Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval of investment fund mergers – approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – Investment Funds – terminating funds and continuing funds do not have substantially similar fundamental investment objectives – certain mergers are not “qualifying exchange” or a tax-deferred transactions under the Income Tax Act – merger to otherwise comply with pre-approval criteria, including securityholder vote, IRC approval – securityholders provided with timely and adequate disclosure regarding the mergers.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b), 5.6.

 July 26, 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
FRANKLIN TEMPLETON INVESTMENTS CORP.
(the Filer)

AND

TEMPLETON BRIC CORPORATE CLASS,
FRANKLIN BISSETT STRATEGIC INCOME FUND,
FRANKLIN BISSETT STRATEGIC INCOME CORPORATE CLASS
(the Terminating Funds)

AND

TEMPLETON EMERGING MARKETS FUND,
FRANKLIN BISSETT MONTHLY INCOME AND GROWTH FUND
(the Continuing Funds, and collectively with the Terminating Funds, the Fund(s))

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the TBRIC Merger, the FBSIF Merger and the FBSICC Merger (each defined below, and collectively, the Mergers) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (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 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

ABCA means the Business Corporations Act (Alberta);

FBSICC Merger means the merger of Franklin Bissett Strategic Income Corporate Class into Franklin Bissett Monthly Income and Growth Fund;

FBSIF Merger means the merger of Franklin Bissett Strategic Income Fund into Franklin Bissett Monthly Income and Growth Fund;

FTCCL means Franklin Templeton Corporate Class Ltd;

IRC means the independent review committee for the Funds; and

TBRIC Merger means the merger of Templeton BRIC Corporate Class into Templeton Emerging Markets Fund.

Representations

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

The Filer

1.             The Filer is a corporation existing under the laws of Ontario having its registered head office in Toronto, Ontario.

2.             The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and mutual fund dealer in the Jurisdiction. The Filer is registered as a portfolio manager, exempt market dealer and mutual fund dealer in each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Quebec, Saskatchewan and Yukon. The Filer is also registered as an investment fund manager in each of Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia and Quebec.

3.             The Filer is the investment fund manager of each of the Funds.

The Funds

4.             FTCCL is an open end mutual fund corporation incorporated under the laws of Alberta on June 1, 2001. Each of Templeton BRIC Corporate Class and Franklin Bissett Strategic Income Corporate Class is a separate class of special shares of FTCCL.

5.             Each of Templeton Emerging Markets Fund, Franklin Bissett Strategic Income Fund and Franklin Bissett Monthly Income and Growth Fund is a trust established under the laws of Ontario.

6.             Securities of the Funds are currently qualified for sale by a simplified prospectus, annual information form and Fund Facts dated May 27, 2016, which have been filed and receipted in each of the Jurisdictions.

7.             Each of the Funds is a reporting issuer in the Jurisdictions.

8.             Neither the Filer nor any Fund is in default under the securities legislation in the Jurisdictions.

9.             Other than circumstances in which the securities regulatory authorities of the Jurisdictions have expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.

Reason for Approval Sought

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

(a)           a reasonable person would not consider the Terminating Funds and their corresponding Continuing Funds to have substantially similar investment objectives, and

(b)           each of the FBSICC Merger and the TBRIC Merger will not be “qualifying exchange” or other tax-deferred transaction within the meaning of the Income Tax Act (Canada) (the Tax Act).

FBICC Merger and FBSIF Merger

11.          Each Terminating Fund has an investment objective of high current income and long-term capital appreciation by investing primarily, directly or indirectly through investing in mutual funds managed by the Manager, in a diversified mix of income-generating equity and fixed income securities from Canada and around the world

12.          The investment objective of the Continuing Fund is a balance of income and capital appreciation by investing primarily in a diversified portfolio of income-generating Canadian, U.S. and global equities, equity-related securities and fixed income securities.

