Starlight U.S. Multi-Family (No. 1) Core Plus 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, and appraisals -- 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

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

September 17, 2021

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) CORE PLUS 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 from the unitholders of every class of affected securities of the Filer voting separately as a class in connection with the proposed acquisition by Sherrin U.S. Multi-Family (No. 1) Holding LP (the "Purchaser") of all of the issued and outstanding limited partnership interests (the "Interests") in Starlight U.S. Multi-Family (No. 1) Core Plus Holding L.P. (the "Holding LP"), a wholly-owned indirect subsidiary of the Filer (the "Transaction"), and requiring instead that minority approval be obtained from all Disinterested Unitholders (as defined below) voting together as a single class (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 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 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 December 10, 2019 under the laws of the Province of Ontario and is governed by a second amended and restated limited partnership agreement dated February 6, 2020 (the "LPA").

3. Starlight U.S. Multi-Family (No. 1) Core Plus GP, Inc., a corporation existing under the laws of Ontario, and in good standing, is the general partner of the Filer (the "General Partner").

4. The Filer's investment objectives are to: (a) indirectly acquire, own, and operate a portfolio primarily comprised of income-producing multi-family properties that can achieve significant increases in rental rates, and are located primarily in the States of Arizona, California, Colorado, Florida, Georgia, Nevada, North Carolina, Oregon, South Carolina, Tennessee, Texas, Utah and Washington; (b) make stable monthly cash distributions; and (c) increase rental rates, 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.

5. The Filer currently owns interests in a portfolio of 2,219 suites in seven properties located in the United States.

6. The Filer completed its initial public offering on February 28, 2020.

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 C units ("Class C Units"); Class D units ("Class D Units"); Class E units ("Class E Units"); Class F units ("Class F Units"); Class I units ("Class I Units"); and Class U units ("Class U Units").

8. As at August 16, 2021, there were 21,360,008 Units issued and outstanding, comprised of 4,505,310 Class A Units, 1,635,000 Class C Units, 8,514,478 Class D Units, 397,000 Class E Units, 2,868,720 Class F Units, 2,500,000 Class I Units, and 939,000 Class U Units.

9. The holders of the Class A Units, Class C Units, Class D Units, Class E Units, Class F Units, Class I 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 I Units are denominated in Canadian dollars (collectively, the "Canadian Dollar Denominated Units"), while the Class E Units and Class U Units are denominated in U.S. dollars.

(b) The proportionate entitlement of the holders of Class A Units, Class C Units, Class D Units, Class E Units, Class F Units, Class I 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.

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

(d) The Class A Units are listed on the TSX Venture Exchange under the symbol "SCPO".

(e) The Class C Units, Class D Units, Class E Units, Class F Units, Class I Units and Class U Units are not listed on any stock exchange. The Class C Units, Class D Units, Class F Units and Class I Units 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) If a non-exempt take-over bid is made for a class of Units other than the Class A Units, then the Class A Units have coattail rights to convert into the class of Units that are the subject of the non-exempt 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.

10. 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.

11. 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, United States of America.

12. A subsidiary of Starlight Group Property Holdings Inc. ("Starlight Group"), a corporation which is wholly-owned by Daniel Drimmer (an officer and director of the General Partner), is the sole general partner of the Purchaser.

13. As at the closing of the Transaction, two arm's length parties unrelated to the Filer (the "Unrelated Purchaser Limited Partners"), will each beneficially own and control 45% of the limited partnership interest in the Purchaser. Mr. Drimmer will beneficially own and control the remaining 10% limited partnership interest in the Purchaser. Neither of the Unrelated Purchaser Limited Partners beneficially owns or has control or direction over any Units of the Filer.

14. On September 10, 2021, the Purchaser and the Filer entered into an acquisition agreement (the "Acquisition Agreement") in respect of the Transaction which will result in the Purchaser indirectly acquiring ownership of the interests in the multi-family real estate properties currently owned by the Filer (the "Subject Properties").

15. The purchase price to be paid by the Purchaser to the Filer under the Transaction was negotiated by the parties and is the result of a competitive process led by CIBC World Markets Inc. ("CIBC") and overseen by an independent committee of the board of directors of the General Partner (the "Independent Committee"). In accepting the proposed purchase price, the Independent Committee considered, in part, (i) the competing bids for the Subject Properties received following a thorough solicitation of potential purchasers, (ii) appraisals for each of the Subject Properties prepared by an independent appraiser commissioned in the normal course (the "Appraisals"), (iii) the fair value mark-up of the Subject Properties as set out in the Filer's financial statements for the six months ended June 30, 2021, and (iv) the greater costs, inefficiencies and risks that would be involved in selling the Subject Properties separately rather than in their entirety. The Purchaser intends to satisfy the purchase price for the Interests through a combination of cash and the assumption of all existing mortgage debt on the multi-family real estate properties currently owned by the Filer.

16. In connection with the Transaction, the Filer will undertake a reorganization immediately prior to closing of the Transaction (the "Internal Reorganization"). Pursuant to the Internal Reorganization, among other things: (i) a new Delaware limited partnership ("Intermediate LP") will be established as a wholly owned subsidiary of Starlight U.S. Multi-Family (No. 1) Core Plus Investment L.P., and be the sole limited partner of Holding LP; and (ii) Intermediate LP will contribute a portion of its limited partnership interest in Holding LP, the value of such limited partnership interests to be equal to the value of the Units beneficially owned and controlled by Mr. Drimmer, in exchange for limited partnership interests in the Purchaser.

17. The purpose of the Internal Reorganization is to allow Mr. Drimmer to indirectly transfer his beneficial interest in the Subject Properties into an indirect beneficial interest in the Purchaser which he will hold through the Filer following the completion of the Transaction and will also require that the LPA be amended to ensure that Mr. Drimmer is excluded from the redemption of Units for cash consideration under the Transaction (the "LPA Amendments").

18. The LPA Amendments require the approval of the holders of Units and such approval will be sought from Disinterested Unitholders as part of the resolution to approve the Transaction. Neither the Internal Reorganization nor the LPA Amendments will be prejudicial to the rights of unitholders of the Filer or impact the pre-established formulas that were in place at the time of the initial issuance of the Units pursuant to which the economic entitlements to participate in distributions made by the Filer and to receive proceeds upon termination or dissolution of the Filer are determined. Disinterested Unitholders will receive the same proceeds from the Transaction that they would have received in the absence of the Internal Reorganization and the LPA Amendments.

19. 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 (other than Mr. Drimmer) and in connection therewith, the Filer will cancel all issued and outstanding Units (other than the Class C Units beneficially owned and controlled by Mr. Drimmer).

20. Mr. Drimmer, as the sole shareholder of Starlight Group, together with Evan Kirsh, Martin Liddell and David Hanick, who are officers of the General Partner, each have a direct or indirect interest in the "carried interest" that provides for a portion (25% in respect of the Class A Units, Class C Units, Class D Units, Class E Units, Class F Units and Class U Units and 20% in respect of the Class I Units) of an amount related to the Filer's distributable cash to be paid to the holders of interests in the "carried interest" and the remaining percentage (75% or 80%, as applicable) is distributed to the Filer's unitholders, provided that the carried interest is paid only if the Filer has sufficient distributable cash to provide unitholders with a return on their invested capital in excess of a minimum reference internal rate of return (7.0% per annum).

21. 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 interests in 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 the Unrelated Purchaser Limited Partners.

22. 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 Starlight Investments US AM Group LP (the "Manager").

23. As at August 16, 2021, Mr. Drimmer, a director and Chief Executive Officer of the General Partner and principal of the Manager, beneficially owned, or exercised control or direction over: 387,500 Class C Units, representing a voting interest in the Filer of approximately 1.81%.

24. As at August 16, 2021, Mr. Kirsh, President of the General Partner, beneficially owned, or exercised control or direction over: 100,000 Class C Units, representing a voting interest in the Filer of approximately 0.47%.

