NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of Mutual Fund Mergers -- approval required because mergers do not meet the criteria for pre-approval -- certain mergers have differences in investment objectives and fee structures -- mergers not a "qualifying exchange" or a tax-deferred transaction under Income Tax Act -- financial statements of continuing funds not required to be sent to unitholders of the terminating fund in connection with the current mergers and future mergers provided the information circular sent for unitholder meeting clearly discloses the various ways unitholders can access the financial statements.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6(1)(f)(ii).
May 7, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
GALILEO FUNDS INC.
IN THE MATTER OF
GALILEO ABSOLUTE RETURN FUND,
GALILEO CANADIAN ACTIVE/PASSIVE FUND,
GALILEO FUND AND
GALILEO GLOBAL ACTIVE/PASSIVE FUND
(the "Terminating Funds")
IN THE MATTER OF
GALILEO SMALL/MID CAP FUND
(the "Continuing Fund")
The principal regulator in the Jurisdiction has received an application from the Manager for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for:
(a) approval of the mergers of the Terminating Funds into the Continuing Fund (the Terminating Funds and the Continuing Fund are sometimes collectively referred to as the "Funds") under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Proposed Mergers"); and
(b) relief from the financial statements delivery requirements contained in subsection 5.6(1)(f)(ii) of NI 81-102 in respect of:
(i) the Proposed Mergers; and
(ii) all future mergers of mutual funds managed by the Manager (the "Future Mergers" and collectively with the Proposed Mergers, the "Mergers"),
(collectively, the "Exemption Sought").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Manager has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut (the "Non-Principal Jurisdictions", and together with the Province of Ontario, the "Jurisdictions").
Defined terms contained in National Instrument 14-101 -- Definitions and in MI 11-102 have the same meaning if used in this decision unless otherwise defined.
This decision is based on the following facts represented by the Manager:
1. The Manager is a corporation existing under the laws of Ontario. The head office of the Manager is located in Toronto, Ontario.
2. The Manager is the manager and trustee of the Funds.
3. The Funds are open-end mutual fund trusts established under the laws of Ontario by declarations of trust.
4. Units of the Funds are currently qualified for sale in each of the provinces and territories of Canada by a simplified prospectus dated November 11, 2008 (the "Prospectus").
5. Each of the Funds is a reporting issuer in the Jurisdictions, and is not in default of the securities legislation in any of the Jurisdictions.
6. Other than circumstances in which the Principal Regulator or the securities regulatory authority of a Non-Principal Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices set out in NI 81-102.
7. The net asset value for each of the Funds is calculated on a daily basis on each day the Toronto Stock Exchange is open for business.
8. The Manager intends to merge each of the Terminating Funds into the Continuing Fund effective on or about the close of business on May 31, 2009 (the "Effective Date"). The Proposed Mergers will be structured pursuant to the following steps:
a. The Manager will review each Terminating Fund's investment portfolio and consider the portfolio in light of the investment objectives of the Continuing Fund. If a Terminating Fund holds investments which are not suitable for the Continuing Fund, those investments may be sold prior to the Effective Date. The value of any investments sold prior to the Effective Date will depend on prevailing market conditions. As a result, a Terminating Fund and the Continuing Fund may each temporarily hold cash or money market instruments and may not be fully invested in accordance with their respective investment objectives for a brief period of time prior to, and following the Proposed Mergers.
b. On the Effective Date, each Terminating Fund will transfer all of its assets (which will consist of cash and portfolio securities) to the Continuing Fund, in exchange for units of the Continuing Fund.
c. Immediately following the above-noted transfer and distribution, each Terminating Fund will distribute to its unitholders the units of the Continuing Fund so that following the distribution, the unitholders of a Terminating Fund will become direct unitholders of the Continuing Fund. Unitholders of each Terminating Fund will receive units of the same value and of the same class of the Continuing Fund as they currently own in the Terminating Fund.
d. As soon as reasonably possible following the Proposed Mergers, each Terminating Fund will be wound up.
9. Unitholders of the Terminating Funds will continue to have the right to redeem units of the Terminating Funds for cash at any time up to the close of business on the Effective Date. In addition, any automatic reinvestments of distributions, purchases under pre-authorized chequing plans and automatic withdrawal plans in effect prior to the Proposed Mergers for a Terminating Fund will be re-established in the Continuing Fund unless the investor advises the Manager otherwise.
10. Unitholders of the Terminating Funds will be asked to approve the Proposed Mergers at special meetings to be held on May 15, 2009. A notice of meeting, a management information circular and a form of proxy were mailed to unitholders of the Funds on or about April 22, 2009 in connection with such meetings, and were filed on SEDAR. The materials mailed to unitholders also included a copy of the current Prospectus of the Funds. The management information circular provides sufficient information about the Proposed Mergers to permit unitholders to make an informed decision about the Proposed Mergers.
11. The notice of meeting and the management information circular prominently disclose that unitholders can obtain the most recent annual and interim financial statements of the Continuing Fund by accessing the SEDAR website at www.sedar.com, by accessing the Manager's website at www.galileofunds.ca or by calling the Manager's toll-free telephone number or contacting the Manager by e-mail.
12. If the approval of unitholders is not received at the special meeting in respect of a Proposed Merger, then that Proposed Merger will not proceed.
13. Upon a request by a unitholder of a Terminating Fund for financial statements of the Continuing Fund, the Manager will make best efforts to provide the unitholder with such financial statements in a timely manner so that the unitholder can make an informed decision regarding the Proposed Merger.
14. Each of the Terminating Funds and the Continuing Fund have an unqualified audit report in respect of their most recent audited financial statements, being the annual financial statements for the year ended December 31, 2008.
15. The Independent Review Committee of the Terminating Funds has provided a positive recommendation with respect to the Proposed Mergers and such recommendation was included in the management information circular.
16. All costs attributable to the Proposed Mergers (consisting primarily of legal, proxy solicitation, printing, mailing and regulatory costs, and including any brokerage expenses incurred in respect of any sale of portfolio assets of the Terminating Funds), will be borne by the Manager and will not be borne by the Funds.
17. The Terminating Funds will merge into the Continuing Fund on or about the close of business on the Effective Date and the Continuing Fund will continue as a publicly offered open-end mutual fund governed by the laws of Ontario. Following the Proposed Mergers, the Terminating Funds will be wound up as soon as reasonably practicable.
18. Pursuant to section 132.2 of the Income Tax Act (Canada) (Tax Act), a merger of mutual funds can be effected on a tax deferred basis where the property of the Terminating Fund is acquired by the Continuing Fund in a "qualifying exchange ". The term "qualifying exchange" is defined in paragraph 132.2(2) of the Tax Act and requires that each merging fund be a "mutual fund trust" at the time of the Proposed Mergers. Currently, neither the Continuing Fund nor any of the Terminating Funds (other than the Galileo Fund) is a "mutual fund trust" for purposes of the Tax Act. Accordingly, the Proposed Mergers cannot be effected on a tax-deferred basis and will be subject to tax on capital gains, if any, in connection with the transfer of each Terminating Fund's assets to the Continuing Fund.
19. Unitholders of the Terminating Funds were provided with information about the tax consequences of the Proposed Mergers in the management information circular and have the opportunity to consider this information prior to voting on the Proposed Mergers.
20. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolios of the Terminating Funds.
21. Approval of the Proposed Mergers is required because the Proposed Mergers do not meet certain criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:
a. while the Manager believes that the fundamental investment objective of each Terminating Fund is substantially similar to the fundamental investment objective of the Continuing Fund in most material respects, there are variations in the investment objectives of certain Terminating Funds (with respect to the capitalization size and/or geographic focus of the companies in which they invest) which may lead a reasonable investor to conclude that the fundamental investment objectives of the Terminating Funds differ from those of the Continuing Fund in some material respects;
b. the fee structures of the Terminating Funds and the Continuing Fund are substantially similar, except that certain Terminating Funds will experience an increase of 0.05% or 0.10% in the management fee payable for Class A and Class F units of such Funds;
c. none of the Proposed Mergers is a "qualifying exchange" within the meaning of section 132.2 of the Tax Act or is a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act, and accordingly the Proposed Mergers cannot be effected on a tax-deferred basis and will be subject to tax on capital gains, if any, in connection with the transfer of each Terminating Fund's assets to the Continuing Fund; and
d. the meeting materials sent to unitholders of the Terminating Funds did not include the most recent annual and interim financial statements that have been made public for the Continuing Fund.
22. Except as noted above, the Proposed Mergers will comply with the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
23. The Manager submits that the Proposed Mergers will result in the following benefits:
a. unitholders of the Funds 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. the Proposed Mergers will eliminate the administrative and regulatory costs of operating the Terminating Funds as separate mutual funds;
c. the Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities than the Terminating Funds currently enjoy;
d. to the extent that securities in a Terminating Fund's portfolio 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 simply terminated; and
e. the Continuing Fund, as a result of its greater size, will benefit from its larger profile in the marketplace.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) the management information circular sent to unitholders in connection with a Merger prominently discloses that unitholders can obtain the most recent interim and annual financial statements of the applicable continuing fund by accessing the SEDAR website at www.sedar.com, by accessing the Manager's website at www.galileofunds.ca, by calling the Manager's toll-free telephone number or by contacting the Manager by e-mail;
(b) upon a request by a unitholder of a terminating fund for financial statements, the Manager will make best efforts to provide the unitholder with financial statements of the applicable continuing fund in a timely manner so that the unitholder can make an informed decision regarding the Merger;
(c) each applicable terminating fund and the applicable continuing fund with respect to a Merger have an unqualified audit report in respect of their last completed financial period; and
(d) the information circular sent to unitholders in connection with a Merger provides sufficient information about the Merger to permit unitholders to make an informed decision about the Merger.
This decision will terminate one year after the publication in final form of any legislation or rule dealing with matters in paragraph 5.5(1)(b) of NI 81-102.