NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization -- Approval required because mergers do not meet the criteria for pre-approval --Funds have differing investment objectives, and mergers conducted on a taxable basis -- Securityholders provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6(1)(a), 5.6(1)(b).
July 22, 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
CI INVESTMENTS INC.
CAMBRIDGE CANADIAN STOCK FUND
CI JAPANESE CORPORATE CLASS
CI U.S. EQUITY PLUS FUND
(Each, a Terminating Fund(s) and
Together with the Manager, the Filers)
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed mergers described below (the Merger(s)) of a Terminating Fund into its corresponding Continuing Fund (defined in the table below and together with the Terminating Funds, the Funds) pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) (the Merger Approval).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Manager 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, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Jurisdictions).
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:
1. The Manager is a corporation amalgamated under the laws of Ontario. The Manager is registered in the Jurisdictions as an adviser in the category of portfolio manager; as an exempt market dealer, commodity trading counsel and commodity trading manager, and investment fund manager in Ontario; and as a non-resident investment fund manager in Quebec and Newfoundland and Labrador.
2. The Manager is the investment fund manager of the Funds.
3. The Manager intends to merge each Terminating Fund into the Continuing Fund shown opposite its name in the table below:
Cambridge Canadian Stock Fund
Cambridge Canadian Equity Corporate Class
CI Japanese Corporate Class
CI Pacific Corporate Class
CI U.S. Equity Plus Fund
Cambridge American Equity Corporate Class
4. Each of Cambridge Canadian Stock Fund and CI U.S. Equity Plus Fund (the Terminating Trust Fund(s)) is an open-end mutual fund trust governed by a declaration of trust.
5. CI Japanese Corporate Class and each Continuing Fund is a mutual fund comprised of two or more classes of convertible special shares of CI Corporate Class Limited (the Corporation). The Corporation is a corporation incorporated under the laws of the Province of Ontario.
6. Each of the Funds is a reporting issuer under the Legislation.
7. Neither the Manager nor any of the Funds is in default of securities legislation in any of the Jurisdictions.
8. Each of the Funds is a mutual fund that is subject to the requirements of NI 81-102. Each of the Funds follows the standard investment restrictions and practices established under the Legislation except to the extent that the Funds have received permission from the CSA to deviate therefrom.
9. Each Terminating Trust Fund currently distributes its securities in all Jurisdictions pursuant to a simplified prospectus and annual information form dated July 26, 2012, as amended (the Terminating Trust Funds' Prospectuses).
10. Securities of CI Japanese Corporate Class were previously offered and distributed in all Jurisdictions pursuant to a simplified prospectus and an annual information form, each dated July 27, 2011. Securities of CI Japanese Corporate Class are no longer in distribution.
11. Each Continuing Fund is in the process of renewing its current simplified prospectus and annual information form. The simplified prospectus and annual information form (the Continuing Funds' Prospectuses) of each Continuing Fund have been filed with the CSA in each Jurisdiction on May 30, 2013 under SEDAR Project #2069145, prior to the commencement of mailing of the Meeting Materials (as defined below). The final prospectus of each Continuing Fund is expected to be filed shortly after the Meetings (as defined below).
The Proposed Mergers
12. The proposed Mergers were announced in:
(a) a press release dated May 27, 2013;
(b) a material change report dated May 28, 2013; and
(c) amendments to the Terminating Trust Funds' Prospectuses and the Continuing Funds' Prospectuses dated May 27, 2013,
each of which has been filed on SEDAR.
13. Due to the different structures of the Funds, the procedures for implementing the Mergers will vary. The specific steps (taking into account the particular features of each Fund) are as follows:
(a) With respect to the Merger of a Terminating Trust Fund into a Continuing Fund (i.e., Mergers #1 and #3):
(i) The value of the Terminating Trust Fund's investment portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Terminating Trust Fund and its Continuing Fund.
(ii) The Continuing Fund will acquire substantially all of the investment portfolio and other assets of the Terminating Trust Fund. In return, the Continuing Fund will issue to the Terminating Trust Fund shares of the Continuing Fund having an aggregate net asset value equal to the value of the assets acquired.
(iii) The Continuing Fund will not assume the Terminating Trust Fund's liabilities. Instead, the Terminating Trust Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger.
