Headnote NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted to permit temporary investment in closed-end fund by open-ended mutual fund in connection with merger of funds – costs of merger borne by the manager – relief for the trade of securities granted from the investment restrictions in ss. 2.1, 2.2 and 2.4 of National Instrument 81-102 – Mutual Funds. Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds – ss. 2.1, 2.2, 2.4 and 19.1.
February 8, 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 NEXGEN FINANCIAL LIMITED PARTNERSHIP (THE FILER)
AND
IN THE MATTER OF NEXGEN CANADIAN BALANCED GROWTH TAX MANAGED FUND (THE CONTINUING FUND)
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 an exemption from the prohibitions in sections 2.1(1), 2.2 and 2.4 of National Instrument 81-102 Mutual Funds (“NI 81-102”) to permit the Continuing Fund to purchase securities of Macquarie NexGen Global Infrastructure Corporation (the “Terminating Fund”) as part of a reorganization transaction whereby shareholders of the Terminating Fund will become shareholders of the Continuing Fund (the “81-102 Merger Approval”).
Under the Process for Exemptive Relief applications in Multiple Jurisdictions (for a passport application):
the Ontario Securities Commission is the Principal Regulator for this application; and
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 (collectively with the Jurisdiction, the “Jurisdictions”).
INTERPRETATION
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.
REPRESENTATIONS
This decision is based on the following facts represented by the Filer:
General
NexGen is proposing to merge (the “Merger”) the Terminating Fund into the Continuing Fund (the Terminating Fund and the Continuing Fund collectively referred to as the “Funds”).
Under the Merger, the securityholders of the Terminating Fund will receive securities of the Continuing Fund into which the Terminating Fund is merged.
The Filer is a limited partnership established under the laws of the Province of Ontario with its head office in Toronto, Ontario.
The Filer is the manager of each of the Funds and is not in default of securities legislation in any of the Jurisdictions.
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 manages the investment portfolios of each of the Funds. Certain directors and officers of the Filer are also directors and officers of the Funds.
The Terminating Fund is a “non-redeemable investment fund” as defined in the Legislation and shares of the Terminating Fund are listed on the Toronto Stock Exchange (TSX).
The Terminating Fund is an investment corporation incorporated under the laws of the Province of Ontario.
The Continuing Fund is an open-end mutual fund established under the laws of the Province of Ontario and the Continuing Fund is one of 18 NexGen tax managed funds housed within NexGen Investment Corporation (“NexGen Investment”), a mutual fund corporation incorporated under the laws of the Province of Ontario.
Securities of the Continuing Fund and all the other funds that form part of the NexGen Group of Funds are offered for continuous sale under a simplified prospectus and annual information form dated May 25, 2010 in the Jurisdictions.
The Funds are reporting issuers under the applicable securities legislation of the Jurisdictions and are not on the list of defaulting reporting issuers maintained under such securities legislation.
The board of directors of each of the Funds approved the proposed Merger on January 18, 2011. A press release and material change report in respect of the Merger were issued and filed on SEDAR on January 18, 2011.
As required by National Instrument 81-107 – Independent Review Committee for Investment Funds, an Independent Review Committee (IRC) has been appointed for the Funds and the Filer has presented the terms of the Merger to the IRC of the Funds for its recommendation on January 6, 2011. The IRC considered the proposed Merger and provided a positive recommendation to the Filer on the basis that the Merger would achieve a fair and reasonable result for each of the Funds.
A meeting (the “Meeting”) of the shareholders of the Terminating Fund will be held on or about March 28, 2011 to approve the proposed Merger. In connection with the Meeting, the Filer, as manager of the Terminating Fund, will send to securityholders of the Terminating Fund a notice of the meeting of securityholders and a Management Information Circular (the “Information Circular”) to be dated on or about February 10, 2011 and a related form of proxy. The Information Circular will provide sufficient information to securityholders to permit them to make an informed decision about the Merger.
The tax implications of the Merger as well as the differences between the Terminating Fund and the Continuing Fund are described in the Information Circular so that shareholders of the Terminating Fund could consider this information before voting on the Merger.
It is proposed that the Share Exchange (as defined below) take place on or about April 15, 2011 (the “Share Exchange Date”).
The Filer will pay all of the costs and expenses associated with the Merger. These costs consist primarily of the legal, proxy solicitation, printing, mailing and regulatory fees.
Following the Share Exchange, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be amalgamated into NexGen Investment on or prior to December 31, 2011.
No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
Prior to the Share Exchange Date, the portfolio assets of the Terminating Fund will at the applicable time consist solely of cash.
Securityholders in the Terminating Fund will be provided with income tax disclosure as it relates to the impact of the implementation of the Merger as well as the differences between the Terminating Fund and the Continuing Fund in the Information Circular. The Share Exchange will be effected as a tax-deferred transaction under the Income Tax Act (Canada).
The Merger will be structured as follows:
a. Prior to the Share Exchange Date: (i) the articles of incorporation of the Terminating Fund will be amended to facilitate the Merger; (ii) the forward contract entered into by the Terminating Fund will be pre-settled in its entirety which will require the counterparty to deliver to the Terminating Fund Canadian securities which will be sold for cash. Accordingly, the Terminating Fund will temporarily hold all of its portfolio in cash (the “Cash Portfolio”) for a brief period of time prior to the Share Exchange;
b. The Terminating Fund will satisfy or otherwise make provision for its liabilities existing as of the Share Exchange Date out of its assets;
c. The Terminating Fund will de-list its shares from the TSX.
d. The shareholders of Class A and Class B Shares of the Terminating Fund will exchange their shares for shares of the Continuing Fund (the “Share Exchange”). 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 Share Exchange Date;
e. Subsequently on the Share Exchange Date, the Continuing Fund will redeem all the Class A and Class B Shares acquired pursuant to the Share Exchange and receive in payment the Cash Portfolio;
f. The Filer will issue a press release forthwith after the Share Exchange is completed announcing the completion of the Share Exchange and the ratio by which the Class A and Class B Shares of the Terminating Fund were exchanged for shares of the Continuing Fund; and
g. The Terminating Fund will be merged with NexGen Investment.
The Share Exchange may be considered a purchase of securities by the Continuing Fund of an issuer, where immediately after the transaction, more than 10 percent of the net assets of the Continuing Fund would be invested in securities of the issuer.
Immediately after the Share Exchange and prior to the redemption of the Class A and Class B Shares of the Terminating Fund for the cash portfolio, the Continuing Fund will hold securities representing more than 10 percent of the outstanding equity securities of the Terminating Fund. In addition, more than 10 percent of the net assets of the Continuing Fund will consist of shares of the Terminating Fund that are illiquid at that time.
In the absence of this order, the Filer would be prohibited from effecting the Share Exchange in connection with the Merger.
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. Securityholders in the Continuing Fund are expected to enjoy improved economies of scale and potentially lower proportionate fund operating expenses (which are borne indirectly by securityholders) as part of a larger combined Continuing Fund;
b. Due to the smaller size and historic growth profile of the Terminating Fund, the administrative and regulatory costs of operating the Terminating Fund as a stand-alone mutual fund would be higher per securityholder and could potentially increase if the Terminating Fund decreases further in asset size;
c. The comparatively larger portfolio of the Continuing Fund is expected to offer improved portfolio diversification to securityholders of the Terminating Fund and in the Continuing Fund;
d. Due to its smaller size, the Terminating Fund may be impacted more significantly than the much larger Continuing Fund by having to sell securities at inopportune times to fund redemptions. The larger Continuing Fund typically has a larger cash balance as a result of its comparatively larger size;
e. The Merger transitions securityholders in the Terminating Fund to a growing and more viable Continuing Fund; and
f. 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 Fund 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 81-102 Merger approval is granted provided that:
(a) the Information Circular sent to securityholders in connection with the Merger prominently discloses that securityholders can obtain the most recent interim and annual financial statements of the applicable Continuing Fund by accessing the SEDAR website at www.sedar.com, by calling the Filer’s toll free number at 1-866-378-7119 or by writing to NexGen at 36 Toronto Street, Suite 1070, Toronto, Ontario M5C 2C5;
(b) upon request by a securityholder of the Terminating Fund for financial statements, the Filer will make best efforts to provide the securityholder with financial statements of the Continuing Fund;
(c) the Terminating Fund and the Continuing Fund with respect to the Merger have an unqualified audit report in respect of their last completed financial period; and
(d) the Information Circular sent to securityholders of the Terminating Fund in connection with the Merger provides sufficient information about the Merger to permit securityholders to make an informed decision about the Merger.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR Project # 1664820
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted to permit temporary investment in closed-end fund by open-ended mutual fund in connection with merger of funds – costs of merger borne by the manager – relief for the trade of securities granted from the investment restrictions in ss. 2.1, 2.2 and 2.4 of National Instrument 81-102 – Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds – ss. 2.1, 2.2, 2.4 and 19.1.