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 -- 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).
December 9, 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 NEXT EDGE CAPITAL CORP. (the Filer) AND IN THE MATTER OF NEXT EDGE ALPHA FUND (the Terminating Fund) AND IN THE MATTER OF NEXT EDGE AHL FUND (the Continuing Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund and the Continuing Fund (collectively, the Funds) for approval pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) in connection with the merger (the Merger) of the Funds as the Filer has concluded the pre-approval under section 5.6 of NI 81-102 is not available because the Merger will not be a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the ITA) or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA as required under section 5.6(1)(b) of NI 81-102 (the Requested 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 Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (collectively, with Ontario, the Jurisdictions).
Unless expressly defined herein, terms in this application have the respective meanings given to them in NI 81-102, National Instrument 14-101 Definitions and MI 11-102.
The decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the Canada Business Corporations Act. The Filer's head office is located in Toronto, Ontario.
2. The Filer is registered as an Investment Fund Manager in Ontario, Québec and Newfoundland and Labrador, as an adviser in the category of Portfolio Manager in Ontario and Alberta and as a dealer in the category of Exempt Market Dealer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia.
3. The Filer's head office is located in Toronto, Ontario.
4. None of the Filer, the Terminating Fund or the Continuing Fund is in default of any securities legislation in any of the Jurisdictions.
5. Each Fund is a mutual fund to which NI 81-102, National Instrument 81-106 -- Investment Fund Continuous Disclosure (NI 81-106) and National Instrument 81-107 -- Independent Review Committee for Investment Funds (NI 81-107) applies. Each Fund is also a commodity pool as such term is defined in National Instrument 81-104 Commodity Pools (NI 81-104), in that each Fund has adopted fundamental investment objectives that permit each Fund to gain exposure to or use or invest in specified derivatives in a manner that is not permitted under NI 81-102.
6. The Terminating Fund is a reporting issuer in each of the Jurisdictions and the Terminating Fund does not have a current prospectus and is not currently in continuous distribution.
7. The Continuing Fund is a reporting issuer in each of the Jurisdictions and the units of the Continuing Fund are qualified for distribution in each of the Jurisdictions under the current prospectus of the Continuing Fund.
8. Units of each Fund are "qualified investments" under the ITA for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered disability savings plans, registered education savings plans and tax-free savings accounts.
9. Each Fund's investment objective is to provide investors with the opportunity to realize capital appreciation through investment returns that have a low correlation to traditional forms of stock and bond securities. Accordingly, each Fund is intended to provide added diversification and enhance the risk/reward profile of conventional investment portfolios.
10. The Continuing Fund has been created to obtain exposure to the returns of a diversified portfolio of financial instruments across a range of global markets including, without limitation, stocks, bonds, currencies, short-term interest rates, energy, metals and agricultural commodities (the Underlying Assets) managed by the Investment Manager using a predominantly trend-following trading program.
11. To pursue its investment objectives, the Continuing Fund obtains exposure to the Underlying Assets acquired and maintained by the Man AHL DP Limited (the Bottom Fund), a company incorporated with limited liability in the Cayman Islands, by investing in a class or series of redeemable non-voting participating shares (the AHL DP Shares) issued by the Bottom Fund.
12. The Terminating Fund is authorized to issue an unlimited number of classes of transferable, redeemable units of each class, of which only Class A Units and Class F Units are issued and outstanding. All classes of units of the Terminating Fund have the same investment objective, strategy and restrictions but differ in respect of one or more of their features, such as management fees, expenses or commissions.
13. The Continuing Fund is authorized to issue an unlimited number of classes of transferable, redeemable units of each class, including two classes designated as Class J Units and the Class K Units. All of the classes of units of the Continuing Fund have the same investment objective, strategy and restrictions but differ in respect of one or more of their features, such as management fees, expenses or commissions.
14. The net asset value per unit for each class of units of each Fund is calculated on Monday of each week, or, if not a business day, on the following business day (each a Valuation Date). The valuation procedures of the Funds are substantially similar.