(iv) The Terminating Trust Fund will declare, pay and automatically reinvest a distribution to its unitholders of net capital gains and income (if any).
(v) Immediately thereafter, the Terminating Trust Fund will redeem all of its outstanding units at their net asset value and pay for them by delivering to its unitholders shares of an equivalent class of the Continuing Fund having an equal aggregate net asset value.
(vi) The Terminating Trust Fund will be wound-up within 30 days following the Merger.
(b) With respect to the Merger of CI Japanese Corporate Class into a CI Pacific Corporate Class (i.e., Merger #2):
(i) Each outstanding share of CI Japanese Corporate Class will be exchanged for shares of equivalent classes of its corresponding Continuing Fund based on their relative net asset values.
(ii) The assets and liabilities of the Corporation attributed to CI Japanese Corporate Class will be reallocated to its corresponding Continuing Fund.
(iii) As soon as reasonably possible following the Merger, the articles of incorporation of the Corporation will be amended to delete CI Japanese Corporate Class.
14. Although the procedures for implementing the Mergers may vary, the result of each Merger will be that investors in each Terminating Fund will cease to be securityholders in the Terminating Fund and will become securityholders in the corresponding Continuing Fund.
15. In the opinion of the Manager, the Mergers will be beneficial to securityholders of each Fund for the following reasons:
(a) it is expected that each Merger will reduce duplication and redundancy;
(b) in the case of the Mergers involving Cambridge Canadian Stock Fund and CI U.S. Equity Plus Fund (i.e., Mergers #1 and #3 in the table above), investors in the Terminating Fund will become investors in the Corporation which will provide such investors with the opportunity to change mutual fund investments while deferring the realization of any taxable capital gains on their investments;
(c) following the Mergers, each Continuing Fund will have more assets, thereby allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions; and
(d) each Continuing Fund will benefit from a larger profile in the marketplace.
16. As required by National Instrument 81-107 -- Independent Review Committee for Investment Funds, the Manager presented the terms of the Mergers to the independent review committee of the Funds (the IRC) for its review. On May 23, 2013, the IRC determined that the Manager's decision to complete the Mergers:
(a) has been proposed by the Manager free from any influence by an entity related to the Manager and without taking into account any consideration relevant to an entity related to the Manager;
(b) represents the business judgement of the Manager uninfluenced by considerations other than the best interest of the Funds;
(c) is in compliance with the Manager's written policies and procedures relating to the Mergers; and
(d) achieves a fair and reasonable result for the Funds.
17. The Manager is convening a special meeting (the Meetings) of the securityholders of each Terminating Fund in order to seek their approval to complete the Mergers, as required by subsection 5.1(f) of NI 81-102. The Meetings will be held on or about July 22, 2013. In connection with the Meetings, the Manager has sent to such securityholders a management information circular, a related form of proxy and the fund facts or simplified prospectus of its Continuing Fund (collectively, the Meeting Materials). The management information circular contains the following information that the Manager has deemed to be material so that securityholders of the Terminating Funds may consider this information before voting on the Mergers: (i) the differences between the Terminating Funds and the Continuing Funds; (ii) the tax implications of the Mergers; (iii) a statement that the securities of the Continuing Fund being acquired by securityholders upon the Mergers are subject to the same redemption charges to which their securities of the Terminating Funds were subject prior to the Mergers; and (iv) the fact that securityholders can obtain, at no cost, the annual information form, the simplified prospectus, the fund facts, the most recent interim and annual financial statements and the most recent management report of fund performance that have been made public by contacting the Manager or by accessing the documents on the Manager's website.
18. If all required approvals for each Merger are obtained, it is proposed that each Merger will occur after the close of business on or about July 26, 2013 (the Effective Date). The Manager therefore anticipates that a securityholder of a Terminating Fund will become a securityholder of its corresponding Continuing Fund after the close of business on the Effective Date.
19. The cost of effecting the Mergers (consisting primarily of proxy solicitation, printing, mailing, legal and regulatory fees) will be borne by the Manager. No sales charge will be payable by any securityholder in connection with the exchange of units of the Terminating Funds into the Continuing Funds. Any brokerage costs incurred directly as a result of the Mergers will be minimal, if any, and will be borne by the Manager.
