Approval of a reorganization of a labour sponsored investment fund pursuant to which the proceeds of the liquidation of the fund's assets will be distributed to shareholders of the fund by way of investing the proceeds in units of a money market fund in the name of each shareholder -- approval required because the reorganization does not meet all of the pre-approval requirements in subsection 5.6(1) of National Instrument 81-102 Mutual Funds.
National Instrument 81-102 Mutual Funds, paragraph 5.5(1)(b) and section 19.1.
August 26, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO AND IN THE MATTER OF JOV LEON FRAZER ENHANCED OPPORTUNITIES FUND INC. (the Fund)
The securities regulatory authority or regulator in Ontario (the Decision Maker) has received an application (the Application) from the Fund for approval of a proposed restructuring wherein the Fund has sold substantially all of its assets in an orderly liquidation, has commenced the formal dissolution and liquidation process and anticipates distributing all of its assets to its shareholders by way of units in the IA Clarington Money Market Fund in the name of the shareholders in the near future (the Reorganization), as described further below, pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102).
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Fund:
1. The Fund was amalgamated under the Canada Business Corporations Act (the CBCA) on December 12, 2006 under the name Horizons Advantaged Equity Fund Inc., amended the provisions of its articles by Articles of Amendment dated December 31, 2011 and changed its name to the current name of the Fund by Articles of Amendment dated March 4, 2013.
2. The Fund's registered office is in Ontario.
3. The Fund is a registered labour sponsored investment fund corporation (LSIF) under the Community Small Business Investment Funds Act (Ontario) (the CSBIF Act). The Fund is registered as a labour-sponsored venture capital corporation (LSVCC) under the Income Tax Act (Canada) (the Tax Act). The Fund's investing activities are governed by both the CSBIF Act and the Tax Act.
4. The Fund has historically invested in small and medium sized businesses with the objective of obtaining long term capital appreciation in accordance with the CSBIF Act.
5. The labour sponsor of the Fund is the Canadian Federal Pilots Association (the Sponsor).
6. The authorized capital of the Fund is as follows:
(a) an unlimited number of Class A shares in three series of which the following were issued and outstanding as at July 31, 2014:
(i) 98,546.037 Class A, Series I
(ii) 11,919.983 Class A, Series II
(iii) 563,122.370 Class A, Series III;
(b) an unlimited number of Class B shares of which 1,100 is issued and outstanding and held by the Sponsor; and
(c) an unlimited number of Class C shares, of which there are none issued or outstanding.
7. Leon Frazer & Associates Inc. (Leon Frazer) is the investment advisor of the Fund under an agreement dated December 12, 2006, assigned September 27, 2010 and further assigned October 18, 2011. Leon Frazer is indirectly wholly-owned by Industrial Alliance Insurance and Financial Services Inc.
8. The Fund's shares are not listed on any stock exchange.
9. The Fund ceased offering its Class A shares on May 10, 2013. Prior to that date, the Fund was offering its Class A shares for sale only in Ontario. The Fund suspended redemptions of its Class A shares on May 28, 2014 when it announced that it intended to liquidate its assets and complete the wind-up.
10. As of July 31, 2014, the Fund had approximately $3.3 million in net assets under management.
11. The Fund has complied with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure in connection with the liquidation of its assets and the proposed Wind-Up by filing press releases and material change reports.
12. Neither the Fund nor JovFinancial Solutions Inc. (the Manager), the manager of the Fund, is in default of securities legislation.
Background to the Wind-Up
13. The Ontario Ministry of Finance (MOF Ontario) announced amendments to the CSBIF Act (the Amendments) which received Royal Assent and were implemented on May 18, 2006. Two of the Amendments introduced related to: (i) the termination of the Ontario tax credits available to purchasers of Class A shares after the 2010 tax season; and (ii) the addition of certain wind-up provisions which allow LSIFs to enter into a formal wind-up phase prior to dissolving. One of the wind-up related provisions introduced by the Amendments permits any LSIF that winds up to return its Class A share investment capital to shareholders without them incurring a tax credit penalty even if they have not held their Class A shares for more than the eight year hold period required by the CSBIF Act.
14. Subsequent to the enactment of the Ontario Amendments, the Fund registered federally under the Tax Act. The Federal Department of Finance (Federal DOF) announced amendments to the Tax Act (the Federal Amendments) on March 21, 2013 and November 27, 2013. The federal budget on March 21, 2013 announced plans to phase out the federal LSVCC tax credit by 2017. The November 27, 2013 amendments related to the addition of certain wind-up provisions which allow LSIFs to enter into a formal wind-up phase prior to dissolving. One of the wind-up related provisions introduced by the Federal Amendments permits any LSIF that winds up to return its Class A share investment capital to shareholders without them incurring a tax credit penalty even if they have not held their Class A shares for more than the eight year hold period required by the Tax Act.
15. The Board of Directors of the Fund announced publicly on May 28, 2014 that the Fund would, subject to obtaining shareholder approval to do so as required under the CBCA, wind-up its affairs and distribute its assets to shareholders.
16. The Fund has submitted a formal wind-up proposal for the Fund (the Wind-Up Proposal) to the MOF Ontario and the Federal DOF.
17. The Fund's objectives when considering the Wind-Up Proposal were to: (a) attain the highest possible valuation of the Class A shares for shareholders; and (b) wind-up the Fund on an orderly basis.
18. The Wind-Up Proposal was implemented by the liquidation of each of the Fund's assets separately (the Orderly Liquidation) in order to meet the stated objectives.
19. Approximately 95% of the shareholders of the Fund hold their Class A shares in a registered account, and approximately 27% of shareholders hold their Class A shares in a non-self-directed client registered retirement savings plan (RRSP) account for which there is no mechanism permitting those accounts to hold cash. The Fund has been advised that cash distributions to those accounts would result in Canada Revenue Agency deeming there to have been a withdrawal from the RRSP account, which withdrawal could not be reversed.
20. The Board of Directors decided that, provided the necessary consents and approvals could be obtained, the Fund would use the proceeds from the liquidation of the Fund to purchase units of IA Clarington Money Market Fund. The Fund would then distribute units of IA Clarington Money Market Fund directly into the accounts of shareholders. Shareholder approval was obtained for such a distribution.
21. IA Clarington Money Market Fund was chosen as a result of IA Clarington Investments Inc.'s relationship as an affiliate of the Fund's manager and because units of that fund could be readily converted to cash and are suitable for most shareholders.
Shareholders Meeting and Completion of Orderly Liquidation
22. A material change report was filed via SEDAR on May 29, 2014 announcing the proposed Orderly Liquidation and Wind-Up Proposal.
23. An information circular (the Circular) which contained details of the Orderly Liquidation, amendment of the Fund's articles and dissolution of the Fund including the income tax considerations associated with these events and a description of the units of IA Clarington Money Market Fund was mailed to the shareholders of the Fund in advance of a special meeting of shareholders held on July 25, 2014 (the Shareholders' Meeting).
24. The Circular advised shareholders that the proceeds to be distributed from the liquidation of the Fund would not be deposited to their accounts in cash and, subject to any consents and approvals necessary, shareholders would receive the equivalent value of the proceeds of the Fund in the form of Series A units of IA Clarington Money Market Fund.
25. A copy of the fund facts documents for the IA Clarington Money Market Fund was included in the package of materials sent to shareholders with respect to the Shareholders' Meeting.
26. The shareholders of the Fund approved a special resolution authorizing the Orderly Liquidation, redemption of investors, the in specie distribution and the wind-up of the Fund at the Shareholders' Meeting.
27. The Manager bore the costs of the Shareholders' Meeting.
28. The independent review committee (IRC) of the Fund met on June 24, 2014. The IRC reviewed the proposed transaction and determined that the purchase by the Fund and the distribution of units of IA Clarington Money Market Fund into shareholders' accounts as proceeds of the redemption of Class A shares of the Fund would achieve a fair and reasonable result for the Fund.
29. The Orderly Liquidation was completed on Tuesday, August 19, 2014.
Procedure for the Liquidation and Dissolution of the Fund
30. With the completion of the Orderly Liquidation, the Fund's assets now consist exclusively of cash, near cash and receivables.
31. The Fund intends, in accordance with the special resolution of the shareholders, to purchase units of IA Clarington Money Market Fund and commence the formal dissolution and liquidation process as it is set out in the CBCA.
Distribution of Proceeds to Shareholders
32. The Board of Directors of the Fund anticipates that there will only be one redemption of securities as part of the liquidation and dissolution process of the Fund.
33. The timing of the distribution will be at the discretion of the Board of Directors of the Fund; however, it is currently anticipated that the distribution will occur August 29, 2014. It is anticipated that all of the assets will be distributed at that time. The distribution will be made after all liabilities (including contingent liabilities, if any) of the Fund are satisfied or otherwise dealt with, including the payment of all expenses of liquidation and any applicable taxes.
34. The proportionate value of the proceeds of distribution belonging to each individual shareholder will be deposited into each of his or her respective investment account regardless of whether his or her account is held at a brokerage firm or is an RRSP account held as a client account.
35. The Fund has confirmed with the Manager that shareholders of the Fund will receive units of IA Clarington Money Market Fund without paying a selling commission and that shareholders will be able to redeem their units without paying a redemption fee as soon as they wish to do so.
36. All shareholders of the Fund will hold the units of IA Clarington Money Market Fund within their existing investment account which account will remain at their existing dealer.
37. Each shareholder of the Fund will receive a single trade confirmation that shows both transactions (the redemption of the Class A shares of the Fund and corresponding purchase of units of the IA Clarington Money Market Fund) and a copy of the fund facts documents of the IA Clarington Money Market Fund.
38. The Fund will issue a press release indicating the distribution has been completed as soon as that occurs and prior to shareholders receiving their trade confirmation.
39. IA Clarington Money Market Fund, according to its interim management report of fund performance for the period ended June 30, 2013, seeks to provide some interest income with a focus on preservation of capital while maintaining liquidity.
40. IA Clarington Money Market Fund invests in high quality debt securities and selects money market instruments that offer good relative value.
41. IA Clarington Money Market Fund is suitable for investors who are seeking interest income and preservation of capital, are investing for the short-term and can tolerate low risk.
Reasons for the Relief Being Required
42. The Fund is in the process of effecting the Reorganzation in the manner described above. A distribution of cash, instead of securities of IA Clarington Money Market Fund, would not require securities regulatory approval pursuant to NI 81-102.
43. Furthermore, due to the structure of the wind-up, a cash transaction would not constitute a reorganization pursuant to paragraph 5.5(1)(b) of NI 81-102.
44. The Reorganization will result in shareholders of the Fund becoming shareholders of IA Clarington Money Market Fund. Therefore the approval of the securities regulatory authority is required pursuant to subsection 5.5(1) of NI 81-102, as the Reorganization does not meet the following pre-approval requirements set out in subsection 5.6(1) of NI 81-102:
(a) the fundamental investment objectives and the fee structure of the Fund may not be considered substantially similar to that of IA Clarington Money Market Fund, as would be required under subparagraph 5.6(1)(a)(ii) of NI 81-102;
(b) the Reorganization will be completed on a taxable basis and not as a "qualifying exchange" or as a tax deferred transaction, as would be required under paragraph 5.6(1)(b) of NI 81-102; and
(c) as the Fund has suspended redemptions of its securities, shareholders of the Fund do not have the right to redeem securities of the Fund prior to the effective date of the Reorganization, as would be required by paragraph 5.6(1)(i) of NI 81-102.
45. Declining the requested approval would leave the Fund with no choice but to distribute cash, and would result in an adverse tax consequence for a significant number of shareholders whose RRSP accounts cannot hold cash.
The Decision Maker is satisfied that the test contained in NI 81-102 that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Maker under NI 81-102 is that approval of the Reorganization is granted.