13.          Relative to the Terminating Funds, the Continuing Fund holds: (1) more geographically-diversified equity securities; (2) more equity-related securities such as preferred shares and convertible securities; and (3) a larger proportion of its net assets in North American equities. Therefore a reasonable person may not consider the investment objectives of the Terminating Funds and the Continuing Fund to be substantially similar.

TBRIC Merger

14.          The Terminating Fund’s investment objective is long-term capital appreciation by investing primarily in equity securities of companies based in the BRIC countries – Brazil, Russia, India and China (including Hong Kong and Taiwan) and in companies expected to benefit from developments in the economies of the BRIC countries.

15.          The Continuing Fund’s investment objective of Templeton Emerging Markets Fund is long-term capital appreciation by investing primarily in equities of companies in emerging markets.

16.          Relative to the Terminating Fund, the Continuing Fund has a greater proportion of investments in emerging market countries outside of Brazil, Russia, India and China. Therefore, a reasonable person may not consider the investment objectives of the Terminating Fund and Continuing Fund to be substantially similar.

Taxable Mergers

17.          Neither the FBSICC Merger nor the TBRIC Merger can be carried out on a tax-deferred basis because there are currently no provisions of the Tax Act that permit a “qualifying exchange” or other tax deferred merger between a share class of a mutual fund corporation and a mutual fund established as a trust.

Approval of the Mergers

18.          Securityholders of the Terminating Funds will be asked to approve the relevant Mergers at special meetings expected to be held on or about August 5, 2016. The securityholders of Franklin Bissett Monthly Income and Growth Fund will also be asked to approve the FBSIF Merger because it would be a material change to that Fund due to the larger asset size of the Terminating Fund compared to the Continuing Fund.

19.          Securityholders in Templeton Emerging Markets Fund are not being asked to vote on the TBRIC Merger and securityholders of Franklin Bissett Strategic Income Corporate Class are not being asked to vote on the FBSICC Merger, because neither of these Mergers is a material change to the relevant Continuing Fund.

20.          The Filer, as the sole Class A common shareholder of FTCCL will also be asked approve the Corporate Class Merger, by written resolution in advance of the special meetings, as required under the ABCA.

21.          Subject to receipt of securityholder approval and the Approval Sought, the Mergers are expected to occur on or about August 12, 2016 (the Effective Date).

Merger Steps

22.          It is proposed that the following steps will be carried out to effect the Mergers:

(a)           In respect of the TBRIC Merger:

(i)            Prior to the Merger, the Terminating Fund will sell securities in its portfolio that are not consistent with the investment objectives or investment strategies of the Continuing Fund. As a result, the Terminating Fund will realize capital gains and losses and will temporarily hold some cash and/or money market instruments and will not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions.

(ii)           On or prior to the Effective Date, the Terminating Fund may declare taxable dividends to eliminate tax that would otherwise be payable by FTCCL. If the Merger occurred on May 31, 2016, dividends would not have been paid on the shares of the Terminating Fund; however, this could change by the time the Merger is implemented.

(iii)          On the Effective Date, the Terminating Fund will transfer all of its assets, which will consist of its investment portfolio and other assets, including cash and/or money market instruments, less an amount required to satisfy the liabilities of the Terminating Fund, to the Continuing Fund, in exchange for units of the Continuing Fund. The units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the net assets transferred by the Terminating Fund.

(iv)          Immediately following the transfer of assets, all of the outstanding shares of the Terminating Fund will be redeemed and, in payment of the redemption amount, FTCCL will distribute the units of the Continuing Fund to shareholders of the Terminating Fund on a series-for-series and dollar-for-dollar basis.

(v)           As soon as reasonably possible following the Merger, the unissued special shares of each series of the Terminating Fund will be cancelled by FTCCL and the Terminating Fund will be terminated.

(b)           In respect of the FBSIF Merger:

(i)            Prior to the Merger, the Terminating Fund will sell securities in its portfolio that are not consistent with the investment objectives or investment strategies of the Continuing Fund. As a result, the Terminating Fund will realize capital gains and losses and will temporarily hold some cash and/or money market instruments and will not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions.

(ii)           On or prior to the Effective Date, each of the Terminating Fund and the Continuing Fund will distribute a sufficient amount of its net income and net realized capital gains to its unitholders so that the Funds are not subject to tax under Part I of the Tax Act for the taxation year ended on the Effective Date.

(iii)          On the Effective Date, the Terminating Fund will transfer all of its assets, which will consist of securities, cash and/or money market instruments, less an amount required to satisfy the liabilities of the Terminating Fund, to the Continuing Fund, in exchange for units of the Continuing Fund. The units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the net assets transferred by the Terminating Fund.

(iv)          Immediately following the transfer of assets, the Terminating Fund will redeem its outstanding units and will distribute the units of the Continuing Fund to unitholders of the Terminating Fund in exchange for all of the unitholders’ units of the Terminating Fund, on a series-for-series and dollar-for-dollar basis.

(v)           As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.

(c)           In respect of the FBSICC Merger:

(i)            Prior to the Merger, the Terminating Fund will sell securities in its portfolio that are not consistent with the investment objectives or investment strategies of the Continuing Fund. As a result, the Terminating Fund will realize capital gains and losses and will temporarily hold some cash and/or money market instruments and will not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger. The value of any investment sold prior to the Effective Date will depend on prevailing market conditions.

(ii)           On or prior to the Effective Date, the Terminating Fund may declare taxable dividends to eliminate tax that would otherwise be payable by FTCCL. If the Merger occurred on May 31, 2016, dividends would not have been paid on the shares of either Terminating Fund; however, this could change by the time the Merger is implemented.

(iii)          On the Effective Date, the Terminating Fund will transfer all of its assets, which will consist of its investment portfolio and other assets, including cash and/or money market instruments, less an amount required to satisfy the liabilities of the Terminating Fund, to the Continuing Fund, in exchange for units of the Continuing Fund. The units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the net assets transferred by the Terminating Fund.

(iv)          Immediately following the transfer of assets, all of the outstanding shares of the Terminating Fund will be redeemed and, in payment of the redemption amount, FTCCL will distribute the units of the Continuing Fund to shareholders of the Terminating Fund on a series-for-series and dollar-for-dollar basis, except that shareholders of Series R and S shares will receive Series O and F units, respectively, of the Terminating Fund.

(v)           As soon as reasonably possible following the Merger, the unissued special shares of each series of the Terminating Fund will be cancelled by FTCCL and the Terminating Fund will be terminated.

23.          Costs and expenses associated with the Mergers, including the costs of the securityholder meetings, will be borne by the Filer and will not be charged to the Funds. The costs of the Mergers include transaction costs associated with any portfolio liquidations, legal, printing, mailing and regulatory fees, as well as proxy solicitation costs.

24.          No sales charges will be payable by securityholders of the Funds in connection with the Mergers.

25.          Securities of the applicable Continuing Funds received by securityholders of the Terminating Funds as a result of the proposed Mergers will have the same sales charge option and, for securities purchased under a low load or deferred sales charge option, the same remaining deferred sales charge schedule, as their securities in the Terminating Funds.

Securityholder Disclosure

26.          A press release describing the Mergers has been issued. The press release, material change report and the simplified prospectus, annual information form and fund facts, which give notice of the Mergers, were filed via SEDAR on May 20, 2016.

27.          A notice of meeting, management information circular, proxy and fund facts of the applicable series of each Continuing Fund (the Meeting Materials) were mailed to securityholders of each Fund and were filed via SEDAR on June 27, 2016.

28.          The Meeting Materials contain the fund facts of the Continuing Funds, a description of the proposed Mergers, information about the Terminating Funds and the Continuing Funds and income tax considerations for securityholders of the Terminating Funds. The Meeting Materials also describe the various ways in which securityholders can obtain a copy of the simplified prospectus and annual information form of the Continuing Funds, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Funds.

Securityholder Purchases and Redemptions

29.          Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash or switch into securities of another Franklin Templeton mutual fund (including on a tax-deferred basis to a fund that is a class of FTCCL, where applicable) at any time up to the close of business on the business day immediately before the Effective Date.

30.          Subject to receiving the necessary approvals at the special meetings, effective as of the close of business on August 5, 2016, the Terminating Funds will cease distribution of securities and any new purchases of securities will be disallowed. The Terminating Funds will remain closed to purchase-type transactions, except existing systematic investment programs (such as pre-authorized chequing plans), until they are merged with the Continuing Funds on the Effective Date. All systematic programs shall remain unaffected until the business day immediately before the Effective Date.

31.          Following the Mergers, all systematic programs that had been established with respect to the Terminating Funds will be re-established on a series-for-series basis, except as described above in respect of shareholders of Series R and S shares of Franklin Bissett Strategic Income Corporate Class, in the applicable Continuing Funds, unless securityholders advise the Filer otherwise.

32.          Securityholders may change or cancel any systematic program at any time and securityholders of the Terminating Funds who wish to establish one or more systematic programs in respect of their holdings in the Continuing Funds may do so following the Mergers.

IRC Review

33.          The Filer has presented the Mergers to the IRC and has obtained a positive recommendation that each of the Mergers, if implemented, would achieve a fair and reasonable result for the Funds.

34.          A summary of the IRC’s recommendation has been included in the notice of special meeting sent to securityholders of the Funds as required by section 5.1(2) of National Instrument 81-107 – Independent Review Committee for Investment Funds.

Benefits of Mergers

35.          The equity components of Franklin Bissett Strategic Income Fund and Franklin Bissett Strategic Income Corporate Class are each entirely invested in high dividend securities. Since the dissolution of the Canadian income trust market at the end of 2010, the universe of high dividend paying equities has narrowed substantially and is now mostly comprised of energy and financial companies. This narrowing of the high dividend market has contributed recently to increased volatility in these Terminating Funds. Franklin Bissett Monthly Income and Growth Fund is expected to provide securityholders with less volatility while still providing exposure to certain types of income producing securities.

36.          Templeton BRIC Corporate Class is a specialized investment strategy, which invests in companies in the “BRIC” countries – Brazil, Russia, India and China and in companies expected to benefit from developments in the economies of the BRIC countries. In the early 2000s, the BRIC countries had some of the largest and most visible emerging economies over the previous decade. As such, Templeton BRIC Corporate Class provided securityholders with a “short-cut” to investing in emerging markets. More recently, however, the BRIC economies have underperformed the emerging market asset class with higher volatility. As such, a broad-based approach that includes the larger universe of emerging market countries may provide a more balanced and comprehensive approach to emerging market investing.

37.          The Filer submits that the Mergers will benefit securityholders of the Terminating Funds in the following additional ways:

(a)           providing securityholders with a broader and more diversified investment universe than in the Terminating Funds to reach the investment objectives for the Continuing Funds; and

(b)           management and administration fees will not increase and MERs of each Continuing Fund will remain substantially the same as or, in some cases, be moderately lower than, the MER of its corresponding Terminating Fund.

38.          While neither the FBSICC Merger nor the TBRIC Merger can be carried out on a tax-deferred basis, the Manager believes that proceeding with these Mergers on a taxable basis is in the overall best interests of securityholders for the following reasons:

(a)           a substantial majority of securityholders in Franklin Bissett Strategic Income Corporate Class and Templeton BRIC Corporate Class hold their shares in registered plans and will therefore have no tax impact as a result of the Mergers; and

(b)           most of the securityholders in Franklin Bissett Strategic Income Corporate Class and Templeton BRIC Corporate Class who hold their shares in non-registered accounts have capital losses, which can generally be carried back three years and forward indefinitely. Securityholders may use capital losses to offset future capital gains.

Decision

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, provided that the Filer obtains the prior securityholder approval for the Mergers at the special meeting to be held for that purpose, or any adjournments thereof.

“Raymond Chan”
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission