Sprott Asset Management L.P. (Re), 2009 CanLII 41223

National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from the self-dealing provisions in s. 118(2)(b) of the Act and s. 115(6) of the Regulation to permit a fund to sell illiquid assets representing 0.34% of the fund's portfolio to its fund manager, as part of the liquidation and distribution of substantially all of the fund's assets to its investors – the trades will comply with conditions in s.6.1(2) of National Instrument 81-107 – Independent Review Committee for Investment Fund (NI 81-107), including Independent Review Committee approval and the requirement that either the last arm’s length trade price from the executing dealer or a quote from an independent, arm’s length dealer be obtained, when the bid and ask price of the illiquid assets are not readily available.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c.S.5, as amended, ss. 118(2)(b), 121(2)(a)(ii), and 147.

Ontario Regulation 1015 General Regulation, section 115(6).

National Instrument 81-107 – Independent Review Committee for Investment Funds.

July 14, 2009

IN THE MATTER OF the Securities LEGISLATION of ontario (The Principal Jurisdiction)

AND

Alberta, Saskatchewan, ontario, Nova Scotia, New Brunswick, and Newfoundland and Labrador

AND

IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF SPROTT ASSET MANAGEMENT L.P. (the Manager or Filer)

and

IN THE MATTER OF SPROTT MOLYBDENUM PARTICIPATION CORPORATION (the Corporation)

Background

The securities regulatory authority or regulator in Ontario 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 exemption pursuant to section 121 of the Legislation from the restriction prohibiting a portfolio manager from knowingly causing any investment portfolio managed by it from purchasing or selling the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager, as set out in clause 118(2)(b) of the Legislation, in order to permit the purchase of the Illiquid Assets (as hereinafter defined) held by the Corporation (the Purchase) by the Filer (the Passport Exemption).

The securities regulatory authority or regulator in each of Alberta, Saskatchewan, Ontario, Nova Scotia, New Brunswick, and Newfoundland and Labrador (the Jurisdictions) (the Coordinated Exemptive Relief Decision Makers) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from

(a) in respect of the Legislation in Newfoundland and Labrador only, the restriction prohibiting a portfolio manager from knowingly causing any investment portfolio managed by it from purchasing or selling the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager, as set out in the Legislation; and

(b) in respect of the Legislation in Ontario, Alberta, Saskatchewan, Nova Scotia, Newfoundland & Labrador and New Brunswick only, the restriction prohibiting the purchase or sale of any security, in which an investment counsel or any partner, officer or associate of an investment counsel has a direct or indirect beneficial interest, from or to any portfolio managed or supervised by the investment counsel, as set out in the Legislation,

in order to permit the Purchase by the Filer (collectively, the Coordinated Exemptive Relief).

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

(a) the Ontario Securities Commission is the principal regulator for this application,

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Québec, Nova Scotia and New Brunswick,

(d) the decision evidences the decision of each Coordinated Exemptive Relief Decision Maker.

Interpretation

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

IRC means the independent review committee of the Corporation established pursuant to NI 81-107;

NI 81-102 means National Instrument 81-102 - Mutual Funds;

NI 81-107 means National Instrument 81-107 - Independent Review Committee for Investment Funds;

SAM GP means Sprott Asset Management GP Inc., the general partner of the Filer; and

SAM Inc. means Sprott Asset Management Inc.

Representations

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

The Filer is a limited partnership formed and organized under the laws of the Province of Ontario and maintains its head office in the City of Toronto. The general partner of the Filer is SAM GP, which is a corporation incorporated under the laws of the Province of Ontario. SAM GP is a directly wholly-owned subsidiary of Sprott Inc. Sprott Inc. is a corporation incorporated under the laws of the Province of Ontario and is a public company listed on the Toronto Stock Exchange. Sprott Inc. is the sole limited partner of the Filer and the sole shareholder of SAM GP. Certain of the directors and officers of the Filer and SAM GP are also directors and officers of Sprott Inc.
The Filer is registered under the securities legislation in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as an adviser in the categories of investment counsel and portfolio manager, or the equivalent.
The Corporation is a corporation incorporated under the laws of the Province of Ontario and maintains its head office in the City of Toronto. The Corporation is a public company listed on the Toronto Stock Exchange under the symbol “MLY” and is a reporting issuer in each province of Canada. The initial public officering of the common shares (the Common Shares) and the warrants of the Corporation were qualified for distribution pursuant to a final prospectus dated April 4, 2007 (the Prospectus).
The Corporation is a “non-redeemable investment fund” as such term is defined in the Legislation and is not subject to the investment restrictions applicable to mutual funds which are prescribed by NI 81-102. The Filer has established an IRC for the Corporation in accordance with the requirements under NI 81-107.
The Filer and the Corporation are not in default of securities legislation in any jurisdiction of Canada.
The primary investment objective of the Corporation is to achieve capital appreciation by investing in securities of private and public companies that explore for, mine and/or process molybdenum (Portfolio Investments) and by investing in, holding, selling and otherwise transacting in all commercial forms of molybdenum (Physical Molybdenum, and together with the Portfolio Investments, the Molybdenum Assets).
Pursuant to a management services agreement dated as of April 3, 2007, the Filer (and its predecessor SAM Inc.) provides management, administrative and investment management services in respect of the Molybdenum Assets held by the Corporation.
On April 4, 2007, SAM Inc. had subscribed on a private placement basis for 3,976,000 Common Shares. Part of the proceeds from SAM Inc.’s subscription for Common Shares was used to repay an outstanding interest-free debt which was owed by the Corporation to SAM Inc. and was used to acquire additional Portfolio Investments. As at June 26, 2009, Sprott Inc. owns 3,976,000 Common Shares or 10.08% of the issued and outstanding Common Shares.
On January 9, 2009, the Corporation announced in a press release that, in view of the unfavourable outlook for the price of molybdenum and for issuers involved in the production and sale of molybdenum, its board of directors had determined that a distribution to shareholders of all or substantially all of the assets of the Corporation would be in the best interests of the Corporation and its shareholders.
On June 3, 2009, the Corporation announced in a press release that the Corporation proposes to distribute all or substantially all of its assets to its shareholders on or about July 9, 2009 (the Distribution) and that the Corporation had entered into a proposed private placement investment with an arm’s length investor and that the Corporation intends to enter into a reorganization transaction. The Corporation proposes to distribute to its shareholders the cash proceeds from the sale of its assets and the private placement investment through a tax-effective share exchange, as a result of which holders of Common Shares will ultimately receive cash and a new class of common shares of the Corporation, thereby remaining shareholders of the Corporation with the potential to benefit from any future success of the reorganized Corporation. Shareholders of the Corporation were asked to vote on the proposed Distribution, the proposed private placement investment and the proposed reorganization transaction at an annual and special meeting of shareholders held on June 30, 2009. Details regarding the proposed Distribution, the proposed private placement investment and the proposed reorganization transaction were contained in a management information circular (the Circular) for such meeting which was mailed to shareholders on June 9, 2009.
Since January 9, 2009, the Corporation has not acquired, and does not expect to acquire, any additional Molybdenum Assets and the Filer has been liquidating the Corporation’s existing Portfolio Investments in an orderly manner, subject to market conditions. Proceeds from the sale of the Corporation’s Molybdenum Assets are being held in cash and short-term securities, pending distribution of such assets by way of a return of capital to shareholders.
The Corporation has a number of Portfolio Investments which are “illiquid assets” as such term is defined in NI 81-102. As at June 26, 2009, the Corporation continues to hold Portfolio Investments which include: 7,218,900 common shares of Golden Phoenix Minerals Inc. (Over-the-Counter Bulletin Board Market: GPXM.OB) and 1,350,000 warrants of Creston Moly Corp. (TSX-V: CMS) which are publicly traded (collectively referred to herein as the Illiquid Assets). As at June 26, 2009, the Illiquid Assets represent 0.34% of the net asset value of the Corporation.
In order to maximize the amount of capital that will ultimately be distributed to each shareholder of the Corporation, the Filer proposes to make a one time purchase of all of the Illiquid Assets held by the Corporation. The Filer is of the view that it will be neither practical nor economical to make a distribution “in kind” of portions of these Illiquid Assets to shareholders of the Corporation since shareholders will have difficulty finding a market, if any, for these types of assets.
The Purchase by the Filer will be subject to the requirements contained in paragraphs (b), (c), (d), (e), (f) and (g) of subsection 6.1(2) of NI 81-107.
In connection with paragraph (c) of subsection 6.1(2) of NI 81-107, the Filer will satisfy the condition that the bid and ask price of each security comprising the Illiquid Assets be “readily available” by obtaining either the last arm’s length trade price from the executing dealer or a quote from an independent, arm’s length dealer.
In connection with paragraph (e) of subsection 6.1(2) of NI 81-107, the current market price of each security comprising the Illiquid Assets at which the trade will be executed in connection with the Purchase by the Filer will be determined in accordance with clause 6.1(1)(a) of NI 81-107.
The Purchase by the Filer will be completed through an independent third-party dealer using best execution practices.
The IRC has approved, in respect of the Corporation, the Purchase by the Filer on the same terms as are required under subsection 5.2(2) of NI 81-107.
At the annual and special meeting of shareholders of the Corporation held on June 30, 2009 shareholders approved the Distribution, including the Purchase by the Filer, and the private placement investment by the arm’s length investor and the Corporation’s reorganization transaction as described in the Circular.
If the Passport Exemption and the Coordinated Exemptive Relief are not granted, the Filer will be prohibited by the Legislation from knowingly causing any investment portfolio managed by it from purchasing or selling the Illiquid Assets from or to the account of a responsible person, any associate of a responsible person or the Filer.
If the Coordinated Exemptive Relief is not granted, the Filer will be prohibited by the Legislation from purchasing or selling the Illiquid Assets, in which the Filer or any partner, officer or associate of the Filer has a direct or indirect beneficial interest, from or to any portfolio managed or supervised by the Filer.
The Purchase by the Filer represents the business judgment of “responsible persons” (as such term is defined in the Legislation) uninfluenced by considerations other than the best interests of the Corporation and its shareholders.

Decision

Each of the principal regulator and the Coordinated Exemptive Relief Decision Makers is satisfied that the decision meets the test set out in the Legislation for the relevant regulator or securities regulatory authority to make the decision.

The decision of the principal regulator under the Legislation is that the Passport Exemption is granted provided that the following conditions are satisfied with respect to the Purchase by the Filer:

(a) the IRC has approved, in respect of the Corporation, the Purchase on the same terms as are required under subsection 5.2(2) of NI 81-107;

(b) the Purchase complies with paragraphs (b), (c), (d), (e), (f) and (g) of subsection 6.1(2) of NI 81-107;

(c) in connection with paragraph (c) of subsection 6.1(2) of NI 81-107, the bid and ask price of each security comprising the Illiquid Assets will satisfy the condition to be “readily available” by obtaining either the last arm’s length trade price from the executing dealer or a quote from an independent, arm’s length dealer;

(d) in connection with paragraph (e) of subsection 6.1(2) of NI 81-107, the current market price of each security comprising the Illiquid Assets at which the trade will be executed in connection with the Purchase will be determined in accordance with clause 6.1(1)(a) of NI 81-107; and

(e) the Purchase will be completed through an independent third-party dealer using best execution practices.

The decision of the Coordinated Exemptive Relief Decision Makers under the Legislation is that the Coordinated Exemptive Relief is granted provided that the following conditions are satisfied with respect to the Purchase by the Filer:

(a) the IRC has approved, in respect of the Corporation, the Purchase on the same terms as are required under subsection 5.2(2) of NI 81-107;

(b) the Purchase complies with paragraphs (b), (c), (d), (e), (f) and (g) of subsection 6.1(2) of NI 81-107;

(e) the Purchase will be completed through an independent third-party dealer using best execution practices.

“Carol S. Perry”
Commissioner
Ontario Securities Commission

“Kevin J. Kelly”
Commissioner
Ontario Securities Commission