October 15, 2020
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
FIDELITY INVESTMENTS CANADA ULC
(the Filer)
and
FIDELITY EVENT DRIVEN OPPORTUNITIES FUND
FIDELITY EVENT DRIVEN OPPORTUNITIES CLASS
FIDELITY EVENT DRIVEN OPPORTUNITIES CURRENCY NEUTRAL CLASS
(each, a Terminating Fund and collectively, the Terminating Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) for approval of the proposed merger (the Mergers) of (i) Fidelity Event Driven Opportunities Fund into Fidelity Canadian Opportunities Fund, (ii) Fidelity Event Driven Opportunities Class into Fidelity Canadian Opportunities Class, and (iii) Fidelity Event Driven Opportunities Currency Neutral Class into Fidelity Canadian Opportunities Class (each of Fidelity Canadian Opportunities Fund and Fidelity Canadian Opportunities Class is a Continuing Fund, and together with the Terminating Funds, the Funds) under 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 the other provinces and territories of Canada (together with Ontario, the Canadian Jurisdictions).
Interpretation
Continuing Corporate Fund means Fidelity Canadian Opportunities Class.
Continuing Trust Fund means Fidelity Canadian Opportunities Fund.
Corporate Funds means the Continuing Corporate Fund and the Terminating Corporate Funds.
Terminating Corporate Fund means each of Fidelity Event Driven Opportunities Class and Fidelity Event Driven Opportunities Currency Neutral Class.
Terminating Trust Fund means Fidelity Event Driven Opportunities Fund.
Trust Funds means the Continuing Trust Fund and the Terminating Trust Fund.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 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 continued under the laws of the Province of Alberta with its head office located in Toronto, Ontario.
The Filer is registered under the securities legislation: (i) in each of the Canadian Jurisdictions as an adviser in the category of portfolio manager; (ii) in Ontario, Newfoundland and Labrador and Quebec as an investment fund manager; (iii) in each of the Canadian Jurisdictions as a dealer in the category of mutual fund dealer and exempt market dealer; and (iv) in Ontario as a commodity trading manager.
The Filer is the investment fund manager of the Funds.
The Filer is not in default of any requirement of securities legislation in any of the Canadian Jurisdictions.
The Funds
Each of the Terminating Trust Fund and the Continuing Trust Fund is an open-ended mutual fund trust established under the laws of Ontario.
Each Terminating Corporate Fund and the Continuing Corporate Fund is a separate class of shares of Fidelity Capital Structure Corp. (the Corporation), a mutual fund corporation governed under the laws of Alberta.
Securities of the Trust Funds are currently qualified for sale under a simplified prospectus, annual information form and fund facts documents dated November 1, 2019 (collectively, the Trust Offering Documents), as amended on August 27, 2020 to reflect the Mergers.
Securities of the Corporate Funds are currently qualified for sale under a simplified prospectus, annual information form and fund facts documents dated April 28, 2020 (collectively, the Corporate Offering Documents), as amended on August 27, 2020 to reflect the Mergers.
Each of the Funds is a reporting issuer under the applicable securities legislation of the Canadian Jurisdictions.
The Funds are not in default of any requirement of securities legislation in any of the Canadian Jurisdictions.
Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices 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 Trust Offering Documents and the Corporate Offering Documents.
Reason for Approval Sought
- The Approval Sought is required because the Mergers do 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) the fundamental objectives of the Continuing Funds are, or may not be considered to be “substantially similar” to the investment objectives of the Terminating Funds;
(b) the Mergers will not be completed as a “qualifying exchange” under the Income Tax Act (Canada) (the Tax Act).
- Except as described in this decision, the proposed 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 Proposed Mergers
Each Merger will be effected on a taxable basis.
Securityholders of the Terminating Funds will be asked to approve the applicable Merger at a special meeting to be held on or about November 12, 2020. In addition, securityholders of the Continuing Corporate Fund will be asked to approve the Corporate Funds Merger, pursuant to applicable corporate law, at a special meeting to be held on or about November 12, 2020.
The investment portfolio and other assets of each Terminating Fund to be acquired by the applicable Continuing Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the effective date of the Mergers, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Fund.
The Filer will pay for the costs of the Mergers. These costs consist mainly of brokerage charges associated with the merger related trades that occur both before and after the effective date of the Mergers and legal, proxy solicitation, printing, mailing and regulatory fees.
If all required approvals for the Mergers are obtained, it is intended that each Terminating Fund will merge into the applicable Continuing Fund on or about the close of business on December 4, 2020 and each Continuing Fund will continue as a publicly offered open end mutual fund.
Each Terminating Fund will be wound up as soon as reasonably possible following the applicable Merger.
The Filer is of the view that none of the Mergers will be a “material change” for any Continuing Fund, as the assets of each Continuing Fund are larger than the assets of its corresponding Terminating Fund.
No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of its applicable Terminating Fund.
Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the business day immediately before the effective date of the Mergers.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), an Independent Review Committee (the IRC) has been appointed for the Funds. The Filer presented the potential conflict of interest matters related to the proposed Mergers to the IRC for a recommendation. On March 11, 2020, the IRC reviewed the potential conflict of interest matters related to the proposed Mergers and provided its positive recommendation for each of the Mergers, after determining that each proposed Merger, if implemented, would achieve a fair and reasonable result for each applicable Fund.
In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), a press release announcing the proposed Mergers was issued on January 16, 2020 and filed via System for Electronic Document Analysis and Retrieval (SEDAR) on January 17, 2020. A material change report in respect of the Mergers was filed via SEDAR on January 24, 2020. Amendments to the Trust Fund Offering Documents and Corporate Fund Offering Documents each dated January 27, 2020 with respect to the proposed Mergers were filed via SEDAR on January 29, 2020. Additionally, a press release announcing further details regarding the proposed Mergers was issued and filed via SEDAR on March 12, 2020. A corresponding material change report was filed via SEDAR on March 20, 2020. Amendments to the Trust Fund Offering Documents and Corporate Fund Offering Documents each dated March 20, 2020 with respect to the proposed Mergers were filed via SEDAR on March 25, 2020.
Because of the impact of COVID-19 and provincial government emergency orders, the Filer decided to postpone the proposed Mergers. A press release announcing the delay of the proposed Mergers was issued on April 1, 2020 and filed via SEDAR on April 8, 2020. A corresponding material change report was filed via SEDAR on April 8, 2020. Amendments to the Trust Fund Offering Documents and Corporate Fund Offering Documents each dated April 8, 2020 with respect to the proposed Mergers were filed via SEDAR on April 14, 2020. Additionally, a press release announcing further details regarding the proposed Mergers, including new dates for securityholder meetings and for the Mergers themselves were issued and filed via SEDAR on August 19, 2020. A corresponding material change report was filed via SEDAR on August 27, 2020. Amendments to the Trust Fund Offering Documents and Corporate Fund Offering Documents each dated August 27, 2020 with respect to the proposed Mergers were filed via SEDAR on August 27, 2020.
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 allows 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 relevant Funds pursuant to applicable legislation, the Filer will only use the notice-and-access procedure for a particular meeting where it has concluded it is appropriate and consistent to do so, also taking into account the purpose of the meeting and whether the Funds would obtain better participation rates by sending the information circular with the other proxy-related materials.
Pursuant to the requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with the special meetings, along with the fund facts document(s) of the relevant series of the Continuing Funds, as applicable, will be mailed to securityholders of the corresponding Terminating Funds and the Continuing Corporate Fund commencing on or around October 13, 2020 and concurrently filed via SEDAR. The management information circular (together with the notice-and-access document and form of proxy, the Meeting Materials), to which the notice-and-access document provides a link, will also be filed via SEDAR at the same time.
The tax implications of the Mergers and the differences between the investment objectives of the Terminating Funds and the Continuing Funds, as applicable, and the IRC's recommendation of the Mergers will be described in the meeting materials so that the securityholders of the Terminating Funds may make an informed decision before voting on the Mergers. The Meeting Materials will also describe the various ways in which investors could obtain a copy of the simplified prospectus, annual information form and fund facts document(s) for each Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.
Merger Steps
- The proposed merger of the Terminating Trust Fund into the Continuing Trust Fund will be structured as follows:
(a) Prior to effecting the Merger, if required, the Terminating Trust Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the Continuing Trust Fund. As a result, the Terminating Trust Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger being effected.
(b) The value of the Terminating Trust Fund’s portfolio and other assets will be determined at the close of business on the effective date of the applicable Merger in accordance with the declaration of trust of the Terminating Trust Fund.
(c) The Terminating Trust Fund will sell its investment portfolio and other assets to the Continuing Trust Fund in exchange for securities of the Continuing Trust Fund.
(d) The Terminating Trust Fund will declare, pay and automatically reinvest a distribution to its securityholders of a sufficient amount of its net income and net realized capital gains, if any, to ensure that it will not be subject to tax for its current taxation year that includes the effective date of the Merger.
(e) The Continuing Trust Fund will not assume any liabilities of the Terminating Trust Fund and the Terminating Trust Fund will retain sufficient assets to satisfy its established liabilities, if any, as of the effective date of the Merger.
(f) The securities of the Continuing Trust Fund received by the Terminating Trust Fund will have an aggregate net asset value equal to the value of the portfolio assets and other assets that the Continuing Trust Fund is acquiring from the Terminating Trust Fund, and the securities of the Continuing Trust Fund will be issued at the applicable series net asset value per security as of the close of business on the effective date of the Merger.
(g) Immediately thereafter, the securities of the Continuing Trust Fund received by the Terminating Trust Fund will be distributed to securityholders of the Terminating Trust Fund in exchange for their securities in the Terminating Trust Fund on a dollar-for-dollar and series-by-series basis, as applicable.
(h) As soon as reasonably possible following the Merger, the Terminating Trust Fund will be wound up.
- The proposed merger of each Terminating Corporate Fund into the Continuing Corporate Fund will be structured as follows:
(a) Prior to effecting the Merger, if required, the Corporation will sell any securities in the portfolio of each Terminating Corporate Fund that do not meet the investment objectives and investment strategies of the Continuing Corporate Fund. As a result, a Terminating Corporate Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with their investment objectives for a brief period of time prior to the Merger being effected.
(b) The value of each Terminating Corporate Fund’s portfolio and other assets will be determined at the close of business on the effective date of the applicable Merger in accordance with the articles of incorporation of the Terminating Corporate Fund.
(c) Prior to the Merger, the Corporation may declare, pay and automatically reinvest ordinary dividends or capital gains dividends to securityholders, in accordance with the account preferences of such securityholders, of a Terminating Corporate Fund and/or the Continuing Corporate Fund, as determined by the board of directors of the Corporation.
(d) Each outstanding share of each Terminating Corporate Fund will be exchanged for share(s) of its equivalent series of the Continuing Corporate Fund based on their relative net asset values.
(e) The assets and liabilities of the Corporation attributed to each Terminating Corporate Fund will be reallocated to the Continuing Corporate Fund.
(f) The articles of incorporation of the Corporation, as amended, will be further amended so that all of the issued and outstanding shares of each Terminating Corporate Fund will be exchanged for shares of the Continuing Corporate Fund on a dollar-for-dollar and series-by-series basis, so that securityholders of each Terminating Corporate Fund become securityholders of the Continuing Corporate Fund and so that the shares of each Terminating Corporate Fund are cancelled.
Benefits of the Merger
- The Filer believes that the Merger is beneficial to securityholders of each Fund for the following reasons:
(a) the U.S.- based sub-advisor for the Terminating Funds advised the Filer and publicly disclosed that it will no longer be offering portfolio management services for the Terminating Funds, nor will they offer equivalent products in the U.S., as of April 1, 2020. Since that time, the portfolios of Terminating Funds have been managed by another individual. This individual does not habitually manage portfolios based on the mandate of the Terminating Funds and will not commit to continuing to do so;
(b) the Continuing Funds provide similar exposure to small- and mid-cap companies, while offering lower-than-typical market sensitivity and the potential for above-average returns (characteristics that investors in the Terminating Funds may have expected);
(c) the Continuing Funds have broader investment objectives, in that the Continuing Funds may invest in a broader group of equity securities, than their corresponding Terminating Funds thereby providing greater flexibility to the portfolio manager, which may benefit investors across market cycles and credit cycles;
(d) the Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand;
(e) following the Mergers, each Continuing Fund will have a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired;
(f) each Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace; and
(g) the MERs of the Continuing Funds are expected to be lower than for their corresponding Terminating Funds.
Tax Implications of Each Merger
The approval of the Principal Regulator for each Merger under subsection 5.5(1)(b) of NI 81-102, and that pre-approval under subsection 5.6(1) of the Instrument is unavailable, because each Merger will not be completed as a “qualifying exchange” under subsection 132.2 of the Tax Act or as a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act.
In the case of the Mergers of the Terminating Corporate Funds into the Continuing Corporate Fund, the qualifying exchange and tax-deferred transactions identified in subsection 5.6(1) of the Instrument are not available for mergers involving a class of a mutual fund corporation without dissolving the entire mutual fund corporation. As a result, the Mergers involving the Terminating Corporate Funds cannot be effected on a tax-deferred basis under the Tax Act.
In the case of the Merger of the Terminating Trust Fund into the Continuing Trust Fund, the Filer proposes to effect such Merger on a taxable basis because it would be in the overall best interests of the investors of the Terminating Trust Fund and the Continuing Trust Fund for the following reasons:
(a) The vast majority of securityholders of the Terminating Trust Fund are tax-exempt Registered Plans or in a loss position. A taxable merger is neither beneficial nor detrimental to a tax-exempt registered plan.
(b) For non-Registered Plan investors, i.e. taxable investors, that are in a loss position, a taxable merger may be preferable since the Merger will crystallize these losses. Crystallizing a loss can be beneficial to investors because they can use the loss to offset any capital gains realized in the same year or the previous three years and thus immediately reduce their tax liability. If an investor did not realize a capital gain in the current year or any of the previous three years, the capital loss can be carried forward to any future year, as these loss carryforwards do not expire. There is no negative impact to an investor from crystallizing the loss.
(c) For non-Registered Plan investors in a gain position, a taxable merger will cause the gains to be immediately realized and, thus, subject to tax. While a tax-deferred merger is preferable to these investors, the proposed Merger is being proposed, in part, due to the poor performance of the Terminating Trust Fund and, therefore, few investors are in a gain position.
(d) As of July 31, 2020, only 1% of investors of the Terminating Trust Fund were in a taxable gain position.
(e) The Continuing Trust Fund has a small amount of capital loss carryforwards. While these are not significant, they are an asset of the Fund that would be lost in a tax-deferred merger.
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 with respect to each Merger, provided that the Filer obtains the prior approval of the securityholders of each Terminating Fund for the Merger at a special meeting held for that purpose.
“Darren McKall”
Darren McKall
Investment Funds and Structured Products Branch