National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of investment fund merger – approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – the merger will not be a “qualifying exchange” or tax-deferred transaction under the Income Tax Act (Canada) – unitholders of the 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.
November 20, 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
NINEPOINT PARTNERS LP
(the “Filer” or the “Manager”)
IN THE MATTER OF
NINEPOINT ENERGY OPPORTUNITIES TRUST
(the “Terminating Fund”)
NINEPOINT ENERGY FUND
(the “Continuing Fund” and collectively with the Terminating Fund, the “Funds”)
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 (the “Legislation”) approving the proposed merger (as further described below) of the Terminating Fund into the Continuing Fund (the “Merger”) 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:
1. the Ontario Securities Commission is the principal regulator (the “Principal Regulator”) for this application; and
2. 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”).
Terms defined in National Instrument 14-101 – Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is the manager of the Terminating Fund and of the Continuing Fund. The Filer is a limited partnership formed under the laws of Ontario. The Filer’s general partner is Ninepoint Partners GP Inc., a corporation incorporated under the Business Corporations Act (Ontario). The Filer is registered as an exempt market dealer and a portfolio manager with the securities regulatory authorities in each of Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia and Saskatchewan. The Filer is registered as an “investment fund manager” in the provinces of Ontario, Newfoundland and Labrador and Québec, with its head office located in Toronto, Ontario. The Filer is also registered as a portfolio manager in the province of Québec.
2. The Terminating Fund is a non-redeemable investment fund established under the laws of the Province of Ontario that is governed by a trust agreement dated November 30, 2016, as amended on March 22, 2018 in connection with the change of the name of the Terminating Fund from “Sprott Energy Opportunities Trust” to “Ninepoint Energy Opportunities Trust” effective as of March 29, 2018. RBC Investor Services Trust is the trustee of the Terminating Fund.
3. The Terminating Fund’s issued and outstanding units currently trade on the Toronto Stock Exchange (“TSX”) under the ticker symbol NRGY.UN.
4. The Terminating Fund is a reporting issuer under applicable securities legislation of the Jurisdictions.
5. The Continuing Fund is a mutual fund established under the laws of the Province of Ontario that is governed by a trust agreement with RBC Investor Services Trust dated September 9, 1997, as amended and restated on October 1, 2001 and February 13, 2004, and as further amended on November 1, 2007, January 16, 2009, December 23, 2013, March 31, 2014, June 2, 2014 and April 23, 2018, assigned to the Manager as manager on August 1, 2017, together with amended and restated Schedules “A” and “B” each dated January 26, 2018, and assumed by the Manager as trustee on April 23, 2018, as amended.
6. Series A Units, Series D Units, Series F Units and Series I Units of the Continuing Fund are offered for sale pursuant to a simplified prospectus dated April 23, 2018, as amended.
7. The Continuing Fund is a reporting issuer under applicable securities legislation of the Jurisdictions.
8. Neither the Filer nor either of the Funds is in default of securities legislation in the Jurisdictions.
9. The Terminating Fund’s initial public offering prospectus dated December 6, 2016 described the Manager’s intention that, on or about October 17, 2018, the Terminating Fund would, subject to applicable law, (i) convert into an exchange traded mutual fund (“ETF”) with a similar investment objective and investment strategies to that of the Terminating Fund, or (ii) merge on a tax-deferred basis into an ETF or convert or merge into an open-end mutual fund, in each case managed by the Manager or an affiliate.
10. As described in the Terminating Fund’s press release dated August 17, 2018, and in a notice sent to unitholders of the Terminating Fund with additional details regarding the Merger, the Manager originally intended that the Merger would be implemented on a tax-deferred “rollover” basis as a “qualifying exchange” as defined in section 132.2 of the Income Tax Act (Canada) (the “Tax Act”) and would be completed without the approval of unitholders of the Terminating Fund in reliance on section 5.3(2)(a) of NI 81-102.
11. However, the Manager subsequently determined that certain tax attributes of the Continuing Fund would be lost if the Merger were effected as a “qualifying exchange” and determined that the Merger should not be implemented as a qualifying exchange. Consequently, the Manager determined that it would seek the approval of the unitholders of the Terminating Fund for the Merger as required by section 5.1(1)(f) of NI 81-102 at a special meeting that was held November 15, 2018 (the “Meeting”). The unitholders of the Terminating Fund approved the Merger at the Meeting.
12. By press release dated September 26, 2018, the Manager announced its intention to seek the approval of unitholders for the Merger.
13. The Manager filed a material change report in respect of the proposed Merger as required by Part 11 of NI 81-106.
14. The Independent Review Committee (the “IRC”) of each of the Terminating Fund and the Continuing Fund has reviewed the proposed Merger from a conflict of interest perspective, and has advised the Manager that, in the applicable IRC’s opinion, the Merger achieves a fair and reasonable result for the Terminating Fund and the Continuing Fund and their unitholders (the “IRC Decisions”).
15. The notice of the meeting and the management information circular of the Terminating Fund (the “Circular”) was mailed to unitholders and filed in accordance with applicable securities legislation.
16. The Circular, among other things, includes:
(a) a description of the Merger and the Continuing Fund;
(b) a description of the differences between the Terminating Fund and the Continuing Fund;
(c) a description of the management fees of the Continuing Fund;
(d) a description of the income tax considerations applicable to the Merger; and
(e) the most recently filed fund facts for the Series F Units of the Continuing Fund.
17. The Circular also discloses that unitholders can obtain the current prospectus as well as the most recently filed annual information form, fund facts for the Series A, Series D and Series I Units of the Continuing Fund, annual financial statements and interim financial reports, and annual and interim management reports of fund performance of the Continuing Fund from the Filer upon request, on the Filer's website or on SEDAR at www.sedar.com.
18. Unitholders had the opportunity to consider the information in the Circular prior to voting on the Merger. As required under the trust agreement of the Terminating Fund, the approval of the unitholders of the Terminating Fund was given by at least 50% of unitholders of the Terminating Fund present at the Meeting in person or by proxy.
Reasons for and benefits of the Merger
19. The Manager believes that the Merger will be beneficial to unitholders of the Terminating Fund and the Continuing Fund for the following reasons:
(a) investors in the Continuing Fund are entitled to buy or redeem all or any portion of their securities daily at the applicable net asset value, resulting in greater liquidity for securityholders in the Terminating Fund;
(b) the Terminating Fund and the Continuing Fund have substantially similar fundamental investment objectives and strategies, as discussed in greater detail in the Circular;
(c) unitholders of both the Terminating Fund and the Continuing Fund will enjoy increased economies of scale as part of a larger combined Continuing Fund;
(d) the Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities, which may lead to increased returns and/or a reduction of risk;
(e) the management expense ratio (the “MER”) of the Series F Units of the Continuing Fund is expected to be lower than the MER of the units of the Terminating Fund;
(f) the Continuing Fund, as a result of its greater size, and thus larger profile in the marketplace, will benefit from potentially attracting more securityholders and enabling it to maintain a “critical mass”; and
(g) as a result of implementing the Merger otherwise than as a “qualifying exchange” the tax attributes of the Continuing Fund will continue to be available.
Tax Implications of the Merger
20. The Manager has concluded that it is in the overall best interests of unitholders to effect the Merger on a taxable basis to preserve the Continuing Fund’s unused capital losses (realized and accrued), which would otherwise expire if an election were made that the Merger be a “qualifying exchange” as defined in section 132.2 of the Income Tax Act (Canada) (the “Tax Act”) and occur on a tax-deferred basis. As a result of effecting the Merger on a taxable basis, the unused capital losses of the Continuing Fund will be available to shelter capital gains realized by the Continuing Fund in future years and thereby reduce the amount of taxable distributions to be made to investors in the Continuing Fund in the future. The unused capital losses of the Terminating Fund will expire in either a taxable or a tax-deferred transaction.
21. Although the assets of the Terminating Fund transferred to the Continuing Fund will be disposed of for fair market value proceeds, if the Merger were to take place on the date hereof, the Manager does not anticipate that the result of the transfers would give rise to net income or net taxable capital gains of the Terminating Fund on an aggregate basis due to its existing accrued but unrealized losses and available loss carryforwards.
22. To the extent that unitholders of the Terminating Fund have an accrued capital loss on their units in a non-registered account, effecting the Merger on a taxable basis will allow such unitholders to realize that loss and use it against current and future capital gains or to carry it back as permitted under the Tax Act.
23. Conversely, to the extent that unitholders of the Terminating Fund have an accrued capital gain on their units in a non-registered account, effecting the Merger on a taxable basis will result in unitholders recognizing that capital gain although there is no corresponding cash distribution.
