NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund merger -- approval required because merger does not meet the criteria for per-approval -- continuing fund has different investment objectives than terminating funds -- merger not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- manager of continuing fund is not an affiliate of the manager of the terminating funds -securityholders provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.5(3), 5.6, 5.7(1)(b), 19.1.
January 25, 2013
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
WEBB ASSET MANAGEMENT CANADA, INC., (Webb)
MATRIX FUNDS MANAGEMENT
(A DIVISION OF GROWTH WORKS CAPITAL LTD.)
(Matrix) (collectively, the "Filers")
WEBB ENHANCED GROWTH FUND AND
WEBB ENHANCED INCOME FUND
(the Terminating Funds)
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval pursuant to:
(i) subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) for the merger (the Merger) of the Terminating Funds into Matrix Monthly Pay Fund (the Continuing Fund) (the Merger Approval); and
(ii) subsection 5.5(1)(a) of NI 81-102 for the change of manager of the Terminating Funds in connection with the Merger (the Change of Manager Approval).
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 Filers have provided notice that subsection 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 Filers:
Webb (The Manager)
1. The Manager is a corporation governed by the laws of Ontario with its head office in Toronto, Ontario.
2. The Manager is the investment fund manager of the Terminating Funds and is registered as an investment fund manager in Ontario. The Manager has not filed financial statements for the year ended December 31, 2011. Once the Merger is completed, the Manager intends to give up its registration as an investment fund manager in Ontario.
3. Matrix is a corporation governed by the federal laws of Canada with its head office in Vancouver, British Columbia.
4. Matrix is registered as an investment fund manager in British Columbia.
5. Each of the Terminating Funds and the Continuing Fund (collectively, the Funds) is an open-end mutual fund trust established under the laws of the Province of Ontario.
6. Units of the Continuing Fund are currently qualified for sale under the simplified prospectus, annual information form and fund facts each dated June 29, 2012. Matrix is the manager of the Continuing Fund.
7. Units of the Terminating Funds ceased to be offered for sale as of July 18, 2012.
8. The Funds are not in default of securities legislation of any province or territory of Canada.
9. The Funds are subject to the investment restrictions and practices contained in Canadian securities law, including NI 81-102, and are managed in accordance with these restrictions and practices, other than as expressly exempted therefrom by Canadian securities regulatory authorities.
10. The net asset value 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.
11. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, a press release announcing the proposed Merger was issued on November 19, 2012 and filed via SEDAR on November 20, 2012. A material change report with respect to the proposed Merger was filed via SEDAR on November 28, 2012.
12. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Manager 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 has provided its decision regarding the Merger and determined, after reasonable inquiry, that the Merger, if implemented, would achieve a fair and reasonable result for each of the Terminating Funds.
13. Unitholders of the Terminating Funds will continue to have the right to redeem their units of the Terminating Funds at any time up to the close of business on the business day prior to the effective date of the Merger.
14. 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 manager of the Continuing Fund is not an affiliate of the Manager;
(ii) the fundamental investment objective of the Continuing Fund is not, or may be considered not to be, "substantially similar" to the investment objectives of the Terminating Funds;
(iii) the Merger will not be completed as a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act (Canada) (the Tax Act); and
(iv) the portfolio assets of the Terminating Funds to be acquired by the Continuing Fund as part of the transaction may not be acceptable to the other mutual fund's fundamental investment objective, and so will be liquidated before the transaction.
Except for these reasons, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
15. The Manager has determined that it would not be appropriate to effect the Merger as a "qualifying exchange" within the meaning of section 132.2 of the Tax Act or as a tax deferred transaction for the following reasons:
(i) each of the Terminating Funds has sufficient loss carry-forwards to shelter any net capital gains that could arise for it on the taxable disposition of its portfolio assets on the Merger;
(ii) substantially all the unitholders in the Terminating Funds have an accrued capital loss on their units and effecting the Merger on a taxable basis will afford them the opportunity to realize that loss and use it against current capital gains or even carry it back as permitted under the Tax Act;
(iii) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; and
(iv) effecting the Merger on a taxable basis will have no other tax impact on the Continuing Fund.
16. A management information circular in connection with the Merger was mailed to unitholders of the Terminating Funds on November 30, 2012 and was subsequently filed on SEDAR. The most recently-filed fund facts document of the Continuing Fund was included in the meeting materials sent to unitholders of the Terminating Funds.
