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 -- merger to otherwise comply with pre-approval criteria, including securityholder vote and IRC approval -- securityholders provided with timely and adequate disclosure regarding the merger -- 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.
January 31, 2020
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 HORIZONS ETFS MANAGEMENT (CANADA) INC. (the Filer) AND HORIZONS EMERGING MARIJUANA GROWERS INDEX ETF (the Terminating Fund)
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 (the Merger) of the Terminating Fund into Horizons US Marijuana Index ETF (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):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Filer has provided notice that paragraph 4.7(1)(c) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than the Jurisdiction (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.
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
3. The Filer is registered as (a) an investment fund manager in Newfoundland and Labrador, Ontario and Québec, (b) a portfolio manager in Alberta, British Columbia, Ontario and Québec (c) a dealer in the category of exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan, (d) a commodity trading adviser in Ontario and (e) a commodity trading manager in Ontario.
4. The Filer is the manager of each Fund.
5. Each Fund was established pursuant to a declaration of trust under the laws of Ontario.
6. The Terminating Fund is an exchange-traded mutual fund ("ETF") whose units are listed on the Aequitas NEO Exchange (the "NEO").
7. The Continuing Fund is an ETF whose units are listed on the NEO.
8. The Filer and each Fund is not in default of securities legislation in any Jurisdiction.
9. Each Fund is a reporting issuer (or the equivalent) under the securities legislation of each Jurisdiction and is subject to the requirements of NI 81-102.
10. Each of the Funds follows the standard investment restrictions and practices established under the Legislation, except to the extent that the Fund has received an exemption to deviate therefrom.
11. The net asset value (NAV) of each Fund is calculated on each day that the NEO is open for business in accordance with the Funds' valuation policy and as described in each Fund's prospectus.
Reason for Approval of the Merger
12. Regulatory approval of the Merger is required because the Merger does not satisfy all the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular: (a) a reasonable person may not consider the Terminating Fund to have substantially similar fundamental investment objectives as the Continuing Fund; and (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.
13. The investment objectives of the Terminating Fund and the Continuing Fund are as follows:
To seek to replicate, to the extent possible, the performance of the Emerging Marijuana Growers Index, net of expenses. The Emerging Marijuana Growers Index is designed to provide exposure to the performance of a basket of primarily North American publicly-listed small-capitalization companies primarily involved in the cultivation, production, and/or distribution of marijuana.
To replicate, to the extent possible, the performance of the US Marijuana Companies Index, net of expenses. The US Marijuana Companies Index is designed to provide exposure to the performance of a basket of North American publicly-listed life sciences companies having significant business activities in, or significant exposure to, the United States marijuana or hemp industries.
14. Except as described above, the Merger will otherwise comply with all the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
15. Although the investment objectives of the Terminating Fund may not be substantially similar to the Continuing Fund, in the Filer's view:
(a) the fundamental investment objectives of the Funds are similar in that both seek to replicate an index of North American publicly-listed companies involved in marijuana; 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.
The Proposed Merger
16. The Filer intends to merge the Terminating Fund into the Continuing Fund.
17. The Merger was announced in a press release on January 17, 2020, and a corresponding material change report was filed via SEDAR on January 24, 2020.
18. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Filer presented the terms of the Merger to the independent review committee of each of the Funds (the IRC) for their review. The IRC determined that the Merger, if implemented, will achieve a fair and reasonable result for the Terminating Fund.
19. The Filer is convening a special meeting (the Meeting) of the unitholders of the Terminating Fund on or about February 19, 2020 in order to seek the approval of the unitholders to complete the Merger, as required by paragraph 5.1(1)(f) of NI 81-102.
20. The Filer 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 unitholders of the Continuing Fund to approve the Merger pursuant to paragraph 5.1(1)(g) of NI 81-102.
21. By way of order dated November 4, 2016, the Filer was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of National Instrument 81-106 Investment Fund Continuous Disclosure to send a printed management information circular to unitholders 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 unitholders. In accordance with the Filer's standard of care owed to the Funds pursuant to securities legislation, the Filer will only use the notice-and-access procedure for a particular meeting where it has concluded it is appropriate and consistent with the purposes of notice-and-access (as described in Companion Policy 54-101CP 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.