15. Units of each Fund are redeemable on a weekly basis at a price equal to the net asset value per unit applicable to the class of units (the Redemption Price) on each Valuation Date upon which the units are redeemed. Notice of redemption must be received on the third business day immediately preceding a Valuation Date in order to receive the Redemption Price in effect as at the next Valuation Date.
16. The fundamental investment objectives and fee structure of the Funds are substantially similar.
17. The Terminating Fund obtained the decision dated May 30, 2014 (the Prior Exemptive Relief), which provided the Terminating Fund with certain exemptions to permit the Terminating Fund to invest in a class or series of participating shares of the Bottom Fund. The conditions attached to the Prior Exemptive Relief provided that, among other things, such exemptive relief will expire on the earlier of December 31, 2014 or at the time of a merger of the Terminating Fund with the Continuing Fund.
18. As a result of the conditions imposed under the Prior Exemptive Relief, which will expire on December 31, 2014, the Filer considered a number of different options for the Terminating Fund, including a wind-up, and determined that the Merger would be in the best interests of the unitholders of the Terminating Fund.
19. A press release in respect of the proposed Merger was filed on SEDAR on September 26, 2014.
20. The value of the Terminating Fund's assets will be determined as at the close of business on the effective date of the Merger.
21. The Continuing Fund will acquire the assets, which may consist substantially of cash but may include AHL DP Shares, of the Terminating Fund, other than such assets as are required to satisfy the liabilities of the Terminating Fund, in exchange for Class J Units and Class K Units of the Continuing Fund.
22. The Continuing Fund will not assume liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger.
23. There will be no sales charges payable by the unitholders of the Terminating Fund in connection with the Merger.
24. The Class J Units and Class K Units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable net asset value per unit as of the effective date of the Merger.
25. Immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund in exchange for their units of the Terminating Fund, with holders of Class A Units of the Terminating Fund receiving Class J Units of the Continuing Fund and holders of Class A Units of the Terminating Fund receiving Class K Units of the Continuing Fund.
26. The Class J Units and Class K Units of the Continuing Fund received by unitholders of the Terminating Fund as a result of the Merger will have the same sales charge option and, for units purchased under a low load option, remaining deferred sales charge schedule as their units in the Terminating Fund.
27. The Terminating Fund will be wound up as soon as reasonably possible following the Merger, but in any event not later than December 31, 2014 in accordance with the Prior Exemptive Relief, and the Continuing Fund will continue as a publicly offered open-end mutual fund existing under the laws of Ontario.
28. The Filer has concluded that the Merger will not constitute a material change for the Continuing Fund, as the net asset value of the Continuing Fund is significantly larger than the net asset value of the Terminating Fund.
29. Subject to receipt of the necessary regulatory approval and the outcome of any special unitholder votes with respect to the proposed Merger, the Merger is expected to become effective on or about December 15, 2014.
30. The Filer 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 ITA or as a tax-deferred transaction for the following reasons: (i) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; (ii) no unitholders of the Terminating Fund will pay tax as a result of effecting the Merger on a taxable basis; and (iii) effecting the Merger on a taxable basis will have no tax impact on the Continuing Fund.
31. If all necessary approvals required for the Merger in respect of the Terminating Fund are not obtained, the Filer will consider other alternatives for the Terminating Fund, including wind-up, in accordance with the declaration of trust governing the Terminating Fund and applicable securities laws.
32. A notice of meeting, a management information circular dated October 30, 2014 (the Circular), a form of proxy and a copy of the current prospectus of the Continuing Fund was mailed to the unitholders of the Terminating Fund in accordance with applicable securities laws and were subsequently filed on SEDAR on November 5, 2014. The Circular contains a description of the proposed Merger, information about the Terminating Fund and the Continuing Fund and income tax considerations for unitholders of the Terminating Fund. The Circular discloses that unitholders of the Terminating Fund may obtain in respect of the Continuing Fund, at no cost, copies of the current prospectus, the most recent annual and interim financial statements, and the most recent management report on fund performance of the Continuing Fund that have been made public by contacting the Filer either accessing the Filer's website or the System for Electronic Document Analysis and Retrieval (SEDAR).
33. At the special meeting of unitholders of the Fund held on December 5, 2014, unitholders of the Terminating Fund unanimously passed the special resolution approving the Merger, as required pursuant to section 5.1(f) of NI 81-102.
34. The Filer will pay for the costs and expenses associated with the Merger, including the cost of holding the meeting in connection with the Merger and of soliciting proxies, including costs of mailing the Circular and accompanying materials. The Funds will bear none of the costs and expenses associated with the Merger.
35. Pursuant to NI 81-107, the terms of the Merger were presented to the independent review committee (the Independent Review Committee) of the Funds for review and consideration. After considering the potential conflict of interest matter related to the Merger, the independent review committee provided their approval that the Merger would achieve a fair and reasonable result for the Funds, if approved by the Terminating Fund's unitholders.
36. Units of the Terminating Fund will continue to be redeemable by unitholders on a weekly basis up to the business day immediately prior to the effective date of the Merger, provided that notice of redemption must be received on the third business day immediately preceding a Valuation Date in order to receive the Redemption Price in effect as at the next Valuation Date.
37. The cash and any other assets of the Terminating Fund acquired by the Continuing Fund in connection with the Merger will be acquired and invested in accordance with the investment objectives, strategies, and restrictions of the Continuing Fund and NI 81-102, except as otherwise permitted by NI 81-104 and subject to receipt of any exemptions therefrom obtained by the Continuing Fund.
38. The Funds have complied with Part 11 of NI 81-106 in connection with the making of the decision to proceed with the Merger.
39. The Filer 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 be able to benefit from a continued investment which most closely corresponds to their original investment decision since the portfolio composition and asset allocation of both Funds are substantially the same (without the expense of the Forward Agreement and without the tax benefits that are being eliminated by the Canadian government) and unitholders will continue to have substantially the same investment exposure as they currently have;
(c) unitholders of the Terminating Fund who continue as unitholders of the Continuing Fund will benefit from lower aggregate management fees than they currently pay as unitholders of the Terminating Fund, and the unitholders of the Terminating Fund will not be responsible for the costs associated with the Merger;
(d) by merging the Terminating Fund instead of terminating it, there is expected to be a benefit for the Continuing Fund from a small reduction of its management expense ratio as the fixed portion of its administrative and regulatory costs will be spread over a larger unitholder and asset base;
(e) investors in the Terminating Fund received prior notice of the Merger and may redeem their units prior to the Merger in compliance with the redemption policies of the Terminating Fund should they wish to do so, and will continue to have the right to redeem their units until the close of business on the last redemption date before the Merger expected to be December 15, 2014;
(f) the Continuing Fund, after the Merger and the addition of the Terminating Fund's assets to the portfolio of the Continuing Fund, will have a larger portfolio and will have the potential to have an even larger portfolio, as the Continuing Fund will be in continuous distribution, and is expected to offer improved portfolio diversification to unitholders;
(g) holders of units of the Terminating Fund will acquire the Continuing Fund units, which will benefit from the same rights with respect to weekly purchases and redemptions; and
(h) it is not expected that the Merger will give rise to material adverse tax implications for holders of units of the Terminating Fund.
Securities Law Requirements for a Pre-Approved Transaction
40. Under section 5.6 of NI 81-102, approval of the Merger by the regulator is not required if all of the applicable criteria for pre-approval listed in paragraphs 5.6(1)(a) through (k) are satisfied.
41. The Merger will satisfy the applicable requirements of paragraphs 5.6(1)(a) through (k) of NI 81-102 with the exception of paragraph 5.6(1)(b) as the Merger will not be "qualifying exchange".
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 is that the Requested Approval is granted.