National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds -- approval required because reorganization does not meet the criteria for pre-approved reorganizations and transfers -- the fundamental investment objectives and the fee structures 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 reorganization.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
Citation: Re Matco Financial Inc., 2016 ABASC 129
May 12, 2016
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 MATCO FINANCIAL INC. (the Filer) AND MATCO ENERGY EQUITY FUND (the Terminating Fund) AND MATCO SMALL CAP 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 paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102), of the proposed reorganization (Reorganization) of the Terminating Fund with 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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Saskatchewan and Manitoba; 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:
1. The Filer is a corporation governed by the laws of Alberta and is registered under the securities legislation of Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Saskatchewan as a portfolio manager, investment fund manager and mutual fund dealer. The Filer is the investment fund manager of the Funds.
2. The head office of the Filer is located in Calgary, Alberta.
3. Each of the Funds is represented by a separate class of shares of Matco Funds Corp. (the Corporation), a corporation governed by the laws of Alberta, with each class of shares being issuable in Series A shares, Series F shares and Series O shares. Each separate series of shares of the Corporation has its own portfolio of assets within the Corporation. The Continuing Fund and the Terminating Fund employ identical procedures for determining the net asset value of their assets.
4. Each of the Funds currently distributes its securities in Alberta, British Columbia, Manitoba, Ontario and Saskatchewan pursuant to a simplified prospectus, annual information form and fund facts documents, each dated June 26, 2015, and each Fund is a reporting issuer under the securities legislation of each of those jurisdictions.
5. Neither the Filer nor either of the Funds is in default of any of the requirements of securities legislation in any jurisdiction of Canada.
6. The Reorganization satisfies all of the criteria for pre-approved reorganizations and transfers set forth in subsection 5.6(1) of NI 81-102 except a reasonable person may not consider the fundamental investment objectives or the fee structure of the Terminating Fund or both to be substantially similar to those of the Continuing Fund.
7. The Reorganization was announced in a joint news release of the Funds, issued April 7, 2016 through the facilities of Canadian Newswire. The Filer prepared and filed a material change report in accordance with the section 11.2 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) on behalf of the Terminating Fund on April 15, 2016, which is available on SEDAR. The Filer believes that the Reorganization does not constitute a material change as defined under NI 81-106 for the Continuing Fund.
8. The securityholders of the Terminating Fund approved the Reorganization as prescribed under subsection 5.1(f) of NI 81-102 (the Securityholder Approval) at a special meeting held on April 29, 2016 (the Meeting). In connection with the Meeting, the Filer sent each securityholder of the Terminating Fund a management information circular (the Circular), a related form of proxy and the fund facts document of the Continuing Fund relating to each series of shares issued by the Continuing Fund. The Circular prepared in connection with the Meeting provided a comparison of the fundamental investment objectives, fee structures and other material differences between the Funds.
9. The Reorganization is subject to receipt of the Approval Sought and it is expected that it will be completed as soon as practicable after the Approval Sought has been granted and in any event within three business days of date of this decision (the Effective Date).
10. On or prior to the Effective Date, the Filer shall cause the Corporation to sell all of the securities held by the Terminating Fund (the Terminating Fund Assets) for cash. The Terminating Fund Assets will be sold for cash because such assets do not align with the Continuing Fund's investment objectives. The cash resulting from the sale of the Terminating Fund Assets will be used by the Continuing Fund to make investments aligned with its current investment objectives.
11. Upon receiving the Approval Sought, the Filer and the Corporation shall enter into a series of transactions listed immediately below in order to effect the Reorganization.
(a) All cash realized from the sale of the Terminating Fund Assets and any other assets of the Terminating Fund, less any amount required to satisfy the liabilities of the Terminating Fund, shall be transferred to the Continuing Fund.
(b) All securityholders in the Terminating Fund shall be issued securities of the same series in the Continuing Fund as they hold in the Terminating Fund in exchange for their securities in the Terminating Fund. The securities of the Continuing Fund received by the securityholders of the Terminating Fund will have an aggregate net asset value equal to the value of the net assets of the Terminating Fund.
(c) The proposed share exchange will be completed on a tax deferred basis pursuant to subsection 86(1) of the Income Tax Act (Canada).
(d) The Terminating Fund will be wound up as soon as reasonably possible following the completion of the foregoing transactions.
12. The independent review committee of each of the Funds (the IRCs) established pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds has reviewed the potential conflict of interest matters involved in a reorganization structured in the same manner as the Reorganization and, after reasonable inquiry, concluded that such a reorganization would achieve a fair and reasonable result for the Funds involved and accordingly has granted standing approval to the Filer to effect such a reorganization.
13. The Filer will bear all transaction costs associated with the sale of the Terminating Fund Assets and all other transaction costs associated with the Reorganization, 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. No fees or expenses, including, for greater certainty, any switching fees, will be payable by the securityholders of the Terminating Fund in connection with the Reorganization.
14. The securityholders of the Terminating Fund will continue to have the right to redeem the shares of the Terminating Fund for cash at any time up to the close of business on the Effective Date.
15. Following the Reorganization, all systematic programs that had been established with respect to the Terminating Fund will be re-established on a series-for-series basis in the Continuing Fund, unless a securityholder advises the Filer otherwise.
16. The Filer believes that the Reorganization will be beneficial to securityholders of the Funds for the following reasons:
(a) securityholders of the Terminating Fund may benefit from the relatively lower degree of volatility and diversification associated with the investments of the Continuing Fund, as compared with the investments of the Terminating Fund;
(b) securityholders of the Terminating Fund will benefit from the fee structure of the Continuing Fund, which does not include the same performance fee arrangement as the Terminating Fund;
(c) 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 within the Continuing Fund;
(d) securityholders 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; and
(e) the Continuing Fund, as a result of its larger size, may benefit from a larger profile in the marketplace.
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.