22. Pursuant to requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with the Meeting and any adjournment thereof, along with the ETF Facts of the Continuing Fund was mailed to unitholders of the Terminating Fund on January 17, 2020, and was filed via SEDAR immediately prior to such mailing. A management information circular in respect of the Meeting (the Circular), which the notice-and-access document provided a link to, was also be filed via SEDAR at the same time.
23. If all required approvals for the Merger is obtained, it is intended that the Merger will occur on or about February 28, 2020 (the Effective Date). The Filer therefore anticipates that each unitholder of the Terminating Fund will become a unitholder of the Continuing Fund after the close of business on the Effective Date. The Terminating Fund will be wound-up as soon as reasonably practicable following the Merger.
24. The tax implications of the Merger as well as the differences between the investment objectives and other features of the Terminating Fund and the Continuing Fund will be described in the Circular, so that unitholders may make an informed decision before voting on whether to approve the Merger. The Circular will also describe the various ways in which unitholders can obtain a copy of the prospectus of the Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.
25. Unitholders of the Terminating Fund will continue to have the right to sell their units of the Terminating Fund on the NEO at any time until the units are delisted, which will occur shortly prior to the Merger being implemented. In addition, if unitholders of the Terminating Fund approve the Merger at the Meeting, unitholders of the Terminating Fund who do not wish to participate in the Merger will also have the opportunity to redeem their units of the Terminating Fund in accordance with the declaration of trust of the Terminating Fund prior to the Effective Date.
26. The costs of preparing and sending the proxy materials and of the solicitation of proxies, as well as other costs and expenses associated with the Meeting and the Merger, will be borne by the Filer.
27. No sales charges will be payable by unitholders of the Funds in connection with the Merger.
28. 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 or prior to 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.
Steps of the Merger
29. The specific steps to implement the Merger are expected to be as follows:
(a) 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 units of the Continuing Fund (the "Continuing Fund Units") determined based on an exchange ratio established as of the close of trading on the business day immediately preceding the effective date of the Merger.
(b) The Exchange Ratio (as defined below) will be calculated based on the relative net asset values of the units of the Terminating Fund (the "Terminating Fund Units") and the Continuing Fund Units.
(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 the Terminating Fund Units will be automatically redeemed. Each unitholder will receive such number of Continuing Fund Units as is equal to the number of Terminating Fund Units held multiplied by the Exchange Ratio of such units.
(d) The Terminating Fund Units will be redeemed by the Terminating Fund in exchange for Continuing Fund Units at an exchange ratio (the "Exchange Ratio") calculated based on the relative net asset value of each of the Terminating Fund Units and the Continuing Fund Units at the close of trading on the NEO on the business day prior to the effective date of the Merger.
(e) The Terminating Fund Units will be de-listed from the NEO and the Terminating Fund will cease to be a reporting issuer in each of the provinces and territories of Canada.
Benefits of the Merger
30. In the opinion of the Filer, the Merger will be beneficial to unitholders of the Terminating Fund for the following reasons:
(a) The Continuing Fund and the Terminating Fund have similar fundamental investment objectives and both seek to replicate an index of North American publicly-listed companies involved in marijuana. In the Filer's view, the Continuing Fund's emphasis on the United States marijuana or hemp industries currently presents a more attractive investment opportunity for unitholders than the "small-cap" marijuana companies to which the Terminating Fund is currently exposed.
(b) 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 potentially benefit investors by ensuring that the Continuing Fund remains a viable, long-term, attractive investment vehicle for existing and potential investors. The Continuing Fund also has a much larger asset base than the Terminating Fund at the current time. The Merger will provide unitholders with a much larger market capitalization and the secondary market for the Continuing Fund Units is expected to be more liquid.
(c) The Merger will eliminate the operating and regulatory costs of operating the Terminating Fund and the Continuing Fund as separate ETFs, and the unitholders of the Continuing Fund, as a result of its greater size, may over time benefit from a reduction of its management expense ratio as its operating and regulatory costs are expected to be spread over a larger asset base. Accordingly, 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 Horizons fund line-up.
(d) The Continuing Fund has a fee structure and valuation procedures that are identical to the fee structure and valuation procedures of the Terminating 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 under the Legislation is that the Merger Approval is granted, provided that the Filer obtains the prior approval of the unitholders of the Terminating Fund for the Merger at the Meeting, or any adjournment thereof.