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 -- a reasonable person may not consider the Funds to have substantially similar fundamental investment objectives -- merger will not be a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- meeting materials did not include statement required by paragraph 5.6(1)(f)(iii) of NI 81-102 -- merger to otherwise comply with pre-approval criteria, including securityholder vote and IRC approval -- securityholders provided with timely and adequate disclosure regarding the mergers -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.6(1), and 19.1.
October 29, 2019
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 FT PORTFOLIOS CANADA CO. (the Filer) AND FIRST TRUST SHORT DURATION HIGH YIELD BOND ETF (CAD-HEDGED) (the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund and First Trust Senior Loan ETF (CAD-Hedged) (the Continuing Fund, and together with the Terminating Fund, the Funds) for a decision of the principal regulator under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the proposed merger of the Funds (the Merger) pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) in connection with (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 subsection 4.7(1) of Multinational Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Canadian 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 Filer:
1. The Filer is a corporation existing under the laws of Nova Scotia with its principal offices located in Toronto, Ontario.
2. The Filer is the manager and trustee of the Funds.
3. The Filer is registered as an investment fund manager in Ontario.
4. The Filer is not in default of the securities legislation of any of the Canadian Jurisdictions.
5. Each of the Funds is an exchange-traded mutual fund and is governed by the provisions of NI 81-102.
6. Each of the Funds is an open-ended mutual fund trust established under the laws of Ontario pursuant to an amended and restated declaration of trust dated May 1, 2013, as amended.
7. Securities of the Terminating Fund are qualified for sale in each of the Canadian Jurisdictions pursuant to a long form prospectus and ETF facts, each dated April 26, 2019, as amended.
8. Securities of the Continuing Fund are qualified for sale in each of the Canadian Jurisdictions pursuant to a long form prospectus and ETF facts, each dated April 26, 2019, as amended.
9. The Funds are reporting issuers as defined under the applicable securities legislation of each of the Canadian Jurisdictions and are not in default of any of the requirements of the securities legislation of any of the Canadian Jurisdictions.
10. The Terminating Fund offers common units and advisor class units (the Terminating Fund Units), which currently trade on the Toronto Stock Exchange (the TSX) under the ticker symbols FSD and FSD.A.
11. The Continuing Fund offers common units and advisor class units (the Continuing Fund Units), which currently trade on the TSX under the ticker symbols FSL and FSL.A.
12. Other than under circumstances in which the securities regulatory authority or securities regulator of the Canadian Jurisdictions has expressly exempted a Fund therefrom, each of the Funds is governed and follows the standard investment restrictions and practices established by NI 81-102.
Reason for Approval Sought
13. The Filer proposes to merge the Terminating Fund into the Continuing Fund on or about November 4, 2019 (the Effective Date).
14. The Approval Sought is required because the Merger does not meet all of the criteria for pre-approved reorganizations and transfers set out in subsection 5.6(1) of NI 81-102. In particular:
(a) a reasonable person may not consider the Funds to have substantially similar fundamental investment objectives;
(b) 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; and
(c) due to inadvertence, the Meeting Materials (as defined below) did not include the statement required by paragraph 5.6(1)(f)(iii) of NI 81-102 in respect of the Continuing Fund.
15. Except as described above, the Merger will otherwise comply with all other criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102.
16. Although the investment objectives of the Terminating Fund may not be substantially similar to the Continuing Fund, in the Filer's view:
(a) the investment objectives and investment strategies of the Funds are similar in that both are designed to provide a high level of current income with capital appreciation as a secondary objective; and
(b) the Terminating Fund has a similar investment mandate as the Continuing Fund and would generally attract the same type of investor with a similar risk-return profile.
17. Although the Merger is being conducted on a taxable basis, in the Filer's view, it is in the best interest of the unitholders of the Funds to complete the Merger on a taxable basis so that the capital losses in the Continuing Fund will continue to be available to the Continuing Fund.
18. A press release with respect to the Merger was issued and filed on the System for Electronic Document Analysis and Retrieval (SEDAR) on September 16, 2019.
19. A material change report with respect to the Merger was filed on SEDAR for the Terminating Fund on September 18, 2019.
20. An amendment dated September 18, 2019 to the long form prospectus of the Terminating Fund dated April 26, 2019 announcing the Merger was filed on SEDAR.
21. Pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds, the independent review committee of the Terminating Fund (the IRC) reviewed the Merger as a potential "conflict of interest matter", and provided its positive recommendation for the Merger, after determining that the Merger would achieve a fair and reasonable result for the Terminating Fund.
22. Pursuant to paragraph 5.1(1)(f) of NI 81-102, unitholders of the Terminating Fund approved the Merger at a special meeting of unitholders held on October 25, 2019 (the Meeting), as required by NI 81-102.
23. A notice of meeting, management information circular dated September 20, 2019 (the Circular) and form of proxy in connection with the Meeting (the Meeting Materials) were mailed to the unitholders of the Terminating Fund on October 4, 2019 and filed on SEDAR in accordance with applicable securities laws.
24. The Circular describes all of the relevant facts concerning the Merger, including a description of the proposed Merger, information about the Funds, including the differences between the respective investment objectives of the Funds, and income tax considerations for unitholders of the Terminating Fund, as well as the IRC's recommendation of the Merger, so that unitholders of the Terminating Fund may make an informed decision before voting on whether to approve the Merger.
25. The Circular also describes the various ways in which unitholders can obtain, at no cost, the current prospectus, most recently filed ETF Facts, most recently filed annual financial statements and most recently filed annual management report of fund performance of the Terminating Fund. The Filer will also provide the current prospectus, most recently filed ETF Facts, most recently filed annual financial statements, most recently filed interim financial reports, most recently filed annual management report of fund performance and most recently filed interim management report of fund performance of the Continuing Fund upon request.
26. Investors of the Terminating Fund had an opportunity to consider this information prior to voting on the Merger at the Meeting.
27. The Merger will not be a "material change" for the Continuing Fund and accordingly, the Filer has no intention to convene a meeting of unitholders for the Continuing Fund to approve the Merger.
28. The Filer will pay for the costs and expenses associated with the Merger, including the cost of holding the meeting and of soliciting proxies, including the costs of mailing the Circular and accompanying materials. Neither of the Funds will bear any of the costs and expenses associated with the Merger.
29. No fees, sales charges or expenses will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
30. No fees or sales charges will be payable by unitholders of the Funds in connection with the Merger.
31. 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.
32. The cash and any other assets of the Terminating Fund acquired by the Continuing Fund in connection with the Merger will be acquired in compliance with NI 81-102.
33. The Merger will be structured substantially as follows:
(a) The value of the Terminating Fund's portfolio and other assets will be determined as of the close of trading on the business day immediately preceding the Effective Date.
(b) Immediately following the close of business on the Effective Date, the Terminating Fund will transfer all or substantially all of its net assets to the Continuing Fund in consideration for the issuance by the Continuing Fund to the Terminating Fund of a number of the Continuing Fund's common units and advisor class units determined based on an exchange ratio calculated based on the relative net asset values of the Continuing Fund Units and Terminating Fund Units (the Exchange Ratio).
(c) Immediately following the transfer of assets of the Terminating Fund to the Continuing Fund and the issuance of Continuing Fund Units to the Terminating Fund, all of the Terminating Fund Units will be automatically redeemed.
(d) Each unitholder of common units of the Terminating Fund will receive such number of common units of the Continuing Fund, and each unitholder of advisor class units of the Terminating Funds will receive such number of advisor class units of the Continuing Fund, as determined by the Exchange Ratio.
(e) The Terminating Fund Units will, subject to the approval of the TSX, be de-listed from the TSX in advance of the Effective Date.
(f) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up and the Continuing Fund will continue as an ETF existing under the laws of Ontario.
34. The result of the Merger will be that unitholders of the Terminating Fund will cease to be unitholders of the Terminating Fund and will become unitholders of the Continuing Fund. The Continuing Fund will continue as a publicly offered open-end mutual fund.
35. Units of the Terminating Fund will continue to be offered, exchanged and redeemed on a daily basis up to the business day immediately prior to the Effective Date, primarily through the designated broker and dealers of the Terminating Fund.
36. In addition, unitholders of the Terminating Fund will be able to trade their Terminating Fund Units on the TSX in the ordinary course at least until the close of business on the business day before the Effective Date.
Benefits of the Merger
37. The Filer believes that the Merger is beneficial to unitholders of the Terminating Fund for the following reasons:
(a) The Continuing Fund provides unitholders with greater exposure to investments in senior floating rate loans, which includes loans of issuers with strong credit metrics such as strong cash flows and effective management teams, while still maintaining some exposure to below investment grade high yield debt. The Continuing Fund's emphasis on senior secured loans should provide a measure of additional protection for unitholders of the Terminating Fund as compared to investments in debt securities that are not secured.
(b) Since the Terminating Fund has a similar investment mandate as the Continuing Fund and would generally attract the same type of investor with a similar risk-return profile, the Merger will contribute towards reducing duplication and redundancy across the Filer's fund line-up.
(c) The Continuing Fund is expected to attract more assets as marketing efforts will be concentrated on fewer funds, rather than two Funds with similar investment mandates. The ability to attract assets to the Continuing Fund will benefit investors by ensuring that the Continuing Fund remains viable, long-term, attractive investment vehicle for existing and potential investors.
(d) The Continuing Fund has a larger asset base than the Terminating Fund. The Merger will provide unitholders of the Terminating Fund with a much larger market capitalization and the secondary market for Continuing Fund Units is expected to be more liquid.
(e) The Continuing Fund has existing capital losses that will carry forward and continue to be available to the Continuing Fund, which may benefit all unitholders of the Continuing Fund.
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 Approval Sought is granted.