Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because mergers do not meet the criteria for pre-approved reorganizations and transfer in National Instrument 81-102 – certain merging funds do not have substantially similar investment objectives – certain mergers not a “qualifying exchange” or a tax-deferred transaction under Income Tax Act – securityholders of terminating funds provided with timely and adequate disclosure regarding the mergers.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds,
ss. 5.5(1)(b), 5.5(3), 5.6, 5.7.

November 30, 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

SPROTT ASSET MANAGEMENT LP

(the Manager)

AND

SPROTT TIMBER FUND,

SPROTT GLOBAL AGRICULTURE FUND,

SPROTT TACTICAL BALANCED FUND,

SPROTT TACTICAL BALANCED CLASS

(each, a Terminating Fund and collectively, the

Terminating Funds, and with the Manager, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) approving the mergers (the Mergers) of the Terminating Funds into the Continuing Funds (defined below) 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 Manager 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 provinces and territories of Canada, other than the province of Ontario (Other 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:

Continuing Fund means each of Sprott Global REIT & Property Equity Fund and Sprott Real Asset Class;

Corporation means Sprott Corporate Class Inc.;

Continuing Corporate Class Fund means Sprott Real Asset Class;

Continuing Trust Fund means Sprott Global REIT & Property Equity Fund;

Corporate Class Fund means each of Sprott Tactical Balanced Class and Sprott Real Asset Class;

Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;

Investment Objective Mergers means each Merger;

IRC means the independent review committee for the Funds;

NI 81-107 means National Instrument 81-107 Independent Review Committee for Investment Funds;

Tax Act means the Income Tax Act (Canada);

Taxable Merger means the Merger of Sprott Tactical Balanced Fund into Sprott Real Asset Class;

Terminating Corporate Class Fund means Sprott Tactical Balanced Class;

Terminating Trust Fund means each of Sprott Global Agriculture Fund, Sprott Timber Fund and Sprott Tactical Balanced Fund; and

Trust Fund means each of Sprott Timber Fund, Sprott Global Agriculture Fund, Sprott Tactical Balanced Fund and Sprott Global REIT & Property Equity Fund.

Representations

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

The Manager

1.             The Manager is a corporation governed by the laws of Canada with its head office in Toronto, Ontario.

2.             The Manager is the investment fund manager of the Funds and is registered under the securities legislation: (i) in British Columbia, Alberta, Sas-katchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as an adviser in the category of portfolio manager; (ii) in Ontario, Newfoundland and Labrador and Que-bec as an investment fund manager; and (iii) in British Columbia, Alberta, Quebec, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as a dealer in the category of exempt market dealer. The Manager is also registered in Ontario as a commodity trading manager.

The Funds

3.             The Funds are either open-ended mutual fund trusts established under the laws of Ontario or separate classes of securities of the Corporation, a mutual fund corporation governed under the laws of Ontario.

4.             Securities of the Funds are currently qualified for sale under three separate simplified prospectuses, annual information forms and fund facts: securities of Sprott Tactical Balanced Fund are qualified under a simplified prospectus, annual information form and fund facts each dated May 30, 2016; securities of Sprott Tactical Balanced Class are qualified under a simplified prospectus, annual information form and fund facts each dated May 30, 2016; and securities of Sprott Timber Fund, Sprott Global Agriculture Fund, Sprott Real Asset Class and Sprott Global REIT & Property Equity Fund are qualified under a simplified prospectus, annual information form and fund facts each dated June 28, 2016, as amended on September 14, 2016 (collectively, the Offering Documents).

5.             Each of the Funds is a reporting issuer under the applicable securities legislation of Ontario and the Other Jurisdictions.

6.             Neither the Manager nor the Funds is in default under the applicable securities legislation of Ontario or the Other Jurisdictions.

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

8.             The net asset value for each series of the Funds is calculated on a daily basis in accordance with the Funds’ valuation policy and as described in the Offering Documents.

