Front Street Capital 2004 et al.

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval granted for change of manager of mutual funds – change of manager is not detrimental to unitholders or the public interest – change of manager approval granted on the condition that prior approval of the funds’ unitholders is obtained at a special meeting of unitholders.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(a), 5.5(3), 5.7.

November 29, 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
FRONT STREET CAPITAL 2004
(the Filer)

AND

IN THE MATTER OF
THE FRONT STREET FUNDS
(as defined below)

AND

IN THE MATTER OF
ASTON HILL FINANCIAL INC.
(Aston Hill)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval under paragraph 5.5(1)(a)of National Instrument 81-102 Investment Funds (NI 81-102) of a proposed change of manager of the mutual funds listed in Appendix “A” (the Front Street Funds) from the Filer to Aston Hill or an affiliate of Aston Hill (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 (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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Québec, Saskatchewan, Yukon Territory, Northwest Territories and Nunavut.

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.

Representations

This decision is based on the following facts represented by the Filer and Aston Hill, as the case may be:

Front Street Capital 2004

1.             The Filer is a partnership established under the laws of the province of Ontario. The Filer’s head office is located in Toronto, Ontario.

2.             The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as an adviser in the category of portfolio manager in Ontario and British Columbia, and as a dealer in the category of exempt market dealer in Ontario and Alberta.

3.             The partners of the Filer are and will be, immediately prior to Closing (as defined below):

4.             The individuals who ultimately control the corporate partners of the Filer, other than FS Group Holdings Ltd. (FS Group), are Normand G. Lamarche (Lamarche Partner Corporation), Frank L. Mersch (Mersch (AFAB) Partner Corporation), Gordon Markwart (9880160 Canada Inc.), Sandra Markwart (9896821 Canada Inc.), David Conway (Mistere Partner Corporation) and Linda Hryma (Hryma Partner Corporation).

5.             FS Group, a corporation established under the laws of the province of Ontario, is the majority controlling partner of the Filer. FS Group is ultimately controlled by four individuals: Gordon McMillan, Andy McKay, Edward Barr and Tim Diamond.

6.             The Filer is not in default of securities legislation in any province or territory of Canada

Front Street Funds

7.             The Filer is the manager of the Front Street Funds, which are open-ended public retail mutual funds.

8.             Each Front Street Fund is organized either as a trust established under the laws of the province of Ontario or the province of British Columbia or as a separate class of shares of Front Street Mutual Funds Limited, a corporation established under the laws of Canada.

9.             Each Front Street Fund is a reporting issuer in each province and territory of Canada and is not in default of securities legislation in any province or territory of Canada.

10.          Securities of the Front Street Funds are distributed in each province and territory of Canada under simplified prospectuses dated June 28, 2016.

11.          The Filer is also the manager of certain pooled funds, which are not reporting issuers in any province or territory of Canada.

Aston Hill Financial Inc.

12.          Aston Hill is a corporation established under the laws of the province of Alberta. Aston Hill is expected to be continued under the laws of the province of Ontario prior to the Closing of the Proposed Transaction (as defined below), shareholder approval for which has already been obtained. Aston Hill is a reporting issuer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan. The common shares of Aston Hill are listed and posted for trading on the Toronto Stock Exchange.

13.          Aston Hill is a diversified asset management company that offers retail mutual funds, closed end funds, hedge funds and segregated institutional funds through various subsidiaries. The activities of Aston Hill are currently conducted through the following entities (collectively, the AH Managers):

(i)            Aston Hill Asset Management Inc. (Aston Hill Asset Management) – is a corporation established under the laws of the province of Ontario and is registered as an adviser in the category of portfolio manager and a dealer in the category of exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Québec. Aston Hill Asset Management Inc. is also registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador. Aston Hill Asset Management Inc. is the manager of open-ended public retail mutual funds governed by NI 81-102 (Aston Hill Mutual Funds), and offers pooled funds and segregated managed accounts to institutional clients.

(ii)           Aston Hill Capital Markets Inc. (Aston Hill Capital) – is a corporation established under the laws of the province of Ontario and is registered as an adviser in the category of portfolio manager in Ontario and as an investment fund manager in Ontario, Québec and Newfoundland and Labrador. Aston Hill Capital Markets Inc. is the manager of TSX-listed non-redeemable investment funds governed by NI 81-102 (Aston Hill Closed-End Funds and together with the Aston Hill Mutual Funds, the AH Funds).

(iii)          AHF Capital Partners Inc. (AHF Capital Partners) – is a corporation established under the laws of the province of Ontario and is registered as an investment fund manager, an adviser in the category of portfolio manager and a dealer in the category of exempt market dealer in Ontario. AHF Capital Partners Inc. is a sub-advisor to certain funds managed by Aston Hill Asset Management Inc.

14.          The authorized capital of Aston Hill consists of an unlimited number of common shares. As of September 8, 2016, there were: (i) 106,443,760 common shares issued and outstanding; (ii) outstanding options to purchase an aggregate of 5,408,333 common shares pursuant to Aston Hill’s rolling stock option plan dated June 8, 2011, as amended on October 26, 2011; (iii) 253,539 deferred share units issued to outside directors of Aston Hill granted pursuant to the Deferred Share Unit Plan of Aston Hill dated January 23, 2012; and (iv) 2,775,000 restricted share units outstanding. Except for the common shares, there are currently no other shares of any class or series in the capital of Aston Hill outstanding. Aston Hill has also issued subordinated convertible debentures (Debentures) in the aggregate principal amount of $33,710,000 bearing an interest rate of 6.50% and maturing on January 31, 2019. The Debentures are convertible at a price of approximately $0.65 such that approximately 1,538.46215 common shares of Aston Hill would be issued for each $1,000 principal amount of Debentures converted.

The Proposed Transaction

15.          In a press release issued on September 9, 2016, the Filer and Aston Hill announced that Aston Hill and 2535706 Ontario Ltd. (AH Sub), a wholly-owned subsidiary of Aston Hill have entered into an agreement (the Acquisition Agreement) in which (i) Aston Hill will acquire 99.99% of the interests of the Filer and 100% of the issued and outstanding Class A voting shares and Class B non-voting shares of Tuscarora Capital Inc. (TCI), for consideration consisting of 120,000,000 common shares in the capital of Aston Hill (the Transaction Consideration) and (ii) AH Sub will acquire 0.01% of the interests of the Filer, for consideration consisting of $1,800.00 (the Proposed Transaction).

16.          As a condition of Closing, the holders of Debentures of Aston Hill were asked to approve amendments to the terms of such Debentures (the Debentureholder Approvals) that result in such holders receiving for each $1,000 principal amount of Debentures (i) 1,445 common shares of Aston Hill and (ii) an amended Debenture having a principal amount of $600 that will pay interest at the rate of 7.00% per annum, that will mature on June 30, 2021 and that will be convertible at a conversion price of $0.30 per common share of Aston Hill (the Debenture Consideration). As a result, upon closing of the Proposed Transaction, current holders of Debentures will collectively be issued 48,710,950 common shares of Aston Hill and amended Debentures with an aggregate principal amount of $20,226,000.

17.          Upon Closing and after giving effect to the Debenture Consideration, the partners (those holding interests as set out in the “Partnership Interest Immediately Prior to Closing (%)” column in the table in paragraph 3) of the Filer will own approximately 46% of Aston Hill, the current shareholders of Aston Hill will own approximately 37% of Aston Hill (41% and 33%, respectively, on a fully diluted basis) and the remaining 17% of the common shares will be owned by the current debentureholders, resulting in approximately 54% of the common shares of Aston Hill remaining in the hands of existing securityholders.

