Padlock Euro Storage Fund I

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 series and class unless the nature of the business affects holders of one series of units or class within a series in a manner materially different from another series or class within a series -- independent directors have determined that the proposed related party transaction will not affect holders of one series of units or class within a series in a manner materially different than holders of any other series of units or class within a series -- information circular included disclosure that relief from separate class vote requirement was being sought and described implications -- requiring a series-by-series 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 EURO STORAGE FUND I ("Euro Fund")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from Euro Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") exempting Euro Fund, 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 Euro Fund, each voting separately as a class, in connection with a proposed plan of arrangement pursuant to which Euro Fund will acquire all of the issued and outstanding trust units of Padlock Partners UK Fund IV ("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) Euro Fund 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 Euro Fund:

Overview of Euro Fund

1. 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").

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

3. Euro Fund 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. Euro Fund'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") and Spain, 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. Euro Fund owns interests in 20 properties located in the UK.

6. The interests in Euro Fund are divided into three (3) classes of units (each, a "Class"), each of which Class has three (3) series (each, a "Series", and all the securities of Euro Fund collectively, the "Euro Fund Units"):

(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").

7. As at the record date for the Meeting (as defined below), being April 9, 2025 (the "Record Date"), there were 11,682,890 Euro Fund Units issued and outstanding, consisting of:

(a) 3,094,400 Euro Fund Class A Units, Series 1, representing 26.49% of the issued and outstanding Euro Fund Units;

(b) 2,421,140 Euro Fund Class A Units, Series 2, representing 20.72% of the issued and outstanding Euro Fund Units;

(c) 3,899,350 Euro Fund Class A Units, Series 3, representing 33.38% of the issued and outstanding Euro Fund Units;

(d) 52,500 Euro Fund Class F Units, Series 1, representing 0.45% of the issued and outstanding Euro Fund Units;

(e) 409,450 Euro Fund Class F Units, Series 2, representing 3.50% of the issued and outstanding Euro Fund Units;

(f) 1,110,550 Euro Fund Class F Units, Series 3, representing 9.51% of the issued and outstanding Euro Fund Units;

(g) 276,450 Euro Fund Class U Units, Series 1, representing 2.37% of the issued and outstanding Euro Fund Units;

(h) 301,550 Euro Fund Class U Units, Series 2, representing 2.58% of the issued and outstanding Euro Fund Units; and

(i) 117,500 Euro Fund Class U Units, Series 3, representing 1.01% of the issued and outstanding Euro Fund Units.

8. None of the securities of Euro Fund are listed on a stock exchange.

9. 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", and together with Fund I and Fund II, the "Predecessor Funds") pursuant to a plan of arrangement that was completed on July 31, 2024 (the "Previous Arrangement").

10. 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.

11. Each Euro Fund Unit has the same rights and obligations, and no holder of Euro Fund Units is entitled to any privilege, priority or preference in relation to any other such holder, subject to the following:

(a) The Euro Fund Class A Units and Euro Fund Class F Units are denominated in Canadian dollars, while the Euro Fund Class U Units are denominated in pound sterling. The difference in currency denominations was intended to provide investors in the Predecessor Funds with the flexibility to invest and receive distributions in either Canadian dollars or pound sterling.

(b) At the time of the initial public offering of the applicable Predecessor Fund, holders of Euro Fund Class A Units paid an agents' fee of C$0.575 per unit, holders of Euro Fund Class F Units paid an agents' fee of $0.275 per unit, and holders of Euro Fund Class U Units paid an agents' fee of £0.575 per unit.

(c) The proportionate entitlement of the holders of each Series (the "Proportionate Series Interest") to participate in distributions made by Euro Fund, including distributions of Net Realized Capital Gains (as defined in the Euro Fund DOT) or income, if any, and to receive proceeds on a redemption of Euro Fund Units and/or upon termination of Euro Fund, is equal to the proportion that the net asset value of the particular Series represented to the aggregate net asset value of all Series at the time of the Previous Arrangement, adjusted for redemptions and disproportionate distributions that have occurred since that time.

(d) The proportionate entitlement of holders of Euro Fund Class A Units, Euro Fund Class F Units, and Euro Fund Class U Units within a Series (the "Proportionate Class Interest" and together with the Proportionate Series Interest, the "Proportionate Interest") to participate in distributions made by Euro Fund, including distributions of Net Realized Capital Gains (as defined in the Euro Fund DOT) or income, if any, and to receive proceeds on a redemption of Euro Fund Units and/or upon termination of Euro Fund, is equal to the proportion of (i)(A) the aggregate gross proceeds received by Fund I (in respect of Series 1), Fund II (in respect of Series 2) and Fund III (in respect of Series 3) for the issuance of trust units of the relevant Class, less the agents' fee paid in respect of such trust units, less (B) the aggregate amount paid to redeem trust units of the relevant Class by the relevant Predecessor Fund prior to the Previous Arrangement or by Euro Fund subsequent to the Previous Arrangement, divided by (ii) the gross subscription proceeds received by the applicable Predecessor Fund less the total agents' fees paid in respect of such Predecessor Fund, less the aggregate amount paid to redeem trust units by the relevant Predecessor Fund prior to the Previous Arrangement or by Euro Fund subsequent to the Previous Arrangement.