Reason for Approval Sought

9.             Regulatory approval of the Mergers is required because each Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. The pre-approval criteria are not satisfied in the following ways:

(a)           The fundamental investment objectives of the Continuing Funds in the Invest-ment Objective Mergers are not, or may be considered not to be, “substantially similar” to the investment objectives of their corresponding Terminating Funds; and

(b)           The Taxable Merger will not be com-pleted as a “qualifying exchange” under the Tax Act.

10.          Except as described in this decision, the proposed Mergers comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

The Proposed Mergers

11.          The Manager intends to reorganize the Funds as follows:

(a)           Sprott Timber Fund will merge into Sprott Global REIT & Property Equity Fund;

(b)           Sprott Global Agriculture Fund will merge into Sprott Global REIT & Property Equity Fund;

(c)           Sprott Tactical Balanced Fund will merge into Sprott Real Asset Class; and

(d)           Sprott Tactical Balanced Class will merge into Sprott Real Asset Class.

12.          In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), a press release announcing the proposed Mergers was issued and filed via SEDAR on September 9, 2016. Amendments to the Offering Documents dated September 14, 2016 and a material change report dated September 16, 2016 with respect to the proposed Mergers were filed via SEDAR on September 16, 2016.

13.          As required by NI 81-107, an IRC has been appointed for the Funds. The Manager presented the potential conflict of interest matters related to the proposed Mergers to the IRC for a decision. The IRC reviewed the potential conflict of interest matters related to the proposed Mergers and on September 21, 2016 provided its positive decision for each of the Mergers, after determining that each proposed Merger, if implemented, would achieve a fair and reasonable result for each applicable Fund.

14.          Securityholders of the Terminating Funds and the Continuing Trust Fund will be asked to approve the Mergers at special meetings to be held on or about December 16, 2016.

15.          In accordance with corporate law requirements, securityholders of the Continuing Corporate Class Fund will be asked to approve an amendment to the articles of the Corporation in connection with the exchange of securities relating to the appli-cable Merger for the Continuing Corporate Class Fund at special meetings to be held on or about December 16, 2016.

16.          The Merger involving an exchange of securities of the Corporation has also been approved by the Manager as the sole common voting shareholder of the Corporation, as required under applicable corporate law.

17.          The Manager was granted relief on October 27, 2016 to exempt each Fund from the requirement in paragraph 12.2(2)(a) of NI 81-106 to send an information circular and proxy-related materials to the securityholders of the Funds and instead allow the Funds to make use of the notice-and-access process in section 2.7.1 of National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101). If approved, the notice prescribed by section 2.7.1 of NI 54-101 (the Notice-and-Access Docu-ment), the form of proxy and the fund facts relating to the relevant series of the Continuing Funds will be sent to securityholders of the Funds commencing on or about November 14, 2016. Additionally, the Notice-and-Access Document and information circular (the Notice-and-Access Document and information circular together, the Meeting Materials) will be concurrently filed via SEDAR and posted on the Filer’s website.

18.          The tax implications of the Mergers as well as the differences between the investment objectives of the Terminating Funds and the Continuing Funds and the IRC’s recommendation of the Mergers are described in the Meeting Materials so that the securityholders of the Terminating Funds may consider this information before voting on the Mergers. The Meeting Materials also describe the various ways in which investors can obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.

19.          Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the business day immediately before the effective date of the Mergers.

Merger Steps

20.          The proposed Mergers of a Terminating Trust Fund into the Continuing Corporate Class Fund and of a Terminating Trust Fund into the Continuing Trust Fund will be structured as follows:

(a)           Prior to effecting the Merger, the Termin-ating Trust Funds will liquidate securities in its portfolio, including any securities that do not meet the investment objec-tives and investment strategies of the applicable Continuing Fund. As a result, some of the Terminating Trust Funds may temporarily hold cash or money market instruments and may not be fully invested in accordance with their invest-ment objectives for a brief period of time prior to the Merger being effected.

(b)           The value of each Terminating Trust Fund’s portfolio and other assets will be determined at the close of business on the effective date of each applicable Merger in accordance with the constating documents of the applicable Terminating Trust Fund.

(c)           The Continuing Trust Fund or the Cor-poration (in the case of the Continuing Corporate Class Fund), as applicable, will acquire the investment portfolio and other assets of the applicable Termin-ating Trust Fund in exchange for securities of the Continuing Fund.

