Securities Law & Instruments

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of Mutual Fund Merger -- approval required because merger does not meet the criteria for pre-approval -- merger has differences in investment objectives -- mergers not a "qualifying exchange" or a tax-deferred transaction under Income Tax Act.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.

December 17, 2009

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

CRITERION INVESTMENTS INC.

(the Filer), AND

CRITERION INTERNATIONAL EQUITY FUND

(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 of the principal regulator (the Legislation) for approval of the merger (the Merger) of the Terminating Fund into Criterion Global Dividend Fund (the Continuing Fund) (together with the Terminating Fund, the Funds) under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) (the Requested Relief).

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 (the Principal Regulator), 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, Nova Scotia, and Newfoundland and Labrador (together with the Principal Regulator, the Decision Makers).

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

1. The head office of the Filer and the Funds is located at 95 Wellington Street, West, Suite 1400, Toronto, Ontario. The Filer is not in default of securities legislation in any jurisdiction of the Decision Makers.

2. Each of the Funds are open-end investment trusts established under the laws of Ontario. The Filer is the manager and trustee of the Funds. The Funds have 11 classes of units outstanding, Class A units, Class B units, Class C units, Class D units, Class F units, Class I units, Class L units, Class M units, Class O units, Class P units and Class Q units. Pursuant to the Merger, unitholders of the Terminating Fund will receive, in exchange for their units of the Terminating Fund, the corresponding class of units of the Continuing Fund.

3. Units of the Funds are currently offered for sale in each jurisdiction of the Decision Makers under a simplified prospectus (SP) and annual information form (AIF) dated June 16, 2009, as amended.

4. The Funds are reporting issuers under the applicable securities legislation of each jurisdiction of the Decision Makers and are not on the list of defaulting reporting issuers maintained under such securities legislation.

5. Each of the Funds follows the standard investment restrictions and practices established by securities regulatory authorities in each jurisdiction of the Decision Makers.

The Merger

6. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Manager presented the terms of the Merger to the independent review committee for its review. The independent review committee recommended the Merger advising that, after reasonable inquiry, it concluded that this will achieve a fair and reasonable result for the Terminating Fund's unitholders.

7. A special meeting of the unitholders of the Terminating Fund was held on December 7, 2009 (the Meeting) to consider the Merger of such fund with the Continuing Fund. Subject to necessary regulatory approval, the Filer intends to effect the Merger on or about December 30, 2009 (the Merger Date).

8. A notice of meeting, management information circular (the Circular) and form of proxy, as well as the SP of the Funds and the annual and interim financial statements of the Continuing Fund were mailed to unitholders of the Terminating Fund in connection with the Meeting on November 16, 2009, and the notice of meeting, management information circular and form of proxy were filed on SEDAR on November 17, 2009.

9. In connection with the Meeting (i) a press release for the Terminating Fund was filed on SEDAR on November 2, 2009, (ii) a material change report for the Terminating Fund was filed on SEDAR on November 6, 2009, (iii) an amendment to the SP of the Terminating Fund was filed on SEDAR dated November 4, 2009, and (iv) an amendment to the AIF of the Terminating Fund was filed on SEDAR dated November 4, 2009.

10. Unitholders of the Terminating Fund will continue to have the right to redeem securities of such fund for cash at any time up to the close of business on the day prior to the Merger.

11. The Requested Relief is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6(1) of NI 81-102 because:

(a) contrary to subsection 5.6(1)(a)(ii) of NI 81-102, a reasonable person may not consider the fundamental investment objective of the Terminating Fund to be substantially similar to the fundamental investment objective of the Continuing Fund; and

(b) contrary to subsection 5.6(1)(b) of NI 81-102, the Merger is not a tax-deferred transaction. The Circular discloses the tax implications of the Merger.

12. The primary differences between the fundamental investment objective of the Terminating Fund and the Continuing Fund are that while the investment objective of the Terminating Fund is to exceed the return of the Morgan Stanley Capital International EAFE Index over a market cycle by investing primarily in international common stocks and other equity securities of issuers organized or conducting business in countries other than the United States, the Continuing Fund's investment objective is to provide unitholders with the opportunity for capital appreciation through investment in the securities that make up the RIS Index managed by Merrill Lynch. The RIS Index is a basket of 30 of the highest yielding companies included in the FTSE™ Global 100 Index based on the prevailing sector weights within the FTSE™ Global 100 Index from time to time.

13. It would be possible to carry out the Merger as a "qualifying exchange" under section 132.2 of the Income Tax Act (Canada). However, by effecting the Merger on a taxable basis rather than on a tax-deferred rollover basis, the Continuing Fund is able to preserve (i) its realized capital losses from the current taxation year and (ii) any loss carry forwards from prior taxation years. Further, it is expected that unitholders of the Terminating Fund who have held units of the Terminating Fund from inception would realize a loss rather than a gain on the taxable disposition of their units of the Terminating Fund for units of the Continuing Fund and, therefore, would not benefit from a tax-deferred rollover. For these reasons, the Filer believes it would be in the best interests of the unitholders of the Terminating Fund to effect the merger on a taxable basis rather than on a tax-deferred basis as a qualifying exchange.

14. Other than subsections 5.6(1)(a)(ii) and 5.6(1)(b) of NI 81-102, the Merger will comply with all other requirements for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

15. The costs and expenses of the Merger will be paid for by the Manager.

16. Following the Merger, a material change report for the Terminating Fund and an amendment to the SP and the AIF of the Funds will be filed on SEDAR.

17. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable. Pursuant to the Merger, the Terminating Fund will liquidate all of its portfolio such that on the date of the Merger, the Terminating Fund will hold only cash. The Terminating Fund will subscribe for units of the Continuing Fund in exchange for its portfolio assets and the assumption of the Terminating Fund's liabilities. On the Merger Date, the Terminating Fund will distribute its net income and any net realized capital gains for its current taxation year, to the extent necessary to eliminate its liability for tax. Immediately thereafter, the units of the Continuing Fund will be distributed to unitholders of the Terminating Fund in exchange for their units in the Terminating Fund on a class-by-class basis, and the Terminating Fund will cease to exist.

18. The Manager believes the Merger will be beneficial to unitholders of the Terminating Fund for the following reasons:

(i) unitholders of the Terminating Fund may have the potential to enjoy increased economies of scale with respect to operating costs and administrative expenses as part of a larger Continuing Fund;

(ii) the Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund;

(iii) there is the potential for more stable, improved performance of the Continuing Fund;

(iv) there are lower management fees charged to investors in the Continuing Fund for each class as compared to the Terminating Fund.

19. For tax reasons, the Terminating Fund wishes to terminate the Fund before the end of 2009.

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.

"Vera Nunes"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission