Sprott Asset Management LP and Sprott All Cap Fund (Re), 2012 CanLII 73223

Headnote NP 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because merger does not meet the criteria for pre-approved re-organizations and transfers in National Instrument 81-102 – terminating fund and continuing fund have different investment objectives – merger not a “qualifying transaction” or a tax-deferred transaction under the Income Tax Act – securityholders of terminating funds provided with timely and adequate disclosure regarding the merger

Applicable Legislative Provisions

National Instrument 81-102 – Mutual Funds, ss. 5.5(1)(b), 5.6(1), 5.7(1)(b) and 19.1

November 27, 2012

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

Sprott Asset Management LP

(the Filer or Sprott)

and

Sprott All Cap 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 Sprott Canadian Equity Fund (the Continuing Fund) (together with the Terminating Fund, the Funds) under subsection 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 (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, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.

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

1. Sprott is a limited partnership established under the laws of the Province of Ontario and its head office is located in Toronto, Ontario.

2. Sprott is registered as an adviser in the category of portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador and as an investment fund manager, exempt market dealer and commodity trading manager in Ontario.

3. Sprott is the manager and promoter of the Funds.

The Funds

4. Each of the Funds is an open-end mutual fund trust established under the laws of the Province of Ontario by a master trust agreement.

5. Units of the Funds are currently offered for sale under a simplified prospectus and annual information form dated May 15, 2012 in all of the provinces and territories of Canada. The Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada. None of the Funds are in default of securities legislation in any province or territory of Canada.

6. 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 under the Legislation.

7. The net asset value (NAV) for each series of units of each Fund is calculated as at 4:00 p.m. Eastern Time on each day that the Toronto Stock Exchange is open for trading.

8. NAV per unit for each series of each Fund are calculated using similar methodologies and currencies. Assets and liabilities generally are valued in the same manner.

9. Both Funds have substantially similar management fee structures and other fee arrangements.

The Merger

10. A press release and material change report in respect of the proposed Merger were filed on SEDAR on October 10, 2012. Units of the Terminating Fund ceased to be available for sale on that date.

11. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), Sprott presented the terms of the Merger 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 Merger and has determined that the proposed Merger, if implemented, would achieve a fair and reasonable result for each of the Funds.

12. Unitholders of the Terminating Fund will continue to have the right to redeem or transfer their units of the Terminating Fund at any time up to the close of business on the business day prior to the effective date of the Merger. Following the Merger, all pre-authorized chequing plans which were established with respect to the Terminating Fund will be re-established with respect to the Continuing Fund unless unitholders who are affected by the Merger advise Sprott otherwise.

13. Sprott will waive any redemption-related costs such as redemption fees and short-term trading fees for investors who redeem their units of the Terminating Fund between October 10, 2012, the date that the proposed Merger was announced, and the date of the Merger.

14. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because: (i) a reasonable person may not consider the fundamental investment objectives of the Terminating Fund and those of the Continuing Fund to be “substantially similar”; and (ii) the Merger will not be a tax-deferred transaction as described in subsection 5.6(1)(b) of NI 81-102. Except for these two reasons, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

15. Sprott has determined that it would not be appropriate to effect the Merger as a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act (Canada) (the Tax Act) or as a tax-deferred transaction for the following reasons: (i) the Terminating Fund has sufficient loss carry-forwards to shelter any net capital gains that could arise for it on the taxable disposition of its portfolio assets on the Merger; (ii) substantially all the unitholders in the Terminating Fund have an accrued capital loss on their units or hold their units in registered plans, and effecting the Merger on a taxable basis will afford taxable unitholders realization of that loss and the ability to use it against current capital gains or even carry it back as permitted under the Tax Act; (iii) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; and (iv) effecting the Merger on a taxable basis will have no other tax impact on the Continuing Fund.

16. A management information circular in connection with the Merger was mailed to unitholders of the Terminating Fund on November 9, 2012 and subsequently filed on SEDAR. The most recently filed fund facts documents of the Continuing Fund were also included in the meeting materials sent to unitholders of the Terminating Fund.

17. The management information circular provides unitholders of the Terminating Fund with information about the investment objectives of the Funds and tax consequences of the Merger. In particular, the management information circular contains the following information that Sprott considered to be material so that unitholders of the Terminating Fund may consider such information before voting on the Merger: (i) the material differences between the Terminating Fund and the Continuing Fund; (ii) the tax implications of the Merger; (iii) a statement that the units of the Continuing Fund acquired by securityholders upon the Merger are subject to the same redemption charges to which their securities of the Terminating Fund were subject prior to the Merger; and (iv) the fact that unitholders can obtain, at no cost, the annual information form, the most recently filed fund facts, the most recent interim and annual financial statements, and the most recent management report of fund performance that have been made public by contacting Sprott or by accessing the documents on Sprott’s website. Accordingly, unitholders of the Terminating Fund will have an opportunity to consider this information prior to voting on the Merger.

18. All costs and expenses associated with the Merger will be borne by Sprott. These costs consist mainly of brokerage fees, legal, proxy solicitation, printing, mailing and regulatory fees. No sales charge will be payable by any unitholder in connection with the exchange of units of the Terminating Fund into the Continuing Fund.

19. Unitholders of the Terminating Fund will be asked to approve the Merger at a special meeting scheduled to be held on or about December 11, 2012. If the meeting is adjourned, the adjourned meeting will be held on or about December 13, 2012.

20. If the requisite approvals are obtained, it is anticipated that the Merger will be implemented on or about December 14, 2012. If unitholder approval is not obtained, the Terminating Fund will be terminated on or about January 17, 2013.

21. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.

22. Following the Merger, units of the Continuing Fund received by unitholders in the Terminating Fund as a result of the Merger will have the same sales charge option and, for units purchased under the low load option, remaining deferred sales charge schedule as their units in the Terminating Fund.

23. The Merger is conditional on the approval of (i) the unitholders of the Terminating Fund; and (ii) the Principal Regulator. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger, which is proposed to occur on or about December 14, 2012 (the Merger Date):

(a) Prior to the Merger Date, the Terminating Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the Continuing Fund. As a result, the Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger;

(b) The value of the Terminating Fund’s portfolio and other assets will be determined at the close of business on the business day prior to the Merger Date in accordance with its trust agreement;

(c) The Continuing Fund will acquire the investment portfolio and other assets of the Terminating Fund in exchange for units of the Continuing Fund;

(d) The Continuing Fund will not assume the Terminating Fund’s liabilities and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Merger Date;

(e) The units of the Continuing Fund received by the Terminating Fund will have an aggregate NAV equal to the value of the Terminating Fund’s portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable series NAV per unit as of the close of business on the Merger Date;

(f) On or shortly before the Merger Date, the Terminating Fund will distribute its net income and net realized capital gains for its current taxation year, to the extent necessary to eliminate its liability for tax;

(g) Immediately thereafter, the units of the Continuing Fund will be distributed to unitholders of the Terminating Fund on a dollar for dollar and series by series basis in exchange for their units in the Terminating Fund; and

(h) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.

24. The Terminating Fund and the Continuing Fund are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of both Funds are “qualified investments” under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.

25. Sprott believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:

(a) Unitholders of the Terminating Fund and the Continuing Fund will enjoy increased economies of scale and lower fund operating expenses (which are borne indirectly by unitholders) as part of a larger combined Continuing Fund;

(b) The Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund;

(c) By merging the Terminating Fund instead of terminating it, there will be a savings for the Terminating Fund in brokerage charges associated with the liquidation of the Terminating Fund’s portfolio on a wind up. The unitholders of the Terminating Fund will not be responsible for the costs associated with the Merger;

(d) The Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities; and

(e) The Continuing Fund, as a result of its greater size, will benefit from its larger profile in the marketplace,

and accordingly has recommended to the unitholders of the Terminating Fund that they vote for the resolution that will authorize Sprott to effect the Merger.

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.

signed “Raymond Chan”

Raymond Chan

Manager, Investment Funds Branch

Ontario Securities Commission