Samara Capital Inc. (Re), 2019 CanLII 25261

March 1, 2019

AND

Decision

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from:

(a) the prohibition contained in section 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director unless this fact is disclosed to the client, and the written consent of the client to the purchase is obtained before the purchase (the Related Issuer Relief), to permit Samara Fund Ltd., a Cayman Islands exempted company (the Cayman Fund) to make its initial investment in a Cayman Islands exempted company to be formed under the laws of the Cayman Islands (the Master Fund and, together with the Cayman Fund, the Funds); and

(b) the prohibition contained in section 13.5(2)(b) of NI 31-103 that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of (a) a responsible person, (b) an associate of a responsible person or (c) an investment fund for which a responsible person acts as an adviser (the In-Specie Relief, and together with the Related Issuer Relief, the Exemption Sought), to permit the Filer, on behalf of the Cayman Fund, to pay for the initial investment in the Master Fund by transferring portfolio securities from the Cayman Fund to the Master Fund (the In-Specie Transaction).

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 British Columbia, Alberta and Manitoba.

Interpretation

Terms defined contained in National Instrument 14-101 Definitions 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

The Filer is a corporation established under the laws of Ontario with its head office located in Toronto, Ontario.
The Filer is registered in Ontario as an investment fund manager, a portfolio manager and an exempt market dealer, in British Columbia and Alberta as an exempt market dealer and portfolio manager, and in Manitoba as an exempt market dealer.
The Filer is the manager and portfolio adviser of the Cayman Fund and will be the manager and portfolio adviser of the Master Fund.
The Filer is not a reporting issuer in any jurisdiction of Canada.
The Filer is not in default of securities legislation in any province or territory of Canada.

The Funds

The Cayman Fund is a corporation formed under the laws of the Cayman Islands.
The Cayman Fund commenced operations in December 2011 and has issued and will issue shares exclusively to Canadian investors pursuant to the “accredited investor exemption” or another exemption from the prospectus requirement under applicable Canadian securities laws and to investors in jurisdictions other than Canada.
The Cayman Fund is a non-redeemable investment fund.
The Master Fund will be a Cayman Islands exempted company formed as the master fund in a “feeder-master” structure.
The Master Fund will commence issuing securities on a date to be determined in the future following the granting of the Exemption Sought (the Transition Date). The Master Fund will issue interests in the Master Fund directly to the Cayman Fund, and may, in the future, also issue interests of the Master Fund directly to investors resident in jurisdictions other than Canada and the Cayman Islands.
The investment objectives and strategies of the Cayman Fund and the Master Fund are, and will be, substantially the same. As such, the investments held by the Cayman Fund are compatible with the investment objectives and strategies of the Master Fund, and the investments held by the Master Fund will be compatible with the investment objectives and strategies of the Cayman Fund.
None of the Funds is, or will become, a reporting issuer in Canada.
Each Fund is not in default of securities legislation in any province or territory of Canada.

Fund-on-Fund Structure

The Filer wishes for the Cayman Fund to transition into a fund-on-fund structure by causing the Cayman Fund to invest in the Master Fund (the Transition).
The fund-on-fund structure will permit the Filer to manage a single portfolio of assets for both the Cayman Fund and the Master Fund in a single investment vehicle structure.
The Filer considers an investment by the Cayman Fund in the Master Fund to be a more cost-effective and efficient way for the Cayman Fund to achieve exposure to the portfolio securities than a direct investment in those securities.
Managing a single pool of assets provides economies of scale, allows the Cayman Fund to achieve its investment objectives in a cost efficient manner, and will not be detrimental to the interests of other shareholders of the Master Fund.
The fund-on-fund structure is expected to increase the asset base of the Master Fund, which is expected to result in additional benefits to shareholders of the Master Fund (including the Cayman Fund), including more favourable pricing and transaction costs on portfolio trades, increased access to investments when there is a minimum subscription or purchase amount, and better economies of scale through greater administrative efficiency.
The Master Fund will not yet have any assets at the time that the Cayman Fund makes its initial investment in the Master Fund. As such, the investment in the Master Fund by the Cayman Fund as at the Transition Date will be effected at the then-current net asset value (NAV) of the Cayman Fund. Thereafter, the Cayman Fund will invest cash in the Master Fund.
Currently, the Cayman Fund holds primarily publicly traded securities and does not hold more than 10% of its assets in “illiquid assets”, as defined in National Instrument 81-102 Investment Funds (NI 81-102).
The Master Fund may invest more than 10% of its assets in illiquid assets after the Cayman Fund’s initial investment, but will obtain the consent of its investors going forward as required under section 13.5(2)(a) of NI 31-103.
The Master Fund will not itself be a top fund in a fund-on-fund structure.
Securities of the Cayman Fund and the Master Fund have, or will have, matching redemption and valuation dates.
The Filer manages, or will manage, the liquidity of the Cayman Fund having regard to the redemption features of the Master Fund to ensure that it can meet redemption requests from investors of the Cayman Fund.
The Filer will provide timely notice of the Transition to each of the investors in the Cayman Fund so that each investor will be able to redeem from the Cayman Fund prior to giving effect to the Transition.
There will not be any duplication of (a) management or performance fees paid to the Filer or any of its affiliates, or (b) incentive allocations, performance allocations or other similar participations in the profits of the Cayman Fund and the Master Fund by the Filer or any of its affiliates.
The investment by the Cayman Fund in the Master Fund represents the Filer’s business judgment, uninfluenced by considerations other than the best interests of the Funds.

In the absence of the Related Issuer Relief, the Cayman Fund is precluded from investing in the Master Fund unless the specific fact is disclosed to securityholders of the Cayman Fund, and the written consent of the securityholders of the Cayman Fund to the investment is obtained prior to the purchase, since an officer and/or director of the Filer, who may be considered a responsible person (as per section 13.5 of NI 31-103) or an associate of a responsible person, may also be a partner, officer and/or director of the Master Fund.
The Filer only requires the Related Issuer Relief in connection with the Cayman Fund’s initial investment in the Master Fund. Upon receipt of the Exemption Sought, the Cayman Fund will revise its offering documents to disclose that, commencing on the Transition Date, the Cayman Fund will invest substantially all of its capital in the Master Fund, and to obtain the consent of security holders of the Cayman Fund whose subscription is effective on and following the Transition Date.
The Filer has determined that it is in the best interests of the Funds to receive the Related Issuer Relief and effect the Transition.

In-Specie Transaction

The Filer wishes to engage in the In-Specie Transaction effective as of the Transition Date, pursuant to which the Cayman Fund will purchase securities of the Master Fund and, as payment for the securities, make good delivery of portfolio securities that meet the investment criteria of the Master Fund.
The Filer considers the In-Specie Transaction to be a more cost-effective and efficient way for the Master Fund to acquire the portfolio securities currently held by the Cayman Fund than the Cayman Fund disposing of its portfolio securities and the Master Fund respectively purchasing the same securities, which would incur unnecessary brokerage costs.
The value of the portfolio securities is equal to the issue price of the securities of the Master Fund for which they are payment, valued as if the securities were portfolio assets of the Master Fund.
The In-Specie Transaction will represent the business judgment of the Filer uninfluenced by considerations other than the best interests of the Funds.

In-Specie Relief

As the Filer is the portfolio adviser of each Fund, the Filer would be considered a “responsible person” within the meaning of the applicable provisions of NI 31-103. Accordingly, without the In-Specie Relief, the Filer would be prohibited from engaging the Funds in the In-Specie Transaction.
The Filer has determined that it is in the best interests of the Funds to receive the In-Specie Relief and effect the In-Specie Transaction.

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 Related Issuer Relief is granted provided that:

(a) securities of the Cayman Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under Canadian securities legislation;

(b) the investment by the Cayman Fund in the Master Fund is compatible with the fundamental investment objectives of the Cayman Fund;

(d) the Cayman Fund will not purchase or hold a security of the Master Fund unless at the time of purchasing securities of the Master Fund, the Master Fund holds no more than 10% of its NAV in securities of other investment funds;

(e) no management fees or incentive fees are payable by the Cayman Fund that, to a reasonable person, would duplicate a fee payable by the Master Fund for the same service

(f) no sales fee or redemption fees are payable by the Cayman Fund in relation to its purchases or redemptions of securities of the Master Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Cayman Fund

(g) the Filer does not cause the securities of the Master Fund held by Cayman Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Cayman Fund holds of the Master Fund to be voted by the beneficial owners of the securities of the Cayman Fund who are not the Filer or an officer, director or substantial securityholder of the Filer; and

(h) when purchasing and/or redeeming securities of Master Fund, the Filer shall act honestly, in good faith and in the best interests of the Cayman Fund and the Master Fund, respectively, and shall exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances; and

the In-Specie Relief is granted provided that:

(a) the Master Fund will, at the time of payment, be permitted to purchase the portfolio securities delivered in specie by the Filer, on behalf of the Cayman Fund;

(b) the portfolio securities are acceptable to the Filer, as portfolio adviser of the Master Fund, and are consistent with the investment objectives of the Master Fund;

(c) the portfolio securities transferred by the Cayman Fund as purchase consideration will be valued: (i) on the same valuation day on which the purchase price of the Master Fund’s securities is determined; and (ii) at a value equal to the amount at which those portfolio securities were valued in calculating the NAV used to establish the purchase price of the Master Fund’s securities, as if the portfolio securities were assets of the Master Fund and as if the Master Fund was subject by subsection 9.4(2)(b)(iii) of NI 81-102;

(d) each of the Cayman Fund and the Master Fund will keep written records of the In-Specie Transaction, reflecting details of the portfolio securities delivered to the Master Fund, and the value assigned to such portfolio securities, for a period of five years after the end of the fiscal year, and the most recent two years in a reasonably accessible place; and

(e) the Filers do not receive any compensation in respect of any sale or redemption of securities of the Cayman Fund and, in respect of any delivery of portfolio securities further to the In-Specie Transaction, the only charge paid by the Cayman Fund or the Master Fund is the transfer charge.

“Neeti Varma”________________________________

Neeti Varma Manager (Acting) Investment Funds and Structured Products Branch Ontario Securities Commission