NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund mergers -- approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- continuing funds have different investment objectives than terminating funds and mergers are not "qualifying exchanges" or tax-deferred transactions under Income Tax Act (Canada) -- securityholders of terminating funds provided with adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.
March 6, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
ACUITY FUNDS LTD.
IN THE MATTER OF
ACUITY PURE CANADIAN EQUITY FUND AND
ACUITY GLOBAL EQUITY FUND
(the "Terminating Funds") AND
ACUITY CANADIAN EQUITY FUND AND
ACUITY GLOBAL DIVIDEND FUND
(the "Continuing Funds", together with the
Terminating Funds, the "Funds")
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") granting approval under section 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") to merge each Terminating Fund into the Continuing Fund opposite its name below (the "Mergers") (the "Merger Approval"):
Terminating Fund Continuing Fund Acuity Pure Canadian Equity Fund Acuity Canadian Equity Fund Acuity Global Equity Fund Acuity Global Dividend Fund
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 all of the other provinces and territories of Canada except Nunavut.
Defined terms contained in National Instrument 14-101 Definitions and in MI 11-102 have the same meaning in this decision unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the laws of Ontario and is the manager and trustee of the Funds. The head office of the Filer is located in Toronto, Ontario.
2. Acuity Investment Management Inc. ("AIMI"), an affiliate of the Filer, is the portfolio adviser of the Funds. AIMI is registered in Ontario as an adviser in the category of investment counsel and portfolio manager.
3. Each Fund is:
(a) an open-end mutual fund trust created under the laws of Ontario and is governed by the terms of a master declaration of trust dated September 1, 2002, as amended (the "Declaration of Trust");
(b) a reporting issuer offering class A and class F units in all provinces and territories of Canada except Nunavut under a simplified prospectus and annual information form dated August 22, 2008, as amended, prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure; and
(c) not in default of the securities legislation in any jurisdiction in which the relief is being sought.
4. Each Fund also offers class I units on a private placement basis. Class I units of the Terminating Funds are held exclusively by other investment funds managed by the Filer (the "Acuity Top Funds").
5. Unless an exemption has been obtained, each of the Funds follows the standard investment restrictions and practices applicable to the Fund.
6. The net asset value for each class of units of each of the Funds is calculated on a daily basis on each day that The Toronto Stock Exchange is open for trading.
7. As of December 31, 2008, the nets assets under management of the Funds ("AUM") was as set out below:
Terminating Fund AUM (000s) Continuing Fund AUM (000s) Acuity Pure Canadian Equity Fund $8,116 Acuity Canadian Equity Fund $41,853 Acuity Global Equity Fund $12,124 Acuity Global Dividend Fund $32,524
8. The Filer believes that, having regard to the relatively small asset base of the Terminating Funds, the Mergers will be beneficial to unitholders of both the Terminating Funds and the Continuing Funds for the following reasons:
(a) unitholders of both the Terminating Funds and Continuing Funds will enjoy increased economies of scale as part of a larger continuing fund;
(b) the Mergers will eliminate the administrative and regulatory costs of operating the Terminating Funds each as a separate mutual fund;
(c) each Continuing Fund will have a portfolio of greater value allowing for increased portfolio diversification opportunities; and
(d) each Continuing Fund, as a result of its greater size, will benefit from a larger profile in the marketplace.
9. Unitholders of the Terminating Funds will be asked to approve the Mergers at a special meeting of unitholders scheduled to be held on March 12, 2009. The Filer will refrain from voting the class I units of the Terminating Funds held by the Acuity Top Funds as contemplated under section 2.5(6)(a) of NI 81-102. The investment objectives and strategies of the Acuity Top Funds permit them to invest in the applicable Continuing Fund.
10. Implicit in the approval being sought from unitholders of the Terminating Funds for the Mergers is their approval of the corresponding Continuing Fund's fundamental investment objectives, as unitholders of each Terminating Fund will become unitholders of the corresponding Continuing Fund as a result of the Mergers.
11. In relation to the Mergers, each Terminating Fund has complied with its continuous disclosure obligations set forth in Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure by filing on SEDAR a press release, material change report and an amendment to the Terminating Fund's current simplified prospectus.
