NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of merger of non-redeemable investment funds – approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 –merging funds do not have substantially similar investment objectives – merger will not be a tax deferred transaction.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.5(3), 5.6, 5.7.
September 13, 2016
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
BMO NESBITT BURNS INC.
(the “Filer” or the “Manager”)
IN THE MATTER OF
COXE COMMODITY STRATEGY FUND
(“Commodity Fund” or the “Terminating Fund”) and
GLOBAL WATER SOLUTIONS FUND
(“Water Fund” and collectively with the Terminating Fund, the “Funds”)
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 (the “Legislation”) approving the proposed merger (as further described below) of the Terminating Fund into Water Fund (the “Merger”) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 – Investment Funds (“NI 81-102”) (the “Merger Approval”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
1. the Ontario Securities Commission is the principal regulator (the “Principal Regulator”) for this application; and
2. 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 (collectively with Ontario, the “Jurisdictions”).
Terms defined in National Instrument 14-101 – Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is incorporated under the laws of Canada and is an indirect subsidiary of the Bank of Montreal, a bank listed in Schedule I of the Bank Act (Canada), with its head office located in Toronto, Ontario. The Filer is a member of IIROC and is registered as an investment dealer (or equivalent) with the securities regulatory authorities in each province and territory of Canada. The Filer is registered as an investment fund manager in the provinces of Ontario, Quebec and Newfoundland and Labrador.
2. The Filer is the investment fund manager of the Terminating Fund and Water Fund. An affiliate of the Filer, BMO Asset Management Corp., is the investment manager of the Terminating Fund. Kleinwort Benson Investors International Ltd. (“KBI”) is the portfolio manager of Water Fund.
3. Each of the Funds is:
(a) a non-redeemable investment fund established under the laws of the province of Ontario that is governed by a declaration of trust. CIBC Mellon Trust Company is the trustee of each of the Funds; and
(b) a reporting issuer under applicable securities legislation of the Jurisdictions. The securities of each Fund were qualified for distribution in the Jurisdictions pursuant to a prospectus prepared, filed and receipted in accordance with National Instrument 41-101 General Prospectus Requirements.
4. Commodity Fund’s issued and outstanding Class A units currently trade on the Toronto Stock Exchange (“TSX”) under the ticker symbol COX.UN, and its Class F units are not listed for trading. Water Fund’s issued and outstanding units currently trade on the TSX under the ticker symbol HTO.UN.
5. Neither the Filer nor either of the Funds is in default of securities legislation in the Jurisdictions.
6. By press releases dated June 30, 2016, the Manager announced its intention to seek the approval of unitholders for the Merger, amongst other business.
7. The Manager filed material change reports in respect of the proposed Merger as required by Part 11 of National Instrument 81-106 – Investment Fund Continuous Disclosure.
8. The net asset value (“NAV”) of Commodity Fund is expected to be greater than the NAV of Water Fund prior to the Merger and therefore the Manager believes the Merger would be a material change for Water Fund.
9. The Independent Review Committee (the “IRC”) of each of the Terminating Fund and Water Fund has reviewed the proposed Merger from a conflict of interest perspective, and has advised the Manager that, in the applicable IRC’s opinion, the Merger achieves a fair and reasonable result for the Terminating Fund and Water Fund and their unitholders (the “IRC Decisions”).
10. The Manager has obtained approval of the unitholders of the Terminating Fund as required by section 5.1(1)(f) of NI 81-102 and the unitholders of Water Fund as required by section 5.1(1)(g) of NI 81-102 at separate special meetings (the “Meetings”). The unitholders of Commodity Fund approved the Merger at the special meeting of Commodity Fund held on August 30, 2016 and the unitholders of Water Fund approved the Merger at the adjourned special meeting of Water Fund held on August 31, 2016.
11. The joint notice of the Meetings and the management information circular of the Terminating Fund and Water Fund (the “Circular”) was mailed to unitholders and filed in accordance with applicable securities legislation.
