Securities Law & Instruments


Headnote

Multilateral Instrument 11-102 Passport System – Approval of investment fund mergers – approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – merger is not a tax-deferred transaction – the fundamental investment objectives of the terminating fund and the continuing fund are not substantially similar – merger to otherwise comply with pre-approval criteria, including unitholder vote, IRC approval.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b).

December 11, 2017

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)

AND

IN THE MATTER OF
THE PROCESS FOR APPLICATIONS FOR APPROVAL
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
BROMPTON FUNDS LIMITED
(the Filer)

AND

GOLDMAN SACHS U.S. INCOME BUILDER TRUST
(GSB)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of GSB for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting approval under subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) to merge (the Merger) GSB and Symphony Floating Rate Senior Loan Fund (SSF), with SSF as the continuing fund (the Approval Sought).

Under the passport system:

(a)           the Ontario Securities Commission is the principal regulator (Principal Regulator) for this application, and

(b)           the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon (Jurisdictions).

Interpretation

Defined terms contained in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1.             The Filer is a corporation governed by the laws of Ontario with its head office in Toronto, Ontario.

2.             The Filer is registered under NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations as an investment fund manager, portfolio manager, commodity trading manager and an exempt market dealer in Ontario and is also registered as an investment fund manager in Newfoundland and Labrador and Quebec.

3.             The Filer is a wholly-owned subsidiary of Brompton Corp.

4.             The Filer is the manager and promoter of each of GSB and SSF (the Funds).

5.             The Filer is not in default of any requirement of securities legislation in any of the Jurisdictions.

Goldman Sachs U.S. Income Builder Trust

6.             GSB is a closed-end investment fund established under the laws of the Province of Ontario that is governed by an amended and restated declaration of trust dated May 26, 2014 (the GSB Declaration of Trust) with TSX Trust Company as trustee (the Trustee).

7.             GSB was qualified by a prospectus dated May 26, 2014.

8.             GSB’s issued and outstanding Class A units currently trade on the Toronto Stock Exchange (TSX) under the ticker symbol GSB.UN and its issued Class U units are not listed for trading.

9.             GSB is a reporting issuer under applicable securities legislation of the Jurisdictions. GSB is not in default of securities legislation in the Jurisdictions.

The Continuing Fund

10.          SSF is a closed-end investment fund established under the laws of the Province of Ontario that is governed by a fifth amended and restated declaration of trust dated as of November 22, 2016 (the SSF Declaration of Trust) with the Trustee as trustee.

11.          SSF was qualified by a prospectus dated October 19, 2011.

12.          SSF’s issued Class A units currently trade on the TSX under the ticker symbol SSF.UN and its issued Class C units, Class F units and Class U units are not listed for trading.

13.          SSF is a reporting issuer under applicable securities legislation of the Jurisdictions. SSF is not in default of securities legislation in the Jurisdictions.

The Proposed Merger

14.          The Filer intends to merge GSB into SSF.

15.          As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Filer presented the terms of the Merger which raise a conflict of interest for the purposes of NI 81-107 and the process proposed for completion of the Merger to GSB’s Independent Review Committee (IRC) on November 1, 2017 for its review and recommendation. The IRC reviewed the proposed transactions and has determined that the proposed Merger, if implemented, would achieve a fair and reasonable result for GSB.

16.          The board of directors of the Filer approved the Merger. A press release and notice of meeting in respect of the proposed Merger were filed on SEDAR on November 1, 2017. The Class A units of GSB continue to trade on the TSX.

17.          Unitholders of GSB will be asked to approve the Merger at the special meeting (the Meeting) of the unitholders of GSB to be held on December 13, 2017. As SSF will be the continuing fund after the completion of the Merger and the Merger will not result in any changes to SSF for its current unitholders, SSF is not required under either applicable securities laws or the SSF Declaration of Trust to hold a special meeting of its unitholders in order to approve the Merger.

18.          In connection with the Meeting, a notice of meeting and a management information circular and a related form of proxy (the Meeting Materials) were mailed to unitholders of GSB on November 22, 2017, and subsequently filed on SEDAR, in accordance with all applicable securities laws.

19.          The Meeting Materials will provide unitholders of GSB with information about, among other things, basic information about each of GSB and SSF including redemption features, the management fees of SSF and the tax consequences of the Merger. The Meeting Materials will also describe the various ways in which unitholders can obtain a copy of the most recent interim and annual financial statements and management reports of fund performance for each of the Funds, at no cost. Accordingly, unitholders of GSB have an opportunity to consider this information prior to voting on the Merger.

20.          A summary of the IRC’s recommendation will be included in the Meeting Materials sent to unitholders of GSB as required by section 5.1(2) of NI 81-107.

21.          Subject to receipt of unitholder approval, approval of the TSX and the Approval Sought, it is expected that the Merger will take place on or about February 8, 2018 (the Merger Date). If unitholder approval is not received at the Meeting, the Filer will review options for the future of GSB, including the possibility of a wind-up of GSB. SSF will continue to operate as it currently operates under the SSF Declaration of Trust.

22.          If the necessary approvals are obtained, the following steps will be carried out to effect the Merger:

(a)           The Class A units of GSB will be delisted from the TSX on or about the Merger Date.

(b)           GSB will transfer all or substantially all of its net assets to SSF in consideration for the issuance by SSF to GSB of a number of units of SSF determined based on the Exchange Ratio (as defined herein) established as of the close of trading on the second business day immediately preceding the Merger Date. The exchange ratio (Exchange Ratio) will be calculated based on the relative net asset value of the units of GSB and the units of SSF.

(c)           Immediately following the transfer of the assets of GSB to SSF and the issuance of units of SSF to GSB, all units of GSB will be automatically redeemed and each holder of units of GSB participating in the Merger will receive such number and class of units of SSF as is equal to the number and class of units of GSB held multiplied by the Exchange Ratio.

(d)           Holders of class A or U units of GSB will become unitholders of the corresponding class of units of SSF.

(e)           Following the Merger, SSF will continue as a TSX-listed investment fund and GSB will be wound up as soon as reasonably practicable.

23.          The Filer will pay all costs and reasonable expenses relating to the solicitation of proxies and holding the Meeting in connection with the Merger as well as the costs of implementing the Merger.

24.          Pursuant to the GSB Declaration of Trust, unitholders of GSB will be permitted to exercise their annual redemption right prior to the Merger Date to require GSB to redeem their applicable units of GSB at their net asset value at the time of such redemption. In particular, unitholders of GSB surrendering their units for redemption on or before December 29, 2017 will have their units redeemed on January 30, 2018. Unitholders of GSB can wait until after the result of the Meeting is announced before choosing to exercise their annual redemption right.

25.          No sales charges will be payable in connection with the acquisition by SSF of the investment portfolios of GSB.

26.          The Merger will not be effected on a tax-deferred basis. On the Merger Date, GSB will dispose of its portfolio and other assets acceptable to SSF’s sub-adviser for proceeds of disposition equal to the fair market value of those assets. As a result, GSB will realize a capital gain (or a capital loss) equal to the amount by which the proceeds of disposition of a particular portfolio asset exceed (or are exceeded by) the adjusted cost base of the particular portfolio asset, net of any reasonable costs of the disposition.

27.          The Filer will not receive any compensation in respect of the acquisition, sale or redemptions of the units of SSF or GSB.

28.          GSB and SSF have the same valuation procedures.

29.          The portfolio and other assets of GSB to be acquired by SSF as a result of the Merger are currently, or will be, acceptable to the sub-adviser of SSF prior to the effective date of the Merger.

30.          GSB and SSF are, and are expected to continue to be at all material times, mutual fund trusts under the Income Tax Act (Canada) (the Tax Act) and, accordingly, units of both GSB and SSF are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.

31.          The Filer believes that the Merger will be beneficial to unitholders of GSB for the following reasons:

(a)           SSF’s annual distribution rate is approximately 6.7%, (based on the net asset value per class A unit of SSF) which represents an increase over GSB’s annual distribution rate of 6.2% (as at November 13, 2017).

(b)           The management fee rate for SSF is 1.25% of net assets of SSF, as compared to GSB’s effective management fee rate of approximately 1.55% of net assets of GSB.

(c)           The management expense ratios (excluding interest expense) for class A units and class U units of SSF are expected to be approximately 1.17% and 1.22% lower, respectively, than the management expense ratios of class A units and class U units of GSB. In addition, fixed annual operating costs of SSF will be spread across a larger base of assets, is expected to reduce operating costs on a per-unit basis and, correspondingly, should improve returns for unitholders of SSF.

(d)           Both the class A units of GSB and the class A units of SSF are listed for trading on the TSX under the symbols GSB.UN and SSF.UN, respectively. Throughout 2017 to November 13, 2017, class A units of SSF had a higher daily average trading volume of 13,611 compared to 3,016 for GSB’s class A units on the TSX. Following the Merger, SSF, as the continuing fund, will have a larger market capitalization and a greater number of units and unitholders, which is expected to further improve liquidity for unitholders of both GSB and SSF.

(e)           The Filer anticipates that an improvement in the trading price of the class A units of GSB (relative to net asset value per class A unit of GSB) will provide a meaningful increase in value for unitholders of GSB. For the nine-month period ended September 30, 2017, GSB had an average daily trading discount of 2.6% in comparison to 0.8% for SSF.

(f)            GSB and SSF currently have similar investment mandates, which is the direct investment in, and active management of, a portfolio comprised primarily of fixed income securities and floating rate senior loans (GSB also invests in high dividend paying equities, preferred equities and other similar securities). Given the relatively small size of GSB, unitholders of GSB (net asset value of approximately $19.3 million as at November 13, 2017) would benefit from the additional liquidity and scale of a larger fund such as SSF (net asset value of approximately $112 million as at November 13, 2017).

(g)           Both GSB and SSF offer their respective unitholders the option to hold their units in class A units or, for those wishing to hold their investment in U.S. dollars, class U units. The Merger will allow unitholders of GSB invested in class A units or class U units of GSB to similarly hold class A units or class U units of SSF and maintain exposure to hedged or unhedged investments.

(h)           All costs of the Merger incurred by GSB will be borne by the Filer and not by GSB, SSF or either of their respective unitholders.

32.          The foregoing reasons for the Merger will be set out in the Meeting Materials along with certain prospectus-level disclosure concerning SSF, including information regarding investment objectives and restrictions, the portfolio manager and risk factors applicable to an investment in SSF.

33.          Approval from the Principal Regulator is required pursuant to subsection 5.5(1)(b) of NI 81-102 because the Merger satisfies the requirements for pre-approved reorganizations and transfers set out in subsection 5.6(1) of NI 81-102, except that:

(a)           the Merger is not a tax-deferred transaction as described in subsection 5.6(1)(b) of NI 81-102; and

(b)           a reasonable person would not consider GSB and SSF to have substantially similar investment objectives as required by subsection 5.6(1)(a)(ii) of NI 81-102.

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 Approval Sought is granted.

“Darren McKall”
Manager
Investment Funds and Structured Products
Ontario Securities Commission