National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval granted for change of manager of investment fund – change of manager is not detrimental to securityholders or the public interest – change of manager to be approved by the fund’s securityholders at a special meeting of the securityholders – National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, s. 5.5(1)(a).
June 20, 2019
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
SOUNDVEST SPLIT TRUST
IN THE MATTER OF
SOUNDVEST CAPITAL MANAGEMENT LTD.
IN THE MATTER OF
BRISTOL GATE CAPITAL PARTNERS INC.
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval (the Approval Sought) under NP 11-203 for approval of the change of manager (the Change of Manager) for the Fund from the Filer to Bristol Gate under subsection 5.5(1)(a) of National Instrument 81-102 – Investment Funds (NI 81-102).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator (Principal Regulator) for this application; and
(ii) the Filer has provided notice that subsection 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 (together with the Jurisdiction, 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. In addition, the following terms have the following meanings:
Combined Value means the net asset value per Capital Unit (as defined herein) and the Maturity Amount per Preferred Security (as defined herein) determined as of the date such distribution is declared.
Maturity Amount means the outstanding principal amount of the Preferred Securities, together with any accrued interest thereon.
Repayment Price is the amount, in respect of a Preferred Security, equal to the original subscription price, together with any accrued and unpaid interest thereon.
This decision is based on the following facts represented by the Filer and Bristol Gate.
1. The Filer is currently the manager of the Fund.
2. The Filer is a corporation organized under the laws of Canada, with its head office located in Ottawa, Ontario.
3. The Filer is currently registered as an investment fund manager and a dealer in the category of exempt market dealer in Ontario and as a portfolio manager in Alberta, British Columbia, Ontario and Quebec.
4. The Fund is an investment trust established under the laws of Ontario pursuant to a declaration of trust dated as of February 25, 2005, which was amended and restated as of March 28, 2008, and amended and restated as of April 30, 2010, and further amended on March 16, 2015 and on March 31, 2015 (the Declaration of Trust). Computershare Trust Company of Canada is the trustee of the Fund.
5. The Fund is a reporting issuer in each of the Jurisdictions.
6. The Fund is authorized to issue an unlimited number of transferrable, redeemable trust units (the Capital Units) of one class, each representing an equal, undivided beneficial interest in the net assets of the Fund. Each whole Capital Unit is entitled to one vote at all meetings of unitholders of the Fund (Unitholders) and is entitled to participate equally with respect to any and all distributions made by the Fund. As of the date hereof, there were 1,541,090 Capital Units issued and outstanding.
7. The Fund is also authorized to issue preferred securities (the Preferred Securities) which are direct unsecured debt obligations of the Fund. The Preferred Securities are governed by a trust indenture (the Trust Indenture) dated March 16, 2005 (as amended) between the Fund and CIBC Mellon Trust Company. Under the terms of the Trust Indenture, the maturity date of the Preferred Securities is March 31, 2020 (the Maturity Date), or automatically on such earlier date upon which the Fund terminates. As of the date hereof, there were 1,541,090 Preferred Securities issued and outstanding.
8. Holders of Preferred Securities are entitled to receive fixed quarterly interest payments of $0.15 per Preferred Security (6.0% per annum on the original subscription price of $10.00). The payment of interest on the Preferred Securities is made in priority to any distribution on the Capital Units.
9. The quarterly distribution on the Capital Units has been suspended as the Fund is not permitted to make or cause to be made any cash distributions on the Capital Units if, immediately after giving effect to the proposed distribution, the Combined Value determined as of the date such distribution is declared would be less than 1.4 times the Repayment Price determined as of the same date. The quarterly distribution on the Capital Units has been suspended since 2011.
10. Under the annual redemption program of the Fund, Preferred Securities and Capital Units are redeemable on the last business day of November of each year at 100% of the net asset value per unit. The redemption proceeds are allocated as follows: (i) as to the portion of such value equal to the original subscription price of, and any accrued and unpaid interest on, the Preferred Security, as a repayment in full of such Preferred Security; and (ii) as to the remainder of such value, as the proceeds of redemption of the Capital Unit.
11. Pursuant to the Declaration of Trust, the Filer may, in its sole discretion and upon giving notice to the holders of Capital Units, wind-up the Fund, without the approval of holders of Capital Units, if the net asset value of the Fund falls below $15 million. The net asset value of the Fund as of May 27, 2019 was $16.7 million.
12. The Capital Units and Preferred Securities are listed on the Toronto Stock Exchange (the TSX) under the symbol BSD.UN and BSD.PR.A, respectively.
13. Neither the Filer nor the Fund is in default of any applicable requirements of securities legislation in any Jurisdiction.
Details of the Proposed Transaction
14. On May 2, 2019, the Filer announced that it and Bristol Gate had reached an agreement (the Agreement) for Bristol Gate to acquire from the Filer the right to act as the investment fund manager and portfolio manager of the Fund under the Declaration of Trust, the management agreement between the Fund and the Filer and the investment advisory agreement between the Filer as investment manager and investment advisor that will result in the Change of Manager. As a condition to the Change of Manager: (i) the Trust Indenture is to be amended to accelerate the scheduled maturity date of the Preferred Securities from March 31, 2020 to June 26, 2019 (the New Maturity Date) or such later date as the Filer may determine which is not less than five business days prior to September 30, 2019 (the Outside Date); and (ii) the Declaration of Trust is to be amended to effect a change in the attributes of the Capital Units to provide the Fund with the right to redeem all of the outstanding Capital Units, other than the Capital Units beneficially owned by Bristol Gate or its related parties, on June 26, 2019 (the Redemption Date) or such later date as the Filer may determine that is following the Redemption Date and not less than three business days prior to the Outside Date, for an amount, if any, per Capital Unit equal to a pro-rata share of the net assets of the Fund remaining after payment or accrual of all debts and liabilities (including the aggregate repayment price for the Preferred Securities and contingent expenses) and liquidation expenses of the Fund, with payment of the redemption amount to be made in cash by the Fund within two business days following the Redemption Date (collectively, the Pre-Closing Changes and, together with the Change of Manager, the Proposed Transaction).
15. The parties to the Agreement have agreed to pay all of the costs and expenses related to the Proposed Transaction.
16. The closing of the Proposed Transaction (the Closing) is expected to occur on or about June 27, 2019, subject to the receipt of all necessary regulatory and securityholder approvals and the satisfaction or waiver of all other conditions to the Proposed Transaction, or such other date as the Filer and Bristol Gate agree to, but in any event no later than September 30, 2019.
17. It is intended that the Proposed Transaction will result in Bristol Gate becoming the investment fund manager and portfolio manager of the Fund. Following completion of the Proposed Transaction, Bristol Gate intends to apply to the Canadian securities administrators for the Fund to cease being a reporting issuer. Bristol Gate also intends to restructure the Fund as a non-public investment fund including changing the investment objectives and strategies of the Fund, raising capital on a prospectus-exempt basis, following an investment approach that seeks to generate capital gains, and to the extent available, utilize the current net capital loss carry-forwards of the Fund.
18. In accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure, a press release announcing the Proposed Transaction was issued on May 2, 2019 and subsequently filed on SEDAR.
19. Pursuant to section 5.1(1)(b) of NI 81-102, special meetings (the Meetings) of holders of Capital Units and holders of Preferred Securities (collectively, the Securityholders) will be held on June 25, 2019 for the purpose of seeking approval of the Change of Manger and the approval by the holders of Preferred Securities of the New Maturity Date and approval by the holders of the Capital Units of ability by the Fund to redeem the Capital Units on the Redemption Date as described herein.
20. The notice for each of the Meetings and the management information circular in respect of the Meetings (the Meeting Materials) describing the Proposed Transaction will be sent to Securityholders on or about June 4, 2019 and copies thereof will be filed on SEDAR following the mailing in accordance with applicable securities legislation. The Meeting Materials will contain sufficient information regarding the Proposed Transaction and all information necessary to allow Securityholders to make an informed decision about the Proposed Transaction. All other information and documents necessary to comply with applicable proxy solicitation requirements of securities legislation for the Meetings will also be mailed to Securityholders.
21. The Filer has determined that the Proposed Transaction is a conflict of interest matter pursuant to section 5.1 of National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107). The Filer has provided information relating to the Proposed Transaction to the Independent Review Committee (the “IRC”) of the Fund as required by section 5.3 of NI 81-107. The IRC has determined, after reasonable inquiry, that the action achieves a fair and reasonable result for the Fund.
The Change of Manager
22. Bristol Gate is a corporation established under the laws of the Province of Ontario.
23. Bristol Gate is registered as an investment fund manager in Ontario and Québec and as a portfolio manager and exempt market dealer in Alberta, British Columbia, Manitoba, Ontario and Québec.
24. Bristol Gate’s head office is located at 45 St. Clair Avenue West, Suite 601, Toronto, Ontario.
25. Bristol Gate is not in default of any applicable requirements of securities legislation in any Jurisdiction.
26. The principal business activity of Bristol Gate is investment management of portfolios of publicly traded equities that provide high dividend growth to reduce risk and improve returns. As of April 30, 2019, Bristol Gate had over $1.3 billion in assets under management. Bristol Gate currently is the manager of two exchange traded funds, namely Bristol Gate Concentrated US Equity ETF (TSX:BGU) and Bristol Gate Concentrated Canadian Equity ETF (TSX: BGC).
27. Bristol Gate and the Filer are not related parties. Except pursuant to the Agreement, there are currently no relationships between Bristol Gate and the Filer (or any of their respective affiliates).
