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 – Differing investment objectives, one continuing fund does not have a current simplified prospectus – Terminating fund’s unitholders provided with timely and adequate disclosure regarding the merger and disclosure regarding the continuing fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, clauses 5.6(1)(a) and 5.6(1)(b).
December 15, 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 ASTON HILL ASSET MANAGEMENT INC.
(the Filer)
AND
ASTON HILL GLOBAL HIGH INCOME FUND
(the Terminating Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the merger (the Merger) of the Terminating Fund into Aston Hill Global Convertible Bond Class (the Continuing Corporate Fund) and Aston Hill Global Convertible Bond Fund (the Continuing Trust Fund and, together with the Continuing Corporate Fund, the Continuing Funds) pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) (the Approval Sought).
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, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador (the Non-Principal 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 Filer is a corporation subsisting under the laws of Ontario. The Filer is registered under the Securities Act (Ontario) as an investment fund manager, portfolio manager and exempt market dealer. The Filer is the manager of the Terminating Fund and each Continuing Fund (collectively, the Funds). The Filer also is the trustee of the Terminating Fund and the Continuing Trust Fund. The head office of the Filer is located in Toronto, Ontario.
The Terminating Fund was formed on May 22, 2009 and completed its initial public offering (IPO) of Class A Units and Class F Units on June 9, 2009 for gross proceeds of $12,700,000. The Fund invested the proceeds of the IPO in a portfolio of common shares of Canadian public companies (the Common Share Portfolio). The Fund then entered into a forward agreement (the Forward Agreement) with a counterparty (the Counterparty) pursuant to which the Counterparty agreed to the pay to the Fund on June 10, 2012 (the Forward Termination Date) as the purchase price for the Common Share Portfolio an amount based on the value of the units of the Aston Hill Global High Income Trust (formerly called the Navina/Lazard Strategic Trust). In this manner, the Fund obtained exposure to the returns of the investment portfolio held by the Trust.
At the completion of the IPO, the Fund incurred and paid offering expenses aggregating approximately $1,100,000. Rather than causing the Fund’s net asset value (NAV) to immediately decline by that amount, the Fund arranged for its NAV to be reduced by its offering expenses over a period of time. This was accomplished by having the Manager agree to reimburse the Fund for such expenses over a period of 8 years using funds provided by the Fund to the Manager in the form of an additional 1% of management fees each year. The arrangement is evidenced primarily by a promissory note (the Note) issued by the Manager to the Fund. Since the principal amount of the Note constitutes an asset that matches the Fund’s offering expenses, the Fund did not reduce its NAV at the closing of the IPO by the offering expenses it incurred, and instead has been reducing its NAV gradually through the higher management fees it pays each year. Notwithstanding that this arrangement has helped the Fund maintain a higher NAV per unit, any unitholder who redeems his or her units is entitled to receive only the NAV per unit after the unitholder’s proportionate share of the IPO offering expenses are deducted. When this occurs, the terms of the Note and the attributes of the units provide that a proportionate amount of the Note is forgiven and the redemption proceeds payable to the redeeming unitholder are reduced by the corresponding amount. This effectively results in the Fund accelerating the pace at which the Fund’s NAV is reduced by its offering expenses.
Each of the Terminating Fund and the Continuing Trust Fund is a reporting issuer under the securities legislation of the Jurisdiction and each Non-Principal Jurisdiction. The Continuing Corporate Fund is a reporting issuer under the securities legislation of the Jurisdiction and each Non-Principal Jurisdiction other than Québec. The Terminating Fund does not currently offer its securities to the public. Each Continuing Fund currently offers its securities to the public under a simplified prospectus filed under the securities legislation of the Jurisdiction and each Non-Principal Jurisdiction other than Québec.
Neither the Filer nor any of the Funds is in default of the securities legislation of the Jurisdiction or any Non-Principal Jurisdiction. Each Fund is a mutual fund that is subject to the requirements of NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure.
The Filer proposes to merge the Terminating Fund into the Continuing Funds. The principal difference between the Continuing Funds is that the Continuing Corporate Fund may be more suitable than the Continuing Trust Fund for investors (Taxable Investors) who hold their investment outside of a registered retirement savings plan, registered retirement income fund, deferred profit sharing plan or other similar tax-advantaged plan (collectively, Registered Plans). An objective of the Merger is to transfer the existing unitholders of the Terminating Fund to the Continuing Fund that is most suitable for them based on their tax status. Accordingly, but subject to paragraph 7, Taxable Investors will become securityholders in the Continuing Corporate Fund and investors (Non-Taxable Investors) who hold their investments inside of a Registered Plan will become securityholders of the Continuing Trust Fund.
All unitholders of the Terminating Fund who are resident in Québec will become unitholders of the Continuing Trust Fund, regardless of their tax status. As a result, by becoming unitholders of the Continuing Trust Fund, Taxable Investors resident in Québec will not have the future benefit of being able to switch such investment to other mutual funds within Aston Hill Corporate Funds Inc. on a tax-deferred basis.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Filer presented the Merger to the independent review committee of the Funds (the IRC) for its review. The IRC met to consider the matter presented and, as part of such consideration, were provided by the Filer with a draft version of the Circular (as defined below), background financial data describing the tax implications of the Merger, and the Filer’s written policies and procedures relating to mergers of public mutual funds. After due consideration and reasonable inquiry, the IRC determined that the decision of the Filer to proceed with the Merger:
(a) has been proposed by the Filer free from any influence by an entity related to the Filer and without taking into account any consideration relevant to an entity related to Filer;
(b) represents the business judgement of the Filer uninfluenced by considerations other than the best interest of the Funds;
(c) is in compliance with the Filer’s written policies and procedures relating to the Merger; and
(d) achieves a fair and reasonable result for the Funds.
The proposed Merger was announced in a press release and material change report dated November 15, 2011, each of which has been filed on SEDAR.
The Filer is convening a special meeting (the Meeting) of the unitholders of the Terminating Fund in order to seek the approval of unitholders to complete the Merger, as required by subsection 5.1(f) of NI 81-102. The Meeting will be held on or about December 20, 2011. In connection with the Meeting, the Filer has mailed to unitholders of the Terminating Fund a notice of meeting and management information circular (the Circular), a related form of proxy and the fund facts relating to the series of securities of the Continuing Funds (collectively, the Meeting Materials). The Meeting Materials have been filed on SEDAR.
If all required approvals for the Merger are obtained, it is intended that the Merger will occur after the close of business on or about December 20, 2011, but not later than January 31, 2012, (the Effective Date). The Terminating Fund will be wound-up as soon as reasonably possible following the Effective Date.
All costs of implementing the Merger (consisting primarily of proxy solicitation, printing, mailing, legal, regulatory fees and brokerage charges) will be borne by the Filer.
Unitholders of each Terminating Fund will continue to have the right to redeem their units of the Terminating Fund at any time up to the close of business on the Effective Date.
In the opinion of the Filer, the Merger satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6(1) of NI 81-102, except as follows:
(a) the Merger will not be implemented as either a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act (Canada) (the Tax Act) or a tax-deferred transaction under section 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act (in each case, a Prescribed Rollover). Consequently, the Merger will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(b) of NI 81-102;
(b) a reasonable person may not consider the investment objectives of the Terminating Fund to be substantially similar to the investment objectives of the Continuing Funds. Accordingly, the Merger may not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(a)(ii) of NI 81-102; and
(c) the Continuing Trust Fund does not have a current simplified prospectus under the securities legislation of Québec. Consequently, the Merger will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(a)(iv) of NI 81-102.
- The Circular explains that the Merger will not be implemented as a Prescribed Rollover because:
(a) there will be no tax advantage to the Terminating Fund or its unitholders from implementing the Merger as Prescribed Rollover since:
(i) all of the Terminating Fund’s assets will be converted to cash immediately prior to completing the Merger; and
(ii) unitholders of the Terminating Fund are expected to realize a capital gain on the redemption of their units as part of the Merger of not more than 3.1% of their net asset value per unit; and
(b) by not implementing the Merger as a Prescribed Rollover, the Terminating Fund will have the flexibility to transfer unitholders to the Continuing Fund more suitable for them based on their current tax status, as described above.
- The Circular also provides:
(a) a summary of the anticipated tax implications of completing the Merger;
(b) a comparison of the investment objectives and strategies of the Terminating Fund to the investment objectives and strategies of each Continuing Fund; and
(c) the discussion of the Note and the implications of the Merger on the Note.
- The Filer believes that the Merger will be beneficial to securityholders of each Fund for the following reasons:
(a) unitholders of the Terminating Fund will become investors in a Continuing Fund that is able to provide them with exposure to a more broadly diversified investment portfolio than is currently possible through the Terminating Fund;
(b) unitholders of the Terminating Fund will become investors in a Continuing Fund that will have a lower management expense ratio than the Terminating Fund due to lower costs and economies of scale;
(c) unitholders of the Terminating Fund will have enhanced liquidity following the Merger since securities of the Continuing Funds are redeemable daily while units of the Terminating Fund are redeemable weekly;
(d) Taxable Investors in the Terminating Fund will be transferred to the Continuing Corporate Fund which will provide them with the flexibility to switch to other mutual funds within Aston Hill Corporate Funds Inc. on a tax-deferred basis (except for unitholders who are resident in Québec);
(e) following the Merger, each Continuing Fund will have more assets, thereby allowing for:
(i) increased portfolio diversification exposure;
(ii) a smaller proportion of assets set aside to fund redemptions; and
(iii) lower annual operating expenses as a percentage of their net asset values; and
(f) following the Merger, unitholders of the Fund will become unitholders or shareholders of an equivalent series in a Continuing Fund that pays annual management fees that are lower, by 1% or more, than the management fees currently paid by the Fund.
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 Approval Sought is granted.
“Darren McKall”
Darren McKall
Manager, Investment Funds
Ontario Securities Commission
SEDAR #1826566