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-approved reorganizations and transfers in National Instrument 81-102 – continuing funds have different investment objectives than terminating funds and certain mergers are not a “qualifying exchange” or a tax-deferred transaction under Income Tax Act – investors 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), 5.6.

(the “Jurisdiction”)

AND

IN THE MATTER OF THE

PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

FRANKLIN TEMPLETON INVESTMENTS CORP. (the “Manager”)

AND

FRANKLIN QUOTENTIAL CANADIAN GROWTH PORTFOLIO, FRANKLIN QUOTENTIAL CANADIAN GROWTH CORPORATE CLASS PORTFOLIO, FRANKLIN QUOTENTIAL GLOBAL BALANCED PORTFOLIO, FRANKLIN QUOTENTIAL GLOBAL BALANCED CORPORATE CLASS PORTFOLIO, FRANKLIN QUOTENTIAL MAXIMUM GROWTH PORTFOLIO AND FRANKLIN QUOTENTIAL MAXIMUM GROWTH CORPORATE CLASS PORTFOLIO (collectively, the “Terminating Funds”)

AND

FRANKLIN BISSETT CANADIAN EQUITY FUND, FRANKLIN BISSETT CANADIAN EQUITY CORPORATE CLASS, FRANKLIN QUOTENTIAL BALANCED INCOME PORTFOLIO, FRANKLIN QUOTENTIAL BALANCED INCOME CORPORATE CLASS PORTFOLIO, FRANKLIN QUOTENTIAL GLOBAL GROWTH PORTFOLIO AND FRANKLIN QUOTENTIAL GLOBAL GROWTH CORPORATE CLASS PORTFOLIO (collectively, the “Continuing Funds”)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the “Application”) from the Manager 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 Continuing Funds under section 5.5(1)(b) of National Instrument 81-102 (“NI 81-102”) Mutual Funds (the “Approval 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, and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-202 Passport System (“MI 11-202”) 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 (the “Non-Principal Jurisdictions”).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

“Class” or “Classes” means, individually or collectively, Franklin Bissett Canadian Equity Corporate Class, Franklin Quotential Balanced Income Corporate Class Portfolio, Franklin Quotential Canadian Growth Corporate Class Portfolio, Franklin Quotential Global Balanced Corporate Class Portfolio, Franklin Quotential Global Growth Corporate Class Portfolio and Franklin Quotential Maximum Growth Corporate Class Portfolio;

“Corporate Class Ltd.” means Franklin Templeton Corporate Class Ltd.;

“Corporate Class Mergers” means the mergers of Franklin Quotential Global Balanced Corporate Class Portfolio into Franklin Quotential Balanced Income Corporate Class Portfolio, Franklin Quotential Canadian Growth Corporate Class Portfolio into Franklin Bissett Canadian Equity Corporate Class and Franklin Quotential Maximum Growth Corporate Class Portfolio into Franklin Quotential Global Growth Corporate Class Portfolio;

“Corporate Law” means the Business Corporations Act (Alberta);

“Effective Date” means the date the Mergers will be completed and is anticipated to be October 25, 2013, or as soon as practicable thereafter;

“Fund” or “Funds” means, individually or collectively, the Terminating Funds and the Continuing Funds;

“IRC” means the independent review committee of the Funds;

“Tax Act” means the Income Tax Act (Canada);

“Trust Fund Taxable Mergers” means the mergers of Franklin Quotential Global Balanced Portfolio into Franklin Quotential Balanced Income Portfolio and Franklin Quotential Maximum Growth Portfolio into Franklin Quotential Global Growth Portfolio;

“Trust Fund Tax-Deferred Merger” means the merger of Franklin Quotential Canadian Growth Portfolio into Franklin Bissett Canadian Equity Fund.

Representations

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

The Manager is a corporation existing under the laws of Ontario. The Manager is the manager of each of the Funds. The registered head office of the Manager is located in Toronto, Ontario.
Corporate Class Ltd. is an open-ended mutual fund corporation incorporated under the laws of Alberta on June 1, 2001. Each of the Classes is a separate class of special shares of Corporate Class Ltd.
Securities of the Funds are currently qualified for sale by a simplified prospectus and annual information form dated June 20, 2013, which has been filed and receipted in Ontario and each of the Non-Principal Jurisdictions.
Each of the Funds is a reporting issuer in Ontario and in each of the Non-Principal Jurisdictions. The Funds and the Manager are not in default under the securities legislation of such jurisdictions.
Other than circumstances in which the Principal Regulator or the securities regulatory authority of a Non-Principal Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices set out in NI 81-102.
The net asset value for each series of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
The Manager intends to merge the Terminating Funds into the Continuing Funds as follows:

a) Franklin Quotential Canadian Growth Portfolio into Franklin Bissett Canadian Equity Fund;

b) Franklin Quotential Global Balanced Portfolio into Franklin Quotential Balanced Income Corporate Class Portfolio;

c) Franklin Quotential Maximum Growth Portfolio into Franklin Quotential Global Growth Portfolio;

d) Franklin Quotential Global Balanced Corporate Class Portfolio into Franklin Quotential Balanced Income Corporate Class Portfolio;

e) Franklin Quotential Canadian Growth Corporate Class Portfolio into Franklin Bissett Canadian Equity Corporate Class; and

f) Franklin Quotential Maximum Growth Corporate Class Portfolio into Franklin Quotential Global Growth Corporate Class Portfolio.

Approval of the Mergers is required because the Mergers do not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:

a) the Trust Fund Taxable Mergers do not qualify as a “qualifying exchange” or a tax deferred transaction under the Tax Act;

b) the fundamental investment objectives of the Terminating Funds and Continuing Funds are not, or may not be considered by a reasonable person to be, “substantially similar”.

Pursuant to the Mergers, investors will receive securities of the same series of a Continuing Fund as they currently own in the corresponding Terminating Fund.
Investors of the Terminating Funds, Franklin Bissett Canadian Equity Corporate Class, Franklin Quotential Balanced Income Corporate Class Portfolio and Franklin Quotential Global Growth Corporate Class Portfolio will be asked to approve the Mergers at meetings to be held on September 16, 2013. The Manager, as the sole Class A Common Shareholder of Corporate Class Ltd., will also approve the Corporate Class Mergers, as required under Corporate Law.
The Manager is not entitled to rely upon the approval of the IRC in lieu of investor approval for the Mergers due to the fact that one or more conditions of section 5.6 of NI 81-102 will not be met, as required by section 5.3(2)(c) of NI 81-102. The IRC has reviewed and made positive recommendations with respect to the Mergers, having determined that the Mergers, if implemented, achieve a fair and reasonable result for each of the Funds. A summary of the IRC’s recommendation will be included in the notice of special meetings sent to investors in the Terminating Funds and applicable Continuing Funds as required by section 5.1(2) of National Instrument 81-107 Independent Review Committee for Investment Funds.
Each Trust Fund Taxable Merger and the Trust Fund Tax-Deferred Merger (collectively, the “Trust Fund Mergers”) is contingent upon the corresponding Corporate Class Merger and vice versa. If applicable investor approval is not received at the special meetings in respect of a Trust Fund Merger, then neither it nor its corresponding Corporate Class Merger will proceed. Similarly, if applicable investor approval is not received at the special meetings in respect of a Corporate Class Merger, then neither it nor its corresponding Trust Fund Merger will proceed.
The Manager will pay for the costs of the Mergers. These costs include legal, proxy solicitation, printing, mailing and regulatory fees.
Investors of the Terminating Funds will continue to have the right to redeem securities of the Terminating Funds for cash at any time up to the close of business on the business day immediately before the Effective Date.
A material change report, press release and amendments to the simplified prospectus, annual information form and the applicable fund facts, which gave notice of the proposed Mergers, were filed via SEDAR on May 17, 2013.
A notice of meeting, management information circular, proxy and fund facts of each of the Continuing Funds in connection with the special meetings of investors will be mailed to investors of the Terminating Funds and applicable Continuing Funds commencing on or about August 16, 2013 and will be filed via SEDAR.
The information circular that will be sent to investors in connection with a Merger contains the following information:

a) the differences between the investment objectives of the Terminating Funds and the Continuing Funds;

b) the tax implications of the Mergers;

c) a statement that securities of a Continuing Fund acquired by investors under a Merger will be subject to the same redemption charges, if any, which applied to their securities of the Terminating Fund immediately prior to the Mergers;

d) a statement that investors who redeem their securities may be subject to redemption charges as outlined in the simplified prospectus; and

e) a statement that investors can obtain a copy of the simplified prospectus and annual information form and each Fund’s most recent interim and annual financial statements and management reports of fund performance by accessing the SEDAR website at www.sedar.com, by accessing the Manager’s website at www.franklintempleton.ca, by calling a toll-free number or by contacting the Manager at service@franklintempleton.ca.

Upon request by an investor for financial statements, the Manager will make best efforts to provide the investor with financial statements of the Continuing Funds in a timely manner so that the investor can make an informed decision regarding a Merger.
Each Terminating Fund and Continuing Fund has an unqualified audit report in respect of its last completed financial period.
Subject to obtaining the necessary approvals, effective as of the close of business on September 16, 2013, the Terminating Funds will cease distribution of securities and any new purchases of securities will be disallowed. The Terminating Funds will remain closed to all purchase-type transactions until they are merged with the Continuing Funds on the Effective Date. Any existing systematic investment programs (such as pre-authorized chequing plans) that had been established with respect to the Terminating Funds will be redirected to the applicable Continuing Funds on a series-for-series basis effective September 17, 2013 unless an investor advises the Manager otherwise. Systematic withdrawal programs shall remain unaffected until the Effective Date. Following the Mergers, all systematic withdrawal programs that had been established with respect to the Terminating Funds will be re-established on a series-for-series basis in the applicable Continuing Funds unless investors advise the Manager otherwise. Investors may change or cancel any systematic program at any time and investors of the Terminating Funds who wish to establish one or more systematic programs in respect of their holdings in the Continuing Funds may do so following the Mergers.
The portfolio assets of each Terminating Fund to be acquired by the respective Continuing Fund will be acceptable to the portfolio adviser of the Continuing Fund and consistent with the investment objectives of the Continuing Fund.
The Trust Fund Tax-Deferred Merger will be implemented pursuant to the following steps:

a) Prior to the Effective Date, all securities in the portfolio of the Terminating Fund will be liquidated. As a result, the Terminating Fund will temporarily hold cash and/or money market instruments and will not be invested in accordance with its investment objectives for a brief period of time prior to the Merger. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions.

b) Prior to the Merger, both the Terminating Fund and the Continuing Fund will distribute to their respective unitholders sufficient net income and net realized capital gains so that neither will be subject to tax under Part I of the Tax Act for the taxation year ended at the time of the Merger.

c) On the Effective Date, the Terminating Fund will transfer all of its assets, which will consist of cash and/or money market instruments, 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 units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the net assets transferred by the applicable Terminating Fund.

d) Immediately following the above-noted transfer, the Terminating Fund will redeem its outstanding units and distribute the units of the Continuing Fund received by the Terminating Fund to unitholders of the Terminating Fund, in exchange for all such unitholders’ existing units of the Terminating Fund, on a series-for-series and dollar-for-dollar basis.

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

The Trust Fund Taxable Mergers will be implemented pursuant to the following steps:

a) Prior to the Effective Date, certain of the securities in the portfolio of the Terminating Funds may be liquidated. As a result, the Terminating Funds may temporarily hold some cash and/or money market instruments and each Terminating Fund may not be invested in accordance with its respective investment objectives for a brief period of time prior to the Mergers. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions.

b) Prior to the Mergers, each 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 Part I of the Tax Act for its current taxation year.

c) On the Effective Date, each Terminating Fund will transfer all of its assets, which will consist of its investment portfolio and other assets, including cash and/or money market instruments, less an amount required to satisfy the liabilities of the Terminating Fund, to its Continuing Fund, in exchange for units of the Continuing Fund. The units of the Continuing Funds received by the respective Terminating Funds will have an aggregate net asset value equal to the value of the net assets transferred by the applicable Terminating Fund.

d) Immediately following the above-noted transfer, each Terminating Fund will redeem its outstanding units and distribute the units of the Continuing Fund received by the Terminating Fund to unitholders of the Terminating Fund, in exchange for all such unitholders’ existing units of the Terminating Fund, on a series-for-series and dollar-for-dollar basis.

e) As soon as reasonably possible following the Mergers, each Terminating Fund will be wound up.

The proposed Corporate Class Mergers will be implemented pursuant to the following steps:

a) Review the Terminating Fund’s investment portfolio and consider the portfolio in light of the investment objectives of the Continuing Fund. If the Terminating Fund holds investments that are not suitable for the Continuing Fund, those investments will be sold prior to the Effective Date. For the merger of Franklin Quotential Canadian Growth Corporate Class Portfolio into Franklin Bissett Canadian Equity Corporate Class, it is expected that the majority of the Terminating Fund’s current investments will be sold prior to the Effective Date. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions. As a result, the Terminating Fund and the Continuing Fund may each temporarily hold cash or money market instruments and may not be fully invested in accordance with its respective investment objective for a brief period of time prior to, and following the Mergers. Corporate Class Ltd. may pay a capital gain dividend on shares of a Terminating Fund where determined fair and equitable. Each investor of the Terminating Funds and Continuing Funds will be subject to the same tax consequences on capital gain dividends, if any, as a result of the Mergers as on regular year-end dividends made by the Corporate Funds and any dividends will be paid out in cash or reinvested in the investors account according to the investor’s current instructions.

b) The articles of incorporation of Corporate Class Ltd. will be amended to authorize the exchange of all outstanding special shares of each series of the Terminating Fund for special shares of the same series of the Continuing Fund.

c) Each investor of the Terminating Fund will receive special shares of the same series of the Continuing Fund with a value equal to the value of their special shares in the Terminating Fund as determined on the Effective Date. After this step is complete, investors of the Terminating Fund will become investors of the Continuing Fund.

d) On the Effective Date, the net assets attributable to the Terminating Fund (being its investment portfolio and other assets, including cash and liabilities) will be included in the portfolio of assets attributable to the Continuing Fund.

e) As soon as reasonably possible following the Mergers, the unissued special shares of the Terminating Fund will be cancelled by Corporate Class Ltd. and the Terminating Fund will be terminated.

The Manager has concluded that it is in the overall best interests of investors to effect the Trust Fund Taxable Mergers on a taxable basis to preserve each of the Continuing Fund’s significant unused capital losses, which would otherwise expire upon implementation of a Trust Fund Taxable Merger on a tax-deferred basis. As a result of effecting the Trust Fund Taxable Mergers on a taxable basis, the capital losses of each of the Continuing Funds will be available to shelter capital gains realized by the applicable Continuing Fund in future years and thereby reduce the amount of taxable distributions made to all investors in the applicable Continuing Fund in the future. The capital losses of each of the Terminating Funds in the Trust Fund Taxable Mergers will expire in either a taxable or a tax-deferred transaction.
No sales charges will be payable in connection with exchange of securities of the Terminating Funds for securities of the Continuing Funds.
Subject to the required approvals of the Principal Regulator and applicable investors, the Terminating Funds will merge into the Continuing Funds on the Effective Date. Following the Mergers, the Continuing Funds will continue as publicly offered open- end mutual funds.
Except as noted herein, the Mergers 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.
The Mergers will result in the following benefits:

a) the reduction of the Franklin Quotential Program from 16 funds to ten funds will provide investors with a streamlined range of products that will make it easier for investors to select a suitable fund based on their risk tolerance;

b) the Continuing Funds charge lower management fees than the applicable Terminating Funds; and

c) the Mergers will eliminate the administrative and regulatory costs (which are paid by the Funds and thus indirectly by investors in the Funds) of operating the Terminating Funds as separate mutual funds.

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.

“Vera Nunes”

Vera Nunes

Assistant Manager, Investment Funds

Ontario Securities Commission

SEDAR NO. 2091726

Franklin Templeton Investments Corp. (Re), 2013 CanLII 53521

Case Summary