18.          FS Group, the majority controlling partner of the Filer, will acquire approximately 91 million common shares of Aston Hill upon Closing, representing 31% of the outstanding common shares of Aston Hill, after giving effect to the Proposed Transaction. As a result, the common shares of Aston Hill will continue to be widely held, with no controlling shareholder following Closing of the Proposed Transaction.

19.          The board of directors of Aston Hill, after consultation with its financial and legal advisors, and based on the unanimous recommendation of a special committee of the Aston Hill board of directors established to review the Proposed Transaction (Special Committee), unanimously recommended that holders of Aston Hill common shares and Debentures vote in favour of the Proposed Transaction at a special meeting of shareholders and debentureholders (collectively, the Aston Hill Meetings) to consider the Proposed Transaction.

20.          Further details of the Proposed Transaction are set out in the Acquisition Agreement and in the joint management information circular in connection with the Aston Hill Meetings, both of which have been filed by Aston Hill on SEDAR.

21.          Shareholders and debentureholders of Aston Hill approved the Proposed Transaction at the Aston Hill Meetings held on November 22, 2016. Debentureholders of Aston Hill also voted in favour of the Debentureholder Approvals at the Aston Hill Meetings.

22.          Completion of the Proposed Transaction is subject to customary closing conditions, including a favourable vote of a majority of the votes cast by shareholders of Aston Hill, the Debentureholder Approvals and applicable regulatory approvals. Assuming timely receipt of all such approvals and the satisfaction of all other conditions, closing is expected to occur on or about November 30, 2016 and no later than December 31, 2016 (the Closing).

23.          In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, the Filer has treated the announcement of the Proposed Transaction as a “material change” for the Front Street Funds and therefore filed the press release dated September 9, 2016, a material change report dated September 9, 2016 announcing the Proposed Transaction and amendments dated September 19, 2016 in relation to the Front Street Funds’ simplified prospectuses.

24.          A notice of the Proposed Transaction has been delivered to the Compliance and Registrant Regulation branch of the Principal Regulator pursuant to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) with respect to the Filer and TCI and other parties as applicable, including notice required under section 11.9 of NI 31-103 in respect of the AH Managers. An application has also been filed with the Investment Industry Regulatory Organization of Canada to seek District Council approval for the Proposed Transaction with respect to TCI.

Proposed Change of Manager

25.          As the ownership of the interests of the Filer will change such that, on Closing, Aston Hill will own 100% of the interests of the Filer, the Proposed Transaction will result in a change of control of the Filer.

26.          Prior to Closing, it is expected that Aston Hill Asset Management and Aston Hill Capital will be amalgamated or otherwise combined or the management contracts will be assigned to one of Aston Hill Asset Management or Aston Hill Capital. The resulting entity (AH Amalco) will remain the investment fund manager of the AH Funds and will become the investment fund manager of the Front Street Funds (the Change of Manager), likely by way of assignment of the management agreements of the Front Street Funds to AH Amalco.

27.          Although the Proposed Transaction will initially result in a change of control of the Filer, the series of transactions described in paragraph 25 will eventually result in a Change of Manager for the Front Street Funds. Consistent with OSC Staff Notice 81-710 Approvals for Change in Control of a Mutual Fund Manager and Change of a Mutual Fund Manager Under National Instrument 81-102 Mutual Funds, securityholder approval for the Change of Manager was sought and received at special meetings of securityholders of the Front Street Funds held on November 10, 2016.

28.          The Proposed Transaction is expected to result in significant cost savings and certain other synergies between the Filer’s business and operations and the business and operations of the AH Managers. However, certain aspects of the operations and business of the Filer and of the AH Managers will not change in a significant manner.

29.          The parties anticipate the following impacts upon the Filer, the AH Managers, the Front Street Funds and the AH Funds:

(i)            It is expected that the senior management teams of the Filer and the AH Managers will be substantially harmonized following Closing, resulting in changes to certain officers and directors (or equivalent) of the Filer and of Front Street Mutual Funds Limited. Joe Canavan will be the UDP of Aston Hill Asset Management, Aston Hill Capital and the Filer upon Closing and of AH Amalco in the future. Other members of senior management of the Filer and of the AH Managers are likely to join the senior management team of AH Amalco.

