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 -- the fundamental investment objectives of the terminating funds and the continuing funds are not substantially similar -- securityholders of terminating funds are provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
January 27, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF FRANKLIN TEMPLETON INVESTMENTS CORP. (the Filer) AND TEMPLETON CANADIAN STOCK FUND, TEMPLETON CANADIAN STOCK CORPORATE CLASS, TEMPLETON CANADIAN BALANCED FUND (each, a Terminating Fund and collectively, the Terminating 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 of the principal regulator (the Legislation) approving the mergers (the Mergers) of the Terminating Funds into the Continuing Funds (defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment 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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively, the Passport 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. The following additional terms shall have the following meanings:
Continuing Funds means Franklin Bissett Canadian Equity Fund, Franklin Bissett Canadian Equity Corporate Class and Franklin Bissett Canadian Balanced Fund;
Corporate Class Merger means the merger of Templeton Canadian Stock Corporate Class into Franklin Bissett Canadian Equity Corporate Class;
FTCCL means Franklin Templeton Corporate Class Ltd;
Funds means collectively, the Terminating Funds and the Continuing Funds and Fund means any one of the Terminating Funds or the Continuing Funds;
IRC means the independent review committee for the Funds;
NI 81-107 means National Instrument 81-107 Independent Review Committee for Investment Funds;
Tax Act means the Income Tax Act (Canada);
Templeton Canadian Balanced Merger means the merger of Templeton Canadian Balanced Fund into Franklin Bissett Canadian Balanced Fund; and
Templeton Canadian Stock Merger means the merger of Templeton Canadian Stock Fund into Franklin Bissett Canadian Equity Fund;
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation existing under the laws of Ontario having its registered head office in Toronto, Ontario.
2. The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and mutual fund dealer in the Jurisdiction and is registered as a portfolio manager, exempt market dealer and mutual fund dealer in each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Quebec, Saskatchewan and Yukon and as an investment fund manager in each of Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia and Quebec.
3. The Filer is the investment fund manager of each of the Funds.
4. FTCCL is an open end mutual fund corporation incorporated under the laws of Alberta on June 1, 2001. Each of Templeton Canadian Stock Corporate Class and Franklin Bissett Canadian Equity Corporate Class is a separate class of special shares of FTCCL.
5. Each of Templeton Canadian Stock Fund, Templeton Canadian Balanced Fund, Franklin Bissett Canadian Equity Fund and Franklin Bissett Canadian Balanced Fund is a trust established under the laws of Ontario.
6. Securities of the Funds are currently qualified for sale by a simplified prospectus, annual information form and Fund Facts dated May 29, 2014, which have been filed and receipted in Ontario and each of the Passport Jurisdictions (collectively, the Jurisdictions).
7. Each of the Funds is a reporting issuer in the Jurisdictions.
8. Neither the Filer nor any Fund is in default under the securities legislation in the Jurisdictions.
9. Other than circumstances in which the securities regulatory authorities of the Jurisdictions has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.
The Proposed Mergers
10. The Filer intends to merge the Terminating Funds into the Continuing Funds as follows:
(a) Templeton Canadian Stock Fund into the Franklin Bissett Canadian Equity Fund;
(b) Templeton Canadian Stock Corporate Class into the Franklin Bissett Canadian Equity Corporate Class; and
(c) Templeton Canadian Balanced Fund into the Franklin Bissett Canadian Balanced Fund.
11. The Mergers require the Approval Sought because the Mergers do not satisfy one of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in that a reasonable person would not consider each Terminating Fund and its corresponding Continuing Fund to have substantially similar investment objectives.
12. The Mergers will not constitute a material change for the Continuing Funds.
13. Securityholders of the Terminating Funds will be asked to approve the relevant Mergers at special meetings expected to be held on or about February 27, 2015. As required under the Business Corporations Act (Alberta), securityholders of the Franklin Bissett Canadian Equity Corporate Class will also be asked to approve the Corporate Class Merger.
14. As disclosed in the management information circular, the Corporate Class Merger is contingent on the Templeton Canadian Stock Merger. The Terminating Fund and Continuing Fund of the Templeton Canadian Stock Merger are the underlying funds of the Terminating Fund and Continuing Fund of the Corporate Class Merger, respectively.
15. Subject to receipt of securityholder approval and the Approval Sought, the Mergers are expected to occur on or about March 13, 2015 (the Effective Date).
16. If securityholder approval is not received at the special meeting in respect of a Fund, then the relevant Merger will not proceed.
17. It is proposed that the following steps will be carried out to effect the Mergers:
(a) In respect of the proposed Templeton Canadian Stock Merger and Templeton Canadian Balanced Merger:
(i) Any investments held by the Terminating Funds that are not consistent with the investment objectives of the Continuing Funds or acceptable to the portfolio manager of the Continuing Funds will be sold prior to the Effective Date. As a result, each Terminating Fund will temporarily hold cash and/or money market instruments and will not be invested in accordance with its investment objectives for a brief period of time prior to the Mergers. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions.
(ii) Prior to the Mergers, each of the Terminating Funds and the Continuing Funds will distribute to their respective securityholders sufficient net income and net realized capital gains so that none of the Funds will be subject to tax under Part I of the Tax Act for the taxation year ended at the time of the Mergers.
(iii) On the Effective Date, each Terminating Fund will transfer all of its assets, which will consist of cash and/or money market instruments, less an amount required to satisfy the liabilities of each Terminating Fund, to the applicable Continuing Fund, in exchange for units of the Continuing Fund. The units of the Continuing Fund received by the applicable Terminating Funds will have an aggregate net asset value equal to the value of the net assets transferred by the applicable Terminating Fund.
(iv) Immediately following the above-noted transfer, each Terminating Fund will redeem its outstanding units and distribute the units of the applicable Continuing Fund received by the Terminating Fund to securityholders of the Terminating Fund, in exchange for all such securityholders' existing units of the Terminating Fund, on a series-for-series and dollar-for-dollar basis.
(b) In respect of the Corporate Class Merger:
(i) Any investments held by the Terminating Fund that are not consistent with the investment objectives of the Continuing Fund or acceptable to the portfolio manager of the Continuing Fund will be sold prior to the Effective Date. It is expected that all of the Terminating Fund's current investments (being units of Templeton Canadian Stock Fund) will be sold prior to the Effective Date. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions. As a result, the Terminating Fund will temporarily hold cash or money market instruments and will not be fully invested in accordance with its investment objectives for a brief period of time prior to, and following the Merger.
(ii) The articles of incorporation of FTCCL will be amended to authorize the exchange of all outstanding special shares of each series of the Terminating Fund for special shares of the same series of the Continuing Fund.
(iii) Each securityholder of the Terminating Fund will receive special shares of the same series of the Continuing Fund with a value equal to the value of their special shares in the Terminating Fund as determined on the Effective Date. After this step is complete, securityholders of the Terminating Fund will become securityholders of the Continuing Fund.
(iv) On the Effective Date, the net assets attributable to the Terminating Fund (being its investment portfolio and other assets, including cash and liabilities) will be included in the portfolio of assets attributable to the Continuing Fund.
18. As soon as reasonably possible following the Mergers, the Terminating Funds will be wound up and the Continuing Funds will continue as publically offered open-end mutual funds.
19. Costs and expenses associated with the Mergers, including the costs of the Meetings, will be borne by the Filer and will not be charged to the Funds. The costs of the Mergers include legal, printing, mailing and regulatory fees, as well as proxy solicitation costs.
20. No sales charges will be payable by securityholders of the Funds in connection with the Mergers.
Comparison of Terminating Funds and Continuing Funds
21. The Mergers satisfy all of the requirements for pre-approved reorganizations and transfers set out in section 5.6(1) of NI 81-102, except the requirement set out in subsection 5.6(1)(a)(ii) that a reasonable person would consider the Terminating Funds and Continuing Funds to have substantially similar investment objectives.
22. A press release describing the proposed Mergers has been issued and the press release, material change report and amendments to the simplified prospectus, annual information form and Fund Facts, which give notice of the proposed Mergers, have been filed via SEDAR.
23. A notice of meeting, management information circular, proxy and Fund Facts of the applicable series of each Continuing Fund (the Meeting Materials) have been mailed to securityholders of each Terminating Fund commencing on or about January 23, 2015 and have been filed via SEDAR.
24. The Meeting Materials contain the Fund Facts of the Continuing Funds, a description of the proposed Mergers, information about the Terminating Funds and the Continuing Funds and income tax considerations for securityholders of the Terminating Funds. The Meeting Materials will also describe the various ways in which securityholders can obtain a copy of the simplified prospectus and annual information form of the Continuing Funds, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Funds, at no cost.
Securityholder Purchases and Redemptions
25. Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash or switch into securities of another Franklin Templeton mutual fund (including on a tax-deferred basis to a fund that is a class of FTCCL, where applicable) at any time up to the close of business on the business day immediately before the Effective Date of the applicable Merger.
26. Subject to receiving the necessary approvals at the special meetings, effective as of the close of business on February 27, 2015, the Terminating Funds will cease distribution of securities and any new purchases of securities will be disallowed. The Terminating Funds will remain closed to purchase-type transactions, except existing systematic investment programs (such as pre-authorized chequing plans), until they are merged with the Continuing Funds on the Effective Date. All systematic programs shall remain unaffected until the business day immediately before the Effective Date of the applicable Merger.
27. Following the Mergers, all systematic programs that had been established with respect to the Terminating Funds will be re-established on a series-for-series basis in the applicable Continuing Funds, unless securityholders advise the Filer otherwise.
28. Securityholders may change or cancel any systematic program at any time and securityholders of the Terminating Funds who wish to establish one or more systematic programs in respect of their holdings in the Continuing Funds may do so following the Mergers.
29. The Filer has presented the proposed Mergers to the IRC and has obtained a positive recommendation that each Merger, if implemented, would achieve a fair and reasonable result for the Funds.
30. A summary of the IRC's recommendation has been included in the notice of special meeting sent to securityholders of the Terminating Funds as required by section 5.1(2) of NI 81-107.
Benefits of Mergers
31. The Filer believes that the Mergers will benefit securityholders of the Terminating Funds in the following ways:
(a) reducing the number of Franklin Templeton Funds will provide investors with a streamlined range of products that will make it easier for investors to select a suitable mutual fund based on their risk tolerance;
(b) merging the Terminating Funds into Continuing Funds advised by Franklin Bissett Investment Management aligns the investment mandates of these Funds with a portfolio advisor whose core strength is security selection in the relatively small and highly concentrated Canadian market;
(c) each Continuing Fund is of a larger size, which allows for increased portfolio diversification opportunities; and
(d) management and administration fees will not increase and MERs of each Continuing Fund will remain substantially the same as or, in some cases, be moderately lower than, the MER of its corresponding Terminating Fund.
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, provided that the Filer obtains the prior securityholder approval for the Mergers at the special meeting held for that purpose, or any adjournments thereof.