National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- mutual fund granted relief from 10 per cent concentration restriction in subsection 2.1(1) of National Instrument 81-102 Mutual Funds in connection with the acquisition by the mutual fund of common shares and common share purchase warrants as a result of a plan of arrangement -- the mutual fund will hold securities in essentially the same amounts as it held in common shares of the two previous issuers -- mutual fund voted in favour of arrangement -- mutual fund must divest common shares acquired through any exercise of the common share purchase warrants.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 2.1(1).
September 17, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
(THE "PRINCIPAL JURISDICTION")
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
GOODMAN & COMPANY,
INVESTMENT COUNSEL LTD.,
ON BEHALF OF
DYNAMIC PRECIOUS METALS FUND
(THE "FILER" or "GOODMAN")
The principal regulator in the Principal Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Principal Jurisdiction (the "Legislation") for a decision under section 19.1 of National Instrument 81-102 - Mutual Funds ("NI 81-102") 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 Dynamic Precious Metals Fund (the "Fund") of securities of Kinross Gold Corporation ("Kinross") in exchange for the shares the Fund presently holds in Red Back Mining Inc. ("Red Back"), in the circumstances described in this Order (the "Relief").
Under the Process for Exemptive Relief Application in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in British Columbia, Alberta, Quebec, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia, Prince Edward Island, Newfoundland & Labrador, Northwest Territories, Yukon, and Nunavut (the "Jurisdictions").
Terms defined in National Instrument 14-101 Definitions and in MI 11-102 have the same meanings in this decision, unless they are otherwise defined in this decision.
1. Goodman acts as the manager, promoter, trustee and portfolio adviser of the Fund. The Fund is distributed under a simplified prospectus and annual information form in the Jurisdictions. Goodman is registered with the Commission and with the securities regulatory authorities in each of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Quebec and Saskatchewan in the category of Portfolio Manager and with the Commission in the category of Commodity Trading Manager as well. To the best of Goodman's knowledge, neither Goodman nor the Fund are in default of securities legislation in any of the Jurisdictions. The head office of the Filer is in Toronto, Ontario.
2. The Fund presently holds common shares in Red Back, a publicly held Canadian based resource company based in Vancouver, Canada. The Red Back shares are listed on the Toronto Stock Exchange.
3. The Fund presently holds common shares in Kinross, a publicly held Canadian based gold mining company. The Kinross shares are listed on the Toronto and New York stock exchanges.
4. On August 2, 2010, Red Back and Kinross announced their agreement to merge through a plan of arrangement under the Canada Business Corporations Act, whereby Kinross will acquire all the issued and outstanding common shares of Red Back and Red Back will become a wholly-owned subsidiary of Kinross. The boards of directors of both Red Back and Kinross have approved the Arrangement and the shareholders of each company approved the Arrangement at special meetings held on September 15, 2010. If all necessary regulatory approvals are obtained in favour of the Arrangement, Red Back shareholders will receive 1.7780 Kinross common shares (each, a "Kinross Share") plus 0.110 of a Kinross common share purchase warrant (each, a "Kinross Warrant") for each Red Back common share held at the closing of the Arrangement.
5. If the Arrangement had been completed on September 3, 2010, the Fund's percentage of net assets in Kinross Shares would have increased to 13.29% (or 15.39%, assuming exercise of all of the warrants received).
6. The Red Back shares presently held by the Fund were acquired in compliance with section 2.1 of NI 81-102. The 10 percent concentration restriction prescribed by section 2.1 was not breached at the time of purchase of the Red Back shares by the Fund, and the position passively exceeded the 10% concentration restriction for the Fund due to significant market appreciation.
7. The Kinross Shares presently held by the Fund were acquired in compliance with section 2.1 of NI 81-102. The 10 percent concentration restriction prescribed by section 2.1 was not breached at the time of purchase of the Kinross Shares by the Fund. If the Arrangement is completed, the Fund will hold in excess of 10 percent of its net assets in Kinross Shares.
8. On behalf of the Fund, Goodman voted the shares of Red Back and Kinross held by the Fund in favour of the Arrangement as, in the opinion of Goodman, the exchange ratio proposed for the Arrangement was fair and reasonable to the Fund and there are many benefits to be gained by the Fund from the Arrangement: such as the premium being offered to shareholders of Red Back in acquiring their shares, the diversification of assets that would result from the increased number of operations the merged Kinross and the combined strength of the merged Kinross gold production, to name a few. Goodman was of the view that it would not have been in the best interests of the Fund to vote against the Arrangement or abstain from voting.
9. 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". Section 2.13 of the Companion Policy to NI 81-102 ("CP 81-102") sets out several examples of transactions that would, in the view of the Canadian securities regulatory authorities, constitute a purchase within the meaning of section 1.1 and section 2.1 of NI 81-102. Paragraph 2.13(2)3 of CP 81-102 suggests that 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". Paragraphs 2.13(3)1 and 2 of CP 81-102 suggest that such an acquisition would not constitute a "purchase" if the mutual fund voted against the merger or if it acquired the security as a result of a compulsory acquisition by an issuer following completion of a successful take-over bid.
10. Without the Relief requested under this Application, the Fund would be considered to have "purchased" the additional Kinross securities it will acquire if the Arrangement is completed, under the interpretation of section 2.1 of NI 81-102. Accordingly, the Fund may be in breach of section 2.1(1) of NI 81-102 since it may, if the Arrangement is completed, acquire Kinross securities in excess of the 10 percent concentration restriction.
11. Goodman does not believe that it is in the best interests of the Fund to sell down the Red Back shares held by the Fund either in anticipation of or immediately following the Arrangement, if implemented, for the sole purpose of being within the 10 percent threshold of section 2.1 of NI 81-102.
12. Given that Goodman believes the Arrangement would be in the best interests of the Fund and that immediately after the Arrangement the Fund would hold shares in the merged Kinross in essentially the same amounts as its current holdings in shares of each Red Back and Kinross, Goodman submits that the Relief requested is in the best interests of the Fund.
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 Relief sought is granted, so long as the Fund's exposure to securities of Kinross exceeds 10 percent of the net assets of the Fund, provided that:
(i) Subject to (ii) below, the Fund will not make any further purchase of securities of Kinross after the completion of the Arrangement;
(ii) The Fund may from time to time exercise the Kinross Warrants obtained pursuant to the Arrangement, provided that it must immediately before or after such exercise dispose of a number of Kinross Shares equal to that number of Kinross Shares received on any such exercise.