National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval granted under NI 81-102 for reorganization of mutual fund that will result in securityholders becoming securityholders of a different fund -- approval needed because pre-approval conditions for merger won't be met because investment objectives, fee structure not substantially similar, and merger to be effected on a taxable basis -- continuing fund larger with a more diversified portfolio than terminating fund -- merger will result in lower MERs for terminating fund securityholders -- merger to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b).
July 28, 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 EXCEL FUNDS MANAGEMENT INC. (the Filer) AND EXCEL EMERGING EUROPE FUND (the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting approval under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) to merge (the Merger) the Terminating Fund into Excel Emerging Markets Fund (the Continuing Fund, and together with the Terminating Fund, the Funds) (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 (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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Defined terms contained in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 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 Filer:
1. The Filer is a corporation governed by the laws of Ontario with its head office in Mississauga, Ontario.
2. The Filer is registered as an investment fund manager in Ontario.
3. The Filer is the manager and promoter of the Funds.
4. Each of the Funds is an open-end mutual fund trust established under the laws of the Province of Ontario by a master trust agreement.
5. Units of the Funds are currently offered for sale under a simplified prospectus and annual information form dated September 30, 2014 in all of the provinces and territories of Canada. The Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada. None of the Filer or the Funds is in default of securities legislation in any province or territory of Canada.
6. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under the Legislation.
7. The net asset value (NAV) for each series of units of each Fund is calculated as at 4:00 p.m. Eastern Time on each day that the Toronto Stock Exchange is open for trading.
8. A press release and material change report in respect of the proposed Merger were filed on SEDAR on June 18, 2015. Units of the Terminating Fund ceased to be available for sale on that date.
9. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Filer presented the terms of the Merger 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 Merger and has determined that the proposed Merger, if implemented, would achieve a fair and reasonable result for each of the Funds.
10. The Filer has determined that the Merger is not a material change for the Continuing Fund.
11. Unitholders of the Terminating Fund will continue to have the right to redeem or transfer their units of the Terminating Fund at any time up to the close of business on the business day prior to the effective date of the Merger.
12. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because: (i) a reasonable person may not consider the fundamental investment objectives of the Terminating Fund and that of the Continuing Fund to be "substantially similar"; (ii) a reasonable person may not consider the fee structure of the Terminating Fund and that of the Continuing Fund to be "substantially similar"; and (iii) the Merger will not be a tax-deferred transaction as described in paragraph 5.6(1)(b) of NI 81-102. Except for these reasons, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
13. The Filer has determined that it would not be appropriate to effect the Merger as a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the Tax Act) or as a tax-deferred transaction for the following reasons: (i) the Terminating Fund has sufficient loss carry-forwards to shelter any net capital gains that could arise for it on the taxable disposition of its portfolio assets on the Merger; (ii) substantially all the unitholders in the Terminating Fund have an accrued capital loss on their units and effecting the Merger on a taxable basis will afford them the opportunity to realize that loss and use it against current capital gains or even carry it back as permitted under the Tax Act; (iii) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; and (iv) effecting the Merger on a taxable basis will have no other tax impact on the Continuing Fund.
14. A notice of meeting, management information circular and proxies in connection with the Merger were mailed to unitholders of the Terminating Fund on July 8, 2015 and were subsequently filed on SEDAR. The most recently-filed fund facts documents of the Continuing Fund were also included in the meeting material package that was sent to unitholders of the Terminating Fund.
15. The management information circular provides unitholders of the Terminating Fund with information about the differences between the Terminating Fund and Continuing Fund, the management fees of the Continuing Fund and the tax consequences of the Merger. Accordingly, unitholders of the Terminating Fund will have an opportunity to consider this information prior to voting on the Merger.
16. The Filer will pay all costs and reasonable expenses relating to the solicitation of proxies and holding the unitholder meeting in connection with the Merger as well as the costs of implementing the Merger, including any brokerage fees.
17. Unitholders of the Terminating Fund will be asked to approve the Merger at a special meeting scheduled to be held on or about August 13, 2015. If the meeting is adjourned, the adjourned meeting will be held on or about August 14, 2015.
18. If the requisite approvals are obtained, it is anticipated that the Merger will be implemented on or about August 17, 2015. If unitholder approval is not obtained, the Terminating Fund will be terminated on or about September 11, 2015.
19. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.
20. Following the Merger, units of the Continuing Fund received by unitholders in the Terminating Fund as a result of the Merger will have the same sales charge option and, for units purchased under the deferred sales charge option or the volume sales charge option, as described in the Terminating Fund's simplified prospectus, the same remaining deferred sales charge schedule as their units in the Terminating Fund.
21. The Merger is conditional on the approval of (i) the unitholders of the Terminating Fund; and (ii) the Principal Regulator. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger, which is proposed to occur on or about August 17, 2015 (the Merger Date):
(a) Prior to the Merger Date, the Terminating Fund will sell all of the securities in its portfolio such that prior to the Merger Date it will only hold cash. As a result, the Terminating Fund will not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger being effected;
(b) The Terminating Fund will distribute a sufficient amount of its net income and net realized capital gains, if any, to unitholders to ensure that it will not be subject to tax for its current tax year;
(c) The Continuing Fund will not assume any liabilities of the Terminating Fund and the Terminating Fund will retain sufficient cash to satisfy its estimated liabilities, if any, as of the Merger Date;
(d) The Terminating Fund will use the remaining cash to acquire units of the Continuing Fund at their applicable series net asset value per unit as of the close of business on the effective date of the Merger;
(e) Immediately thereafter, units of the Continuing Fund will be distributed to unitholders of the Terminating Fund in exchange for their units in the Terminating Fund on a dollar-for-dollar and series-by-series basis, as applicable; and
(f) Following the Merger Date, and in any case within 60 days thereof, the Terminating Fund will be wound up.
22. The Terminating Fund and the Continuing Fund are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of both Funds are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.
23. The Filer believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) due to the political developments in Russia, there has occurred a significant deterioration of the investment environment for global investors such that the Terminating Fund no longer represents a favourable investment for investors. Russia represents ~50% of the MSCI Emerging Europe 10/40 Index, the 6-country benchmark of the portfolio. Other constituent countries of the benchmark are smaller and have less market liquidity, hence are vulnerable to global investor flows. This has resulted in higher portfolio volatility that has been difficult to mitigate. Further, the Filer does not expect the situation in Russia to improve in the intermediate term;
(b) unitholders of the Terminating Fund will continue to have investment exposure to a larger diversified portfolio of holdings of emerging market countries located anywhere in the world. The Continuing Fund is benchmarked against the 23-country MSCI Emerging Market Index. These countries have different economic cycles and drivers that provide the Filer with the potential to diversify risks in different macroeconomic conditions;
(c) unitholders of the Terminating Fund will not be subject to any increased management fees as the management fees that are charged to the Series A and Series F units of the Continuing Fund are the same as, or less than, the management fees that are currently charged to the Series A and Series F units of the Terminating Fund. The management fees for the Series I and Series O units of the Funds will continue to be negotiated directly with the investor;
(d) unitholders of the Terminating Fund and the Continuing Fund will enjoy increased economies of scale as part of a larger combined Continuing Fund;
(e) by merging the Terminating Fund instead of terminating it, there will be a savings for the Terminating Fund in brokerage charges associated with the liquidation of the Terminating Fund's portfolio on a wind-up. The unitholders of the Terminating Fund will not be responsible for the costs associated with the Merger; and
(f) the Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace;
and accordingly has recommended to the unitholders of the Terminating Fund that they vote for the resolutions that will authorize the Filer to effect the Merger.
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.