Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because merger does not meet the criteria for pre-approval – differences in investment objectives – merger not a “qualifying exchange” – some portfolio assets of terminating fund not consistent with continuing fund’s investment objectives – securityholders of terminating and continuing funds provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds ss. 5.5(1)(b), 5.6
May 8, 2008
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 BMO INVESTMENTS INC. (the Filer)
and
BMO U.S. Equity 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 of the principal regulator (the Legislation) for approval of the merger (the Merger) of the Terminating Fund into BMO Global Dividend Class (the Continuing Fund) under clause 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
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.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation governed by the laws of Canada and is the manager of each of the Terminating Fund and the Continuing Fund (each a Fund and collectively, the Funds).
The head office of the Filer is located in Ontario.
The Funds
Each of the Funds is a class of special shares of BMO Global Tax Advantage Funds Inc., a mutual fund corporation incorporated by articles of incorporation under the laws of Canada dated September 5, 2000, as amended on September 28, 2000, October 25, 2000, November 28, 2003, October 1, 2004, April 30, 2007 and January 25, 2008.
Shares of each of the Funds are currently offered for sale under a simplified prospectus and annual information form dated May 2, 2007, as amended on September 29, 2007, November 9, 2007 and January 25, 2008 in all provinces and territories of Canada. A pro forma filing to renew the offering of the Terminating Fund and the Continuing Fund for distribution was completed on April 1, 2008.
The Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada and are not on the list of defaulting reporting issuers maintained under such securities legislation.
Unless an exemption has been obtained, each of the Funds follows the standard investment restrictions and practices established by the securities regulatory authorities in each province and territory of Canada.
The net asset value for shares of each of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
Merger
The Filer proposes to merge the Terminating Fund into the Continuing Fund. A press release and material change report were filed on SEDAR in March 2008 in connection with the Merger.
A management information circular in connection with the Merger was filed on SEDAR and was otherwise mailed to shareholders of each Fund on or about April 8, 2008 (the Circular).
As required by National Instrument 81-107 Independent Review Committee for Investment Funds, an independent review committee (the IRC) has been appointed for the Funds. The Filer presented the terms of the Merger to the IRC for a recommendation. The IRC reviewed the proposed Merger and recommended that it be put to shareholders of the Funds for their consideration on the basis that the Merger would achieve a fair and reasonable result for the Funds.
Shareholders of the Terminating Fund and shareholders of the Continuing Fund approved the Merger at special meetings of shareholders each held on or about May 5, 2008.
Implicit in the approval by shareholders of the Merger is the adoption by the Terminating Fund of the fundamental investment objective of the Continuing Fund. Investors in the Terminating Fund will be asked to review those parts of the Circular which describe the change in fundamental objective for the Continuing Fund when considering the merits of the Merger of the Terminating Fund into the Continuing Fund.
The proposed Merger of the Terminating Fund into the Continuing Fund will be structured substantially as follows:
(a) the Articles of Incorporation of BMO Global Tax Advantage Fund Inc. will be amended to provide for
(i) the exchange of all of the Terminating Fund’s shares for shares of the Continuing Fund on a dollar-for-dollar basis; and
(ii) the cancellation of the shares of the Terminating Fund;
(b) shares of the Continuing Fund will be issued to shareholders of the Terminating Fund on a dollar-for-dollar basis;
(c) shares of the Terminating Fund will be cancelled; and
(d) the Articles of Incorporation of BMO Global Tax Advantage Funds Inc. may be further amended to the extent necessary to give effect to the foregoing.
Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.
The Filer will pay all costs and expenses relating to the solicitation of proxies and the holding of the shareholder meetings in connection with the Merger. Neither the Terminating Fund nor the Continuing Fund will bear any of the costs and expenses of the Merger, including brokerage commissions resulting from the need for portfolio realignment.
Subject to the required approval of the principal regulator and shareholders of each of the Funds, the Merger is expected to occur on or about May 9, 2008.
Shareholders of the Terminating Fund will continue to have the right to redeem shares of the Terminating Fund for cash at any time up to the close of business on the business day immediately preceding the effective date of the Merger.
Approval of the Merger 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 because (i) the fundamental investment objective of the Terminating Fund is not substantially similar to the fundamental investment objective of the Continuing Fund; (ii) certain of the portfolio assets of the Terminating Fund are not consistent with the fundamental investment objective of the Continuing Fund and (iii) the Merger will not be structured as a “qualifying exchange” or a tax-deferred transaction in accordance with the Tax Act.
The primary difference between the fundamental investment objectives of the Terminating Fund and the Continuing Fund is that the Continuing Fund invests primarily in equities of U.S. companies while the investments of the Continuing Fund are geographically broader in scope and are based on dividend yield. The Filer submits that the Merger will reduce duplication between the Funds and allow for greater diversification.
After the Merger, the portfolio securities that do not meet the investment objectives of the Continuing Fund will be liquidated as quickly as commercially reasonable.
The tax implications of the Merger as well as the differences between the Terminating Fund and the Continuing Fund are described in the Circular so that shareholders of the Terminating Fund could consider this information before voting on the Merger.
The Filer belies that the Merger will be in the best interests of shareholders of the Terminating Fund for the following reasons:
(a) shareholders of the Terminating Fund will enjoy increased economies of scale as part of a larger Continuing Fund;
(b) the expenses borne by shareholders for administration and regulatory costs of operating separate, smaller mutual funds could be reduced over the long run;
(c) the Continuing Fund will have a portfolio of greater value allowing for increased portfolio diversification opportunities; and
(d) the Continuing Fund, as a result of its greater size may benefit from a larger profile in the marketplace.
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 Requested Relief is granted.
This decision, as it relates to the jurisdiction of the principal regulator, will terminate one year after the publication in final form of any legislation or rule of that principal regulator dealing with matters in paragraph 5.5(1)(b) of NI 81-102.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds
ONTARIO SECURITIES COMMISSION
SEDAR Project No. 1231023