York Labour Fund Inc. - s. 5.5(1)(b) of NI 81-102 Mutual Funds

Order

Headnote

Approval granted under section 5.5(1)(b) of National Instrument 81-102 Mutual Funds for sale of substantially all of the assets of a labour sponsored investment fund to another labour sponsored investment fund -- transaction does not meet criteria for pre-approved transactions in section 5.6 of NI 81-102 because not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6, 5.7.

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

AND

IN THE MATTER OF

YORK LABOUR FUND INC.

(YLFI)

 

ORDER

Background

The Ontario Securities Commission (the Commission) has received an application from YLFI pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) for approval (the Approval) for YLFI to sell substantially all of its assets to Lawrence Enterprise Fund Inc. (LEFI) on or about June 30, 2006 (the Transaction), pursuant to which shareholders of YLFI will become shareholders of LEFI.

Representations

This Order is based on the following facts represented by YLFI and Lawrence Asset Management Inc. (LAMI), the manager and adviser of YLFI and LEFI:

1. YLFI is a corporation incorporated under the Canada Business Corporations Act (the CBCA), is registered as a labour sponsored investment fund under the Community Small Business Investment Funds Act (Ontario) (the CSBIFA), is a labour sponsored venture capital corporation under the Income Tax Act (the ITA) and is a reporting issuer in Ontario. YLFI is not in default of any requirement of Ontario's securities laws.

2. LAMI is the manager and adviser of YLFI.

3. The authorized share capital of YLFI consists of an unlimited number of class A shares, an unlimited number of class B shares and an unlimited number of class C shares. As at January 24, 2006, 1,102,216 class A shares and 100 class B shares of YLFI were issued and outstanding.

4. All of the issued and outstanding class B shares of YLFI are held by the sponsor of YLFI, the Ontario Council of the International Union of Painters and Allied Trades.

5. Shares of YLFI are currently not qualified for sale to the public by means of a prospectus.

6. YLFI filed a press release dated January 5, 2006 and a material change report dated January 12, 2006 to announce the Transaction.

7. The class A shareholders of YLFI approved the Transaction at an annual and special meeting of shareholders (the Meeting), which was held on Tuesday, February 28, 2006.

8. LEFI is a corporation incorporated under the CBCA, is registered as a labour sponsored investment fund under the CSBIFA, is a labour sponsored venture capital corporation under the ITA and is a reporting issuer in Ontario and Nova Scotia. LEFI is not in default of any requirement of the securities laws of either province.

9. LAMI is the manager and adviser of LEFI.

10. The authorized share capital of LEFI consists of an unlimited number of class A shares, issuable in series and 25,000 class B shares. As at January 24, 2006, 4,683,720 class A shares and one class B share were issued and outstanding.

11. All of the issued and outstanding class B shares of LEFI are held by the sponsor of LEFI, the Canadian Air Traffic Control Association, CAW Local 5454.

12. The class A series III and IV shares are currently qualified for sale to the public by a prospectus dated December 29, 2005.

13. The class A shareholders of LEFI approved certain amendments to the constating documents of LEFI, which will allow the Transaction to occur, at an annual and special meeting of shareholders, which was held on Tuesday, February 28, 2006.

14. The Transaction is expected to be implemented on or about June 30, 2006 (the Effective Date). It is proposed that, on the Effective Date, LEFI will acquire substantially all of the assets of YLFI in exchange for class A, series V shares of LEFI, which will be automatically distributed to the class A shareholders of YLFI in exchange for their class A shares of YLFI pursuant to an exchange ratio (the Exchange Ratio) to be determined by reference to the net asset value of YLFI relative to the net asset value of LEFI as at the Effective Date, subject to such adjustments as determined by the independent directors of YLFI and LEFI.

15. It is currently expected that the net asset value of YLFI will be discounted by 15% based on the risks associated with YLFI's investment portfolio. The independent directors of YLFI believe that effecting the Transaction with LEFI on this basis will maximize value for the class A shareholders of YLFI as compared to any other interested party, particularly as a significant portion of the assets of YLFI are also held by LEFI.

16. LECG Canada Ltd. (LECG), the independent valuator which prepared the independent valuation report for the statement of investment portfolio contained in YLFI's annual financial statements for the year ended August 31, 2005, has reviewed and confirmed to the board of directors of YLFI the appropriateness of the valuation process undertaken by the independent director of YLFI in determining the Exchange Ratio, including the reasonableness of the discount that is being considered and that all material factors were considered in the valuation process.

17. The costs of effecting the Transaction will be borne by LAMI.

18. After the Transaction is completed, all of the class A shareholders of YLFI will be class A, series V shareholders of LEFI.

19. The Transaction is expected to benefit the class A shareholders of YLFI as LEFI is larger and as an investment in LEFI is expected to provide the class A shareholders of YLFI with more diversification, lower costs through economies of scale, better liquidity, an improved competitive position and better expectations for future growth. LAMI believes that the Transaction is in the best interests of YLFI.

20. The Transaction satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6(1) of NI 81-102 except that the Transaction is not a "qualifying exchange" within the meaning of section 132.2 of the ITA and is not a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA.

21. The management information circular dated February 6, 2006 provided to YLFI shareholders in connection with the Meeting disclosed the tax implications of the Transaction. Given the investment losses in YLFI, the Transaction is not expected to result in any adverse tax effect to any class A shareholder of YLFI.

22. LAMI contemplates winding up YLFI as soon as reasonably possible following the Transaction.

Order

The Commission is satisfied that it would not be prejudicial to the public interest to grant the Approval pursuant to paragraph 5.5(1)(b) of NI 81-102 for YLFI to enter into the Transaction with LEFI, provided that the Transaction is completed by no later than June 30, 2006.

Dated June 21, 2006

"Leslie Byberg"
Manager, Investment Funds
Ontario Securities Commission