Impact of Change of Manager on the Fund
28. Subject to obtaining the Requested Approval, upon Closing, Bristol Gate will become the investment fund manager and portfolio manager of the Fund. Prior to that date, all the Preferred Securities and all the Capital Units, other than the Capital Units held by Bristol Gate and its related parties, will have been redeemed. Bristol Gate will assume the role of manager and portfolio manager of the Fund and Bristol Gate and its related parties will be the only unitholders of the Fund.
29. The business reasons for the Proposed Transaction are to (i) pay-out existing Securityholders as if the Fund was terminating early, and (ii) provide Bristol Gate with an opportunity to restructure the Fund as a non-public investment fund.
30. Immediately prior to Closing, the Capital Units will be voluntarily delisted from the TSX.
31. The Filer believes that the Proposed Transaction is in the best interests of Unitholders. The Proposed Transaction is being proposed for the following reasons:
(a) There is limited trading activity for each of the Capital Units and the Preferred Securities on the TSX. Over the past 12 months, the average monthly trading volume of the Capital Units and the Preferred Securities was 28,327 and 21,292, respectively. If the Proposed Transaction is approved by holders of Capital Units and Preferred Securities at their respective Meeting, all issued and outstanding Capital Units, other than the Capital Units held by Bristol Gate and its related parties, will be redeemed on the Redemption Date and all issued and outstanding Preferred Securities will mature on the New Maturity Date. Accordingly, one of the reasons for the Proposed Transaction is to provide liquidity to securityholders of the Fund which the Filer believes is prudent due to the fact that both the scheduled Maturity Date and the proposed New Maturity Date are less than one year in duration.
(b) If the Proposed Transaction is not approved by Unitholders, the Filer expects, in accordance with the Declaration of Trust, in its sole discretion and without the approval of holders of Capital Units, to terminate the Fund on the earlier of: (i) the scheduled Maturity Date of March 31, 2020; or (ii) at such time when the net asset value of the Fund falls below $15 million. Due to the fact that the scheduled Maturity is less than one year in duration, the Filer believes it would be prudent to liquidate the holdings of the Fund in the short term to protect the Fund against downside risks and capture unrealized gains.
(c) The Filer believes that the Proposed Transaction presents a good opportunity for the Unitholders to take advantage of a favourable market window which would allow for the payment of the full Maturity Amount to the holders of the Preferred Securities as the Combined Value of the Fund was $10.84 as of May 27, 2019, which is up from $9.71 as of December 31, 2018. As such, if the Proposed Transaction is approved by Unitholders at the Meeting, the Filer believes that the holders of Preferred Securities are more likely to receive the full payment of the Maturity Amount on the New Maturity Date than on the scheduled Maturity Date.
(d) Similarly, a favourable market window currently exists for the redemption of the Capital Units, as the net asset value per Capital Unit of the Fund was $0.84 as of May 27, 2019, which is up from nil as of December 31, 2018. As such, if the Proposed Transaction is approved, the Filer believes that the holders of Capital Units are more likely to receive a redemption payment in respect of their Capital Units on the Redemption Date than if the Capital Units were redeemed upon the Fund being terminated and wound-up by the Filer following the Maturity Date.
(e) In addition, the Fund’s expenses continue to have a negative effect on the net asset value of the Fund specifically due to the reduction in size of the Fund over the years. The redemption of the Capital Units on the Redemption Date allows holders of Capital Units to dispose of their holdings and limit further erosion of the net asset value of the Fund caused by the continued payment of such fees, costs and expenses.
(f) Further, the Filer and Bristol Gate have agreed to pay for all of the fees and expenses related to the Proposed Transaction therefore the Filer believes that bringing the Proposed Transaction to the Unitholders for their consideration at the Meetings is in the best interest of the Fund.
32. Securityholders will be asked to approve the Proposed Transaction at the Meetings and the Meeting Materials sent to Securityholders will contain sufficient information regarding the effects of implementing the Proposed Transaction, and all other information necessary to allow Securityholders to make an informed decision about the Proposed Transaction.
33. The Filer and Bristol Gate, and not the Fund, will bear all costs and expenses associated with calling and holding the Meeting and implementing the Proposed Transaction, including legal fees, filing fees and other expenses associated with preparing, printing and mailing the Meeting Materials and obtaining necessary regulatory approvals.
34. Upon Closing, the individuals that comprise the IRC of the Fund will cease to be members of the IRC by operation of subsection 3.10(1)(b) of NI 81-107.
35. Upon Closing, the individuals that will be principally responsible for the investment fund management and portfolio management of the Fund will have the requisite integrity and experience as contemplated under section 5.7(1)(a)(v) of NI 81-102.
36. The Proposed Transaction will not adversely affect Bristol Gate’s financial position or its ability to fulfill its regulatory obligations.
37. The Requested Approval will not be detrimental to the protection of investors in the Fund or prejudice the public interest.
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 approval of securityholders of the Fund for the Change of Manager.
Investment Funds and Structured Products Branch
Ontario Securities Commission