NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization -- Approval required because merger does not meet the criteria for pre-approval -- merger conducted on a taxable basis -- Securityholders provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
October 30, 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 ASTON HILL ASSET MANAGEMENT INC. (the Filer) AND ASTON HILL GLOBAL RESOURCE & INFRASTRUCTURE 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) for approval under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) in connection with the proposed merger (the Merger) of the Terminating Fund into Aston Hill Global Resource Fund (the Continuing Fund, and together with the Terminating Fund, the Funds) (the Requested Relief).
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 each of the provinces and territories of Canada.
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 Toronto, Ontario.
2. The Filer is registered under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations as a portfolio manager and an exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick and Nova Scotia and an investment fund manager, a portfolio manager and an exempt market dealer in Newfoundland and Labrador, Ontario and Québec.
3. The Filer is the manager of the Funds.
4. The Filer is not in default of securities legislation in any province or territory of Canada.
The Continuing Fund
5. The Continuing Fund is an open-end mutual fund trust established under the laws of the Province of Ontario by a master declaration of trust dated June 30, 2011, as amended.
6. The Continuing Fund is a reporting issuer under the applicable securities legislation of each province and territory of Canada. The Continuing Fund is not in default of securities legislation in any province or territory of Canada.
The Terminating Fund
7. The Terminating Fund is an open-end mutual fund trust established under the laws of the Province of Ontario by a master trust agreement dated June 30, 2011, as amended.
8. Units of the Terminating Fund are currently offered for sale under a simplified prospectus and annual information form dated May 12, 2015 in all of the provinces and territories of Canada.
9. The Terminating Fund is not in default of securities legislation in any province or territory of Canada.
10. 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 the Merger will not be a tax-deferred transaction as described in paragraph 5.6(1)(b) of NI 81-102. Except for this reason, 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.
11. 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:
(a) to the extent that unitholders in the Terminating Fund have an accrued capital loss on their units in a non-registered account, effecting the Merger on a taxable basis will afford the unitholders of the Terminating Fund the opportunity to realize that loss and use it against current and future capital gains or even carry the capital loss back as permitted under the Tax Act;
(b) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund; and
(c) effecting the Merger on a taxable basis will have no tax impact on the Continuing Fund.
12. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Filer presented the terms of the Merger to the Funds' Independent Review Committee (IRC) on June 19, 2015 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.
13. A press release and material change report in respect of the proposed Merger were filed on the system for electronic disclosure and retrieval (SEDAR) on June 25, 2015.
14. A notice of meeting, a management information circular (the Circular) and proxies in connection with the Merger were mailed to unitholders of the Terminating Fund on July 13, 2015 and were subsequently filed on SEDAR.
15. The Circular provided 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.
16. On August 10, 2015, unitholders of the Terminating Fund approved the resolutions set out in the Circular to merge the Terminating Fund into the Continuing Fund. If the Requested Relief is obtained, it is anticipated that the Merger will be implemented on or about November 2, 2015 (the Effective Date).
17. The Terminating Fund and the Continuing Fund have the same valuation procedures.
18. The Filer is of the view that the investment objective of the Terminating Fund is the same as the investment objective of the Continuing Fund.
19. The risk profile of the Continuing Fund is the same as that of the Terminating Fund.
20. The Filer has determined that the Merger is not a material change for the Continuing Fund.
21. The Continuing Fund will offer the same series of units as the Terminating Fund. Holders of series X, Y, A, F and I units of the Terminating Fund will become unitholders of the corresponding series of units of the Terminating Fund.
22. The portfolios and other assets of the Terminating Fund are or will be acceptable to the portfolio advisors of the Continuing Fund prior to the Effective Date and will also be consistent with the investment objectives of the Continuing Fund.
23. 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.
24. The Filer will pay all costs and expenses relating to the Merger, including any brokerage fees.
25. The Filer will not receive any compensation in respect of the acquisition, sale or redemptions of the units of the Fund delivered upon terminations.
26. Unitholders of the Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash at any time up to the close of business on the Effective Date. The Circular disclosed that securities of a Continuing Fund acquired by unitholders upon the proposed Merger are subject to the same redemption charges to which their securities of the Terminating Fund were subject prior to the Merger.
27. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger:
(a) the Terminating Fund will transfer all of its assets and liabilities to the Continuing Fund for an amount equal to the net value of the assets transferred;
(b) the Continuing Fund will issue securities of the Continuing Fund to the Terminating Fund having a net asset value equal to the net value of the assets transferred by the Terminating Fund; and
(c) the Terminating Fund will redeem its outstanding securities and pay the redemption price for these securities by distributing securities of the Continuing Fund to the Terminating Fund's unitholders. Securities of the Continuing Fund received by the unitholders of the Terminating Fund will have an aggregate net asset value equal to the aggregate net asset value of the securities of the Terminating Fund which are being redeemed.
28. Any cash acquired by the Continuing Fund in connection with the Merger will be invested in accordance with the investment objectives, strategies, and restrictions of the Continuing Fund and NI 81-102.
29. 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.
30. Following the Merger, all pre-authorized chequing plans and systematic withdrawal plans of unitholders of the Terminating Fund will be re-established in the Continuing Fund on the same terms.
31. The Filer believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) upon completion of the Merger, the Continuing Fund will have a greater level of assets resulting in economies of scale for operating expenses as part of a larger combined fund;
(b) the annual management fees payable by unitholders of Continuing Fund will be the same as or lower than the current annual management fees of the Terminating Fund; and
(c) the Merger will result in the unitholders of the Terminating Fund owning units of the Continuing Fund which has a substantial amount of tax loss carry-forwards.
32. The foregoing reasons for the Mergers were set out in the Circular along with certain prospectus-level disclosure concerning the Continuing Funds, including information regarding fees, expenses, investment objectives, valuation procedures, the manager, the portfolio advisor (or sub-advisor, as applicable), income tax considerations and net asset value. The Circular has provided sufficient information about each Merger to permit unitholders to make an informed decision about the Merger. The Circular also disclosed that unitholders can obtain the simplified prospectus, annual information form, fund facts, the most recent financial statements, and the most recent management report of fund performance of the Continuing Fund that have been made public, from the Filer upon request, on the Filer's website or on SEDAR at www.sedar.com.
33. 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.
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 Requested Relief is granted.