25. As at August 16, 2021, Mr. Liddell, Chief Financial Officer of the General Partner, beneficially owned, or exercised control or direction over: 50,000 Class C Units, representing a voting interest in the Filer of approximately 0.23%.

26. As at August 16, 2021, Mr. Hanick, Corporate Secretary of the General Partner, beneficially owned, or exercised control or direction over: 15,000 Class C Units and 2,125 Class D Units, representing a voting interest in the Filer of approximately 0.08%.

27. As at August 16, 2021, Harry Rosenbaum, a director of the General Partner, beneficially owned, or exercised control or direction over 28,200 Class A Units and 20,000 Class C Units, representing a voting interest in the Filer of approximately 0.23%.

28. As at August 16, 2021, Kelly Smith, a director of the General Partner, beneficially owned, or exercised control or direction over nil Units, representing a 0.00% voting interest in the Filer.

29. As at August 16, 2021, the Interested Unitholders (as defined below) beneficially owned or controlled:

(a) 28,200 Class A Units (or approximately 0.63% of the Class A Units);

(b) 572,500 Class C Units (or approximately 35.02% of the Class C Units);

(c) 2,125 Class D Units (or 0.02% of the Class D Units);

(d) nil Class E Units (or 0.00% of the Class E Units);

(e) nil Class F Units (or approximately 0.00% of the Class F Units);

(f) nil Class I Units (or approximately 0.00% of the Class I Units); and

(g) nil Class U Units (or approximately 0.00% of the Class U Units).

30. 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.

31. 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, which the General Partner and the Manager believe to be 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:

(a) Negotiation of the Transaction was overseen by the Independent Committee, which is comprised solely of directors that are independent of the Filer, the Manager and the Unrelated Purchaser Limited Partners, being Mr. Rosenbaum and Ms. Smith.

(b) The Independent Committee retained CIBC as financial advisor in respect of the Transaction and CIBC 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 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 (including the LPA Amendments) 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 Mr. Drimmer, Mr. Kirsh, Mr. Liddell, Mr. Hanick, Mr. Rosenbaum and Ms. Smith, (collectively, the "Interested Unitholders")), 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 and including the enhanced disclosure requirements mandated by MI 61-101, 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 the Appraisals and any other "prior valuations" (within the meaning of MI 61-101), which will also be summarized in the Information Circular.

32. 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 (including the LPA Amendments) does not affect holders of one class of Units in a manner materially different from its effect on holders of another class of Units.

33. The division of the Filer's limited partnership units into various classes was related to the use of different currencies, to accommodate a number of investment account differences, 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 initial issuance of the Units and provided for in the LPA.

34. 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 (i) 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 (a) in respect of a holder of any Unit other than a Class I Unit, such holder's share of the "Proportionate Class Interest", and (b) in respect of a holder of a Class I Unit, such holder's share of the Proportionate Class Interest plus the amount by which the aggregate asset management fee payable to the Manager is reduced in respect of a Class I Unit, adjusted to reflect that the carried interest in respect of each Class I Unit is reduced (20%), with no catch-up amounts payable, and (ii) 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 (i) 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 offering that is attributable to a specific class of units and (ii) the aggregate net proceeds of the initial public offering (being the gross proceeds less the agents' fee) for all classes 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.

35. The relative returns as between classes within the Filer (including Class I Units) 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 neither the Transaction, the Internal Reorganization nor the LPA Amendments will 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 in existence immediately following the Filer's initial public offering, 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.

36. Each unlisted Canadian Dollar Denominated Unit may be converted into Class A Units, being the sole listed class of Units, at the option of the holders thereof. The Class A Units can be converted at any time into Class D Units, an unlisted class of Units.

37. 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 C Units (7.65% of issued and outstanding Units), Class E Units (1.86% of issued and outstanding Units), Class F Units (13.64% of issued and outstanding Units), Class I Units (11.70% of issued and outstanding Units) and Class U Units (4.40% 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 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.

38. 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 (including the LPA Amendments), 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 CIBC 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.