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 – labour sponsored investment funds with different investment objectives – merger not a “qualifying exchange” or a tax-deferred transaction under the Income Tax Act – current simplified prospectus and financial statements of continuing fund not required to be sent to unitholders of the terminating fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b) and 5.6.
April 20, 2009
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
Canadian Medical Discoveries 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 of the principal regulator (the Legislation) for an approval under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds to permit the Fund to merge with GrowthWorks Canadian Fund Ltd. (the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
Interpretation
Defined terms contained in National Instrument 14-101 – Definitions and in MI 11-102 have the same meaning if used in this decision unless otherwise defined. Canadian Medical Discoveries Fund Inc. is also referred to as the “Fund”.
Representations
This decision is based on the following facts represented by the Filer:
CMDF
CMDF is a corporation existing under the laws of Canada with its head office located in Toronto, Ontario.
CMDF is registered as a labour sponsored investment fund 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 ITA).
JovFunds Management Inc. is the manager of CMDF (the Manager).
The labour sponsor of CMDF is The Professional Institute of the Public Service of Canada.
The authorized capital of CMDF is as follows:
a) an unlimited number of Class A, Series I, shares;
b) an unlimited number of Class A, Series II, shares (together with the Class A, Series I, Shares, the Class A Shares);
c) 25,000 Class B shares which are held by the labour sponsor of CMDF; and
d) an unlimited number of Class C shares issuable in series.
CMDF is a reporting issuer under the applicable securities legislation of each province and territory of Canada and is not on the list of defaulting reporting issuers maintained under the applicable securities legislation of such jurisdictions.
CMDF’s fundamental investment objective is to achieve long-term capital appreciation through investment in eligible Canadian businesses engaged in the health sciences sector, with emphasis on those businesses involved in the testing and development, or production and commercialization stages of development.
CMDF’s net asset value is calculated on a daily basis on each day the Toronto Stock Exchange is open for business.
Sales and redemptions of shares of CMDF have been suspended since June 25, 2008 in accordance with decisions of the Autorité des marchés financiers du Québec dated June 25, 2008 and December 22, 2008 (the Prior Decisions) as a result of liquidity issues which are detailed in such decisions.
Prior to making applications for the Prior Decisions to suspend sales and redemptions the board of directors of CMDF constituted a special committee, the voting members of which were all independent from the Manager (the Committee).
The mandate of the Committee was to consider strategic options available for CMDF including, but not limited to various liquidation scenarios, eventual wind-up and closure, and reorganization into another fund or investment vehicle.
The Committee retained independent legal and financial advisors to assist it:
a) in its consideration of strategic options, which ultimately resulted in the recommendation of the approval of the proposed Merger to the CMDF board of directors, which recommendation was adopted; and
b) in its negotiations with the Manager for the termination of various agreements pursuant to which managerial and administrative services are currently provided to CMDF.
A material change report and press release was filed via SEDAR on November 7, 2008 with respect to the proposed Merger.
A notice of meeting, a management information circular and a proxy in connection with the annual and special meeting of securityholders to consider the Merger was mailed to securityholders of CMDF on or about February 4, 2009 and was filed on SEDAR.
Significant merger terms and conditions, including the redemption fees of 35% in the first three years, were disclosed in the management information circular described in paragraph 14.
The Independent Review Committee of CMDF provided a positive recommendation with respect to the Merger and such recommendation was included in the management information circular described in paragraph 14.
Securityholders of CMDF approved the Merger at a meeting held February 26, 2009.
GW Canadian
GW Canadian was incorporated under the Canada Business Corporations Act with its head office located in Toronto, Ontario.
GW Canadian is a registered labour-sponsored investment fund corporation under the Ontario Act and is a registered labour-sponsored venture capital corporation under the ITA and The Labour-Sponsored Venture Capital Corporations Act (Manitoba). GW Canadian is an approved fund under the Labour-sponsored Venture Capital Corporations Act (Saskatchewan). GW Canadian’s investing activities are governed by such legislation (the LSIF Legislation).
GW Canadian primarily invests in small and medium sized businesses with the objective of obtaining long term capital appreciation and must make “eligible investments” in “eligible businesses” as prescribed under the LSIF Legislation.
The labour sponsor of GW Canadian is the Canadian Federation of Labour.
The authorized capital of GW Canadian is as follows:
a) an unlimited number of Class A shares issuable in series, which are widely held, of which there are currently 20 series created and 10 series offered under GW Canadian’s current prospectus;
b) 1,000 Class B Shares which are held by the sponsor of GW Canadian; and
c) an unlimited number of Class C shares issuable in series, of which there is one issued series designated as “IPA shares” held by the manager of GW Canadian to provide for a “participating” or “carried” interest in the venture investments of GW Canadian.
GW Canadian’s net asset value is calculated on a weekly basis.
Securityholders of GW Canadian approved the Merger at a meeting held on December 3, 2008.
The Merger
- The proposed Merger will take place in accordance with the following steps:
a) The articles of incorporation of CMDF will be amended to authorize the exchange of all the outstanding Class A Shares of CMDF for Class A Shares GW Canadian.
b) CMDF will transfer all of its assets which will consist of cash and portfolio securities, less an amount required to satisfy the liabilities of CMDF, to GW Canadian in exchange for Class A shares of GW Canadian (the Merger Shares).
c) Immediately following the above-noted transfer, CMDF will distribute to its Class A securityholders the Merger Shares so that following the distribution, the securityholders of CMDF will become direct securityholders of GW Canadian.
d) As soon as reasonably practicable following the Merger, CMDF will be wound up.
GW Canadian will not generally assume the liabilities of CMDF in connection with the Merger. However, indemnity agreements granted by CMDF in favour of its directors and officers will be assumed by GW Canadian subject to the overriding provision that recourse against GW Canadian under all such indemnities will generally be limited, in aggregate, to the value of the net assets of GW Canadian attributable on the books and records of GW Canadian to the specific series of GW Canadian Class A shares distributed as Merger Shares. Liability arising from this assumption of indemnities will be allocated solely to the Merger Shares. The indemnities will survive for three years following the Merger.
Like most corporations in Canada, CMDF carries directors’ and officers’ liability insurance to help protect directors and officers against liabilities incurred as a result of acting in such capacities. To provide ongoing coverage post-Merger, CMDF may extend the policy to cover claims made during a “run-off” period of up to three years after the Merger, the cost of which would be paid by CMDF (as it would if the Merger were not completed).
For a moment in time immediately after GW Canadian purchases the assets of CMDF in exchange for the Merger Shares of GW Canadian, CMDF will have 100% of its portfolio invested in shares of GW Canadian and CMDF will own greater than 10% of the outstanding Class A Shares of GW Canadian.
The incremental costs of the Merger will be borne GrowthWorks WV Management Ltd., the manager of GW Canadian, subject to a cap on legal and other advisory costs of $275,000. The costs of the Merger consist mainly of legal, proxy solicitation, printing, mailing, brokerage costs and regulatory fees.
CMDF will negotiate and pay for the termination of various agreements pursuant to which managerial and administrative services are currently provided to it and such arrangements were approved by CMDF`s securityholders at a meeting held February 26, 2009.
Subject to all necessary approvals being obtained and all conditions to the Merger being satisfied or waived, CMDF will merge into GW Canadian on or about the close of business on May 15, 2009 and GW Canadian will continue as a publicly offered open-end mutual fund.
No sales charges will be payable by CMDF or GW Canadian in connection with the acquisition by GW Canadian of the investment portfolio of CMDF or the exchange of CMDF Class A Shares for Merger Shares.
Shareholders of CMDF will be entitled to exercise dissent rights pursuant to and in the manner set forth in section 192 of the Canada Business Corporations Act with respect to the resolution approving the sale of all or substantially all of the assets of CMDF to GW Canadian. It is a condition of the Merger that no shares of CMDF are subject to validly exercised dissent rights. This and other conditions of the Merger may be waived or modified. If dissent rights are validly exercised and the Merger proceeds, shareholders that validly exercise these rights and do not withdraw their dissent (Dissenting Shareholders) will be entitled to receive the “fair value” of their CMDF Class A shares, determined as at the day before the CMDF shareholder meeting. Any Dissenting Shareholders who held their CMDF Class A shares for less than eight years may be required, in accordance with the ITA and the Ontario Act, to repay all or a portion of the federal and provincial tax credits granted when the shares were originally purchased.
Approval for the Merger
- Approval for the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations set out in subsection 5.6(1) of NI 81-102 because:
a) the fundamental investment objective of CMDF may not be considered substantially similar to that of GW Canadian as would be required under subsection 5.6(1)(a)(ii) of NI 81-102;
b) GW Canadian does not have a current simplified prospectus in each local jurisdiction in which securityholders of CMDF reside as would be required under subsection 5.6(1)(a)(ii) of NI 81-102;
c) the Merger will be completed on a taxable basis and not as a “qualifying exchange” or as a tax deferred transaction as would be required under subsection 5.6(1)(b) of NI 81-102;
d) CMDF delivered a custom-made document, derived from the current long form prospectus of GW Canadian. containing prospectus-level disclosure regarding GW Canadian and the Merger Shares to securityholders of CMDF instead of delivering a “current simplified prospectus” of GW Canadian as would be required under subsection 5.6(1)(f)(ii) of NI 81-102;
e) CMDF disclosed to securityholders of CMDF the most recent interim and annual financial statements availability at GW Canadian’s website at www.growthworks.ca or at www.sedar.com or on request from the GrowthWorks WV Management Limited, the manager of GW Canadian, instead of by way of physical delivery as would be required under subsection 5.6(1)(f)(ii) of NI 81-102; and
f) Securityholders of CMDF will not have the right to redeem securities of CMDF prior to the effective date of the Merger as would be required by subsection 5.6(1)(i) of NI 81-102.
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 hereby granted.
Leslie Byberg
Leslie Byberg
Director, Investment Funds