Approval of mutual fund mergers -- mergers part of amalgamation of mutual fund corporations -- approval required because mergers do not meet all the criteria for pre-approval outlined in section 5.6 of NI 81-102 -- merging funds have different fee structures -- current simplified prospectus and financial statements of continuing funds not delivered to shareholders of corresponding terminating funds, circular instead containing the relevant information -- amalgamation may not technically constitute a wind-up of the Terminating Funds for the purposes of section 5.6(1)(c).
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6, 5.6(1)(a)(ii), 5.6(1)(f)(ii), 5.7(1)(b).
October 31, 2008
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
FRONT STREET CAPITAL 2004 (the Manager),
FRONT STREET MUTUAL FUNDS LIMITED (MF)
and FRONT STREET OPPORTUNITY FUNDS LTD.
(FSOF) (collectively, the Filers)
IN THE MATTER OF
FRONT STREET RESOURCE OPPORTUNITIES
FUND, FRONT STREET YIELD OPPORTUNITIES
FUND, FRONT STREET EQUITY OPPORTUNITIES
FUND, FRONT STREET CASH FUND AND
FRONT STREET SMALL CAP OPPORTUNITIES
FUND, EACH A CLASS OF SHARES OF FSOF
(the Terminating Funds)
IN THE MATTER OF
FRONT STREET RESOURCE FUND CLASS,
FRONT STREET DIVERSIFIED INCOME FUND
CLASS, FRONT STREET CANADIAN EQUITY
FUND CLASS, FRONT STREET MONEY MARKET
FUND CLASS AND FRONT STREET SMALL CAP
FUND CLASS, EACH A CLASS OF SHARES OF MF
(the Continuing Funds)
(the Terminating Funds and the Continuing Funds,
collectively the Funds)
The principal regulator in the Jurisdiction has received an application from the Filers and the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the proposed mergers of the Terminating Funds into the Continuing Funds to be effective November 1, 2008 (the Mergers) pursuant to clause 5.5(1)(b) of National Instrument 81-102 -- Mutual Funds (NI 81-102) (the Merger Approval).
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 Filers have provided notice that Section 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland, Northwest Territories, Yukon and Nunavut.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filers and the Funds:
1. The head office of each of the Filers is located at 33 Yonge Street, Suite 600, Toronto, Ontario. The Filers and the Funds are not in default of securities legislation in any jurisdiction.
2. FSOF and MF are mutual fund corporations (the Corporations) incorporated under the laws of Canada. FSOF and MF each currently offer multiple mutual fund classes. The principal advantage to investors of the multiple mutual fund class structure is the ability of taxable investors to switch their investments between different mutual fund classes within each Corporation on a tax-deferred basis.
3. Each Fund is an existing Fund with portfolio assets, except for Front Street Small Cap Fund Class, which is a new fund with no portfolio assets (the New Fund, the other Funds collectively, the Existing Funds). Each of the Existing Funds is, and the New Fund will be, a reporting issuer as defined in the securities legislation of each province and territory of Canada. Each of the Terminating Funds operates in accordance with National Instrument 81-104 -- Commodity Pools (NI 81-104) and distributes its shares to the public pursuant to a prospectus. Each of the Continuing Funds operates or, in the case of the New Fund will operate, in accordance with NI 81-102 and distributes, or in the case of the New Fund will distribute, its shares to the public pursuant to a simplified prospectus (SP) and annual information form (AIF). Each Existing Fund currently has, and the New Fund will have, three series: Series A, Series B and Series F shares.
4. The New Fund will file a preliminary SP and AIF and a final SP and AIF in due course to qualify its shares for distribution to the public. The New Fund's preliminary and final SP and AIF will be combined with the other Continuing Funds' pro forma and final SP and AIF. The combined preliminary and pro forma SP and AIF and the final SP and AIF for the Continuing Funds will reflect that the Continuing Funds, after the Mergers, are classes of shares of New MF each having a new name the same as the old name less the word "Class".
5. Each Fund is a separate share class of MF or FSOF. Although each Existing Fund is generally a non-voting share class, each had the right to vote separately as a class in respect of the proposed Mergers.
6. On August 18, 2008, the Manager and the management of FSOF announced the proposal for the amalgamation of FSOF, MF and one other mutual fund corporation, Front Street Special Opportunities Canadian Fund Ltd. (SOCdnF) and the intention to continue the Corporations as one Corporation (New MF). The Manager has since that date decided it would not be in the best interests of shareholders of SOCdnF to proceed with the amalgamation relating to SOCdnF at this time. The Manager now intends that FSOF and MF will amalgamate to form New MF (the Amalgamation) and each Terminating Fund will merge into the Continuing Fund identified opposite its name below.
Terminating Fund Continuing Fund (each a class of FSOF) (each a class of MF) Front Street Resource Opportunities Fund Front Street Resource Fund Class Front Street Yield Opportunities Fund Front Street Diversified Income Fund Class Front Street Equity Opportunities Fund Front Street Canadian Equity Fund Class Front Street Cash Fund Front Street Money Market Fund Class Front Street Small Cap Opportunities Fund Front Street Small Cap Fund Class
7. The Manager, a partnership established under the laws of Ontario, is the manager of FSOF. The Manager currently indirectly manages MF through its 100% ownership of the voting shares of MF and elects the directors of MF. All of the senior management and directors of MF, with the exception of the Chief Financial Officer, are members of the senior management of the Manager. The Manager will be the manager of New MF and of the Continuing Funds.
8. As a result of the Amalgamation, investors in the Continuing Funds will be provided with a broader choice of mutual funds into which they may switch their investments on a tax-deferred basis. The Amalgamation and Mergers may also benefit investors as a result of the increased economies of scale resulting from the consolidation of sales, marketing and management activities that are expected to reduce fund expenses.
9. A press release dated August 18, 2008, a material change report dated August 27, 2008 and an amendment to the prospectus for each of the Existing Funds dated September 26, 2008 were filed on SEDAR in connection with the Amalgamation and Mergers.
10. A notice of meeting and management information circular (the Circular) were mailed to shareholders of the Existing Funds in connection with the proposed Amalgamation and Mergers on or about September 8, 2008.
11. Each of the Corporations held special meetings of shareholders on October 15, 2008 and obtained the required approval of each class of shareholders for the Amalgamation and Mergers. Subject to necessary regulatory approval, the Filers intend to effect the Amalgamation and Mergers on or about November 1, 2008.
12. The Amalgamation will be effected pursuant to an amalgamation agreement (the Amalgamation Agreement) to be entered into between the Corporations as contemplated by section 182 of the Canada Business Corporations Act (the CBCA).
13. Pursuant to the Amalgamation Agreement, for each share of FSOF or MF that they hold as at the close of business on the day prior to the effective date of the Amalgamation and Mergers (the Effective Date), shareholders will receive one share of a corresponding class and series of New MF having the same value.
14. The Manager currently holds all of the voting shares of FSOF and MF. The Manager will receive one voting share of New MF for each voting share of FSOF or MF held, resulting in all voting shares of New MF being held by the Manager.
15. Shareholders of the Terminating Funds will continue to have the right to redeem securities of the Terminating Funds for cash at any time up to the close of business on the day prior to the Effective Date.
16. Shareholders of the Existing Funds are permitted to dissent from the Amalgamation pursuant to the provisions of the CBCA. A shareholder who dissents will be entitled, in the event the Amalgamation becomes effective, to be paid by New MF the fair value of the shares of a Fund held by such shareholder determined as at the close of business on the day before the resolution approving the Amalgamation was passed.
17. The Continuing Funds and the Terminating Funds have substantially similar fundamental investment objectives, investment strategies and valuation procedures. As stated in the Circular, as commodity pools operated in accordance with NI 81-104, the Terminating Funds are exempted from certain of the provisions of NI 81-102 that would otherwise apply. In particular, commodity pools are permitted a more liberal derivatives use than conventional mutual funds. Following the Mergers, none of the Funds will be a commodity pool and so will be restricted in their derivatives use by NI 81-102. However, the Manager does not believe that this will result in a material change to a Fund's portfolio or investment performance following the Merger.
18. The fee structures of the Terminating Funds are generally the same as the fee structures of the Continuing Funds but, in some cases, the management fees of the Continuing Funds are lower than those of the Terminating Funds and the performance fees for the Continuing Funds are required to be calculated in relation to a benchmark in accordance with NI 81-102, while the performance fees for the Terminating Funds, which have operated in accordance with NI 81-104, are not.
19. The Amalgamation is a tax-deferred transaction under subsection 87(1) of the Income Tax Act (Canada).
20. The Circular included disclosure about the Amalgamation and Mergers and prospectus-like disclosure concerning New MF, the Continuing Funds and the shares to be issued under the Amalgamation Agreement, including information regarding fees, expenses, investment objective, investment strategy, valuation procedures, the manager, the investment manager, redemptions, income tax considerations, dividend policy and net asset value. The Circular also disclosed that shareholders can obtain the most recent financial statements that have been made public reflecting the portfolio assets of the Funds from the Manager upon request or on SEDAR at www.sedar.com and that investors in the Terminating Funds can also review the provisions of the current simplified prospectus and annual information form of MF, available from the Manager upon request or on SEDAR at www.sedar.com.
21. The Circular also described the tax implications of the Mergers, shareholders' right to redeem if they did not wish to participate in the Mergers, shareholders right to dissent to the Amalgamation and indicated that the Funds' IRC had concluded that submitting the proposed Mergers to shareholders for their consideration and approval achieved a fair and reasonable result for shareholders.
22. The costs of the Amalgamation and Mergers will be paid for by the Manager.
23. The Filers and the Funds require approval of the Mergers and cannot rely on section 5.6(1) of NI 81-102 for the following reasons:
(i) The fee structure of the Continuing Funds is not substantially similar to that of the Terminating Funds, as some management fees of the Continuing Funds are lower than those of the Terminating Funds and the performance fees for the Continuing Funds are required to be calculated in relation to a benchmark in accordance with NI 81-102, while the performance fees for the Terminating Funds, which have operated in accordance with NI 81-104, are not;
(ii) The materials sent to shareholders of the Funds did not include a copy of the current simplified prospectus of the Continuing Funds or a copy of the financial statements of the Continuing Funds; and
(iii) A statutory amalgamation may not technically constitute a wind-up of the Terminating Funds.
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.