February 23, 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 brandes INVESTMENT partners & Co. (the Filer)
and
BRANDES GLOBAL EQUITY CLASS
SIONNA CANADIAN EQUITY PRIVATE POOL
GREYSTONE CANADIAN EQUITY INCOME & GROWTH CLASS
(the Terminating Funds)
and
BRANDES GLOBAL EQUITY FUND
SIONNA CANADIAN EQUITY FUND
GREYSTONE CANADIAN EQUITY INCOME & GROWTH FUND
(the Continuing Funds, and collectively with the Terminating Funds, the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the Brandes Merger, the Sionna Merger and the Greystone Merger (each defined below, and collectively, the Mergers) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (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 11-102 Passport System (“MI 11-102”) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively 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. The following additional terms shall have the following meanings:
Brandes Merger means the merger of Brandes Global Equity Class into Brandes Global Equity Fund;
Sionna Merger means the merger of Sionna Canadian Equity Private Pool into Sionna Canadian Equity Fund;
Greystone Merger means the merger of Greystone Canadian Equity Income & Growth Class into Greystone Canadian Equity Income & Growth Fund; and
IRC means the independent review committee for the Funds;
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation existing under the laws of Nova Scotia having its registered head office in Toronto, Ontario. The Filer operates under the retail trade name Bridgehouse Asset Managers.
The Filer is registered as an investment fund manager in each of Ontario, Quebec, and Newfoundland and Labrador, as a portfolio manager and exempt market dealer in all provinces and territories, and as a mutual fund dealer in all provinces and territories except Quebec.
The Filer is the investment fund manager of each of the Funds.
The Funds
Each Terminating Fund is a separate class of mutual fund shares of Bridgehouse Corporate Class Inc. (BCCI). BCCI is a corporation incorporated under the laws of Ontario on July 10, 2015. BCCI has elected to be a mutual fund corporation with the filing of its first income tax return.
Each of the Continuing Funds is a mutual fund trust established under the laws of Ontario.
Securities of each of the Funds, other than Greystone Canadian Equity Income & Growth Fund, are currently qualified for sale by a simplified prospectus, annual information form and fund facts dated April 22, 2016, and in the case of the Greystone Canadian Equity Income & Growth Fund, currently qualified for sale by a simplified prospectus, annual information form and fund facts dated September 14, 2016, which have been filed and receipted in each of the Jurisdictions.
Each of the Funds is a reporting issuer under the securities legislation of the Jurisdictions.
Neither the Filer nor any Fund is in default under the securities legislation in the Jurisdictions.
Other than circumstances in which the securities regulatory authority of a Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices set out in NI 81-102.
Reason for Approval Sought
- Regulatory approval of the Mergers is required because the Mergers do not satisfy the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 as each Merger will not be a “qualifying exchange” or other tax-deferred transaction within the meaning of the Income Tax Act (Canada) (the Tax Act). The Mergers cannot be effected as a “qualifying exchange” or other tax-deferred transaction as the Terminating Funds are not mutual fund trusts and thus the requirements of a “qualifying exchange” under the Tax Act cannot be met. There are currently no provisions of the Tax Act that permit a “qualifying exchange” or other tax-deferred transaction between a share class of a mutual fund corporation and a mutual fund established as a trust.
Approval of the Mergers
Investors of the Terminating Funds and Greystone Canadian Equity Income & Growth Fund will be asked to approve the relevant Mergers at special meetings expected to be held on or about February 17, 2017. Investors of Greystone Canadian Equity Income & Growth Fund are being asked to vote on the Greystone Merger because the Greystone Merger is a material change to the Continuing Fund, since the assets of the Terminating Fund are larger than those of the Continuing Fund.
Investors of Brandes Global Equity Fund are not being asked to vote on the Brandes Merger and investors of Sionna Canadian Equity Fund are not being asked to vote on the Sionna Merger, because these Mergers are not a material change to the relevant Continuing Fund, since the assets of the relevant Terminating Fund are significantly smaller than those of its corresponding Continuing Fund.
The Filer, as the sole common shareholder of BCCI, will also be asked to approve the Mergers, as required under the Business Corporations Act (Ontario).
Subject to receipt of securityholder approval and the Approval Sought, the Mergers are expected to occur on or about February 24, 2017 (Effective Date).
Investors of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund or switch into securities of another mutual fund trust managed by the Filer at any time up to the close of business on the business day immediately before the Effective Date.
Merger Steps
- It is proposed that the following steps will be carried out to effect the Mergers:
(a) In respect of the Brandes Merger:
(i) On or prior to the Effective Date, BCCI may declare taxable dividends to obtain a refund of refundable tax on taxable dividends received, or deemed to be received, by BCCI from taxable Canadian corporations. If the Merger occurred on January 31, 2017, ordinary dividends and capital gain dividends would not have been paid on the shares of the Terminating Fund; however, this could change by the time the Merger is implemented.
(ii) On the Effective Date, BCCI will transfer the assets attributable to the Terminating Fund, which will consist of its assets other than the units of the Continuing Fund held by the Terminating Fund, including 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 Terminating Fund.
(iii) Immediately following the transfer of assets, all of the outstanding shares of the Terminating Fund will be redeemed and, in payment of the redemption amount, the Filer will distribute the units of the Continuing Fund to shareholders of the Terminating Fund on a series-for-series and dollar-for-dollar basis.
(iv) As soon as reasonably possible following the Merger, the Terminating Fund will be terminated.
(b) In respect of the Sionna Merger:
(i) The Terminating Fund and Continuing Fund are invested in substantially similar securities and as such the Filer does not anticipate any material changes to securities in the portfolio of the Terminating Fund. On or prior to the Effective Date, BCCI may declare dividends to obtain a refund of refundable tax on taxable dividends received, or deemed to be received, by BCCI from taxable Canadian corporations. If the Merger occurred on January 31, 2017, an ordinary dividend of $96,004.21 would have been paid on the shares outstanding of the Terminating Fund; however, this could change by the time the Merger is implemented. There would not have been a capital gain dividend if the Merger occurred on January 31, 2017.
(ii) On the Effective Date, BCCI will transfer all of the assets attributable to the Terminating Fund, 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 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 Terminating Fund.
(iii) Immediately following the transfer of assets, all of the outstanding shares of the Terminating Fund will be redeemed and, in payment of the redemption amount, the Filer will distribute the units of the Continuing Fund to shareholders of the Terminating Fund on a series-for-series and dollar-for-dollar basis.
(iv) As soon as reasonably possible following the Merger, the Terminating Fund will be terminated.
(c) In respect of the Greystone Merger:
(i) The Terminating Fund and Continuing Fund are invested in substantially similar securities and as such the Filer does not anticipate any material changes to securities in the portfolio of the Terminating Fund. On or prior to the Effective Date, BCCI may declare dividends to obtain a refund of refundable tax on taxable dividends received, or deemed to be received, by BCCI from taxable Canadian corporations. If the Merger occurred on January 31, 2017, an ordinary dividend of $89,025.27 would have been paid on the shares outstanding of the Terminating Fund; however, this could change by the time the Merger is implemented. There would not have been a capital gain dividend if the Merger occurred on January 31, 2017.
(ii) On the Effective Date, BCCI will transfer all of the assets attributable to the Terminating Fund, 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 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 Terminating Fund.
(iii) Immediately following the transfer of assets, all of the outstanding shares of the Terminating Fund will be redeemed and, in payment of the redemption amount, the Filer will distribute the units of the Continuing Fund to shareholders of the Terminating Fund on a series-for-series and dollar-for-dollar basis.
(iv) As soon as reasonably possible following the Merger, the Terminating Fund will be terminated.
Costs and expenses associated with the Mergers, including the costs of the securityholder meetings, will be borne by the Filer and will not be charged to the Funds. The costs of the Mergers include legal, printing, mailing and regulatory fees, as well as proxy solicitation costs.
No sales charges will be payable by investors of the Funds in connection with the Mergers.
Securityholder Disclosure
A press release describing the proposed Mergers was issued and the press release and material change report, which give notice of the proposed Mergers, were filed via SEDAR on December 8, 2016.
A notice of meeting, management information circular, proxy and fund facts of the applicable series of each Continuing Fund (Meeting Materials) were made available to investors of each Terminating Fund and Greystone Canadian Equity Income & Growth Fund commencing on January 12, 2017 and were filed via SEDAR on January 12, 2017. The Filer is relying on exemptive relief granted by the securities regulatory authorities of the Jurisdictions exempting the applicable Funds from the requirement in paragraph 12.2(2)(a) of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), to send an information circular and proxy-related materials to the securityholders of the Funds and instead allow the Funds to make use of the notice-and-access process in section 2.7.1 of National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101). The notice prescribed by section 2.7.1 of NI 54-101 (the Notice-and-Access Document), the form of proxy and the fund facts relating to the relevant series of the Continuing Funds were sent to investors of the applicable Funds on January 12, 2017. Additionally, the Notice-and-Access Document and management information circular were concurrently filed via SEDAR and posted on the Filer’s website.
The Meeting Materials contain a description of the proposed Mergers relevant to each investor, information about the Terminating Funds and the Continuing Funds and income tax considerations for investors of the Terminating Funds. The Meeting Materials also describe the various ways in which investors can obtain a copy of the simplified prospectus and annual information form of the Continuing Funds, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Funds, at no cost.
Securityholder Purchases and Redemptions
Investors of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund or switch into securities of another mutual fund trust managed by the Filer at any time up to the close of business on the business day immediately before the Effective Date.
Effective as of the close of business on December 7, 2016, the Terminating Funds were closed to new purchases of securities. The Terminating Funds will remain closed to purchase-type transactions, except existing systematic investment programs (such as pre-authorized chequing plans), until they are merged with the Continuing Funds on the Effective Date. All systematic programs shall remain unaffected until the business day immediately before the Effective Date.
Following the Mergers, all systematic 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 Filer 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.
IRC Review
The Filer 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.
The Filer has presented the proposed Mergers to the IRC and obtained a positive recommendation that each Merger, if implemented, would achieve a fair and reasonable result for the Funds.
A summary of the IRC’s recommendation has been included in the notice of special meetings made available to investors of the Terminating Funds and Greystone Canadian Equity Income & Growth Fund, as required by section 5.1(2) of National Instrument 81-107 Independent Review Committee for Investment Funds.
Benefits of Mergers
The elimination of the tax-deferred switching option for mutual fund corporations by the Federal Government effective January 1, 2017, has materially reduced the benefit offered by the Terminating Funds. The announcement to eliminate this tax deferral feature was made in March 2016 shortly after the launch of each of the Terminating Funds. The combination of the elimination of the benefit and the timing of the announcement has negatively impacted the potential for each of the Terminating Funds to individually or collectively attract enough investors to ultimately operate efficiently and achieve the benefit of scale that is necessary to keep expenses as low as possible.
In addition, for each Terminating Fund, there is a corresponding trust version available, the Continuing Funds, and the investment mandates of the Continuing Funds are similar, if not identical, to the corresponding Terminating Fund. As a result, there is now redundancy and duplication of costs across the Filer’s mutual fund platform that will be reduced by the proposed Mergers, ultimately benefitting investors. Management fees will not increase in the Continuing Funds and management expense ratios (MER) of each Continuing Fund will be the same as, or lower than, the MER of the corresponding Terminating Funds, depending on the provincial residency of the investors in the Fund.
No costs will be incurred by the investors of any Funds in connection with the Mergers. All costs and expenses associated with the Mergers, including the costs of securityholder meetings, will be borne by the Filer.
No commission or other fee will be charged to investors on the issue or exchange of securities of the Terminating Funds into the Continuing Funds.
Following the Mergers, all optional services (such as systematic plans) will continue to be available to investors, who will be automatically enrolled in comparable plans with respect to securities of the applicable Continuing Fund unless they advise otherwise.
The reduction in redundancy and duplication of costs resulting from the Mergers will ultimately benefit investors. In addition, this will result in a more stream-lined product offering that is easier for investors to understand.
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 the prior securityholder approval for the Mergers at the special meeting held for that purpose, or any adjournments thereof.
“Vera Nunes”
Vera Nunes
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission