Franklin Templeton Investments Corp. and The Merging Funds (Re), 2019 CanLII 94497

October 8, 2019

(the Jurisdiction)

and

(the Filer)

and

(as defined below)

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Merging Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the proposed merger (each, a Merger and collectively, the Mergers) of each Merging Fund into the corresponding Continuing Trust 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 Application 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 the other provinces and territories of Canada (together with Ontario, the Canadian Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

Continuing Trust Fund means each of Franklin Bissett Canadian Equity Fund, Franklin Bissett Core Plus Bond Fund, Franklin Bissett Monthly Income and Growth Fund, Franklin Bissett Small Cap Fund, Franklin U.S. Rising Dividends Fund, Franklin U.S. Opportunities Fund and Templeton Emerging Markets Fund;

Fund means a Continuing Trust Fund or a Merging Fund;

IRC means the independent review committee for the Funds;

Merger Date means (i) for the Merger of each of Templeton Asian Growth Corporate Class and Templeton Frontier Markets Corporate Class into Templeton Emerging Markets Fund, the Merger of Franklin Select U.S. Equity Fund into Franklin U.S. Opportunities Fund, and the Merger of Franklin Quotential Fixed Income Portfolio into Franklin Bissett Core Plus Bond Fund, on or about November 15, 2019 and no later than December 31, 2019; and (ii) for the Merger of each of Franklin Bissett Canadian All Cap Balanced Corporate Class and Franklin Bissett Canadian All Cap Balanced Fund into Franklin Bissett Monthly Income and Growth Fund, the Merger of each of Franklin Mutual U.S. Shares Corporate Class and Franklin Mutual U.S. Shares Fund into Franklin U.S. Rising Dividends Fund, the Merger of Franklin Bissett Energy Corporate Class into Franklin Bissett Canadian Equity Fund, and the Merger of each of Franklin Bissett Microcap Fund and Franklin Bissett Small Cap Corporate Class into Franklin Bissett Small Cap Fund, on or about November 22, 2019 and no later than December 31, 2019.

Merging Corporate Fund means Franklin Bissett Canadian All Cap Balanced Corporate Class, Franklin Bissett Energy Corporate Class, Franklin Bissett Small Cap Corporate Class, Franklin Mutual U.S. Shares Corporate Class, Templeton Asian Growth Corporate Class and Templeton Frontier Markets Corporate Class;

Merging Fund means a Merging Corporate Fund or a Merging Trust Fund;

Merging Trust Fund means each of Franklin Bissett Canadian All Cap Balanced Fund, Franklin Bissett Microcap Fund, Franklin Quotential Fixed Income Portfolio, Franklin Mutual U.S. Shares Fund and Franklin Select U.S. Equity Fund;

Tax Act means the Income Tax Act (Canada); and

Taxable Merger means the Merger of Franklin Bissett Canadian All Cap Balanced Corporate Class into Franklin Bissett Monthly Income and Growth Fund, the Merger of Franklin Mutual U.S. Shares Corporate Class into Franklin U.S. Rising Dividends Fund, the Merger of each of Templeton Asian Growth Corporate Class and Templeton Frontier Markets Corporate Class into Templeton Emerging Markets Fund, the Merger of Franklin Bissett Energy Corporate Class into Franklin Bissett Canadian Equity Fund, as well as the Merger of each of Franklin Bissett Microcap Fund and Franklin Bissett Small Cap Corporate Class into Franklin Bissett Small Cap Fund.

Representations

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

The Filer

The Filer is a corporation amalgamated under the laws of the Province of Ontario with its head office in Toronto, Ontario.
The Filer is the manager of the Funds and the trustee of the Merging Trust Funds and Continuing Trust Funds.
The Filer is registered as an investment fund manager in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario and Québec, as a portfolio manager, mutual fund dealer and exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, Saskatchewan and Yukon, and as a commodity trading manager in Ontario.

The Funds

Each of the Merging Corporate Funds is an open-end mutual fund structured as a share class of Franklin Templeton Corporate Class Ltd. (Corporate Class Ltd.), which is a corporation incorporated under the laws of the Province of Alberta. Each of the Merging Trust Funds and Continuing Trust Funds is an open-end mutual fund governed by a master declaration of trust and established under the laws of the Province of Ontario.
Securities of the Funds are currently qualified for sale in each of the Canadian Jurisdictions under a simplified prospectus, annual information form and fund facts dated May 28, 2019, as amended on June 17, 2019 and June 25, 2019 (the Offering Documents).
Each of the Funds is a reporting issuer under the applicable securities legislation of the Canadian Jurisdictions and is subject to NI 81-102.
Neither the Filer nor the Funds are in default under the securities legislation of any of the Canadian Jurisdictions.
Other than circumstances in which the securities regulatory authority of a Canadian Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the investment restrictions and practices for a conventional mutual fund established under NI 81-102.
The 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 Offering Documents.
The Continuing Trust Funds have substantially similar valuation procedures to those of the Merging Funds.
Securities of the Funds are qualified investments under the Tax Act for registered retirement savings plans, registered retirement income funds, registered education savings plans and tax-free savings accounts.

Reason for Approval Sought

Regulatory approval of the Mergers is required because each 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:

(a) for each of the Mergers, other than the Merger of Franklin Bissett Small Cap Corporate Class into Franklin Bissett Small Cap Fund, the fundamental investment objective of the Merging Fund is not, or may be considered not to be, “substantially similar” to the investment objective of its corresponding Continuing Trust Fund;

(b) for the Merger of Templeton Asian Growth Corporate Class into Templeton Emerging Markets Fund, the fee structure of Templeton Asian Growth Corporate Class is not, or may be considered not to be, “substantially similar” to the fee structure of Templeton Emerging Markets Fund; and

(c) the Taxable Mergers will not be completed as a “qualifying exchange” or other tax-deferred transaction under the Tax Act.

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

The Mergers

The Filer intends to reorganize the Funds as follows:

Merging Fund

Continuing Trust Fund

Franklin Bissett Canadian All Cap Balanced Fund

Franklin Bissett Monthly Income and Growth Fund

Franklin Bissett Canadian All Cap Balanced Corporate Class

Franklin Bissett Energy Corporate Class

Franklin Bissett Canadian Equity Fund

Franklin Bissett Microcap Fund

Franklin Bissett Small Cap Fund

Franklin Bissett Small Cap Corporate Class

Franklin Mutual U.S. Shares Fund

Franklin U.S. Rising Dividends Fund

Franklin Mutual U.S. Shares Corporate Class

Franklin Quotential Fixed Income Portfolio

Franklin Bissett Core Plus Bond Fund

Franklin Select U.S. Equity Fund

Franklin U.S. Opportunities Fund

Templeton Asian Growth Corporate Class

Templeton Emerging Markets Fund

Templeton Frontier Markets Corporate Class

When considering a merger of two or more funds, the Filer selects the appropriate continuing fund to receive the assets of the merging fund by evaluating a variety of criteria, including scale, fees, performance, risk rating, tax impact of the merger, tax efficiency, capacity to deliver value and continuity of investment. Once each of these items has been reviewed, the Filer formalizes its analysis and recommends a continuing fund with which to proceed.
The Filer has determined that it would not be appropriate to effect the Merger of Franklin Bissett Microcap Fund into Franklin Bissett Small Cap Fund as a “qualifying exchange” under the Tax Act for the following reasons:

(a) the majority of securityholders of the Merging Fund are tax-exempt;

(b) effecting the Merger on a taxable basis would preserve the loss carry-forwards in the Continuing Trust Fund; and

The other Taxable Mergers will be effected on a taxable basis and will not be completed as a “qualifying exchange” under the Tax Act, since a tax-deferred merger is not possible under the Tax Act given the structure of the relevant Funds.
With respect to the proposed Merger of Franklin Quotential Fixed Income Portfolio into Franklin Bissett Core Plus Bond Fund, while the investment objectives of these Funds are not substantially similar due to the fact that the Merging Fund is a global fixed income fund while the Continuing Trust Fund is a Canadian fixed income fund:

(a) the Funds provide investors with a similar Canadian fixed income investment experience because the foreign fixed income exposure of the Merging Fund is hedged to the Canadian dollar and thus the risk profile of the Merging Fund is similar to that of the Continuing Trust Fund;

(b) the Funds both have a risk rating of “low”;

(c) the combined management fee and administration fee of each series of the Continuing Trust Fund is lower than that of the corresponding series of the Merging Fund;

(d) the Continuing Trust Fund has a longer track record and delivered superior performance as compared to the Merging Fund; and

(e) the Merger is being completed on a tax-deferred basis under the Tax Act.

With respect to the proposed Merger of Templeton Asian Growth Corporate Class into Templeton Emerging Markets Fund, while the investment objectives of these Funds are not substantially similar:

(a) there is significant overlap in the investment holdings of these Funds because both Funds invest in securities of companies located in emerging market regions and both Funds are managed by the same portfolio managers;

(b) the Funds both have a risk rating of “medium”; and

With respect to the proposed Merger of Franklin Bissett Energy Corporate Class into Franklin Bissett Canadian Equity Fund, while the investment objectives of these Funds are not substantially similar because the investments of the Continuing Trust Fund are more broadly diversified among Canadian equities than those of the Merging Fund, which is focused on the energy sector:

(a) the Filer believes a more diversified Canadian mandate is appropriate in light of the recent performance of the energy sector;

(b) the risk rating of the Continuing Trust Fund is lower than that of the Merging Fund;

(c) the combined management fee and administration fee of each series of the Continuing Trust Fund is lower than that of the corresponding series of the Merging Fund; and

(d) the Continuing Trust Fund has delivered superior performance as compared to the Merging Fund.

