Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because the proposed merger does not meet the criteria for pre-approval – investment objectives of the funds are not substantially similar – merger is not a “qualifying exchange” or a tax-deferred transaction under Income Tax Act – financial statements of continuing fund not sent to unitholders of the terminating fund in connection with the merger but the information circular sent for unitholder meeting clearly discloses the various ways unitholders can access the financial statements – terminating fund failed to comply with Part 11 of National Instrument 81-106 but sole investor that purchased without knowledge of merger provided with notice and given ability to get out at no cost.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 5.5(1)(b) and s. 5.6.
October 23, 2009
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the “Jurisdiction”)
AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATION IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF BLUMONT CAPITAL CORPORATION (“BluMont”)
AND
IN THE MATTER OF BLUMONT NORTH AMERICAN FUND (the “Terminating Fund”)
AND
IN THE MATTER OF BLUMONT CANADIAN FUND (the “Continuing Fund”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the “Application”) from BluMont on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for approval pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 – Mutual Funds (“NI 81-102”) to merge the assets of the Terminating Fund with the assets of the Continuing Fund (the “Merger”).
Under NP 11-203 (a passport review application):
(a) the Ontario Securities Commission is the principal regulator for this Application; and
(b) BluMont has provided notice that Section 4.7(a) of Multilateral Instrument 11-102 – Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories and Yukon Territory (the “Jurisdictions”).
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
This decision is based on the following facts represented by the Filer:
BluMont and the Funds
BluMont is a corporation governed by the laws of Ontario and its head office is located in Toronto, Ontario.
BluMont has been the Trustee and Manager of each of the Terminating Fund and the Continuing Fund (together, the “Funds”) from the inception date of each Fund, being August 25, 1997 in the case of the Continuing Fund and May 5, 1998 in the case of the Terminating Fund to December 1, 2001, on which date BluMont transferred trusteeship and management of the Funds to Burgeonvest Securities Limited (“Burgeonvest”). On December 1, 2004, Burgeonvest then transferred trusteeship and management of the Funds to its affiliate, Halcyon Fund Management Inc. (“Halcyon”). Throughout this period, and subsequent to the transfer to Burgeonvest, BluMont or its affiliate, Integrated Investment Management Inc., continued to provide investment advisory and management services pursuant to subadvisory agreements entered into between BluMont and each of Burgeonvest and Halcyon. Effective November 8, 2007, Halcyon transferred trusteeship and management of the Funds back to BluMont and BluMont continues to provide trustee, management and advisory services to the Funds to present.
BluMont is not in default of securities legislation in any of the Jurisdictions.
The Funds
Each of the Funds is an open-end investment trust governed by a declaration of trust under the laws of the Province of Ontario. BluMont is the Trustee and Manager of each of the Funds.
Each of the Funds is a mutual fund as defined in the Securities Act (Ontario).
Each of the Funds is a reporting issuer in all the provinces and territories of Canada (other than Nunavut) and is separate and distinct from each other in all respects, including as to its assets and liabilities.
Units of the Continuing Fund and the Terminating Fund are being offered in all provinces and territories (other than Nunavut) under a combined simplified prospectus and annual information form dated January 29, 2009.
The investment practices of each Fund comply or will comply in all respects with the requirements of NI 81-102, except to the extent that the Funds have been granted exemptions from the required securities regulatory authorities to deviate therefrom.
Other than as described in paragraph 15(d), neither of the Funds is in default of securities legislation in any of the Jurisdictions.
BluMont believes that the Merger will be beneficial to Unitholders for the following reasons:
(a) the Continuing Fund will have a greater level of assets which will allow for, among other things, increased portfolio diversification opportunities; greater liquidity of investments; and increased economies of scale for operating expenses;
(b) the Terminating Fund has had diminishing resources which is hampering its ability to buy and hold equity securities of worthwhile North American companies;
(c) the Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund, which because of its small size, will no longer be economically viable to operate on a stand-alone basis; and
(d) the Continuing Fund benefits from a management fee, exclusive of GST, which is limited to 1.80% compared to a management fee, exclusive of GST, which is limited to 1.85% for the Terminating Fund.
The Merger
Subject to Unitholder approval, the Merger will be structured as follows:
(a) the value of the Terminating Fund’s portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with the Terminating Fund’s amended and restated declaration of trust dated as of November 8, 2007;
(b) the Continuing Fund will acquire all or substantially all of the investment portfolio and the assets of the Terminating Fund in exchange for trust units of the Continuing Fund;
(c) the Continuing Fund will not assume the Terminating Fund’s liabilities and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;
(d) the trust units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund’s portfolio and other assets and will be issued at the net asset value per unit of the Continuing Fund as of the close of business on the effective date of the Merger;
(e) immediately thereafter, the trust units of the Continuing Fund received by the Terminating Fund will be distributed to Unitholders on a pro rata basis in exchange for their Units in the Terminating Fund; and
(f) as soon as reasonably possible following the Merger, the liabilities of the Terminating Fund will be satisfied and the Terminating Fund will be wound up.
Unitholders will continue to have the right to redeem units of the Terminating Fund held by them and the right to switch their investment to other mutual funds offered and managed by BluMont until the close of business on the business day before the effective date of the Merger, provided that BluMont is in receipt of a written redemption or switch order, duly completed and executed by or on behalf of the applicable unitholder, with the consequent income tax implications. Redemption and switch requests not settled on or before the effective date of the Merger will be deemed to be requests to redeem units of the Continuing Fund and the normal settlement procedures will apply after the effective date of the Merger. Unitholders of the Terminating Fund will be able to subsequently redeem, in the ordinary course, the units of the Continuing Fund that they acquire through the Merger.
The Merger was presented to, and a positive recommendation in favour was received from, the independent review committee of both of the Terminating Fund and the Continuing Fund.
The cost of the Merger will be borne by BluMont.
Description of those Elements of the Proposed Transaction that make Section 5.6 of NI 81-102 Inapplicable
Securities regulatory approval for the Merger is required under Section 5.5(1)(b) of NI 81-102 because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in Section 5.6 of NI 81-102 in the following ways:
(a) the fundamental investment objective of the Terminating Fund is not substantially similar to the fundamental investment objectives of the Continuing Fund. Although both the Terminating Fund and the Continuing Fund invest primarily in equity securities across a broad range of sectors, the Continuing Fund invests primarily in equity securities of Canadian companies encompassing both larger and smaller capitalization companies. The Terminating Fund invests primarily in equities of North American companies encompassing primarily mid to smaller capitalization companies;
(b) the Merger will not qualify as a “qualifying exchange” under the Income Tax Act (Canada) (the “Tax Act”);
(c) the materials sent to Unitholders in connection with the Merger did not include copies of the Continuing Fund’s annual and interim financial statements as contemplated by Section 5.6(1)(f)(ii) of NI 81-102. However, the circular sent to Unitholders instead, did contain disclosure that Unitholders can obtain a copy of the Continuing Fund’s financial statements at no cost by accessing the SEDAR website at www.sedar.com or by requesting a copy of such documents from BluMont, in which case, such requested materials would be promptly mailed to the requesting Unitholder; and
(d) through inadvertence the Funds failed to comply with Part 11 of National Instrument 81-106 – Investment Funds Continuous Disclosure (NI 81-106) as the Funds did not issue a press release, file a material change report and file a prospectus amendment in connection with BluMont’s decision to seek the approval of the unitholders of the Terminating Fund (the “Unitholders”) to complete the Merger.
During the period between the record date for the special meeting (the “Meeting”), and the date hereof, only one new investor (the “New Investor”) purchased units of the Terminating Fund. Since the New Investor may not have been aware of the proposed Merger at the time of purchase, the New Investor was informed of the proposed Merger and offered the right to redeem the units he acquired in the Terminating Fund, at no cost to the New Investor, up to the date of the Merger. The New Investor elected to exercise this redemption right and will, upon such redemption, receive the net asset value per unit of the Terminating Fund (which, as of the date of exercise, was greater than the original purchase price per unit paid by the New Investor).
The Manager will file a renewal prospectus following completion of the Merger.
Description of the Differences between the Funds
Fundamental Investment Objectives and Investment Strategies
(a) The Terminating Fund
(i) The Terminating Fund’s investment objective is to achieve superior capital appreciation over both short and long-term horizons by primarily investing in North American equity securities. (ii) The Terminating Fund seeks to achieve its objective primarily by investing in equities of North American companies encompassing primarily mid to smaller capitalized companies. The Terminating Fund may invest in bonds and other debt instruments from time to time. The Terminating Fund does not specialize in any one industry other than to concentrate investments in those industries which the advisor believes offer the best opportunities for exceptional returns at each stage of the economic and market cycle. The Terminating Fund has allocated investments between Canada and the United States based on available opportunities. The Terminating Fund may also invest in equity based options (including put options (i.e. the option to sell) or call options (i.e. the option to purchase)) either in respect of a specific security or a stock exchange index as a means to reduce volatility. (iii) The Terminating Fund may invest in short positions, mostly in equity securities, in total not exceeding 20% of the net asset value of the Terminating Fund. Short positions are initiated opportunistically, targeting companies which, in the opinion of the advisor have inferior business prospects, poor management track records or severely deteriorated financial prospects. (iv) The Terminating Fund may hold cash or invest in short term securities for the purpose of preserving capital and/or maintaining liquidity, based upon ongoing evaluation of current and anticipated economic and market conditions. The Terminating Fund may invest in short term securities and bonds for the purpose of preserving capital and/or maintaining liquidity, based upon the advisor’s ongoing evaluation of current and anticipated economic and market conditions.(b) The Continuing Fund
(i) The Continuing Fund’s investment objective is to achieve superior capital appreciation over both short and long-term horizons by primarily investing in Canadian equity securities. (ii) The Continuing Fund aims to achieve its objective primarily by investing in equity securities of Canadian companies encompassing both larger and smaller capitalization companies. The Continuing Fund may invest in bonds and other debt instruments from time to time. The Continuing Fund does not specialize in any one industry other than to concentrate investments in those industries which the advisor believes offer the best opportunities for exceptional returns at each stage of the economic and market cycle. The Continuing Fund may also invest in equity based options (including put options or call options) either in respect of a specific security or in respect of a stock exchange index as a means to reduce volatility. (iii) The Continuing Fund may invest in short positions, mostly in equity securities, in total not exceeding 20% of the net asset value of the Continuing Fund. Short positions are initiated opportunistically, targeting companies which, in the opinion of the advisor, have inferior business prospects, poor management track records or severely deteriorated financial prospects. (iv) The Continuing Fund may hold cash or invest in short-term securities for the purpose of preserving capital and/or maintaining liquidity, based upon the advisor’s ongoing evaluation of current and anticipated economic and market conditions. The Continuing Fund may also invest in foreign securities of the same type and characteristics within the applicable foreign property limits imposed under the Tax Act.Differences in Fee Structure. The management fee payable by Terminating Fund is 1.85% per annum and the management fee payable by the Continuing Fund is 1.80% per annum. In addition to the management fee, each of these Funds is responsible for the payment of all expenses relating to its operation and the carrying on of its business.
The management expense ratio (“MER”) of the Terminating Fund for the 2008 financial year was 2.54% and the MER of the Continuing Fund was 2.79%. However, such MERs were calculated based on the 2008 management fees applicable to the Continuing Fund (2.15% per annum) and the Terminating Fund (1.90% per annum), which have since been reduced to the 2009 management fees indicated in paragraph 19 above. Both the Terminating Fund and the Continuing Fund pay performance fees to the Manager.
Description of Other Material Differences. The size and net asset values of the Terminating Fund and the Continuing Fund are substantially different. As at July 31, 2009, the net asset value (the “NAV”) of the Terminating Fund was $3.8 million (NAV per unit - $18.87) and the NAV of the Continuing Fund was $12.5 million (NAV per unit - $15.91).
Details of the Total Annual Returns of each of the Funds for the Previous Five Years. The total annual returns for the Terminating Fund for the previous three years (since inception) have been 2007 – (-0.59%), 2008 – (-30.63%) and 2009 (year to date) – 17.10%. The total annual returns for the Continuing Fund for the previous five years have been 2004 – 10.13%, 2005 – 19.51%, 2006 – 8.6%, 2007 – 12.12% and 2008 – 9.59%.
Approval of Unitholders
The approval of the Merger by Unitholders is required because:
(a) a reasonable person might consider that, as a result of the Merger, there has been a change in the fundamental investment objectives of the Terminating Fund; and
(b) the Merger will result in a transfer of the assets of the Terminating Fund to the Continuing Fund, following which: (i) the Terminating Fund will cease to continue after the Merger; and (ii) the Merger will result in the Unitholders of the Terminating Fund becoming holders of trust units of the Continuing Fund.
The Unitholders of the Terminating Fund approved the Merger at a special meeting of unitholders held on September 21, 2009. The Merger was approved by 100% of the votes cast at the special meeting. Subject to obtaining securities regulatory approval, it is expected that the Merger will occur on or about October 21, 2009.
Approval of unitholders of the Continuing Fund
- The approval of the Merger by unitholders of the Continuing Fund is not required (i) pursuant to Section 5.1(g) of NI 81-102 as the Merger is not represented by a material change to the Continuing Fund; or (ii) otherwise pursuant to the Continuing Fund’s constating documents.
Decision
The Principal Regulator is satisfied that the test contained in the Legislation that provides the Principal Regulator with the jurisdiction to make the decision set forth herein has been met.
The decision of the Principal Regulator under the Legislation is that, subject to the Filer obtaining Unitholder approval of the Merger, approval for the Merger is granted.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR Project #1461608