MRRS - Approval of fund merger pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds -- Regulatory approval needed because the Transaction does not meet certain of the pre-approval requirements of section 5.6 of NI 81-102 - Fundamental investment objectives of the Terminating Fund and Continuing Fund are not substantially similar; merger does not constitute a 'qualifying exchange'; meeting materials sent to unitholders of the Terminating Fund to not include annual and interim financial statements of the Continuing Fund.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.7(1)(b).
September 7, 2007
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
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
MD FUNDS MANAGEMENT INC.
("MDFM" or the "Manager")
MD US SMALL CAP GROWTH FUND
(the "Terminating Fund")
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from MDFM and the Terminating Fund (the "Filers") for a decision under the securities legislation of the Jurisdictions (the "Legislation") for approval of the merger of the Terminating Fund into MD US Large Cap Growth Fund (the "Continuing Fund") (collectively, the "Funds") under paragraph 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.
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 Filers:
1. MDFM is a corporation governed by the laws of Canada. As manager and trustee of the Funds, MDFM is principally responsible for the management and administration of the Funds.
2. The Funds are open-ended mutual fund trusts governed by the laws of the Province of Ontario.
3. Securities of the Funds are qualified for distribution in all of the provinces and territories of Canada under a simplified prospectus and annual information form dated June 27, 2007 (the "Prospectus").
4. Each of the Funds is a reporting issuer under the securities legislation of each of the provinces and territories of Canada. The Funds are not in default of any of the requirements of the securities legislation of any of the Jurisdictions.
5. Unless an exemption has been obtained, each of the Terminating Fund and Continuing Fund follow the standard investment restrictions and practices contained within NI 81-102.
6. The net asset values of the Terminating Fund and the Continuing Fund are calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.
7. The Manager intends to merge the Terminating Fund into the Continuing Fund on or about September 23, 2007. The proposed merger of the Terminating Fund and the Continuing Fund is referred to in this Decision as the "Transaction".
8. The Manager proposes to take the following steps to implement the Transaction:
a) the Terminating Fund will transfer substantially all of its net assets, comprised of cash, cash equivalents (inclusive of dividend and sales proceeds receivable) and portfolio securities (where such securities are consistent with the investment objective of the Continuing Fund), less assets sufficient to satisfy its liabilities, to the Continuing Fund in exchange for securities of the Continuing Fund;
b) immediately thereafter, the securities of the Continuing Fund received by the Terminating Fund will be distributed to the unitholders of the Terminating Fund on a pro rata basis so that each unitholder will become a direct unitholder in the Continuing Fund;
c) the Terminating Fund will be terminated and wound up as soon as practicable thereafter and in any event not later than October 5, 2007.
9. Unitholders of the Terminating Fund will continue to have the right to redeem their securities of the Terminating Fund for cash at any time up to the close of business on September 21, 2007 (being the business day immediately preceding the anticipated merger date).
10. A unitholder of the Terminating Fund will receive that number of securities of the Continuing Fund having a net asset value equal to the value of the securities of the Terminating Fund held by that unitholder.
11. All expenses related to the Transaction, including all brokerage expenses incurred in respect of any required sale of portfolio assets of the Terminating Fund, will be borne by the Manager.
12. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
13. Following the Transaction, the Continuing Fund will continue as a publicly offered open-end mutual fund trust and the Terminating Fund will be wound up as soon as reasonably practicable.
14. A press release and a material change report concerning the Transaction was filed on behalf of the Terminating Fund with the securities commissions of all provinces and territories on June 29, 2007 under SEDAR Project Number 1124047. The Prospectus contains disclosure relating to the Transaction.
15. A notice of meeting, a management information circular (the "Circular") and a proxy in connection with meetings of unitholders was mailed to unitholders of the Terminating Fund and the Continuing Fund commencing on or about August 20, 2007 and was filed on SEDAR on August 20, 2007. The current simplified prospectus for the Funds was mailed to unitholders of the Funds on or about July 19, 2007.
16. Unitholders of the Terminating Fund will be requested to approve the Transaction at a meeting scheduled for September 10, 2007. At the same meeting, unitholders of the Continuing Fund will be asked to approve a change to the current investment objective of the Continuing Fund. The Transaction is contingent upon the unitholders of the Continuing Fund approving the Manager's proposed change to that Fund's investment objectives. Investors in the Terminating Fund have been asked to review those parts of the Circular which describe the change in fundamental investment objective for the Continuing Fund when considering the merits of the Transaction.
17. Approval of the Transaction is required because the Transaction does 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 Transaction will not be structured as a "qualifying exchange" under the Income Tax Act;
b) the investment objective of the Terminating Fund and the proposed new investment objective of the Continuing Fund, if approved by unitholders of the Continuing Fund, may not be considered to be substantially similar; and
c) the meeting materials sent to unitholders of the Terminating Fund will not include the most recent annual and interim financial statements that have been made public for the Continuing Fund.
18. Unitholders of the Terminating Fund have been provided with information about the tax consequences of the Transaction in the Circular so that they may consider this information prior to voting on the Transaction. It is anticipated that the Terminating Fund will be in a loss position meaning that most of the unitholders of the Terminating Fund will not be prejudiced and will not realize a capital gain as a result of the Transaction.
19. The fee structures of the Continuing Fund and the Terminating Fund are comparable.
20. The Circular which has been provided to unitholders of the Terminating Fund contains information regarding the Continuing Fund's investment objectives, investment advisers and investment strategies sufficient to consider the Transaction.
21. The Manager believes that the Transaction will benefit unitholders of the Terminating Fund in the following ways:
a) unitholders of the Terminating Fund will enjoy increased economies of scale and lower fund operating expenses (which are borne indirectly by unitholders) as part of a larger combined Continuing Fund;
b) to the extent that securities in the investment portfolio of the Terminating Fund are transferred to the Continuing Fund, there will be a savings in brokerage charges over a straight liquidation of those portfolio securities if the Terminating Fund was terminated;
c) the Transactions will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund; and
d) the Continuing Fund will have a portfolio of greater value allowing for increased portfolio diversification opportunities than the Terminating Fund.
22. The Circular sent to unitholders of the Terminating Fund prominently discloses that unitholders of the Terminating Fund can obtain the most recent interim and annual financial statements and the annual information form of the Continuing Fund at no cost from www.sedar.com, the Manager's internet site, or by calling toll-free 1-800-267-2332.
23. Upon a request by a unitholder to the Manager for financial statements of the Continuing Fund, the Manager will make its best efforts to provide the unitholder with financial statements of the Continuing Fund before the unitholder meeting to approve the Transaction so that the unitholder can make an informed decision regarding the Transaction.
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 hereby approved.