National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of investment fund merger -- approval required because the merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 Investment Funds -- terminating fund and continuing fund do not have substantially similar fundamental investment objectives and fee structures -- merger is not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- securityholders provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.6, 5.7(1)(b).
November 14, 2014
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 EXCEL FUNDS MANAGEMENT INC. (the Filer or Excel) AND EXCEL CAPITAL INCOME FUND (the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for approval of the merger (the "Merger") of the Terminating Fund into Excel High Income Fund (the "Continuing Fund") (together with the Terminating Fund, the "Funds") under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (such approval, the "Approval Sought").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator ("Principal Regulator") for this application, and
(b) the Filer has provided notice that subsection 4.7(2) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
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 Filer:
1. Excel is a corporation governed by the laws of the Province of Ontario with its head office in Mississauga, Ontario.
2. Excel is the investment fund manager of the Funds and is registered as an investment fund manager in Newfoundland and Labrador, Ontario and Quebec.
3. Each of the Funds is an open-end mutual fund trust established under the laws of the Province of Ontario.
4. The Terminating Fund was structured to provide tax-efficient returns that are similar to the returns of the Continuing Fund. To do so, the Terminating Fund entered into a share basket forward agreement (the "Forward Agreement") with a Canadian Chartered Bank (the "Bank"). Under the Forward Agreement, the Terminating Fund hedges its exposure to equities by forward-selling Canadian equity securities for a price determined based on the net asset value of the units of the Continuing Fund.
5. On March 21st, 2013, the Canadian government announced, through its federal budget, that, following a transitional period ending on December 31, 2014, it would eliminate certain tax benefits in investment funds, such as the Terminating Fund, that use forward agreements to convert income to capital gains for tax purposes. As a result of the announcement, Excel closed the Terminating Fund to additional investments on April 8, 2013.
6. Series A and Series F units of the Continuing Fund are currently qualified for sale under a simplified prospectus, annual information form and fund facts each dated September 30, 2014, (the "Offering Documents"). The Series I and Series O units of the Continuing Fund are offered under exemptions from the prospectus requirement. As noted above, the Terminating Fund was closed to new investments on April 8, 2013.
7. The Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada. Neither Excel nor the Funds are in default of securities legislation in any province or territory of Canada.
8. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under the Legislation.
9. The net asset value (NAV) for each series of units of each Fund is calculated as at 4:00 p.m. Eastern Time on each day that the Toronto Stock Exchange is open for trading.
10. Given the elimination of the tax benefits for which the Terminating Fund was structured, it no longer makes sense to operate both the Terminating Fund and the Continuing Fund as the Terminating Fund will no longer provide the additional tax benefit to investors. Therefore Excel is proposing the Merger.
11. A press release and material change report in respect of the proposed Merger were filed on SEDAR on September 12, 2014.
12. As required by National Instrument 81-107 Independent Review Committee for Investment Funds ("NI 81-107"), an Independent Review Committee (the "IRC") has been appointed for the Funds. Excel presented the potential conflict of interest matters related to the proposed Merger to the IRC for a recommendation. On September 2, 2014, the IRC reviewed the potential conflict of interest matters related to the proposed Merger and provided its positive recommendation for the Merger, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for each Fund.
13. Unitholders of the Terminating Fund will continue to have the right to redeem units of the Terminating Fund at any time up to the close of business on the business day immediately before the effective date of the Merger.
14. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because: (i) the fundamental investment objective of the Continuing Fund is not, or may not be considered to be, "substantially similar" to the investment objective of the Terminating Fund; (ii) the fee structure of the Continuing Fund is not, or may not be considered to be, "substantially similar" to the fee structure of the Terminating Fund; and (iii) the Merger will not be completed as a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act (Canada) (the "Tax Act").
15. Excel has determined that it would not be appropriate to effect the Merger as a "qualifying exchange" within the meaning of section 132.2 of the Tax Act or as a tax-deferred transaction for the following reasons: (i) the Terminating Fund will shelter any net capital gains that will arise for it on the Settlement of its Forward Agreement at the time of the Merger; (ii) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; (iii) effecting the Merger on a taxable basis will have no tax impact on the Continuing Fund; and (iv) the Terminating Fund is able to settle the Forward Agreement for units of the Continuing Fund, rather than requiring the Bank to redeem its units of the Continuing Fund for cash.
16. A notice of meeting, management information circular and form of proxy in connection with the Merger were mailed to unitholders of the Terminating Fund on or about October 14, 2014 and were subsequently filed on SEDAR. The most recently filed fund facts documents for Series A and Series F of the Continuing Fund were also included in the meeting material package that was sent to unitholders of the Terminating Fund.
17. The management information circular provides unitholders of the Terminating Fund with information about (i) the investment objectives of the Funds, (ii) the fee structures of the Funds, (iii) the tax consequences of the Merger, and (iv) how unitholders of the Terminating Fund may obtain, at no cost, the most recent simplified prospectus, annual information form, fund facts document, interim and annual financial statements and management report of fund performance of the Continuing Fund. Accordingly, unitholders of the Terminating Fund will have sufficient information to make an informed decision about the Merger.
18. Excel will pay for all costs associated with the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees.
19. No sales charges will be payable by unitholders of the Funds in connection with the Merger.
20. Unitholders of the Terminating Fund approved the Merger at a special meeting held on November 13, 2014.
21. If all the requisite approvals are obtained, it is anticipated that the Merger will be implemented following the close of business on or about November 17, 2014.
22. In connection with the Merger, the units of the Continuing Fund distributed to unitholders of the Terminating Fund will be exchanged for their units in the Terminating Fund on a dollar for dollar and series by series basis, as applicable.
23. Units of the Continuing Fund received by unitholders of the Terminating Fund, as a result of the Merger, will have the same sales charge options as their previous units. For units of the Terminating Fund that were purchased under a low load option, the remaining deferred sales charge schedule will apply to the units of the Continuing Fund.
24. Following the Merger, and in any case before December 31, 2014, the Terminating Fund will be wound up.
25. The Merger is conditional on the approval of (i) the unitholders of the Terminating Fund; and (ii) the Principal Regulator. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger, which is proposed to occur following the close of business on or about November 17, 2014:
(a) Prior to effecting the Merger, the Terminating Fund will settle (the "Settlement") the Forward Agreement it has in place with the Bank by delivering its Canadian share portfolio to the Bank in exchange for units of the Continuing Fund that the Bank owns.
(b) The units of the Continuing Fund to be received by the Terminating Fund from the Bank will have an aggregate net asset value equal to the purchase price determined under the Forward Agreement.
(c) The Terminating Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to unitholders to ensure that it will not be subject to tax for its current tax year.
(d) The Continuing Fund will not assume any liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the Merger.
(e) The Terminating Fund will then distribute units of the Continuing Fund to its unitholders on the redemption of their units of the Terminating Fund.
(f) The units of the Continuing Fund distributed to unitholders of the Terminating Fund will be exchanged for their units in the Terminating Fund on a dollar for dollar and series by series basis, as applicable.
(g) Following the Merger, and in any case within 60 days thereof, the Terminating Fund will be wound up.
26. As a consequence of the Settlement and the completion of the Merger as outlined in the steps above, the units of the Continuing Fund held by the Bank will, following the Merger, be held directly by the unitholders of the Terminating Fund. As this change is not anticipated by the Filer to have any impact on the size, current holdings, investment objective or investment strategies of the Continuing Fund, the Filer does not view the Merger as a material change for the Continuing Fund.
27. The Continuing Fund is, and is expected to continue to be at all material times, a mutual fund trust under the Tax Act and, accordingly, units of the Continuing Fund are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans, locked-in retirement accounts, life income funds, locked-in retirement income funds and tax-free savings accounts.
28. Excel believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) given the elimination of the tax benefits for which the Terminating Fund was structured, it no longer makes sense to continue to operate both the Terminating Fund and the Continuing Fund as the Terminating Fund will no longer provide an additional tax benefit to investors;
(b) following the Merger, the unitholders of the Terminating Fund will continue to have the same investment exposure as they currently have (without the expense of the Forward Agreement and without the tax benefits that are being eliminated by the Canadian government) but the exposure will be through a direct investment in the Continuing Fund;
(c) unitholders of the Terminating Fund will not be subject to any increased management fees as the management fees that are charged to both the A and F series of units of the Continuing Fund are the same as the management fees that are currently charged to both the A and F series of units of the Terminating Fund. The management fees that are charged on the series I and O units will continue to be negotiated directly with the investor; and;
(d) by merging the Terminating Fund instead of terminating it, there will be a savings for the Terminating Fund in brokerage charges associated with the liquidation of the Terminating Fund's portfolio on a wind up. The unitholders of the Terminating Fund will not be responsible for the costs associated with the Merger.
Accordingly, Excel has recommended to the unitholders of the Terminating Fund that they vote for the resolutions that will authorize Excel to effect the Merger.
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 Approval Sought is granted.