Securities Law & Instruments

Headnote

Approval of mutual fund merger -- merger 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 -- current simplified prospectus and financial statements of continuing fund not delivered to shareholders of corresponding terminating fund as merger, in substance, merely the transfer of terminating fund, as it exists, from one company to empty share class of new company -- amalgamation may not technically constitute a wind-up of the terminating fund 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).

November 27, 2009

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

FRONT STREET CAPITAL 2004 (the Manager),

FRONT STREET MUTUAL FUNDS LIMITED (MFL)

AND FRONT STREET SPECIAL OPPORTUNITIES

CANADIAN FUND LTD. (SOCF)

(collectively, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the proposed merger by way of amalgamation of Front Street Special Opportunities Canadian Fund (the Terminating Fund) into New Front Street Special Opportunities Canadian Fund (the Continuing Fund) to be effective December 1, 2009 (the Merger) 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.

Interpretation

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

Representations

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

The Filers

1. The head office of each of the Filers is located at 33 Yonge Street, Suite 600, Toronto, Ontario. The Filers are not in default of securities legislation in any jurisdiction.

2. Each of MFL and SOCF is, and new Front Street Mutual Funds Limited (New MFL) will be, a mutual fund corporation incorporated under the laws of Canada. MFL currently offers multiple fund classes, each of which is considered a separate mutual fund for securities law purposes. The principal advantage to investors of the multiple fund class structure is the ability of taxable investors to switch their investments between different mutual fund classes within the corporation on a tax deferred basis.

3. Following the amalgamation of MFL and SOCF to form New MFL, the Continuing Fund will be a reporting issuer as defined in the securities legislation of each province and territory of Canada. The Terminating Fund is a class of shares of SOCF and operates in accordance with NI 81-102 and distributes its shares to the public under a simplified prospectus (SP) and annual information form (AIF), and has been a reporting issuer for at least 12 months. The Continuing Fund will be a class of shares of New MFL and will operate in accordance with NI 81-102. It has filed a preliminary SP and AIF and will file a final SP and AIF in due course to qualify its shares for distribution to the public. The Continuing Fund's preliminary and final SP and AIF will be combined with the pro forma and final SP and AIF of the other funds of MFL, which are continuing in New MFL. The Terminating Fund currently has three series of shares: Series A, Series B, and Series F shares and the Continuing Fund will have Series A, Series X, Series B, Series Y and Series F shares.

4. The Manager, a partnership established under the laws of Ontario, is the manager of SOCF. The Manager currently indirectly manages MFL through its 100% ownership of the voting shares of MFL and elects the directors of MFL. All of the senior management and directors of MFL, with the exception of the Chief Financial Officer, are members of the senior management of the Manager. The Manager will be the manager of the Continuing Fund.

The Merger

5. On October 5, 2009, the Manager and the management of MFL and SOCF announced the calling of a special meeting (the Meeting) to consider the amalgamation of MFL and SOCF to form New MFL. The Terminating Fund will be continued as the Continuing Fund.

6. As a result of the Merger, investors in the Terminating Fund will be provided with a broader choice of mutual funds into which they may switch their investments on a tax-deferred basis. The Merger 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.

7. A press release dated October 5, 2009, a material change report dated October 5, 2009, and an amendment to the prospectus for the Terminating Fund dated October 5, 2009 were filed on SEDAR in connection with the Meeting.

8. A notice of meeting and management information circular (the Circular) were mailed to shareholders of the Filers in connection with the Meeting on November 3, 2009.

9. MFL and SOCF held special meetings of shareholders on November 24, 2009 and obtained the required approval of each class of shareholders for the Merger. The Filers intend to effect the Merger on or about December 1, 2009.

10. The Merger will be effected pursuant to an amalgamation agreement (the Amalgamation Agreement) to be entered into between MFL and SOCF as contemplated by section 182 of the Canada Business Corporations Act (the CBCA).

11. Pursuant to the Amalgamation Agreement, for each share of the Terminating Fund that they hold as at the close of business on the day prior to the effective date of the Amalgamation (the Effective Date), shareholders will receive one share of a corresponding class and series of the Continuing Fund.

12. Shareholders of the Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash at any time up to the close of business on the day prior to the Effective Date.

13. Shareholders of MFL and SOCF are permitted to dissent from the Merger pursuant to the provisions of the CBCA. A shareholder who dissents will be entitled, in the event the Merger becomes effective, to be paid by New MFL the fair value of the shares of the Terminating Fund held by such shareholder determined as at the close of business on the day before the resolution approving the Amalgamation was passed.

14. The Merger will be a tax-deferred transaction under subsection 87(1) of the Income Tax Act (Canada).

15. The Circular included disclosure about the Merger and prospectus-like disclosure concerning the Continuing Fund including information regarding fees, expenses, investment objective and investment strategy of the Continuing Fund, 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 existing funds of MFL and the Terminating Fund from the Manager upon request or on SEDAR at www.sedar.com and that investors can also review the provisions of the current SP and AIF of MFL and SOCF, available from the Manager upon request or on SEDAR at www.sedar.com.

16. The Circular also described the tax implications of the Merger, shareholders' right to redeem if they did not wish to participate in the Merger, shareholders' right to dissent to the Merger and indicated that the Funds' IRC had concluded that submitting the proposed Merger to shareholders for their consideration and approval achieved a fair and reasonable result for shareholders.

17. The costs of the Merger will be paid for by the Manager.

18. The Filers and the Terminating Fund require approval of the Merger because they cannot rely on section 5.6(1) of NI 81-102 for the following reasons:

(a) The materials sent to shareholders of the Terminating Fund did not include a copy of the current SP of the Continuing Fund or a copy of the financial statements of the Continuing Fund; and

(b) A statutory amalgamation may not technically constitute a wind-up of the Terminating Fund.

19. Upon the Merger, the portfolio assets of the Terminating Fund will be transferred to the Continuing Fund. Prior to the Merger, the Continuing Fund will be an empty share class of New MFL with no portfolio assets of its own. The investment objectives, investment strategies, and fee structure of the Continuing Fund applicable to the current shareholders will be identical to the Terminating Fund. The Merger will have no material impact on the shareholders of the Terminating Fund. The substance of the Merger is merely to move the Terminating Fund from SOCF to New MFL.

20. Upon the Merger, the portfolio assets referable to each series of shares of the Terminating Fund will become referable to a corresponding series of shares of the Continuing Fund (each such series, a Replacement Series). The rights associated with each Replacement Series will be identical in all respects to the rights formerly associated with the corresponding series of shares of the Terminating Fund. Upon the Merger, for each share they held of the Terminating Fund, shareholders will receive a share of the Replacement Series. The net asset value (NAV) of each such share of the Replacement Series will be equal to the NAV per share of the corresponding series of shares of the Terminating Fund.

21. The Continuing Fund will be managed substantially similarly to the Terminating Fund. The Continuing Fund will have the same manager and portfolio manager as the Terminating Fund. The Continuing Fund will have a substantially similar management fee and redemption fee structure as the Terminating Fund. As at the Effective Date, the Continuing Fund will hold the same portfolio assets as the Terminating Fund.

22. The Continuing Fund's prospectus will state that the start date for each Replacement Series of the New Fund is based upon the start date of the corresponding series of SOCF.

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 Merger Approval is granted.

"Darren McKall"
Assistant Manager, Investment Funds Branch