(d)           The Continuing Trust Fund and the Corporation will not assume any liabilities of the applicable Terminating Trust Fund and the Terminating Trust Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the applicable Merger.

(e)           The Terminating Trust Funds will distri-bute a sufficient amount of their net income and net realized capital gains, if any, to securityholders to ensure that they will not be subject to tax for their current tax year.

(f)            The securities of each Continuing Fund received by the applicable Terminating Trust Fund will have an aggregate net asset value equal to the value of the portfolio assets and other assets that the Continuing Fund is acquiring from the Terminating Trust Fund, and the securities of the Continuing Fund will be issued at the applicable series net asset value per security as of the close of business on the effective date of the applicable Merger.

(g)           Immediately thereafter, securities of each Continuing Fund received by the applicable Terminating Trust Fund will be distributed to securityholders of the Terminating Trust Fund in exchange for their securities in the Terminating Trust Fund on a dollar-for-dollar basis, as applicable.

(h)           As soon as reasonably possible following each Merger, and in any case within 60 days following the effective date of the Merger, the applicable Terminating Trust Fund will be wound up.

21.          The proposed Merger of the Terminating Corporate Class Fund into the Continuing Corporate Class Fund will be structured as follows:

(a)           Prior to effecting the Merger, the Cor-poration will liquidate securities in the portfolio underlying the Terminating Cor-porate Class Fund, including any securities that do not meet the invest-ment objective and investment strategies of the Continuing Corporate Class Fund. As a result, the portfolio of the Terminating Corporate Class Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger being effected.

(b)           The value of the Terminating Corporate Class Fund’s portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Terminating Corporate Class Fund.

(c)           The Corporation may pay ordinary dividends or capital gains dividends to securityholders of the Terminating Corporate Class Fund and/or the Continuing Corporate Class Fund, as determined by the Manager at the time of the Merger.

(d)           The portfolio of assets attributable to the Terminating Corporate Class Fund will be included in the portfolio of assets attributable to the Continuing Corporate Class Fund and the net asset value of the Continuing Corporate Class Fund will be increased by an amount equal to the value of the portfolio of assets being attributed to the Continuing Corporate Class Fund determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Continuing Corporate Class Fund.

(e)           The articles of the Corporation will be amended so that all of the issued and outstanding securities of the Terminating Corporate Class Fund will be exchanged for securities of the Continuing Corporate Class Fund on a dollar-for-dollar basis, so that securityholders of the Terminating Corporate Class Fund become security-holders of the Continuing Corporate Class Fund and then the securities of the Terminating Corporate Class Fund will be cancelled.

22.          The Manager will pay for the costs of the Mergers. These costs consist mainly of brokerage charges associated with the Merger-related trades that occur both before and after the effective date of the Mergers and legal, proxy solicitation, printing, mailing and regulatory fees.

23.          No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of its applicable Terminating Fund.

24.          The investment portfolio and other assets of each Terminating Fund to be acquired by the applicable Continuing Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the effective date of the Mergers, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objectives of the applicable Continuing Fund.

25.          Each Terminating Fund will merge into its applicable Continuing Fund and the Continuing Funds will continue as publicly offered open-ended mutual funds.

Benefits of Mergers

26.          The Manager believes that the Mergers are beneficial to securityholders of each Terminating Fund and Continuing Fund for the following reasons:

(a)           the Mergers will eliminate the administrative and regulatory costs of operating each Terminating Fund and Continuing Fund as separate funds;

(b)           following the Mergers, each Continuing Fund will have a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired;

(c)           each Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace;

(d)           investors of Sprott Tactical Balanced Fund and Sprott Tactical Balanced Class will receive securities of the Continuing Fund that have a management fee that is the same as the management fee charged in respect of the securities of the Terminating Fund that they currently hold; and

(e)           investors of Sprott Timber Fund and Sprott Global Agriculture Fund will receive securities of the Continuing Fund that have a management fee that is lower than the management fee charged in respect of the securities of the Terminating Fund that they currently hold.

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.

“Raymond Chan”

Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission