Counsel Portfolio Services Inc. and Counsel Income Portfolio (Re), 2019 CanLII 73248

August 7, 2019

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 COUNSEL PORTFOLIO SERVICES INC. (the Manager)

AND

COUNSEL INCOME PORTFOLIO (the Terminating Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Fund, for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed merger (the Merger) of the Terminating Fund with the Continuing Fund (as defined below), 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 Manager 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 the provinces and territories of Canada, other than Quebec (together with Ontario, the Canadian 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:

Continuing Fund means Counsel High Income Portfolio;

Effective Date means on or about September 13, 2019, the anticipated date of the Merger;

Funds means collectively, the Terminating Fund and the Continuing Fund;

Grandfathering Merger means the Merger of the Terminating Fund into the Continuing Fund, where the Series E units of Counsel High Income Portfolio will be created solely to facilitate the Merger, will not be qualified for distribution under a prospectus and will not be available for sale subsequent to the Merger.

Representations

This decision is based on the following facts represented by the Manager:

The Manager

1The Manager is a corporation governed by the laws of Ontario with its head office in Mississauga, Ontario.

2The Manager is registered as follows:

(a) under the securities legislation of Ontario as a portfolio manager;

(b) under the securities legislation of Ontario, Quebec and Newfoundland and Labrador as an investment fund manager; and

(c) under the Commodity Futures Act (Ontario) as a commodity trading manager.

3The Manager is the manager of each Fund.

The Funds

4The Funds are unit trusts established under the laws of Ontario. Each of the Funds are reporting issuers under the securities legislation of the Canadian Jurisdictions and is subject to the requirements of NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure. Neither the Manager nor the Funds are in default of securities legislation in any of the Canadian Jurisdictions.

5Each Fund follows the standard investment restrictions and practices established under the Legislation, except to the extent that the Funds have received an exemption from the securities regulatory authority of a Canadian Jurisdiction to deviate therefrom.

6Units of the Funds are currently qualified for sale in each of the provinces and territories of Canada, except Quebec, under the simplified prospectus, annual information form and fund facts each dated October 29, 2018, as amended (collectively, the Offering Documents).

7Series E units of Counsel Income Portfolio are not qualified for distribution under a prospectus. Further, Series E units of Counsel High Income Portfolio will be created solely to facilitate the Merger, will not be qualified for distribution under a prospectus and will not be available for sale subsequent to the Merger.

8The net asset value for each series of the Funds is calculated on a daily basis in accordance with the Funds’ valuation policy and as described in the applicable Offering Documents.

Reasons for the Approval Sought

9Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. The pre-approval criteria are not satisfied in the following ways:

(i) the fundamental investment objectives of the Continuing Fund is not, or may be considered not to be, “substantially similar” to the investment objectives of the Terminating Fund; and

(ii) the materials sent to applicable unitholders of Counsel Income Portfolio in respect of the Grandfathering Merger did not include the current simplified prospectuses or the most recently filed fund facts document(s) for the corresponding series of Counsel High Income Portfolio.

10Except as noted above, the Merger will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

The Proposed Merger

11Pursuant to the Merger, unitholders of each of the Terminating Fund would become unitholders of the Continuing Fund, as follows:

Terminating Fund

Continuing Fund

Counsel Income Portfolio

Counsel High Income Portfolio

12The Merger does not require approval of unitholders of the Continuing Fund as the Manager has determined that the Merger does not constitute a material change for the Continuing Fund.

13As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Independent Review Committee (IRC) has been appointed for the Funds. The Manager presented the terms of the Merger to the IRC for a recommendation. The IRC reviewed the Merger and provided a positive recommendation for the Merger, having determined that the Merger, if implemented, would achieve a fair and reasonable result for the Funds and their respective unitholders.

14The proposed Merger was announced in:

(i) a press release dated June 10, 2019;

(ii) a material change report dated June 17, 2019 and

(iii) amendments dated June 17, 2019 to the Offering Documents,

each of which have been filed on SEDAR.

15By way of order dated December 14, 2017, the Manager was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of NI 81-106 to send a printed management information circular to unitholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such unitholders. Pursuant to the requirements of the Notice-and-Access Relief, the notice-and-access document, a form of proxy in connection with each special meeting of unitholders of the Funds, as well as the most recent fund facts for the applicable series of the Continuing Fund (other than in respect of the Grandfathering Merger) will be mailed to unitholders of the Terminating Fund commencing on or about July 29, 2019, and will be concurrently filed on SEDAR. The management information circular and forms of proxy (collectively, the Meeting Materials) in connection with special meeting of unitholders of the Funds will be posted on the Manager’s website at www.counselservices.com. The Meeting Materials will also appear on the SEDAR website at www.sedar.com.

16The Meeting Materials describe all of the relevant facts concerning the Merger relevant to each unitholder, including the differences between investment objectives, strategies of the Terminating Fund and the Continuing Fund, the IRC’s recommendations regarding the Merger, and income tax considerations so that unitholders of the Terminating Fund may consider this information before voting on the Merger. The Meeting Materials also describe the various ways in which unitholders can obtain a copy of the simplified prospectus and annual information form of the Continuing Fund, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Fund, at no cost.

