Padlock Partners UK Fund IV

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 -- declaration of trust 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 -- independent directors have determined that the proposed business combination will not affect holders of one class of units in a manner materially different than holders of any other class of units -- information circular included disclosure that relief from separate class vote requirement was being sought and described implications -- requiring a class-by-class vote could give a de facto veto right to a very small group of unitholders -- relief granted, subject to conditions.

Applicable Legislative Provisions

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

May 6, 2025

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 PADLOCK PARTNERS UK FUND IV ("Fund IV")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from Fund IV for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") exempting Fund IV, 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 holders of every class of affected securities of Fund IV, each voting separately as a class, in connection with a proposed plan of arrangement pursuant to which Padlock Euro Storage Fund I ("Euro Fund") will acquire all of the issued and outstanding trust units of Fund IV, 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) Fund IV 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 Alberta, Saskatchewan, Manitoba, Québec and New Brunswick.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102, and MI 61-101 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by Fund IV:

Overview of Fund IV

1. Fund IV is an unincorporated investment trust established under, governed by, and in good standing under, the laws of the Province of Ontario, pursuant to a declaration of trust dated April 27, 2023, as amended and restated on June 23, 2023 (the "Fund IV DOT").

2. Fund IV's head office is located at 199 Bay Street, Suite 4000, Commerce Court West, Toronto, Ontario, M5L 1A9.

3. Fund IV is a reporting issuer in each province and territory of Canada and is not in default of any applicable requirements under the securities legislation thereunder.

4. Fund IV's investment objectives are to: (i) provide holders of trust units ("Unitholders") with an opportunity to invest in a portfolio of diversified income-producing commercial real estate properties in the United Kingdom ("UK"), with a particular focus on self-storage and mixed-use properties; (ii) provide Unitholders with quarterly cash distributions; and (iii) enhance the potential for long-term growth of capital through rental escalations in tenant leases, acquisition and conversion opportunities, and a liquidity event by way of an exit into the public markets or other transaction.

5. Fund IV owns interests in five properties located in the UK.

6. The interests in Fund IV are divided into four (4) classes of units (collectively, the "Fund IV Units"): Class A units ("Class A Units"); Class C units ("Class C Units"); Class F units ("Class F Units"); and Class U units ("Class U Units").

7. As at the record date for the Meeting (as defined below), being April 9, 2025 (the "Record Date"), there were 4,336,570 Fund IV Units issued and outstanding, consisting of 2,514,920 Class A Units, nil Class C Units, 1,612,250 Class F Units, and 209,400 Class U Units.

8. Accordingly, as at the Record Date, the Class A Units represented 58.0% of the issued and outstanding Fund IV Units, the Class C Units represented 0% of the issued and outstanding Fund IV Units, the Class F Units represented 37.2% of the issued and outstanding Fund IV Units, and the Class U Units represented 4.8% of the issued and outstanding Fund IV Units.

9. No class of Fund IV Units are listed on a stock exchange.

10. Each Fund IV Unit has the same rights and obligations, and no holder of Fund IV 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, and Class F Units are denominated in Canadian dollars, while the Class U Units are denominated in pound sterling. The difference in currency denominations was intended to provide investors in Fund IV with the flexibility to invest in Fund IV and receive distributions in either Canadian dollars or pound sterling.

(b) The Class A Units bore an agents' fee of C$0.575 per Class A Unit, the Class C Units did not bear an agents' fee, the Class F Units bore an agents' fee of $0.275 per Class F Unit, and the Class U Units bore an agents' fee of £0.575 per Class U Unit.

(c) The proportionate entitlement of holders of Class A Units, Class C Units, Class F Units and Class U Units (together, the "Proportionate Class Interest") to participate in distributions made by Fund IV, including distributions of Net Realized Capital Gains (as defined in the Fund IV DOT) or income, if any, and to receive proceeds on a redemption of Fund IV Units and/or upon termination of Fund IV, is equal to the proportion of (i) (A) the aggregate gross proceeds received by Fund IV for the issuance of such class of Fund IV Units less the agents' fee paid in respect of such class of Fund IV Units, less (B) the aggregate amount paid in respect of redemptions of Fund IV Units of such class, divided by (ii) the net proceeds of the initial public offering (being the gross proceeds less the agents' fee) for all classes of Fund IV Units less the aggregate amount paid in respect of all redemptions of Fund IV Units.

11. Section 9.7 of the Fund IV DOT 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 Fund IV Units in a manner materially different from its effect on holders of another class of Fund IV Units, in which case the Fund IV Units of the affected class will vote separately as a class.

12. Section 9.7 of the Fund IV DOT also provides that, in the event that Fund IV enters into a transaction that is subject to MI 61-101 and, as a result, requires approval from each class of Fund IV Units voting separately as a class, Fund IV will apply to applicable securities regulatory authorities for discretionary relief from such requirement given that (a) Section 9.7 of the Fund IV DOT provides that Unitholders will vote as a single class unless the nature of the business to be transacted at the meeting of Unitholders affects holders of one class of Fund IV Units in a manner materially different from its effect on holders of another class of Fund IV Units, (b) the relative returns of any proposed transaction to each class of Fund IV Units are fixed pursuant to the formula set out in the Fund IV DOT, and (c) providing a class vote could grant disproportionate power to a potentially small number of Unitholders.

13. Fund IV is managed by Clear Sky Capital Inc. (the "Canadian Manager") and Padlock Capital Partners IV, LLC (collectively, the "Fund IV Managers").

Proposed Transaction

14. On April 7, 2025, Fund IV entered into an arrangement agreement with, among others, Euro Fund, pursuant to which Euro Fund will acquire all of the issued and outstanding Fund IV Units, thereby indirectly acquiring ownership of the interests in the real estate properties currently owned by Fund IV (the "Proposed Transaction").

15. Euro Fund is an unincorporated investment trust established under, governed by, and in good standing under the laws of the Province of Ontario, pursuant to a declaration of trust dated July 8, 2020, as amended and restated on August 13, 2020 and further amended and restated on July 30, 2024 (the "Euro Fund DOT").

16. Euro Fund is managed by the Canadian Manager, Padlock Capital Partners, LLC, Padlock Capital Partners II, LLC and Padlock Capital Partners III, LLC (together with the Fund IV Managers, the "Fund Managers").

17. The interests in Euro Fund are divided into three (3) classes of units, each of which class has three (3) series:

(a) Class A units, series 1, Class A units, series 2, and Class A units, series 3 (collectively, the "Euro Fund Class A Units");

(b) Class F units, series 1, Class F units, series 2, and Class F units, series 3 (collectively, the "Euro Fund Class F Units"); and

(c) Class U units, series 1, Class U units, series 2, and Class U units, series 3 (collectively, the "Euro Fund Class U Units").

18. Euro Fund is the resulting entity of the consolidation of Padlock Partners UK Fund I ("Fund I"), Padlock Partners UK Fund II ("Fund II"), and Padlock Partners UK Fund III ("Fund III") pursuant to a plan of arrangement that was completed on July 31, 2024 (the "Previous Arrangement").

19. Pursuant to the Previous Arrangement:

(a) holders of trust units of Fund I were issued: Euro Fund Class A Units, series 1; Euro Fund Class F Units, series 1; and Euro Fund Class U Units, series 1, corresponding to the applicable class of trust units of Fund I held by them;

(b) holders of trust units of Fund II were issued: Euro Fund Class A Units, series 2; Euro Fund Class F Units, series 2; and Euro Fund Class U Units, series 2, corresponding to the applicable class of trust units of Fund II held by them; and

(c) holders of trust units of Fund III were issued: Euro Fund Class A Units, series 3; Euro Fund Class F Units, series 3; and Euro Fund Class U Units, series 3, corresponding to the applicable class of trust units of Fund III held by them.

20. Pursuant to the Proposed Transaction, the Euro Fund DOT will be further amended to, among other things, create series 4 within each of the Euro Fund Class A Units, the Euro Fund Class F Units and the Euro Fund Class U Units (the "Series 4 Euro Fund Units"). To maintain their existing proportionate entitlements and distributions in Fund IV, each Unitholder will receive an equivalent number of Series 4 Euro Fund Units of the applicable class commensurate with the number of Fund IV Units held by them.

21. The Proposed Transaction will not alter the entitlements of Unitholders or otherwise provide for the payment of cash or assets to holders of Series 4 Euro Fund Units in a manner that differs from their pre-established Proportionate Class Interest entitlements as set out in the Fund IV DOT.

22. The entitlements of Series 4 Euro Fund Units to distributions will be determined based on the net asset value of Fund IV, with such proceeds being allocated proportionately among each class of Series 4 Euro Fund Units based on the original Proportionate Class Interest entitlements from Fund IV's initial public offering.

23. In connection with the Proposed Transaction, the management agreement of Fund IV will be terminated and the Fund Managers will become party to an amended and restated management agreement, amending and restating the existing management agreement of Euro Fund to include Fund IV, and the share terms providing for the "carried interest" that affiliates of the Fund Managers are entitled to will be amended to account for the Proposed Transaction, similar to the amendments made to the management agreement and share terms as part of the Previous Arrangement. No payout of the carried interest will occur pursuant to the Proposed Transaction.

24. The Proposed Transaction is a business combination for Fund IV as Unitholders could have their interests in Fund IV Units terminated without their consent, and related parties of Fund IV, being the Fund IV Managers, are parties to connected transactions to the Proposed Transaction, being the entering into of the amended and restated management agreement of Euro Fund and the amendments to the carried interest terms to preserve the carried interest, pursuant to which they may also be receiving a collateral benefit. As a result, the Proposed Transaction is subject to the applicable requirements of MI 61-101. Such requirements include, among other things, approval of the Proposed Transaction by a majority of the votes cast by holders of each class of Fund IV Units, excluding the votes attached to Fund IV 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 Unitholders that do not need to be excluded, the "Disinterested Unitholders") at a meeting of Unitholders of that class called to consider the Proposed Transaction.

25. Fund IV has called a special meeting of Unitholders on May 9, 2025 to consider the Proposed Transaction (the "Meeting").

26. The Disinterested Unitholders in respect of the Proposed Transaction include all Unitholders, with the exception of the Fund IV Managers, the executive officers of Fund IV, and Marcus Kurschat, as principal of the Fund IV Managers and a trustee of Fund IV, and any related party or joint actor of any of them. As of the Record Date, none of these persons hold any Fund IV Units, and accordingly, the Disinterested Unitholders hold 100% of each class of Fund IV Units.

27. Fund IV is exempt from the formal valuation requirement in MI 61-101 in respect of the Proposed Transaction on the basis of subsection 4.4(1) of MI 61-101 as no securities of Fund IV are listed on a specified market.

28. The board of trustees of Fund IV (the "Board"), the Independent Trustees (as defined below) and the Fund IV Managers have each determined that:

(a) no aspect of the Proposed Transaction will affect holders of one class of Fund IV Units in a manner materially different than holders of another class of Fund IV Units as all Unitholders will receive the formulaic and pre-established treatment as specified by their respective Proportionate Class Interest determined at the time of Fund IV's initial public offering when investors selected their preferred class of Fund IV Units (if applicable) and purchased or acquired their Fund IV Units; and

(b) no separate class vote is required for any aspect of the Proposed Transaction under the terms of the Fund IV DOT.

29. The Proposed Transaction was proposed by the Fund IV Managers to Dale Williams and Abbas Osman, each of whom is independent of Fund IV and the Fund IV Managers for the purposes of MI 61-101 (the "Independent Trustees"). The Independent Trustees established a committee to consider the merits of the Proposed Transaction (the "Independent Committee").

30. The Proposed Transaction is, and was, subject to a number of mechanisms, which the Board believes ensures that the collective interests of Unitholders are protected, and that the Unitholders are treated fairly and in accordance with their voting and economic entitlements under the Fund IV DOT. These include that:

(a) Negotiation of the Proposed Transaction was overseen by the Independent Committee.

(b) The Independent Committee supervised the preparation of a fairness opinion by Evans & Evans, Inc. (the "Fairness Opinion") with respect to the Proposed Transaction. The Fairness Opinion was prepared on an individual basis for each of Fund IV and Euro Fund, having regard to their particular individual circumstances. The Fairness Opinion concluded that, as it relates to Fund IV, based upon and subject to the assumptions, limitations and qualifications set out therein, the Proposed Transaction is fair, from a financial point of view to the Unitholders. The Fairness Opinion was included in the joint management information circular of Fund IV and Euro Fund dated April 10, 2025 in respect of the Proposed Transaction (the "Information Circular") that was prepared and sent to Unitholders.

(c) The Independent Committee retained Wildeboer Dellelce LLP to act as its independent legal advisor.

(d) The Independent Committee retained Evans & Evans, Inc. on behalf of Fund IV to act as independent advisor in respect of the Proposed Transaction.

(e) The Board exercised the requisite standard of care in accordance with the terms of the Fund IV DOT with respect to the Proposed Transaction. Marcus Kurschat, as principal of the Fund IV Managers, has and will continue to recuse himself from any Board deliberations and the passing of any resolutions in connection with the Proposed Transaction.

(f) The Independent Committee determined that the net asset value of each class of Fund IV Units, the value of the Euro Fund Units, and the exchange ratio at which Unitholders will receive Series 4 Euro Fund Units were reasonable.

(g) The Independent Committee determined that the Proposed Transaction was in the best interests of Fund IV and approved the Proposed Transaction.

(h) The Proposed Transaction will be put before Unitholders for approval, which will be determined on the basis of a majority of the votes cast by Disinterested Unitholders, voting together as a single class.

(i) The Information Circular included disclosure that Fund IV has applied for the Exemption Sought and described the implications of the Exemption Sought, if granted.

31. Separate class votes by Unitholders would have the effect of granting disproportionate importance to a small group of Disinterested Unitholders of Class U Units (approximately 4.8% of the issued and outstanding Fund IV Units). Despite their relatively small holdings, Disinterested Unitholders in this group would be afforded a de facto veto right in respect of the Proposed Transaction that could be exercised against all other Unitholders. 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 0.48% of the Fund IV Units could effectively veto the Proposed Transaction. Such an outcome would not be in accordance with the reasonable expectations of Unitholders.

32. To the best of the knowledge of Fund IV and the Fund IV Managers, there is no reason to believe that Unitholders of any particular class would not approve the Proposed Transaction where the holders of Fund IV Units of any of the other classes are in favour.

33. As of April 30, 2025, neither Fund IV nor the Fund IV Managers have received any complaints or expressions of concern about the Proposed Transaction or the Exemption Sought.

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:

(a) a special meeting of the Unitholders is held in order for the Disinterested Unitholders to consider and, if deemed advisable, approve the Proposed Transaction, such approval to be obtained with the Disinterested Unitholders voting together as a single class; and

(b) Fund IV issues and files a press release announcing receipt of the Exemption Sought prior to the Meeting and describes the implications of same.