National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund mergers -- approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- merger not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- financial statements of continuing fund not required to be sent to unitholders of the terminating fund in connection with the current merger and future mergers provided the management information circular clearly discloses the various ways unitholders can access the financial statements -- unitholders of terminating fund and continuing fund provided with adequate disclosure regarding the merger
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6(1), 5.7(1)(b).
November 26, 2010
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
SPROTT ASSET MANAGEMENT LP
(the Filer or Sprott)
SPROTT GLOBAL EQUITY FUND
(the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for:
(a) approval of the merger (the Merger) of the Terminating Fund into Sprott All Cap Fund (the Continuing Fund) (together with the Terminating Fund, the Funds) under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102); and
(b) relief from the financial statements delivery requirements contained in subsection 5.6(1)(f)(ii) of NI 81-102 (the Financial Statement Delivery Requirement) in respect of:
(i) the Merger; and
(ii) all future mergers of mutual funds managed by the Filer (the Future Mergers)
(collectively, the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator (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, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Terms defined in National Instrument 14-101 Definitions and 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 Filer:
1. Sprott is a limited partnership established under the laws of the Province of Ontario and its head office is located in Toronto, Ontario.
2. Sprott is registered as an adviser in the category of portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador and as an exempt market dealer in Ontario. Sprott has submitted an application to be registered as an investment fund manager with the Principal Regulator.
3. Sprott is the manager and promoter of the Funds.
4. Each of the Funds is an open-end mutual fund trust established under the laws of the Province of Ontario by a master trust agreement.
5. Units of the Funds are currently offered for sale under a simplified prospectus and annual information form dated May 6, 2010 in all of the provinces and territories of Canada. The Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada. None of Sprott or the Funds are in default of securities legislation in any province or territory of Canada.
6. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under the Legislation.
7. The net asset value (NAV) for each series of units of each Fund is calculated as at 4:00 p.m. Eastern Time on each day that the Toronto Stock Exchange is open for trading.
8. The board of directors of Sprott Asset Management GP Inc., the general partner of Sprott, approved the Merger on October 4, 2010 and a press release and material change report in respect of the Merger were filed on SEDAR on October 5, 2010.
9. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), Sprott presented the terms of the Merger to the Funds' Independent Review Committee (IRC) for its review and recommendation. The IRC reviewed the potential conflict of interest matters related to the proposed Merger and on October 20, 2010, determined that the proposed Merger, if implemented, would achieve a fair and reasonable result for each of the Funds.
10. Unitholders of the Terminating Fund will continue to have the right to redeem or transfer their units of the Terminating Fund at any time up to the close of business on the business day prior to the effective date of the Merger.
11. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81 102, namely because: (i) the Merger will not be a tax-deferred transaction as described in subsection 5.6(1)(b) of NI 81 102; and (ii) Sprott will not include a copy of the most recent annual and interim financial statements in the materials sent to unitholders of the Terminating Fund as required by subsection 5.6(1)(f)(ii).
12. The Merger will be a material change for the Continuing Fund as the NAV of the Continuing Fund is smaller than the NAV of the Terminating Fund.
13. A management information circular in connection with the Merger was mailed to unitholders of the Terminating Fund and the Continuing Fund on October 29, 2010 and subsequently filed on SEDAR.
14. The management information circular provides unitholders of the Terminating Fund with information about the tax consequences of the Merger. Accordingly, unitholders of the Terminating Fund will have an opportunity to consider this information prior to voting on the Merger.
15. Sprott will pay all costs and reasonable expenses relating to the solicitation of proxies and holding the unitholder meetings in connection with the Merger as well as the costs of implementing the Merger, including any brokerage fees.
16. Sprott will waive any redemption-related costs such as redemption fees and short-term trading fees for investors who redeem their units of the Terminating Fund between October 4, 2010, the date the Merger was approved by the board of the general partner of the Manager, and the date of the Merger.
17. Unitholders of the Terminating Fund and the Continuing Fund will be asked to approve the Merger at special meetings scheduled to be held on or about November 25, 2010. If the meetings are adjourned, the adjourned meetings will be held on or about November 29, 2010.
18. If the requisite approvals are obtained, it is anticipated that the Merger will be implemented on or about November 30, 2010. If unitholder approval is not obtained, the Terminating Fund will be terminated on or about December 31, 2010.
19. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.
20. The Merger is conditional on the approval of (i) the unitholders of the Terminating Fund and the Continuing Fund; and (ii) the Principal Regulator. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger, which is proposed to occur on or about November 30, 2010 (the Merger Date):
(a) Prior to the Merger Date, the Terminating Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the Continuing Fund. As a result, the Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger;
(b) The value of the Terminating Fund's portfolio and other assets will be determined at the close of business on the Merger Date in accordance with its trust agreement;
(c) The Continuing Fund will acquire the investment portfolio and other assets of the Terminating Fund in exchange for units of the Continuing Fund;
(d) The Continuing Fund will not assume the Terminating Fund's liabilities and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Merger Date;
(e) The units of the Continuing Fund received by the Terminating Fund will have an aggregate NAV equal to the value of the Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable series NAV per unit as of the close of business on the Merger Date;
(f) On the Merger Date, the Terminating Fund will distribute its net income and net realized capital gains for its current taxation year, to the extent necessary to eliminate its liability for tax;
(g) Immediately thereafter, the units of the Continuing Fund will be distributed to unitholders of the Terminating Fund on a dollar for dollar and series by series basis in exchange for their units in the Terminating Fund; and
(h) As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
21. The Terminating Fund and the Continuing Fund are, and are expected to continue to be at all material times, mutual fund trusts under the Income Tax Act (Canada) (the Tax Act) and, accordingly, units of both Funds are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.
22. Subsection 5.6(1)(f) of NI 81-102 requires that certain materials be sent to unitholders of the Terminating Fund in connection with the approval that must be obtained from those unitholders for the Merger. Specifically, the following documents must be sent:
(a) an information circular that describes the Merger, the characteristics of the Continuing Fund and any income tax considerations;
(b) if not previously sent, the current simplified prospectus and the most recent annual and interim financial statements for the Continuing Fund; and
(c) a statement describing how unitholders may obtain the annual information form for the Continuing Fund.
23. Instead of including financial statements in the package of information sent to the unitholders of the Terminating Fund, Sprott proposes to prominently disclose in the information circular sent to unitholders that they can obtain the most recent interim and annual financial statements of the Continuing Fund by accessing the SEDAR website at www.sedar.com or Sprott's website at www.sprott.com, by calling Sprott's toll free telephone number 1-866-299-9906, or by contacting their dealer.
24. In accordance with section 5.3 of National Instrument 81-106 Investment Fund Continuous Disclosure, it has been Sprott's practice to annually solicit instructions from existing investors in the Sprott mutual funds to request delivery of such financial statements. Unitholders in the Sprott mutual funds have the opportunity to request to receive such documents on an annual basis.
25. Sprott believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) Unitholders of the Terminating Fund and the Continuing 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) The Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund;
(c) By merging the Terminating Fund instead of terminating it, there will be a savings for the Terminating Fund in brokerage charges associated with the liquidation of the Terminating Fund's portfolio on a wind up. The unitholders of the Terminating Fund will not be responsible for the costs associated with the Merger;
(d) The Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities;
(e) The Continuing Fund, as a result of its greater size, will benefit from its larger profile in the marketplace; and
(f) Completing the Merger on a taxable basis will preserve any net losses or loss carry-forwards in the Continuing Fund (although such losses are expected to be nominal, if at all)
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 Requested Relief 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 contacting their dealer or by telephone toll free at 1-866-299-9906 or via internet at www.sprott.com or by accessing the SEDAR website at www.sedar.com;
(b) Upon a request by a unitholder of a terminating fund for financial statements, the Filer 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 applicable 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;
(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; and
(e) This decision will terminate one year after the publication in final form of any legislation or rule dealing with matters in subsection 5.5(1)(b) of NI 81-102.