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).
August 8, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
THE PROVINCE OF ONTARIO
IN THE MATTER OF THE
PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
NEXGEN FINANCIAL LIMITED PARTNERSHIP
NEXGEN GLOBAL VALUE TAX MANAGED FUND
NEXGEN GLOBAL VALUE REGISTERED FUND
NEXGEN GLOBAL RESOURCE TAX MANAGED FUND
NEXGEN GLOBAL RESOURCE REGISTERED FUND
(each a “Terminating Fund” and collectively the “Terminating Funds”)
NEXGEN CANADIAN BALANCED GROWTH TAX MANAGED FUND
NEXGEN CANADIAN BALANCED GROWTH REGISTERED FUND
(each a “Continuing Fund” and collectively the “Continuing Funds”,
and together with the Terminating Funds, the “Funds”)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction for approval of the mergers (the "Mergers") of NexGen Global Value Registered Fund and NexGen Global Resource Registered Fund into NexGen Canadian Balanced Growth Registered Fund (the "Registered Mergers") and the mergers of NexGen Global Value Tax Managed Fund and NexGen Global Resource Tax Managed Fund into NexGen Canadian Balanced Growth Tax Managed Fund (the "Tax Managed Mergers") under paragraphs 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Approval Sought").
Under the Process for Exemptive Relief Applications 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, Newfoundland and Labrador and Northwest Territories (including Ontario, the "Jurisdictions").
Terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
The decision is based on the following facts represented by the Filer:
1. The Filer is a limited partnership established under the laws of the Province of Ontario and its head office is located in Toronto, Ontario. The Filer is registered as a dealer in the category of mutual fund dealer, an adviser in the category of portfolio manager and an investment fund manager under the Securities Act (Ontario) and as an adviser in the category of commodity trading manager under the Commodity Futures Act (Ontario).
2. The Filer is the manager of the Funds, each an open-end mutual fund established under the laws of the Province of Ontario and subject to the requirements of NI 81-102. Each of NexGen Global Value Tax Managed Fund, NexGen Global Resource Tax Managed Fund and NexGen Canadian Balanced Growth Tax Managed Fund are housed within NexGen Investment Corporation ("NexGen Investment"), a mutual fund corporation incorporated under the laws of the Province of Ontario. Each of NexGen Global Value Registered Fund, NexGen Global Resource Registered Fund and NexGen Canadian Balanced Growth Registered Fund are mutual fund trusts governed by a declaration of trust.
3. The Filer intends to merge: (i) NexGen Global Value Tax Managed Fund into NexGen Canadian Balanced Growth Tax Managed Fund; and (ii) NexGen Global Resource Tax Managed Fund into NexGen Canadian Balanced Growth Tax Managed Fund; (iii) NexGen Global Value Registered Fund into NexGen Canadian Balanced Growth Registered Fund; and (iv) NexGen Global Resource Registered Fund into NexGen Canadian Balanced Growth Registered Fund.
4. Securities of the Funds are currently offered for sale under a Simplified Prospectus (the "Prospectus") and Annual Information Form dated May 31, 2013 in the Jurisdictions.
5. The Funds (with the exception of the NexGen Canadian Balanced Growth Tax Managed Fund) are reporting issuers under the applicable securities legislation of the Jurisdictions (the "Legislation"). The NexGen Canadian Balanced Growth Tax Managed Fund is a reporting issuer in all provinces and territories of Canada.
6. Neither the Filer nor the Funds is in default under the Legislation.
7. Each of the Funds is a mutual fund that is subject to the requirements in NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure. 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.
8. The net asset value for each series of securities of the Funds is calculated on a daily basis on each day the Toronto Stock Exchange is open for trading.
Details of the Proposed Mergers
9. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, the proposed Mergers were announced in:
(a) a press release dated July 3, 2013;
(b) a material change report dated July 9, 2013; and
(c) amendments to the Prospectus and Fund Facts of the Terminating Funds dated July 3, 2013,
each of which has been filed on SEDAR.
10. Having obtained the necessary approvals, it is proposed that the Mergers take place after the close of business on or about August 9, 2013 (the "Merger Date").
11. Pursuant to the Mergers, the Filer anticipates that a securityholder of a Terminating Fund will become a securityholder of its corresponding Continuing Fund on the Merger Date.
12. The following steps will be carried out to effect the Mergers:
(a) In respect of the Tax Managed Mergers:
i. Portfolio securities held by the Terminating Funds which may not be suitable investments for the Continuing Fund will be liquidated on or before the Merger Date.
ii. Each outstanding share of a Terminating Fund will be exchanged for share(s) of an equivalent class and series of the Continuing Fund. The share exchange will be effected on the basis of the relative net asset values of the applicable shares at the close of business on the Merger Date.
iii. The assets and liabilities of NexGen Investment attributable to the Terminating Funds will be transferred to the Continuing Fund.
iv. The Terminating Funds will then be wound up.
(b) In respect of the Registered Mergers:
i. The master declaration of trust of the Terminating Funds will be amended to facilitate the Mergers. Among other changes, the investment objective of each of the Terminating Funds will be amended to facilitate the Mergers.
ii. Each of the Terminating Funds will transfer all of its assets which will consist of cash and securities, if applicable, less an amount required to satisfy the liabilities of the Terminating Fund to the Continuing Fund in exchange for units of the Continuing Fund. The unit exchange will be effected on the basis of the relative net asset values of the applicable units at the close of business on the Merger Date.
iii. Each unitholder of a Terminating Fund will receive the corresponding units of the Continuing Fund.
iv. Each Terminating Fund will distribute to its unitholders sufficient net income and net realized capital gains so that it will not be subject to tax under the Income Tax Act (Canada) for its current taxation year.
v. Each Terminating Fund will distribute to its unitholders the units of the Continuing Fund received by it in exchange for all of the unitholders' existing units of the Terminating Fund on a series-by-series basis so that following the distribution the unitholders of the Terminating Fund will become direct unitholders of the Continuing Fund.
vi. The Terminating Funds will then be wound up.
13. Although the procedures for implementing the Mergers may vary, the result of each of the Mergers will be that securityholders in each Terminating Fund will cease to be securityholders in the Terminating Funds and will become securityholders in the corresponding Continuing Fund.
14. In the opinion of the Filer, the Mergers will be beneficial to securityholders of each of the Funds for the following reasons:
(a) securityholders in the Terminating Funds are expected to enjoy potentially improved economies of scale as part of a larger combined Continuing Fund;
(b) Due to the smaller size and historic growth profile of the Terminating Funds, the administrative and regulatory costs of operating the Terminating Funds as stand-alone mutual funds would be higher per securityholder and could potentially increase if the Terminating Funds decrease further in asset size;
(c) The Mergers transition securityholders in the Terminating Funds to growing and more viable Continuing Funds.
15. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, NexGen presented the terms of the Mergers 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 Mergers and determined that the Merger, if implemented, would achieve a fair and reasonable result for each of the Terminating Funds and the Continuing Funds.
16. A meeting (the "Meeting") of the securityholders of each Terminating Fund was held on July 30, 2013 to approve the proposed Mergers.
17. In connection with the Meeting, the Filer, as manager of the Terminating Funds, sent to securityholders of each Terminating Fund on July 3, 2013 a notice of the meeting of securityholders and a management information circular (the "Information Circular") dated June 22, 2013 and a related form of proxy.
18. The Information Circular contains the following information that the Filer 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 acquired by the securityholders upon completion of each of 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 most recently filed Fund Facts and Management Report of Fund Performance that have been made public by contacting the Filer or by accessing the documents on the Filer's website or through SEDAR.
19. The Filer will pay all costs and expenses of effecting the Mergers including costs relating to the solicitation of proxies and holding the Meeting in connection with each of the Mergers, as well as the costs of implementing the Mergers, including any brokerage fees.
20. No sales charges will be payable by any securityholder in connection with the exchange of securities of the Terminating Funds into the Continuing Funds.
21. Each Terminating Fund has substantially the same distribution policy as its Continuing Fund.
22. Any sales charges applicable to securities of a Continuing Fund are the same or lower than for the equivalent class of securities of its corresponding Terminating Fund.
23. All Funds have substantially similar arrangements with respect to switch fees.
24. All Funds calculate their net asset values daily at 4:00 p.m. Net asset values per unit or share are calculated for each class of securities using similar methodologies and currencies. Assets and liabilities generally are valued in the same manner.
25. Securityholders of the Terminating Funds will continue to have the right to redeem or transfer their securities of a Terminating Fund at any time up to the close of business on the business day prior to the Merger Date. Following the Mergers, all optional plans (including pre-authorized purchase programs, automatic withdrawal plans and systematic switch programs) which were established with respect to a Terminating Fund will be re-established in comparable plans with respect to its Continuing Fund unless securityholders advise otherwise.
26. Following the Mergers, each of the Continuing Funds will continue as a publicly offered open-end mutual fund and the Terminating Funds will be wound up.
27. Following the Mergers, a Material Change Report and amendments to the Simplified Prospectus, Annual Information Form, and Fund Facts of each Terminating Fund in respect of its respective merger will be filed.
28. In the opinion of the Filer, each of the Mergers satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6 of NI 81-102, except the criteria contained in subsection 5.6(1)(a)(ii) of NI 81-102 as the investment objectives of the Terminating Funds may not be considered by a reasonable person to be "substantially similar" to the investment objectives of the Continuing Funds, and the criteria contained in subsection 5.6(1)(b) of NI 81-102 as the Registered Mergers will be conducted on a taxable basis.
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 Approval Sought is granted.