12. Section 9.7 of the Euro Fund DOT provides that Unitholders vote as a single Series and 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 Series or Class within a Series in a manner materially different from its effect on holders of another Series or Class within a Series, in which case the Euro Fund Units of the affected Series or Class within a Series will vote separately as a Series or Class within a Series.

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

14. Euro Fund is managed by Clear Sky Capital Inc. (the "Canadian Manager"), Padlock Capital Partners, LLC, Padlock Capital Partners II, LLC, and Padlock Capital Partners III, LLC (collectively, the "Euro Fund Managers").

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

Proposed Transaction

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

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

18. As at the Record Date, there were 4,336,570 Fund IV Units issued and outstanding, consisting of 2,514,920 Fund IV Class A Units, nil Fund IV Class C Units, 1,612,250 Fund IV Class F Units, and 209,400 Fund IV Class U Units.

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

20. The Proposed Transaction will not alter the entitlements of Unitholders or holders of Fund IV Units or otherwise provide for the payment of cash or assets to Unitholders within a Series, or holders of Fund IV Units, in a manner that differs from the pre-established proportionate interest entitlements as set out in the Euro Fund DOT or the declaration of trust of Fund IV, as applicable.

21. The entitlements of Series 4 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 Units based on the original proportionate class entitlements from Fund IV's initial public offering.

22. 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.

23. The Proposed Transaction is a related party transaction for Euro Fund as Euro Fund will be acquiring or combining with Fund IV, a related party, and is therefore 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 of the nine (9) Series of Euro Fund Units, excluding the votes attached to Euro Fund 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 Euro Fund Units of the particular Series called to consider the Proposed Transaction.

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

25. The Disinterested Unitholders in respect of the Proposed Transaction include all Unitholders, with the exception of the Euro Fund Managers, the executive officers of Euro Fund, and Marcus Kurschat, as principal of the Euro Fund Managers and a trustee of Euro Fund, and any related party or joint actor of any of them. As of the Record Date, none of these persons hold any Euro Fund Units, and accordingly, the Disinterested Unitholders hold 100% of each of the nine (9) Series.

26. Euro Fund is exempt from the formal valuation requirement in MI 61-101 in respect of the Proposed Transaction on the basis of paragraph 5.5(b) of MI 61-101 as no securities of Euro Fund are listed on a specified market.

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

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

(b) no separate Series or Class of a Series vote is required for any aspect of the Proposed Transaction under the terms of the Euro Fund DOT.

28. The Proposed Transaction was proposed by the Euro Fund Managers to Dale Williams and Abbas Osman, each of whom is independent of Euro Fund and the Euro Fund 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").

29. 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 Euro Fund 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 Euro Fund and Fund IV, having regard to their particular individual circumstances. The Fairness Opinion concluded that, as it relates to Euro Fund, 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 Euro Fund and Fund IV 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 Euro Fund 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 Euro Fund DOT with respect to the Proposed Transaction. Marcus Kurschat, as principal of the Euro Fund 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 per Euro Fund Unit, the value of each class of Fund IV Units, and the exchange ratio at which holders of Fund IV Units will receive Series 4 Units were reasonable.

(g) The Independent Committee determined that the Proposed Transaction was in the best interests of Euro Fund 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 Euro Fund has applied for the Exemption Sought and described the implications of the Exemption Sought, if granted.

30. Separate class votes by Unitholders would have the effect of granting disproportionate importance to a small group of Disinterested Unitholders of each of:

(a) the Euro Fund Class F Units, Series 1 (0.45% of the issued and outstanding Euro Fund Units);

(b) the Euro Fund Class F Units, Series 2 (3.50% of the issued and outstanding Euro Fund Units);

(c) the Euro Fund Class U Units, Series 1 (2.37% of the issued and outstanding Euro Fund Units);

(d) the Euro Fund Class U Units, Series 2 (2.58% of the issued and outstanding Euro Fund Units); and

(e) the Euro Fund Class U Units, Series 3 (1.01% of the issued and outstanding Euro Fund Units).

Despite their relatively small holdings, Disinterested Unitholders in each of these groups 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 Series of Unitholders is only 10% for each Series, it is possible that a holder of less than 0.10% of the Euro Fund Units could effectively veto the Proposed Transaction. Such an outcome would not be in accordance with the reasonable expectations of Unitholders.

31. To the best of the knowledge of Euro Fund and the Euro Fund Managers, there is no reason to believe that the holders of Euro Fund Units of any particular Series would not approve the Proposed Transaction where the holders of Euro Fund Units of any of the other Series are in favour.

32. As of April 30, 2025, neither Euro Fund nor the Euro Fund Mangers 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) Euro Fund issues and files a press release announcing receipt of the Exemption Sought prior to the Meeting and describes the implications of same.