National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because certain mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – the fundamental investment objectives of the terminating fund and the continuing fund are not substantially similar – securityholders of terminating fund provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
May 17, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
AGF INVESTMENTS INC.
AGF MONTHLY HIGH INCOME FUND
(the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed merger (the Merger) of the Terminating Fund into AGF Elements Yield Portfolio (the Continuing Fund, and together with the Terminating Fund, the Funds) pursuant to paragraph 5.5(1)(b) of National instrument 81-102 Investment Funds (NI 81-102) (the Merger 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 Manager 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 provinces and territories of Canada, other than Ontario (together with Ontario, the Jurisdictions).
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 Manager:
1. The Manager is a corporation incorporated under the laws of the province of Ontario with its head office in Toronto, Ontario.
2. The Manager is registered as follows:
(a) an investment fund manager in Alberta, British Columbia, Ontario, Quebec and Newfoundland and Labrador;
(b) a portfolio manager in each of the Jurisdictions;
(c) an exempt market dealer in Alberta, British Columbia, Manitoba, Ontario, Quebec and Saskatchewan;
(d) a mutual fund dealer in British Columbia, Ontario and Quebec; and
(e) a commodity trading manager in Ontario.
3. The Manager is the manager, trustee and portfolio manager of the Funds.
4. The Funds are open-ended mutual funds established as trusts under the laws of Ontario.
5. Each of the Funds is a reporting issuer under the applicable securities legislation of the Jurisdictions, and is subject to the requirements of NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure.
6. Neither the Manager nor the Funds is in default under the securities legislation of any of the Jurisdictions.
7. Each Fund follows the standard investment restrictions and practices established under the securities legislation of the Jurisdictions except to the extent that the Funds have received an exemption from the securities regulatory authority of a Jurisdiction to deviate therefrom.
8. Securities of the Funds are currently qualified for sale in each of the Jurisdictions under a simplified prospectus, annual information form and fund facts dated April 26, 2018 (collectively, the Offering Documents).
9. The net asset value for each series of the Funds is calculated on each day that the Toronto Stock Exchange is open for business in accordance with the Funds’ valuation policy and as described in the Offering Documents.
Reason for Merger Approval
10. Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular, the investment objectives of the Continuing Fund are not, or may be considered not to be, “substantially similar” to the investment objectives of the Terminating Fund.
11. The investment objectives of the Terminating Fund and the Continuing Fund are as follows:
AGF Monthly High Income Fund
AGF Elements Yield Portfolio
The investment objective of AGF Monthly High Income Fund is to achieve a high level of monthly income by investing primarily in income producing securities with added diversification through selective investment in fixed income securities and common shares.
The investment objective of AGF Elements Yield Portfolio is to achieve high current income by investing primarily in a diversified mix of income, bond and equity funds that may include exposure to income trusts, royalty trusts and REITs.
12. Except as described in this decision, the Merger complies with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Merger
13. The Manager intends to merge the Terminating Fund into the Continuing Fund.
14. The Merger was announced in:
(a) a press release dated April 26, 2018;
(b) a material change report dated April 26, 2018; and
(c) the Offering Documents,
each of which has been filed on SEDAR.
15. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Manager presented the terms of the Mergers to the IRC for its review. The IRC determined that the Mergers, if implemented, will achieve a fair and reasonable result for each of the Funds.
16. The Manager is convening a special meeting of the securityholders of the Terminating Fund in order to seek the approval of the securityholders of the Terminating Fund to complete the Merger, as required by paragraph 5.1(1)(f) of NI 81-102 (the Meeting). The Meeting will be held on or about June 14, 2018.
17. The Manager has concluded that the Merger is not a material change to the Continuing Fund, and accordingly, there is no intention to convene a meeting of securityholders of the Continuing Fund to approve the Merger pursuant to paragraph 5.1(1)(g) of NI 81-102.
18. By way of order dated November 4, 2016, the Manager was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of NI 81-106 to send a printed management information circular to securityholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such securityholders. In accordance with the Manager’s standard of care owed to the Funds pursuant to securities legislation, the Manager will only use the notice-and-access procedure for a particular meeting where it has concluded that it is appropriate and consistent with the purposes of notice-and-access (as described in the Companion Policy to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer) to do so, also taking into account the purpose of the meeting and whether the Funds would obtain a better participation rate by sending the management information circular with the other proxy-related materials.
19. Pursuant to the requirements of the Notice-and-Access Relief, a notice-and-access document and form of proxy in connection with the Meeting, along with the most recent fund facts of the relevant series of the Continuing Fund, was mailed to securityholders of the Terminating Fund commencing on May 10, 2018 and were concurrently filed via SEDAR. The management information circular (Circular), which the notice-and-access document provides a link to, was also filed via SEDAR at the same time.
20. If all required approvals for the Merger are obtained, it is intended that the Merger will occur after the close of business on or about August 3, 2018 (the Effective Date). The Manager therefore anticipates that each securityholder of the Terminating Fund will become a securityholder of the Continuing Fund after the close of business on the Effective Date. The Terminating Fund will be wound up as soon as reasonably possible following the Merger.
21. The Circular describes all relevant facts concerning the Merger, including the investment objectives, strategies and fee structure of the Funds, the tax implications and other consequences of the Merger, as well as the IRC’s recommendation of the Merger, so that securityholders of the Terminating Fund may make an informed decision before voting on whether to approve the Merger. The Circular also describes the various ways in which securityholders can obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Fund, and the most recent interim and annual financial statements and management reports of fund performance.
22. Securityholders of the Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the business day immediately preceding the Effective Date. Following the Merger, all optional plans which were established with respect to the Terminating Fund will be re-established in comparable plans with respect to the Continuing Fund unless securityholders advise otherwise.
23. The Manager will pay for the costs of the Merger. These costs consist mainly of brokerage charges associated with any merger-related trades that occur both before and after the Effective Date and legal, proxy solicitation, printing, mailing and regulatory fees.
24. No sales charges will be payable by securityholders of the Funds in connection with the Merger.
25. The investment portfolio and other assets of the Terminating Fund to be acquired by the Continuing Fund in order to effect the Merger are currently, or will be on the Effective Date, acceptable to the portfolio manager of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.
26. The specific steps to implement the Merger are as follows:
(a) Any investments of the Terminating Fund which are not suitable for the Continuing Fund or acceptable to the portfolio manager of the Continuing Fund will be sold prior to the Effective Date. As a result, the Terminating Fund may temporarily hold cash and/or money market instruments and may not be invested in accordance with its investment objectives for a brief period of time prior to the Merger. The value of any investments sold will depend on prevailing market conditions.
(b) Prior to the Effective Date, the Terminating Fund will distribute to its securityholders sufficient net income and net realized capital gains, if any, so that the Terminating Fund will not be subject to tax under Part I of the Income Tax Act (Canada) for the taxation year ended on the Effective Date.
(c) The value of the Terminating Fund’s portfolio and other assets will be determined at the close of business on the Effective Date in accordance with its declaration of trust.
(d) On the Effective Date, substantially all of the Terminating Fund’s assets will be transferred to the Continuing Fund (after reserving sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date) in exchange for securities of the Continuing Fund having an aggregate net asset value equal to the aggregate value of the assets transferred by the Terminating Fund, and the securities of the Continuing Fund will be issued at the applicable series net asset value per security as of the close of business on the Effective Date.
(e) Immediately thereafter, the securities of the Terminating Fund will be redeemed at their series net asset value and such amount will be paid to securityholders of the Terminating Fund on a dollar for dollar basis by way of the transfer of securities of an equivalent series of the Continuing Fund to each Terminating Fund securityholder.
(f) As the Continuing Fund invests primarily in underlying funds, it is anticipated that the portfolio assets transferred by the Terminating Fund to the Continuing Fund on the Effective Date will be contributed in specie to the underlying funds held by the Continuing Fund in exchange for securities of such underlying funds.
(g) Within 30 days following completion of the Merger, the Terminating Fund will be wound up and terminated.
(h) Any outstanding unit certificates (if applicable) of the Terminating Fund will be cancelled.
27. The result of the Merger will be that securityholders of the Terminating Fund will cease to be securityholders of the Terminating Fund, will become securityholders of the Continuing Fund and will realize capital gains or capital losses. The Continuing Fund will continue as a publicly-offered open-end mutual fund.
Benefits of the Merger
28. In the opinion of the Manager, the Merger will be beneficial to securityholders of the Funds for the following reasons:
(a) the Merger will result in a more streamlined and simplified product line-up that is easier for investors to understand;
(b) the Merger will eliminate similar fund offerings, thereby reducing the administrative and regulatory costs of operating the Terminating Fund and the Continuing Fund as separate funds;
(c) a line-up consisting of fewer mutual funds that target similar types of investors will allow the Manager to concentrate its marketing efforts to attract additional assets in the Continuing Fund. Ultimately this benefits securityholders because it ensures that the Continuing Fund remains a viable, long-term investment vehicle for existing and potential investors;
(d) the Continuing Fund has a portfolio of greater value, allowing for increased portfolio diversification opportunities compared to the Terminating Fund;
(e) the Continuing Fund, as a result of greater size, will allow the operating expenses to be spread over a larger asset base, which may positively impact the management expense ratio of the Continuing Fund;
(f) as the Continuing Fund has a lower risk rating than the Terminating Fund, securityholders of the Terminating Fund will become investors in a fund that has a similar investment profile to the Terminating Fund, while enjoying lower investment volatility;
(g) there is considerable overlap between the portfolio holdings of the Terminating Fund and the portfolio holdings of the Continuing Fund; and
(h) securityholders of the Terminating Fund will receive securities of the Continuing Fund that have a management fee that is lower than that charged in respect of the series of securities of the Terminating Fund that they currently hold.
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.
Investment Funds and Structured Products Branch
Ontario Securities Commission