Growthworks Canadian Fund Ltd. (Re), 2009 CanLII 3986

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Labour-sponsored investment fund with same venture but different non-venture investment strategies among different series of Class A shares – two proposed mergers of series of Class A shares referable to different sets of portfolio assets – each set of two series a mutual fund under section 1.3 NI 81-102. Approval of mutual fund mergers under sections 5.5(1)(b) and 5.5(3) required because mergers do not meet the criteria for pre-approved reorganizations and transfers in section 5.6(1) of NI 81-102 – different investment objectives, not a qualifying exchange, prospectus and financial statements incorporated into circular by reference.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds sections 5.5(1)(b), 5.5(3) and 5.6(1).

February 4, 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 Growthworks Canadian Fund Ltd. (the "Filer") and In the Matter of the Filer's Venture/Balanced Class A Shares ("Balanced Shares"), Venture/Diversified Class A Shares ("Diversified Shares"), Venture/Resource Class A Shares ("Resource Shares") and Venture/Growth Class A Shares ("Growth Shares")

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 approval under paragraph 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") to merge its assets referable to its Balanced Shares with its assets referable to its Diversified Shares and to merge its assets referable to its Resource Shares with its assets referable to its Growth Shares by conversion of each series of the Balanced Shares and Resources Shares into the corresponding series of the Diversified Shares and Growth Shares, respectively (collectively, the "Conversions") (the "Approval").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) Ontario 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 Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut, and Yukon Territory.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined in this decision.

Representations

The decision is based on the following facts represented by the Filer:

The Manager

GrowthWorks WV Management Ltd. (the "Manager") is the manager of the Filer under a management contract. The Manager's head office is in Toronto, Ontario.

The Filer

The Filer is a corporation incorporated under the Canada Business Corporations Act.
The Filer is a registered labour-sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario), a registered labour-sponsored venture capital corporation under the Income Tax Act (Canada) (the "Tax Act") and The Labour-Sponsored Venture Capital Corporations Act (Manitoba) and an approved fund under the Labour-sponsored Venture Capital Corporations Act (Saskatchewan). The Filer's investing activities are governed by this legislation (the "LSIF Legislation").
The labour sponsor of the Filer is the Canadian Federation of Labour.
The authorized capital of the Filer is as follows:

(a) an unlimited number of Class A shares issuable in series, of which there are currently 20 series created and 10 series offered under the Filer's current multi-fund long form renewal prospectus dated November 3, 2008, as amended (the "Renewal Prospectus");

(b) 1,000 Class B shares which are held by the sponsor of the Filer; 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 to provide for a "participating" or "carried" interest in the venture investments of the Filer.

The Filer's shares are not listed on an exchange.
The Filer is a mutual fund as defined in the Securities Act (Ontario).
The Filer's investment objective is to achieve long-term capital appreciation by investing in a mix of venture investments and non-venture investments.
All 20 series of Class A shares of the Filer participate in the same pool of venture investments pursuant to the same venture investment strategies. However, the Filer offers shareholders a different investment focus for non-venture investments.
14 of the Filer's 20 series of Class A shares are or have been offered as "menu" series (the "Menu Series") in sets of two series as illustrated in the chart below. The two series in each set of Menu Series have different commission structures referred to as "Commission I" and "Commission II", each corresponding to one of two dealer compensation options.
As indicated by their names, the seven sets of two Menu Series are invested pursuant to different non-venture investment strategies with each set of two Menu Series therefore referable to a different portfolio of non-venture investments. Holders of Menu Series shares may generally switch from one Menu Series to another having the same commission structure.
10 of the 14 Menu Series are offered under the Renewal Prospectus. The Balanced Shares and Resource Shares comprise the remaining four Menu Series. In connection with the Conversions, the Filer announced on September 26, 2008 that it will no longer offer Balanced Shares and Resource Shares and that the other Menu Series may no longer switch into Balanced Shares or Resource Shares. Consequently, Balanced Shares and Resource Shares are not offered under the Renewal Prospectus.

