MRRS -- Approval of fund mergers -- modified simplified prospectus of Continuing Fund provided to unitholders of Terminating Fund and financial statements of continuing fund not required to be sent to unitholders of the terminating funds provided information circular sent in connection with the unitholder meeting clearly discloses the various ways unitholders can access the financial statements -- unitholders of the Continuing Fund to vote to approve the Mergers due to its relative small size as compared with the Terminating Funds.
Applicable Ontario Statutory Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.
July 30, 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,
YUKON TERRITORY, NORTHWEST TERRITORY
AND NUNAVUT TERRITORY
IN THE MATTER OF THE
MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
FRANKLIN TEMPLETON INVESTMENTS CORP.
IN THE MATTER OF
FRANKLIN WORLD HEALTH SCIENCES AND
BIOTECH FUND, FRANKLIN WORLD HEALTH
SCIENCES AND BIOTECH CORPORATE CLASS
AND FRANKLIN TECHNOLOGY CORPORATE
CLASS (COLLECTIVELY, THE
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application (the "Application") from the Manager and the Terminating Funds (the "Filers") for a decision under the securities legislation of the Jurisdictions (the "Legislation") for approval of the mergers (collectively, the "Mergers" and individually a "Merger") of the Terminating Funds into Franklin Flex Cap Growth Corporate Class (the "Continuing Fund") under s. 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Requested Approval").
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.
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision. The following additional terms shall have the following meanings:
"Class" or "Classes" means, individually or collectively, Franklin World Health Sciences and Biotech Corporate Class, Franklin Technology Corporate Class and Franklin Flex Cap Growth Corporate Class;
"Fund" or "Funds" means, individually or collectively, the Terminating Funds and the Continuing Fund;
"Tax Act" means the Income Tax Act (Canada).
This decision is based on the following facts represented by the Filers:
1. The Manager is a corporation existing under the laws of Ontario. The Manager is the manager of each of the Funds and the trustee of each of the Funds other than the Classes. The head office of the Manager is located in Toronto, Ontario.
2. Corporate Class Ltd. is an open-ended mutual fund corporation incorporated under the laws of Alberta on June 1, 2001. Each of the Classes is a separate class of special shares of Corporate Class Ltd.
3. Franklin World Health Sciences and Biotech Fund is an open-end mutual fund trust established under the laws of Ontario by a declaration of trust.
4. The Manager intends to merge the Terminating Funds into the Continuing Fund.
5. Securities of the Funds are currently qualified for sale by a simplified prospectus and annual information form dated June 12, 2007, which has been filed and receipted in all of the Jurisdictions.
6. Each of the Funds is a reporting issuer under applicable securities legislation of each Jurisdiction and is not on the list of defaulting reporting issuers maintained under the applicable securities legislation of the Jurisdictions.
7. Other than circumstances in which the securities regulatory authority of a Jurisdiction (the "Authorities") has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established by the Authorities.
8. The net asset value for each series of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
9. Pursuant to the Mergers, securityholders of each Terminating Fund will receive securities with the same value and in the same series of the Continuing Fund as they currently own in the Terminating Funds.
10. The proposed merger of Franklin World Health Sciences and Biotech Corporate Class and Franklin Technology Corporate Class into the Continuing Fund will be structured pursuant to the following steps:
a) The articles of incorporation of Corporate Class Ltd. will be amended to authorize the exchange of all outstanding securities of each series of each Terminating Fund for securities of the same series of the Continuing Fund.
b) Each securityholder of the Terminating Funds will receive securities of the same series of the Continuing Fund with a value equal to the value of their securities in the Terminating Fund as determined on the date of the Merger. After this step is complete, securityholders of each Terminating Fund will become securityholders of the Continuing Fund.
c) On the effective date of the Merger, the net assets attributable to a Terminating Fund (being its investment portfolio and other assets, including cash, and less liabilities) will be included in the portfolio of assets attributable to the Continuing Fund.
d) Immediately after the Merger, the issued and outstanding securities of each Terminating Fund will be cancelled by Corporate Class Ltd., and the Terminating Funds will be terminated as soon as reasonably practical, and in any event not later than December 31, 2007.
11. The proposed merger of Franklin World Health Sciences and Biotech Fund into the Continuing Fund will be structured pursuant to the following steps:
a) Prior to the Merger, the Terminating Fund will determine the amount of income and net capital gains it has realized during the year up to the effective date of the Merger less the amount of any capital loss or non-capital loss carryforwards deductible by the Terminating Fund. If necessary the Terminating Fund will then distribute sufficient income and net capital gains to its securityholders to ensure that the Terminating Fund will not pay any taxes on this income and gains (if any).
b) The declaration of trust of the Terminating Fund will be amended to create the right of the Continuing Fund to acquire all the securities held by each securityholder of the Terminating Fund.
c) The Continuing Fund will then acquire all the securities of the Terminating Fund in exchange for securities of the same series of the Continuing Fund of equal value, as determined on the date of the Merger. After this step is complete, the Continuing Fund will become the only securityholder of the Terminating Fund, and securityholders of the Terminating Fund will become securityholders of the Continuing Fund.
d) Prior to December 31, 2007, the securities acquired by the Continuing Fund from the securityholders of the Terminating Fund will be redeemed in exchange for all the net assets (being the investment portfolio and other assets, including cash, and less liabilities) of the Terminating Fund. The Terminating Fund will then be terminated as soon as reasonably practical and in any event not later than December 31, 2007.
e) Following implementation of the Merger, the former securityholders of the Terminating Fund who had unrealized capital gains on their securities in the Terminating Fund at the effective date of the Merger will receive a tax election package from the Manager. If they complete, sign and return this tax election by a date to be fixed by the Manager, they may defer the realization of some or all of the capital gains on their securities.
12. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Funds.
13. Prior to the date of the Mergers, securities in the portfolio of the Terminating Funds will need to be liquidated if they do not meet the investment objectives or strategies of the Continuing Fund. As a result, the Terminating Funds may temporarily hold cash or money market instruments and may not be fully invested in accordance with their investment objectives for a brief period of time before the Mergers.
14. If the Merger is approved, the annual management fee rates for Series A units of and Series F units of the Terminating Funds will be the same as those for the Continuing Fund.
15. The securities of the Continuing Fund received by a securityholder of the corresponding Terminating Fund will have a different fee structure as the securities of the Terminating Fund held by that securityholder will be subject to lower management fees.
16. Any automatic reinvestments of distributions, purchases under pre-authorized chequing plans and automatic withdrawal plans in effect prior to the Merger for the Terminating Fund will be re-established in the applicable Continuing Fund unless the investor advises the Manager otherwise.
17. The costs attributable to the Mergers (consisting primarily of legal, proxy solicitation, printing and mailing costs) will be borne by the Manager and will not be borne by the Terminating Funds or the Continuing Fund.
18. Securityholders of a Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash at any time up to the close of business on the business day immediately before the effective date of the Mergers.
19. A material change, press release and the simplified prospectus and annual information form, which gave notice of the proposed Mergers, were filed via SEDAR on June 12, 2007.
20. A notice of meeting, a management information circular and a proxy in connection with meetings of securityholders will be mailed to securityholders of the Terminating Funds and Continuing Fund, commencing on or about July 23, 2007 and will be filed via SEDAR.
21. On October 5, 2005, in connection with a prior fund merger, the Manager received exemptions from the requirement to deliver:
a) the Franklin Templeton Investment Funds simplified prospectus to securityholders of Terminating Funds in connection with all future mergers of mutual funds managed by the Manager (the "Future Mergers") pursuant to clause 5.6(1)(f)(ii) of NI 81-102; and
b) the most recent annual and interim financial statements of the Continuing Fund to securityholders of the Terminating Funds in connection with all Future Mergers pursuant to clause 5.6(1)(f)(ii) of NI 81-102.
(The relief outlined in (a) and (b) are collectively referred to as the "Prospectus and Financial Statement Delivery Relief".)
22. Further to the Prospectus and Financial Statement Delivery Relief, the material sent to securityholders of the Terminating Funds will include a tailored simplified prospectus consisting of:
a) the current Part A of the simplified prospectus of the Continuing Fund, and
b) the current Part B of the simplified prospectus of the Continuing Fund.
23. Securityholders of the Terminating Funds and Continuing Fund will be asked to approve the Mergers at meetings to be held on August 17, 2007. The Manager, as the sole Class A common shareholder of Corporate Class Ltd., will also approve the Mergers, as required under corporate law.
24. The Terminating Funds will merge into the Continuing Fund on or about the close of business on August 24, 2007 and the Continuing Fund will continue as a publicly offered open-end mutual fund governed by the laws of Alberta.
25. Each Terminating Fund will be wound up as soon as reasonably practicable following the implementation of the Mergers and in any event not later than December 31, 2007.
26. The Merger of a Class of the Terminating Fund into a Class of the Continuing Fund will be carried out as a qualifying exchange within the meaning of Section 132.2 of the Income Tax Act (Canada).
27. Approval of the Mergers is required because the Mergers do not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:
(a) The fundamental investment objectives of the Terminating Funds may be considered not to be substantially similar to those of the Continuing Fund; and
(b) The Merger of the Unit Trust Fund into a Class and specifically the Merger of the Franklin World Health Sciences and Biotech Fund into the Continuing Fund will not be completed as a "qualifying exchange" within the meaning of section 132.2 of the Tax Act.
28. The Filers submit that the Mergers will result in the following benefits:
a) Securityholders of the Terminating Funds will benefit from increased diversification;
b) Securityholders of the Terminating Funds will enjoy increased economies of scale as part of the larger combined Continuing Fund; and
c) Securityholders of Franklin World Health Sciences and Biotech Fund who become securityholders of the Continuing Fund as a consequence of the Mergers will be able to benefit from the tax efficiency features of a corporate fund structure.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Makers with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Mergers are approved provided that the information circular sent to securityholders with respect to the Mergers provides sufficient information about the applicable merger to permit securityholders to make an informed decision about that merger;