October 23, 2014
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 Manulife Asset Management limited (the “Filer”)
AND
IN THE MATTER OF Manulife Strategic Income Class, Manulife Yield Opportunities Class, Manulife Floating Rate Income Class, Manulife Structured Bond Class, Manulife Corporate Bond Class, Manulife Strategic Balanced Yield Class, Manulife U.S. Balanced Private Pool (formerly Manulife Balanced Private Pool), Manulife Balanced Income Private Pool, Manulife Global Fixed Income Private Pool, Manulife Canadian Fixed Income Private Pool, Manulife Corporate Fixed Income Private Pool, Manulife International Value Equity Class and Manulife Preferred Income Fund (each a “Terminating Fund” and, collectively, the “Terminating Funds”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer and the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for approval of the mergers (the “Mergers”) of each Terminating Fund into the corresponding continuing fund set opposite such Terminating Fund’s name in Appendix A hereto (the “Continuing Fund(s)” and, together with the Terminating Funds, the “Funds”) under subsection 5.5(1)(b) of National Instrument 81-102 – Investment Funds (“NI 81-102”).
Under the process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the “OSC”) is the 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, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
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 governed under the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.
The Filer is registered in the categories of commodity trading manager, mutual fund dealer, portfolio manager and investment fund manager, and is not in default of any of the requirements of the securities legislations of any of the provinces and territories of Canada.
The Filer is the manager of the Funds and is also the trustee of the Trust Funds (as hereinafter defined).
The Funds are reporting issuers as defined under the applicable securities legislation of each province and territory of Canada and are not in default of any of the requirements of the securities legislation of any of the provinces and territories of Canada.
Each Fund is subject to all of the requirements of NI 81-102, National Instrument 81-106 – Investment Fund Continuous Disclosure and National Instrument 81-107 – Independent Review Committee for Investment Funds (“NI 81-107”), subject to any exemptions therefrom that may be available under applicable securities legislations or granted by the securities regulatory authorities.
Manulife Preferred Income Fund and each of the Continuing Funds other than Manulife Preferred Income Class (collectively, the “Trust Funds”) are open-ended mutual fund trusts established under the laws of Ontario by declarations of trust and, where applicable, separate regulations.
Manulife Preferred Income Class and each of the Terminating Funds other than Manulife Preferred Income Fund (collectively, the “Corporate Funds”) are classes of mutual fund shares of Manulife Investment Exchange Funds Corp. (the “Corporation”). The Corporation is a mutual fund corporation formed under the laws of Ontario by articles of amalgamation dated October 23, 2010, as amended.
Securities of each of the Terminating Funds have ceased distribution of new securities.
The Income Tax Act (Canada) (the “Tax Act”) was amended in December 2013 to implement proposals that were first announced in the March 21, 2013 federal budget regarding the income tax treatment of certain types of forward transactions (the “Forward Rules”). Under the Forward Rules, subject to time limited grandfathering rules, gains (and losses) realized by certain Terminating Funds under forward purchase and sale agreements previously entered into (the “Forward Agreements”) will now be treated as ordinary income (or loss) rather than a capital gain (or capital loss).
With the exception of the Mergers of Manulife International Value Equity Class into Manulife International Value Equity Fund and Manulife Preferred Income Fund into Manulife Preferred Income Class, the Mergers have been proposed by the Manager, in part, as a result of the Forward Rules.
In connection with each Merger impacted by the Forward Rules, the applicable Forward Agreements will be settled on or prior to the effective date of the Merger (as such effective dates are set out on Appendix A hereto).
With the exception of Manulife Structured Bond Class and Manulife U.S. Balanced Private Pool, the Terminating Funds which utilize Forward Agreements will be merging into their respective reference funds under such Forward Agreements.
The Filer is of the view that, with the exception of the use of Forward Agreements by certain Terminating Funds, the investment objective of each Terminating Fund is substantially similar to the investment objective of its respective Continuing Fund.
A Terminating Fund will transfer all of its assets and liabilities to its corresponding Continuing Fund for an amount equal to the net value of the assets transferred.
A Continuing Fund will issue securities of the Continuing Fund to its corresponding Terminating Fund having a net asset value equal to the net value of the assets transferred by the Terminating Fund.
Each Terminating Fund will redeem its outstanding securities and pay the redemption price for these securities by distributing securities of its corresponding Continuing Fund to the Terminating Fund’s securityholders.
Any cash acquired by a Continuing Fund in connection with its Merger will be invested in accordance with the investment objectives, strategies, and restrictions of such Continuing Fund and NI 81-102.
Securities of a Continuing Fund received by the securityholders of its corresponding Terminating Fund (as described in the Circular (as defined below)) will have an aggregate net asset value equal to the aggregate net asset value of the securities of the Terminating Fund which are being redeemed.
As soon as reasonably practicable after the distribution of securities of a Continuing Fund by a Terminating Fund to its securityholders, such Terminating Fund will be terminated or wound-up.
No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of its corresponding Terminating Fund.
The Filer will not receive any compensation in respect of the acquisition, sale or redemptions of the units of any Continuing Funds delivered upon terminations.
The Filer will waive any sales commissions, redemption fees or other fees associated with such mergers.
The Terminating Funds and the Continuing Funds have substantially similar valuation procedures.
The portfolios and other assets of a Terminating Fund to be acquired by its Continuing Fund as a result of a Merger are currently, or will be, acceptable to the portfolio advisors of the applicable Continuing Fund prior to the effective date of the Merger, and are or will also be consistent with the investment objectives of the applicable Continuing Fund.
Securityholders of each Terminating Fund will continue to have the right to redeem securities of each such Terminating Fund for cash at any time up to the close of business on the effective date of the Merger. The Circular (as hereinafter defined) disclosed that securities of a Continuing Fund acquired by securityholders upon the proposed Mergers are subject to the same redemption charges to which their securities of the Terminating Fund were subject prior to the Merger.
A press release was issued and filed on SEDAR on July 24, 2014 and a material change report was filed on SEDAR on July 29, 2014 with respect to the proposed Mergers.
Pursuant to subsection 5.1(f) of NI 81-102, securityholders of the Terminating Funds were asked to approve the Mergers at special meetings held on October 16, 2014. Pursuant to subsection 5.1(g) of NI 81-102, securityholders of certain Continuing Funds (namely, of Manulife Canadian Conservative Balanced Fund, Manulife Balanced Income Private Trust and Manulife Preferred Income Class) were also asked to approve their Mergers at special meetings held on October 16, 2014.
As quorum was not met at the special meetings held on October 16, 2014, nor at the adjourned special meetings held on October 21, 2014, for Manulife Balanced Income Private Pool, Manulife Global Fixed Income Private Pool, Manulife Canadian Fixed Income Private Pool and Manulife Corporate Fixed Income Private Pool, such special meetings have been adjourned to October 23, 2014.
A notice of meeting, a management information circular (the “Circular”) and a form of proxy in connection with the special meetings of securityholders was mailed to securityholders of the Terminating Funds and certain Continuing Funds and filed on SEDAR on September 23, 2014.
All of the Mergers are intended to be completed on a taxable basis under the Income Tax Act (Canada). The majority of the Mergers are being proposed, in part, in response to the Forward Rules that have eliminated the use of forward purchase and sale agreements to re-characterize fully taxable income into capital gains and there is no method to implement a tax-deferred merger of a Corporate Fund into a Trust Fund. One positive result of a taxable merger is that any accumulated unused losses in the Continuing Funds and the Corporation can be carried forward to defer possible future gains within the Continuing Funds and the Corporation following the completion of the Mergers.
Pursuant to NI 81-107, the independent review committee of the Funds (the “IRC”) has reviewed the proposed Merger of each Terminating Fund with its corresponding Continuing Fund and the process to be followed in connection with each such Merger, and has advised the Filer that, in the opinion of the IRC, having reviewed each Merger as a potential “conflict of interest matter”, each Merger achieves a fair and reasonable result for the Terminating Funds and the Continuing Funds. Such opinion has been disclosed in the Circular.
No costs will be incurred by any securityholders of any Fund in connection with the Mergers and termination of the Terminating Funds.
The risk profile of each Continuing Fund is the same as that of its corresponding Terminating Fund, with the exception of the merger of Manulife Structured Bond Class into Manulife Canadian Conservative Balanced Fund, where securityholders will be moving from a “low” level of risk to a “low to medium” level of risk. The Filer believes that this increase in risk level is minimal and is not expected to have a negative impact on investors. Further, any additional risk and cost associated with the applicable Forward Agreement with respect to this Merger will not be borne by the Continuing Fund.
The Filer believes that the Mergers will benefit securityholders of the Funds because:
(i) With the exception of Manulife International Value Equity Class and Manulife Preferred Income Fund, the Terminating Funds have been impacted by the Forward Rules. Without the Mergers, securityholders of such Terminating Funds will likely experience a negative tax impact.
(ii) As trust funds are not subject to certain corporate income taxes, securityholders of Terminating Funds (which are Corporate Funds) impacted by the Forward Rules may earn a better after-tax return by investing in the trust equivalent of a mutual fund (such as the Continuing Funds).
(iii) Each Merger has the potential to lower costs for securityholders as the operating costs and expenses of the Continuing Funds will be spread over a greater pool of assets, potentially reducing each Continuing Fund’s management expense ratio.
(iv) No securityholder of a Terminating Fund will be subject to an increase in management fees as a result of the Mergers and, in some cases, will potentially benefit from a decrease in management fees.
(v) Following each Merger, systematic withdrawal plans and any other active optional service, which had been established with respect to a Terminating Fund, will be re-established with respect to its corresponding Continuing Fund unless securityholders advise otherwise.
(vi) Securityholders of the Terminating Funds have received prior notice of the Mergers and may at any time redeem the securities of the Terminating Fund up to the close of business on the Effective Date of a Merger.
The foregoing reasons for the Mergers were set out in the circular along with certain prospectus-level disclosure concerning the Continuing Funds, including information regarding fees, expenses, investment objectives, valuation procedures, the manager, the portfolio advisor (or sub-advisor, as applicable), income tax considerations and net asset value. The Circular has provided sufficient information about each Merger to permit securityholders to make an informed decision about the Merger. The Circular also disclosed that securityholders can obtain the simplified prospectus, annual information form, fund facts, the most recent financial statements, and the most recent management report of fund performance of the Continuing Funds that have been made public, from the Filer upon request, on the Filer’s website or on SEDAR at www.sedar.com. Also accompanying the Circular delivered to securityholders will be a copy of the fund facts document for the relevant Continuing Fund.
Approval of the Mergers are required under section 5.7 of NI 81-102 because the Mergers do not satisfy one of the criteria for pre-approved reorganizations under section 5.6 of NI 81-102; namely, each Merger will not be a “qualifying exchange” within the meaning of section 132.2 of the Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act. The Mergers may not be implemented on a tax-deferred rollover basis under the Tax Act and accordingly will occur on a taxable basis. The Circular provides a summary of certain Canadian federal tax considerations applicable to certain securityholders of the Terminating 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 for the Mergers is granted provided that the Filer obtains the prior approval of the securityholders of the Funds of the Mergers, as applicable, at the special meetings held for that purpose, or any adjournments thereof.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds & Structure Branch
Ontario Securities Commission
APPENDIX A
TERMINATING FUND
CONTINUING FUND
EFFECTIVE DATE OF THE MERGER
Manulife Strategic Income Class
Manulife Strategic Income Fund
On or about November 7, 2014
Manulife Yield Opportunities Class
Manulife Yield Opportunities Fund
On or about November 7, 2014
Manulife Floating Rate Income Class
Manulife Floating Rate Income Fund
On or about November 7, 2014
Manulife Structured Bond Class
Manulife Canadian Conservative Balanced Fund
On or about November 7, 2014
Manulife Corporate Bond Class
Manulife Corporate Bond Fund
On or about November 7, 2014
Manulife Strategic Balanced Yield Class
Manulife Strategic Balanced Yield Fund
On or about November 7, 2014
Manulife U.S. Balanced Private Pool (formerly Manulife Balanced Private Pool)
Manulife U.S. Balanced Private Trust (formerly Manulife Balanced Private Trust)
On or about November 7, 2014
Manulife Balanced Income Private Pool
Manulife Balanced Income Private Trust
On or about November 7, 2014
Manulife Global Fixed Income Private Pool
Manulife Global Fixed Income Private Trust
On or about November 7, 2014
Manulife Canadian Fixed Income Private Pool
Manulife Canadian Fixed Income Private Trust
On or about November 7, 2014
Manulife Corporate Fixed Income Private Pool
Manulife Corporate Fixed Income Private Trust
On or about November 7, 2014
Manulife International Value Equity Class
Manulife International Value Equity Fund
On or about October 24, 2014
Manulife Preferred Income Fund
Manulife Preferred Income Class
On or about October 24, 2014