17Fund facts document(s) relating to the applicable series of the Continuing Fund will be mailed to unitholders of the corresponding series of the Terminating Fund in all instances other than in respect of the Grandfathering Merger. In order to effect the Grandfathering Merger, Series E units of Counsel High Income Portfolio will be distributed to unitholders of Counsel Income Portfolio in reliance on the prospectus exemption contained in section 2.11 of National Instrument 45-106 Prospectus Exemptions.

18In respect of Grandfathering Merger, because a current simplified prospectus and fund facts documents are not available for Series E of Counsel High Income Portfolio, unitholders of Series E of Counsel Income Portfolio will be sent fund facts relating to Series A units of Counsel High Income Portfolio

19The Manager will pay for the costs of the Merger. These costs consist mainly of the costs of producing fund facts documents and brokerage charges associated with the trades that occur both before and after the date of the Merger and legal, proxy solicitation, printing, mailing and regulatory fees. There are no charges payable by unitholders of the Terminating Fund who acquire units of the corresponding Continuing Fund as a result of the Mergers.

20Unitholders of the Terminating Fund will be asked to approve the Merger at a special meeting of unitholders scheduled to be held on or about September 4, 2019.

21Following the implementation of the Merger, all systematic plans that have been established with respect to the Terminating Fund will be re-established in the Continuing Fund, either on a series-for-series basis or into a similar series with substantially similar fees, unless unitholders advise the Manager otherwise or unless otherwise noted in the information circular.

22Unitholders may change or cancel any systematic plan at any time and unitholders of the Terminating Fund who wish to establish one or more systematic plans in respect of their holdings in the Continuing Fund may do so following the implementation of the Merger.

23The Merger will be completed as a tax‑deferred transaction under the Income Tax Act (Canada) (Tax Act). Unitholders of the Terminating Fund will be provided with information about the income tax consequences of the Merger in the information circular and will have the opportunity to consider such information prior to voting on the Merger.

Merger Steps

24If the necessary approvals are obtained, the Manager will carry out the following steps to complete the Mergers:

(i) Prior to effecting the Merger, if required, the Terminating Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the Continuing Fund and purchase other securities so that, as of the effective date of the Merger, the portfolio of the Terminating Fund is substantially similar to that of the Continuing Fund. As a result, the Terminating Fund may temporarily hold cash, money market instruments or investments that are not consistent with their investment objectives and may not be fully invested in accordance with their investment objectives for a brief period of time prior to the Merger being effected.

(ii) The value of the Terminating Fund’s portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Terminating Fund.

(iii) The Continuing Fund will acquire the investment portfolio and other assets of the Terminating Fund in exchange for units of the Continuing Fund.

(iv) The Continuing Fund will not assume any liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the Merger.

(v) The Terminating Fund will distribute a sufficient amount of their net income and net realized capital gains, if any, to unitholders to ensure that they will not be subject to tax for their current tax year. As of May 31, 2019, the Manager does not expect that Counsel Income Portfolio will distribute capital gains as a result of the Merger in advance of the Merger Date.

(vi) The units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the portfolio assets and other assets that the Continuing Fund is acquiring from the Terminating Fund, and the units of the Continuing Fund will be issued at the applicable series net asset value per unit as of the close of business on the effective date of the Merger.

(vii) Immediately thereafter, units thereafter, units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund as proceeds of redemption of their units in the Terminating Fund on a dollar for dollar and series-by-series basis.

(viii) As soon as reasonably possible following each Merger, the applicable Terminating Fund will be wound up.

25Unitholders of each Terminating Fund will continue to have the right to redeem units of the Terminating Fund or exchange such units for units of any other mutual fund offered under the applicable Offering Documents at any time up to the close of business on the effective date of the Merger. Terminating Fund unitholders that exchange their units for units of other mutual funds managed by the Manager will not incur any charges other than switch fees, if applicable, as described in the Terminating Fund’s simplified prospectus. Unitholders that redeem units may be subject to redemption charges.

26Following the implementation of the Merger, the Continuing Fund will continue as a publicly offered open-ended mutual fund offering units in the Canadian Jurisdictions.

27Following the implementation of the Merger, a press release and material change report announcing the results of the unitholder meeting in respect of the reorganization of the Terminating Fund will be issued and filed.

28No sales charges will be charged by the Manager to investors or to the Terminating Fund or Continuing Fund in connection with the acquisition by a Continuing Fund of the investment portfolio of the Terminating Fund.

29The assets of the Terminating Fund to be acquired by the Continuing Fund in order to effect the Merger is currently, or will be, acceptable, on or prior to the effective date of the Merger, to the portfolio manager(s) of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.

30If the Merger is approved, the reorganization will be implemented after the close of business on the Effective Date. If the Merger is not approved, the Terminating Fund will continue to be offered for distribution.

Merger Benefits

31The Manager believes that the Merger is beneficial to unitholders of the Terminating Fund for the following reasons:

(i) the Continuing Fund has generated better past performance than the Terminating Fund (although past performance is not a guarantee of future returns and may not be repeated);

(ii) the Merger is being proposed to reflect the Manager’s belief that the Continuing Fund will provide better return potential over the long term;

(iii) the Continuing Fund’s asset allocation (in particular its larger exposure to global foreign markets) provides enhanced diversification;

(iv) an opportunity for higher yield and enhanced investment strategies, with no changes to risk rating; and

(v) management fees and/or administration fees in the Continuing Fund will be lowered so that they will be identical to the fees in 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 Manager obtains the prior approval of the unitholders of the Terminating Fund for the Merger at a special meeting held for that purpose.