NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – a reasonable person may not consider the Terminating Fund and Continuing Fund to have substantially similar investment objectives – securityholders of Terminating Fund provided with timely disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.5(3), 5.6, 5.7.
May 10, 2017
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
ASTON HILL CANADIAN TOTAL RETURN FUND
(the Terminating Fund)
ASTON HILL TOTAL RETURN FUND
(the Continuing Fund, and together with the Terminating Fund, the Funds)
LOGiQ ASSET MANAGEMENT LTD.
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) for approval (the Approval Sought) under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) of the proposed merger of the Terminating Fund into the Continuing Fund (the Merger).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator (Principal Regulator) for this application; and
(ii) the Filer has provided notice that sub-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 (together with the Jurisdiction, the Juris-dictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision unless otherwise defined.
This decision is based on the following facts represented by the Filer.
1. The head office of the Filer is located in Toronto, Ontario. The Filer is the investment fund manager and trustee of each of the Funds.
2. The Filer is registered as an exempt market dealer and portfolio manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Quebec and as an investment fund manager in Newfoundland and Labrador, Ontario, and Quebec.
3. Each of the Funds is a reporting issuer in each of the jurisdictions of Canada.
4. Neither the Filer nor the Funds is in default of securities legislation in any jurisdiction of Canada.
5. Securities of each of the Funds are currently qualified for sale by a simplified prospectus, annual information form and fund facts dated May 12, 2016, as amended, which have been filed and receipted in each of the jurisdictions of Canada.
6. Other than circumstances in which a securities regulatory authority has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices set out in NI 81-102.
7. Each of the Funds is an open-end mutual fund operating under the laws of Canada.
8. The Terminating Fund offers series A, TA6, UA, F, TF6, UF and I units, and the previously offered Y and Z units. The Fund’s investment objective is to seek to provide long-term returns by investing in a portfolio consisting primarily of Canadian equity securities.
9. The Continuing Fund offers series A, TA6, UA, F, TF6, UF, and I units. The Continuing Fund is authorized to issue an unlimited number of units of each such series.
10. The Continuing Fund’s investment objective is to seek to achieve consistent returns that are not highly correlated with the Canadian equity markets. The Continuing Fund invests primarily in a diversified portfolio of equity securities of North American issuers and, from time to time, will take short positions in such securities.
11. The Continuing Fund’s net asset value as at December 31, 2016 was $ 44,238,519. The Terminating Fund’s net asset value as at December 31, 2016 was $ 5,731,639.
12. Following the Merger, the Continuing Fund will be renamed LogiQ Total Return Fund.
13. The unitholders of the Terminating Fund (the Unitholders) approved the Merger at the adjourned special meeting held on May 4, 2017 and, subject to receipt of the Approval Sought, the Filer currently expects to implement the Merger on or about May 11, 2017 (the Effective Date).
14. Pursuant to the Merger, Unitholders will, on the Effective Date, receive units of such series of the Continuing Fund equivalent to the series of units held by the Unitholder in the Terminating Fund.
15. There will be no merger, and regulatory approval is not required, in respect of Series Y and Series Z units of the Terminating Fund previously offered by the Terminating Fund and referred to in the Circular (defined below), as there will not be any Unitholders holding such units as at the Effective Date.
16. The Filer examined its line-up of available funds and selected the Continuing Fund as the particular fund to merge the Terminating Fund into because it has a broader investment objective than the Terminating Fund and its investments are not limited primarily to Canadian equities (as in the case of the Terminating Fund).
17. The broader investment mandate of the Continuing Fund provides it with a greater ability than the Terminating Fund to seek growth opportunities and reduce volatility in the following ways: (i) the Continuing Fund has greater flexibility to invest as it is not limited to one North American market; (ii) the ability to invest primarily outside of Canada gives the Continuing Fund greater opportunity to invest in a wider range of large-cap issuers; and (iii) the ability to short North American equities allows the portfolio adviser to hedge exposures and reduce correlation to the Canadian markets to seek consistent risk-adjusted returns.
18. The Terminating Fund filed a press release and a material change report in respect of the proposed Merger on SEDAR on March 15, 2017.
19. Pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), on March 28, 2017, the Funds’ Independent Review Committee (IRC) provided a positive recommendation for the Merger, after determining that in the IRC’s opinion, having reviewed the Merger as a potential conflict of interest, the Merger achieves a fair and reasonable result for the Funds.
20. Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for preapproved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because a reasonable person may not consider the fundamental investment objectives of the Terminating Fund and the Continuing Fund to be “substantially similar”. The Merger will otherwise comply with all the other criteria for pre-approved organizations and transfers set out in section 5.6 of NI 81-102.
21. The Filer has determined that the Merger will not be a material change for the Continuing Fund.
22. A notice of the meeting, joint management information circular (the Circular) and proxies in connection with the special meeting were mailed to Unitholders on April 10, 2017 and filed via SEDAR.
23. The Circular of the Terminating Fund includes a comparison describing the similarities and differences between the Terminating Fund and the Continuing Fund, and includes information regard-ing fees, investment objectives, the manager, the portfolio advisor, the purchase options, the distribution policies and discusses the income tax considerations applicable to the Merger. Accord-ingly, Unitholders will have had an opportunity to consider this information prior to voting on the Merger.
24. A summary of the IRC’s recommendation has been included in the Circular sent to Unitholders as required by section 5.1(2) of NI 81-107.
25. The Funds will not bear any of the costs and expenses associated with the Merger. The Filer will pay for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees, as well as the costs of implementing the Merger, including any brokerage fees associated with (i) liquidating a portion of the Terminating Fund’s portfolio, if necessary, and (ii) investing the resulting cash transferred to the Continuing Fund.
26. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund.
27. The net asset value of the units of a series of the Continuing Fund received by a Unitholder pursuant to the Merger will be equal to the net asset value per series of units of the Terminating Fund held by such Unitholder on the business day prior to the effective date of the Merger.
28. It is not expected that Unitholders will experience any adverse tax consequences as a result of the Merger or any pre-Merger liquidations, if any. The Filer is of the view that almost all of the portfolio assets of the Terminating Fund can be transferred to the Continuing Fund. Where a portion of the portfolio is required to be disposed of for smaller positions, the Filer expects that the Terminating Fund has sufficient tax loss carry-forwards to cover the amount of the gain generated from these sales.
29. The fees of the applicable series of the Continuing Fund which Unitholders will receive are the same as the fees of the applicable series of the Terminating Fund.
30. No sales charges will be payable by Unitholders in connection with the Merger.
31. The valuation procedures for the Funds are substantially similar.
32. Unitholders will have the same purchase option and deferred sales charge schedule in the Continuing Fund as in the Terminating Fund. Unitholders will also have the same pre-authorized purchase chequing plan available to them in the Continuing Fund as was available in the Terminating Fund.
33. Unitholders will have the same distribution arrangements available in the Continuing Fund as was available in the Terminating Fund, including that investors who have elected to receive cash distributions in the Terminating Fund will receive cash distributions in the Continuing Fund.
34. Unitholders 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 Merger, subject to the standard redemption charges as set out in the Terminating Fund’s simplified prospectus.
35. The units of the Continuing Fund are redeemable daily at a price based on the net asset value per unit.
Procedure for the Merger
36. For the Merger, units of the Terminating Fund will be exchanged for units of the same series of the Continuing Fund at an exchange ratio (the Exchange Ratio in respect of a series of units) calculated based on the relative net asset values of each series of units of the Terminating Fund and the Continuing Fund as at the close of business on the business day immediately prior to the Effective Date. If the Approval Sought is obtained, the following events will occur in order to give effect to the Merger:
a. Prior to the Merger, the Terminating Fund and the Continuing Fund will distribute any net income and net realized capital gains for its current taxation year to the extent necessary to eliminate its liability for non-refundable income tax.
b. The Exchange Ratio in respect of each series of units of the Terminating Fund will be calculated.
c. Prior to midnight on the Effective Date, the Terminating Fund will transfer all of its assets to the Continuing Fund in consideration for an amount equal to the fair market value of its assets transferred to the Continuing Fund on the Effective Date (a Purchase Price).
d. The Continuing Fund will satisfy the Purchase Price by assuming the Ter-minating Fund’s liabilities and by issuing to the Terminating Fund that number of units of each applicable series of the Continuing Fund equal to the number of such units then outstanding multiplied by the applicable Exchange Ratio.
e. Immediately thereafter, all of the units of the Terminating Fund will be redeemed and the redemption price therefor will be paid by delivering the applicable number of units of the applicable series of the Continuing Fund to Unitholders of the Terminating Fund based on the number of such units of the Terminating Fund then held.
f. The Terminating Fund and the Continu-ing Fund will file a joint tax election in respect of the transfer to the Continuing Fund of all of the assets of the Terminating Fund.
g. The Terminating Fund will be wound-up within 30 days following the Merger.
Benefits of the Merger
37. The Filer believes that the Merger will be beneficial to Unitholders of the Funds for the following reasons:
a. there is little opportunity to reduce the fixed costs individually associated with, and currently paid by, the Terminating Fund and the Continuing Fund, including expenses such as audit, legal, trustee, custody, transfer agency, independent review committee, filing and fund accounting fees. The fixed costs associated with the Continuing Fund after the Merger will be less than the total fixed costs currently paid by the Terminating Fund and the Continuing Fund and will be spread over a larger number of units;
b. the Continuing Fund is expected to have a larger asset base which will allow for greater portfolio diversification and a smaller proportion of assets set aside in the form of cash to fund redemptions. This may lead to the reduction of risk and increased returns;
c. the Continuing Fund had a lower MER (before waivers and absorptions) of 2.87% for the Series A units and 1.78% for the Series F units for the year-ended December 31, 2016. Comparatively, the Terminating Fund had a MER (before waivers and absorptions) of 5.13% for the Series A units and 4.10% for the Series F units for the year ended December 31, 2016;
d. the Merger allows Unitholders of the Terminating Fund to continue their investment in a fund with North-American based investment objectives; and
e. the Manager will pay the costs and expenses of the Merger, therefore the Merger will save the Terminating Fund the costs of a dissolution and wind-up, which would otherwise be borne by the Terminating Fund.
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.
Investment Funds and Structured Products Branch
Ontario Securities Commission