NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund merger -- approval required because merger does not meet the criteria for per-approval -- merger not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- manager of continuing fund is not an affiliate of the manager of the terminating funds -- 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.
March 7, 2016
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 REDWOOD ASSET MANAGEMENT INC. (Redwood) AND AIP ASSET MANAGEMENT INC. (AIP) (together the Filers) AND IN THE MATTER OF REDWOOD GLOBAL MACRO CLASS (the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Filers and the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the proposed merger (the Merger) of the Terminating Fund into AIP Global Macro Class (the Continuing Fund and together with the Terminating Fund, the Funds and each a Fund) under subsection 5.5(1)(b) of National Instrument 81-102 -- Investment Funds (NI 81-102) (such approval, the Approval Sought).
Under the process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the OSC) is the principal regulator for this application; and
(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 each of the other Provinces and Territories of Canada (together with Ontario, the 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.
This decision is based on the following facts represented by the Filers:
1. Redwood is a corporation incorporated under the Business Corporations Act (Ontario) (OBCA) and has its head office in Toronto, Ontario.
2. Redwood is registered as an investment fund manager, portfolio manager and exempt market dealer in Ontario, as an investment fund manager and exempt market dealer in Quebec, as an investment fund manager in Newfoundland and Labrador, as an exempt market dealer in Alberta, and as an exempt market dealer in British Columbia.
3. Redwood is the investment fund manager of the Terminating Fund, and AIP is the portfolio manager of the Terminating Fund.
4. AIP is a Toronto-based asset management company formed under the laws of the Province of Ontario pursuant to articles of incorporation dated February 21, 2013.
5. The head office of AIP is located at 77 King St West, Suite 4140, Toronto, ON M5K 1E7.
6. AIP manages hedge funds and mutual funds and discretionary separately managed accounts.
7. AIP is registered in Alberta and British Columbia under the applicable legislation as a portfolio manager. AIP is also registered in Ontario under the applicable legislation as an exempt market dealer, portfolio manager and investment fund manager.
8. Neither Redwood nor AIP is in default of securities legislation in any jurisdiction of Canada.
9. The Terminating Fund is a class of mutual fund shares of Ark Mutual Funds Ltd. (Ark Ltd.), a corporation formed under the OBCA by articles of incorporation dated November 2, 2007.
10. The authorized capital of Ark Ltd. consists of an unlimited number of common shares and 1,000 classes of mutual fund shares issuable in series. One common share (the Common Share) has been issued to Redwood. The Terminating Fund represents one of the classes of mutual fund shares of Ark Ltd. outstanding and the Common Share is the only common share of Ark Ltd. outstanding.
11. The Terminating Fund currently distributes its securities in all the Jurisdictions pursuant to a simplified prospectus, annual information form and fund facts, each dated August 18, 2015 (collectively the Redwood Offering Documents) and as each has been amended, and is a reporting issuer in all the Jurisdictions.
12. The Terminating Fund is subject to, among other laws and regulations, NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).
13. The Terminating Fund is not in default of any requirements of applicable securities legislation.
14. On January 26, 2016, AIP filed a preliminary simplified prospectus, a preliminary annual information form, and related fund facts (collectively, the AIP Offering Documents), for a family of mutual funds to be managed by AIP, including the Continuing Fund.
15. The Continuing Fund will be a class of mutual fund shares of a newly created mutual fund corporation, AIP Mutual Funds Corporation (AIP Corp.), a corporation that was incorporated under the OBCA on January 14, 2016.
16. The Continuing Fund will distribute Series A, Series F and Series I shares in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario (the Distributing Jurisdictions), pursuant to the final AIP Offering Documents. The Continuing Fund will therefore be a reporting issuer in the Distributing Jurisdictions.
17. No shareholders of the Terminating Fund currently reside in a jurisdiction other than the Distributing Jurisdictions, and the Terminating Fund is closed to new purchases of shares in Provinces and Territories other than the Distributing Jurisdictions.
