Mutual Reliance Review System for Exemptive Relief Applications -- mutual funds granted relief from 10% concentration restriction in subsection 2.1(1) of National Instrument 81-102 Mutual Funds in connection with the acquisition by certain of the mutual funds to acquire shares of MGIC Investment Corporation in exchange for the shares those mutual funds presently held in Radian Group Inc. as a result of a merger -- the mutual funds will hold securities in the merged entity in essentially the same amounts as they held in common shares of Radian Group Inc.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 2.1(1).
July 19, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,
ONTARIO, QUEBEC, NEW BRUNSWICK, NOVA SCOTIA,
PRINCE EDWARD ISLAND, NEWFOUNDLAND AND LABRADOR,
NORTHWEST TERRITORIES, YUKON TERRITORY AND NUNAVUT
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
AIC AMERICAN FOCUSED FUND,
AIC AMERICAN FOCUSED CORPORATE CLASS,
AIC CANADIAN FOCUSED FUND,
AIC CANADIAN FOCUSED CORPORATE CLASS,
AIC CANADIAN BALANCED FUND,
AIC CANADIAN BALANCED CORPORATE CLASS
AND AIC DIVIDEND INCOME FUND
(collectively, the Specified AIC Funds),
AIC LIMITED AND AIC INVESTMENT SERVICES INC.
(collectively, the Filer)
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for a decision under section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102 or the Legislation) that the Filer be exempt from the issuer concentration restriction contained in subsection 2.1(1) of NI 81-102 in connection with the acquisition by certain of the Funds (defined below) of shares of MGIC Investment Corporation in exchange for the shares those Funds presently hold in Radian Group Inc., pursuant to the Merger (defined below) described in this Decision Document (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications (MRRS):
(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.
Defined terms contained in National Instrument 14-101 Definitions and in NI 81-102 have the same meanings in this decision unless they are otherwise defined in this decision.
(a) MGIC means MGIC Investment Corporation, a U.S. company with its common stock listed on the New York Stock Exchange.
(b) Radian means Radian Group Inc., a U.S. company with its common stock listed on the New York Stock Exchange.
(c) Merger means the proposed merger of MGIC with Radian to form MGIC Radian Financial Group Inc., announced in February 2007.
(d) Funds means the Specified AIC Funds and any other AIC Fund that may hold Radian common shares immediately prior to the Merger.
This decision is based on the following facts represented by the Filer:
1. AIC Limited acts as the manager and trustee (the Manager or AIC) of, and AIC Investment Services Inc. acts as the portfolio adviser (the Portfolio Adviser) of, the AIC Funds. The AIC Funds are distributed under simplified prospectuses and annual information forms in all provinces and territories of Canada. The Portfolio Adviser is an affiliate of AIC Limited and is registered with the Ontario Securities Commission and other provincial regulators, as applicable, as an adviser in the category of investment counsel and portfolio manager. The principal offices of the Manager and the Portfolio Adviser are located in Burlington, Ontario.
2. The Specified AIC Funds presently hold securities in Radian. On February 6, 2007, Radian and MGIC announced the Merger, which was approved by the shareholders of both companies at meetings held on May 9 and 10, 2007. In the Merger, Radian shareholders will receive 0.9658 shares of MGIC common shares for each Radian common share held immediately prior to the Merger. The Merger is expected to be completed late in the third quarter or early in the fourth quarter of 2007 pending all remaining regulatory approvals.
3. The following table indicates for each Specified AIC Fund as of May 31, 2007: (i) the number of Radian common stock held, (ii) the percentage of net assets that stock represented as of that date, (iii) the number of MGIC common shares each Specified AIC Fund would have received if the Merger had been completed on that date and (iv) the percentage of assets of each Specified AIC Fund those MGIC common shares would have represented if the Merger had been completed on that date.
Specified AIC Fund Radian common Percentage of MGIC common Percentage of shares held assets held in shares assets held in Radian common (if Merger had MGIC common shares been completed shares on May 31, (if Merger had 2007) been completed on May 31, 2007) MGIC market price as of May 31 can be expected to adjust to account for the Merger so that it will be consistent with Radian market price AIC American 1,608,745 11.6 1,553,726 11.7 Focused Fund AIC American 201,897 11.2 194,992 11.3 Focused Corporate Class AIC Canadian 1,309,900 10.4 1,265,101 10.6 Focused Fund AIC Canadian 144,385 10.0 139,447 10.2 Focused Corporate Class AIC Canadian 304,820 8.3 294,395 8.4 Balanced Fund AIC Canadian 34,985 8.3 33,789 8.4 Balanced Corporate Class AIC Dividend Income 240,787 4.7 232,552 4.8 Fund
4. The Radian common shares presently held by each Specified AIC Fund were acquired in full compliance with section 2.1(1) of NI 81-102. The 10 percent concentration restriction prescribed by section 2.1(1) was not breached at the time of purchase of the Radian common shares by any Specified AIC Fund. Those Specified AIC Funds currently holding in excess of 10 percent of their net assets in Radian common shares, exceeded that threshold passively and not through additional purchases of Radian common shares.
5. On behalf of the Specified AIC Funds, AIC voted in favour of Radian completing the Merger, given AIC's belief that the Merger would be in the best interests of the Specified AIC Funds and that the exchange ratio in the Merger was fair and reasonable to the Specified AIC Funds. In AIC's opinion, it was in the best interests for AIC to vote the common shares of Radian held by the Specified AIC Funds, given the benefits inherent in the Merger to the Specified AIC Funds. AIC was of the view that it would not be in the best interests of the Specified AIC Funds to vote against the Merger or abstain from voting.
6. Section 2.1(1) of NI 81-102 prohibits a mutual fund from purchasing a security of an issuer if, immediately after the transaction, more than 10 percent of the net assets of the mutual fund, taken at market value at the time of the transaction, would be invested in securities of any issuer. The word "purchase" is defined in section 1.1 of NI 81-102 as meaning "in connection with an acquisition of a portfolio asset by a mutual fund, an acquisition that is the result of a decision made and action taken by the mutual fund". Paragraph 2.13(2)3 of the Companion Policy to NI 81-102 suggests that, generally, where a mutual fund receives a security as a result of a merger for which the mutual fund voted in favour, then that acquisition would constitute a "purchase".
7. Without the Requested Relief, the Funds would be considered to have "purchased" the MGIC common shares they will acquire as a result of the Merger and the Funds may be in breach of section 2.1(1) since they might, as a result of the Merger, acquire MGIC common shares in excess of the 10 percent concentration restriction.
8. AIC does not believe that it is in the best interests of the Funds to divest of the Radian common shares held by each Fund in order to be within the 10 percent threshold of section 2.1(1) of NI 81-102 after the Merger.
9. The Funds will hold securities in the merged Radian-MGIC entity in essentially the same amounts as they will hold in common shares of Radian immediately before the Merger. Thus, the Funds will have no more economic exposure to the merged Radian-MGIC entity immediately after the Merger than it did to Radian immediately before the Merger.
10. No Fund will make any further purchase of the securities of the merged Radian-MGIC entity after the Merger for as long as its exposure to securities in the merged Radian-MGIC entity remain above 10 percent of net assets.
11. The Filer is applying for the Requested Relief for all of the Funds, given that the Merger will not take place until later in 2007 and it is not possible to definitively state which Funds will be in breach of section 2.1(1) of NI 81-102 until immediately after the Merger.
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.