June 22, 2017
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
LOGiQ GROWTH AND INCOME CLASS
(the Terminating Fund)
AND
LOGiQ BALANCED MONTHLY INCOME CLASS (the Continuing Fund, and together with the Terminating Fund, the Funds)
AND
LOGiQ CAPITAL 2016 (the Filer)
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of LOGiQ Mutual Funds Limited and the Funds (each a class of LOGiQ Mutual Funds Limited) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting approval (the Approval Sought) under subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) of the proposed merger of the Terminating Fund into the Continuing Fund (the Merger).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator (Principal Regulator) for this application; and
(ii) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11- 102 Passport System (MI 11-102) is intended to be relied upon in each of the
other provinces and territories of Canada (together with the Jurisdiction, the Jurisdictions).
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
1The head office of each of the Filer and the Funds is located in Toronto, Ontario. The Filer is the manager and investment advisor of the Funds.
2The Filer is registered as an exempt market dealer and portfolio manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Quebec and as an investment fund manager in Newfoundland and Labrador, Ontario, and Quebec.
The Funds
3Each Fund is a reporting issuer in each of the jurisdictions of Canada.
4Neither the Filer nor the Funds is in default of securities legislation in any jurisdiction of Canada.
5Securities of the Funds are currently qualified for sale by a simplified prospectus, annual information form and fund facts dated June 28, 2016, as amended, which have been filed and receipted in each of the jurisdictions of Canada.
6Other than circumstances in which a securities regulatory authority has expressly exempted a Fund therefrom, the Funds follow the standard investment restrictions and practices set out in NI 81-102.
7LOGiQ Mutual Funds Limited is a multi-class mutual fund corporation operating under the laws of Canada. LOGiQ Mutual Funds Limited offers each of the Funds.
8The Terminating Fund offers series A, B, F and X shares.
9The Terminating Fund’s fundamental investment objective is to provide current income and long-term capital appreciation by investing primarily in a diversified portfolio of North American equity and income securities, including dividend paying or distribution paying equity and income securities such as corporate and government bonds. The Terminating Fund may also engage in option writing strategies to enhance income and manage risk and may, from time to time, engage in the short-selling of securities that its investment advisor believes are overvalued.
10The Continuing Fund offers series A, B, F and X shares. The Continuing Fund is authorized to issue an unlimited number of shares of each such series.
11The Continuing Fund’s investment objective is to provide shareholders with consistent long term capital growth and the opportunity for income through the selection, management and strategic trading of long and short positions in securities of income trusts, common shares, preferred shares, derivatives and corporate and government debt. The Continuing Fund’s investment advisor will also consider positioning the Continuing Fund’s investment portfolio to reduce its correlation to Canadian equity and fixed-income indices.
The Merger
12The Filer intends to hold, on or about June 27, 2017, a special meeting of the shareholders of the Terminating Fund (the Shareholders) to consider and, if thought fit, to approve, among other things, the Merger.
13If approved by the Shareholders, the Filer currently expects to implement the Merger on or about June 30, 2017 (the Effective Date). If approval of the Shareholders is not obtained, the Terminating Fund will be terminated.
14Pursuant to the Merger, each Shareholder will, on the Effective Date, receive shares of such series of the Continuing Fund equivalent, including in value, to the series of shares held by the Shareholder in the Terminating Fund.
15The Filer examined its line-up of available funds and selected the Continuing Fund as the particular fund to propose merging the Terminating Fund into because it has a broader investment objective than the Terminating Fund and its investments are not limited primarily to North American equity and income securities (as in the case of the Terminating Fund).
16The broader investment mandate of the Continuing Fund provides it with a greater ability than the Terminating Fund to seek growth opportunities and reduce volatility in the following ways: (i) the Continuing Fund has greater flexibility to invest as it is not limited to the North American market; (ii) the ability to invest primarily outside of Canada and North America gives the Continuing Fund greater opportunity to invest in a wider range of large-cap issuers; and (iii) the ability to short equities and increased emphasis on options use allows the investment advisor to hedge exposures and reduce correlation to the Canadian markets to seek consistent risk-adjusted returns.
17The Terminating Fund filed a press release and a material change report in respect of the proposed Merger on SEDAR on April 24, 2017.
18As required under National Instrument 81-107 Independent Review Committee for Investment Funds (“NI 81-107”), on April 26, 2017, the Funds’ Independent Review Committee (IRC) provided a positive recommendation for the Merger, after determining that in the IRC’s opinion, having reviewed the Merger as a potential conflict of interest, the Merger achieves a fair and reasonable result for each of the Funds.
19Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for preapproved 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 each of the Terminating Fund and the Continuing Fund to be “substantially similar” and (ii) the Merger will not proceed as a “qualifying exchange” or “tax deferred transaction”. The Merger will otherwise comply with all the other criteria for pre-approved organizations and transfers set out in section 5.6 of NI 81-102.
20The Filer has determined that the Merger will not be a material change to the Continuing Fund.
21Notice of the meeting, a management information circular (the Circular) and proxy in connection with the special meeting of Shareholders of the Terminating Fund were mailed to the Shareholders on June 6, 2017 and concurrently filed via SEDAR.
22The Circular of the Terminating Fund includes a brief comparison describing the similarities and differences between the Terminating Fund and the Continuing Fund, and includes information regarding fees, expenses, investment objectives, the manager, the portfolio advisor, and net asset value calculation, and discusses the income tax considerations applicable to the Merger. The Circular discloses where Shareholders can obtain the most recent simplified prospectus, annual information form, fund facts, interim and annual financial statements and annual management report of fund performance of the Terminating Fund and the Continuing Fund at no cost, and also includes the fund facts document for the applicable series of units of the Continuing Fund. Accordingly, Shareholders will have had an opportunity to consider this information prior to voting on the Merger.
23A summary of the IRC’s recommendation is included in the Circular sent to Shareholders as required by section 5.1(2) of NI 81-107.
24The Funds will not bear any of the costs and expenses associated with the Merger. The Filer will pay for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees, as well as the costs of implementing the Merger, including any brokerage fees.
25Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund.
26The annual management fee (which includes any service fees) chargeable on the securities of each Fund are set out in the table below:
Fund
Fees
LOGiQ Balanced Monthly Income Fund
Series A: 2.00% (includes trailer of 0.75%) Series B: 2.00% (includes trailer of 1.00%) Series F: 1.00%
Series X: 1.75% (includes trailer of 0.50%)
LOGiQ Growth and Income Fund
Series A: 2.00% (includes trailer of 0.75%) Series B: 2.00% (includes trailer of 1.00%) Series F: 1.00%
Series X: 1.75% (includes trailer of 0.50%)
27The Continuing Fund’s net asset value as at June 6, 2017 was $27,638,304.78. The Terminating Fund’s net asset value as at June 6, 2017 was $10,989,629.11.
28As set out above, the fees of the applicable series of the Continuing Fund which Shareholders of the Terminating Fund will receive are the same as the fees of the applicable series of the Terminating Fund.
29As a consequence of recent amendments to the Income Tax Act (Canada) (the “Tax Act”) that relate to “switches” of shares of a mutual fund corporation, the exchange of shares of the Terminating Fund for shares of the Continuing Fund in connection with the Merger will be a disposition for purposes of the Tax Act and, accordingly, a Shareholder of the Terminating Fund will generally realize a capital gain or capital loss in connection with the Merger.
30No sales charges will be payable by Shareholders of the Terminating Fund in connection with the Merger.
31The valuation procedures for the Funds are substantially similar.
32Shareholders will have the same purchase option and deferred sales charge schedule in the Continuing Fund as in the Terminating Fund. Shareholders will also have the same pre-authorized purchase plan available to them in the Continuing Fund as was available in the Terminating Fund.
33Shareholders will have the same distribution arrangements available in the Continuing Fund as were available in the Terminating Fund, except (as referenced in the Circular) that the Terminating Fund expects to generate an annual distribution of approximately $0.264, payable as to $0.022 per share per month, whereas the Continuing Fund expects to generate an annual distribution of approximately $0.280, payable as to $0.023 per share per month. Investors who have elected to receive cash distributions in the Terminating Fund will receive cash distributions in the Continuing Fund.
34Shareholders will continue to have the right to redeem securities 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, subject to the standard redemption charges as set out in the Terminating Fund’s simplified prospectus.
35The shares of the Continuing Fund are redeemable daily at a price based on the net asset value per share.
Procedure for the Merger
36The proposed Merger will be structured according to the steps set out below:
a. the Shareholders of the Terminating Fund will be asked to consider and, if thought fit, to approve Merger;
b. upon the Merger, shares of the Terminating Fund will be exchanged for new shares of the Continuing Fund. The number of shares of a series of the Continuing Fund received will be determined by multiplying the number of shares of each applicable series of the Terminating Fund outstanding at the close of business prior to the effective date of the Merger by an exchange ratio (which will be equal to the net asset value per series of shares of the Terminating Fund on the business day prior to the effective date of the Merger, divided by the net asset value per the equivalent series of shares of the Continuing Fund on such date);
c. All of the assets of LOGiQ Mutual Funds Limited notionally allocated to the Terminating Fund will become assets that are notionally allocated to the Continuing Fund. As such, there will be no pre-merger liquidation of any portion of the Terminating Fund’s portfolio.
d. the Terminating Fund will cease to exist and a notice pursuant to section 2.10 of NI 81-102 will be filed on the Terminating Fund’s SEDAR profile.
Benefits of the Merger
37The Filer believes that the Merger will be beneficial to shareholders of the Funds for the following reasons:
a. there is little opportunity to reduce the fixed costs individually associated with, and currently paid by, the Terminating Fund and the Continuing Fund, including expenses such as audit, legal, trustee, custody, transfer agency, independent review committee, filing and fund accounting fees. The fixed costs associated with the Continuing Fund after the Merger will be less than the total fixed costs currently paid by the Terminating Fund and the Continuing Fund and will be spread over a larger number of shares;
b. the Continuing Fund is expected to have a larger asset base which will allow for greater portfolio diversification and a smaller proportion of assets set aside in the form of cash to fund redemptions. This may lead to the reduction of risk and increased returns;
c. the Continuing Fund had a lower MER (before waivers and absorptions) of 3.04% for the Series A share 3.02% for Series B shares, 2.03% for the Series F shares and 2.71% for Series X shares for the year-ended October 31, 2016. Comparatively, the Terminating Fund had a MER (before waivers and absorptions) of 3.17% for the Series A shares, 3.15% for Series B shares, 2.19% for the Series F shares and 2.88% for Series X shares for the year ended October 31, 2016;
d. Since the Filer will pay the costs of the Merger, the Merger will save the Terminating Fund the costs of a dissolution and wind-up, which would otherwise be borne by the Terminating Fund.
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, provided that the Filer obtains prior approval of the Shareholders of the Terminating Fund for the Merger at the meeting held for that purpose, or any adjournments thereof.
“Raymond Chan”
Raymond Chan Manager, Investment Funds and Structured Products Ontario Securities Commission
Application #: 2017/0247
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 reorganizations and transfers in National Instrument 81-102 – a reasonable person may not consider the Terminating Fund and Continuing Fund to have substantially similar investment objectives – the merger will not be effected as a “qualifying transaction” or as a tax-deferred transaction – securityholders of Terminating Fund provided with timely disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds sections 5.5(1)(b), 5.5(3), 5.6, 5.7.