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 – mergers are not a “qualifying exchange” or a tax-deferred transaction under the Income Tax Act (Canada) – securityholders of terminating funds provided with timely and adequate disclosure regarding mergers.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.5(3), 5.6, 5.7.
December 14, 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
COUNSEL PORTFOLIO SERVICES INC.
COUNSEL SHORT TERM FIXED INCOME CLASS,
COUNSEL U.S. VALUE CLASS,
COUNSEL U.S. GROWTH CLASS,
COUNSEL INTERNATIONAL VALUE CLASS,
COUNSEL INTERNATIONAL GROWTH CLASS, AND
COUNSEL GLOBAL SMALL CAP CLASS
(COLLECTIVELY, THE “TERMINATING FUNDS” AND INDIVIDUALLY, A “TERMINATING FUND”)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Funds, for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed reorganization of each of the Terminating Funds with applicable Continuing Funds (each as defined below), pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Requested Relief).
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 British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
“Continuing Funds” means Counsel U.S. Value, Counsel U.S. Growth, Counsel International Value, Counsel International Growth, Counsel Global Small Cap, and Counsel Short Term Bond (collectively, the “Continuing Funds” and individually, a “Continuing Fund”).
“Effective Date” means on or about January 13, 2017, the anticipated date of the Proposed Reorganization.
“Funds” means collectively, the Terminating Funds and the Continuing Funds.
“Proposed Reorganizations” means each of the proposed mergers of the Terminating Funds into the applicable Continuing Funds.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation formed by articles of incorporation under the laws of Ontario with its head office in Mississauga, Ontario. The Filer is registered as a portfolio manager and investment fund manager in Ontario, and as an investment fund manager in Quebec and Newfoundland and Labrador.
2. The Filer is the manager of the Funds.
3. The Terminating Funds are separate classes of securities of Counsel Portfolio Corporation, a mutual fund corporation governed under the laws of Ontario. The Continuing Funds are unit trusts established under the laws of Ontario. Each Terminating Fund invests solely in its corresponding Continuing Fund.
4. The Funds are each reporting issuers under the securities legislation of each province and territory of Canada, except Quebec. Neither the Filer nor the Funds are in default of securities legislation in any province or territory of Canada, as applicable.
5. 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.
6. Securities of the Terminating Funds were previously qualified for sale in each of the provinces and territories of Canada, except Quebec, under a simplified prospectus and annual information form each dated October 29, 2015, as amended. The distribution of securities of the Terminating Funds ceased on October 28, 2016.
7. The Continuing Funds are currently qualified for distribution under a simplified prospectus, annual information form and fund facts each dated October 29, 2016, as amended.
8. The net asset value for each class or series of the Funds, as applicable, is calculated on a daily basis in accordance with the Funds’ valuation policy and as described in the foundation documents of the Terminating Funds and the offering documents of the Continuing Funds, as applicable.
The Proposed Reorganizations
9. Pursuant to the Proposed Reorganizations, securityholders of each of the Terminating Funds would become securityholders of the applicable Continuing Fund, as follows (each a “Merger” and collectively, the “Mergers”):
Counsel U.S. Value Class
Counsel U.S. Value
Counsel U.S. Growth Class
Counsel U.S. Growth
Counsel International Value Class
Counsel International Value
Counsel International Growth Class
Counsel International Growth
Counsel Global Small Cap Class
Counsel Global Small Cap
Counsel Short Term Fixed Income Class
Counsel Short Term Bond
10. Approval of the Proposed Reorganization is required because the Mergers will not be completed as a “qualifying exchange” or a tax‑deferred transaction under the Income Tax Act (Canada) (the “Tax Act”).
11. Except as noted above, the Proposed Reorganizations will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
12. The Proposed Reorganizations do not require approval of securityholders of the Continuing Funds as the Filer has determined that the Proposed Reorganizations do not constitute material changes to any of the Continuing Fund.
13. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Independent Review Committee (IRC) has been appointed for the Funds. The Filer presented the terms of the Proposed Reorganizations to the IRC for a recommendation. The IRC reviewed the Proposed Reorganizations and provided a positive recommendation for each of the Proposed Reorganization, having determined that the Proposed Reorganizations, if implemented, would achieve a fair and reasonable result for each of the Funds and their respective securityholders.
14. A press release describing the Proposed Reorganizations was issued and the press release was filed on SEDAR on September 26, 2016. An associated material change report and amendments to the simplified prospectus and annual information form (including amendments thereto where applicable), as well as revised fund facts of the Terminating Funds, which give notice of the Proposed Reorganizations, were filed on SEDAR on September 30, 2016.
15. A notice of meeting, management information circular, proxy and fund facts of the applicable series of the Continuing Funds (“Meeting Materials”) were mailed or otherwise made available to securityholders of the Terminating Funds on November 23, 2016 and were filed on SEDAR on November 30, 2016.
16. The Meeting Materials contain a description of the Proposed Reorganizations relevant to each securityholder, 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, at no cost.
17. The Manager will pay for the costs of the proposed Mergers. These costs consist mainly of brokerage charges associated with the trades that occur both before and after the date of the proposed Mergers and legal, proxy solicitation, printing, mailing and regulatory fees. There are no charges payable by securityholders of the Terminating Funds who acquire securities of the corresponding Continuing Funds as a result of the Proposed Reorganization.
18. Securityholders of each of the Terminating Funds will be asked to approve the Proposed Reorganization associated with that Terminating Fund at a special meeting of securityholders scheduled to be held on or about December 16, 2016.
19. The Mergers will be effected on a taxable basis, which the Manager has determined will be in the overall best interests of the investors of the Terminating Funds and the Continuing Funds.
20. Following the implementation of the Proposed Reorganization, all systematic plans that were established with respect to the Terminating Funds will be re-established in the applicable Continuing Fund unless securityholders advise the Filer otherwise.
21. Securityholders may change or cancel any systematic plan at any time and securityholders of the Terminating Funds who wish to establish one or more systematic plans in respect of their holdings in the Continuing Fund may do so following the implementation of the Proposed Reorganizations.
Proposed Reorganization Steps
22. If the necessary approvals are obtained, the Filer will carry out the following steps to complete the Proposed Reorganizations:
(a) Prior to effecting the Merger, if required, the Corporation will redeem any securities in the underlying Continuing Fund in which a Terminating Fund invests. As a result, the portfolios of some of the Terminating Funds may temporarily hold cash, money market instruments or investments that are not consistent with their investment objectives, and may not be fully invested in accordance with their investment objectives for a brief period of time prior to the Merger being effected.
(b) Each Terminating Fund may, prior to the Mergers, pay taxable dividends and/or capital gains dividends to its securityholders, but only to the extent required to manage the tax liability of the Corporation in a manner that the Board of Directors of the Corporation, in consultation with the Manager, determines to be fair and reasonable.
(c) The value of each Terminating 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 Fund.
(d) Each Continuing Fund will acquire the investment portfolio and other assets of the applicable Terminating Fund in exchange for securities of the Continuing Fund.
(e) Each Continuing Fund will not assume any liabilities of the applicable Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the applicable Merger.
(f) The securities of each Continuing Fund received by the applicable Terminating 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 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 Fund will be distributed to securityholders of the Terminating Fund, as proceeds of redemption of their securities in the Terminating Fund on a dollar‑for‑dollar and series by series basis.
(h) As soon as reasonably possible following each Merger, the Corporation will cancel the securities of the applicable Terminating Fund.
23. Securityholders in the Terminating Funds will continue to have the right to redeem or exchange their securities for securities of any other mutual fund of the Filer at any time up to the close of business on the business day before the Effective Date. Securityholders of the Terminating Fund that switch their securities for securities of other mutual funds of the Filer will not incur any charges other than switch fees, if applicable, as described in each Terminating Fund’s simplified prospectus. Securityholders who redeem securities may be subject to redemption charges.
24. Following the implementation of the Proposed Reorganizations, the Continuing Funds will continue as publicly offered open-ended mutual funds offering securities in all provinces and territories in Canada, except Quebec.
25. Following the implementation of the Proposed Reorganizations, a press release and material change report announcing the results of the securityholder meetings in respect of the reorganization of the Terminating Funds will be issued and filed.
Proposed Reorganization Benefits
26. The Filer believes that the Proposed Reorganization is beneficial to securityholders of the Terminating Funds for the following reasons:
(a) The Terminating Funds were introduced as part of a corporate class structure which has generally not been supported by investors. One of the main benefits to a corporate class structure is the ability to switch amongst funds within the corporation without triggering a tax event. However, due to changes announced by the Canada Revenue Agency, the opportunity for tax deferred switching between corporate class funds will be terminated as of January 1, 2017. As a result, the Manager does not anticipate investor interest in the Terminating Funds to improve.
(b) As the Continuing Funds are substantially larger in assets, investors can be more assured of the Fund’s long term viability.
(c) If the Mergers occur, holders of certain series of securities of the Terminating Funds will benefit from lower management fees and/or administration fees on the corresponding series of securities of the Continuing Funds received in the merger.
27. If the Proposed Reorganizations are approved, the reorganizations will be implemented after the close of business on the Effective Date. If the Proposed Reorganizations are not approved, Counsel expects to terminate the applicable Terminating Fund(s) in the first quarter of 2017.
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 Requested Relief is granted, provided that the Filer obtains the prior approval of the securityholders of the Terminating Funds for the Proposed Reorganizations at a special meeting held for that purpose.
Investment Funds and Structured Products Branch
Ontario Securities Commission