Franklin Templeton Investments Corp. (Re), 2021 CanLII 39383

May 11, 2021

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 Franklin templeton investments corp. (the Filer)

and

TEMPLETON GLOBAL BOND FUND (HEDGED)

(the Terminating Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the merger (the Merger) of the Terminating Fund into Templeton Global Bond Fund (the Continuing Fund and, together with the Terminating Fund, the Funds) 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 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 provinces and territories of Canada, other than the province of Ontario (Other Jurisdictions and with Ontario, the 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.

Representations

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

The Filer and the Funds

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

2. The Filer is the investment fund manager, portfolio manager and trustee of the Funds.

3. The Filer is registered as an investment fund manager in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario and Québec as a mutual fund dealer, portfolio manager and exempt market dealer in each province of Canada and the Yukon, and as a commodity trading manager in Ontario.

4. Each Fund is an open‑ended mutual fund established as a trust under the laws of Ontario.

5. Units of the Funds are currently qualified for sale under a simplified prospectus, annual information form and fund facts each dated June 26, 2020, as amended (collectively, the Offering Documents).

6. The Filer created and qualified certain hedged series units of the Continuing Fund for sale by an amendment to the Offering Documents dated February 18, 2021. The Filer intends to offer such hedged series units for sale on or about June 25, 2021.

7. Each Fund is a reporting issuer under the applicable securities legislation of the Jurisdictions.

8. Neither the Filer nor either Fund is in default under securities legislation in the Jurisdictions.

9. Other than circumstances in which the securities regulatory authority of a Jurisdiction has expressly exempted a Fund therefrom, each Fund follows the standard investment restrictions and practices established under NI 81-102.

10. The net asset value for each series of each Fund is calculated each business day in accordance with the Fund’s valuation policy, as described in the Offering Documents.

11. The Funds have substantially similar valuation procedures.

12. Units of the Funds are qualified investments under the Income Tax Act (Canada) (the Tax Act) for RRSPs, RRIFs, DPSPs, RESPs, RDSPs and TFSAs.

Reason for Approval Sought

13. Regulatory approval 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, given that the Merger will not be completed as a “qualifying exchange” or other tax deferred transaction under the Tax Act.

14. Except as described in this decision, the proposed Merger complies with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102, as the Funds have substantially similar investment objectives, fee structures and valuation procedures.

The Proposed Merger

15. The Filer intends to reorganize the Funds such that the Terminating Fund will merge into the Continuing Fund and the securityholders of the Terminating Fund will become securityholders of the Continuing Fund.

16. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), a press release announcing the proposed Merger was issued and filed via SEDAR on March 12, 2021. A material change report and amendments to the Offering Documents with respect to the proposed Merger were filed via SEDAR on March 12, 2021.

17. 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 Merger to the IRC for a recommendation. On March 10, 2021, the IRC reviewed the potential conflict of interest matters related to the proposed Merger and provided its positive recommendation for the Merger, after determining that the Merger, if implemented, would achieve a fair and reasonable result for the Funds.

18. Securityholders of the Terminating Fund will be asked to approve the Merger at a special meeting to be held on or about June 11, 2021.

19. The Filer has concluded the Merger will not be a “material change” for the Continuing Fund.

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

21. The Filer will pay for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees.

22. If all required approvals for the Merger are obtained, it is intended that the Terminating Fund will merge into the Continuing Fund effective the close of business on or about June 25, 2021 and the Continuing Fund will continue as a publicly offered open‑end mutual fund.

23. The Terminating Fund will be wound up as soon as reasonably possible following the Merger, and in any event within 60 days of the Merger.

24. 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.

25. In accordance with the Filer’s standard of care owed to the funds it manages 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 applicable fund would obtain better participation rates by sending the management information circular with the other proxy-related materials.

26. Pursuant to the requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with the special meeting, along with the fund facts of the Continuing Fund, will be mailed to securityholders of the Terminating Fund on May 10, 2021 and concurrently filed via SEDAR. The management information circular, to which the notice-and-access document provides a link, will also be filed via SEDAR at the same time.

27. The tax implications of the Merger and the IRC's positive recommendation regarding the Merger will be described in the meeting materials, so that the securityholders of the Terminating Fund may make an informed decision before voting on the Merger. The meeting materials will also describe the various ways in which investors can obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Fund and its most recent interim and annual financial statements and management report of fund performance.

28. In light of the disclosure in the management information circular, securityholders of the Terminating Fund have all the information necessary to determine whether the proposed Merger is appropriate for them.

29. Securityholders of the Terminating Fund will continue to have the right to redeem units at any time up to the close of business on the business day immediately before the effective date of the Merger.

30. No sales charges, redemption fees or other fees or commissions will be payable by securityholders of the Terminating Fund in connection with the Merger. The Filer will waive any redemption fees payable by a securityholder in connection with the redemption of units of the Terminating Fund purchased under the Deferred Sales Charge Purchase Option or the Low-Load Purchase Option (each as described in the Offering Documents).

31. The Merger is proposed to proceed on a taxable basis for the following reasons:

(a) the Terminating Fund may not qualify as a mutual fund trust under the Tax Act on the date of the Merger and in that case, a qualifying exchange would not be possible;

(b) substantially all of the taxable securityholders of the Terminating Fund are in a loss position and effecting the Merger on a taxable basis would not have an adverse tax impact on these securityholders;

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

(d) the majority of the securityholders of the Terminating Fund are tax exempt.

Merger Steps

32. The proposed Merger will be structured as follows:

(a) On or prior to the effective date of the Merger, the Terminating Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to securityholders to ensure that it will not be subject to tax for its current tax year.

(b) On or before the effective date of the Merger, the Terminating Fund will cash settle its currency forward contacts and will invest any net proceeds in Series O units of the Continuing Fund, or will redeem Series O units of the Continuing Fund to pay any net liability. At this point in time, Series O is the only series of units in the Continuing Fund held by the Terminating Fund.

(c) 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.

(d) On the effective date of the Merger, the Terminating Fund will redeem its Series O units of the Continuing Fund and will purchase an equivalent value of hedged series units of the Continuing Fund. The hedged series units of the Continuing Fund received by the Terminating 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.

(e) Immediately thereafter, the hedged series units of the Continuing Fund received by the Terminating Fund will be distributed to securityholders of the Terminating Fund in exchange for their units in the Terminating Fund on a dollar-for-dollar basis. Series A, F, O, PA and PF units of the Terminating Fund will be exchanged for Series A-Hedged, F-Hedged, O-Hedged, PA-Hedged and PF-Hedged units of the Continuing Fund, respectively.

(f) As soon as reasonably possible following the Merger, and in any case within 60 days following the effective date of the Merger, the Terminating Fund will be wound up.

Benefits of Merger

33. The Filer believes that the Merger will be beneficial to securityholders of each Fund for the following reasons:

(a) the units of the Terminating Fund are so narrowly held that the Terminating Fund may soon fail to qualify as a ‘mutual fund trust’ as defined in the Tax Act. If the Terminating Fund does not qualify as a ’mutual fund trust’ throughout its taxation year, material adverse tax consequences may result;

(b) due to the small number of securityholders in the Terminating Fund, it is no longer economically viable for the Terminating Fund to continue as a standalone fund;

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

(d) the Merger will cause the Continuing Fund to be more widely held, which may generate a larger profile in the marketplace by potentially attracting more investors.

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 Terminating Fund at the special meeting held for that purpose.

“Darren McKall”

_______________________________

Darren McKall

Investment Funds and Structured Products Branch

Ontario Securities Commission

SEDAR Project # 3188507

Application File # 2021/0160