Canadian Medical Discoveries Fund Inc. and Canadian Medical Discoveries Fund II Inc. - MRRS Decision

Headnote

MRRS -- ss. 5.5(1)(b) and 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) -- Approval of an amalgamation of labour sponsored investment funds -- approval is required because the amalgamation does not meet all of the pre-approval requirements in s. 5.6(1) of NI 81-102.

Applicable Legislative Provisions

National Instrument 81-102 -- Mutual Funds, ss. 5.5(1)(b), 5.6(1), 5.7(1)(b).

November 24, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUÉBEC, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR, YUKON TERRITORY,

NORTHWEST TERRITORIES AND NUNAVUT TERRITORY

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

CANADIAN MEDICAL DISCOVERIES FUND INC. (CMDFI)

AND CANADIAN MEDICAL DISCOVERIES FUND II INC.

(CMDFII)

(CMDFI and CMDFII collectively, the Filers or the Funds)

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Funds for a decision under the securities legislation for:

(a) 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) (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 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 Filers:

The Funds

1. CMDFI is a corporation incorporated under the laws of Canada, is registered as a labour sponsored investment fund corporation (an LSIF Corporation) registered under the Community Small Business Investments Funds Act (Ontario), as amended (the Ontario Act) and is a registered labour-sponsored venture capital corporation under the Income Tax Act (Canada) (the ITA). CMDFI currently has assets under management of approximately $192.4 million.

2. CMDFII is a corporation incorporated under the laws of Canada, is registered as an LSIF Corporation under the Ontario Act and is a prescribed labour-sponsored venture capital corporation under the ITA. CMDFII currently has assets under management of approximately $14.7 million.

3. The registered office of both Funds is located at BCE Place, 181 Bay Street, Suite 3740, Toronto, Ontario.

4. CMDFI is offered in each of the provinces and territories of Canada pursuant to a prospectus dated December 21, 2005, as amended February 8, 2006 and October 12, 2006. CMDFII is offered in each province and territory of Canada other than Saskatchewan, New Brunswick and Nova Scotia pursuant to a prospectus dated December 2, 2005, as amended and restated December 21, 2005 as amended February 8, 2006 and October 12, 2006 in respect of CMDFII (the CMDFI and CMDFII prospectuses as amended are referred to herein as the Prospectuses).

5. Medical Discovery Management Corporation (MDMC) is the manager of the Funds and The Professional Institute for the Public Service of Canada is the sponsor of the Funds (the Sponsor). MDMC and the Sponsor will be the manager and sponsor of the amalgamated company, Canadian Medical Discoveries Fund Inc. (the AmalCo).

6. The investment objectives of CMDFI are as follows:

"To achieve long-term capital appreciation through investments in eligible Canadian businesses engaged in the health sciences sector, with emphasis on those businesses involved in early-stage commercialization of research or product development."

The investment objectives of CMDFIII are as follows:

"To achieve long-term capital appreciation through investment in eligible Canadian businesses engaged in the health sciences sector, with emphasis on those businesses involved in the Product Testing and Development, or Production and Marketing stages of development."

7. MDMC submits that the Investment Objectives of CMDFI and CMDFII are substantially similar. The investment objectives of the AmalCo will be as follows:

"To achieve long-term capital appreciation through investment in eligible Canadian businesses engaged in the health sciences sector, with emphasis on those businesses involved in the Testing and Development, or Production and Commercialization stages of development."

8. The management fee charged to CMDFI by MDMC is the same as the management fee charged to CMDFII by MDMC and the performance fee charged to CMDFI by MDMC is the same as the performance fee charged to CMDFII by MDMC. AmalCo will be charged the same management and performance fees MDMC as are currently charged to CMDFI and CMDFII.

9. MDMC submits that the investment strategies and processes, management fees, investment restrictions and practices, net asset value calculation method, and purchase and redemption process of the Funds are substantially the same.

The Amalgamation

10. Pursuant to an amalgamation agreement between CMDFI and CMDFII (the Amalgamation Agreement), CMDFI Class A shareholders will be entitled to receive, in exchange for their CMDFI Class A Shares, a number of Class A Shares in the capital of AmalCo that is equal in value to the closing net asset value of their CMDFI Class A Shares from the business day prior to the effective date of the Amalgamation (being their number of CMDFI Class A Shares multiplied by the closing net asset value per Class A Share on the business day prior to the effective date) divided by $10.

11. Pursuant to the Amalgamation Agreement, CMDFII Class A shareholders will be entitled to receive, in exchange for their CMDFII Class A Shares, a number of Class A Shares in the capital of AmalCo that is equal in value to the closing net asset value of their CMDFII Class A Shares from the business day prior to the effective date of the Amalgamation (being their number of CMDFII Class A Shares multiplied by the closing net asset value per Class A Share on the business day prior to the effective date) divided by $10.

12. Shareholders of the Funds will continue to have the right to redeem their securities for cash at any time up to the close of business on November 29, 2006 (being the day immediately preceding the anticipated closing date), subject to regular early redemption fees and the withholding of amounts previously received by such shareholders as Federal and Ontario tax credits.

13. The Amalgamation, if approved by shareholders of the Funds and completed, is viewed by MDMC to be beneficial to shareholders of the Funds for the following reasons:

(a) AmalCo will offer each Fund greater capital resources to make investments as appropriate opportunities arise. Amalco's larger capital resources will permit it to maximize shareholder value by providing the companies in which it invests with the ability to meet their full growth potential;

(b) AmalCo will offer the Funds the opportunity to be part of an LSIF corporation with greater resources, thereby realizing greater economies of scale and lowering the cost of administration per shareholder;

(c) AmalCo will offer the Fund's shareholders investment objectives which are substantially similar to the investment objectives of each Fund; and

(d) AmalCo will provide CMDFII significantly greater portfolio liquidity to fund future redemption requests.

14. There will be no sales charges or commissions payable in connection with the acquisition of shares of the Funds by shareholders of the Funds under the Amalgamation Agreement.

15. The Amalgamation will be a "qualifying exchange" under the ITA. The Amalgamation will result in a tax-deferred rollover for each of the Funds and in general, a continuity of tax accounts.

16. Section 27.1(3) of the Ontario Act provides that new shares issued on an amalgamation in replacement of shares that were issued by a predecessor corporation shall be deemed to have been issued at the time that the predecessor corporation issued the replaced shares, meaning that the period prior during which shareholders of the Funds seeking to redeem the shares would be subject to "claw-back" of tax credits granted on the original issuance of such shares will not be affected.

17. The Class A Shares of AmalCo to be issued pursuant to the Amalgamation will have the same attributes as the Class A Shares of the Funds and the redemption features and tax credits previously received by shareholders on the acquisition of Class A Shares of the Funds will be unaffected by the Amalgamation.

18. The Funds complied with Part 11 of National Instrument 81-106 -- Investment Fund Continuous Disclosure in connection with the Amalgamation.

19. Class A shareholders of the Funds will be entitled to dissent from the Amalgamation pursuant to the provisions of section 190(1) of the Canada Business Corporations Act (the CBCA).

20. Class A shareholders who exercise their dissent right will be entitled to receive the net asset value of his or her Class A shares as at the end of business on the date prior to the approval of the Amalgamation resolution by the Class A shareholders of CMDFI or CMDFII, as the case may be, will be required to repay federal and Ontario tax credits and may realize a capital gain or loss on receipt of payment for his or her Class A Shares.

21. The Sponsor, as the holder of all Class B Shares of the Funds, is expected to approve the Amalgamation by delivering a Unanimous Shareholder Special Resolution prior to November 30, 2006.

22. The Class A shareholders of the Funds will meet consecutively to approve the Amalgamation on November 30, 2006.

23. The Funds will file Articles of Amalgamation pursuant to section 185 of the CBCA with a view to receiving a certificate of amalgamation from Industry Canada dated November 30, 2006.

24. The Funds will continue thereafter under the name "Canadian Medical Discoveries Fund Inc." in English and in French "Fonds De Decouvertes Medicales Canadiennes Inc."

25. Concurrently with the closing of the Amalgamation on or about November 30, 2006 CMDFI intends to file a final renewal prospectus disclosing the revision of its investment objectives. Thereafter, AmalCo will continue sales of Class "A" shares pursuant to such prospectus.

26. The costs of implementing the Amalgamation will be borne by MDMC.

27. The Funds cannot rely on section 5.6(1) of NI 81-102 for the following reasons:

(a) the Amalgamation does not contemplate the wind-up of either Fund;

(b) the materials to be sent to Class A shareholders will not include a copy of the current long form prospectus of AmalCo, or a copy of the annual and interim semi- annual financial statements of AmalCo, as required by section 5.6(1)(f)(ii) of NI 81-102 because such documents do not yet exist.

Shareholder Disclosure

28. A press release dated October 6, 2006 with respect to the Amalgamation was filed on SEDAR on October 6, 2006.

29. A material change report dated October 16, 2006 with respect to the Amalgamation was filed on SEDAR on October 16, 2006.

30. Amendments to the Prospectuses of the Funds dated October 12, 2006 with respect to the Amalgamation were filed on SEDAR on October 17, 2006.

31. A Joint Management Information Circular (the Circular) was mailed to all Class A shareholders of the Funds on October 24, 2006 and an Annual and Special Meeting of Shareholders will be held on November 30, 2006. The Circular contains details of the Amalgamation, including income tax considerations associated with the Amalgamation. Also, the annual financial statements of the Funds dated August 31, 2006 were included with the mailing of the Circular.

Decision

Each of the Decision Makers 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 Makers under NI 81-102 is that the Requested Relief is granted provided that:

(a) the Funds have disclosed in their Circular information about the Amalgamation and prospectus like disclosure concerning the AmalCo and the shares to be issued under the Amalgamation including information regarding fees, expenses, investment objectives, investment strategies, valuation procedures, the manager, the investment manager, redemptions, income tax considerations, dividend policy, net asset value and risk factors; and

(b) the Funds have included in their Circular a pro forma balance sheet for AmalCo derived from the Funds' August 31, 2006 audited financial statements and disclosed in their Circular that audited financial statements of the Funds as at and for the periods ended August 31, 2006, can be obtained at no cost by accessing the SEDAR website at www.sedar.com.