Headnote NP 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund reorganizations pursuant to section 5.5(1)(b) of NI 81-102 required because the reorganizations do not meet criteria for pre-approval – the reorganizations do not meet the requirement in section 5.6(1)(a)(ii) of NI 81-102 because the investment objectives of the terminating Funds may not be considered by a reasonable person to be “substantially similar” to the investment objectives of the continuing Funds
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s.19.1
Date: October 29, 2012
IN THE MATTER OF THE SECURITIES LEGISLATION OF THE PROVINCE 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
NEXGEN CANADIAN LARGE CAP TAX MANAGED FUND NEXGEN CANADIAN LARGE CAP REGISTERED FUND (each a “Terminating Fund” and, collectively, the “Terminating Funds”)
AND
NEXGEN CANADIAN DIVIDEND AND INCOME TAX MANAGED FUND NEXGEN CANADIAN DIVIDEND AND INCOME REGISTERED FUND (each a “Continuing Fund” and, collectively, the “Continuing Funds”, and, together with the Terminating Funds, the “Funds”)
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application (the “Application”) from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for approval of the mergers of NexGen Canadian Large Cap Registered Fund into NexGen Canadian Dividend and Income Registered Fund (the “Registered Merger”) and the merger of NexGen Canadian Large Cap Tax Managed Fund into NexGen Canadian Dividend and Income Tax Managed Fund (the “Tax Managed Merger” and, together with the Registered Merger, the “Proposed Mergers”) under paragraphs 5.5(1)(b) of National Instrument 81-102 Mutual Funds (“NI 81-102”) (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, Quebec, Newfoundland and Labrador and Northwest Territories (including Ontario, the “Jurisdictions”).
INTERPRETATION
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
The decision is based on the following facts represented by the Filer:
The Filer and the Funds
The Filer is a limited partnership established under the laws of the Province of Ontario and its head office is located in Toronto, Ontario. The Filer is registered as a dealer in the category of mutual fund dealer, an adviser in the category of portfolio manager and 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 is the manager of the Funds, each an open-end mutual fund established under the laws of the Province of Ontario and subject to the requirements of NI 81-102. Each of NexGen Canadian Large Cap Tax Managed Fund and NexGen Canadian Dividend and Income Tax Managed Fund are housed within NexGen Investment Corporation (“NexGen Investment”), a mutual fund corporation incorporated under the laws of the Province of Ontario. Each of NexGen Canadian Large Cap Registered Fund and NexGen Canadian Dividend and Income Registered Fund are mutual fund trusts governed by a declaration of trust.
The Filer intends to merge: (i) NexGen Canadian Large Cap Tax Managed Fund into NexGen Canadian Dividend and Income Tax Managed Fund; and (ii) NexGen Canadian Large Cap Registered Fund into NexGen Canadian Dividend and Income Registered Fund.
Securities of the Funds are currently offered for sale under a simplified prospectus (the “Prospectus”) and annual information form dated May 25, 2012 in the Jurisdictions.
The Filer and the Funds are reporting issuers under the applicable securities legislation of the Jurisdictions and are not on the list of defaulting reporting issues maintained under each Jurisdiction’s applicable securities legislation.
Each of the Funds is a mutual fund that is subject to the requirements in NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure. Each of the Funds follows the standard investment restrictions and practices established under the Legislation except to the extent that the Funds have received permission from the CSA to deviate therefrom.
The Funds are currently qualified for sale in each of the provinces and territories of Canada pursuant to a simplified prospectus, annual information form and fund facts dated May 25, 2012, as amended (the “Funds’ Prospectus”).
The net asset value for each of series of securities of the Funds is calculated on a daily basis on each day the Toronto Stock Exchange is open for trading.
The Proposed Mergers
Pursuant to the Proposed Mergers, investors of each Terminating Fund will become investors of the Continuing Fund.
In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, the Proposed Mergers were announced in:
a. a press release dated September 7, 2012;
b. a material change report dated September 7, 2012; and
c. amendments to the Prospectus and fund facts of the Terminating Funds dated September 14, 2012,
each of which has been filed on SEDAR.
- If the necessary approvals are obtained, the following steps will be carried out to effect the Proposed Mergers:
a. In respect of the Tax Managed Merger:
i. Each outstanding share of the Terminating Fund will be exchanged for share(s) of an equivalent class and series of the Continuing Fund. 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 Merger Date.
ii. The assets and liabilities of NexGen Investment attributable to the Terminating Fund will be transferred to the Continuing Fund.
iii. The Terminating Fund will then be wound up.
b. In respect of the Registered Merger:
i. The master declaration of trust of the Terminating Fund will be amended to facilitate the Merger. Among other changes, the investment objective of the Fund will be amended to facilitate the Merger.
ii. The Terminating Fund will transfer all of its assets which will consist of portfolio securities and cash, less an amount required to satisfy the liabilities of the Terminating Fund to the Continuing Fund in exchange for units of the Continuing Fund. The unit exchange will be effected on the basis of the relative net asset values of the applicable units at the close of business on the Merger Date.
iii. Each unitholder of the Terminating Fund will receive the corresponding units of the Continuing Fund.
iv. The Terminating Fund will distribute to its unitholders sufficient net income and net realized capital gains so that it will not be subject to tax under the Income Tax Act (Canada) for its current taxation year.
v. The Terminating Fund will distribute to its unitholders the units of the Continuing Fund received by it in exchange for all of the unitholders’ existing units of the Terminating Fund on a series-by-series basis so that following the distribution the unitholders of the Terminating Fund will become direct unitholders of the Continuing Fund.
vi. The Terminating Fund will be wound up.
Although the procedures for implementing the Proposed Mergers may vary, the result of each Proposed Merger will be that securityholders in each Terminating Fund will cease to be securityholders in the Terminating Funds and will become securityholders in the corresponding Continuing Fund.
In the opinion of the Filer, the Proposed Mergers will be beneficial to securityholders of each Fund for the following reasons:
(i) securityholders in the Terminating Funds are expected to enjoy potentially improved economies of scale as part of a larger combined Continuing Fund as the management expense ratio prior to absorption of each of the Continuing Funds will be less than that of the applicable Terminating Funds;
(ii) Due to the smaller size and historic growth profile of the Terminating Funds, the administrative and regulatory costs of operating the Terminating Funds as stand-alone mutual funds would be higher per securityholder and could potentially increase if the Terminating Funds decrease further in asset size;
(iii) The Proposed Mergers will transition securityholders in the Terminating Funds to growing and more viable Continuing Funds; and
(iv) Each Continuing Fund will benefit from a larger profile in the marketplace.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds (“NI 81-107”), NexGen presented the terms of the Proposed Mergers to the Funds’ independent review committee (“IRC”) for its review and recommendation. The IRC reviewed the potential conflict of interest matters related to the proposed Proposed Mergers and determined that the Proposed Mergers, if implemented, would achieve a fair and reasonable result for each of the Terminating Funds and the Continuing Funds.
A meeting (the “Meeting”) of the securityholders of each Terminating Fund will be held on November 20, 2012 to approve the Proposed Mergers. Investors of the Terminating Funds will be asked to approve the Proposed Mergers at the Meeting.
In connection with the Meeting, the Filer, as manager of the Terminating Funds, will send to securityholders of each Terminating Fund a notice of the meeting of securityholders and a management information circular (the “Information Circular”) to be dated on or about September 21, 2012 and a related form of proxy.
The Information Circular contains the following information that the Filer has deemed to be material so that securityholders of the Terminating Funds may consider this information before voting on the Proposed Mergers: (i) the differences between the Terminating Funds and the Continuing Funds; (ii) the tax implications of the Proposed Mergers; (iii) a statement that the securities of the Continuing Fund acquired by the securityholders upon completion of the Proposed Mergers are subject to the same redemption charges to which their securities of the Terminating Funds were subject prior to the Proposed Mergers; and (iv) the fact that securityholders can obtain, at no cost, the annual information form, the most recently filed fund facts and management report of fund performance that have been made public by contacting the Filer or be accessing the documents on the Filer’s website or through SEDAR.
The portfolio and other assets of the Terminating Funds that will become assets of the Continuing Funds are acceptable to the portfolio advisor of the Continuing Fund and are consistent with the investment objectives of the Continuing Fund. To the extent that a particular security may be unsuitable or undesirable for the Continuing Fund, that security will be sold prior to the Proposed Mergers.
If all required approvals are obtained, it is expected that the Proposed Mergers take place after the close of business on or about November 30, 2012 (the “Merger Date”). The Filer then anticipates that a securityholder of a Terminating Fund will become a securityholder of its corresponding Continuing Fund on the Merger Date.
If the approval of investors of the Terminating Funds is not obtained at the Meeting, then the Proposed Merger for that Terminating Fund will not proceed.
All costs and expenses of effecting the Proposed Mergers (consisting primarily of proxy solicitation, printing, mailing, legal and regulatory fees) as well as the costs of implementing the Proposed Mergers, including any brokerage fees, will be borne by the Filer.
No sales charges will be payable by any securityholder in connection with the exchange of securities of the Terminating Funds into the Continuing Funds.
Securityholders of the Terminating Funds will continue to have the right to redeem or transfer their securities of a Terminating Fund at any time up to the close of business on the business day prior to the Merger Date. Following each Proposed Merger, all optional plans (including pre-authorized purchase programs, automatic withdrawal plans and systematic switch programs) which were established with respect to a Terminating Fund will be re-established in comparable plans with respect to its Continuing Fund unless securityholders advise otherwise.
Each Terminating Fund has substantially the same distribution policy as its Continuing Fund.
Any sales charges applicable to securities of a Continuing Fund are the same or lower than for the equivalent class of securities of its corresponding Terminating Fund.
All Funds have substantially similar arrangements with respect to switch fees.
All Funds calculate their net asset values daily at 4:00 p.m. Net asset values per unit or share are calculated for each class of securities using similar methodologies and currencies. Assets and liabilities generally are valued in the same manner.
Following the Proposed Mergers, the Continuing Funds will continue as publicly offered open-ended mutual funds and the Terminating Funds will be wound up.
Following the Proposed Mergers, a material change report and amendments to the simplified prospectus, annual information form and fund facts of each Terminating Fund in respect of its respective Proposed Merger will be filed.
The Proposed Mergers are conditional on the approval of: (i) the securityholders of the Terminating Funds, (ii) the securityholders of the corresponding Tax Managed or Registered Fund (i.e. the securityholders of NexGen Canadian Dividend and Income Registered Fund in the case of the Tax Managed Merger); and (iii) the Principal Regulator.
In the opinion of the Filer, each Proposed Merger satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6 of NI 81-102, except the criteria contained in subsection 5.6(1)(a)(ii) of NI 81-102 as the investment objectives of the Terminating Funds may not be considered by a reasonable person to be “substantially similar” to the investment objectives of the Continuing Fund.
Except as noted above, the Proposed Mergers will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
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 provided that the Information Circular sent to securityholders of the Terminating Funds provides sufficient information about the Proposed Mergers to permit securityholders to make an informed decision about the Proposed Mergers.
“Raymond Chan”
Raymond Chan Manager, Investment Funds Branch Ontario Securities Commission
Headnote
NP 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund reorganizations pursuant to section 5.5(1)(b) of NI 81-102 required because the reorganizations do not meet criteria for pre-approval – the reorganizations do not meet the requirement in section 5.6(1)(a)(ii) of NI 81-102 because the investment objectives of the terminating Funds may not be considered by a reasonable person to be “substantially similar” to the investment objectives of the continuing Funds
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s.19.1