Securities Law & Instruments

Headnote

Application for relief from 90-day divestment requirements prescribed by subsection 2.2(2) of National Instrument 81-102 Mutual Funds -- Mutual Funds held securities of a Company in excess of the 10% control restriction in paragraph 2.2(1)(a) further to a reorganization of the Company -- Securities of the Company are illiquid -- Mutual Funds unable to divest themselves of excess securities of the Company in a commercially reasonable manner -- Mutual Funds given 24 months from the date of the reorganization to divest of excess securities of the Company.

Rule Cited

National Instrument 81-102 Mutual Funds, ss. 2.2(1)(a), 2.2(2).

November 10, 2005

IN THE MATTER OF

THE SECUR/TIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUEBEC, NOVA SCOTIA,

NEW BRUNSWICK, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR,

NORTHWEST TERRITORIES,

YUKON TERRITORY AND NUNAVUT TERRITORY

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

FIDELITY CANADIAN GROWTH COMPANY FUND

(the Growth Fund)

AND

FIDELITY CANADIAN ASSET ALLOCATION FUND

(the Asset Allocation Fund, and together with the

Growth Fund, the Fliers)

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from Fidelity Investments Canada Limited (Fidelity), on behalf of the Filers for a decision under section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102 or the Legislation) that the Funds be exempt from subsection 2.2(2) of NI 81-102 in relation to their investment in CorActive Group Inc. (the Requested Relief).

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions or in Quebec Commission Notice 14-101 have the same meaning in this decision unless they are otherwise defined in this decision.

Representations

This decision is based on the following facts represented by the Fidelity on behalf of the Filers:

1. Fidelity is a corporation amalgamated under the Business Corporations Act (Ontario). Fidelity is the manager and trustee of the Filers.

2. Each Filer is an open-ended mutual fund trust established by Fidelity under the laws of Ontario. The investment objective of the Growth Fund is to achieve long-term capital growth by investing primarily in equity securities of Canadian companies. The investment objective of the Asset Allocation Fund is to achieve a high total investment return using an asset allocation approach by investing in a mix of Canadian equity securities, fixed income securities and money market instruments.

3. Each Filer is a reporting issuer under the securities legislation of each of the Jurisdictions.

4. CorActive High-Tech Inc. (the Company) is a company incorporated under the Canada Business Corporations Act. The Company is not, and has never been, a reporting issuer in any Jurisdiction, and its securities are not listed or quoted on any public exchange or market. The Company's securities are therefore illiquid.

5. On June 21, 2001, the Filers purchased, on a private placement basis, Class D preferred shares in the capital of the Company (the Class D Shares). Each Class D Share was convertible on a one-for-one basis into common shares, subject to certain adjustment provisions. Each Class D Share entitled the holder to one vote for every common share into which it was convertible. The terms of the Class D Shares provided that upon a liquidation of the Company, holders of Class D Shares would be entitled to receive an amount in priority to the holders of shares of any other class (the Liquidation Preference) and would be entitled to participate on a share-for-share basis with holders of the other classes of shares with respect to any assets available for distribution following payment of preferred liquidation amounts on any other classes of shares (the Participation Right).

6. Immediately following the purchase:

(a) the Class D Shares held by the Growth Fund constituted approximately 8.45% of the outstanding equity securities of the Company. Such Class D Shares entitled the Growth Fund to 8.45% of the votes attached to all outstanding shares of the Company; and

(b) the Class D Shares held by the Asset Allocation Fund constituted approximately 5.63% of the outstanding equity securities of the Company. Such Class D Shares entitled the Asset Allocation Fund to 5.63% of the votes attached to all outstanding shares of the Company.

7. On June 30, 2005, the Company completed a reorganization (the Reorganization). Pursuant to the Reorganization, all of the equity securities of the Company were exchanged for equity and debt securities of CorActive Group Inc. (Group), and the Company became a wholly-owned subsidiary of Group.

8. Including the Filers, there were 8 shareholders of the Company. Following the Reorganization, these same shareholders of the Company became the only shareholders of Group.

9. Group is a company incorporated under the Canada Business Corporations Act. It is not a reporting issuer in any jurisdiction, and its securities are not listed or quoted on any public exchange or market. Group's securities are therefore illiquid.

10. Under the Reorganization, each Class D Share was exchanged for one Class D preferred share of Group (the Group Class D Shares) and one and one-half Class E shares of Group (the Group Class E Shares). In addition, each holder of Class D Shares received a promissory note, the principal amount of which was immediately repaid upon completion of the Reorganization.

11. The Group Class D Shares are not convertible into any other class or series of shares. Each Group Class D Share entitles the holder to one vote. Holders of the Group Class D Shares are entitled to a Liquidation Preference but do not have a Participation Right.

12. The Group Class E Shares are non-voting and non-convertible. Holders of Group Class E Shares are not entitled to a Liquidation Preference, but have a Participation Right to share in the assets available for distribution to shareholders upon a liquidation following payment of preferred liquidation amounts on any other classes of shares.

13. One of the purposes of the Reorganization was to separate the Liquidation Preference and the Participation Right into two separate classes of shares. Accordingly, the number of shares of Group held by each of the Filers following the Reorganization is two and one-half times the number of shares of the Company held prior to the Reorganization, even though the overall fights of a holder of such shares did not increase.

14. As a result of the Reorganization:

(a) the Growth Fund holds Group Class D Shares and Group Class E Shares, together comprising 14.63% of the outstanding shares in the capital of Group; and

(b) the Asset Allocation Fund holds Group Class D Shares and Group Class E Shares, together comprising 9.76% of the outstanding shares in the capital of Group.

15. Under the definition of equity securities in section 89(1) of the Securities Act (Ontario), the Group Class D Shares would not constitute equity securities. Accordingly, the Group Class E Shares held by the Growth Fund would comprise 15.25% of the outstanding equity securities of Group, and the Group Class E Shares held by the Asset Allocation Fund would comprise 10.17% of the outstanding equity securities of Group.

16. The shares of Group held by the Growth Fund entitle the Growth Fund to 8.45% of the votes attached to all outstanding securities of Group. The shares of Group held by the Asset Allocation Fund entitle the Asset Allocation Fund to 5.63% of the votes attached to all outstanding securities of Group.

17. The value of the Growth Fund's investment in Group constitutes less than 0.05% of the value of its total portfolio. The value of the Asset Allocation Fund's investment in Group constitutes less than 0.05% of the value of its total portfolio.

18. Each Filer is in compliance with section 2.4 of National Instrument 81-102, which prohibits a mutual fund from having invested more than 15% of its net assets, taken at market value, in illiquid assets.

19. Each Filer is currently unable to divest itself, in a commercially reasonable manner, of the securities of Group held in excess of the limits described in paragraph 2.2(1)(a) of NI 81-102 having regard to the fact that the securities of Group are illiquid and are likely to remain so beyond the prescribed 90-day divestment period in subsection 2.2(2) of NI 81-102.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:

(a) the Filers will, as quickly as is commercially reasonable, and in any event no later than 24 months from the date of the Reorganization, reduce their respective holdings of equity securities in Group so that they do not hold securities of Group in excess of the limits described in paragraph 2.2(1)(a) of N! 81-102; and

(b) should the Filers' voting rights in respect of their shares of Group come to represent more than 10% of the votes attached to all outstanding voting securities of Group at any time during the 24 month divestment period prescribed in paragraph (a) above, the Filers will not vote those voting securities that are held in excess of the limits described in paragraph 2.2(1)(a) of NI 81-102.

"Leslie Byberg"
Manager, Investment Funds Branch
Ontario Securities Commission