Headnote National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of fund merger pursuant to an amalgamation under paragraph 5.5(1)(b) of NI 81-102 – Approval required because amalgamation does not meet all criteria for pre-approval outlined in section 5.6 of NI 81-102 – Current prospectus and financial statements of continuing fund not delivered to shareholders because prospectus-level disclosure contained in the Circular sent to shareholders – Continuing fund will have the same investment objectives, investment strategies, management fees, portfolio investment manager and at the effective date of the amalgamation, the same portfolio assets as existing fund – Amalgamation does not technically constitute a wind-up of the existing fund – Proxy circular includes disclosure about the amalgamation and prospectus-like disclosure about the continuing fund. Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, sections 5.6(1)(a)(iv), 5.5(1)(b), 5.6(1)(c) and 5.6(1)(f)(iii)
May 6, 2011
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
Brompton equity split corp. and dividend growth split corp.
And
IN THE MATTER OF Brompton funds management limited
(the “Filer”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Brompton Equity Split Corp. (“BE”) and Dividend Growth Split Corp. (“DGS”) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for an exemption from requirements contained in subsection 5.6(1) of National Instrument 81-102 Mutual Funds (“NI 81-102”) for the proposed amalgamation (the “Amalgamation”) of BE and DGS (the “Requested Relief”).
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, and
(b) the Filer has provided notice that subsection 4.7(1) of Multinational Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in the jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, 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 MI 11-102 have the same meaning if used in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is the manager of both BE and DGS. The Filer was formed pursuant to the Business Corporations Act (Ontario) (the “OBCA”) by articles of amalgamation dated September 28, 2010. The Filer performs management and administrative services for BE and DGS pursuant to management agreements. Its head office is at Suite 2930, Bay Wellington Tower, Brookfield Place, 181 Bay Street, Toronto, Ontario M5J 2T3.
The Filer is not in default of securities legislation in any jurisdiction.
BE and DGS
BE and DGS are mutual fund corporations incorporated under the OBCA, are reporting issuers in each of the provinces and territories of Canada and are not in default of securities legislation in any jurisdiction.
While BE and DGS are technically considered to be mutual funds under the securities legislation of certain provinces of Canada, BE and DGS are not conventional mutual funds and have obtained exemptions from certain requirements of NI 81-102 and National Instrument 81-106 Investment Fund Continuous Disclosure (“NI 81-106”).
The head office of BE and DGS is located at Suite 2930, Bay Wellington Tower, Brookfield Place, 181 Bay Street, Toronto, Ontario M5J 2T3.
The authorized share capital of BE and DGS consists of an unlimited number of preferred shares (the “Preferred Shares”), an unlimited number of class A shares (the “Class A Shares”) and an unlimited number of class J shares (the “Class J Shares”) (for the purposes of this decision, the term “Shareholders” means the holders of Preferred Shares and Class A Shares in either BE or DGS, as applicable). The Preferred Shares and Class A Shares of BE and DGS are listed for trading on the Toronto Stock Exchange.
BE filed a final prospectus dated March 29, 2004 for the initial issuance of its Preferred Shares and Class A Shares. DGS filed a final prospectus dated November 20, 2007 for the initial issuance of its Preferred Shares and Class A Shares.
BE and DGS’ initial public offerings were conducted through the full service investment dealer channel and their shares were issued through and are held in the book based system of CDS Clearing and Depository Services Inc. BE and DGS are not, nor have they ever been, in continuous distribution.
BE has retained Highstreet Asset Management Inc. (“Highstreet”) as portfolio manager pursuant to a portfolio manager agreement to make all investment decisions for BE and to write call options and put options in accordance with the investment objectives, investment strategy, investment criteria and investment restrictions of BE. DGS has retained Highstreet as options advisor pursuant to an options advisory agreement to rebalance the portfolio and to write call options and put options in accordance with the investment objectives, investment guidelines and investment restrictions of DGS. Highstreet’s principal office is located at Suite 350, 244 Pall Mall Street, London, Ontario N6A 5P6.
The investment objectives of BE and DGS are to: (i) provide holders of Preferred Shares with fixed cumulative preferential quarterly cash distributions in the amount of $0.13125 per Preferred Share; (ii) provide holders of Class A Shares with regular monthly cash distributions; (iii) return the original issue price to holders of Preferred Shares on the maturity date; and (iv) in the case of BE, return at least the original issue price to holders of Class A Shares on the maturity date and, in the case of DGS, provide holders of Class A Shares with the opportunity for growth in net asset value (“NAV”) per Class A Share. The valuation procedures and fee structures of BE and DGS are substantially similar.
BE’s portfolio consists primarily of Canadian common stocks listed on the Toronto Stock Exchange. DGS’ portfolio consists of common stocks in large-capitalization Canadian companies.
BE and DGS are subject to certain investment restrictions that, among other things, limit the equity securities and other securities that BE and DGS may acquire for their portfolios. BE and DGS’ investment restrictions may not be changed without the approval of the respective holders of Preferred Shares and Class A Shares, each voting separately as a class, by an extraordinary resolution, at a meeting called for such purpose.
BE and DGS have adopted the standard investment restrictions and practices set forth in NI 81-102 (as it may be amended from time to time).
The Amalgamation
Subject to regulatory approval, the Amalgamation is expected to occur on or about May 18, 2011.
Under the Amalgamation, each Preferred Share of BE will be exchanged for one Preferred Share of DGS. Class A Shares of BE will be exchanged for Class A Shares of DGS at an exchange ratio based on the relative NAV per Class A Share of BE and DGS as determined immediately prior to the effective date of the Amalgamation. Class J Shares of BE will be exchanged for Class J Shares in DGS.
The Amalgamation will be a tax-deferred transaction under subsection 87(1) of the Income Tax Act (Canada).
As a result of the Amalgamation, BE and DGS will amalgamate to form one continuing corporation which will be named Dividend Growth Split Corp.
Upon the Amalgamation, the portfolio assets of BE will become the portfolio assets of DGS in compliance with NI 81-102 and currently, or will at the effective date of the Amalgamation, qualify for inclusion in DGS’ portfolio consistent with DGS’ investment objectives.
The Board of Directors of BE and DGS have approved the Amalgamation, subject to regulatory approval.
The independent review committees of BE and DGS have approved the Amalgamation, subject to regulatory approval.
At special meetings held on April 8, 2011, shareholders of BE and DGS approved the Amalgamation in accordance with subsections 5.1(f) or (g) of NI 81-102. Each class of shares voted separately.
The Filer intends to offer Shareholders of BE who do not wish to participate in the Amalgamation with the opportunity to redeem at NAV per Class A Share or NAV per Preferred Share plus accrued dividends immediately prior to the effective date of the Amalgamation (the “Special Redemption”).
A notice of meeting, a management information circular (the “Circular”) and a proxy in connection with the Amalgamation was mailed to the Shareholders of BE and DGS on March 18, 2011. The Circular contains a description of the proposed Amalgamation, information about BE and DGS and the income tax considerations for Shareholders of BE and DGS. The Circular discloses that Shareholders of BE and DGS may obtain in respect of DGS, at no cost, an annual information form, the most recent annual and interim financial statements, and the most recent management report of fund performance that have been made public by contacting the Filer or by accessing the websites of BE, DGS or the System for Electronic Document Analysis and Retrieval (“SEDAR”).
BE and DGS will comply with Part 11 of NI 81-106 in deciding to proceed with the Amalgamation. Copies of the press release and material change reports for the Amalgamation are available on the websites of BE, DGS and SEDAR.
The Filer will pay all of the costs associated with the Amalgamation, including the cost of holding the meetings for the Amalgamation and of soliciting proxies, including costs of mailing the Circular and accompanying materials.
Shareholders of BE will continue to have the right to redeem their Preferred Shares or Class A Shares for cash at any time up to the close of business on the business day immediately preceding the effective date of the Amalgamation but will be required to tender such shares for the Special Redemption on or before a date to be set by the Filer expected to be on about April 15, 2011.
Shareholders of BE and DGS may exercise rights of dissent pursuant to section 185 of the OBCA. Those who validly exercise such rights will be entitled to be paid the fair value of the shares. If BE and DGS were trusts these dissent rights would not be available on a merger of BE and DGS.
Certain changes will be made to the Preferred Shares and Class A Shares of DGS following the Amalgamation, including extension of the ultimate redemption date of the Preferred Shares and Class A Shares for an additional terms to be determined by the Filer (together with extensions thereafter). In that regard, the board of directors of DGS will have the authority to set the Preferred Share dividend rate at the time of any extension. Following the Amalgamation, shareholders will be able to redeem either their Preferred Shares or Class A Shares of DGS at NAV per share of the class prior to any extension of the redemption date. In order to maintain an equal number of Preferred Shares and Class A Shares of DGS outstanding following the Amalgamation, DGS will have the ability to redeem Preferred Shares on a pro rata basis if there are more Preferred Shares than Class A Shares outstanding following the Amalgamation. DGS will also have the ability to authorize the consolidation of Class A Shares if more Class A Shares than Preferred Shares are outstanding following the Amalgamation.
The Amalgamation meets all requirements necessary for mutual funds to complete a transaction without regulatory approval as enumerated under subsection 5.6(1) of NI 81-102, except that DGS does not have a current simplified prospectus in the local jurisdiction and except those requirements of subsection 5.6(1) as they relate to fund facts documents and prospectus amendments, as neither BE nor DGS is a non-listed continuously distributed mutual fund.
The notice of meeting sent to Shareholders of BE and DGS contains, or incorporates by reference, all the information and documents necessary for the Shareholders to consider the Amalgamation including a full description of the Amalgamation, a full description of BE and DGS and a summary of the Independent Review Committee’s decision with respect to the proposed Amalgamation. The Circular contains a prominent statement that Shareholders of BE and DGS may obtain, free of charge, the most recent annual information form, the most recent annual and interim financial statements, and the most recent management reports of fund performance that have been made public by contacting the Filer or by accessing the websites for BE, DGS or SEDAR.
The Amalgamation is expected to provide the following benefits:
(a) Following the Amalgamation, DGS is expected to have a larger market capitalization and a greater number of securities and Shareholders than BE or DGS separately do, which is expected to enhance trading liquidity.
(b) Redemption entitlement for BE Shareholders will be enhanced as DGS offers quarterly redemptions at NAV less costs, whereas BE only offers redemptions at NAV less costs on an annual basis. Shareholders of BE will also be provided with an opportunity for redemption earlier than the scheduled maturity date of BE of May 31, 2011.
(c) Shareholders of both BE and DGS are expected to enjoy improved economies of scale and potentially lower proportionate fund operating expenses as part of the larger DGS fund following the Amalgamation, which correspondingly should improve returns.
(d) DGS offers a lower management fee of 0.60% of NAV per annum as compared to the current BE management fee of 1.0% of NAV per annum.
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 is that the Requested Relief is granted.
“Darren McKall”
Darren McKall
Manager, Investment Funds
ONTARIO SECURITIES COMMISSION