18. The Continuing Fund will be subject to, among other laws and regulations, NI 81-102, NI 81-106 and NI 81-107.
The Proposed Merger
19. On November 23, 2015, Redwood and AIP entered into an agreement (the Transaction Agreement) pursuant to which the parties agreed that the Merger would take place, subject to approval by the securityholders of the Terminating Fund, obtaining all necessary regulatory approvals and the satisfaction of all other conditions precedent set out in the Transaction Agreement.
20. As a result, effective on or about March 18, 2016 (the Effective Date), and subject to receipt of all necessary regulatory and shareholder approvals and the satisfaction of all other required conditions precedent to the Transaction Agreement, the Merger will occur. Securityholders of the Terminating Fund will become securityholders of the Continuing Fund and the Terminating Fund will be wound up as soon as reasonably practicable thereafter.
21. Redwood will continue to act as manager for certain other open-end funds that are not relevant to the Merger.
22. AIP intends to manage and administer the Continuing Fund in a similar manner as the Terminating Fund. If the Merger is approved, securityholders of the Terminating Fund will still hold an investment in a corporate mutual fund that has substantially similar investment objectives and strategies, as well as other common elements, including:
(a) Portfolio Advisor -- AIP is and will be the portfolio advisor to each Fund.
(b) Registered Plan Eligibility -- The Terminating Fund is a qualified investment for trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, tax-free savings accounts, registered disability savings plans and deferred profit sharing plans. Assuming AIP Corp. qualifies as a "public corporation", which is anticipated to be the case, the Continuing Fund will be similarly qualified.
(c) Valuation Procedures -- The Continuing Fund will have similar valuation procedures as the Terminating Fund. The net asset value of each Fund is or will be calculated at the close of trading on each day that the Toronto Stock Exchange is open for trading. Net asset values per share are or will be calculated for each series of securities using the same methodologies and currencies. Assets and liabilities will be valued in a similar manner.
23. A press release announcing the Merger was issued and disseminated on December 1, 2015. A related material change report was filed under SEDAR Project No. 02427202 on December 5, 2015.
24. Amendments to the Redwood Offering Documents were also filed on SEDAR under SEDAR Project No. 2368041 in connection with the announcement of the Merger and in accordance with applicable securities requirements.
25. At a special meeting of shareholders of the Terminating Fund held on February 26, 2016 (the Special Meeting), the shareholders of the Terminating Fund approved the Merger. A notice of meeting and a management information circular (the Circular) was mailed to shareholders of the Terminating Fund on February 4, 2016 and filed on SEDAR on February 5, 2016 in accordance with the requirements of applicable securities legislation.
26. The Circular provided shareholders of the Terminating Fund with sufficient information, including a discussion regarding the tax implications of the Merger and information respecting AIP and the Continuing Fund, to permit them to make an informed decision whether to approve the Merger. In addition, the Circular included certain prospectus-level disclosure concerning the Continuing Fund, including information regarding fees, expenses, investment objectives, valuation procedures, the manager, and the portfolio advisor. The Circular also disclosed that securityholders could obtain the preliminary AIP Offering Documents that were filed upon request or on SEDAR at www.sedar.com. Also accompanying the Circular delivered to securityholders of the Terminating Fund was a copy of the preliminary fund facts document for the Continuing Fund.
27. In accordance with the provisions of NI 81-107, the Independent Review Committee of the Terminating Fund has reviewed the potential conflict of interest matters related to the Merger and, after reasonable inquiry, it concluded pursuant to deliberations on January 19, 2016 that the Merger, if implemented, will achieve a fair and reasonable result for the Terminating Fund.
28. Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:
(a) the Merger is intended to be implemented between Funds that have different and unaffiliated managers. Consequently, the Merger will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(a)(i) of NI 81-102;
(b) the Merger cannot be implemented as either a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the Tax Act) or a tax-deferred transaction under section 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act. Consequently, the Merger does not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(b) of NI 81-102; and
(c) the Continuing Fund is not yet in existence and therefore does not have a current prospectus under which it may offer its shares. As the Continuing Fund is not yet in existence, the Circular therefore cannot contain the statement required under subsection 5.6(1)(f)(iii) of NI 81-102.
29. Except for the foregoing 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.
Proposed Merger Steps
30. The specific steps to implement the Merger are described below. The Merger will be completed on a taxable basis. The result of the Merger will be that investors in the Terminating Fund will cease to be shareholders in the Terminating Fund and will become shareholders in the Continuing Fund.
31. Redwood has determined that a substantial majority of the shares of the Terminating Fund are held in tax deferred registered plans, which are not generally affected by the tax consequences of the Merger.
32. The proposed Merger will be structured as follows:
(a) The value of the Terminating Fund's portfolio and other assets will be determined at the close of business on the Effective Date.
(b) The Continuing Fund will acquire all or substantially all of the investment portfolio and the assets of the Terminating Fund in exchange for shares of the Continuing Fund having an aggregate net asset value equal to the value of the investment portfolio and assets acquired.
(c) The Continuing Fund will not assume the Terminating Fund's liabilities and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date.
(d) If necessary, the Terminating Fund will declare, pay and automatically reinvest a dividend of net capital gains (if any).
(e) The shares of the Terminating Fund will be redeemed at their net asset value and paid for with shares of a corresponding series of the Continuing Fund having an equal aggregate net asset value as of the Effective Date of the Merger. Such shares will be distributed to shareholders of the Terminating Fund on a pro rata basis.
(f) As soon as reasonably practicable after the Effective Date, the articles of Ark Ltd. will be amended in order to remove the class of shares represented by the Terminating Fund, thereby winding up the Terminating Fund.
33. If the Merger receives all required approvals, Shareholders of the Terminating Fund will receive shares of an equivalent class of the Continuing Fund, as shown opposite in the table below:
Series A shares
Series A shares
Series F shares
Series F shares
Series I shares
Series I shares
34. The cost of effecting the Merger (consisting primarily of proxy solicitation, printing, mailing, legal and regulatory fees) will be borne by Redwood and/or AIP. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
35. The right of the shareholders of the Terminating Fund to redeem or switch their shares of the Terminating Fund will cease as of the close of business on the day prior to the Effective Date. Shareholders of the Terminating Fund will subsequently be able to redeem, in the ordinary course, the shares of the Continuing Fund that they will acquire upon the Merger. Shareholders of the Terminating Fund with pre-authorized contribution plans and automatic withdrawal plans will have their plans switched over to the Continuing Fund unless AIP receives notice to the contrary.
Reasons for the Merger
36. In the opinion of Redwood and AIP, the Merger will be beneficial to securityholders of the Funds for the following reasons:
(a) the management fees of the Continuing Fund will be lower than those of the Terminating Fund.
(b) AIP is a mutual fund manager with significant resources to grow the Continuing Fund, which growth may lead to economies of scale that may benefit securityholders of the Funds.
(c) AIP will be managing a limited number of mutual funds, as compared to Redwood. Consequently, it is anticipated that the Continuing Fund could attract more assets as marketing efforts by AIP will be concentrated on fewer funds. The ability to attract assets in the Continuing Fund will benefit investors by ensuring that the Continuing Fund remains a viable, long-term, attractive investment vehicle for existing and potential investors.
(d) As will be described in the preliminary AIP Offering Documents, AIP is also qualifying for distribution an additional mutual fund, AIP Canadian Enhanced Income Class. AIP Canadian Enhanced Income Class will represent a separate class of mutual fund shares of AIP Corp. One of the primary benefits of investing in corporate mutual funds is the ability to switch from one mutual fund to another mutual fund within the same corporate structure on a tax-deferred "rollover" basis without realizing a capital gain or loss on the switch as long as your securities are capital property to you. The Merger will therefore result in the Continuing Fund and AIP Canadian Enhanced Income Class, as well as any future corporate mutual fund established within AIP Corp., being part of the same mutual fund corporation. Securityholders will therefore continue to maintain investment flexibility as they will have the option to switch to another mutual fund (or mutual funds) on a tax-deferred basis.
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.