(ii)           It is expected that the name and branding of the Filer, of the AH Managers, of the Front Street Funds and of the AH Funds, will change. The change of name of Aston Hill requires shareholder approval, which approval was received at the Aston Hill Meetings held on November 22, 2016.

(iii)          Other than the potential consolidation of the portfolio management teams as a result of the amalgamation or combination to create AH Amalco, there are no current plans to make significant changes to the individual portfolio managers of the Filer and the AH Managers who are currently responsible for the management of the portfolios of the Front Street Funds and the AH Funds, respectively, but such changes could be made in the future, once the parties have completed their assessment of the performance of each individual portfolio manager. Any significant changes to the individual portfolio managers of the Front Street Funds and the AH Funds would be treated as material changes, where appropriate.

(iv)          There has been no assessment as to whether there will be any change to the investment objectives or strategies of the Front Street Funds or of the AH Funds or whether there will be any mergers of the Front Street Funds with the AH Funds. If any such changes are contemplated following Closing, they will be treated as material changes and appropriate regulatory and securityholder approvals will be sought.

(v)           All external service providers to the Front Street Funds and the AH Funds will be assessed and there may be changes to such service providers following Closing.

(vi)          It is expected that there will be synergies with respect to the wholesale and client service support of, and back office and compliance supervisory personnel for, the Front Street Funds and the AH Funds as a result of the Proposed Transaction. However, no decision has been made as to which support staff and personnel of the Filer and the AH Managers will change.

(vii)         The operations of the Front Street Funds and the AH Funds will be reviewed following Closing, which may result in changes to the management fees and expenses charged to the Front Street Funds and the AH Funds. Securityholder approval will be sought for any changes that could result in an increase to the fees and expenses charged with respect to the Front Street Funds and the AH Funds, as required by sections 5.1(1)(a) and 5.1(1)(a.1) of NI 81-102.

(viii)        The members of the Independent Review Committee (IRC) of the Front Street Funds will cease to be IRC members by operation of section 3.10(1)(c) of National Instrument 81-107 Independent Review Committee for Investment Funds. However, immediately following Closing, the members of the IRC of the AH Funds will be appointed as members of the IRC of the Front Street Funds and certain members of the IRC of the Front Street Funds may be appointed to the IRC of the AH Funds. In any event, the current members of the IRC of the AH Funds will constitute a majority of the combined IRC following Closing.

30.          The Proposed Transaction is expected to benefit the Filer and the Front Street Funds:

(i)            It will result in the Filer becoming part of a multi-faceted public Canadian asset management business, which should be advantageous to its financial position and its ability to fulfill its regulatory and compliance obligations to the Front Street Funds and as a registrant. The expected synergies between the Filer’s business and operations and the business and operations of the AH Managers are anticipated to result in a reduction in expenses borne by the Front Street Funds and the AH Funds.

(ii)           The operations of the Front Street Funds and the AH Funds will be reviewed following Closing and all external service providers to the Front Street Funds and the AH Funds will be assessed. The parties expect to be able to leverage the increased scale of the combined entities to renegotiate service contracts with external service providers to the Front Street Funds and the AH Funds. This review, assessment and renegotiation process is expected to result in increased efficiencies in the operations of the Front Street Funds and the AH Funds and may result in a reduction in expenses borne by the Front Street Funds and the AH Funds.

(iii)          While there are no current plans to make significant changes to the individual portfolio managers of the Filer and the AH Managers (other than the potential consolidation of the portfolio management teams as a result of the amalgamation or combination to create AH Amalco) who are currently responsible for the management of the portfolios of the Front Street Funds and the AH Funds, respectively, such changes could be made in the future, once the parties have completed their assessment of the performance of each individual portfolio manager. Any such changes are expected to benefit the Front Street Funds and the AH Funds because the new portfolio management team will be selected to bring greater investment discipline to the relevant fund and thereby is expected to reduce the investment volatility of such fund.

(iv)          The Filer and the AH Managers will be able to enhance future product offerings by leveraging the talent of the portfolio managers and sub-advisors used by the AH Funds and the Front Street Funds to create new investment funds. This enhancement of product offerings is expected to benefit the AH Funds and the Front Street Funds as it is expected to result in a more diverse array of investment options for investors.

(v)           The parties will be able to leverage the strengths and talents of the Aston Hill group of companies, to be able to adopt best practices in the management of the Front Street Funds and the AH Funds. It is expected that there will be synergies with respect to the compliance supervisory personnel for Filer and the AH Managers. As a result, there is the potential for an increase in compliance experience and resources available to the Front Street Funds and the AH Funds.

(vi)          There are significant cost savings available to drive future cash flow growth for Aston Hill and its securityholders.

(vii)         The Filer’s wholesalers will be able to leverage the distribution networks of the AH Funds to expand the distribution of the Front Street Funds and the AH Managers’ wholesalers will be able to leverage the distribution networks of the Front Street Funds to expand the distribution of the AH Funds. Increased sales of the Front Street Funds and the AH Funds is expected to result in (a) a larger asset base over which to spread expenses, thereby offering the potential for investors to benefit from lower MERs in the funds and (b) an investment portfolio of greater value, thereby offering the potential for greater investment diversification.

31.          The Filer referred the Proposed Transaction to the Front Street Funds’ IRC for its review, which advised the Filer that, after reasonable inquiry, the Change of Manager achieves a fair and reasonable result for the Front Street Funds.

32.          Securityholders of the Front Street Funds approved the Change of Manager of the Front Street Funds at special meetings (the Front Street Funds Special Meetings) held on November 10, 2016 in accordance with section 5.1(1)(b) of NI 81-102.

33.          The Front Street Funds and the AH Funds will not bear any of the costs and expenses associated with the Proposed Transaction, including the Change of Manager. The costs and expenses of Proposed Transaction (including the Change of Manager) will be borne by the Filer and/or Aston Hill (or one of its affiliates).

34.          The Filer does not expect the Change of Manager to adversely affect its financial position or its ability to fulfill its regulatory obligations.

35.          The Approval Sought will not be detrimental to the protection of the securityholders of the Front Street Funds or prejudicial to the public interest.

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:

(a)           the Filer obtains prior approval of the securityholders of the Front Street Funds for the Change of Manager at the Front Street Funds Special Meetings;

(b)           the notice of the Front Street Funds Special Meetings and the management information circular in respect of the Front Street Funds Special Meetings (the Circular) are sent to the securityholders of the Front Street Funds and copies thereof are filed on SEDAR in accordance with applicable securities legislation;

(c)           the Circular contains:

(i)            sufficient information regarding the business, management and operations of Aston Hill, including details of the AH Funds and the officers and board of directors of Aston Hill;

(ii)           all information necessary to allow securityholders of the Front Street Funds to make an informed decision about the Change of Manager and to vote on the Change of Manager; and

(d)           all other information and documents necessary to comply with the applicable proxy solicitation requirements of securities legislation for the Front Street Funds Special Meetings are sent to securityholders of the Front Street Funds.

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

APPENDIX “A”

FRONT STREET FUNDS

Front Street MLP and Infrastructure Income Class
Front Street Resource Growth and Income Class
Front Street Balanced Monthly Income Class (formerly, Front Street Diversified Income Class)
Front Street Growth Class
Front Street Special Opportunities Class
Front Street Global Opportunities Class
Front Street Growth and Income Class
Front Street Tactical Equity Class
Front Street Money Market Class
Front Street Tactical Bond Class
Front Street Global Balanced Income Class
Front Street Tactical Bond Fund
Front Street Growth Fund