Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of investment fund merger pursuant to paragraph 5.5(1)(b) -- approval required because the merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 Investment Funds -- terminating fund and continuing fund does not have substantially similar fundamental investment objectives and fee structures -- merger is not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- securityholders provided with timely and adequate disclosure regarding the merger.

Citation: Re Norrep Capital Management Ltd., 2016 ABASC 142.

May 26, 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 NORREP CAPITAL MANAGEMENT LTD. (THE FILER) AND NORREP GLOBAL CLASS AND NORREP CANADIAN EQUITY CLASS (THE TERMINATING FUNDS) AND NORREP GLOBAL INCOME GROWTH CLASS AND NORREP CORE CANADIAN POOL (THE CONTINUING FUNDS)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Makers) have received an application from the Filer on behalf of the Terminating Funds and the Continuing Funds (each a Fund and together, the Funds) for a decision under the securities legislation (the Legislation) of the Jurisdictions for approval (the Requested Approval), pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102), of the proposed merger of Norrep Global Class into Norrep Global Income Growth Class (the Global Merger) and of the proposed merger of Norrep Canadian Equity Class into Norrep Core Canadian Pool (the Canadian Merger and together with the Global Merger, the Mergers).

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, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island (together with the Jurisdictions, the Offering Jurisdictions); and

(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 or NI 81-102 have the same meaning if used in this decision, unless otherwise defined herein.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a corporation incorporated under the Business Corporations Act (Alberta) (ABCA) with its head office in Calgary, Alberta.

2. The Filer is registered as an investment fund manager, portfolio manager and exempt market dealer under applicable securities legislation in Alberta and Ontario, as an investment fund manager in Québec and Newfoundland and Labrador and as an exempt market dealer and portfolio manager in British Columbia.

3. The Filer acts as investment fund manager and portfolio manager of the Funds.

The Funds

4. Norrep Canadian Equity Class, Norrep Global Class and Norrep Global Income Growth Class are each a separate class of special shares of Norrep Opportunities Corp. (Norrep Opportunities), a corporation incorporated under the ABCA.

5. Shares of Norrep Canadian Equity Class, Norrep Global Class and Norrep Global Income Growth Class are currently distributed in the Offering Jurisdictions under a simplified prospectus, annual information form and fund facts dated June 29, 2015, as amended on December 3, 2015, March 22, 2016 and April 22, 2016.

6. Norrep Core Canadian Pool is a class of special shares of Norrep Core Portfolios Ltd. (Norrep Core Portfolios), a corporation incorporated under the ABCA.

7. Shares of Norrep Core Canadian Pool are currently distributed in the Offering Jurisdictions under a simplified prospectus, annual information form and fund facts dated February 16, 2016, as amended on March 22, 2016.

8. The Funds are each reporting issuers under the securities legislation of the Offering Jurisdictions.

9. None of the Filer, nor the Funds, are in default of securities legislation in any jurisdiction of Canada.

10. Other than circumstances in which the securities regulatory authority of a jurisdiction of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.

11. The net asset value (NAV) for each series of shares of the Funds is generally calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading (each, a Business Day) and shares of the Funds are generally redeemable on any Business Day.

12. The Continuing Funds have identical valuation procedures to those of the applicable Terminating Funds.

13. The Terminating Funds and the Continuing Funds are, and are expected to continue to be at all material times, mutual fund corporations under the Income Tax Act (Canada) (the Tax Act) and accordingly, shares of the 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.

Details of the Mergers

14. The Filer intends to merge the Terminating Funds into the Continuing Funds as follows:

(a) Norrep Global Class into Norrep Global Income Growth Class; and

(b) Norrep Canadian Equity Class into Norrep Core Canadian Pool.

15. Approval for the Mergers is required because the Mergers do not satisfy the following criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102:

(a) the fundamental investment objectives of the Continuing Funds and the Terminating Funds may not be considered by a reasonable person to be "substantially similar";

(b) the fee structure of Norrep Core Canadian Pool may not be considered by a reasonable person to be "substantially similar" to the fee structure of Norrep Canadian Equity Class; and

(c) the Canadian Merger will not be a "qualifying exchange" or a tax deferred transaction under the Tax Act.