Menu Series proposed for con-version into series opposite its name

Commission Option

Menu Series Renewal Prospectus

Commission Option

Balanced Shares

Commission I

Diversified Shares

Commission I

Commission II

Resource Shares

Commission I

Growth Shares

Commission I

Commission II

Venture/Income Class A shares of Filer

Commission I

Commission II

Venture/Financial Services Class A shares of Filer

Commission I

Commission II

Venture/GIC Class A shares of Filer

Commission I

Commission II

The Filer began offering its Menu Series in 2003. The remaining six of the Filer's 20 series of Class A shares include one series offered prior to the introduction of the Menu Series in 2003 and five series created and issued in connection with past merger transactions.
Each group of series of Class A shares of the Filer that is referable to a separate portfolio of assets is a separate mutual fund under section 1.3 of NI 81-102 and is treated as a separate investment fund for the purpose of reporting financial results under National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106"). Consequently, at present, the Filer is required to prepare and file seven sets of financial statements and management reports of fund performance corresponding to the seven sets of two Menu Series referred to above.
The net asset value ("NAV") of the Filer and the prices for each series of Class A shares of the Filer are calculated at least weekly, on the last business day of each week. The valuation policies and procedures for all series of Class A shares of the Filer are the same.
As at January 23, 2009, the Filer had approximately $382 million in net assets and the net assets of the Class A shares of the Filer proposed to be merged were as follows:

Balanced Shares

Commission I

$4,140,730

Diversified Shares

Commission I

$7,945,911

Commission II

$3,810,186

Commission II

$14,117,785

Resource Shares

Commission I

$1,990,167

Growth Shares

Commission I

$7,696,162

Commission II

$1,437,764

Commission II

$3,161,574

The management fees for the corresponding series of the Balanced Shares and Diversified Shares and for the corresponding series of the Resource Shares and Growth Shares, respectively, are the same.
The Filer is not in default of securities legislation in any jurisdiction.

The Conversions

Shareholders of the Filer approved the Conversions at the Filer's annual and special meeting of shareholders held on December 3, 2008 ("AGM") by way of a vote of all shareholders present or represented at the meeting and by way of separate series votes of holders of the Balanced Shares, Resource Shares, Diversified Shares and Growth Shares, in each case by way of a special resolution. In connection with the AGM, shareholders received an information circular dated October 22, 2008 (the "Circular") that contained details of the Conversions, including income tax considerations associated with the Conversions, and incorporated by reference the Filer's then current renewal prospectus dated November 7, 2007, as amended. This prospectus qualified the sale of the Balanced Shares, Resource Shares, Diversified Shares and Growth Shares as part of the Filer's continuous offering of Class A shares. The Filer subsequently filed its Renewal Prospectus referred to above.
At present, the Balanced Shares' non-venture investment strategies are to invest in high quality debt, high yield investments and investments linked to the performance of bank securities. The Diversified Shares' non-venture investment strategies are to invest in high quality debt, high yield investments, investments linked to publicly traded equities and equity and debt securities of banks and other issuers in the financial services sector and issuers in the resource sectors. The Circular explained that the Balanced Shares and Diversified Shares have overlapping non-venture investment mandates as each mandate includes high quality debt, high yield investments and bank investments. The rights and restrictions attached to the Diversified Shares are the same as those attached to the Balanced Shares.
At present, the Resource Shares' non-venture investment strategies are to invest in securities linked to issuers whose business activities are in the resource sector or sub-sectors such as oil & gas, precious metals, base metals, forestry and drilling services. The Growth Shares' non-venture investment strategies are to invest in securities linked to a portfolio or index of publicly traded shares and equity securities such as broad market indexes. As of October 22, 2008 (being the date of the Circular), this is achieved through investments linked to the S&P/TSX 60 Capped Index which as at September 30, 2008 had approximately 46% weighting to resource issuers. The Circular explained that the Resource Shares and Growth Shares have overlapping non-venture investment mandates as each mandate includes investments linked to issuers participating in resource sectors. The rights and restrictions attached to the Resource Shares are the same as those attached to the Growth Shares.
The Conversions are intended to streamline the Filer's share offering by eliminating series that have overlapping non-venture investment strategies. The Filer believes that this streamlining will result in a more straightforward share offering without dramatically altering the range of non-venture investment strategies that investors may select from. The Conversions are also intended to create efficiencies with respect to the manner in which the Filer's financial results are tracked, compiled and reported.
The Conversions are expected to occur before February 28, 2009 and will be based on the NAV per share of the Balanced Shares and Resource Shares relative to the NAV per share of the Diversified Shares and Growth Shares, respectively. Accordingly, and as stated in the Circular, for a holder of Balanced Shares or Resource Shares, the Conversions will result in a change in the number of the shares held but will not change the value of the shareholder's investment on conversion.
The Conversions will be effected by amendment to the Filer's Articles adding a conversion feature to each series of Balanced Shares and Resource Shares that permits the Filer to convert the Balanced Shares and Resource Shares into the corresponding series of the Diversified Shares and Growth Shares, respectively.
The Filer has complied with Part 11 of NI 81-106 in connection with the Conversions.
While the Conversions will not represent "qualifying exchanges" under section 132.2 of the Tax Act, they will qualify as tax-deferred transactions under other provisions of the Tax Act such that holders of Balanced Shares and Resource Shares will not be liable for income tax as a result of the Conversions. A holder's adjusted cost base of Diversified Shares received on conversion of their Balanced Shares will be deemed to be equal to the average of the adjusted cost base of the converted Balanced Shares and the adjusted cost base of any other Diversified Shares held by the holder at the time of the conversion. The same principle would apply to conversions of Resource Shares into Growth Shares.
Holders of Balanced Shares, Resource Shares, Diversified Shares and Growth Shares were entitled to exercise dissent rights pursuant to and in the manner set forth in Section 190 of the Canada Business Corporations Act with respect to the resolutions approving the Conversions. The Circular disclosed that shareholders who exercise dissent rights with respect to their shares will be subject to the requirement to repay federal and provincial tax credits. The Filer did not receive any dissent notices in connection with the Conversions.
Shareholders will continue to have the right to redeem their Balanced Shares and Resource Shares until a date designated by the Filer which is expected to be shortly before the effective date of the Conversions. Any such redemptions may be subject to tax withholdings under applicable LSIF Legislation. There will be no interruption in redemptions of Diversified Shares and Growth Shares.
Balanced Shares and Resource Shares may continue to switch into other Menu Series until a date designated by the Filer which is expected to be shortly before the effective date of the Conversions. The Circular disclosed that the Conversions will not be considered a disposition for income tax purposes.
The Circular referenced the recommendation of the Board of Directors of the Filer that shareholders vote in favour of the resolutions approving the Conversions.
Pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds, the Independent Review Committee of the Filer reviewed the Conversions and recommended that the Filer proceed with the Conversions subject to shareholder and regulatory approval.
The costs of implementing the Conversions will be borne by the Manager of the Filer.

Approval for the Conversions

Approval for the Conversions is required because they do not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6(1) of NI 81-102 for the following reasons:

(a) A reasonable person might not consider the investment objectives of the Diversified Shares and the Growth Shares to be substantially similar to the investment objectives of the Balanced Shares and the Resource Shares, respectively, as required by section 5.6(1)(a)(ii) of NI 81-102;

(b) The Conversions will not represent "qualifying exchanges" within the meaning of section 132.2 of the Tax Act or be tax-deferred transactions under sections 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act, as required by Section 5.6(1)(b) of NI 81-102;

(c) The materials sent to shareholders did not include copies of the Filer's November 7, 2007 renewal prospectus, as amended, 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. However, the Circular sent to shareholders instead did:

(i) Contain details of the Conversions, including income tax considerations associated with the Conversions;

(ii) As permitted by NI 81-106 and National Instrument 51-102 Continuous Disclosure Obligations, incorporate by reference the Filer's then current renewal prospectus, which in turn incorporated by reference the most recently filed annual and interim financial statements of the Filer; and

(iii) Disclose that shareholders can obtain a copy of the Filer's then current renewal prospectus and financial statements at no cost by accessing the SEDAR website at www.sedar.com, by accessing the Filer's website at www.growthworks.ca or by calling a toll-free telephone number (in which case the Manager would 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 Approval is granted.

singed Vera Nunes

________________________________________ Name: Vera Nunes Title: Assistant Manager, Investment Funds

Ontario Securities Commission

Headnote

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds sections 5.5(1)(b), 5.5(3) and 5.6(1).