Kyoto Planet Asset Management Inc.

Order

Headnote

Relief granted to Investment Counsel/Portfolio Manager of a privately offered investment fund from self-dealing provisions in paragraph 118(2)(b) of the Act and subsection 115(6) of the Regulation -- relief in connection with a proposed in-kind distribution of shares held by the fund to the unitholders in exchange for the redemption of their units of the Fund -- in-kind distribution part of a series of transactions considered by the IC/PM to be necessary to comply with terms and conditions placed on its registration by Commission staff, and to effect the wind-up of the fund -- unitholders participating in the distribution are the only remaining unitholders of the fund.

Statutes Cited

Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 118(2)(b), 121(2)(a)(ii), 147.

Regulation Cited

Regulation 1015, R.R.O. 1990, as am., s. 115(6).

December 1, 2008

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

(the Act)

AND

IN THE MATTER OF

KYOTO PLANET ASSET MANAGEMENT INC.

 

ORDER

Background

The Ontario Securities Commission (the "Commission") has received an application from Kyoto Planet Asset Management Inc. ("KPAM") for an order pursuant to subparagraph 121(2)(a)(ii) and section 147 of the Act, exempting KPAM from

(a) the restriction in paragraph 118(2)(b) of the Act, which prohibits a portfolio manager from selling the securities of any issuer to the account of a responsible person, any associate of a responsible person or the portfolio manager, and

(b) the restriction in subsection 115(6) of Ontario Regulation 1015, R.R.O. 1990, as amended (the "Regulation"), which prohibits a purchase or sale of any security in which an investment counsel or any partner, officer or associate of an investment counsel has a direct or indirect beneficial interest from being made from any portfolio managed or supervised by the investment counsel,

in connection with a proposed in-kind distribution of shares by the Kyoto Planet Fund (the "Fund") to the Inside Unitholders in exchange for the redemption of their units of the Fund (the "Requested Relief"). The proposed in-kind distribution is part of a series of transactions considered by KPAM to be necessary to comply with terms and conditions that have been placed on KPAM's registration by Commission staff, and to effect the wind-up of the Fund.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this order unless they are defined in this order.

Representations

This order is based on the following facts represented by KPAM:

1. KPAM is a corporation formed under the laws of British Columbia. KPAM is registered under the Act as an "investment counsel/portfolio manager" and as a "limited market dealer". KPAM is the trustee, manager and investment manager of the Fund.

2. The Fund is an open-ended mutual fund formed under the laws of Ontario pursuant to an Amended and Restated Declaration of Trust dated November 30, 2007 (the "Declaration of Trust"). The Fund is not a reporting issuer in Ontario or in any other jurisdiction, as units of the Fund were distributed in reliance on the "accredited investor" exemption in National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106").

3. KPAM caused the Fund to purchase shares of Atlantic Hydrogen Inc. ("Company A") from Kyoto Planet Group Inc. ("KPG") on December 31, 2007. KPAM also caused the Fund to purchase shares of Pan Asia Biofuels Corporation ("Company B") from KPG on January 31, 2008 (these purchases are, collectively, the "Vend-Ins"). The shares of Company A and Company B purchased by the Fund are referred to as "the Shares".

4. At the time of the Vend-Ins,

(a) Damien Reynolds, then a "responsible person" of KPAM, was also the beneficial owner of voting securities of KPG carrying more than 10 per cent of the voting rights attached to all of KPG's outstanding voting securities, such that KPG was an "associate of a responsible person".

(b) KPG was a "substantial securityholder" of KPAM, and held a "significant interest" in Company A and Company B.

5. Pursuant to a letter dated August 13, 2008, as amended by a further letter dated August 15, 2008, Commission staff notified KPAM that the Vend-Ins were in violation of subparagraph 111(2)(c)(ii), subsection 111(3), and paragraph 118(2)(b) of the Act. Commission staff also imposed terms and conditions (the "Terms and Conditions") on KPAM's registration, effective August 27, 2008. The Terms and Conditions required KPAM to, among other things, sell the Shares at their fair market value, subject to compliance with relevant securities laws. Any gains from the sales were to be for the benefit of the Fund. If there was any loss from the sales, KPAM was responsible for compensating the Fund in cash for the loss. For the purposes of calculating any gain or loss to the Fund, the sales of the two investments were to be treated separately. Further, KPAM was to provide written notice to unitholders of the Fund which (1) stated that KPAM had made two investments for the Fund which were not in compliance with Ontario securities law and the investment restrictions in the Fund's offering memorandum, (2) outlined KPAM's action plan to bring the Fund's investments into compliance with Ontario securities law and the investment restrictions in the Fund's offering memorandum, and (3) included a copy of the Terms and Conditions.

6. Company A and Company B are non-public issuers. Accordingly, the Shares are highly illiquid and there is no market on which they can be readily sold.

7. In light of the current difficult market conditions and the fact that the Shares accounted for approximately 90% of the Fund's net asset value as of the date of this application, management of KPAM determined that it was in the best interests of the Fund and its unitholders to immediately cease distribution of further units of the Fund and to effect a mandatory redemption of all issued and outstanding units, other than those held by certain Inside Unitholders (as defined below).

8. On September 12, 2008, KPAM gave all unitholders, other than the Inside Unitholders, notice (the "Notice") under section 5.2 of the Fund's Declaration of Trust that their units would be redeemed (the "Mandatory Redemption") as of September 30, 2008 (the "Mandatory Redemption Date") at the greater of the net asset value per unit (the "NAV") on the Mandatory Redemption Date or the unitholder's NAV at purchase. In accordance with the Terms and Conditions, the Notice provided that:

(a) the minimum amount that a redeeming unitholder would receive upon the Mandatory Redemption would be their original investment, less any commissions that may have been paid to their adviser;

(b) if the Shares of Company A and Company B were valued at an amount on the Mandatory Redemption Date which was less than their original cost to the Fund, KPAM would compensate unitholders in cash for the difference; and

(c) the Mandatory Redemption of units would not be subject to an early redemption penalty and no deduction would be made from the redemption proceeds for any accrued performance fees.

9. The Fund ceased distribution of its units immediately upon the Terms and Conditions becoming effective. Accordingly, the last date on which a new subscription was accepted was July 31, 2008.

10. The Mandatory Redemption was completed on October 9, 2008. All unitholders of the Fund, other than the Inside Unitholders, were paid redemption proceeds in cash equal to the unitholder's original investment, less any commissions paid to the unitholder's adviser, as described in the Notice. Subsequent to the Mandatory Redemption, the Inside Unitholders are the only remaining unitholders of the Fund.

11. KPAM wishes to sell the Shares by distributing them "in-kind" to KPG, Mr. Craig Basinger, Mr. Paul Guedes and Mr. David King (the "Inside Unitholders") in exchange for the redemption of all of the units of the Fund held by the Inside Unitholders (the "Proposed Transactions"). Once the Proposed Transactions are complete, KPAM intends to effect the dissolution of the Fund by terminating the Declaration of Trust.

12. KPG is an "affiliate" of KPAM because it owns approximately 89% of the issued and outstanding voting shares of KPAM and is a "responsible person" of KPAM for purposes of paragraph 118(2)(b) of the Act because it had access to KPAM's decision to sell the Shares prior to the implementation of that decision.

13. Craig Basinger is a director and officer of KPAM, and is therefore a "responsible person" of KPAM for purposes of paragraph 118(2)(b) of the Act. As an officer of KPAM, he is also an officer of an investment counsel for purposes of subsection 115(6) of the Regulation.

14. Paul Guedes is an employee of KPG who has access to investment decisions made by KPAM on behalf of the Fund prior to implementation, and is therefore a "responsible person" of KPAM for purposes of paragraph 118(2)(b) of the Act.

15. At the time the decision to effect the Proposed Transactions was made, David King was a director and officer of KPAM and, accordingly, was a "responsible person" of KPAM for purposes of paragraph 118(2)(b) of the Act. Mr. King resigned as a director, officer and employee of KPAM effective September 17, 2008.

16. Without the relief granted herein, the Proposed Transactions would be prohibited by paragraph 118(2)(b) of the Act, and the sale of Shares to Mr. Basinger would be additionally prohibited by subsection 115(6) of the Regulation.

17. The Proposed Transactions are permitted under the Declaration of Trust. In addition, since each of the Inside Unitholders is an "accredited investor" for the purposes of NI 45-106, the Shares can be sold by the Fund to each of them in reliance on section 2.3 of NI 45-106.

18. In the view of management of KPAM, the Proposed Transactions would be the most effective and expeditious way for KPAM to comply with the Terms and Conditions requiring it to sell the Shares.

19. The conflicts of interest that paragraph 118(2)(b) of the Act and subsection 115(6) of the Regulation were designed to prevent are not present in the Proposed Transactions.

20. Commission staff were processing this exemptive relief application when the Commission received notice that KPAM had failed to maintain adequate bonding or insurance coverage, as required by subsection 108(3) of the Regulation.

21. On November 12, 2008, with the consent of KPAM, Commission staff imposed further terms and conditions upon KPAM's registration, effective immediately. The further terms and conditions were intended to facilitate the orderly wind-up of KPAM's business and affairs, and restricted the duration of KPAM's registration as a dealer and as an adviser under the Act to a transition period ending on the earliest of (a) the termination of KPAM's engagement as an adviser to the Fund, (b) the dissolution of the Fund, and (c) December 31, 2008. During the transition period, KPAM's registration as a dealer and as an adviser is restricted to trading with or on behalf of, or acting as an adviser to, the Fund, provided that securityholders of the Fund only comprise one or more of the Inside Unitholders.

Order

Pursuant to subparagraph 121(2)(a)(ii) and section 147 of the Act, it is ordered that the Requested Relief is granted.

"Suresh Thakrar
Commissioner
Ontario Securities Commission
 
"Margot Howard"
Commissioner
Ontario Securities Commission