16. In each case, shareholders in the Terminating Funds will receive shares of the same series of the applicable Continuing Fund as they currently own in the corresponding Terminating Fund.

17. While Norrep Core Canadian Pool does not offer Series I or Series O shares, there were no Series I or Series O shares of Norrep Canadian Equity Class outstanding at the time that Norrep Canadian Equity Class was closed to new purchases.

18. The Filer is not entitled to rely upon the approval of the Independent Review Committee of the Funds (IRC) in lieu of shareholder approval for the Mergers due to the fact that one or more conditions of section 5.6 of NI 81-102 will not be met, as required by paragraph 5.3(2)(a) of NI 81-102. The IRC of the Funds has reviewed and made positive recommendations with respect to the Mergers, having determined that each Merger, if implemented, achieves a fair and reasonable result for the applicable Fund.

19. The Filer does not consider the Global Merger to be a material change, as defined in NI 81-102, to Norrep Global Income Growth Class. However, the Filer will seek approval for the Global Merger from the shareholders of Norrep Global Income Growth Class as required pursuant to the ABCA. The sole common shareholder of Norrep Opportunities will also approve the Global Merger as required under the ABCA.

20. The Filer will seek approval for the Canadian Merger from the shareholders of Norrep Core Canadian Pool because the Canadian Merger may be considered a material change for Norrep Core Canadian Pool since the NAV of Norrep Core Canadian Pool is smaller than the NAV of Norrep Canadian Equity Class.

21. The board of directors of each of the Filer, Norrep Opportunities and Norrep Core Portfolios approved the proposed Mergers. A news release and material change report in respect of each of the Funds, giving notice of the proposed Mergers, were issued and filed on SEDAR on March 22, 2016. Related amendments to the simplified prospectus, annual information form and fund facts of each of the Funds were filed on SEDAR on March 22, 2016.

22. In accordance with paragraphs 5.1(1)(f) and 5.1(1)(g) of NI 81-102 and the ABCA, as applicable, shareholders of each of the Funds will be asked to approve the Mergers at special meetings to be held concurrently on or about June 15, 2016.

23. In anticipation of the implementation of the Mergers, effective at 4:00 p.m. on March 22, 2016, shares of the Terminating Funds were no longer available for purchase other than with respect to existing automatic purchase plans.

24. A notice of meeting, management information circular (the Circular), related form of proxy and fund facts of each of the Continuing Funds in connection with the special meetings of shareholders will be mailed to shareholders of the Funds on or about May 18, 2016 and will be filed via SEDAR.

25. The Circular will include the following information:

(a) a description of the proposed Mergers including the steps that will be taken to effect the Mergers;

(b) a comparison of each of the Terminating Funds to the applicable Continuing Fund including the differences between the investment objectives and fee structures of each Terminating Fund and the applicable Continuing Fund;

(c) the tax implications of the Mergers to shareholders of each of the Funds, including a statement in bold type of the tax implications to shareholders of Norrep Canadian Equity Class who do not hold their shares in a Registered Plan (as defined in the Circular);

(d) a summary of the IRC's determination in respect of each of the Funds;

(e) a statement that shareholders who redeem their shares will be subject to the same redemption charges to which their shares of the Terminating Fund were subject to prior to the Mergers except that in the case of the Canadian Merger, any deferred sales charges applicable to shares of Norrep Canadian Equity Class will be waived; and

(f) disclosure that shareholders of the Funds may obtain in respect of each Continuing Fund, at no cost, the most recent annual and interim financial statements, the current simplified prospectus, annual information form, the fund facts and the most recent management report on fund performance that are currently available and that have been made public by contacting the Filer or by accessing the website of the Filer or by accessing SEDAR.

Accordingly, shareholders of each Fund will have an opportunity to consider such information prior to voting on the applicable Merger.

26. The Filer will pay all costs and expenses associated with the Mergers. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees and brokerage charges associated with the merger-related trades.

27. No sales charges will be payable in connection with the acquisition by the Continuing Funds of the investment portfolios of the Terminating Funds.

28. Subject to receipt of the requisite shareholder approvals and the Requested Approval, it is anticipated that the Mergers will be implemented as soon as practicable after the special meetings and in any event prior to June 30, 2016 (the Merger Date). If the requisite shareholder approval is not received for a proposed Merger, that proposed Merger will not proceed. The Mergers are not contingent on each other.

29. Shareholders of the Terminating Funds will continue to have the right to switch to another mutual fund managed by the Filer (on a tax-deferred basis if the switch is to a fund that is a class of Norrep Opportunities and, based on the March 22, 2016 Federal Budget, occurs before October, 2016) or to redeem shares of the Terminating Funds for cash at any time up to the close of business on the Business Day immediately prior to the Merger Date.

30. Prior to the Merger Date, each Terminating Fund will dispose of any portfolio assets that are not considered by the portfolio adviser of the applicable Continuing Fund to be consistent with the investment objectives and strategies of that Continuing Fund.

31. Following the Mergers, the Continuing Funds will continue as publicly offered open-end mutual funds and the Terminating Funds will be wound-up and cancelled as soon as reasonably possible.

32. It is proposed that the following steps will be carried out to effect the Global Merger:

(a) Prior to the Merger Date, if required, Norrep Global Class will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of Norrep Global Income Class. As a result, Norrep Global Class may hold cash for a period of time prior to the Global Merger being effected, which it is permitted to do in accordance with its investment objectives.

(b) Prior to the Merger Date, Norrep Opportunities may pay a capital gains dividend on shares of Norrep Global Class where determined fair and equitable.

(c) The articles of incorporation of Norrep Opportunities will be amended to exchange all of the outstanding special shares of each series of Norrep Global Class for special shares of the same series of Norrep Global Income Growth Class. Pursuant to that exchange, shareholders in Norrep Global Class will receive special shares of the same series of Norrep Global Income Growth Class as they hold in Norrep Global Class, with a value equal to the value of their special shares in Norrep Global Class as determined on the Merger Date. After this step is complete, shareholders of Norrep Global Class will be shareholders of Norrep Global Income Growth Class.

(d) On the Merger Date, the net assets attributable to Norrep Global Class (being its investment portfolio and other assets, including cash and liabilities) will be included in the portfolio of assets attributable to Norrep Global Income Growth Class.

(e) As soon as reasonably possible following the Global Merger, the articles of incorporation of Norrep Opportunities will be amended to terminate Norrep Global Class.

33. It is proposed that the following steps will be carried out to effect the Canadian Merger:

(a) In anticipation of the Canadian Merger, the portfolio manager of Norrep Canadian Equity Class has been divesting its holdings in small and mid-capitalization issuers that do not meet the investment objectives and criteria of Norrep Core Canadian Pool. Notwithstanding, these portfolio changes are in accordance with the investment objectives of Norrep Canadian Equity Class. At the Merger Date, all of the securities in the portfolio of Norrep Canadian Equity Class will meet the investment objectives and investment strategies of Norrep Core Canadian Pool.

(b) The value of Norrep Canadian Equity Class's portfolio and other assets will be determined at the close of business on the Merger Date in accordance with the constating documents of the Fund.

(c) Norrep Core Canadian Pool will acquire the investment portfolio of Norrep Canadian Equity Class in exchange for securities of Norrep Core Canadian Pool.

(d) Norrep Core Canadian Pool will not assume any liabilities of Norrep Canadian Equity Class and Norrep Canadian Equity Class will retain sufficient assets to satisfy its estimated liabilities, if any, as of the applicable Merger Date.

