Headnote NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because mergers do not meet the criteria for pre-approval – The continuing fund does not have substantially similar fundamental investment objective as compared to that of the terminating funds – Terminating funds’ unitholders provided with timely and adequate disclosure regarding the merger and prospectus-level disclosure regarding the continuing fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, clauses 5.5(1)(b) and 5.6(1)(a).
March 31, 2011
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
THE PROVINCE OF ONTARIO
(the Jurisdiction)
AND
IN THE MATTER OF THE
PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN
MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
NEXGEN FINANCIAL LIMITED PARTNERSHIP
(the Filer)
AND
NEXGEN AMERICAN GROWTH TAX MANAGED FUND
NEXGEN NORTH AMERICAN VALUE TAX MANAGED FUND
NEXGEN GLOBAL DIVIDEND TAX MANAGED FUND
(collectively, the Terminating Funds)
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the merger (the Merger) of each Terminating Fund into NexGen Canadian Balanced Growth Tax Managed Fund (the Continuing Fund) (together with the Terminating Funds, the Funds) under paragraph 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) (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 (the Principal Regulator), 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 British Columbia, Alberta, Quebec, Newfoundland and Labrador and Northwest Territories (including Ontario, the Jurisdictions).
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
The decision is based on the following facts represented by the Filer:
The Filer is a limited partnership established under the laws of the Province of Ontario and its head office is located in Toronto, Ontario.
The Filer is registered as a dealer in the category of mutual fund dealer, as an adviser in the category of portfolio manager and as an investment fund manager under the Securities Act (Ontario) and as an adviser in the category of commodity trading manager under the Commodity Futures Act (Ontario).
The Filer is the manager of each of the Funds and is not in default of securities legislation in any province or territory of Canada.
The Filer is the portfolio manager of each of the Funds.
The Funds are open-end mutual funds established under the laws of the Province of Ontario, and form part of 18 NexGen tax managed funds housed within NexGen Investment Corporation (the Corporation), a mutual fund corporation incorporated under the laws of the Province of Ontario.
Shares of the Funds are currently offered for sale under a simplified prospectus and annual information form dated May 25, 2010 in the Jurisdictions. Each of the Funds follows the standard investment restrictions and practices established under the Legislation.
The Funds are reporting issuers under the applicable securities legislation of the Jurisdictions and are not in default of securities legislation in any province or territory of Canada.
The board of directors of the Corporation approved the Merger on March 3, 2011, and a press release and material change report in respect of the Merger were filed on SEDAR on March 14, 2011.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Corporation presented the terms of the Merger to the Funds’ Independent Review Committee (the IRC) for its review and recommendation. The IRC reviewed the potential conflict of interest matters related to the proposed Merger and, on February 14, 2011, the IRC determined that the proposed Merger, if implemented, would achieve a fair and reasonable result for each of the Funds.
Shareholders of the Terminating Funds will continue to have the right to redeem or transfer their shares of a Terminating Fund at any time up to the close of business on the business day prior to the effective date of the Merger.
A meeting of the shareholders of each Terminating Fund was held on March 30, 2011 to approve the proposed Merger.
Subsection 5.6(1)(f) of NI 81-102 requires that certain materials be sent to the Terminating Funds’ shareholders in connection with their approval of the Merger. The Manager sent to shareholders of each Terminating Fund, a notice of the meeting of shareholders and a Management Information Circular (the Information Circular) dated February 17, 2011, the current simplified prospectus, and a related form of proxy. The Information Circular provides sufficient information to shareholders to permit them to make an informed decision about the Merger. The Information Circular sent to shareholders prominently discloses that they can obtain the most recent interim and annual financial statements of the Continuing Fund by accessing the SEDAR website at www.sedar.com or calling the Filer’s toll free telephone number 1-866-378-7119, or writing to the Filer at its head office address.
It is proposed that the Merger take place on or about May 6, 2011.
The Manager will pay all costs and reasonable expenses relating to the solicitation of proxies, holding the shareholder meetings in connection with the Merger and the costs of implementing the Merger, including any brokerage fees.
Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Funds will be wound up.
The Merger is conditional on the approval of (i) the shareholders of the Terminating Funds, (ii) the unitholders of certain NexGen registered funds (the counterpart funds to the Terminating Funds) and (iii) the Principal Regulator. The shareholders of the Terminating Funds as well as the unitholders of the NexGen registered funds referenced above have approved the Merger.
If the necessary approvals are obtained, the following steps will be carried out to effect the Merger:
a. Portfolio securities held by the Terminating Fund which may not be suitable investments for the Continuing Fund will be liquidated on or before the effective date of the Merger.
b. Each outstanding share of the Terminating Fund will be exchanged for shares(s) of an equivalent class and series of the Continuing Fund. The share exchange will be effected on the basis of the relative net asset values of the applicable shares at the close of business on the closing of the Merger (the Valuation Time) in accordance with the formula set out below.
Fund Shares
No. of Continuing Fund shares
to be received =
Net Asset Value of Terminating Fund
Shares at the Valuation Time
Net Asset Value of Continuing Fund Shares at the Valuation Time
c. The assets and liabilities of the Corporation attributable to the Terminating Fund will be transferred to the Continuing Fund.
d. Each of the Terminating Funds will then be wound up.
The Corporation is, and is expected to continue to be at all material times, a mutual fund corporation under the Income Tax Act (Canada) (the “Tax Act”) and, accordingly, shares of the Continuing Fund are “qualified investments” under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.
Approval of the Merger is required 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 because, contrary to section 5.6(1)(a)(ii) of NI 81-102, a reasonable person may consider the fundamental investment objectives of the Continuing Fund not to be substantially similar to the fundamental investment objectives of each Terminating Fund.
In the opinion of the Filer, the Merger will be beneficial to securityholders of the Terminating Fund and those in the Continuing Fund for the following reasons:
a. shareholders in the Continuing Fund are expected to enjoy improved economies of scale and potentially lower proportionate fund operating expenses (which are borne indirectly by shareholders) as part of a larger combined Continuing Fund;
b. due to the smaller size and historic growth profile of the Terminating Funds, the administrative and regulatory costs of operating the Terminating Funds as stand-alone mutual funds would be higher per shareholder and could potentially increase if the Terminating Funds decrease further in asset size;
c. the Merger transitions shareholders in the Terminating Funds to a growing and more viable Continuing Fund; and
d. generally, the historical rate of return for the Continuing Fund has been higher and more consistent than the historical rate of return for the Terminating Funds with which it is proposed to be merged.
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.
“Vera Nunes”
Title: Assistant Manager, Investment Funds Branch
Ontario Securities Commission
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because mergers do not meet the criteria for pre-approval – The continuing fund does not have substantially similar fundamental investment objective as compared to that of the terminating funds – Terminating funds’ unitholders provided with timely and adequate disclosure regarding the merger and prospectus-level disclosure regarding the continuing fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, clauses 5.5(1)(b) and 5.6(1)(a).