Headnote
NP 11-203 – Exemptions granted to flow-through limited partnerships from the requirements in National Instrument 81-106 Investment Fund Continuous Disclosure to file an annual information form, to maintain and prepare an annual proxy voting record, to post the proxy voting record on its website, and to provide it to securityholders upon request. Flow-through limited partnerships have a short lifespan and do not have a readily available secondary market.
Applicable Legislative Provisions
National Instrument 81-106 Investment Fund Continuous Disclosure, sections 9.2, 10.3, 10.4 and 17.1
April 30, 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 frontierAlt Energy 2006 Flow-Through Limited Partnership (the frontierAlt 2006 Partnership)
and
frontierAlt Energy 2006-II Flow-Through Limited Partnership (the frontierAlt 2006-II Partnership)
(collectively, the Partnerships)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Partnerships for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from:
(a) the requirement in Section 9.2 of National Instrument 81-106 – Investment Funds Continuous Disclosure (NI 81-106) to prepare and file an annual information form (the AIF) for each financial year;
(b) the requirement in Section 10.3 of NI 81-106 to maintain a proxy voting record (the Proxy Voting Record); and
(c) the requirements in Section 10.4 of NI 81-106 to prepare a Proxy Voting Record on an annual basis for the period ending June 30 of each year, to post the Proxy Voting Record on the Partnerships’ website no later than August 31 of each year, and to send the Proxy Voting Record to the limited partners of the Partnerships (Limited Partners) upon request,
((a), (b), and (c) are collectively, the Exemption 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 Partnerships have 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, New Brunswick, Nova Scotia, Newfoundland and Labrador, and Prince Edward Island.
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 Partnerships:
The frontierAlt 2006 Partnership and the frontierAlt 2006-II Partnership were formed pursuant to the provisions of the Limited Partnerships Act (Ontario) on February 6, 2006 and August 23, 2006, respectively.
The frontierAlt 2006 Partnership and the frontierAlt 2006-II Partnership received receipts dated March 31, 2006 and October 5, 2006, respectively, issued under MRRS by the Ontario Securities Commission on behalf of each of the provincial regulators, except Québec, with respect to (final) prospectuses dated March 30, 2006 and October 4, 2006, respectively, offering for sale up to 5,000,000 and 1,600,000 limited partnership units (Units), respectively, of the Partnerships at a price of $10 per unit and $25 per unit, respectively. The Partnerships are reporting issuers in each of the provinces of Canada, except Québec. No additional Units have been or will be issued.
The principal office of the Partnerships is located in Toronto, Ontario.
The Partnerships were formed to invest in certain common shares (Flow-Through Shares) of companies that operate, as their principal business, in oil and/or gas exploration, development and/or production industries in Canada (Resource Issuers) pursuant to agreements (Investment Agreements) between the relevant Partnership and the Resource Issuer. Under the terms of each Investment Agreement, the Partnership will subscribe for Flow-Through Shares of the Resource Issuer and the Resource Issuer will agree to incur and renounce to the Partnership, in amounts equal to the subscription price of the Flow-Through Shares, expenditures in respect of resource exploration and development that qualify as Canadian exploration expense and that may be renounced as Canadian exploration expense to the Partnership.
It is contemplated that the frontierAlt 2006 Partnership will terminate on June 30, 2008 and the frontierAlt 2006-II Partnership will terminated on December 31, 2008. Prior to those dates, the general partner of each Partnership may propose to the Limited Partners at a special meeting of Limited Partners to be held prior to the termination dates, one or more alternatives to the dissolution of the Partnership and distribution of the net assets of the Partnership to the Limited Partners, including, without limitation, a proposal that the Partnership exchange its assets for securities of a mutual fund corporation or other appropriate investment vehicle (including a fund in the frontierAlt Group of mutual funds), and distribute such securities to the Limited Partners on a tax deferred “rollover” basis, which alternatives may be proposed by the general partner and must be approved by a majority of the Limited Partners at a special meeting.
The Partnerships are not operating businesses. Rather, each Partnership is a short-term special purpose vehicle that will be dissolved within approximately two years of its formation. The primary investment purpose of the Partnerships is not to achieve capital appreciation, although this is a secondary benefit, but rather to obtain for the Limited Partners the significant tax benefits that accrue when Resource Issuers renounce resource exploration and development expenditures to the Partnerships through Flow-Through Shares.
The Units are not listed or quoted for trading on any stock exchange or market. The Units are not redeemable by the Limited Partners. Generally, Units are not transferred by Limited Partners, since Limited Partners must be holder of the Units on the last day of each fiscal year of the Partnership in order to obtain the desired tax deduction.
It is a term of the partnership agreements governing the Partnerships that the general partners of the Partnership have the authority to manage, control, administer and operate the business and affairs of the Partnerships, including the authority to take all measures necessary or appropriate for the business, or ancillary thereto, and to ensure that the Partnerships comply with all necessary reporting and administrative requirements.
Each of the Limited Partners of the Partnerships has, or will be expected to be, by subscribing for Units of the Partnerships, agreed to the irrevocable power of attorney contained in the partnership agreement and has thereby, in effect, consented to the making of this Application.
Since its formation, the Partnerships’ activities have been limited to (i) completing the issue of the Units under its respective prospectus, (ii) investing its available funds in accordance with its respective investment objectives, and (iii) incurring expenses as described in its prospectus.
Given the limited range of business activities conducted by the Partnerships, the short duration of their existence and the nature of the investment of the Limited Partners, the preparation and distribution of an AIF by the Partnerships would not be of any benefit to the Limited Partners and may impose a material financial burden on the Partnerships. Upon the occurrence of any material change to a Partnership, Limited Partners would receive all relevant information from the material change reports the Partnership is required to file in the Jurisdiction and the other provinces of Canada, except Québec.
As a result of the implementation of NI 81-106, investors purchasing Units of the Partnerships were provided with a prospectus containing written policies on how the Flow-Through Shares or other securities held by the Partnership are voted (the Proxy Voting Policies), and had the opportunity to review the Proxy Voting Policies before deciding whether to invest in Units.
Generally, the Proxy Voting Policies require that the securities of companies held by the Partnerships be voted in a manner most consistent with the economic interests of the Limited Partners of the Partnership.
Given the short lifespan of the Partnerships, the production of a Proxy Voting Record would provide Limited Partners with very little opportunity for recourse if they disagreed with the manner in which the Partnership exercised or failed to exercise its proxy voting rights, as the Partnerships would likely be dissolved by the time any potential change could materialize.
Preparing and making available to Limited Partners a Proxy Voting Record will not be of any benefit to Limited Partners and may impose a material financial burden on the Partnerships.
Through inadvertence, the Filers were not included in the application and exemptive order granted on April 29, 2008 to frontierAlt Energy & Precious Metals Flow-Through Limited Partnership, frontierAlt 2008 Precious Metals & Energy Flow-Through Limited Partnership and frontierAlt Capital Corporation for the same exemptive relief as the Exemption Sought.
Proxy Voting Records for the Partnerships for the period ended June 30, 2007 were maintained, prepared, posted and made available to Limited Partners through the website of the Partnerships.
The Partnerships are of the view that the Exemption Sought is not against the public interest, is in the best interests of the Partnership and their Limited Partners and represents the business judgment of responsible persons uninfluenced by considerations other than the best interest of the Partnership and their Limited Partners.
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.
“Rhonda Goldberg”
Rhonda Goldberg
Manager, Investment Funds Branch
Ontario Securities Commission
Headnote
NP 11-203 – Exemptions granted to flow-through limited partnerships from the requirements in National Instrument 81-106 Investment Fund Continuous Disclosure to file an annual information form, to maintain and prepare an annual proxy voting record, to post the proxy voting record on its website, and to provide it to securityholders upon request. Flow-through limited partnerships have a short lifespan and do not have a readily available secondary market.
Applicable Legislative Provisions
National Instrument 81-106 Investment Fund Continuous Disclosure, sections 9.2, 10.3, 10.4 and 17.1