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Mackenzie Financial Corporation and Mackenzie Cundill US Class
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of investment fund mergers -- approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 Investment Funds -- terminating funds and continuing fund do not have substantially similar fundamental investment objectives -- mergers will not be a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -mergers to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval -- securityholders provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b) and 19.1(2).
November 19, 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 MACKENZIE FINANCIAL CORPORATION (the Filer) AND MACKENZIE CUNDILL US CLASS (the Terminating Fund)
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund, for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed merger of the Terminating Fund into the Continuing Fund (each as defined below), pursuant to subsection 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 the provinces and territories of Canada, other than Ontario (together with Ontario, the Canadian 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:
Continuing Fund means Mackenzie US Growth Class.
Effective Date means on or about February 7, 2020, the anticipated date of the Merger.
Exempt Merger means the Merger with respect to Series J of the Terminating Fund and the Continuing Fund which are not currently offered for purchase and are not currently qualified for distribution under a simplified prospectus.
Funds means collectively, the Terminating Fund and the Continuing Fund.
Merger means the proposed merger of the Terminating Fund into the Continuing Fund.
New Series Merger means the Merger with respect to Series F5, Series PWT5 and Series T5 securities of the Continuing Fund which will be created to facilitate the Merger.
Terminating Fund means Mackenzie Cundill US Class.
REPRESENTATIONS
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation governed by the laws of Ontario and is registered as follows: as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; as a portfolio manager and exempt market dealer in the Canadian Jurisdictions; as an adviser in Manitoba; and as a commodity trading manager in Ontario.
2. The Filer, with its head office in Toronto, Ontario, is the trustee and manager of the Funds.
The Funds
3. The Funds are separate classes of securities of Mackenzie Financial Capital Corporation (Capitalcorp), a mutual fund corporation governed by the laws of the Jurisdiction.
4. The Funds are reporting issuers under the securities legislation of the Canadian Jurisdictions and are subject to the requirements of NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure. Neither the Filer nor the Funds are in default of securities legislation in any of the Canadian Jurisdictions.
5. Other than circumstances in which the securities regulatory authority of a Canadian Jurisdiction has expressly exempted a Fund therefrom, the Funds follow the standard investment restrictions and practices established under NI 81-102.
6. Securities of the Funds are qualified for sale under the simplified prospectus, annual information form and fund facts each dated September 27, 2019, as amended (collectively, the Offering Documents). Series J of the Funds is only offered on an exempt distribution basis. Series F5, Series PWT5 and Series T5 securities of the Continuing Fund will be newly created and will be qualified for distribution under a prospectus.
7. The net asset value for each series of the Funds is calculated on a daily basis in accordance with the Funds' valuation policy and as described in the Offering Documents.
8. The Continuing Fund has substantially similar valuation procedures to those of the Terminating Fund.
9. Securities of the Funds are qualified investments under the Income Tax Act (Canada) (Tax Act) for the following registered plans: registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans, life income funds, locked-in retirement accounts, locked-in retirement income funds, locked-in retirement savings plans, prescribed retirement income funds, restricted life income funds, restricted locked-in savings plans, registered disability savings plans and tax-free savings accounts.
Reasons for the Approval Sought
10. 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. The pre-approval criteria are not satisfied in the following ways:
(i) the Merger cannot be completed as a "qualifying exchange" or a tax-deferred transaction under the Tax Act given the structure of the Funds;
(ii) the fundamental 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; and
(iii) as described below, the materials to be sent to securityholders of the Terminating Fund in respect of the New Series Merger and Exempt Merger will not include the current simplified prospectus or the most recently filed fund facts documents for the applicable series of the Continuing Fund.
11. Pursuant to the Merger, securityholders of the Terminating Fund would become securityholders of the Continuing Fund.
12. Except as noted above, the Merger will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
13. The Filer is of the view that the Merger will not constitute a "material change" for the Continuing Fund.
14. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Independent Review Committee (IRC) has been appointed for the Funds. The Filer presented the terms of the Merger to the IRC for a recommendation. On September 19, 2019, the IRC reviewed the Merger and provided a positive recommendation for the Merger, having determined that the Merger, if implemented, would achieve a fair and reasonable result for the Funds and their respective securityholders.
15. In accordance with National Instrument 81-106 -- Investment Fund Continuous Disclosure (NI 81-106), a press release announcing the Merger was issued and filed via SEDAR on September 24, 2019. A material change report and amendments to the Offering Documents with respect to the Merger, were filed in accordance with NI 81-106.
16. By way of order dated October 21, 2016, the Filer 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. Subject to certain conditions, the Notice-and-Access Relief instead allows a notice-and-access document to be sent to such securityholders. Pursuant to the requirements of the Notice-and-Access Relief, the notice-and-access document, a form of proxy in connection with the special meeting of securityholders of the Terminating Fund will be mailed to securityholders of the Terminating Fund commencing on or about December 13, 2019 and will be concurrently filed on SEDAR. The management information circular and forms of proxy (collectively, the Meeting Materials) in connection with the special meeting of securityholders of the Terminating Fund will be posted on the Filer's website at www.mackenzieinvestments.com. The Meeting Materials will also appear on the SEDAR website at www.sedar.com.
17. The Meeting Materials describe all of the relevant facts concerning the Merger relevant to the securityholders, including the differences between investment objectives, strategies of the Terminating Fund and the Continuing Fund, the IRC's recommendations regarding the Merger, and income tax considerations so that securityholders of the Terminating Fund may consider this information before voting on the Merger. The Meeting Materials also describe the various ways in which securityholders can obtain a copy of the simplified prospectus and annual information form of the Continuing Fund, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Fund, at no cost.
18. Fund facts documents relating to the applicable series of the Continuing Fund will be mailed to securityholders of the corresponding series of the Terminating Fund in all instances other than in respect of the New Series Merger and Exempt Merger.
19. In respect of the New Series Merger, because a current simplified prospectus and fund facts document are not available for Series F5, Series PWT5 and Series T5 of the Continuing Fund, securityholders of Series F5, Series PWT5 and Series T5 of the Terminating Fund will be sent a fund facts document relating to Series F8, Series PWT8 and Series T8 securities, respectively, of the Continuing Fund as the fees and features of the corresponding series are closely aligned.
20. In respect of the Exempt Merger, Series J securities of the Continuing Fund are no longer offered for purchase, as is the case with Series J securities of the Terminating Fund.
21. In order to effect the Exempt Merger, securities of Series J of the Continuing Fund will be distributed to applicable securityholders of the Terminating Fund in reliance on the prospectus exemption contained in section 2.11 of National Instrument 45-106 -- Prospectus Exemptions.
22. The Filer will pay for the costs of the Merger. These costs consist mainly of brokerage charges associated with the trades that occur both before and after the date of the Merger and legal, proxy solicitation, printing, mailing and regulatory fees. There are no charges payable by securityholders of the Funds as a result of the Merger.
23. Securityholders of the Terminating Fund will be asked to approve the Merger at a special meeting of securityholders scheduled to be held on or about January 17, 2020.
24. Following the implementation of the Merger, all systematic plans that will be established with respect to the Terminating Fund will be re-established in the Continuing Fund, either on a series-for-series basis or into a similar series with substantially similar fees, unless securityholders advise the Filer otherwise or unless otherwise noted in the information circular.
25. Securityholders may change or cancel any systematic plan at any time as long as the Filer receives at least three business days' notice and securityholders of the Terminating Fund who wish to establish one or more systematic plans in respect of their holdings in the Continuing Fund may do so following the implementation of the Merger.
26. The Merger will be completed as a taxable transaction under the Tax Act. Securityholders of the Terminating Fund will be provided with information about the income tax consequences of the Merger in the information circular and will have the opportunity to consider such information prior to voting on the Merger.
27. If the necessary securityholder approval is obtained, the Terminating Fund will merge into the Continuing Fund at or about the close of business on the Effective Date, and the Continuing Fund will continue as a class of Capitalcorp.
Merger Steps
28. If the necessary approvals are obtained, the Filer will carry out the following steps to complete the Merger:
(i) Prior to effecting the Merger, if required, Capitalcorp will sell any securities in the portfolio of the Terminating Fund that do not meet the investment objectives and investment strategies of the Continuing Fund and purchase other securities so that, as of the Effective Date, the portfolio of the Terminating Fund is substantially similar to that of the Continuing Fund. As a result, the Terminating Fund may temporarily hold cash, money market instruments or investments that are not consistent with its investment objectives, and it may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger being effected.
(ii) The Funds may pay taxable dividends and/or capital gains dividends to their securityholders, but only to the extent required to manage the tax liability of Capitalcorp in a manner that the Board of Directors of Capitalcorp, in consultation with the Filer, determines to be fair and reasonable.
(iii) The value of each Fund's portfolio and other assets will be determined at the close of business on the Effective Date in accordance with the constating documents of the Funds.
(iv) The Continuing Fund will not assume any liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date.
(v) All of the issued and outstanding securities of the Terminating Fund will be exchanged for securities of the Continuing Fund on a dollar-for-dollar and series-by-series basis, so that securityholders of the Terminating Fund become securityholders of the Continuing Fund.
(vi) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
29. Securityholders in the Terminating Fund will continue to have the right to redeem their securities or exchange their securities for securities of any other mutual fund of the Filer at any time up to the close of business on the business day before the Effective Date. Securityholders of the Terminating Fund that switch their securities for securities of other mutual funds of the Filer will not incur any charges other than switch fees, if applicable, as described in the Terminating Fund's simplified prospectus. Securityholders who redeem securities may be subject to redemption charges.
30. Following the implementation of the Merger, a press release and material change report announcing the results of the securityholder meetings in respect of the Merger will be issued and filed.
31. No sales charges will be charged by the Filer to investors or to the Terminating Fund or Continuing Fund in connection with the acquisition by a Continuing Fund of the investment portfolio of its Terminating Fund.
32. The assets of the Terminating Fund to be acquired by the Continuing Fund in order to effect the Merger are currently, or will be, acceptable, on or prior to the Effective Date, to the portfolio managers of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.
33. If the Merger is approved, the reorganization will be implemented after the close of business on the Effective Date. If the Merger is not approved, the Terminating Fund will continue to be offered for distribution.
Merger Benefits
34. The Filer believes that the Merger is beneficial to securityholders of the Terminating Fund for the following reasons:
(i) Superior performance of the Continuing Fund: The Continuing Fund has generated significantly better past performance than the Terminating Fund (although past performance is not a guarantee of future returns and may not be repeated);
(ii) Better future return potential: The Merger is being proposed to reflect the Filer's belief that the Continuing Fund will provide better return potential over the long term; and
(iii) Same fees: Management fees and/or fixed administration fees will be the same for the Continuing 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 approval of the securityholders of the Terminating Fund for the Merger at a special meeting held for that purpose.
"Neeti Varma"
Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission