Lawrence Asset Management Inc. - MRRS Decision

MRRS Decision

Headnote

One time trade of securities between mutual funds in the same family of funds that are not reporting issuers to implement fund merger is exempted from the conflict of interest restrictions in section 118(2)(b). Commission extremely reluctant to approve requested relief since costs of the merger were to be borne by the unitholders and this was not disclosed in any materials. Order was approved based on fact that in the past, there was no requirement that managers bear the cost of mergers in the context of entities not subject to NI 81-102 and no notice that staff would generally insist on this as a pre-condition to recommending in favour of discretionary relief in connection with such mergers.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 118(2)(b), 21(2)(a)(ii).

December 30, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA, SASKATCHEWAN, ONTARIO,

NEW BRUNSWICK, NOVA SCOTIA, AND

NEWFOUNDLAND AND LABRADOR

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

LAWRENCE PAYOUT RATIO TRUST

LAWRENCE PAYOUT RATIO TRUST II and

LAWRENCE CONSERVATIVE PAYOUT RATIO TRUST

(collectively, the "Trusts")

AND

LAWRENCE ASSET MANAGEMENT INC.

(the "Filer")

 

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 Filer, on behalf of the Trusts for a decision under the securities legislation of the Jurisdictions (the "Legislation") granting relief from the restriction in the Legislation which prohibits a portfolio manager from purchasing or selling the securities of any issuer from or to the account of a responsible person or any associate of a responsible person in order to implement the mergers of each of Lawrence Payout Ratio Trust and Lawrence Conservative Payout Ratio Trust into Lawrence Payout Ratio Trust II (individually a "Merger" and collectively, the "Mergers") (the "Requested Relief").

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.

Representations

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

1. The Filer intends to merge the Trusts identified below under "Terminating Trust" (individually, a "Terminating Trust" and collectively, the "Terminating Trusts") into Lawrence Payout Ratio Trust II (the "Continuing Trust") as set out below:

Terminating Trust
Continuing Trust
 
Lawrence Payout Ratio Trust
Lawrence Payout Ratio Trust II
 
Lawrence Conservative Payout Ratio Trust
Lawrence Payout Ratio Trust II

(individually, a "Merger" and collectively, the "Mergers").

2. At the time that the Merger steps are effected, the Filer will be the "portfolio manager" of each Trust for purposes of the Legislation and therefore will be considered a "responsible person".

3. The transfer of the investment portfolio of each Terminating Trust to the Continuing Trust by operation of the Mergers may be considered a sale of securities caused by the Filer from the Terminating Trust to the account of an associate of the Filer, contrary to the Legislation.

4. The Continuing Trust is an "associate" of the Filer due to the fact that the Filer is its trustee.

5. Each Trust is a "non-redeemable investment fund" as defined in the Legislation and is not a mutual fund for the purposes of the Legislation.

6. Each Trust was established as a trust under the laws of the Province of Ontario and the Filer is the trustee and manager of each Trust.

7. Lawrence Payout Ratio Trust ("LPRT") offered its units in all of the Provinces of Canada pursuant to a final prospectus dated November 29, 2004 (the "LPRT Prospectus") and closed its initial public offering on December 16, 2004.

8. Lawrence Conservative Payout Ratio Trust ("LCPRT") offered its units in all of the Provinces of Canada pursuant to a final prospectus dated February 25, 2005 (the "LCPRT Prospectus") and closed its initial public offering on March 17, 2005.

9. Lawrence Payout Ratio Trust II ("LPRTII") offered its units in all of the Provinces of Canada pursuant to a final prospectus dated August 30, 2005 (the "LPRTII Prospectus" and together with the LPRT Prospectus and LCPRT Prospectus, the "Prospectuses") and closed its initial public offering on September 19, 2005.

10. Unitholders of the Trusts will be asked to approve the Mergers at special meetings of unitholders to be held on December 15, 2005 (the "Meetings"). In connection with the Meetings, the Filer is sending to the unitholders of each Trust a management information circular dated November 15, 2005 and a related form of proxy (collectively, the "Meeting Materials"). If unitholders approve the Mergers, it is proposed that each Merger will occur on or about December 31, 2005 (the "Effective Date"), subject to regulatory approvals, where necessary.

