NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund reorganization – Approval required because transaction does not meet the criteria for pre-approval – Distinct funds within one labour sponsored investment fund consolidating – The labour sponsored fund does not have a current prospectus – Shareholders provided with timely and adequate disclosure regarding the consolidation and prospectus-level disclosure regarding the continuing series.

National Instrument 81-102 Mutual Funds, clauses 5.5(1)(b), 5.6(1)(a), 5.6(1)(f).

December 21, 2011

(the Jurisdiction)

AND

(the Manager)

AND

(the Filer)

Background

The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval, pursuant to section 5.5(1)(b) of National Instrument 81-102 Mutual Funds (the Instrument), to permit the Filer to effect a consolidation (the Asset Consolidation) of the pools of assets forming the net asset values of the Class A Shares, Series I, II, III, IV and V of the Filer, which is expected to become effective on December 23, 2011 or as soon thereafter as practicable (the Effective Date) (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, Manitoba, Québec, New Brunswick, Nova Scotia, Newfoundland and Labrador and Prince Edward Island (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

This decision is based on the following facts represented by the Filer:

The Manager

The Manager is the investment fund manager of the Filer.
The Manager is an Ontario corporation and has its head office in Toronto.
The Manager is registered under the securities legislation of Ontario in the categories of investment fund manager, portfolio manager and exempt market dealer.
The Manager is the manager of the Filer under a management agreement dated December 4, 2006 which was assigned to the Manager. On January 1, 2007, the Manager amalgamated with Covington Group of Funds Inc. under the laws of the Province of Nova Scotia. Prior to January 1, 2007, Covington Group of Funds Inc. had been the manager of the Filer and following January 1, 2007, the Manager continued this function. On January 29, 2010, the Manager was continued under the laws of the Province of Ontario.

The Filer

The Filer is a corporation formed by way of an amalgamation on January 6, 2006 pursuant to the Canada Business Corporations Act (the Amalgamation) of six predecessor funds, Triax Growth Fund Inc., New Millennium Venture Fund Inc., New Generation Biotech (Balanced) Fund Inc., E2 Venture Fund Inc., Venture Partners Balanced Fund Inc. and Capital First Venture Fund Inc. (collectively, the Predecessor Funds).
The Class A shares of Triax Growth Fund Inc. were previously offered in all of the provinces of Canada except in the Province of Saskatchewan pursuant to a long form prospectus for which a receipt was obtained pursuant to the legislation of those jurisdictions. The Class A shares of the other Predecessor Funds were offered only in the Province of Ontario.
The authorized capital of the Filer consists of an unlimited number of Class A shares, issuable in series (collectively, the Class A Shares) and an unlimited number of Class B shares (the Class B Shares).
The Filer has nine series of Class A Shares currently issued and outstanding as follows: Class A Shares, Series I (Series I Shares), Class A Shares, Series II (Series II Shares), Class A, Series III (Series III Shares), Class A Shares, Series IV (Series IV Shares), Class A Shares, Series V (Series V Shares), Class A Shares, Series VI (Series VI Shares), Class A Shares, Series VII (Series VII Shares), Class A Shares, Series VIII (Series VIII Shares) and Class A Shares, Series IX (Series IX Shares). The Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares, the Series V Shares, the Series VI Shares and the Series VII Shares were each issued to shareholders of the Predecessor Funds as part of the Amalgamation. Certain of those series were subsequently offered for sale by prospectus.
All of the issued and outstanding Class B Shares are owned by the sponsor, the Canadian Federal Pilots Association.
No Class A Shares are currently offered for sale. The Filer last filed a (final) prospectus dated January 30, 2009 in the Province of Ontario in connection with the offering to the public of the Series II Shares, the Series III Shares, the Series VIII Shares, and the Series IX Shares. That prospectus lapsed and was not renewed.
No series of the Filer’s Class A Shares is listed on an exchange.
The Filer is registered as a labour sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario) (the Ontario Act) and as a labour-sponsored venture capital corporation under the Income Tax Act (Canada) (the Tax Act). The Filer’s investing activities are governed by such legislation (collectively, the LSIF Legislation).
The Filer is a mutual fund as defined in the Securities Act (Ontario) (the Securities Act).
The Filer is a reporting issuer under the applicable securities legislation of the Jurisdictions.
The Series I Shares, the Series II Shares and the Series III Shares refer to a separate consolidated portfolio of assets (the Series I, II, III Assets) for the calculation of their net asset value, and are considered to be a separate mutual fund for the purposes of the Securities Act.
The Series IV Shares refer to a separate portfolio of assets (the Series IV Assets) for the calculation of their net asset value, and are considered to be a separate mutual fund for the purposes of the Securities Act.
The Series V Shares refer to a separate portfolio of assets (the Series V Assets) for the calculation of their net asset value, and are considered to be a separate mutual fund for the purposes of the Securities Act.
The Asset Consolidation consists of the consolidation of the Series I, II, III Assets with the Series IV Assets and the Series V Assets, which assets would then be managed as one consolidated pool (the Consolidated Pool) for the benefit of the shareholders of each of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares.
The Asset Consolidation, if completed, will not affect any series of Class A Shares other than the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares.
As of September 30, 2011, the Filer had approximately $87.7 million in net assets.
As of September 30, 2011, the net asset values were as follows:

(a) for the Series I Shares, the Series II Shares, the Series III Shares, collectively, the net asset value was approximately $31 million,

(b) for the Series IV Shares, the net asset value was approximately $6.7 million, and

The Filer makes investments in eligible Canadian businesses as defined in the Ontario Act. The investments objectives of the series of Class A Shares that are the subject of this Application are:

(a) for each of the Series I Shares, the Series II Shares, the Series III Shares and the Series IV Shares, to realize long-term capital appreciation on its investment portfolio; and

(b) for the Series V Shares, (i) to realize long-term capital appreciation on a portion of its investment portfolio and (ii) preserve and return an investor’s initial subscription price paid for their Series V Shares on or about December 31, 2011 (the Series V Capital Repayment Date).

With respect to the Series V Shares, the applicable Predecessor Fund invested exclusively in life sciences transactions and the performance of the Series V Assets, both in the applicable Predecessor Fund and the Filer, has been poor. It is highly unlikely that, absent an infusion of capital, that the second portion of the investment objective would be achieved by the Series V Capital Repayment Date, if ever. If the Asset Consolidation is completed, the Manager, who is owed accrued but unpaid fees of approximately $3.8 million at September 30, 2011 will forgive approximately $2.9 million of this amount in connection with the Asset Consolidation which will enable the Filer to return an amount equal to each investor’s initial subscription price on the Effective Date, which is anticipated to be prior to the Series V Capital Repayment Date. As a result, shareholders of the Series V Shares who do not redeem all of their Series V Shares would choose to continue to invest the balance of their investment in accordance with the investment objective of realizing long-term capital appreciation on the Series V Shares.
After giving effect to the Asset Consolidation, the single investment objective of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares will be to realize long-term capital appreciation on the combined investment portfolio.
The net asset value of each of the series of the Filer’s Class A Shares is calculated on a weekly basis, on the last business day of each week.
The Asset Consolidation will have no effect on the fee structure of the Series I Shares, the Series II Shares and the Series III Shares, and will result in a decrease in the annual management fee for the Series IV Shares from 2.75% per year to 2.5% per year.
The Asset Consolidation will have no effect on the fee structure of the Series V Shares.
The Manager is entitled to a performance bonus (the Series I, II, III Performance Bonus) based on the realized gains and cumulative performance of the eligible investments comprising the Series I, II, III Assets.
The Manager is entitled to a performance bonus (the Series IV Performance Bonus) based on the realized gains and cumulative performance of the eligible investments comprising the Series IV Assets.
The Manager was originally entitled to a performance bonus on the investment portfolio comprising the Series V Assets (the Series V Performance Bonus); however the Filer has divested of each of the Community Small Business Investment Funds (CSBIFs) in which it invested without triggering the payment of a performance bonus. Upon the dissolution of the CSBIFs, underlying investments were distributed in kind to the Filer, which investments are not eligible for the payment of a performance bonus.
Neither the Series I, II, III Performance Bonus nor the Series IV Performance Bonus will be affected by the Asset Consolidation. These performance bonuses will remain the same both before and after the Asset Consolidation.

Shareholder Approval

On October 20, 2011, the Filer announced the proposed Asset Consolidation. The Asset Consolidation has been approved by the board of directors of the Filer and by its independent review committee.
On September 23, 2011, the Filer filed a notice of meeting and record date calling an annual and special meeting of the shareholders of the Filer for November 18, 2011, which meeting was subsequently adjourned to December 16, 2011 (the Shareholders’ Meeting).
In connection with the Shareholders’ Meeting, shareholders of the Filer were sent an information circular dated October 24, 2011, containing details of the proposed Asset Consolidation, the fees to be paid following the Asset Consolidation and the income tax considerations associated therewith. The information circular was filed on SEDAR.
An addendum to the information circular, containing additional disclosure and amending certain disclosure in the information circular, was sent to the dealers representing the shareholders of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares, and was filed on SEDAR on December 2, 2011 (the information circular and addendum, together, being the Circular).
The Circular contained prospectus-level disclosure regarding the Asset Consolidation.
The Asset Consolidation has received the approval of a special majority of the shareholders of the Series I Shares, the Series II Shares, the Series III Shares, voting as a group, the shareholders of the Series IV Shares, voting as a series, and the shareholders of the Series V Shares, voting as a series.
The Asset Consolidation requires amendments to certain sections of the amended articles of amalgamation of the Filer (the Articles). Amendments to the sections of the Articles relating to the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares will be made in order to effect the consolidation of the Series I, II, III Assets, the Series IV Assets and the Series V Assets, which will form the basis of the net asset values of such shares. The Articles will be amended so that the shareholders of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares all share in one pool of assets, the Consolidated Pool, after the Asset Consolidation, instead of three pools of assets prior to the Asset Consolidation.
Each shareholder of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares will continue to hold the same number and series of shares immediately following the Asset Consolidation as such shareholder held immediately prior to the Asset Consolidation. Similarly, each Series I Share, Series II Share, Series III Share, Series IV Share and Series V Share will have the same value immediately following the Asset Consolidation as it did immediately prior to the Asset Consolidation.
Thereafter, the entitlement of each shareholder of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares will be based upon its proportionate interest of the assets of the Consolidated Pool. This proportionate interest is based on the respective contributions of each series to the Consolidated Pool on the Effective Date. Each series of Class A Shares will continue to be responsible for series specific expenses and will, therefore, have a different net asset value from the other series.
None of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares or the Series V Shares will be issued, acquired, redeemed or cancelled in order to effect the Asset Consolidation.
The last scheduled date for calculation of the net asset value of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares before the anticipated Effective Date is expected to be December 23, 2011.
Shareholders of all of the series of the Filer will continue to have the right to redeem Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares for cash at any time up to the close of business on the last valuation day immediately preceding the Effective Date of the Asset Consolidation. Such redemptions may be subject to tax under the LSIF Legislation.
Shareholders of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and/or the Series V Shares are permitted to dissent from the Asset Consolidation resolution pursuant to the provisions of section 190 of the Canada Business Corporations Act. A shareholder who dissents will be entitled, in the event the Asset Consolidation becomes effective, to be paid by the Filer, the fair value of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and/or the Series V Shares held by such shareholder determined as at the close of business on the day before the Asset Consolidation resolution was adopted. Where a shareholder dissents from the resolution and receives a cash payment for his shares from the Filer, the shareholder is considered to have realized proceeds of disposition equal to the amount of the payment received by the shareholder. If such Class A Shares have been held by the shareholder for less than eight years, the proceeds of disposition will be reduced by the amount required to be withheld from the proceeds and remitted by the Filer to the appropriate taxing authorities and any applicable fees.
The Filer will issue a press release after the close of business on the date of Shareholders’ Meeting, being December 16, 2011, announcing the results of the Shareholders’ Meeting and, if applicable, confirming the anticipated Effective Date.
All of the costs of effecting the Asset Consolidation (consisting primarily of legal, proxy solicitation, printing, mailing and accounting costs) will be paid by the Manager.
In the opinion of the Manager, the Asset Consolidation will be beneficial to shareholders of the Series I Shares, the Series II Shares, the Series III Shares, the Series IV Shares and the Series V Shares for the following reasons:

(a) it will result in improved liquidity levels that will enable the Consolidated Pool to better manage follow-on investment requirements of investee companies and to meet the redemption requests of shareholders;

(b) it will add further diversification to the current separate pools of assets; and

(c) as there are a number of fixed costs and expenses associated with operating separate series of the Fund as distinct pools of assets, it will result in a reduction of the fixed cost component of each such series as a result of operating one Consolidated Pool.

Approval for the Asset Consolidation under Section 5.5(1)(b) of the Instrument

Approval for the Asset Consolidation is required because the Filer does not satisfy all of the criteria for pre-approved organizations and transfers set out in section 5.6(1) of the Instrument because it does not have a current prospectus or simplified prospectus, as required under sections 5.6(1)(a)(iv) and 5.6(1)(f)(ii) of the Instrument.
The Filer and the Manager are not in default of securities legislation in any province or territory of Canada.

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.

“Sonny Randhawa”

Title: Manager, Investment Funds Branch Ontario Securities Commission

SEDAR No. 1820170

Covington Capital Corporation (Re), 2011 CanLII 83249

Case Summary