20. Securityholders of each Terminating Fund will continue to have the right to redeem their securities of the Terminating Fund at any time up to the close of business on the Effective Date. Following each Merger, all optional plans (including pre-authorized purchase programs, automatic withdrawal plans, systematic switch programs and automatic rebalancing services) which were established with respect to the Terminating Fund will be re-established in comparable plans with respect to its Continuing Fund unless investors advise otherwise.
21. Each Terminating Fund has the same distribution policy as its Continuing Fund.
22. The Manager bears all of the operating expenses of the Funds (other than certain taxes, borrowing costs and certain new governmental fees) in return for fixed annual administration fees. Each Terminating Fund has the same fixed annual administration fee as its respective Continuing Fund.
23. All Funds have the same arrangements with respect to switch fees.
24. All Funds calculate their net asset values daily as at 4:00 p.m. (Toronto time). Net asset values per unit or share are calculated for each class of securities using similar methodologies and currencies.
25. Regulatory approval of the Mergers is required because each Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 as follows:
(a) a reasonable person may not consider the investment objective of each Terminating Fund involved in the Mergers to be substantially similar to the investment objective of its respective Continuing Fund and, accordingly, the Mergers do not meet the criteria for pre-approved reorganizations under subsection 5.6(1)(a)(ii) of NI 81-102; and
(b) Mergers #1 and #3 in the chart above cannot be implemented as either a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the Tax Act) or a tax-deferred transaction under section 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act because these Mergers involve a Terminating Fund which is structured as a trust and a Continuing Fund which is structured as a class of a corporation, as per representations #4 and #5 above.
Consequently, these Mergers do not meet the criteria for pre-approved reorganizations under subsection 5.6(1)(b) of NI 81-102.
26. A reasonable person may not consider the investment objective of each Terminating Fund involved in the Mergers to be substantially similar to the investment objective of its respective Continuing Fund for the reasons below:
(a) The investment objective of the Continuing Fund in Merger #1 specifically provides that the investments may be made directly or indirectly in equity securities of Canadian companies, whereas the Terminating Fund in Merger #1 does not specifically provide for indirect investments in its investment objective.
(b) The investment objective of the Terminating Fund in Merger #2 provides that the investments may be made in equity and equity-related securities of Japanese companies and companies with significant operations in Japan, whereas the investment objective in the Continuing Fund in Merger #2 allows for investments in companies in or are listed on stock exchanges in Asia and the Pacific Rim region.
(c) The investment objective of the Continuing Fund in Merger #3 specifically provides that the fund may also invest in equity-related securities, whereas the Terminating Fund in Merger #3 does not specifically provide for investments in equity-related securities in its investment objective.
27. For the two Mergers described in paragraph 25(b) (i.e., Mergers #1 and #3), it is anticipated that there will be unutilized tax loss carryforwards of the Terminating Funds that will expire because these two Mergers cannot be implemented as either a "qualifying exchange" or a tax-deferred transaction under the Tax Act. The unutilized tax loss carryforwards of the Terminating Funds that will expire because of the Mergers (Loss Carryforwards) are as follows:
(a) For Terminating Fund -- Cambridge Canadian Stock Fund:
Non-Capital Loss Carryforwards ($)
Capital Loss Carryforwards ($)
(b) For Terminating Fund -- CI U.S. Equity Plus Fund:
Non-Capital Loss Carryforwards ($)
Capital Loss Carryforwards ($)
28. Although the Loss Carryforwards will expire due to the Mergers#1 and #3, securityholders who exchange their securities of Terminating Trust Funds for those of the Continuing Funds will enjoy other tax advantages which outweigh these losses. The corporate class structure of the Continuing Funds allows securityholders of the Continuing Funds to defer paying tax on capital gains. For example, securityholders may transfer between mutual funds within CI Corporate Class Limited without realizing capital gains and will only pay tax on capital gains when they sell their shares for cash or transfer them to another mutual fund outside of CI Corporate Class Limited. In contrast, securityholders who hold securities outside of CI Corporate Class Limited (i.e., the Terminating Trust Funds) will realize capital gains when they switch mutual funds and will be liable to pay tax on such capital gains.
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 is granted.