12. The Circular, among other things, includes a description of:
(a) Water Fund, including certain prospectus level disclosure concerning Water Fund’s investment objectives, strategies and restrictions, distribution policy, redemption process, organization and management and historical performance. The description of Water Fund’s historical performance shows that Water Fund has a shorter track record than the Terminating Fund, the inception date of Water Fund being January 29, 2015 as compared to Commodity Fund with an inception date of May 22, 2008;
(b) where unitholders can obtain the prospectus (including a description of Water Fund’s risk factors), financial statements, and management reports of fund performance of Water Fund that have been made public; namely, from the Filer upon request, on the Filer's website or on SEDAR at www.sedar.com;
(c) the process for implementing the Merger;
(d) the income tax considerations applicable to the Merger;
(e) the IRC Decisions;
(f) the Special Redemption Right (as defined below); and
(g) the similarities and material differences between the Terminating Fund and Water Fund, including the following differences in sector focus of investment objectives and strategies and in distributions, key service providers and fees as a percentage of NAV per annum and management expense ratio (“MER”):
focus of investment objectives and strategies
Invests in an actively managed global portfolio comprised primarily of publicly-listed equity securities of issuers across the water cycle that are providing solutions to water scarcity.
Invests in an actively managed portfolio that provides exposure to commodity related securities approximately equal in weightings to targets established from time to time by Mr. Donald G.M. Coxe (Chairman of Coxe Advisors LLC) in agriculture, base metals & steel, energy and precious metals sectors.
Up to 25% of total assets
No fixed policy. Current quarterly rate is $0.40 per unit per annum.
Does not pay regular distributions.
Portfolio Manager/ Investment Manager
BMO Asset Management Corp.
Coxe Advisors LLC
Management Fees (excluding service fees)
1.55% (for Class A units and Class F units)
0.40% for Class A units
MER (as at Dec 31, 2015)
Class A: 2.65%
Class F: 3.13%
13. The Class A units of the Terminating Fund have a service fee, whereas the units of Water Fund do not have a similar service fee. The merger into a non-service fee class is ultimately beneficial to unitholders as it reduces fees associated with the units.
14. Unitholders had the opportunity to consider the information in the Circular prior to voting on the Merger. As required under the applicable declaration of trust, the approval of the unitholders of the Terminating Fund and Water Fund was given by at least two-thirds of unitholders of the applicable Fund present at the Meeting in person or by proxy.
Reasons for and benefits of the Merger
15. The Manager believes that the Merger will be beneficial to unitholders of the Terminating Fund and Water Fund for the following reasons:
(a) There is little opportunity to reduce the fixed costs individually associated with, and currently paid, by each of the Terminating Fund and Water Fund including expenses such as audit, legal, trustee, custody, transfer agency, independent review committee, filing and fund accounting fees. The fixed costs associated with Water Fund after the Merger will be less than the total fixed costs currently paid by the Terminating Fund and Water Fund and will be spread over a larger number of units.
(b) Water Fund will likely have a larger asset base which will allow for greater portfolio diversification and a smaller proportion of assets set aside to fund redemptions. This may lead to the reduction of risk and increased returns.
(c) Water Fund will have an increased number of units trading on the TSX after the Merger, which will allow for more liquidity for investors who wish to buy or sell units.
(d) Unitholders of the Terminating Fund will benefit from the lower fee structure of Water Fund:
(i) An annual management fee equal to 1.00% per annum of the NAV of Water Fund is paid to the Manager. Currently, the Manager is paid an administration fee of 1.55% per annum of the NAV of Commodity Fund.
(ii) The Terminating Fund also pays a service fee equal to 0.40% of the NAV per Class A unit of Commodity Fund to the Manager who in turn pays registered dealers whose clients hold units at the end of a calendar quarter. Water Fund does not have a similar service fee.
(e) Water Fund had a lower MER of 2.40% for the year-ended December 31, 2015. Comparatively, Commodity Fund had a MER of 2.65% for the Class A units and 3.13% for the Class F units for the year ended December 31, 2015.
(f) BMO Asset Management Corp., the investment manager of the Terminating Fund, has tendered notice of its resignation as investment manager of the Terminating Fund.
(g) The Merger allows unitholders of the Terminating Fund to continue their investment in a fund with resource-based investment objectives.
(h) As Water Fund will be the continuing fund, unitholders of the Terminating Fund wishing to participate in the Merger will transition to an investment in an actively managed global portfolio comprised primarily of publicly-listed equity securities of global companies across the water cycle that are providing solutions to water scarcity. KBI is the portfolio manager of Water Fund and is responsible for implementing the investment strategy of Water Fund. KBI is an institutional asset manager headquartered in Dublin, Ireland, managing approximately US$9 billion in assets as at March 31, 2016, including approximately US$1 billion in water related strategies.
(i) The Manager will pay all costs and expenses relating to the solicitation of proxies and holding the Meetings as well as the costs of implementing the Merger, including any brokerage fees both of (a) liquidating the Terminating Fund’s portfolio and (2) investing the resulting cash transferred to Water Fund. Since the Manager will pay the costs of the proposed Merger, the proposed Merger will save the Terminating Fund the cost of a dissolution and wind-up, which would be borne by the Terminating Fund.
(j) The Merger provides unitholders in the Terminating Fund with the opportunity to redeem units of the Terminating Fund and acquire units of Water Fund free of brokerage and sales charges that may apply to such transactions on termination of the Terminating Fund in the absence of the Merger.
Tax Implications of the Merger
16. The Manager has concluded that it is in the overall best interests of unitholders to effect the Merger on a taxable basis to preserve Water Fund’s unused capital losses (realized and accrued), which would otherwise expire if an election were made that the Merger be a “qualifying exchange” as defined in section 132.2 of the Income Tax Act (Canada) (the “Tax Act”) and occur on a tax-deferred basis. As a result of effecting the Merger on a taxable basis, the unused capital losses of Water Fund will be available to shelter capital gains realized by Water Fund in future years and thereby reduce the amount of taxable distributions to be made to investors in Water Fund in the future including investors in the Terminating Fund who become investors by virtue of the Merger.
17. Although the assets of the Terminating Fund transferred to Water Fund will be disposed of for fair market value proceeds, as disclosed in the Circular, if the Merger had taken place on the date of the Circular, the Manager does not anticipate that the result of the transfer would have given rise to net income or net taxable capital gains of the Terminating Fund due to its existing accrued but unrealized losses and available loss carryforwards. The Manager does not currently anticipate this result to change; however, circumstances may change before the Merger Date.
18. To the extent that unitholders of the Terminating Fund have an accrued capital loss on their units in a non-registered account, effecting the Merger on a taxable basis will allow such unitholders to realize that loss and use it against current and future capital gains or to carry it back as permitted under the Tax Act.
19. Conversely, to the extent that unitholders of the Terminating Fund have an accrued capital gain on their units in a non-registered account, effecting the Merger on a taxable basis will result in unitholders recognizing that capital gain; however, as the Terminating Fund would be terminated in accordance with its declaration of trust if the Merger did not proceed, such capital gain would have been recognized in any event.
Implementation of the Merger
20. Unitholders of the Terminating Fund who wish to redeem their units will be provided with a special redemption right (the “Special Redemption Right”), allowing such unitholders to redeem their units prior to the Merger without any fee and otherwise on the same terms that would have been applied had the Terminating Fund terminated and redeemed all units as contemplated by its declaration of trust. Unitholders of the Terminating Fund were able to wait until after the results of the Meetings were announced before choosing to exercise the Special Redemption Right. Unitholders were also reminded of the Special Redemption Right and the deadline in the press release of the Terminating Fund issued on August 30, 2016 announcing unitholder approval of the Merger.
21. The Special Redemption Right coincides with the annual redemption provided for in the Terminating Fund’s declaration of trust. The notice period to surrender units for redemption is the same for annual redemptions and the Special Redemption Right, with a deadline of September 15, 2016. The NAV per unit will be calculated as of September 30, 2016 for the annual redemption and the Special Redemption Right.
22. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger:
(a) The Manager expects that the Terminating Fund will be delisted from the TSX on or about October 7, 2016 (the “Merger Date”).
(b) The fair market value of the Terminating Fund’s assets will be determined at the close of business on the business day immediately prior to the Merger Date, after giving effect to the redemption of units of the Terminating Fund pursuant to the Special Redemption Right and after the disposition of any securities required to be disposed of by the Terminating Fund prior to the Merger.
(c) The Terminating Fund and Water Fund, if necessary, may make a distribution of net income and/or net realized capital gains in order that neither is liable to tax in the taxation year that includes the Merger. If the Merger had taken place on the date of the Meetings, the Manager does not anticipate that any Fund would have made such a distribution. The Manager does not currently anticipate that either Fund will pay such a distribution; however, circumstances may change before the Merger Date.
(d) The Terminating Fund will transfer all of its assets to Water Fund for a purchase price equal to the fair market value of the assets transferred. Water Fund will satisfy the obligation to pay the purchase price by assuming the liabilities of the Terminating Fund and by issuing to the Terminating Fund such number of units of Water Fund determined based on an exchange ratio established as of the close of trading on the business day immediately preceding the Merger Date. The exchange ratio will be calculated based on the relative NAV of the Terminating Fund’s units and the units of Water Fund.
(e) Immediately following the transfer of the assets of the Terminating Fund to Water Fund and the issuance of the units of Water Fund to the Terminating Fund, all units of the Terminating Fund will be automatically redeemed and the Terminating Fund unitholders participating in the Merger will receive such number of units of Water Fund as is equal to the number of units of the Terminating Fund held multiplied by the applicable exchange ratio. No fractional units of Water Fund or cash in lieu thereof will be issued or paid to unitholders of the Terminating Fund under the Merger.
(f) Holders of Class A units and/or Class F units of Commodity Fund will become unitholders of Water Fund (Water Fund only has one class of units). Each unitholder will receive units of Water Fund with a value equal to the value of their units of the Terminating Fund based on the relevant exchange ratio.
(g) Following the Merger Date, unitholders of the Terminating Fund will be able to commence trading units of Water Fund distributed to them under the Merger.
23. The Terminating Fund and Water Fund have similar valuation procedures. The assets of the Terminating Fund will be sold and its liabilities assumed by Water Fund at the values used to calculate the NAV of the Funds.
24. The investment portfolio and other assets of the Terminating Fund are expected to be substantially liquidated and as a result it is expected that the vast majority of the assets transferred will be cash. To the extent any securities are transferred, they will only be transferred to the extent they are acceptable to KBI prior to the Merger Date.
25. The cash acquired by Water Fund in connection with the Merger will be invested in accordance with the investment objectives, strategies, and restrictions of Water Fund and NI 81-102.
26. Brokerage commissions payable as a result of the liquidation of the Terminating Fund’s portfolio as part of the Merger will be borne by the Manager and not the Terminating Fund. In addition, no sales charges will be payable in connection with the acquisition by Water Fund of the investment portfolio of the Terminating Fund or in connection with the acquisition by unitholders of the Terminating Fund of units of Water Fund.
27. The Manager will not receive any compensation in respect of the acquisition, sale or redemption of the units of the Funds in connection with the Merger.
28. The Funds are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of the Funds are “qualified investments” under the Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered disability savings plans, registered education savings plans and tax-free savings accounts.
29. As soon as possible following the steps set out above, the Terminating Fund will terminate.
Reasons for Seeking the Relief
30. The Merger Approval 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 (i) the Terminating Fund does not have investment objectives that are substantially similar to Water Fund’s investment objectives; (ii) the Class A units of the Terminating Fund do not have a fee structure that is substantially similar to Water Fund’s units' fee structure; and (iii) the Merger will not be completed as a “qualifying exchange” under the Tax Act. The Merger will otherwise comply with all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
31. In light of the disclosure that is included in the Circular, unitholders of the Terminating Fund and Water Fund had all the information necessary to determine whether the Merger is appropriate for them. Unitholders of the Terminating Fund will have the Special Redemption Right to permit them to exit the Terminating Fund should they not wish to become unitholders of Water Fund.
32. The Filer has determined that it would be in the best interests of the unitholders and not prejudicial to the public interest to receive the Requested Relief.
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 Merger Approval is granted.
Investment Funds and Structured Products
Ontario Securities Commission