Securities Law & Instruments


Ss. 5.5(1)(b) and 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) -- Approval of a reorganization of a labour sponsored investment fund wherein the proceeds of the wind-up of the fund will be distributed to shareholders by way of investing the proceeds in units of a certain money market fund in the name of each shareholder -- approval is required because the reorganization 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, paragraph 5.5(1)(b), section 5.6(1) and paragraph 5.7(1)(b).

February 1, 2007






(the Fund)




The securities regulatory authority or regulator in Ontario (the Decision Maker) has received an application (the Application) from the Fund for approval of a proposed restructuring wherein the Fund has sold substantially all of its venture portfolio assets in an en-bloc sale, has commenced the formal dissolution and liquidation process and anticipates distributing all of its assets to its shareholders by way of purchasing units in the CI Money Market Fund in the name of the shareholders in the near future (the Reorganization), as described further below, pursuant to clause 5.5(1)(b) of National Instrument 81-102 - Mutual Funds (NI 81-102).


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


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

The Fund

1. The Fund was incorporated under the Canada Business Corporations Act (the CBCA). The Fund's registered office is in Ontario.

2. The Fund is a registered labour sponsored investment fund corporation (LSIF) under the Community Small Business Investment Funds Act (Ontario) (the CSBIF Act). The Fund recently renounced its registration as a labour-sponsored venture capital corporation (LSVCC) under the Income Tax Act (Canada) (the Tax Act) and is now a prescribed LSVCC under the Tax Act. The Fund's investing activities are governed by the CSBIF Act.

3. The Fund has historically invested in small and medium sized businesses with the objective of obtaining long term capital appreciation in accordance with the CSBIF Act.

4. The labour sponsor of the Fund is the Canadian Police Association (the Sponsor).

5. The authorized capital of the Fund is as follows:

(a) an unlimited number of Class A shares of which 7,080,828 were issued and outstanding as at October 31, 2006;

(b) 25,000 Class B shares of which 1 is issued and outstanding and held by the Sponsor; and

(c) an unlimited number of Class C shares, of which there are none issued or outstanding.

6. Covington Capital is the investment advisor of the Fund under an agreement. Covington Capital is indirectly wholly-owned by Affiliated Managers Group, Inc. Covington Capital's head office is in Ontario.

7. The Fund's shares are not listed on any stock exchange.

8. The Fund ceased offering and redeeming its Class A shares on June 16, 2006 when it announced that it intended to sell its assets and complete the Wind-Up. Prior to that date, the Fund was offering its Class A shares for sale only in Ontario.

9. As of August 31, 2006, the Fund had approximately $52.6 million in net assets under management.

10. The Fund has complied with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) in connection with the sale of its assets and the proposed Wind-Up by filing press releases, material change reports and a prospectus amendment.

Background to the Wind-Up

11. The board of directors of the Fund has received advice from Covington Capital, in its capacity as the Fund's investment advisor, that the Fund is approaching the logical end of its investment life cycle.

12. Most of the shareholders of the Fund are able to redeem their investment without being obligated to repay the tax credits pursuant to the CSBIF Act which they received at the time they subscribed for Class A shares. The board of directors of the Fund was concerned about the practicality of selling Venture Portfolio Assets to honour redemptions, both from a timing and from a pricing perspective.

13. The Ontario Ministry of Finance (MOF Ontario) announced amendments to the CSBIF Act (the Amendments) which received Royal Asset and were implemented on May 18, 2006. Two of the Amendments introduced related to: (i) the termination of the Ontario tax credits available to purchasers of Class A shares after the 2010 tax season; and (ii) the addition of certain wind-up provisions which allow LSIFs to enter into a formal wind-up phase prior to dissolving. One of the wind-up related provisions introduced by the Amendments permits any LSIF that winds up to return its Class A share investment capital to shareholders without them incurring a tax credit penalty even if they have not held their Class A shares for more than the eight year hold period required by the CSBIF Act.

14. After many months of discussing the strategic options available to the Fund, the Board of Directors of the Fund concluded and announced publicly and informed the MOF Ontario and the Ontario Securities Commission (the Commission) on June 16, 2006 that the Fund was contemplating winding-up its affairs and distributing its assets to shareholders, subject to obtaining shareholder approval to do so as required under the CBCA.

15. The Fund subsequently developed and submitted a formal wind-up proposal for the Fund (the Wind-Up Proposal) to the MOF Ontario and to the Commission on July 31, 2006 in order to initiate dialogue between the Fund and these parties respecting the possibility of selling the venture portfolio assets (the Venture Portfolio Assets) and completing the Wind-Up.

16. The Fund's competing objectives when drafting the Wind-Up Proposal were to: (a) resolve the Fund's liquidity issues in the short term; (b) attain the highest possible valuation of the Class A shares for shareholders; (c) continue to carry on the venture capital business of the Fund until the shareholders resolved to sell or a court authorized the sale of the Venture Portfolio Assets; and (d) wind-up the Fund on an orderly basis. The Wind-Up Proposal included two alternative options -- the en-bloc sale of all or substantially all of the Venture Portfolio Assets (the En-Bloc Sale) and the liquidation of each of the Venture Portfolio Assets separately (the Orderly Liquidation) for the Fund to follow in order to meet the stated objectives. Regardless of the option chosen, the MOF Ontario indicated that should shareholders of the Fund approve the Wind-Up Proposal, that wind-up should occur within twenty-four (24) months of that date.

The En-Bloc Sale

17. The Board of Directors determined that an En-Bloc Sale of all of the Venture Portfolio Assets was preferable to an Orderly Liquidation for a variety of reasons, including: (a) there would be greater certainty of the value of the investment portfolio of the Fund prior to embarking on the transaction; (b) the transfer of the shares of at least three of the Fund's portfolio companies would be facilitated if it occurred in connection with a sale of substantially all of the portfolio of the Fund; and (c) the En-Bloc Sale alternative could be concluded in a significantly shorter period of time which, it is expected, will result in lower operating and transaction expenses being incurred by the Fund during the wind-up period and permit the Fund to distribute the net proceeds of the Wind-Up of the Fund to shareholders sooner.

18. Covington Capital was instructed to solicit expressions of interest for the portfolio. After considering the merits of each expression of interest which was received by the Fund, the Board of Directors determined that the most advantageous proposal was from Birch Hill Equity Partners Management Inc. (BH).

Shareholders Meeting and Completion of En-Bloc Sale

19. In connection with the shareholders' meeting, shareholders of the Fund were sent an information circular (the Circular) which contained details of the En-Bloc Sale to BH and the liquidation and dissolution of the Fund including the income tax considerations associated with these events.

20. The Circular also gave notice to shareholders that the proceeds to be distributed from the liquidation of the Fund will not be deposited to their accounts in cash and subject to any consents and approvals necessary, shareholders will receive the equivalent value of the proceeds of the Fund in the form of units of CI Money Market Fund.

21. A copy of the prospectus for the CI Money Market Fund was included in the package of materials sent to shareholders with respect to the shareholders' meeting.

22. The shareholders of the Fund approved resolutions authorizing the En-Bloc Sale to BH and the Wind-Up of the Fund at the shareholders' meetings held on November 9, 2006 (the Shareholders' Meeting). Shareholders of the Fund were permitted to dissent from the En-Bloc Sale to BH pursuant to the provisions of section 190 of the CBCA. No shareholders chose to submit such instructions.

23. The En-Bloc Sale to BH transaction was completed on November 22, 2006. A press release was issued on November 23, 2006 announcing the completion of the transaction. A material change report was filed via SEDAR on November 24, 2006 announcing same.

Procedure for the Liquidation and Dissolution of the Fund

24. With the completion of the En-Bloc Sale having occurred, the Fund's assets consist exclusively of cash, near cash and tax receivables.

25. The Fund now intends, consistent with the special resolution of the shareholders, to commence the formal dissolution and liquidation process as it is set out in the CBCA. The Board of Directors of the Fund anticipates that the distribution will be made in two or more instalments as part of the liquidation and dissolution process of the Fund.

The Reorganization

26. The first distribution will be made as soon as practicable, which is currently anticipated to be during January, 2007. It is anticipated that the majority of the assets will be distributed at that time. The second distribution will be made after all liabilities (including contingent liabilities, if any) of the Fund are satisfied or otherwise dealt with, including the payment of all expenses of liquidation and any applicable taxes. It is anticipated that it will take a number of months to complete this process.

27. The number, timing and amount of any particular distribution as part of the winding-up will be at the discretion of the Board of Directors of the Fund. Neither the precise timing nor the exact number of distributions has been determined by Covington Capital or by the Board of Directors of the Fund at this time.

28. The proportionate value of the proceeds of distribution belonging to each individual shareholder will be deposited into each of his or her respective investment account regardless of whether his or her account is held at a brokerage firm or is a registered retirement savings plan (RRSP) account held as a client account.

29. It was originally intended that shareholders would receive their proportional interest in cash. However, after consulting with the Administrator of the Fund, it was determined that physically delivering a cheque or wire-transfer to each individual shareholder would cost approximately $10.00 per shareholder. This would amount to approximately $200,000 per distribution, which cost would be borne by the Fund. A distribution of units of a money market fund would have only a set up fee associated with it, estimated to be $10,000 for all shareholders.

30. Furthermore, approximately twenty per cent of the shareholders of the Fund hold their Class A shares in a non-self-directed client RRSP account for which there is no mechanism permitting those accounts to hold cash. The Fund has been advised that cash distributions to those accounts would result in Canada Revenue Agency deeming there to have been a withdrawal from the RRSP account, which withdrawal could not be reversed.

31. For the above reasons, the Board of Directors decided that, provided the necessary consents and approvals could be obtained, the Fund would use the proceeds from the liquidation of the Fund to purchase units of CI Money Market Fund. The Fund would then distribute units of CI Money Market Fund directly into the accounts of shareholders. CI Money Market Fund was chosen as a result of CI Investment Inc.'s relationship with the Fund as the Fund's administrator, registrar and transfer agent and because units of that fund could be readily converted to cash and are suitable for most shareholders.

32. The Fund has confirmed with the Administrator that, if the Fund receives the necessary consents and approvals, shareholders of the Fund would receive units of CI Money Market Fund without paying a selling commission and that shareholders would be able to redeem their units without paying a redemption fee as soon as they wish to do so.

33. All shareholders of the Fund will hold the units of CI Money Market Fund within their existing investment account which account will remain at their existing dealer.

34. Each shareholder of the Fund will receive a single trade confirmation that shows both transactions (the redemption of the Class A shares of the Fund and corresponding purchase of units of the CI Money Market Fund) and a copy of the prospectus of the CI Money Market Fund.

35. The Fund will issue a press release indicating the first distribution has been completed as soon as that occurs and prior to shareholders receiving their trade confirmation.

CI Money Market Fund

36. CI Money Market Fund, according to its management report of fund performance for the period ended March 31, 2006, seeks to earn income at the highest rate of return that is consistent with preserving capital and maintaining liquidity.

37. CI Money Market Fund invests primarily in money market instruments that mature in less than one year. These include short-term debt obligations issued or guaranteed by the governments of Canada, any province or agency of these governments, and commercial paper and other high quality short-term debt obligations of Canadian corporations and Canadian chartered banks.

38. CI Money Market Fund is suitable for investors who are investing for the short-term, can tolerate low risk and want to receive income.

Reasons for the Relief Being Required

39. The Fund is in the process of effecting the Wind-Up in the manner described above. A distribution of cash would not require securities regulatory approval pursuant to NI 81-102. Furthermore, due to the structure of the Wind-Up, a cash transaction would not constitute a reorganization pursuant to section 5.5(1)(b) of NI 81-102.

40. The Reorganization will result in shareholders of the Fund becoming shareholders of CI Money Market Fund therefore the approval of the securities regulatory authority is required pursuant to section 5.5(1) of NI 81-102 and the Reorganization does not meet the pre-approval requirements of section 5.6 of NI 81-102.

41. Declining the requested approval would leave the Fund with no choice but to distribute cash, at significantly greater expense to the Fund and consequently its shareholders and would result in an adverse tax consequence for a significant number of shareholders whose RRSP accounts cannot hold cash.


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 Reorganization is granted.

"Rhonda Goldberg"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission