May 14, 2018
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
Lysander Funds Limited
(the Manager)
and
Canso Select Opportunities Fund (the Restructuring Fund and together with the Manager, the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Restructuring Fund for a decision under the securities legislation of the Jurisdiction for approval under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) of the proposed plan of arrangement (the Arrangement) for the exchange of Class A units (Class A Units) and Class F units (Class F Units) of the Restructuring Fund for Class A multiple voting shares (NewCo Class A Multiple Voting Shares) and/or Class B subordinate voting shares (NewCo Class B Subordinate Voting Shares) of Canso Select Opportunities Corporation (NewCo) (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 (Principal Regulator) for this application, and
(b) 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 provinces and territories of Canada, other than the Province of Ontario (the Other Jurisdictions).
Interpretation
Defined terms contained in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filers:
The Manager
The Manager is a corporation governed by the laws of the Province of Ontario with its head office in Richmond Hill, Ontario.
The Manager is registered as an investment fund manager in the Provinces of Newfoundland and Labrador, Ontario and Quebec.
The Manager is the manager and promoter of the Restructuring Fund.
The Restructuring Fund & NewCo
The Restructuring Fund is a closed-end mutual fund trust established under the laws of the Province of Ontario under a master declaration of trust dated September 25, 2013 (the Declaration of Trust). Class A Units of the Restructuring Fund are listed on the Toronto Stock Exchange (TSX) under the ticker symbol “SCW.UN”.
The Restructuring Fund is a reporting issuer under the applicable securities legislation of the Province of Ontario and the Other Jurisdictions (the Legislation). The Restructuring Fund is subject to NI 81-102.
NewCo is a corporation governed by the laws of the Province of Ontario with its head office in Richmond Hill, Ontario. NewCo has applied for its NewCo Class A Multiple Voting Shares and NewCo Class B Subordinate Voting Shares to be publicly-listed on a stock exchange in Canada.
NewCo Class A Multiple Voting Shares and NewCo Class B Subordinate Voting Shares of NewCo will be qualified for sale under the management information circular dated March 16, 2018 (the Circular).
Neither the Manager, NewCo nor the Restructuring Fund is in default under the Legislation.
Other than circumstances in which the securities regulatory authority of the Province of Ontario and the Other Jurisdictions has expressly exempted the Restructuring Fund therefrom, the Restructuring Fund follows the standard investment restrictions and practices established under NI 81-102.
The net asset value (NAV) for each class of units of the Restructuring Fund is calculated on a daily basis in accordance with the Restructuring Fund’s valuation policy and as described in the Restructuring Fund’s offering documents.
The Restructuring
The Manager intends to restructure the Restructuring Fund into a publicly-listed corporation.
Regulatory approval of the Arrangement is required because the Arrangement 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 Restructuring Fund is not being reorganized with, nor are its assets being transferred to, another investment fund;
(ii) the valuation procedures of the Restructuring Fund are not, or may not be considered to be, “substantially similar” to the valuation procedures of NewCo;
(iii) the fee structure of the Restructuring Fund is not, or may not be considered to be, “substantially similar” to the fee structure of NewCo;
(iv) the Arrangement is not a “qualifying exchange” or tax-deferred transaction under the Income Tax Act (Canada) (the Tax Act); and
(v) the portfolio assets of the Restructuring Fund are not being acquired by another investment fund.
Except for the reasons noted in paragraph 12 above, the Arrangement 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.
Class A unitholders and Class F unitholders of the Restructuring Fund (the Unitholders) will continue to have the right to redeem units of the Restructuring Fund monthly and annually in accordance with the terms of the Declaration of Trust. Under the annual redemption right, units were surrendered for redemption during the period commencing on March 15, 2018 until 5:00 p.m. (Toronto time) on March 29, 2018 (the Notice Period). Units properly surrendered for redemption during the Notice Period will be redeemed on May 31, 2018. Units redeemed on May 31, 2018 will be redeemed, in respect of a class of units, at a redemption price per unit of that class surrendered for redemption on May 31, 2018 that is equal to 100% of the NAV per unit as of such date, less any costs and expenses incurred by the Restructuring Fund in connection with funding the redemption. During the Notice Period, Unitholders tendered redemption notices totalling approximately $23.6 million of Class A and Class F units, which is about 60% of the NAV of the Restructuring Fund. A press release with respect to the redemptions was issued on April 9, 2018 and subsequently filed via SEDAR. A material change report with respect to the redemptions was also filed via SEDAR on April 16, 2018.
A press release with respect to the Restructuring Fund announcing the proposed Arrangement was issued on February 1, 2018 and subsequently filed via SEDAR. A material change report with respect to the Restructuring Fund regarding the proposed Arrangement was also filed via SEDAR on February 5, 2018.
A notice of meeting, the Circular and a proxy in connection with the Arrangement were filed on SEDAR on March 16, 2018 and subsequently mailed to Unitholders.
The Circular provides Unitholders with information about the differences between the Restructuring Fund and NewCo, the publicly-listed corporate structure of NewCo and the tax consequences of the Arrangement. Accordingly, Unitholders had an opportunity to consider this information prior to voting on the Arrangement.
Unitholders were asked to approve the Arrangement (the Arrangement Resolution) at a special meeting of Unitholders on April 12, 2018 (the Special Meeting). The Arrangement Resolution was approved by more than 662/3% of the votes cast by Unitholders present in person or represented by proxy at the Special Meeting. Also, pursuant to OSC Rule 56-501 – Restricted Shares (OSC Rule 56-501), the Arrangement Resolution was approved by the majority of the votes cast by Unitholders other than the votes attaching to Class A and Class F Units held directly or indirectly by affiliates and control persons of the Restructuring Fund.
All costs and expenses of the Restructuring Fund and NewCo relating to the Arrangement, including legal fees, accounting fees, financial advisory fees, regulatory filing fees, stock exchange fees, all disbursements of advisors and printing and mailing costs, shall be paid by the Manager and its affiliate, Canso Investment Counsel Ltd. (Canso), whether or not the Arrangement is consummated.
The Arrangement is conditional on the approval of (i) the Unitholders, (ii) the Principal Regulator, (iii) the Ontario Superior Court of Justice (Commercial List) (the Court), and (iv) the listing of the NewCo Class A Multiple Voting Shares and NewCo Class B Subordinate Voting Shares on a stock exchange in Canada. The Manager, on behalf of the Restructuring Fund, received final approval from the Court for the Arrangement on April 25, 2018. If the remaining necessary approvals are obtained, the following steps will be carried out to effect the Arrangement:
(a) The Restructuring Fund will determine the amount of income and net taxable gains (if any) it has realized during the taxation year including the Effective Date. If applicable, the Restructuring Fund will distribute sufficient net income and net capital gains to Unitholders to ensure that the Restructuring Fund will not be subject to tax under Part I of the Tax Act.
(b) On the Effective Date, Unitholders of Class A Units will receive, for each Class A Unit held as of the close of business on the trading day immediately preceding the Effective Date (the Determination Time), one NewCo Class A Multiple Voting Share and one NewCo Class B Subordinate Voting Share, unless a Class A election to exchange certain Class A Units and Class F Units held by such Unitholder for NewCo Class A Multiple Voting Shares on the Effective Date (the Class A Election) or Class B Election (as described below) from the Unitholder was received by Clearing and Depository Services Inc. (CDS) prior to 5:00 p.m. (Toronto time) on May 15, 2018 (the Election Deadline). Class A Unitholders that submit a Class A Election to CDS prior to the Election Deadline shall receive two NewCo Class A Multiple Voting Shares (and nil NewCo Class B Subordinate Voting Shares) for each Class A Unit transferred. Class A Unitholders that submit a Class B election to exchange certain Class A Units and Class F Units held by such Unitholder for NewCo Class B Subordinate Voting Shares on the Effective Date (the Class B Election) to CDS prior to the Election Deadline shall receive two NewCo Class B Subordinate Voting Shares (and nil NewCo Class A Multiple Voting Shares) for each Class A Unit transferred. No fractional shares of NewCo will be issued. The total number of NewCo Class A Multiple Voting Shares or Class B Subordinate Voting Shares to be issued to any Unitholder shall be rounded up to the nearest whole share in the event that such Unitholder would otherwise be entitled to a fractional share representing 0.5 or more of a NewCo Class A Multiple Voting Share or Class B Subordinate Voting Share, and shall, without additional compensation, be rounded down to the nearest whole NewCo Class A Multiple Voting Share or Class B Subordinate Voting Share in the event that such Unitholder would otherwise be entitled to a fractional share representing less than 0.5 of a NewCo Class A Multiple Voting Share or Class B Subordinate Voting Share.
(c) On the Effective Date, Unitholders of Class F Units will receive, for each Class F Unit held as of the Determination Time, that number of NewCo Class A Multiple Voting Shares and NewCo Class B Subordinate Voting Shares that is the quotient of the Net Asset Value per Unit of the Class F Units divided by the Net Asset Value per Unit of Class A Units, in each case determined as of the Determination Time (which quotient is referred to herein as the Class F – Class A NAV Ratio), unless a Class A Election or Class B Election from the Unitholder was received by CDS prior to the Election Deadline. Class F Unitholders that submit a Class A Election prior to the Election Deadline shall receive that number of NewCo Class A Multiple Voting Shares that is equal to two times the Class F – Class A NAV Ratio (and nil NewCo Class B Subordinate Voting Shares) for each Class F Unit. Class F Unitholders that submit a Class B Election prior to the Election Deadline shall receive that number of NewCo Class B Subordinate Voting Shares that is equal to two times the Class F – Class A NAV Ratio (and nil NewCo Class A Multiple Voting Shares) for each Class F Unit. No fractional shares of NewCo will be issued. Fractional shares will be rounded up or down to the nearest whole number pursuant to subsection 20(c).
(d) Any NewCo Class A Multiple Voting Shares and NewCo Class B Subordinate Voting Shares issued prior to the Arrangement will be cancelled.
(e) There shall be added to the separate stated capital accounts maintained for NewCo Class A Multiple Voting Shares and NewCo Class B Subordinate Voting Shares an amount determined by the NewCo board of directors in accordance with Section 24(2) of Ontario Business Corporations Act (the OBCA) in respect of the NewCo Class A Multiple Voting Shares and NewCo Class B Subordinate Voting Shares issued under the Arrangement, and NewCo shall be authorized to subsequently reduce its stated capital in an amount determined by the NewCo board of directors, in respect of which no amount is distributed to the shareholders of NewCo, as contemplated by Section 34(1)(b)(ii)(B) of the OBCA.
(f) The Restructuring Fund, which following the Arrangement shall be wholly owned by NewCo, will be continued for a reasonable transitional period (the Transitional Period) before being wound up.
If the required approvals are obtained, the last day to request any conversion of Class F Units of the Restructuring Fund will be May 17, 2018. Class A Units of the Restructuring Fund will be restricted as of June 1, 2018.
If the required approvals are obtained, it is anticipated that the Class A Units of the Restructuring Fund will be delisted from the TSX on or about June 5, 2018 immediately before the exchange of Class A Units or Class F Units for NewCo Class A Multiple Voting Shares and/or NewCo Class B Subordinate Voting Shares. The Restructuring Fund will then convert into NewCo and NewCo will become a reporting issuer under the Legislation by virtue of the Arrangement. Following the completion of the Arrangement, the Restructuring Fund will apply to cease to be a reporting issuer.
Following the Arrangement, the Manager will be replaced by a corporate board of directors of NewCo. Unlike the Restructuring Fund, which is managed by a portfolio manager, the investments of NewCo will be determined by an investment committee of NewCo.
As required by National Instrument 81‑107 Independent Review Committee for Investment Funds, an Independent Review Committee (the IRC) has been appointed for the Restructuring Fund. The Manager presented the potential conflict of interest matters related to the proposed Arrangement to the IRC for a recommendation. On February 26, 2018, the IRC reviewed the potential conflict of interest matters related to the proposed Arrangement and determined that the proposed Arrangement, if implemented, would achieve a fair and reasonable result for Unitholders.
Units of the Restructuring Fund are qualified investments under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans, locked-in retirement accounts, life income funds, locked-in retirement income funds and tax-free savings accounts (collectively, the Registered Plans). Shares of NewCo will also be qualified investments under the Tax Act for Registered Plans.
A transfer of units of the Restructuring Fund to NewCo for shares of NewCo will be a disposition for Canadian income tax purposes, which may result in a capital gain or loss to Unitholders who hold their units outside of Registered Plans. Such Unitholders may be entitled to obtain a full or partial tax deferral subject to making a joint tax election with NewCo. Unitholders who redeem their units prior to the Arrangement will realize a capital gain or loss for Canadian income tax purposes.
The Manager believes that the Arrangement will be beneficial to Unitholders for the following reasons:
(a) Conversion to Efficient Corporate Model – the Arrangement provides the Restructuring Fund with an effective and efficient method of converting from a mutual fund trust to an Ontario corporation, allowing NewCo to have greater financial flexibility, reduce overhead and administrative costs, increase its access to capital and permit the pursuit of a more effective long term investment strategy;
(b) Illiquidity of Investments – the Restructuring Fund currently invests in some illiquid investments that have been performing well to date, but it is not sustainable for the Restructuring Fund in its current form as an investment fund to continue to fund monthly and annual redemptions by Unitholders;
(c) Active Investing – a corporate structure will better enable NewCo to be actively involved in corporate activities, activist investing, potentially taking large private positions and holding increased illiquid investments including private equity and debt, loans, real estate and infrastructure;
(d) Elimination of Management Fees and Performance Fees – the Restructuring Fund currently pays the Manager a management fee equal to 1.00% per annum of the NAV of the Restructuring Fund, calculated and payable monthly in arrears, plus applicable taxes. The Restructuring Fund also currently pays for all of its expenses incurred in connection with its operation and administration, including costs of portfolio transactions and any extraordinary expenses that may be incurred from time to time. NewCo will be responsible for paying its own operating expenses including, but not limited to, the remuneration to the board of directors, fees of service providers and professional advisors, audit, legal, custodial, brokerage commissions, fees on portfolio transactions, interest, rent, systems, insurance, recordkeeping, regulatory, reporting and other operating costs. Canso has agreed, pursuant to an operational services agreement, to provide any day-to-day operational services to carry out the business and affairs of NewCo. Under such operational services agreement, Canso may charge NewCo on a cost recovery basis for services, including overhead expenses of Canso that are related to the daily operating functions of NewCo, such as employee salaries, rent and utilities;
(e) Preferential NewCo Class B Subordinate Voting Shares Dividend – Unitholders who convert to NewCo Class B Subordinate Voting Shares will have a preferential dividend entitlement: specifically, declaration of dividends shall be at the discretion of the NewCo board of directors, but dividends may only be declared on the NewCo Class A Class A Multiple Voting Shares or NewCo Class B Subordinated Voting Shares if dividends are concurrently declared on both classes of shares, and in such case the dividend declared on the NewCo Class B Subordinated Voting Shares shall be $0.05 per share higher than the dividend declared on the NewCo Class A Multiple Voting Shares;
(f) Annual Redemption Right – Registered Unitholders who oppose the Arrangement may, upon compliance with certain conditions, exercise their annual redemption right and receive the fair value of their units;
(g) Removal of Restrictions Relating to Tax Status – In order to maintain its status as a “mutual fund trust” and to avoid becoming a “SIFT trust”, both within the meaning of the Tax Act, the Restructuring Fund is required to comply with specific restrictions regarding its activities and investments. NewCo will not have to comply with these restrictions, including restrictions on foreign ownership, the requirement to provide its investors with monthly redemption rights, and restrictions on investments in “non-portfolio properties” as defined in the Tax Act;
(h) Removal of 10% Ownership Concentration Restriction – NewCo will not have to restrict its investments to no more than 10% of its net assets in the securities of any single issuer;
(i) Required Unitholder Approval – Unitholders had an opportunity to vote on the Arrangement Resolution and the distribution of restricted shares and approved the Arrangement Resolution by more than 662/3% of the votes cast by Unitholders present in person or represented by proxy at the Special Meeting (voting together as a class) and by the majority of the minority Unitholders pursuant to OSC Rule 56-501; and
(j) Court Approval – the fact that the Arrangement was approved by the Court, which considered, among other things, the fairness and reasonableness of the Arrangement.
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.
“Raymond Chan”
Raymond Chan, Manager
Investment Funds and Structured Products
Ontario Securities Commission
App#2018/0132
SEDAR #2739828