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 – continuing funds have different investment objectives than terminating funds – securityholders of terminating funds provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b) and 5.6, 5.7(1)(b) and 19.1.
October 17, 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
Manulife Asset Management Limited
(the “Filer”)
AND
In the Matter of
Manulife Global Monthly Income Fund
Manulife U.S. Mid-Cap Fund
Manulife Global Leaders Class
(each a “Terminating Fund” and, collectively, the “Terminating Funds”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer and the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for approval of the mergers (the “Mergers”) of the Terminating Funds into the applicable Continuing Funds (as defined below) under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (“NI 81-102”).
Under the process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the “OSC”) is the principal regulator for this application; 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, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
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
This decision is based on the following facts represented by the Filer:
The Filer is a corporation governed under the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.
The Filer is registered in the categories of commodity trading manager, exempt market dealer, mutual fund dealer, portfolio manager and investment fund manager.
The Filer is the manager of the Funds and also trustee of the Trust Funds (as both hereinafter defined).
Manulife Global Monthly Income Fund, Manulife Diversified Income Portfolio, Manulife U.S. Mid-Cap Fund and Manulife U.S. All Cap Equity Fund (the “Trust Funds”) are open-ended mutual fund trusts established under the laws of Ontario by a Master Declaration of Trust and separate Regulation and are governed by the provisions of NI 81-102.
Manulife Global Leaders Class and Manulife Global Opportunities Class (the “Corporate Funds”) are classes of mutual fund shares of Manulife Investment Exchange Funds Corp. (the “Corporation”). The Corporation is a mutual fund corporation formed under the laws of Ontario by articles of amalgamation dated October 23, 2010. Each Corporate Fund is an open-ended mutual fund.
The Filer is proposing to merge each Terminating Fund listed in the chart below into the fund (each a “Continuing Fund” and, collectively, the “Continuing Funds” and, together with the Terminating Funds, the “Funds”) shown opposite its name:
TERMINATING FUND
CONTINUING FUND
Manulife Global Monthly Income Fund
Manulife Diversified Income Portfolio (formerly Manulife Simplicity Income Portfolio)
Manulife U.S. Mid-Cap Fund
Manulife U.S. All Cap Equity Fund
Manulife Global Leaders Class
Manulife Global Opportunities Class
Securities of the Funds are currently qualified for sale in each of the provinces and territories of Canada pursuant to a simplified prospectus and annual information form dated August 19, 2011, which have been receipted in all of the provinces and territories of Canada on August 23, 2011.
The Terminating Funds and the Continuing Funds are reporting issuers as defined under the applicable securities legislation of each province and territory of Canada and are not in default of any of the requirements of the securities legislation of any of the provinces and territories of Canada.
Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established by NI 81-102.
The net asset value for each of the Funds is calculated on a daily basis at the end of each day the Toronto Stock Exchange is open for trading.
The Merger of Manulife Global Monthly Income Fund into Manulife Diversified Income Portfolio and Manulife U.S. Mid-Cap Fund into Manulife U.S. All Cap Equity Fund will be structured as follows:
(i) Securityholders of Manulife Global Monthly Income Fund and Manulife U.S. Mid-Cap Fund will be asked to approve the Mergers.
(ii) The Regulations governing Manulife Global Monthly Income Fund and Manulife U.S. Mid-Cap Fund will be amended to permit such actions as are necessary to complete the Mergers.
(iii) The Terminating Fund will transfer all of its assets and liabilities to its corresponding Continuing Fund for an amount equal to the net value of the assets transferred, which amount will be satisfied as described in (iv) below.
(iv) The Continuing Fund will issue securities of the Continuing Fund (as described in (vi) below) to its corresponding Terminating Fund having a net asset value equal to the net value of the assets transferred by the Terminating Fund.
(v) The Terminating Fund will redeem its outstanding securities and pay the redemption price for these securities by distributing securities of its corresponding Continuing Fund to the Terminating Fund’s securityholders.
(vi) Securityholders of the Terminating Fund will receive securities of the Continuing Fund as follows:
Terminating Fund
Continuing Fund
Manulife Global Monthly Income Fund
Manulife Diversified Income Portfolio
Advisor Series securities
Series H securities1
Series F securities
Series J securities2
Series G securities
Series G securities
Series I securities
Series I securities
Series IT securities
Series IT securities
Series O securities
Series O securities
Series T securities
Series K securities3
Manulife U.S. Mid-Cap Fund
Manulife U.S. All Cap Equity Fund
Advisor Series securities
Advisor Series securities
Series F securities
Series F securities
Series G securities
Series G securities
Series I securities
Series I securities
Series O securities
Series O securities
Series X securities
Series X securities
(vii) Securities of the Continuing Fund received by the securityholders of its corresponding Terminating Fund will have an aggregate net asset value equal to the aggregate net asset value of the securities of the Terminating Fund which are being redeemed.
(viii) As soon as reasonably practicable after the distribution of securities of the Continuing Fund by the Terminating Fund, the Terminating Fund will be wound-up.
- The Merger of Manulife Global Leaders Class into Manulife Global Opportunities Class will be structured as follows:
(i) A resolution will be signed by the board of directors of the Corporation approving the completion of the Merger as described in (iv) below.
(ii) Securityholders of Manulife Global Leaders Class and Manulife Global Opportunities Class will each be asked to approve the Merger.
(iii) The articles of amalgamation of the Corporation will be amended to allow for the completion of the Merger as described in (iv) below.
(iv) The securities of Manulife Global Leaders Class will be exchanged for securities of Manulife Global Opportunities Class based on their relevant net asset values as follows:
Manulife Global Leaders Class
Manulife Global Opportunities Class
Advisor Series securities
Advisor Series securities
Series F securities
Series F securities
Series G securities
Series G securities
Series I securities
Series I securities
Series O securities
Series O securities
Series X securities
Series X securities
(v) Securities of Manulife Global Opportunities Class received by securityholders of Manulife Global Leaders Class will have an aggregate net asset value equal to the aggregate net asset value of the securities of Manulife Global Leaders Class which are being exchanged.
(vi) The assets and liabilities attributed to Manulife Global Leaders Class will be reallocated to Manulife Global Opportunities Class.
(vii) As soon as reasonably practicable following the merger, the articles of amalgamation of the Corporation will be amended to delete Manulife Global Leaders Class.
No sales charges will be payable in connection with the acquisition by each Continuing Fund of the investment portfolio of its corresponding Terminating Fund.
The portfolios and other assets of each Terminating Fund to be acquired by the applicable Continuing Fund as a result of the Mergers are currently, or will be, acceptable to the portfolio advisers of the applicable Continuing Fund prior to the effective date of the Mergers, and are or will also be consistent with the investment objectives of the applicable Continuing Fund.
Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash at any time up to the close of business on the effective date of the Mergers, which is expected to be on or about November 4, 2011. The management information circular (the “Circular”) discloses that securities of a Continuing Fund acquired by securityholders upon the proposed Mergers are subject to the same redemption charges to which their securities of the Terminating Fund were subject prior to the Merger.
A press release was issued and filed on SEDAR on August 16, 2011 and a material change report was filed on SEDAR on August 16, 2011 with respect to the proposed Mergers. The simplified prospectus and annual information form for the Manulife Mutual Funds included disclosure relating to the proposed Mergers and was receipted on August 23, 2011.
Pursuant to subsection 5.1(f) of NI 81-102, securityholders of the Terminating Funds will be asked to approve the Mergers at special meetings to be held on or about October 19, 2011.
As required by the Business Corporations Act (Ontario), the current shareholders of Manulife Global Opportunities Class, will be asked to approve its Merger at special meetings to be held on or about October 19, 2011.
A notice of meeting, the Circular and a form of proxy in connection with the special meetings of securityholders were mailed to securityholders of the Terminating Funds and of Manulife Global Opportunities Class and filed on SEDAR on September 26, 2011.
The Mergers will each be a “qualifying exchange” within the meaning of Section 132.2 of the Income Tax Act (Canada) (“ITA”) or a tax deferred transaction under subsection 86(1) of the ITA.
Pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds, the independent review committee of the Funds has reviewed the proposed Merger of each Terminating Fund with its corresponding Continuing Fund and the process to be followed in connection with each Merger, and has advised the Filer that, in the opinion of the independent review committee, having reviewed each Merger as a potential “conflict of interest matter”, each Merger achieves a fair and reasonable result for the Terminating Funds and the Continuing Funds. This information will be disclosed in the Circular.
The Filer will pay for the costs of the Mergers. These costs consist mainly of legal, proxy solicitation, printing, mailing, brokerage costs and regulatory fees.
Approval for the Mergers is required because the Mergers do not meet all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of the NI 81-102 because a reasonable person may not consider the fundamental investment objectives of the Terminating Funds and the corresponding Continuing Funds to be “substantially similar”, as required by section 5.6(1)(a)(ii).
The Mergers will comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Filer believes that the Mergers will benefit securityholders of the Funds because:
(i) Securityholders of the combined Continuing Funds may benefit from economies of scale in administrative and regulatory operating costs and expenses associated with operating the Funds, significant costs that can contribute to higher management expense ratios.
(ii) Each Merger has the potential to lower costs for securityholders as the operating costs and expenses of the Continuing Funds will be spread over a greater pool of assets when the Terminating Funds merge into the corresponding Continuing Funds, potentially reducing each Continuing Fund’s management expense ratio. No securityholder of the Terminating Funds will be subject to an increase in management fees as a result of the Terminating Funds merging into the corresponding Continuing Funds and, in some cases, securityholders will potentially benefit from a decrease in management fees.
(iii) The tax-deferred nature of the Mergers means the Mergers will have no material adverse tax consequences for securityholders.
(iv) Each Continuing Fund will have an asset base of greater size, potentially allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions. Each Continuing Fund is also expected to benefit from an increased profile in the marketplace. The ability to improve diversification may lead to increased returns and a reduction of risk, while at the same time creating a higher profile that will attract more investors.
(v) Each of the Continuing Funds is expected to attract more assets as marketing efforts will be concentrated on fewer funds, rather than multiple funds with similar investment mandates. The ability to attract assets in the Continuing Funds will benefit investors by ensuring that the Continuing Funds remain viable, long-term, attractive investment vehicles for existing and potential investors.
The foregoing reasons for the Mergers are set out in the Circular. In addition, the Circular includes prospectus-like disclosure concerning the Continuing Funds, including information regarding fees, expenses, investment objective, valuation procedures, the manager, the portfolio advisor (or sub-advisor, as applicable), income tax considerations and net asset value. The Circular also discloses that securityholders can obtain the simplified prospectus, annual information form, the fund facts, the most recent financial statements of the Continuing Funds, and the most recent management report of fund performance that have been made public, from the Filer upon request, on the Filer’s website or on SEDAR at www.sedar.com. Also accompanying the Circular delivered to securityholders is a copy of the fund facts document for the relevant Continuing Fund.
In respect of the Circular and the other disclosure documents set out in sub-paragraph 5.6(f)(iii) of NI 81-102, the Filer has ensured that:
(i) the Circular sent to securityholders in connection with a Merger provides sufficient information about the Merger to permit securityholders to make an informed decision about the Merger;
(ii) the Circular sent to securityholders in connection with a Merger prominently discloses that securityholders can obtain the most recent interim and annual financial statements of the applicable Continuing Fund by contacting their dealer, by calling Manulife’s 1-800 number, by accessing it on Manulife’s website at www.manulifemutualfunds.ca or by accessing the SEDAR website at www.sedar.com;
(iii) upon request by a securityholder for financial statements or the simplified prospectus of the funds, Manulife makes best efforts to provide the securityholder with financial statements of the applicable continuing fund in a timely manner so that the securityholder can make an informed decision regarding a Merger; and
(iv) each applicable Terminating Fund and the applicable Continuing Fund with respect to a Merger has an unqualified audit report in respect of its last completed financial period.
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 Mergers are approved.
“Chantal Mainville”
Chantal Mainville
Acting Manager, Investment Funds Branch
Ontario Securities Commission
Footnotes
- A new series of securities of Manulife Diversified Income Portfolio, to be called Series H securities, will be created to grandfather the trailer fee of the Advisor Series securities of the Terminating Fund. Upon completion of the Merger, Series H securities will be closed to all new purchases, including pre-authorized contributions. Series H securityholders will maintain the same management fee and DSC schedule within the Continuing Fund.
- A new series of securities of Manulife Diversified Income Portfolio, to be called Series J securities, will be created to grandfather the management fee of the Series F securities of the Terminating Fund. Upon completion of the merger, Series J securities will be closed to all new purchases, including pre-authorized contributions. Series J securityholders will maintain the same management fee within the Continuing Fund.
- A new series of securities of Manulife Diversified Income Portfolio, to be called Series K securities, will be created to grandfather the trailer fee of the Series T securities of the Terminating Fund. Upon completion of the merger, Series K securities will be closed to all new purchases, including pre-authorized contributions. Series K securityholders will maintain the same management fee and DSC schedule within the Continuing Fund.