(e) The shares of Norrep Core Canadian Pool received by Norrep Canadian Equity Class will have an aggregate net asset value equal to the value of the portfolio assets that Norrep Core Canadian Pool acquires from Norrep Canadian Equity Class. The shares of Norrep Core Canadian Pool will be issued at the applicable series net asset value per share as of the close of business on the Merger Date.

(f) Effective on the Merger Date, Norrep Opportunities will redeem all of the issued and outstanding Norrep Canadian Equity Class shares and distribute to the former holders of those shares, the shares of Norrep Core Canadian Pool. The distribution will occur on a dollar-for-dollar and series by series basis, as applicable.

(g) As soon as reasonably possible following the Canadian Merger, the articles of incorporation of Norrep Opportunities will be amended to terminate Norrep Canadian Equity Class.

34. The Manager has analyzed the tax implications of the Canadian Merger from the perspective of shareholders of Norrep Canadian Equity Class as well as from the perspective of Norrep Canadian Equity Class and Norrep Core Canadian Pool and has concluded that it is more appropriate to effect the Canadian Merger on a taxable basis.

35. The Manager has elected not to effect the Canadian Merger on a tax-deferred basis for reasons it considers appropriate including that:

(a) a taxable transaction will result in a more efficient transfer of the portfolio assets of Norrep Canadian Equity Class to Norrep Core Canadian Pool which is expected to alleviate portfolio construction issues that could arise if the Canadian Merger occurred on a tax-deferred basis; and

(b) the Manager has determined that a substantial majority of the shares of Norrep Canadian Equity Class are held in tax-deferred registered plans, which are not generally affected by the tax consequences of transactions such as the Canadian Merger.

36. The Filer believes the Mergers will be beneficial to the shareholders of each of the Funds party to that Merger for the reasons provided below.

(a) Shareholders of the Continuing Funds are expected to benefit from increased economies of scale and lower operating expenses as part of larger combined Continuing Funds.

(b) Each of the Continuing Funds is expected to attract more assets as marketing efforts will be concentrated on fewer funds, rather than multiple funds with similar investment mandates. The ability to attract assets in the Continuing Funds will benefit investors by helping to ensure that the Continuing Funds remain viable, long-term, attractive investment vehicles for existing and potential investors.

(c) The Continuing Funds will have a greater level of assets and will enable the Filer to focus its sales efforts on the growth of the Continuing Funds which in turn is expected to allow for increased portfolio diversification opportunities and greater liquidity of investments.

(d) The administrative and regulatory costs of operating the Terminating Funds as stand-alone mutual funds are expected to increase if the Terminating Funds continue their current growth trajectories.

(e) The Continuing Funds, as a result of their increased size, will benefit from a more significant profile in the marketplace.

(f) The Mergers will reduce the duplication of administrative and regulatory costs involved in operating the Terminating Funds and the Continuing Funds as separate investment funds.

(g) Reducing the number of Norrep funds will provide investors with a more streamlined range of products that will make it easier for investors to select a suitable mutual fund based on their risk tolerance and investment objectives as the Mergers will eliminate funds with similar and over-lapping investment objectives and strategies.

(h) The management fee of the Continuing Fund will remain the same in the case of the Global Merger. In addition, the Manager has waived the performance fee applicable to Norrep Global Income Growth Class, which is a benefit to its shareholders. Shareholders of Norrep Global Class may also benefit from being in a fund that pays regular monthly distributions. In the case of the Canadian Merger, the Norrep Core Canadian Pool management fee is lower than the management fee of Norrep Canadian Equity Class, and there is no performance fee payable by Norrep Core Canadian Pool.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.

The decision of the Decision Makers under the Legislation is that the Requested Approval is granted, provided that:

(a) the Circular contains the disclosure referred to in paragraph 25 of this decision; and

(b) prior to the Merger Date, shareholder approval, as required by NI 81-102 and the ABCA, as applicable, has been obtained from:

(i) in respect of the Canadian Merger, each of the Funds party to the Canadian Merger; and

(ii) in respect of the Global Merger, each of the Funds party to the Global Merger.

"Denise Weeres"
Manager, Legal
Corporate Finance