11. The Mergers are expected to take place using the following steps:

(a) The declaration of trust for LPRTII (being the Continuing Trust) will be amended as required in order to implement the Mergers.

(b) The declaration of trust for LPRT will be amended as required in order to implement the Merger.

(c) The declaration of trust for LCPRT will be amended as required in order to implement the Merger.

(d) The LPRT exchange ratio will be calculated based on the relative net asset value of LPRT and LPRTII as at the close of trading on the Toronto Stock Exchange (the "TSX") on the day prior to the Effective Date.

(e) The LCPRT exchange ratio will be calculated based on the relative net asset value of LCPRT and LPRTII as at the close of trading on the TSX on the day prior to the Effective Date.

(f) On the Effective Date, LPRT will transfer all of its property and liabilities to LPRTII in consideration for the issue to LPRT of an appropriate number of LPRTII units based on the LPRT exchange ratio.

(g) On the Effective Date, LCPRT will transfer all of its property and liabilities to LPRTII in consideration for the issue to LCPRT of an appropriate number of LPRTII units based on the LCPRT exchange ratio.

(h) On the Effective Date, all of the LPRT units will be automatically redeemed and each LPRT unitholder will receive Continuing Trust units equal in number to the number of LPRT units held by such LPRT unitholder multiplied by the LPRT exchange ratio.

(i) On the Effective Date, all of the LCPRT units will be automatically redeemed and each LCPRT unitholder will receive Continuing Trust units equal in number to the number of LCPRT units held by such LCPRT unitholder multiplied by the LCPRT exchange ratio.

(j) All tax elections and tax returns in connection with the Mergers will be prepared and filed by each of LPRT, LCPRT and LPRTII.

(k) Following the Mergers, LPRTII will change its name to "Lawrence Payout Ratio Trust" and will continue trading under the symbol "LPU.UN".

12. The Filer will file a press release and material change report to announce the Mergers.

13. The Mergers are being proposed to enable LPRT unitholders, LCPRT unitholders and LPRTII unitholders to hold Continuing Trust units which will have a market capitalization, based on current prices and units outstanding, of over $263,162,647 million. This is expected to reduce the operating costs of the Continuing Trust on a per unit basis and increase ongoing liquidity of the Continuing Trust units on the TSX. These two objectives have been brought into greater relief by the receipt in November 2005 of requests for redemption by unitholders of LPRT of 4,754,938 units representing 37% of LPRT's capitalization. Under a merged trust, administrative cost savings will be realized through eliminating the duplication of certain third party costs including transfer agent fees, audit fees, legal fees, exchange listing fees, printing fees and mailing and reporting costs. Any net cost savings will benefit Continuing Trust unitholders.

14. If approved, the Mergers will be effected on a "qualifying exchange" basis which provides a tax-deferred "rollover" to unitholders of the Terminating Trusts. This will allow LPRT and LCPRT unitholders to defer any capital gain on the exchange of their units until they sell or redeem the LPRT units received under the exchange.

15. The Trusts have substantially similar investment objectives, fee structures and valuation procedures.

16. The assets of each Terminating Trust will be transferred to the Continuing Trust in accordance with the steps described above. Because the transfer of assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the assets received by the Continuing Trust, it is the Filer's opinion that there will be no conflict of interest for the Filer to effect the Mergers.

17. In the opinion of the Filer, the Mergers will not adversely affect unitholders of the relevant Terminating Trust or the Continuing Trust and will in fact be in the best interests of unitholders of each of the Trusts.

18. In the absence of this order, the Filer would be prohibited from purchasing and selling the securities of the Terminating Trusts in connection with the Mergers.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met. The decision of the Decision Makers under the Legislation is that the Requested Relief is granted.

"Harold Hands"
Commissioner
Ontario Securities Commission
 
"Susan Wolburgh-Jenah"
Commissioner
Ontario Securities Commission