Sale Transaction as follows:

(a) transferring 11,500,000 Subject Common Shares to the Filer for cancellation;

(b) transferring all of the Subject Preferred Shares to the Filer for cancellation;

(c) transferring all of the Albright Compensation Securities to the Filer for cancellation;

(d) assuming the Intercompany Indebtedness; and

(e) issuing a non-interest bearing promissory note to the Filer in the aggregate amount of the value of 6,000,000 Subject Common Shares (the "Sale Option Shares") determined on the basis of a per share price equal to 95% of the Market Price of the Montfort Shares as of the closing time (the "Promissory Note", and such per share price, the "Sale Option Share Price").

18. Pursuant the Definitive Agreement, the Filer has the right, but not the obligation, to purchase the Sale Option Shares from the Buyer for cancellation at the Sale Option Share Price (the "Call Right"), provided that (a) the purchase of the Sale Option Shares does not result in the creation of a new "Control Person" (as such term is defined in the TSXV Corporate Finance Manual), and (b) the then Market Price of the Montfort Shares equals or exceeds the Sale Option Share Price.

19. Each of the Filer, Albright, and the Buyer has agreed to use commercially reasonable efforts to ensure that the Call Right may be exercised, in compliance with applicable law, prior to the first anniversary of the closing of the Sale Transaction. If the Call Right has not been exercised three (3) years after the closing of the Sale Transaction, the Call Right will terminate and the Buyer will be permitted to assign, dispose, or otherwise transfer all, or any portion of, the Sale Option Shares to an arm's length third party, provided that any proceeds received by the Buyer from such transaction be paid to the Filer and set off against the Promissory Note. If any amount remains outstanding on the Promissory Note after the Buyer has disposed of all the Sale Option Shares, such amount will be deemed forgiven by the Filer with no further action required by any party.

20. None of the Buyer, Albright, or their affiliates will vote the Sale Option Shares for the term of the Call Right.

21. Following the completion of the Sale Transaction, other than the Sale Option Shares, Albright and his affiliates will no longer have any interests in the Filer.

22. In connection with the closing of the Original Transaction, Albright was appointed Chief Capital Officer of the Filer and joined the Board. Concurrently with the execution of the Definitive Agreement, Albright resigned from those roles but remains an employee of the Filer and has been seconded to Brightpath. Upon completion of the Sale Transaction, Albright will resign from his employment with the Filer.

23. The Board and the Special Committee are of the view that the Sale Transaction:

(a) will significantly improve the Filer's financial position by both materially reducing outstanding liabilities and increasing the credit quality of lending assets remaining on the Filer's balance sheet; and

(b) will simplify the Filer's operations and reduce overhead costs, and result in improved operating results.

24. Each of the Board and the Special Committee has unanimously determined, acting in good faith, that:

(a) the Definitive Agreement, Sale Transaction, and Share Repurchase are in the best interests of the Filer and its shareholders (other than Albright and his affiliates);

(b) the terms of the Definitive Agreement, Sale Transaction, and Share Repurchase are fair and reasonable, even if:

(i) the value attributable to the Subject Securities at the closing time of the Sale Transaction (determined in accordance with the terms of the Definitive Agreement) decreases from the value that would have been attributable to the Subject Securities at the time the Definitive Agreement was entered into; and

(ii) the Filer is unable to realize any of the amounts owed under the Promissory Note and is required to forgive up to the entire amount of the Promissory Note;

(c) the value of Brightpath is not greater than the economic value of the Subject Securities (determined in accordance with the terms of the Definitive Agreement) and the Intercompany Indebtedness;

(d) Brightpath does not represent all or substantially all of the Filer's assets;

(e) there is no requirement, corporate or otherwise, to obtain shareholder approval for the Share Repurchase or the Sale Transaction;

(f) the Share Repurchase will not materially affect control of the Filer;

(g) the Sale Transaction will not adversely affect the financial position of the Filer and, upon completion, will increase the value of the equity ownership positions of the Filer's other securityholders;

(h) the Filer will continue to be in compliance with the TSXV's continuous listing requirements in respect of the Montfort Shares and the Montfort Series A Preferred Shares following the completion of the Share Repurchase; and

(i) it is reasonable to conclude that, following the completion of the Sale Repurchase there will be a market for holders of Montfort Shares and Montfort Series A Preferred Shares that is not materially less liquid than the market that existed at the time the Definitive Agreement was entered into in respect of the Montfort Shares and the Montfort Series A Preferred Shares, respectively.

25. The terms of the Definitive Agreement were negotiated at arm's length through the Special Committee and independent legal counsel and finalized after extensive negotiations between the Filer and the Buyer.

26. The Sale Transaction is conditional on receipt of this order and the acceptance of the TSXV. The Filer received conditional acceptance for the Sale Transaction from the TSXV on February 6, 2025, which acceptance is not conditional on disinterested shareholder approval provided that the Sale Transaction does not result in the creation of a new "Control Person" (as such term is defined in the TSXV Corporate Finance Manual).

27. The Sale Transaction will not result in the creation of a new "Control Person" (as such term is defined in the TSXV Corporate Finance Manual). Following the Share Repurchase, Thomson will hold approximately 19.9% of the issued and outstanding Montfort Shares and will be the Filer's largest shareholder.

28. The Buyer and Albright are located in, and all of the Subject Securities and Albright Compensation Securities are held in, the Province of Ontario.

29. The Share Repurchase pursuant to the Sale Transaction will constitute an "issuer bid" for the purposes of NI 62-104, to which the Issuer Bid Requirements would apply. The Share Repurchase cannot be made in reliance upon any exemptions from the Issuer Bid Requirements contained in Part 4 of NI 62-104.

30. The Share Repurchase, including the Call Right, is an integral part of the Sale Transaction and neither the Buyer nor Albright is receiving any cash in exchange for the Share Repurchase or as part of the Sale Transaction.

31. The purpose of the Share Repurchase is not to give preferential treatment to the Buyer or Albright or to provide a method for the Filer to purchase the Subject Securities, but rather to facilitate the sale of Brightpath and realize the value of this asset for the benefit of the Filer and its shareholders and to improve the Filer's financial condition.

32. Pursuant to the terms of the Definitive Agreement, the Subject Securities are being transferred to the Filer for cancellation on the basis of a per share price equal to 95% of the Market Price as of the closing time.

33. The Sale Option Share Price will be equivalent to the price at which the 11,500,000 Subject Common Shares will be repurchased from the Buyer at closing of the Sale Transaction, and as one of the conditions for the Filer to be able to exercise the Call Right is that the then Market Price of the Montfort Shares is equal to or exceeds the Sale Option Share Price, the Sale Option Share Price will never be greater than the Market Price of a Montfort Share, both at the time of closing of the Sale Transaction and also at the time the Call Right is exercised and the Sale Option Shares are purchased.

34. The Albright Compensation Securities will be cancelled for no consideration.

35. Each of the other parties to the Original Transaction, being Thomson, Kyle, and Elder (collectively, the "Brightpath Vendors") have provided a consent (collectively, the "Consents") pursuant to which they have represented that they:

(a) are familiar with the terms of the Sale Transaction;

(b) have no interest in being a party to the Sale Transaction; and

(c) consent to the Sale Transaction and are in favour of the granting of exemptive relief from the Issuer Bid Requirements to the Filer.

36. None of the Brightpath Vendors received, or will receive, directly or indirectly, any payment, beneficial enhancement, or inducement of any kind in connection with agreeing to execute the Consents.

37. As a result of the fact that no securityholders of the Filer other than the Buyer and Albright are parties to the Definitive Agreement, it is impossible for the Filer to offer to acquire Montfort Shares and/or Montfort Series A Preferred Shares from all securityholders on the same terms and conditions as those contemplated by the Definitive Agreement.

38. Holders of Montfort Shares and/or Montfort Series A Preferred Shares who are not offered the opportunity to sell their respective securities of the Filer under the Sale Transaction are otherwise entitled to sell their Montfort Shares and/or Montfort Series A Preferred Shares into the market for cash proceeds.

39. Other than the Subject Securities, the Filer has no plans to repurchase any of its securities.

40. The Sale Transaction is a "related party transaction" for the Filer (as such term is defined in Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101")) by virtue of the fact that Albright has beneficial ownership over more than 10% of the voting rights attached to all of the Filer's voting securities and was a director and senior officer of the Filer at the time the Sale Transaction was agreed to. The Buyer is an "affiliated entity" of Albright (as such term is defined in MI 61-101) and accordingly, also a "related party" of the Filer.

41. Paragraph 5.5(b) of MI 61-101 (the "Specified Markets Exemption") exempts related party transactions from the formal valuation requirement under MI 61-101 if no securities of the issuer are listed or quoted on the Toronto Stock Exchange, Aequitas NEO Exchange Inc., the New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market, or a stock exchange outside of Canada and the United States other than the Alternative Investment Market of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc. The Filer is able to satisfy the Specified Markets Exemption and is relying on same in respect of the Sale Transaction.

42. Paragraph 5.7(1)(e) of MI 61-101 (the "Financial Hardship Exemption") exempts related party transactions from the minority approval requirement under MI 61-101 if the issuer is in financial hardship. The Filer is able to satisfy the Financial Hardship Exemption and is relying on same in respect of the Sale Transaction as, among other things, the Special Committee and the independent directors on the Board have unanimously determined that:

(a) the Filer is in serious financial difficulty;

(b) the Sale Transaction is designed to improve the financial position of the Filer;

(c) the terms of the Sale Transaction are reasonable in the circumstances of the Filer; and

(d) there is no other requirement, corporate or otherwise, to hold a meeting to obtain any approval of the Filer's shareholders.

43. Since the announcement of the Sale Transaction on February 3, 2025, the Filer has not received any complaints or expressions of concern about the Share Repurchase or the Sale Transaction.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to section 6.1 of NI 62-104 that the Filer be exempt from the Issuer Bid Requirements in connection with the Share Repurchase, provided that:

(a) the Filer issues and files a news release on SEDAR+ at least five (5) business days prior to the closing of the Sale Transaction that (i) discloses that the Filer has been granted exemptive relief from the Issuer Bid Requirements in connection with the Share Repurchase, and (ii) includes a description of the material terms of the Call Right, the background to the Sale Transaction, and the views of the Board and Special Committee in respect of the value of Brightpath and the consideration being received by the Filer for Brightpath (including the Sale Option Shares);

(b) none of the Brightpath Vendors has received, or will receive, directly or indirectly, any payment, beneficial enhancement, or inducement of any kind in connection with agreeing to execute the Consents;

(c) as at the time of the closing of the Share Repurchase, the Board and Special Committee remain of the view that the Share Repurchase and Sale Transaction are in the best interests of the Filer and its shareholders, and that the terms of each of them are fair and reasonable;

(d) all approvals and/or consents required in respect of the Sale Transaction, have been obtained and not revoked; and

(e) there are no approvals required in respect of the Sale Transaction (including the Share Repurchase) that must be obtained at a meeting of securityholders of the Filer.

DATED at Toronto, Ontario this 19th day of March, 2025.

"David Mendicino"
Manager, Corporate Finance Division 
Ontario Securities Commission