Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because the consolidation does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds ss. 5.5(1)(b), 5.6.
November 27, 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 COVINGTON VENTURE FUND INC. (the "Filer")
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the "Legislation") for approval from section 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102"), to permit the Filer to effect a consolidation (the "Consolidation") of the pool of assets forming the basis of the net asset value of the Class A Shares, Series VII (the "Series VII Assets") with the pool of assets forming the basis of the net asset value of the Class A Shares, Series VIII and the Class A Shares, Series IX (the "Series VIII and Series IX Assets") (the "Approval").
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 the jurisdictions of British Columbia, Alberta, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.
Interpretation
Defined terms contained 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 Manager on behalf of the Filer:
The Manager
1The Manager (defined herein) is a Nova Scotia corporation and has its head office in Toronto.
2The Manager is registered under the securities legislation of Ontario as an adviser in the categories of investment counsel and portfolio manager.
3Covington Capital Corporation is the manager (the "Manager" or "Covington") of the Filer under a management agreement. On January 1, 2007, the Manager amalgamated with Covington Group of Funds Inc. under the laws of the Province of Nova Scotia. Prior to January 1, 2007, Covington Group of Funds Inc. had been the manager of the Filer and following January 1, 2007, The Manager continued this function.
4The Manager is indirectly wholly-owned by Affiliated Managers Group Inc. ("AMG"). AMG is an asset management company with equity investments in a diverse group of mid-sized investment management firms throughout North American and Europe. AMG is listed on the New York Stock Exchange under the symbol "AMG".
The Filer
5The Filer is a corporation formed by way of an amalgamation on January 6, 2006 pursuant to the Canada Business Corporations Act (the "Amalgamation") of six predecessor funds, Triax Growth Fund Inc., New Millennium Venture Fund Inc., New Generation Biotech (Balanced) Fund Inc., E2 Venture Fund Inc., Venture Partners Balanced Fund Inc. and Capital First Venture Fund Inc. (collectively, the "Predecessor Funds").
6The Class A shares of Triax Growth Fund Inc. were previously offered in all of the provinces of Canada except in the Province of Saskatchewan pursuant to a long form prospectus for which a receipt was obtained pursuant to the legislation of those jurisdictions. The Class A shares of the other Predecessor Funds were only offered in the Province of Ontario. The Filer is therefore a reporting issuer in all of the provinces of Canada except Saskatchewan. It is for this reason that the Applicants are applying to the Regulators and not just to the Principal Jurisdiction in order to receive this Decision.
7The authorized capital of the Filer consists of an unlimited number of Class A shares, issuable in series (collectively, the "Class A Shares") and an unlimited number of Class B shares in the capital of the Filer (the "Class B Shares").
8The Filer has nine series of Class A Shares currently issued and outstanding. Class A Shares, Series I through to Class A Shares, Series VII were issued to shareholders of the Predecessor Funds as part of the Amalgamation. Class A Shares, Series VIII and Class A Shares, Series IX (the "Series VIII and the Series IX Shares") were qualified for sale in November 2007. All of the issued and outstanding Class B Shares are owned by the Canadian Federal Pilots Association (the "Sponsor").
9The Filer filed a final prospectus dated January 30, 2008 as amended on October 16, 2008 (the "Prospectus") in the Province of Ontario in connection with the proposed offering to the public of Class A Shares, Series II, Class A Shares, Series III, Class A Shares, Series VIII and Class A Shares, Series IX in the capital of the Filer, which are the only series of Class A Shares currently in distribution.
10The Class A Shares, Series VII (the "Series VII Shares") and the Series VIII and Series IX Shares have only ever been offered to investors in Ontario.
11No series of the Filer's Class A Shares are listed on an exchange.
12The Filer is registered as a labour sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario) (the "Ontario Act") and as a labour-sponsored venture capital corporation under the Income Tax Act (Canada) (the "Tax Act"). The Filer's investing activities are governed by such legislation (collectively, the "LSIF Legislation").
13The Filer is a mutual fund as defined in the Securities Act (Ontario) ("Securities Act").
14The Series VII Shares refer to a separate portfolio of assets, the Series VII Assets.
15The Series VIII and Series IX Shares also refer to one separate portfolio of assets, the Series VIII and Series IX Assets.
16As of September 30, 2008, the Filer had approximately $157 million in net assets.
17As of September 30, 2008 the net assets of Class A Shares, Series VII and the net assets of Series VIII and Series IX Shares are approximately $10,705,000 and $8,680,000, respectively.
18The Filer makes investments in eligible Canadian businesses as defined in the Ontario Act. The investment objective of the Series VII Shares and of the Series VIII and Series IX Shares is: (i) with respect to all series of Class A Shares, to realize long-term capital appreciation on all or part of its investment portfolio; and (ii) on the remainder of its investment portfolio, with respect to Class A Shares, Series IV – Series IX, to preserve and return an investor's initial subscription price paid for such series of Class A Shares on or about the date indicated in the original prospectus of the applicable series.
19It is the Filer's objective to return the initial subscription price paid for the Series VII Shares on or about December 31, 2016.
20It is the Filer's objective to return the initial subscription price paid for the Series VIII and Series IX Shares on or about December 31, 2016 or December 31, 2017, depending when those shares were purchased.
21The net asset value of each of the Filer's series including Series VII Shares and the Series VIII and Series IX Shares is calculated on a daily basis.
22If the Consolidation is effected, the Series VII Shares fee structure will change to mirror the Class A Shares, Series VIII fee structure. The Series IX Shares fee structure will remain unchanged. The Series VII Shareholders will either have their fees stay the same in most cases or decrease in respect of the management fee and sponsor fee that they pay.
23The Filer has complied with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106") in connection with the Consolidation.
The Consolidation
24On October 7, 2008, the Filer announced the Consolidation of the Series VII Assets with the Series VIII and Series IX Assets. The Consolidation has been approved by the board of the Filer and by its independent review committee. The Consolidation is subject to the approval of the holders of Series VII Shares (the "Series VII Shareholders") and the holders of Series VIII and Series IX Shares (the "Series VIII and Series IX Shareholders") as it involves an amendment to sections of the articles of amendment of the Filer ("Articles"), as well as applicable regulatory approvals.
25On September 10, 2008, the Filer filed a notice of meeting and record date calling a special meeting of the shareholders of the Filer for November 14, 2008 (the "Shareholders' Meeting"), and, if approved, the Consolidation is expected to be effective on or about November 17, 2008 (the "Effective Date").
26In connection with the Shareholders' Meeting, shareholders of the Filer have been sent an information circular (the "Circular") which contains details of the proposed Consolidation, including income tax considerations associated with the Consolidation.
27The Consolidation will be completed through amendments to the sections of the Articles of the Filer relating to the Series VII Shares and the Series VIII and Series IX Shares in order to effect the Consolidation of the Series VII Assets and the Series VIII and Series IX Assets forming the basis of the net asset value of such shares. The Articles of the Filer will be amended so that the Series VII Shareholders and the Series VIII and Series IX Shareholders all share in one pool of assets after the Consolidation instead of two pools of assets prior to the Consolidation.
28The entitlement of each Series VII Shareholder and each Series VIII and Series IX Shareholder will be to their proportionate interest to the assets of the consolidated pool. The number of Class A Shares of each respective series that shareholders own will remain the same and the value of each of the Series VII Share or each Series VIII and Series IX Share immediately after the Consolidation will be the same as the value immediately prior to the filing of the amendment to the Articles and the Consolidation.
29None of the Series VII Shares or of the Series VIII and Series IX Shares will be issued, acquired, redeemed or cancelled in order to effect the Consolidation.
30The last scheduled pricing date for Series VII Shares and for the Series VIII and Series IX Shares before the anticipated Effective Date of the Consolidation will be one day prior to the Effective Date.
31Shareholders of all of the series of the Filer will continue to have the right to redeem Series VII Shares, Series VIII and Series IX Shares for cash at any time up to the close of business on the business day immediately preceding the Effective Date of the Consolidation. Such redemptions may be subject to tax under the LSIF Legislation.
32Shareholders of Series VII Shares, Series VIII and Series IX Shares of the Filer will be entitled to exercise dissent rights pursuant to and in the manner set forth in Section 190 of the Canada Business Corporations Act (the "CBCA") with respect to the resolutions to amend the Articles of the Filer. Shareholders that validly exercise these rights and do not withdraw their dissent ("Dissenting Shareholders") will be entitled to receive the "fair value" of the applicable series of Class A Shares as at the day before the resolution approving the amendments to the Articles of the Filer is adopted by shareholders of the Filer. Any Dissenting Shareholders of the Filer who held their Class A Shares for less than eight years will be required, in accordance with LSIF Legislation, to repay federal and provincial tax credits granted when the shares were originally purchased.
33The Manager will continue to serve as manager for the Filer after the Consolidation.
34All of the costs of effecting the Consolidation (consisting primarily of legal, proxy solicitation, printing, mailing and accounting costs) will be paid by the Manager.
35Pursuant to NI 81-107 – Independent Review Committee for Investment Funds, the Independent Review Committee (the "IRC") of the Filer has reviewed the Consolidation and the process to be followed in connections with the Consolidation and has advised the Filer that, in the IRC's opinion, having reviewed the potential conflicts of interest in the Consolidation, the Consolidation achieves a fair and reasonable result for the Filer.
Approval for the Consolidation
36Approval for the Consolidation is required because the Consolidation does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6(1) of NI 81-102 because:
(i) the Consolidation is not a "qualifying exchange" within the meaning of section 132.2 of the Tax Act, as required by Section 5.6(1)(b) of the National Instrument; and
(ii) the materials sent to shareholders of the Filer do not include copies of the current long form prospectuses of the Filer, or copies of the annual and interim financial statements of the Filer, as required by Section 5.6(1)(f)(ii) of NI 81-102. The Fund determined that it was not cost effective to include a long form prospectus with the meeting materials when the salient features of the Series VII Shares and Series VIII and Series IX Shares were outlined in the Circular. However, the Circular sent to the shareholders of the Filers instead:
A. includes disclosure about the Consolidation and prospectus-like disclosure concerning the series of the Filer that are involved in the Consolidation;
B. for purposes of NI 81-106 and NI 51-102, incorporates by reference the prospectus of the Filer (as permitted under NI 51-102);
C. discloses that shareholders can obtain the current copy of the Filer's Prospectus at no cost by accessing the SEDAR website at www.sedar.com, by accessing the Manager's website at www.covingtonfunds.com or by calling a toll-free telephone number (in which case the Manager will cause the requested material to be promptly mailed to the requesting shareholder); and
D. discloses that shareholders can obtain annual and interim financial statements of the Filer as at and for the period ended July 31, 2008 and any management reports of fund performance produced by the Filer at no cost by accessing the SEDAR website at www.sedar.com, by accessing the Manager's website at www.covingtonfunds.com or by calling a toll-free telephone number (in which case the Manager will cause the requested material to be promptly mailed to the requesting shareholder).
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 Exemption Sought is granted provided that in connection with the Consolidation, the management information circular sent to securityholders in connection with the Consolidation provides sufficient information about the Consolidation to permit securityholders to make an informed decision about the Consolidation.
Vera Nunes Assistant Manager Investment Funds Ontario Securities Commission
SEDAR Project #1337667