MI 11-102 and NP 11-203 -- fund manager proposes merging a non-redeemable investment fund into a mutual fund -- merger requires approval under paragraph 5.5(1)(b) of NI 81-102 -- approval granted.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, s. 5.5.
Citation: Re Middlefield Limited, 2015 ABASC 749
June 16, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF ALBERTA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF MIDDLEFIELD LIMITED (the Filer) AND ENERGY INDEXPLUS DIVIDEND FUND (the Terminating Fund) AND MIDDLEFIELD GLOBAL INFRASTRUCTURE FUND (the Continuing Fund)
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Makers) has received an application from the Filer on behalf of the Terminating Fund and the Continuing Fund (each a Fund and together, the Funds) for a decision under the securities legislation (the Legislation) of the Jurisdictions for approval (the Approval Sought), pursuant to section 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102), of the proposed merger (Merger) of the Terminating Fund into the Continuing Fund.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Alberta Securities Commission is the principal regulator for this application,
(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, Saskatchewan, Manitoba, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon, and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions or in MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer:
The Filer and Fund Information
1. The Filer is a corporation governed by the laws of Alberta and is registered as an investment fund manager under securities legislation in each of Alberta, Ontario, Québec and Newfoundland and Labrador. The Filer is the manager of the Funds.
2. The head office of the Filer is located in Calgary, Alberta.
3. The Terminating Fund completed its initial public offering of units on July 19, 2011 and is a non-redeemable investment fund governed by a declaration of trust dated June 29, 2011. The units of the Terminating Fund are listed for trading on the Toronto Stock Exchange (TSX) under the symbol "IDE.UN".
4. The Continuing Fund was launched on June 12, 2013 and is a mutual fund trust governed by a declaration of trust dated June 12, 2013.
5. The Terminating Fund and the Continuing Fund are reporting issuers under the securities legislation of each jurisdiction of Canada.
6. Neither the Filer nor the Funds are in default of any of the requirements of securities legislation in any jurisdiction of Canada.
7. The Continuing Fund currently distributes its securities in all of the jurisdictions of Canada pursuant to a simplified prospectus, annual information form and fund facts documents, each dated May 22, 2015.
Details of the Merger
8. The proposed Merger was announced in a joint press release of the Funds dated April 10, 2015, which has been filed by each Fund on SEDAR. It is expected that the Merger will be completed on or about June 17, 2015 (the date the Merger becomes effective being the Effective Date).
9. Pursuant to the Merger, units of the Terminating Fund will be exchanged for Series A units of the Continuing Fund at an exchange ratio (the Exchange Ratio) which will be calculated by dividing the net asset value per unit of the Terminating Fund by the net asset value per Series A unit of the Continuing Fund, each as determined at the close of trading on the TSX on the business day prior to the Effective Date.
10. The proposed Merger will be structured as follows:
(a) The Terminating Fund and the Continuing Fund will amend their respective declarations of trust if and to the extent necessary or appropriate to implement the Merger.
(b) To the extent necessary, the Terminating Fund will make payable to its unitholders on the Effective Date sufficient income and capital gains in order that the Terminating Fund will not be liable for any tax that would not be refundable to it for the stub taxation year ending on the Effective Date. Such distribution will be reinvested in additional units of the Terminating Fund and the then outstanding units will be consolidated such that the number of consolidated units outstanding is equal to the number of units outstanding before the distribution. The Continuing Fund will also take similar steps to ensure that it will not be liable for any tax that would not be refundable to it for the stub taxation year ending on the Effective Date.
(c) On the Effective Date, the Terminating Fund will transfer all of its assets and liabilities to the Continuing Fund in exchange for an amount (the Purchase Price) equal to the value of the net assets transferred to the Continuing Fund on the Effective Date.
(d) The Continuing Fund will satisfy the Purchase Price by issuing that number of its Series A units as is equal to the number of units in the Terminating Fund then outstanding multiplied by the Exchange Ratio.
(e) The units of the Terminating Fund will then be redeemed without further action and the Terminating Fund will pay the redemption price therefor by distributing the applicable number of Series A units to its former unitholders, with each such unitholder receiving that number of Series A units as is equal to the Exchange Ratio multiplied by the number of units of the Terminating Fund held by such unitholder immediately prior to the completion of the Merger.
(f) Following the distribution of Series A units to former unitholders of the Terminating Fund, the Terminating Fund and the Continuing Fund will file a joint tax election in respect of the transfer to the Continuing Fund of all of the assets and liabilities of the Terminating Fund.
(g) The Terminating Fund will be wound up as soon as reasonably practicable following the Merger.
11. The independent review committees of the Funds (the IRCs) established pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds have reviewed the potential conflict of interest matters involved in mergers structured in the same manner as the Merger and, after reasonable inquiry, concluded that such mergers would achieve a fair and reasonable result for the funds involved and accordingly have granted standing approval to the Filer to effect such mergers.
12. The Manager will convene a special meeting (the Meeting) of the unitholders of the Terminating Fund in order to seek approval of the Merger, as required by section 5.1(f) of NI 81-102. The Meeting will be held on or about June 10, 2015. In connection with the Meeting, the Manager will send to each unitholder of the Terminating Fund a management information circular, a related form of proxy and the fund facts document of the Continuing Fund relating to its Series A units.
13. If all required approvals for the Merger are obtained, it is intended that the Merger will occur and unitholders of the Terminating Fund will become unitholders of the Continuing Fund at approximately 12:01 a.m. on the Effective Date. The Terminating Fund will be wound-up as soon as reasonably practicable following the Merger.
14. The cost of effecting the Merger (consisting primarily of proxy solicitation, printing, mailing, legal and regulatory fees and brokerage commissions in connection with any realignment of the portfolios of the Continuing Fund or the Terminating Fund) will be borne by the Filer.
15. The units of the Terminating Fund are expected to be de-listed from trading on the TSX on the day prior to the Effective Date. Upon completion of investment dealers' back office operations in connection with the Merger, unitholders of the Terminating Fund will be able to redeem the Series A units of the Continuing Fund that they acquired pursuant to the Merger on a daily basis and for redemption proceeds per Series A unit equal to the net asset value per Series A unit next calculated. Any period of illiquidity following the Merger will be as short as is practicable. No fees or expenses will be payable by such unitholders in connection with a redemption of units of the Continuing Fund issued pursuant to the Merger.
16. In the opinion of the Filer the Merger satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6(1) of NI 81-102 except as follows:
(a) In the opinion of the Filer, a reasonable person may not consider the fundamental investment objectives or fee structure of the Terminating Fund to be substantially similar to those of the Continuing Fund. Accordingly, the Merger may not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(a)(ii) of NI 81-102.
(b) The Terminating Fund's unitholders will not have the opportunity to redeem their units of the Terminating Fund for proceeds equal to the net asset value per unit between the date of the press release announcing the Merger and the Effective Date. Accordingly, the Merger may not meet the criteria for pre-approved reorganizations and transfers under subsections 5.6(1)(j)(ii) and (iii) of NI 81-102. However, the Filer believes that an additional redemption right is not necessary, since Series A units of the Continuing Fund are redeemable on a daily basis for redemption proceeds per Series A unit equal to the net asset value per Series A unit next calculated and no fees or expenses will be payable by such unitholders in connection with a redemption of units of the Continuing Fund issued pursuant to the Merger.
17. The Filer believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) the Merger will reduce the duplication of administrative and regulatory costs involved in operating the Terminating Fund and the Continuing Fund as separate investment funds;
(b) the Continuing Fund will have a greater level of assets which in turn is expected to allow for increased portfolio diversification opportunities and greater liquidity of investments;
(c) unitholders of the Terminating Fund and the Continuing Fund may enjoy increased economies of scale for operating expenses as part of a larger combined Continuing Fund;
(d) the Series A units of the Continuing Fund issued pursuant to the Merger will be redeemable on a daily basis and for redemption proceeds per Series A unit equal to the net asset value per Series A unit next calculated; and
(e) the Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace.
18. The management information circular prepared in connection with the Meeting provides a comparison of the fundamental investment objectives, fee structures and other material differences between the Funds.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Approval Sought is granted.