In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), on June 25, 2019, a press release was issued and filed on SEDAR in respect of the merger of Franklin Select U.S. Equity Fund into Franklin U.S. Opportunities Fund (the Select U.S. Equity Merger) and a material change report and amendments to the Offering Documents of Franklin Select U.S. Equity Fund were filed on SEDAR. A press release announcing the other Mergers was issued on August 30, 2019 and filed via SEDAR on September 3, 2019. A material change report and amendments to the Offering Documents of these Merging Funds were filed via SEDAR on September 3, 2019, which incorporates the requisite changes in connection with these Mergers.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds, an IRC has been appointed for the Funds. The Filer presented the potential conflict of interest matters related to the Select U.S. Equity Merger to the IRC on June 21, 2019 and received a positive recommendation. The Filer presented the potential conflict of interest matters related to the other Mergers to the IRC on August 14, 2019 and received a positive recommendation.
Securityholders of each Merging Fund will be asked to approve the applicable Merger at a special meeting to be held on or about November 1, 2019 (the Meeting).
By way of order dated December 5, 2016, the Filer 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 securityholders while proxies are being solicited and, subject to certain conditions, instead allow a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such securityholders. In accordance with the Filer’s standard of care owed to the Funds pursuant to securities legislation, the Filer only uses the notice-and-access procedure for a particular meeting where it has concluded that it is appropriate and consistent with the purposes of notice-and-access (as described in the Companion Policy to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer) to do so, also taking into account the purpose of the meeting and whether the Funds would obtain a better participation rate by sending the management information circular with the other proxy-related materials.
Pursuant to the requirements of the Notice-and-Access Relief, a notice-and-access document and form of proxy in connection with the Meetings, along with the most recent fund facts of the relevant series of each Continuing Trust Fund, was mailed to securityholders of the Merging Funds commencing on October 1, 2019 and was concurrently filed via SEDAR. The management information circular (together with the notice-and-access document and form of proxy, the Meeting Materials), which the notice-and-access document provides a link to, will also be filed via SEDAR at the same time.
The Meeting Materials will describe all relevant facts concerning the Mergers, including the investment objectives, strategies and fee structures of the Funds, the tax implications and other consequences of the Mergers as well as the IRC’s recommendation of the Mergers. The Meeting Materials will also describe the various ways in which securityholders can obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Trust Funds, and the most recent interim and annual financial statements and management reports of fund performance for the Continuing Trust Funds.
The Filer will pay for the costs of the Mergers. These costs consist mainly of brokerage charges associated with any Merger‑related trades, legal, proxy solicitation, printing, mailing and regulatory fees.
Securityholders of each Merging Fund will continue to have the right to redeem their securities of the Merging Fund at any time up to the close of business on the business day immediately before the applicable Merger Date.
No sales charges will be payable by securityholders of the Merging Funds in connection with the acquisition by each Continuing Trust Fund of the investment portfolio of its corresponding Merging Fund.
Following the Mergers, all existing systematic investment and withdrawal programs that had been established for a Merging Fund will become applicable to the corresponding Continuing Trust Fund on a series-for-series basis, unless securityholders advise the Filer otherwise. A systematic program may be changed at any time.
The assets of each Merging Fund to be acquired by the applicable Continuing Trust Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the applicable Merger Date, to the portfolio manager(s) of the applicable Continuing Trust Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Trust Fund.

Merger Steps

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

(a) In respect of the Merger of each Merging Trust Fund into the corresponding Continuing Trust Fund:

(i) Prior to the applicable Merger Date, any investments of a Merging Trust Fund which are not suitable for the corresponding Continuing Trust Fund or acceptable to the portfolio manager of the Continuing Trust Fund will be sold. As a result, each Merging Trust Fund may temporarily hold cash and/or money market instruments and may not be invested in accordance with its investment objectives for a brief period of time prior to the Merger Date. The value of any investments sold will depend on prevailing market conditions.

(ii) Prior to the applicable Merger Date, each Merging Trust Fund will distribute to its securityholders sufficient net income and net realized capital gains, if any, so that the Merging Trust Fund will not be subject to tax under Part I of the Tax Act for the taxation year that includes the Merger Date.

(iii) The value of each Merging Trust Fund’s portfolio and other assets will be determined at the close of business on the applicable Merger Date in accordance with its declaration of trust.

(iv) On the applicable Merger Date, substantially all of each Merging Trust Fund’s assets will be transferred to the corresponding Continuing Trust Fund (after reserving sufficient assets to satisfy its estimated liabilities, if any, as of the Merger Date) in exchange for securities of the Continuing Trust Fund having an aggregate net asset value equal to the aggregate value of the assets transferred by the Merging Trust Fund. The securities of the Continuing Trust Fund will be issued at the applicable series net asset value per security of the Continuing Trust Fund as of the close of business on the Merger Date.

(v) Immediately thereafter, the securities of the applicable Continuing Trust Fund received by the Merging Trust Fund will be distributed to securityholders of the Merging Trust Fund in exchange for their securities in the Merging Trust Fund on a dollar-for-dollar and series-by-series basis.

(vi) Any outstanding unit certificates (if applicable) of each Merging Trust Fund will be cancelled.

(vii) As soon as reasonably possible following each Merger, and in any case within 60 days following the applicable Merger Date, each Merging Trust Fund will be wound up and terminated.

(b) In respect of the Merger of Franklin Bissett Small Cap Corporate Class into Franklin Bissett Small Cap Fund:

(i) Prior to the applicable Merger Date, Corporate Class Ltd. may pay taxable and/or capital gains dividends to securityholders of Franklin Bissett Small Cap Corporate Class, as determined by the Filer.

(ii) On the applicable Merger Date, the securities of Franklin Bissett Small Cap Fund owned by Corporate Class Ltd. and attributable to Franklin Bissett Small Cap Corporate Class will be distributed to securityholders of Franklin Bissett Small Cap Corporate Class in exchange for their securities in Franklin Bissett Small Cap Corporate Class on a dollar-for-dollar and series-by-series basis.

(iii) The securities of Franklin Bissett Small Cap Corporate Class will be cancelled.

(i) Prior to the applicable Merger Date, any investments of a Merging Corporate Fund which are not suitable for the corresponding Continuing Trust Fund or acceptable to the portfolio manager of the Continuing Trust Fund will be sold. As a result, each Merging Corporate Fund may temporarily hold cash and/or money market instruments and may not be invested in accordance with its investment objectives for a brief period of time prior to the Merger Date. The value of any investments sold will depend on prevailing market conditions.

(ii) Prior to the applicable Merger Date, Corporate Class Ltd. may pay taxable and/or capital gains dividends to securityholders of each Merging Corporate Fund, as determined by the Filer.

(iii) On the applicable Merger Date, substantially all of the portfolio of assets attributable to each Merging Corporate Fund will be transferred to the corresponding Continuing Trust Fund (after reserving sufficient assets to satisfy its estimated liabilities, if any, as of the Merger Date) in exchange for securities of the Continuing Trust Fund having an aggregate net asset value equal to the aggregate value of the assets transferred by the Merging Corporate Fund. The securities of the Continuing Trust Fund will be issued at the applicable series net asset value per security of the Continuing Trust Fund as of the close of business on the Merger Date.

(iv) Immediately thereafter, the securities of the applicable Continuing Trust Fund received by the Merging Corporate Fund will be distributed to securityholders of the Merging Corporate Fund in exchange for their securities in the Merging Corporate Fund on a dollar-for-dollar and series-by-series basis.

(v) The securities of each Merging Corporate Fund will be cancelled.

Following the implementation of the Mergers, securityholders of each Merging Fund will cease to be securityholders of the Merging Fund and will become securityholders of the Continuing Trust Fund.

Benefits of the Mergers

The Filer believes that the Mergers are beneficial to securityholders of the Funds for the following reasons:

(a) the Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand;

(b) a line-up consisting of fewer mutual funds that target similar types of investors will allow the Filer to concentrate its marketing efforts to attract additional assets in the Continuing Trust Funds. Ultimately this benefits securityholders because it ensures that each Continuing Trust Fund remains a viable, long-term investment vehicle for existing and potential investors;

(c) the Continuing Trust Funds have a portfolio of greater value, allowing for increased portfolio diversification opportunities compared to the Merging Funds;

(d) as each Continuing Trust Fund has either the same or a lower risk rating than its corresponding Merging Fund, investors of each Merging Fund will become investors in a Continuing Trust Fund that has a risk profile that is the same as, or lower than, the risk profile of the Merging Fund; and

(e) with the exception of Series A, F and I of Templeton Asian Growth Corporate Class, investors of each Merging Fund will receive securities of the applicable Continuing Trust Fund that have a combined management fee and administration fee that is the same as, or lower than, the combined management fee and administration fee charged in respect of the securities of the Merging Fund that they currently hold.

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 approval of the securityholders of the Merging Funds at a special meeting held for that purpose.

"Darren McKall"

Darren McKall Investment Funds and Structured Products Ontario Securities Commission Se

SEDAR Project #2950783 App. No.#2019/0394