Covington Group of Funds Inc. et al. - MRRS Decision

MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- approval of merger of certain labour sponsored investment funds pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Mutual Funds -- exemption granted from the requirement in National Instrument 81-106 Investment Fund Continuous Disclosure to send securityholders an information circular prepared in the form of Form 51-102F5 in connection with the merger, subject to conditions.

Rules Cited

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.

National Instrument 81-106 Investment Fund Continuous Disclosure, s. 12.2(2)(a).

December 15, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, MANITOBA,

ONTARIO, QUEBEC,NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR

(the Jurisdictions)

AND

IN THE MATTER OF THE

MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

COVINGTON GROUP OF FUNDS INC.,

NGB MANAGEMENT INC., AND

NEW MILLENNIUM VENTURE PARTNERS INC.

(collectively, the Managers)

AND

TRIAX GROWTH FUND INC.

NEW MILLENNIUM VENTURE FUND INC.,

E2 VENTURE FUND INC.,

CAPITAL FIRST VENTURE FUND INC.,

NEW GENERATION BIOTECH (BALANCED) FUND INC., AND

VENTURE PARTNERS BALANCED FUND INC.,

(collectively, the Funds)

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Managers and the Funds (together, the Filers) for a decision under the securities legislation of the Jurisdictions (the Legislation) for:

(1) approval (the Approval) of the amalgamation (the Current Merger) of the Funds pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102);

(2) an exemption (the Exemption) from paragraph 12.2(2)(a) of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) in respect of the requirement to send shareholders of the Funds an information circular in the form of a completed Form 51-102F5; and

(3) in connection with all future mergers (Future Mergers) of labour sponsored investment fund corporations managed by the Managers or any of their affiliates that are implemented within one year of the date of this decision, for:

(i) an exemption from paragraph 12.2(2)(a) of NI 81-106 in respect of the requirement to send shareholders of Terminating Funds an information circular in the form of a completed Form 51-102F5 (the Future Exemption); and

(ii) approval pursuant to paragraph 5.5(1)(b) of NI 81-102 to not send:

(a) a current prospectus of the Continuing Fund; and

(b) annual and interim financial statements of the Continuing Fund, to securityholders of the Terminating Funds.

(the approval requested in (3)(ii) above is referred to as the Future Approval).

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision. The following additional terms shall have the following meanings:

"Complete Circular" means the information circular prepared in accordance with Form 51-102F5 -- Information Circular of National nstrument 51-102 -- Continuous Disclosure Obligations;

"Continuing Fund" means the fund that continues after an applicable Merger and includes the New Fund;

"Equity Shares" means Class A Shares, Series II of New Millennium Venture Fund Inc. and all Class A Shares of Triax Growth Fund Inc. and E2 Venture Fund Inc.;

"Financial Information" means the financial statement disclosure for the Terminating Funds and the Continuing Fund in an applicable Merger that s required to be included in the Complete Circular, as prescribed by Item 4.2;

"Item 14.2" means Item 14.2 in Form 51-102F5 -- Information Circular of National Instrument 51-102 -- Continuous Disclosure Obligations;

"Merger" means the Current Merger or any Future Merger;

"New Fund" means Covington Venture Fund Inc., the fund that will exist following the Current Merger;

"Ontario Funds" means the Funds other than the Triax Growth Fund Inc.;

"Tailored Circular" means the information circular prepared in the form of a completed Form 51-102F5, except that with respect to Item 14.2:

(a) the Tailored Circular will describe the Merger and provide a summary of the characteristics of the Continuing Fund, and will provide information sufficient to enable a reasonable securityholder to form a reasoned judgment concerning the nature and effect of the Merger and the ontinuing Fund, including: (i) a description of the Continuing Fund; (ii) the investment objectives and strategy of the Continuing Fund; (iii) the risk factors associated with an investment in the Continuing Fund; (iv) the identity of the manager and the principal service providers of the Continuing Fund; (v) subscription, valuation and redemption information; (vi) a description of fees and expenses; (vii) a description of dealer compensation; (viii) an outline of the income tax considerations; (ix) nformation about an investor's statutory rights; and (x) a pro forma balance sheet of the Continuing Fund; and

(b) the Tailored Circular will not include the financial statement information of the Terminating Funds or the Continuing Fund as specified by Item 14.2 but instead each of the Terminating Funds and the Continuing Fund will post the Financial Information on SEDAR and make the Financial Information available on the Terminating Funds' website and the Continuing Fund's website, as applicable, and the Managers (or their affiliates, as applicable) will provide a printed copy of the Financial Information promptly and at no cost to any shareholder who requests it from any of the Managers (or their affiliates, as applicable) via a tollfree telephone number.

"Tax Act" means the Income Tax Act (Canada);

"TGF" means Triax Growth Fund Inc.; and

"Terminating Funds" means the Funds and any applicable funds managed by the Managers or their affiliates to be reorganized into a Continuing Fund pursuant to a Future Merger.

Representations

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

The Filers

1. Each of the Managers is a corporation incorporated under the laws of Ontario and is a directly or indirectly wholly-owned subsidiary of AMG Canada Inc., a subsidiary of Affiliated Managers Group, Inc., a US public company based in Boston, Massachusetts and incorporated pursuant to the laws of Delaware. The registered office of the Managers is located in Ontario.

2. TGF is incorporated under the Canada Business Corporations Act. Each of the Ontario Funds is incorporated under the Business Corporations Act (Ontario). Each of the Ontario Funds will be continued under the Canada Business Corporations Act a few days before the Current Merger to enable them to amalgamate with TGF.

3. Each of the Ontario Funds is a reporting issuer under applicable securities legislation of Ontario and is not on the public list of defaulting reporting issuers maintained under the applicable securities legislation of Ontario. TGF is a reporting issuer in every province of Canada except Saskatchewan and is not on the public list of defaulting reporting issuers maintained under the applicable securities legislation of those jurisdictions.

4. Each of the Funds follows the standard investment restrictions and practices applicable to labour sponsored investment funds in their relevant governing legislation.

5. The net asset value for each series of Class A Shares of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.

The Current Merger

6. Each of the Funds will be amalgamated under the Canada Business Corporations Act to form the New Fund on the effective date of the Current Merger. The New Fund will, by operation of law, assume all of the assets and liabilities of the Funds, including the investment portfolio of each Fund. The Managers intend to implement the Current Merger on or about December 15, 2005.

7. The value of each Fund's portfolio and other assets will be determined at the close of business on the day before the effective date of the Current Merger in accordance with the constating documents of each Fund.

8. The Class A shareholders of the Funds will be entitled to receive, pursuant to the terms of the amalgamation agreement, Class A shares of the New Fund having an equivalent net asset value to the Class A shares in the Fund(s) amalgamated out of existence in exchange for their Class A shares in the Fund(s). The Class B shareholder of the Funds, being the Canadian Federal Pilots Association, will receive 600 Class B shares in the capital of the New Fund.

9. Seven different series of Class A Shares of the New Fund will be created. There will be three series of Class A Shares of the New Fund into which all of the Equity Shares are to be exchanged. Those three series will differ based on the sales commissions paid at the time the shares were originally issued and whether or not such commissions were amortized. There will be four series of Class A Shares into which one of the Class A Shares of Venture Partners Balanced Fund Inc., the Class A Shares of Capital First Venture Fund Inc., the Class A Shares, Series I of New Millennium Venture Fund Inc. or the Class A Shares, Series I of New Generation Biotech (Balanced) Fund Inc. (collectively, the Balanced Shares) are to be exchanged. Each series into which Balanced Shares are exchanged will have substantially similar investment objectives as the Balanced Shares for which they are exchanged.

10. No sales charges will be payable in connection with the Current Merger.

11. The portfolios and other assets of the Funds to be acquired by the New Fund may be acquired by the New Fund in compliance with the investment restrictions and practices applicable to labour sponsored investment funds in the Jurisdictions.

12. The portfolios and other assets of the Funds to be assumed by the New Fund are currently, or will be, acceptable, on or prior to the effective date of the Current Merger, to the portfolio advisers of the New Fund and are or will be consistent with the investment objectives of the New Fund. The investment objectives of the New Fund in respect of the Equity Shares will be broader than the investment objectives of both New Millennium Venture Fund Inc. and E2 Venture Fund Inc. since all sector specific restrictions will be removed.

13. The Current Merger will be a tax deferred transaction within the meaning of section 87(1) of the Income Tax Act (Canada).

14. Shareholders of the Funds will continue to have the right to redeem securities of the applicable Fund for cash at any time up to the close of business on the business day immediately prior to the effective date of the Current Merger.

15. The Funds have complied with Part 11 of NI 81-106 in connection with the making of the decision to proceed with the Current Merger by the board of directors of each Fund.

16. Shareholders of the Funds will be asked to approve the continuance of the Funds under the CBCA, where applicable, and the Current Merger at the adjourned meeting (the Shareholder Meeting) scheduled to be held on December 13, 2005. For those series of shares of the Funds that will be subjected to a change in investment objective due to the removal of sector specific investment restrictions, the approval of such change will be sought. All shareholders will be asked to approve the new fee structure for the New Fund, their acceptance of the change in the management fees, if applicable, and their acceptance of the proposed tax treatment. The approval of the shareholders will generally be sought on the basis of class votes, however Class A shareholders of New Millennium Venture Fund Inc. will be entitled to vote by series due to the fact that the investment objectives of holders of Series I shares will not change and the investment objective for holders of Series II shares will change.

17. If approved, the name of the New Fund will be Covington Venture Fund Inc.

18. Each Fund whose shareholders approve the amalgamation will, subject to the prior approval of the board of directors of the applicable Fund, amalgamate to form the New Fund as expeditiously as possible following shareholder approval, which amalgamation is currently anticipated to occur on or about December 15, 2005 and the New Fund will continue as publicly offered labour-sponsored investment fund and labour sponsored venture capital corporation after receiving all necessary approvals to do so.

19. The Current Merger is not contingent upon all of the Funds proceeding with the Current Merger and two or more may proceed even if one or more of the others elects not to proceed.

20. The Managers will pay for the costs and expenses associated with the Current Merger. These costs and expenses consist mainly of legal, accounting, proxy solicitation, printing, mailing and regulatory fees.

21. Approval of the Current Merger is required because the Current Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:

(a) the fundamental investment objectives of certain of the Funds and the New Fund are not, or may be considered not to be "substantially similar";

(b) the fee structure for the Equity Shares is not, or may not be considered to be "substantially similar";

(c) the New Fund does not have a current prospectus;

(d) the materials sent to shareholders of the Funds in connection with the Shareholder Meeting do not include a current prospectus and annual and interim financial statements for the New Fund; and

(e) an annual information form for the New Fund will not be available to shareholders.

Shareholder Disclosure

22. In connection with the Shareholder Meeting, the Managers will not send shareholders of the Funds a current prospectus and the most recent annual and interim financial statements that have been made public for the New Fund since such documents do not yet exist. As well, the Managers will not make available to shareholders an annual information form for the New Fund since such a document does not yet exist.

23. Instead, the Managers will mail shareholders a notice of meeting, a proxy, and a Tailored Circular. As well, each of the Funds will post its Financial Information on SEDAR and make the Financial Information available on the Funds' website, and the Managers will provide a printed copy of the Financial Information promptly and at no cost to any shareholder who requests it from any of the Managers via mail, e-mail or a toll-free telephone number.

24. In addition to mailing the Tailored Circular to shareholders, the Managers will also:

(a) prepare the Complete Circular, which will contain prospectus-level disclosure relating to the New Fund, the most recent audited annual financial statements of the Funds and a pro forma balance sheet of the New Fund; and

(b) file the Complete Circular on SEDAR, make the Complete Circular available on the Funds' website and provide a printed copy of the Complete Circular promptly and at no cost to any shareholder who requests it by contacting one of the Managers via a toll-free telephone number.

25. Delivering the Tailored Circular and making available the Complete Circular upon shareholder request will result in cost savings of $125,000 to $150,000 associated with the printing and mailing of shareholder meeting materials.

26. Shareholders who receive with the information contained in the Tailored Circular will not be prejudiced by not receiving the added disclosure contained in the Complete Circular as they will have access to more detailed information at no cost if they wish to receive it.

Decision

Each of the Decision Makers is satisfied that the test contained in the NI 81-102 and NI 81-106 that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under NI 81-102 and NI 81-106 is that the Approval, the Exemption, the Future Approval and the Future Exemption are granted provided that:

1) the Managers (or their applicable affiliates in the case of a Future Merger) file a Complete Circular on SEDAR, make the Complete Circular available on the Terminating Funds' website and provide a printed copy of the Complete Circular promptly and at no cost to any shareholder who requests it by contacting one of the Managers (or their applicable affiliates in the case of a Future Merger) via mail, e-mail or a toll-free telephone number;

2) the Managers (or their applicable affiliates in the case of a Future Merger) mail shareholders of the Terminating Funds the Tailored Circular, and the Tailored Circular:

(a) prominently discloses in the first few pages of the Tailored Circular and in an easily identifiable location in the Tailored Circular that the shareholders of the Terminating Funds can obtain the Complete Circular and the Financial Information (if such information exists for the Continuing Fund) by accessing the SEDAR website at www.sedar.com, by accessing the Terminating Funds' website and the Continuing Fund's website, as applicable, or by calling any of the Managers (or their applicable affiliates in the case of a Future Merger) at a toll-free telephone number; and

(b) prominently discloses in the first few pages of the Tailored Circular and in an easily identifiable location in the Tailored Circular where the information about the applicable Continuing Fund can be found in the Tailored Circular;

3) each of the Terminating Funds and Continuing Funds posts its Financial Information (if such information exists for the Continuing Fund) on SEDAR and makes the Financial Information (if such information exists for the Continuing Fund) available on their website, and the Managers (or their applicable affiliates in the case of a Future Merger) provide a printed copy of the Financial Information (if such information exists for the Continuing Fund) promptly and at no cost to any shareholder who requests it from any of the Managers (or their applicable affiliates in the case of a Future Merger) via a toll-free telephone number;

4) the Terminating Funds and Continuing Fund (if it has financial statements) in each applicable Merger has an unqualified audit report in respect of their last completed financial period; and

5) all other requirements of NI 81-102 with respect to the implementation of a Merger are complied with.

"Susan Silma"
Director, Investment Funds Branch
Ontario Securities Commission