12. In accordance with the provisions of National Instrument 81-107 Independent Review for Investment Funds, the Filer has referred the Mergers to the Funds' Independent Review Committee ("IRC") for its review. The IRC has advised the Filer that, after reasonable inquiry, it has concluded that the Mergers do not create any conflict of interest issues that have not been adequately addressed and, on this basis, achieve a fair and reasonable result for the Funds.
13. A management information circular was sent to unitholders of the Terminating Funds on or about February 19, 2009 accompanying the notice of special meeting dated February 12, 2009 (the "Circular") which described:
(a) the tax implications of each Merger;
(b) the differences between each Terminating Fund and its corresponding Continuing Fund;
(c) the various ways in which investors can obtain a copy of the annual information form and the management reports of fund performance for the Continuing Funds; and
(d) the Funds' IRC's conclusion, after reasonable inquiry, that the Mergers do not create any conflict of interest issues that have not been adequately addressed and, on this basis, achieve a fair and reasonable result for the Funds.
14. A copy of the current simplified prospectus and the most recent annual and interim financial statements made public for the Funds were included with the Circular.
15. If approved, each Merger will be structured as follows:
(a) It is anticipated that substantially all the assets of the Terminating Fund will be transferred to its corresponding Continuing Fund. However, immediately prior to the date of a Merger, if there are any securities in the underlying portfolio of assets attributable to the Terminating Fund that do not meet the investment objectives and investment strategies of its corresponding Continuing Fund (as determined by AIMI), such securities will be sold and converted to cash or cash equivalents. In this limited circumstance, the Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the relevant Merger.
(b) The balance of the Terminating Fund's investment portfolio and other assets will be valued and determined at the close of business on the effective date of the relevant Merger in accordance with the Declaration of Trust.
(c) The Continuing Fund will acquire the investment portfolio and cash and/or cash equivalents referred to above in exchange for units of its corresponding Terminating Fund.
(d) The Continuing Fund will not assume the liabilities of its corresponding Terminating Fund, and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the relevant Merger.
(e) The units of the Continuing Fund received by its corresponding Terminating Fund under the relevant Merger will have an aggregate net asset value equal to the value of that Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring and will be issued at the applicable class net asset value per unit as of the close of business on the effective date of the applicable Merger.
(f) Each Terminating Fund will distribute to its unitholders a sufficient amount of its net income and net realized capital gains so that it will not be subject to tax under Part I of the Income Tax Act (Canada) for its current taxation year.
(g) The units of the Continuing Fund received by its corresponding Terminating Fund under a Merger will be distributed to unitholders of that Terminating Fund on a dollar-for-dollar and class-by-class basis in exchange for their units in the Terminating Fund.
(h) As soon as reasonably possible following a Merger, the applicable Terminating Fund will be wound up.
16. Upon completion of the Mergers, unitholders of each class of units of a Terminating Fund will hold units of the same class of the corresponding Continuing Fund collectively having the same value as, and having the same sales charge option and remaining deferred sales charge schedule that applied to, their units of the Terminating Fund held prior to the Merger.
17. The portfolio assets of a Terminating Fund to be acquired by its corresponding Continuing Fund will be acceptable to AIMI, the portfolio adviser of that Continuing Fund, and consistent with the Continuing Fund's fundamental investment objective.
18. The cost of effecting the Mergers, consisting primarily of legal, proxy solicitation, brokerage fees (including fees incurred on any required sale of portfolio assets of the Terminating Funds), printing, mailing and regulatory fees, will be borne by the Filer.
19. Unitholders of a Terminating Fund will continue to have the right to redeem units of that Terminating Fund for cash at any time up to the close of business on the business day immediately preceding the effective date of the Merger.
20. Subject to receipt of the Merger Approval and to unitholder approval, each Merger is expected to occur as soon as possible following the special meeting of unitholders scheduled to be held on March 12, 2009.
21. The Merger Approval is required because the Mergers do not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 because:
(a) contrary to section 5.6(1)(a)(ii), a reasonable person could conclude that the fundamental investment objective of each Terminating Fund is not substantially similar to the fundamental investment objective of its corresponding Continuing Fund; and
(b) contrary to section 5.6(1)(b), the Mergers will not be effected as a "qualifying exchange" or as a tax-deferred transaction as such terms are defined or understood under the Income Tax Act (Canada).
22. Except as noted above, the Mergers meet all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
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 Merger Approval is granted.