Venturelink Diversified Balanced Fund Inc. and Venturelink Brighter Future (Balanced) Fund Inc. - s. 5.5(1)(b) of NI 81-102 Mutual Funds

Decision

Headnote

s. 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) -- Approval of an amalgamation of two labour sponsored investment funds -- approval is required because the amalgamation does not meet all of the pre-approval requirements in s. 5.6 of NI 81-102 -- Approval is granted because the Amalgamation will benefit shareholders and will make the labour sponsored investment funds market more efficient.

Applicable Legislative Provisions

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

July 18, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

AND

IN THE MATTER OF

VENTURELINK DIVERSIFIED BALANCED FUND INC.

AND VENTURELINK BRIGHTER FUTURE

(BALANCED) FUND INC.

(the Funds or the Filers)

 

DECISION DOCUMENT

Background

The securities regulatory authority or regulator in Ontario (the Decision Maker) has received an application (the "Application") from the Funds for approval of a proposed amalgamation of the Funds (the Amalgamation) pursuant to clause 5.5(1)(b) of National Instrument 81-102 - Mutual Funds (NI 81-102).

Interpretation

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

Representations

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

The Filers

VentureLink Diversified Balanced Fund Inc.

1. VentureLink Diversified Balanced Fund Inc. (DB) was incorporated under the Business Corporations Act (Ontario) (the OBCA).

2. DB is a registered labour sponsored investment fund corporation (LSIF) under the Community Small Business Investment Funds Act (Ontario) (the CSBIF Act) and is a prescribed labour-sponsored venture capital corporation (LSVCC) under the Income Tax Act (Canada) (the Tax Act). DB's investing activities are governed by such legislation (the DB LSIF Legislation).

3. DB primarily invests in securities of community small business investment fund corporations (CSBIFs) which in turn invest in companies operating in a diverse range of industries, with the objective of obtaining long term capital appreciation and must make "eligible investments" in "eligible businesses" as prescribed under the DB LSIF Legislation.

4. The labour sponsor of DB is the Canadian Federal Pilots Association (the DB Sponsor).

5. The authorized capital of DB is as follows:

(a) an unlimited number of Class A Shares which are widely held; and

(b) an unlimited number of Class B shares of which all of the issued and outstanding Class B shares are held by the DB Sponsor.

6. VentureLink LP is the manager of DB under a management contract. VentureLink LP is controlled by VL Capital Inc. a company controlled by Geoffrey D. Horton, W. James Whitaker and John S. Varghese. Its sole business is managing the Funds and four other VentureLink funds and it has approximately $215 million in assets under management.

7. DB's shares are not listed on an exchange and DB ceased offering Class A Shares on November 29, 2003.

8. DB has approximately $16.4 million in net assets.

9. The net asset value of DB is calculated each business day.

10. DB has complied with Part 11 of National Instrument 81-106 - Investment Fund Continuous Disclosure (NI 81-106) in connection with the Amalgamation.

VentureLink Brighter Future (Balanced) Fund Inc.

11. VentureLink Brighter Future (Balanced) Fund Inc. (BFB) was incorporated under the OBCA.

12. BFB is registered as a LSIF under the CSBIF Act and is prescribed as a LSVCC under the Tax Act. BFB's investing activities are governed by such legislation (the BFB LSIF Legislation).

13. BFB primarily invests in securities of CSBIFs which in turn make eligible investments in start-up and early stage Ontario businesses involved in essential resources, infrastructure and essential service industries, such as energy, water and waste management. BFB's objective is to obtain long term capital appreciation and it must make "eligible investments" in "eligible businesses" as prescribed under the BFB LSIF Legislation.

14. The labour sponsor of BFB is the Canadian Federal Pilots Association (the BFB Sponsor).

15. The authorized capital of BFB is as follows:

(a) an unlimited number of Class A shares, which are widely held; and

(b) an unlimited number of Class B shares, of which all of the issued and outstanding Class B shares are held by the BFB Sponsor.

16. VentureLink LP is the manager of BFB under a management contract.

17. BFB Shares are not listed on an exchange and BFB ceased offering Class A Shares under a prospectus on December 14, 2002.

18. BFB has approximately $18.8 million in net assets.

19. The net asset value of BFB is calculated each business day.

20. BFB has complied with Part 11 of NI 81-106 in connection with the proposed Amalgamation.

The Amalgamation

21. On June 15, 2006, DB and BFB announced the proposal to amalgamate the Funds and to continue them as one fund (the Amalgamated Fund).

22. The investment objective of the Amalgamated Fund will be to realize long-term capital appreciation on all or part of its investment portfolio. Balanced Fund will make investments in eligible Canadian businesses as defined in the CSBIF Act.

23. It is anticipated that the shareholders of DB and BFB will vote on the Amalgamation at shareholders' meetings to be held on July 25, 2006 (the Shareholders' Meetings), and, if approved, the Amalgamation is expected to be effective on a date (the Effective Date) to be determined by VentureLink LP, currently expected to be on or about July 28, 2006. VentureLink LP may, in its discretion postpone implementing the approved Amalgamation until a later date which shall be no later than October 1, 2006 or may elect after agreement of the board of directors of the Funds is received to not proceed with the Amalgamation.

24. In connection with the Shareholders' Meetings, shareholders of DB and BFB will be sent an information circular (the Circular) which will contain details of the proposed Amalgamation, including income tax considerations associated with the Amalgamation.

25. It is proposed that on the Effective Date, the Funds will amalgamate pursuant to the OBCA and continue thereafter as a prescribed LSVCC pursuant to the Tax Act and as a registered LSIF pursuant to the CSBIF Act under the name the "VentureLink Balanced Fund Inc." or such other name that is decided by the Board of Directors of the Amalgamated Fund. On the Effective Date shareholders of:

(a) DB Class A Shares will be entitled to receive, in exchange for those shares, Class A Shares of the Amalgamated Fund equal to the number of DB Class A Shares so held multiplied by the net asset value per Class A Share of DB divided by the net asset value per Class A Share of the Amalgamated Fund all as determined on the Effective Date;

(b) BFB Class A Shares will be entitled to receive, in exchange for those shares, Class A Shares of the Amalgamated Fund equal to the number of BFB Class A Shares multiplied by the net asset value per Class A Share of BFB divided by the net asset value per Class A Share of the Amalgamated Fund all as determined on the Effective Date; and

(c) DB and BFB Class B Shares will be entitled to receive, in exchange for those shares, 200 Class B Shares in the capital of the Amalgamated Fund.

26. While the Amalgamation will not be a "qualifying transaction" within the meaning of section 132.2 of the Tax Act, more than 95% of the issued and outstanding shares of DB and BFB are held in tax sheltered registered retirement savings plans. Moreover, based on historical selling prices and the anticipated relative values of the shares issued by the Amalgamated Fund and the Class A shares of DB and BFB on the Effective Date, very few of the shareholders of DB or BFB will realize a capital gain as a result of the Amalgamation.

27. Shareholders of the Funds will be entitled to dissent from the Amalgamation pursuant to the provisions of the OBCA. A shareholder who dissents will be entitled, in the event the Amalgamation becomes effective, to be paid by the Amalgamated Fund, the fair value of the Class A Shares of a Fund determined as at the close of business on the day before the Amalgamation resolution was passed. The Boards and management of the Funds believe that the net asset value of each of the Class A Shares of the Funds represents the fair value of those Shares.

28. Any dissenting shareholders who held their Class A Shares of one of the Funds for less than eight years will be required to repay federal and provincial tax credits granted when the shares were originally purchased.

29. VentureLink LP will continue to serve as manager for the Amalgamated Fund (the AF Manager).

30. The costs of implementing the Amalgamation including the legal, incremental printing, mailing and regulatory costs will be borne by VentureLink LP. The cost of the solicitation of proxies for the Shareholders' Meeting will be borne by the Funds.

31. As a result of the terms of the Amalgamation, and the nature of DB and BFB as LSIFs, the Funds require approval of the Amalgamation and cannot rely on section 5.6(1) of NI 81-102 for the following reasons:

(i) a reasonable person would not consider the Amalgamated Fund to have substantially similar fundamental investment objectives as the Funds, as required by Section 5.6(a)(ii) of NI 81-102;

(ii) the Amalgamation is not a "qualifying exchange" within the meaning of section 132.2 of the Tax Act, as required by Section 5.6(1)(b) of NI 81-102;

(iii) the Amalgamation does not contemplate the wind up of the Funds; and

(iv) the materials to be sent to shareholders of DB and BFB will not include: a copy of the current long form prospectus of the Amalgamated Fund, or a copy of the annual and interim financial statements of the Amalgamated Fund, as required by Section 5.6(1)(f)(ii) of NI 81-102 because such documents do not yet exist.

32. Management of the Funds believes that the Amalgamation will be beneficial to shareholders for the following reasons:

(a) Greater Venture Portfolio Diversification - The shareholders of the Amalgamated Fund, will become shareholders of a fund which has a broader, more diversified venture portfolio which is composed of a greater number of portfolio companies than that held by each individual fund. Diversification is the main tool available to reduce the high level of risk inherent in venture investing.

(b) Improved Liquidity - After the Amalgamation, the Amalgamated Fund is expected to have a stronger overall liquidity position than each of the Funds would have had alone. Maintaining adequate liquidity is important for a number of reasons. Cash is needed to meet the follow-on investment requirements of investee companies and to meet the redemption requests of shareholders. Adequate liquidity avoids the need to sell portfolio positions at inopportune times to generate cash, which can result in lower values being realized. Adequate liquidity allows the Amalgamated Fund to meet follow-on fundraising commitments to investee companies also prevents shareholders from suffering the dilutive effects of financings completed at significantly lower prices than previous financings.

(c) Reduced Costs - As compared to continuing each of the Funds as a single entity, shareholders of the Amalgamated Fund can expect to bear a modestly reduced level of fixed, recurring fees and expenses post-Amalgamation such as those of professional services fees and shareholder communication expenses.

Shareholder Disclosure

33. The Circular sent to DB and BFB shareholders will:

(a) include disclosure about the Amalgamation and prospectus like disclosure concerning the Amalgamated Fund and the shares to be issued under the Amalgamation including information regarding fees, expenses, investment objective, investment strategy, valuation procedures, the manager, the investment manager, redemptions, income tax considerations, dividend policy, net asset value and risk factors;

(b) disclose that shareholders can obtain audited annual financial statements of DB and BFB as at and for the periods ended December 31, 2005 at no cost by accessing the SEDAR website at www.sedar.com, by accessing the VentureLink Funds website at www.venturelinkfunds.com or by calling a toll-free telephone number. Note that financial statements have been delivered, in the normal course in accordance with the requirements of NI 81-106, to those shareholders of DB and BFB that requested them.

34. Although the materials sent to shareholders of DB and BFB will not include a copy of the current long form prospectus or annual and interim financial statements of the Amalgamated Fund, the Circular sent to these shareholders will contain detailed information about the Amalgamated Fund as it would be should the Amalgamation occur. The Circular will also contain a pro forma statement of net assets of the Amalgamated Fund compiled from he balance sheets of the Funds at December 31, 2005.

35. The Circular will contain a description of the Amalgamation, including the tax considerations associated with the Amalgamation which will allow DB and BFB shareholders to make an informed decision with respect to the Amalgamation.

Decision

The Decision Maker is satisfied that the test contained in NI 81-102 that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Maker under NI 81-102 is that approval of the Amalgamation is granted subject to the following:

(a) the Funds have disclosed in the Circular of DB and BFB that shareholders can obtain the most recent annual and interim financial statements of DB and BFB that have been made public, at no cost, by accessing the SEDAR website at www.sedar.com, by accessing the VentureLinks website at www.venturelinkfunds.com or by calling a toll-free telephone number; and

(b) the Funds include prospectus-like disclosure concerning the Amalgamated Fund in the Circular of DB and BFB.

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