17. The management information circular provides unitholders of the Terminating Funds with information about the investment objectives of the Funds, the manager of the Continuing Fund and tax consequences of the Merger. Accordingly, unitholders of the Terminating Funds had an opportunity to consider this information prior to voting on the Merger.
18. The management information circular provides that, if an affirmative vote was not received, the Terminating Funds would be terminated. Accordingly, unitholders of the Terminating Funds had an opportunity to consider this information prior to voting on the Merger.
19. The Manager will pay all costs and expenses relating to the solicitation of proxies and holding the unitholder meeting in connection with the Merger as well as the costs of implementing the Merger, including any brokerage fees.
20. Unitholders of the Terminating Funds approved the Merger at a special meeting held on December 21, 2012.
21. The Merger will not constitute a material change for the Continuing Fund, as the net asset value of the Continuing Fund is significantly larger than the net asset value of the Terminating Funds.
22. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Funds will be wound up as soon as reasonably practicable. Matrix is not the manager of the Terminating Funds. As the manager of the Terminating Funds and the manager of the Continuing Fund are not affiliated, regulatory approval pursuant to section 5.5(1)(a) of NI 81-102 is required for this change.
23. The Merger is conditional on the approval of (i) the unitholders of the Terminating Funds; 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 January 21, 2013 (the Merger Date):
(i) Prior to the Merger Date, each Terminating Fund will sell the securities in its portfolio. As a result, the Terminating Funds may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger being effected.
(ii) The value of the Terminating Funds' portfolio and other assets will be determined at the close of business on the effective date of the Merger.
(iii) The Continuing Fund will acquire the investment portfolio and other assets of the Terminating Funds in exchange for units of the Continuing Fund.
(iv) The Continuing Fund will not assume any liabilities of the Terminating Funds and the Terminating Funds will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the Merger.
(v) The Terminating Funds will distribute a sufficient amount of its net income and net realized capital gains, if any, to unitholders to ensure that it will not be subject to tax for its current tax year.
(vi) The units of the Continuing Fund received by the Terminating Funds will have an aggregate net asset value equal to the value of the portfolio assets and other assets that the Continuing Fund is acquiring from the Terminating Funds, and the units of the Continuing Fund will be issued at the applicable series net asset value per unit as of the close of business on the effective date of the Merger.
(vii) Immediately thereafter, units of the Continuing Fund received by the Terminating Funds will be distributed to unitholders of the Terminating Funds in exchange for their units in the Terminating Funds on a dollar-for-dollar and series by series basis, as applicable.
(viii) As soon as reasonably possible following the Merger, and in any case within 60 days thereof, the Terminating Funds will be wound up.
24. The Terminating Funds are not mutual fund trusts under the Tax Act and so are not qualified investments for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans or tax-free savings accounts (collectively, Registered Plans).
25. The Continuing Fund is, and is expected to continue to be at all material times, a mutual fund trust under the Tax Act. Accordingly, units of the Continuing Fund are qualified investments under the Tax Act for Registered Plans.
26. The Merger will be beneficial to securityholders of the Terminating Funds and the Continuing Fund for the following reasons:
(i) Series F unitholders of the Terminating Funds will benefit from reduced management fees that are charged to class F units of the Continuing Fund. The management fees that are charged to class A units of the Continuing Fund are the same as those charged to the Terminating Fund. Unlike the Terminating Funds, the Continuing Fund does not charge a performance fee;
(ii) unitholders of the Terminating Funds will benefit from reduced management expense ratio of the Continuing Fund;
(iii) the fundamental investment objectives and strategies of each of the Terminating Funds are similar to the fundamental investment objectives and strategies of the Continuing Fund in that the funds all invest in equity securities. The Merger will not entail any changes in the Continuing Fund's investment objectives and strategies, which are broader than the investment objectives and strategies of the Terminating Funds;
(iv) unitholders of the Terminating Funds and the Continuing Fund will enjoy increased economies of scale as part of a larger combined Continuing Fund;
(v) following the Merger, the Continuing Fund will have a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired;
(vi) the unitholders of the Terminating Funds will not be responsible for the costs associated with the Merger; and
(vii) as part of the Merger, unitholders of the Terminating Funds become unitholders of the Continuing Fund without paying a sales charge. Unitholders can then switch to another fund managed by Matrix, again, without paying a sales charge (other than, perhaps, a switching fee that the dealer may charge or a short-term trading fee). If the Terminating Funds terminated instead of merging, Unitholders would likely be required to pay a sales charge or broker fee when investing in another fund or other security.
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 Merger Approval and the Change of Manager Approval is granted.