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Franklin Templeton Investments Corp. et al.
Headnote
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund merger -- approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- the merger is not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act, and investment objectives are not similar -- merger to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, paragraph 5.5(1)(b) and subsection 19.1.
February 17, 2016
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 FRANKLIN TEMPLETON INVESTMENTS CORP. (the Filer) AND FRANKLIN BISSETT CANADIAN HIGH DIVIDEND FUND FRANKLIN BISSETT CANADIAN HIGH DIVIDEND CORPORATE CLASS (the Terminating Funds) AND FRANKLIN BISSETT CANADIAN DIVIDEND FUND FRANKLIN BISSETT CANADIAN DIVIDEND CORPORATE CLASS (the Continuing Funds, and collectively with the Terminating Funds, the Fund(s))
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the Corporate Class Merger and the Trust Fund Merger (each defined below, and collectively, the Mergers) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (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 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:
Corporate Class Merger means the merger of Franklin Bissett Canadian High Dividend Corporate Class into Franklin Bissett Canadian Dividend Corporate Class;
FTCCL means Franklin Templeton Corporate Class Ltd;
IRC means the independent review committee for the Funds; and
Trust Fund Merger means the merger of Franklin Bissett Canadian High Dividend Fund into Franklin Bissett Canadian Dividend Fund.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation existing under the laws of Ontario having its registered head office in Toronto, Ontario.
2. In the Jurisdiction, the Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and mutual fund dealer. In each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Quebec, Saskatchewan and Yukon, the Filer is registered as a portfolio manager, exempt market dealer and mutual fund dealer. And in each of Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia and Quebec, the Filer is also registered as an investment fund manager.
3. The Filer is the investment fund manager of each of the Funds.
The Funds
4. FTCCL is an open end mutual fund corporation incorporated under the laws of Alberta on June 1, 2001. Each of Franklin Bissett Canadian High Dividend Corporate Class and Franklin Bissett Canadian Dividend Corporate Class is a separate class of special shares of FTCCL.
5. Each of Franklin Bissett Canadian High Dividend Fund and Franklin Bissett Canadian Dividend Fund is a trust established under the laws of Ontario.
6. Securities of the Funds are currently qualified for sale by a simplified prospectus, annual information form and fund facts dated May 28, 2015, which have been receipted in the Jurisdictions.
7. Each of the Funds is a reporting issuer in the Jurisdictions.
8. Neither the Filer nor any Fund is in default under the securities legislation in the Jurisdictions.
9. Other than circumstances in which the securities regulatory authorities of the Jurisdictions have expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.
Reason for Approval Sought
10. Regulatory approval of the Mergers is required because the Mergers do not satisfy the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 as follows:
(a) a reasonable person would not consider the Terminating Funds and their corresponding Continuing Funds to have substantially similar investment objectives, and
(b) the Trust Fund Merger will not be "qualifying exchange" within the meaning of the Income Tax Act (Canada) (the Tax Act).
11. Franklin Bissett Canadian High Dividend Fund, Franklin Bissett Canadian High Dividend Corporate Class, Franklin Bissett Canadian Dividend Fund and Franklin Bissett Canadian Dividend Corporate Class each invests, directly or indirectly, in income producing Canadian securities, which include common shares, income trusts and preferred shares. Each of Franklin Bissett Canadian High Dividend Fund and Franklin Bissett Canadian High Dividend Corporate Class has an investment objective of a high level of after tax cash flow by investing primarily in income producing Canadian securities including common shares, income trusts, preferred shares and fixed income instruments, but Franklin Bissett Canadian High Dividend Corporate Class seeks to achieve its investment objective indirectly by investing substantially all of its assets in units of Franklin Bissett Canadian High Dividend Fund while Franklin Bissett Canadian High Dividend Fund invests directly in such securities. The investment objective of each of Franklin Bissett Canadian Dividend Fund and Franklin Bissett Canadian Dividend Corporate Class is long-term capital appreciation by investing primarily in dividend paying or income producing Canadian securities, including common shares income trust units and preferred shares, but Franklin Bissett Canadian Dividend Corporate Class seeks to achieve its investment objective by investing substantially all of its assets in units of Franklin Bissett Canadian Dividend Fund while Franklin Bissett Canadian Dividend Fund invests directly in such securities. As a result, relative to its respective Terminating Fund, each Continuing Fund: (1) places more emphasis on capital appreciation, while still paying income; (2) tends to favour dividend-paying over income-producing investments; and (3) may hold a smaller proportion of its net assets in fixed income investments. Because of the differences in the Terminating Funds and Continuing Funds outlined above, a reasonable person may consider the investment objectives of the Terminating Funds and Continuing Funds to be less than substantially similar.
12. The Trust Fund Merger is not being carried out on a tax-deferred basis to permit the accumulated unused losses in the Continuing Fund to be carried forward to shelter possible future gains within the Continuing Fund following completion of the Trust Fund Merger. The accumulated losses in the Continuing Fund consist primarily of unrealized losses that would be required to be recognized (and would subsequently expire unused) as a result of a tax-deferred merger.
Approval of the Mergers
13. Securityholders of the Funds will be asked to approve the relevant Mergers at special meetings expected to be held on or about April 8, 2016. The securityholders in Franklin Bissett Canadian Dividend Fund are being asked to vote because the transaction would be a material change to that Fund. The securityholders in Franklin Bissett Canadian Dividend Corporate Class are being asked to vote as required under the Business Corporations Act (Alberta) (the ABCA).
14. The Filer, as the sole Class A common shareholder of FTCCL will also approve the Corporate Class Merger, as required under the ABCA.
15. As detailed on page 2 of the management information circular, the Corporate Class Merger is contingent on the Trust Fund Merger and the Trust Fund Merger is contingent on the Corporate Class Merger.
16. Subject to receipt of securityholder approval and the Approval Sought, the Mergers are expected to occur on or about April 22, 2016 (the Effective Date).
Merger Steps
17. It is proposed that the following steps will be carried out to effect the Mergers:
(a) In respect of the Trust Fund Merger:
(i) Prior to the Effective Date, certain of the securities in the portfolio of the Terminating Fund may be liquidated. As a result, the Terminating Fund may temporarily hold some cash and/or money market instruments, and the Terminating Fund may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger. The value of any investments sold prior to the Effective Date will depend on prevailing market conditions.
(ii) Prior to the Merger, the Terminating Fund will distribute to its unitholders sufficient net income and net realized capital gains so that it will not be subject to tax under Part I of the Tax Act for its current taxation year.
(iii) On the Effective Date, the Terminating Fund will transfer all of its assets, which will consist of its investment portfolio and other assets, including cash and/or money market instruments, less an amount required to satisfy the liabilities of the Terminating Fund, to the Continuing Fund, in exchange for units of the Continuing Fund. The units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the net assets transferred by the Terminating Fund.
(iv) Immediately following the above-noted transfer, the Terminating Fund will redeem its outstanding units and distribute the units of the Continuing Fund received by the Terminating Fund to unitholders of the Terminating Fund, in exchange for all such unitholders' existing units of the Terminating Fund, on a series-for-series and dollar-for-dollar basis.
(v) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
(b) In respect of the Corporate Class Merger:
(i) Prior to the Effective Date, all of the securities in the portfolio of the Terminating Fund will be liquidated. As a result, the Terminating Fund and the Continuing Fund will temporarily hold cash or money market instruments, and will not be fully invested in accordance with their respective investment objectives for a brief period of time prior to, and following the Merger. The value of any investments sold prior to the Effective Date will depend upon prevailing market conditions.
(ii) The articles of incorporation of FTCCL will be amended to authorize the exchange of all outstanding special shares of each series of the Terminating Fund for special shares of the same series of the Continuing Fund.
(iii) Each securityholder of the Terminating Fund will receive special shares of the same series of the Continuing Fund with a value equal to the value of their special shares in the Terminating Fund as determined on the Effective Date. After this step is complete, securityholders of the Terminating Fund will become securityholders of the Continuing Fund.
(iv) On the Effective Date, the assets (consisting of cash and/or money market instruments) and liabilities attributable to the Terminating Fund will be included in the portfolio of assets and liabilities attributable to the Continuing Fund.
(v) As soon as reasonably possible following the Corporate Class Merger, the unissued special shares of the Terminating Fund will be cancelled by FTCCL, and the Terminating Fund will be terminated.
18. Costs and expenses associated with the Mergers, including the costs of the securityholder meetings, will be borne by the Filer and will not be charged to the Funds. The costs of the Mergers include transaction costs associated with any portfolio liquidations, legal, printing, mailing and regulatory fees, as well as proxy solicitation costs.
19. No sales charges will be payable by securityholders of the Funds in connection with the Mergers.
Securityholder Disclosure
20. A press release describing the Mergers has been issued. The press release, material change report and amendments to the simplified prospectus, annual information form and fund facts, which give notice of the Mergers, have been filed via SEDAR.
21. A notice of meeting, management information circular, proxy and fund facts of the applicable series of each Continuing Fund (the Meeting Materials) will be mailed to securityholders of each Fund commencing on or about March 17, 2016 and will be filed via SEDAR.
22. The Meeting Materials will contain the fund facts of the Continuing Funds, a description of the proposed Mergers, information about the Terminating Funds and the Continuing Funds and income tax considerations for securityholders of the Terminating Funds. The Meeting Materials will also describe the various ways in which securityholders can obtain a copy of the simplified prospectus and annual information form of the Continuing Funds, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Funds.
Securityholder Purchases and Redemptions
23. Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash or switch into securities of another Franklin Templeton mutual fund (including on a tax-deferred basis to a fund that is a class of FTCCL, where applicable) at any time up to the close of business on the business day immediately before the Effective Date.
24. Subject to receiving the necessary approvals at the special meetings, effective as as of the close of business on April 8, 2016, the Terminating Funds will cease distribution of securities and any new purchases of securities will be disallowed. The Terminating Funds will remain closed to purchase-type transactions, except existing systematic investment programs (such as pre-authorized chequing plans), until they are merged with the Continuing Funds on the Effective Date. All systematic programs shall remain unaffected until the business day immediately before the Effective Date.
25. Following the Mergers, all systematic programs that had been established with respect to the Terminating Funds will be re-established on a series-for-series basis in the applicable Continuing Funds, unless securityholders advise the Filer otherwise.
26. Securityholders may change or cancel any systematic program at any time and securityholders of the Terminating Funds who wish to establish one or more systematic programs in respect of their holdings in the Continuing Funds may do so following the Mergers.
IRC Review
27. The Filer has presented the Mergers to the IRC and has obtained a positive recommendation that each of the Mergers, if implemented, would achieve a fair and reasonable result for the Funds.
28. A summary of the IRC's recommendation will be included in the notice of special meeting sent to securityholders of the Funds as required by section 5.1(2) of National Instrument 81-107 -- Independent Review Committee for Investment Funds.
Benefits of Mergers
29. The Terminating Funds currently invest some portion of their assets, either directly or indirectly, in high dividend paying securities. Since the dissolution of the Canadian income trust market at the end of 2010, the universe of high dividend paying equities has narrowed substantially and is now mostly comprised of energy and financial companies. This narrowing of the high dividend market has contributed recently to increased volatility in the Terminating Funds. The Continuing Funds are expected to provide securityholders with less volatility while still providing exposure to certain types of income producing securities. The Filer submits that the Mergers will benefit securityholders of the Terminating Funds in the following additional ways:
(a) reducing the number of Franklin Templeton funds will provide securityholders with a streamlined range of products that will make it easier for securityholders to select a suitable mutual fund based on their risk tolerance;
(b) providing securityholders with a broader and more diversified investment universe than in the Terminating Funds to reach the investment objectives for the Continuing Funds; and
(c) management and administration fees will not increase and MERs of each Continuing Fund will remain substantially the same as or, in some cases, be moderately lower than, the MER of its corresponding Terminating Fund.
Decision
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, provided that the Filer obtains the prior securityholder approval for the Mergers at the special meeting held for that purpose, or any adjournments thereof.
"Darren McKall"
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission