Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund merger – approval required because the merger did not meet the criteria for pre-approved reorganizations and transfer in National Instrument 81-102 – merger will not be a “qualifying exchange.

 

Applicable Legislative Provisions

 

National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.5(3), 5.6, 5.7, 19.1.

 

October 6, 2017

 

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

FT PORTFOLIOS CANADA CO.

(the Filer)

 

AND

 

IN THE MATTER OF

FIRST TRUST ALPHADEX™ CANADIAN DIVIDEND ETF AND

FIRST TRUST CANADIAN CAPITAL STRENGTH ETF

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of First Trust AlphaDEX™ Canadian Dividend ETF (“FDY” or the “Terminating Fund”) and First Trust Canadian Capital Strength ETF (“FST” or the “Continuing Fund”) for a decision of the principal regulator under the securities legislation of the Jurisdiction (the “Legislation”) for approval pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (“NI 81-102”) in connection with the proposed merger of FDY and FST (the “Requested Approval”).

 

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 sub-section 4.7(1) of Multinational Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in the jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nuna-vut.

 

Interpretation

 

Defined terms contained 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:

 

1.             The Filer is the manager of FDY and FST. The Filer is registered as an investment fund manager in the Province of Ontario.

 

2.             The principal offices of the Filer, FDY and FST are located at 40 King Street West, 30th Floor Suite 3001, Toronto, Ontario, M5H 3Y2.

 

3.             None of the Filer, FDY or FST is in default of the securities legislation of any province or territory of Canada.

 

4.             Each of FDY and FST is an ETF established under the laws of the Province of Ontario pursuant to an amended and restated declaration of trust dated June 1, 2017. The Filer acts as trustee of FDY an FST.

 

5.             Each of FDY and FST is a reporting issuer under the laws of all of the Passport Jurisdictions.

 

6.             FDY offers common units and advisor class units (the “FDY Units”), which currently trade on the TSX under the ticker symbol FDY and FDY.A. FST offers common units and advisor class units (the “FST Units”) which currently trade on the TSX under the ticker symbol FST and FST.A.

 

7.             FDY seeks to provide its unitholders with exposure to the performance of a portfolio of higher yielding Canadian dividend paying stocks, as well as providing unitholders with monthly distributions. FDY seeks to achieve its investment objectives by primarily investing in Canadian dividend paying equities. FDY applies the AlphaDEX™ selection methodology, whereby First Trust Advisors L.P. (the “Portfolio Advisor”) selects securities from a universe of Canadian companies whose dividend yield is greater than or equal to the median dividend yield of all members of the S&P/TSX Composite Index.

 

8.             FST seeks to provide its unitholders with long-term capital appreciation by investing primarily in securities of issuers that are based in Canada and have significant business operations in the Canadian market. FST uses a multi-step, bottom-up quantitative selection process to identify its investible universe of securities, and fundamental analysis to make final portfolio selections. The selection process is designed to identify issuers that have certain objectives and easily deter-minable attributes that, in the opinion of the Portfolio Advisor, makes them capital strength issuers.

 

9.             Under the Merger, the Terminating Fund will transfer all or substantially all of its net assets to FST in consideration for the issuance by FST to FDY of a number of FST common units and FST advisor class units determined based on an exchange ratio established as of the close of trading on the business day immediately preceding the effective date of the Merger (the “Exchange Ratio”).

 

10.          The Exchange Ratio will be calculated based on the relative net asset values of the FST Units and the FDY Units.

 

11.          Immediately following the transfer of assets of FDY to FST and the issuance of FST Units to FDY, all the FDY Units will be automatically redeemed. Each unitholder of FDY will receive such number of FST Units as is equal to the number of FDY Units of a class held multiplied by the Exchange Ratio of such units.

 

12.          As soon as reasonably possible following the Merger, the Terminating Fund will be wound up and the Continuing Fund will continue as an ETF existing under the laws of Ontario.

 

13.          Unitholders of FDY approved the Merger at a special meeting of unitholders held on September 20, 2017, as required pursuant to NI 81-102.

 

14.          Subject to necessary regulatory approval and approval of unitholders of each of FDY, the Merger is expected to occur on or about October 13, 2017.

 

15.          A notice of meeting, a management information circular dated August 10, 2017 (the “Circular”) and a proxy in connection with the Merger has been mailed to the unitholders of FDY in accordance with applicable securities laws. The Circular contains a description of the proposed Merger, information about FDY and FST and the income tax considerations for unitholders of FDY. The Circular discloses that unitholders of FDY may obtain at no cost, the most recent annual financial statements, the most recent annual management report of fund performance and the current prospectus of FDY by contacting the Filer or by accessing the website of the Filer or the System for Electronic Document Analysis and Retrieval (“SEDAR”).

 

16.          The Filer will pay for the costs and expenses associated with the Merger, including the cost of holding the meeting and of soliciting proxies, including the costs of mailing the Circular and accompanying materials. FDY will not bear any of the costs and expenses associated with the Merger.

 

17.          As required by National Instrument 81-107 – Independent Review Committee for Investment Funds, the terms of the Merger were presented to the independent review committee (the “Independent Review Committee”) of FDY for its review and recommendation. After considering the potential conflict of interest matter related to the Merger, the independent review committee provided its positive recommendation for the Merger on the basis that the Merger, if implemented, would achieve a fair and reasonable result for FDY and FST and their respective unitholders. A summary of the Independent Review Committee’s recommendation has been included the Circular.

 

18.          Units of the Terminating Fund will continue to be offered, exchanged and redeemed on a daily basis up to the business day immediately prior to the effective date of the Merger, primarily through the designated broker and dealers of the Terminating Fund.

 

19.          In addition, unitholders of the Terminating Fund will be able to trade their FDY units on the TSX in the ordinary course at least until the close of business on the business day before the effective date of the Merger.

 

20.          The cash and any other assets of the Terminating Fund acquired by the Continuing Fund in connection with the Merger will be acquired in compliance with NI 81-102.

 

21.          The Filer believes that the Merger will provide unitholders of FDY with the following benefits:

 

(a)           Broader market exposure – The investment objectives and investment strategy of FDY and FST are similar in that both funds are designed to provide exposure to Canadian equities, however, FST provides unitholders with exposure to a broader investment universe as opposed to just dividend paying equities. The Filer believes that the Canadian
equity market continues to represent an attractive investment opportunity for unitholders.

 

(b)           Greater liquidity – FST has a larger asset base then FDY. The merger of FDY and FST will provide unitholders with a much larger market capitalization and the primary and secondary market for FST Units is expected to be more liquid.

 

(c)           Tax losses – FST has existing capital and non-capital tax losses that will carry forward and continue to be available to the Continuing Fund, which may benefit all unitholders of the Continuing Fund.

 

22.          A press release was issued on August 10, 2017 and a material change report was filed on SEDAR by FDY relating to the proposed Merger on August 10, 2017.

 

23.          An amendment dated August 16, 2017 to the long form prospectus of FDY dated April 28, 2017 announcing the Merger proposal has been filed on SEDAR.

 

24.          Under section 5.6 of NI 81-102, approval of the Merger by the regulator is not required if all of the criteria for pre-approval listed in paragraphs 5.6(1)(a) through (i) are satisfied.

 

25.          The Filer believes that the Merger will satisfy all the requirements of paragraphs 5.6(1)(a) through (i) of NI 81-102 with the exception of paragraph 5.6(1)(b), as the Merger will not be a “qualifying exchange”.

 

26.          The Filer has concluded in respect of the Terminating Fund that the pre-approval under section 5.6 of NI 81-102 is not available because the Merger will not be a “qualifying exchange” within the meaning of section 132.2 of the Tax Act or a tax deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act.

 

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 is that the Requested Approval is granted.

 

“Darren McKall”

Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission