Headnote NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund reorganization – Approval required because merger does not meet the criteria for pre-approval – As the continuing fund is currently a closed-end fund which will restructure into an open-ended mutual fund conditional on its securityholders’ approval, no current prospectus is available to send to terminating fund’s securityholders - Terminating fund’s securityholders provided with timely and adequate disclosure regarding the merger and prospectus-level disclosure regarding the continuing fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, clauses 5.5(1)(b), 5.6(1)(a), 5.6(1)(b) and 5.6(1)(f).
September 4, 2013
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 Portland Investment Counsel Inc.
(the Manager)
and
Portland Global Income Fund
(the Terminating Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager 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 Global Banks Premium Income Trust (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 (the Principal Regulator) for this application, and
(b) the Manager 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 Manager:
The Manager
The Manager is a corporation governed by the laws of Ontario with its head office in Burlington, Ontario.
The Manager is the investment fund manager and portfolio manager of the Funds. The Manager is registered as: (i) an investment fund manager in Ontario, Alberta, Newfoundland and Labrador and Quebec; (ii) a portfolio manager and exempt market dealer in Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Prince Edward Island, Quebec and Saskatchewan; (iii) a mutual fund dealer in Ontario; and (iv) an exempt market dealer in Nunavut.
The Funds
The Terminating Fund is an open-end mutual fund trust, established under the laws of the Province of Ontario. Units of the Terminating Fund are currently qualified for sale under a simplified prospectus, annual information form and fund facts dated October 1, 2012, as amended.
The Continuing Fund is a closed-end investment fund, established under the laws of the Province of Ontario and the units of which are listed on the Toronto Stock Exchange (the TSX).
Each of the Funds is a reporting issuer under the applicable securities legislation of each province and territory of Canada.
Neither the Manager nor the Funds is in default under the securities legislation of any province or territory of Canada.
The Manager obtained the approval of the unitholders of the Continuing Fund to convert the Continuing Fund from a closed-end fund to an open-end mutual fund (the Restructuring) at a special meeting of unitholders held on August 22, 2013. In approving the Restructuring, unitholders of the Continuing Fund also approved, among other things, a change to the investment objectives of the Continuing Fund and amendments to the declaration of trust of the Continuing Fund so that the Continuing Fund can operate as an open-end mutual fund in accordance with NI 81-102.
If the Manager decides to implement the Restructuring, the units of the Continuing Fund will be delisted from the TSX on or about November 15, 2013 and the Restructuring will occur on or about December 13, 2013. On the date of the Restructuring, the declaration of trust of the Continuing Fund will be amended by moving the Continuing Fund into the master declaration of trust that governs the Portland mutual funds. The existing issued and outstanding units of the Continuing Fund will be redesignated as Series A2 units and consolidated so that each will have a net asset value of $10 immediately following the Restructuring.
Upon the Restructuring, the investment objective of the Continuing Fund will be changed to be substantially the following: “The Fund’s investment objective is to provide income and long-term total returns by investing primarily in a high-quality portfolio of fixed/floating rate income securities, preferred shares and dividend paying equity securities.” Accordingly, the investment objective of the Continuing Fund upon the Restructuring will be substantially the same as that of the Terminating Fund.
The Terminating Fund follows the standard investment restrictions and practices established under NI 81-102. Upon the Restructuring, the Continuing Fund will also follow the standard investment restrictions and practices established under NI 81-102 and will adopt substantially the same investment strategies as the Terminating Fund.
The Manager intends to qualify Series A, Series A2, Series F and Series G units of the Continuing Fund pursuant to a simplified prospectus by filing a preliminary simplified prospectus for the Continuing Fund on or about November 15, 2013. The final simplified prospectus of the Continuing Fund is expected to be filed on or about December 13, 2013.
When units of the Continuing Fund are offered pursuant to a simplified prospectus, the Manager expects that Series A units of the Continuing Fund will be available under the low load sales charge option and the deferred sales charge option, while Series A2 of the Continuing Fund will be available under the initial sales charge option.
The series of units of the Terminating Fund that will be exchanged for the series of units of the Continuing Fund to facilitate the Merger are as described in paragraph 29(c) below. The Manager expects that the fees and expenses of each series of the Continuing Fund (after the Restructuring) will be the same or lower than those of the series of the Terminating Fund for which the series of the Continuing Fund will be exchanged.
The net asset value per unit for each Fund is calculated on a daily basis in accordance with the Fund’s valuation policy.
The Merger
In accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure, a press release announcing the proposed Merger was issued on June 25, 2013 and filed via SEDAR on June 26, 2013. A material change report with respect to the proposed Merger was filed via SEDAR on June 26, 2013.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds, an Independent Review Committee (the IRC) has been appointed for the Funds. The Manager presented the potential conflict of interest matter related to the proposed Merger to the 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.
Unitholders of the Terminating Fund will continue to have the right to redeem units of the Terminating Fund at any time up to the close of business on the business day immediately before the effective date of the Merger.
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) the Continuing Fund will not, on the date of the Merger, have a current prospectus; therefore the Merger will not satisfy the requirement under subsection 5.6(1)(a)(iv); (ii) the Merger will be completed on a taxable basis; accordingly, the Merger will not meet the requirements under subsection 5.6(1)(b); (iii) the materials sent to unitholders of the Terminating Fund will not include the current prospectus or most recently filed fund facts document of the Continuing Fund, contrary to subsection 5.6(1)(f)(ii); and (iv) the materials sent to unitholders of the Terminating Fund will not include a statement that unitholders may obtain the Continuing Fund’s prospectus and most recently filed fund facts document by contacting the Continuing Fund; therefore, the Merger will not satisfy the requirement under subsection 5.6(1)(f)(iii). Except for these 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.
The Manager 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) effecting the Merger on a taxable basis would allow the unitholders of the Terminating Fund to benefit from the Continuing Fund’s existing tax losses, which currently amount to approximately $12 million in capital losses as of December 31, 2012; (ii) excluding the Manager which owned units of the Terminating Fund as the seed capital investment, approximately 67% of unitholders in the Terminating Fund hold their units in registered accounts; (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 or its unitholders. It is also not possible to effect the Merger as a qualifying exchange because the Terminating Fund is not a mutual fund trust under the Tax Act.
A notice of meeting, a management information circular and a proxy in connection with the special meeting of unitholders was mailed to unitholders of the Terminating Fund commencing on July 29, 2013 and was concurrently filed via SEDAR.
The Manager could not deliver the current prospectus or fund facts documents for the Continuing Fund with the meeting materials as the Continuing Fund did not have a receipt for a final prospectus when the meeting materials were mailed to unitholders. The long form prospectus of the Continuing Fund dated January 27, 2005 (the 2005 Prospectus) has lapsed. Because, among other things, the investment objectives and fees and expenses payable by the Continuing Fund will change upon the Restructuring, the disclosure in the 2005 Prospectus does not reflect many of the key features of the Continuing Fund after the Restructuring. A simplified prospectus will be filed for the Continuing Fund as described in paragraph 11 above. Accordingly, instead of delivering the current prospectus or fund facts documents for the Continuing Fund, the Manager indicated in the management information circular that the fundamental investment objectives and investment strategies of the Continuing Fund would be substantially similar as those of the Terminating Fund. The Manager also included a description of the fee structure of the Continuing Fund (after the Restructuring), as well as the tax implications of the Merger and a summary of the IRC’s recommendation with respect to the Merger.
The management information circular disclosed that the final simplified prospectus, fund facts, and annual information form for the Continuing Fund will be available on or about December 13, 2013, subject to regulatory approval, and that unitholders of the Terminating Fund can obtain these documents by contacting the Manager or by accessing the SEDAR website on that date. In addition, the management information circular disclosed that unitholders may obtain the most recent annual and interim financial statements, and the most recent management report of fund performance that have been made public in respect of the Continuing Fund by contacting the Manager or by accessing the SEDAR website.
All costs and expenses associated with the Merger will be borne by the Manager. These costs consist mainly of brokerage fees, legal, proxy solicitation, printing, mailing and regulatory fees.
No sales charges will be payable by any unitholder in connection with the exchange of units of the Terminating Fund with the units of the Continuing Fund.
The Manager called a special meeting of unitholders of the Terminating Fund on August 22, 2013, at which meeting the unitholders approved the Merger.
If the requisite regulatory and investor approvals are obtained and the Manager decides to implement the Merger, the Merger will be implemented on or about December 13, 2013 after the Restructuring. Upon making the decision to implement the Merger, the Manager, on behalf of the Terminating Fund, will comply with the continuing disclosure requirements in connection with a material change.
To allow sufficient time, not only for the Manager but for the various service providers, to implement the Restructuring, the Manager chose August 22, 2013 as the date for the unitholder meeting of the Continuing Fund to approve the Restructuring. In the Manager’s view, there was no reason to have the unitholder meeting of the Terminating Fund approving the Merger on a different date than the unitholder meeting of the Continuing Fund approving the Restructuring.
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 or deferred sales charge option, remaining deferred sales charge schedule as their units in the Terminating Fund.
The following steps will be carried out to effect the Merger:
(a) The Terminating Fund will transfer all of its assets, which will consist of cash and portfolio securities, less an amount required to satisfy the liabilities of the Terminating Fund, to the Continuing Fund, in exchange for units of the Continuing Fund.
(b) The Terminating Fund will distribute to its unitholders sufficient of its 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 taxation year ending on the Merger.
(c) Immediately following the above-noted transfer, the Terminating Fund will distribute to its unitholders the units of the Continuing Fund so that following the distribution, the unitholders of the Terminating Fund will become direct unitholders of the Continuing Fund:
(i) The holders of Series A Units in the Terminating Fund purchased under the initial sales charge option will receive Series A2 Units of the Continuing Fund.
(ii) The holders of Series A Units in the Terminating Fund purchased under the low load sales charge or deferred sales charge option will receive Series A Units of the Continuing Fund.
(iii) The holders of Series F Units in the Terminating Fund will receive Series F Units of the Continuing Fund.
(iv) The holders of Series G units in the Terminating Fund purchased under the initial sales charge option will receive Series A2 units of the Continuing Fund.
(v) The holders of Series G Units in the Terminating Fund purchased under the low load sales charge or deferred sales charge option will receive Series G Units of the Continuing Fund.
(vi) The holders of Series T Units in the Terminating Fund purchased under the initial sales charge option will receive Series A2 Units of the Continuing Fund.
(vii) The holders of Series T Units in the Terminating Fund purchased under the low load sales charge or deferred sales charge option will receive Series A Units of the Continuing Fund.
(d) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
(e) The Continuing Fund will be renamed “Portland Global Income Fund” on or about the time of the Merger.
The Terminating Fund is a registered investment and the Continuing Fund is a mutual fund trust under the Tax Act. Units of both Funds are “qualified investments” under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and tax free savings accounts. Units of the Continuing Fund are also “qualified investments” under the Tax Act for registered education savings plans and registered disability savings plans.
The Manager believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) the Merger will result in reducing the administrative and regulatory costs of operating each of the Terminating Fund and Continuing Fund as separate investment funds;
(b) unitholders of the Terminating Fund and Continuing Fund will enjoy increased economies of scale as part of a larger combined Continuing Fund and as a result, the Manager expects that the MER of the combined Continuing Fund will be lower than that of the Terminating Fund or the Continuing Fund without the Merger;
(c) following the Merger, the Terminating Fund will be part of a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired;
(d) the Merger transitions unitholders of the Terminating Fund to a growing and more viable Continuing Fund; and
(e) the Merger will result in unitholders of the Terminating Fund becoming unitholders of the Continuing Fund, which is a “mutual fund trust” under the Tax Act and, unlike the Terminating Fund, will not be subject to alternative minimum tax and will be able to take advantage of the capital gains refund mechanism as well as other tax benefits.
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.
‘Vera Nunes’
Vera Nunes, Manager
Manager, Investment Funds Branch
Ontario Securities Commission
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund reorganization – Approval required because merger does not meet the criteria for pre-approval – As the continuing fund is currently a closed-end fund which will restructure into an open-ended mutual fund conditional on its securityholders’ approval, no current prospectus is available to send to terminating fund’s securityholders - Terminating fund’s securityholders provided with timely and adequate disclosure regarding the merger and prospectus-level disclosure regarding the continuing fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, clauses 5.5(1)(b), 5.6(1)(a), 5.6(1)(b) and 5.6(1)(f).