Implementation of the Merger
24. The trust agreement of the Terminating Fund will be amended to the extent necessary to provide unitholders of the Terminating Fund who wish to redeem their units with a special redemption right (the “Special Redemption Right”), allowing such unitholders to redeem their units prior to the Merger at a price equal to their net asset value on the same terms that would have been applied had the Terminating Fund terminated and redeemed all units as contemplated by its trust agreement. Unitholders were first notified of the Special Redemption Right and the applicable deadlines in the press release of the Terminating Fund issued on September 26, 2018. The notice period to surrender units under the Special Redemption Right was from October 1, 2018 until 4:00 p.m. (Toronto time) on October 26, 2018. The net asset value per unit for the Special Redemption Right was calculated on October 30, 2018 and unitholders received payment on or before November 9, 2018. Redeeming unitholders under the Special Redemption Right received a redemption price per unit equal to the net asset value per unit on October 30, 2018, less any costs and expenses incurred by the Terminating Fund in order to fund such redemption, including brokerage costs, if any.
25. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger:
(a) The Manager expects that the units of the Terminating Fund will be delisted from the TSX prior to the effective date of the Merger of on or about November 29, 2018 (the “Merger Date”).
(b) The fair market value of the Terminating Fund’s assets will be determined at the close of business on the Merger Date, after giving effect to the redemption of units of the Terminating Fund pursuant to the Special Redemption Right and after the disposition of any securities required to be disposed of by the Terminating Fund prior to the Merger.
(c) Each of the Terminating Fund and the Continuing Fund, if necessary, may make a distribution of net income and/or net realized capital gains in order that it is not liable to tax in the taxation year that includes the Merger. If the Merger were to take place on the date hereof, the Manager does not anticipate that either fund would make such a distribution.
(d) The Terminating Fund will transfer all of its assets to the Continuing Fund for a purchase price equal to the fair market value of the assets transferred. The Continuing Fund will satisfy the obligation to pay the purchase price by assuming the liabilities of the Terminating Fund and by issuing to the Terminating Fund such number of Series F Units of the Continuing Fund determined based on an exchange ratio established as of the close of trading on the Merger Date. The exchange ratio will be calculated based on the relative net asset value of the Terminating Fund’s units and the Series F Units of the Continuing Fund.
(e) Immediately following the transfer of the assets of the Terminating Fund to the Continuing Fund and the issuance of the Series F Units of the Continuing Fund to the Terminating Fund, all units of the Terminating Fund will be automatically redeemed and each Terminating Fund unitholder will receive such number of Series F Units of Continuing Fund as is equal to the number of units of the Terminating Fund held multiplied by the exchange ratio. No fractional Series F Units of the Continuing Fund or cash in lieu thereof will be issued or paid to unitholders of the Terminating Fund under the Merger.
(f) Holders of units of the Terminating Fund will become Series F unitholders of the Continuing Fund.
(g) Following the Merger Date, unitholders of the Terminating Fund will be able to commence switches, reclassifications, conversions and redemptions of the Series F Units of the Continuing Fund distributed to them under the Merger as permitted in accordance with the terms of the Series F Units.
26. As soon as possible following the steps set out above, the Terminating Fund will terminate.
27. The portfolio assets of the Terminating Fund to be acquired by the Continuing Fund as part of the Merger will be: (i) permitted to be acquired by the Continuing Fund under NI 81-102; and (ii) acceptable to the Manager for the Continuing Fund and consistent with the Continuing Fund’s fundamental investment objectives.
28. Any cash acquired by the Continuing Fund in connection with the Merger will be invested in accordance with the investment objectives, strategies, and restrictions of the Continuing Fund and NI 81-102.
29. Any brokerage commissions payable as a result of a liquidation of any of the Terminating Fund’s portfolio as part of the Merger will be borne by the Manager and not the Terminating Fund. In addition, no sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund or in connection with the acquisition by unitholders of the Terminating Fund of Series F Units of the Continuing Fund.
30. The Manager will not receive any compensation in respect of the acquisition, sale or redemption of the units of the Funds in connection with the Merger.
31. The Funds will bear none of the costs and expenses associated with the Merger.
32. The Funds are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of the Funds are "qualified investments" under the Tax Act for trusts governed by 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.
Reasons for Seeking the Relief
33. The Merger Approval 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 the Merger will not be completed as a “qualifying exchange” under the Tax Act. The Merger will otherwise comply with all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
34. In light of the disclosure that is included in the Circular, unitholders of the Terminating Fund had all the information necessary to determine whether the Merger is appropriate for them. Unitholders of the Terminating Fund will have the Special Redemption Right to permit them to exit the Terminating Fund should they not wish to become unitholders of the Continuing Fund.
35. The Filer has determined that it would be in the best interests of the unitholders and not prejudicial to the public interest to receive the Merger Approval.
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 Merger Approval is granted.
Investment Funds and Structured Products
Ontario Securities Commission