National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of investment fund mergers – approval required because mergers do not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – the fundamental investment objective of the terminating funds and continuing fund are not substantially similar – unitholders of the 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), 19.1.
September 18, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
FIRST ASSET INVESTMENT MANAGEMENT INC.
FIRST ASSET NORTH AMERICAN CONVERTIBLES FUND
FIRST ASSET DIVERSIFIED CONVERTIBLE DEBENTURE FUND
(DCD and, together with NCD, the Terminating Funds)
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 mergers (the Mergers) of the Terminating Funds into First Asset Canadian Convertible Bond ETF (the Continuing Fund and, together with the Terminating Funds, the Funds) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Merger Approval).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Filer has provided notice that subsection 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, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Jurisdictions).
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:
The Manager and the Funds
1. The Filer is registered as a portfolio manager in Ontario and as an investment fund manager under the securities legislation of each of Ontario, Quebec and Newfoundland and Labrador. The Filer’s head office is located in Ontario.
2. The Filer is the manager of each Fund.
3. Each Fund was established pursuant to a declaration of trust under the laws of Ontario.
4. Each Terminating Fund is a non-redeemable investment fund whose units are listed on the Toronto Stock Exchange (TSX).
5. The Continuing Fund is an exchange-traded mutual fund (ETF) whose units are listed on the TSX.
6. The Filer and each Fund is not in default of securities legislation in any Jurisdiction.
7. Each Fund is a reporting issuer (or the equivalent) under the securities legislation of each Jurisdiction and is subject to the requirements of NI 81-102.
8. Each of the Funds follows the standard investment restrictions and practices established under the Legislation, except to the extent that the Fund has received an exemption to deviate therefrom.
9. The net asset value (NAV) of each Fund is calculated on each day that the TSX is open for business in accordance with the Funds’ valuation policy and as described in each Fund’s prospectus.
Reason for Approval of the Mergers
10. Regulatory approval of the Mergers is required because the Mergers do not satisfy all the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular, a reasonable person may not consider each Terminating Fund to have substantially similar fundamental investment objectives as the Continuing Fund.
11. The investment objectives of each Terminating Fund and the Continuing Fund are as follows:
To provide unitholders with quarterly cash distributions together with the opportunity for capital appreciation.
To provide unitholders with quarterly cash distributions together with the opportunity for capital appreciation.
To provide unitholders with (i) quarterly cash distributions, and (ii) the opportunity for capital appreciation by investing on a capitalization-weighted basis in a portfolio (the CXF Portfolio) of Convertible Bonds of Canadian issuers. Inclusion of a Convertible Bond in the CXF Portfolio is based upon the following criteria (the Eligibility Criteria): (i) minimum market capitalization outstanding of $50 million; (ii) minimum trailing 30 day average daily volume traded of $150 thousand (the Liquidity Threshold); (iii) publicly traded on a stock exchange in Canada; (iv) not currently in default of payment of either interest or principal; and (v) at least 31 days to maturity (either term or next call), provided that, to the extent that an index is developed and published which establishes criteria and methodologies, which are, in the opinion of the Portfolio Manager, similar to that of the Continuing Fund, the Portfolio Manager may decide, in its discretion, to track that index and invest pursuant to such index’s methodology.
Convertible Bonds means unsecured, subordinated debentures of issuers that can be converted into equity securities of the issuers at a specified price at the option of the holder, and excludes Synthetic Convertible Securities.
Synthetic Convertible Security means a combination of a debt instrument and an equity option that when combined behave in a manner similar to a convertible debenture, and includes instruments issued by financial institutions which offer combined exposure to the credit and equity option of an issuer.
12. Other than the criterion described in paragraph 10, the Mergers comply with all the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Mergers
13. The Filer intends to merge each Terminating Fund into the Continuing Fund.
14. The Mergers were announced in a press release dated September 12, 2018 and a material change report dated September 13, 2018, both of which have been filed on SEDAR.
15. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Filer presented the terms of the Mergers to the independent review committee of each of the Funds (the IRC) for their review. The IRC determined that the Mergers, if implemented, will achieve a fair and reasonable result for each of the Funds.
16. The Filer is convening special meetings (each, a Meeting) of the unitholders of each Terminating Fund on or about October 22, 2018 in order to seek the approval of the unitholders to complete the Mergers, as required by paragraph 5.1(1)(f) of NI 81-102.
17. The Filer has concluded that the Mergers are not a material change to the Continuing Fund, and, accordingly, there is no intention to convene a meeting of unitholders of the Continuing Fund to approve the Mergers pursuant to paragraph 5.1(1)(g) of NI 81-102.
18. By way of order dated November 4, 2016, the Filer was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of National Instrument 81-106 Investment Fund Continuous Disclosure to send a printed management information circular to unitholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such unitholders. In accordance with the Filer’s standard of care owed to the Funds pursuant to securities legislation, the Manager will only use the notice-and-access procedure for a particular meeting where it has concluded it is appropriate and consistent with the purposes of notice-and-access (as described in Companion Policy 54-101CP Communication with Beneficial Owners of Securities of a Reporting Issuer) to do so, also taking into account the purpose of the meeting and whether the Funds would obtain a better participation rate by sending the management information circular with the other proxy-related materials.
19. Pursuant to requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with each Meeting and any adjournment thereof, along with the ETF Facts of the Continuing Fund will be mailed to unitholders of each Terminating Fund on or about September 21, 2018, and will be filed via SEDAR immediately prior to such mailing. A management information circular in respect of each Meeting (each, a Circular), which the notice-and-access document provided a link to, will also be filed via SEDAR at the same time.
20. If all required approvals for the Mergers are obtained, it is intended that the Mergers will occur on a date in mid-December 2018. (the Effective Date). The Filer therefore anticipates that each unitholder of each Terminating Fund will become a unitholder of the Continuing Fund after the close of business on the Effective Date. The Terminating Funds will be wound-up within 30 days following the Mergers.
21. Each Merger will be a “qualifying exchange” under the Income Tax Act (Canada) and will therefore be effected on a tax-deferred basis.
22. The tax implications of the Mergers as well as the differences between the investment objectives, fee structure and other features of each Terminating Fund and the Continuing Fund will be described in the applicable Circular, so that unitholders may make an informed decision before voting on whether to approve the Mergers. Each Circular will also describe the various ways in which unitholders can obtain a copy of the prospectus of the Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.
23. Unitholders of each Terminating Fund will continue to have the right to trade their units of each Terminating Fund on the TSX at any time until the units are delisted, which will occur shortly prior to the Mergers being implemented. If unitholders of the Terminating Funds approve the Mergers at the Meetings, unitholders of each Terminating Fund who do not wish to participate in the Mergers will have the opportunity to redeem their units of the applicable Terminating Fund at a price equal to the NAV of the units of the applicable Terminating Fund prior to the Effective Date.
24. The costs of effecting the Mergers (consisting of primarily legal and regulatory fees, and proxy solicitation, printing and mailing costs) will be borne by the Filer.
25. No sales charges will be payable by unitholders of the Funds in connection with the Mergers.
26. The investment portfolio and other assets of each Terminating Fund to be acquired by the Continuing Fund in order to effect the Mergers are currently, or will be on or prior to the Effective Date, acceptable to the portfolio manager of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.
Steps of the Mergers
27. The specific steps to implement the Mergers are expected to be as follows:
(a) as soon as reasonably practicable, prior to the Effective Date, each Terminating Fund will liquidate a portion of its portfolio into cash;
(b) prior to the Mergers, each of the Terminating Funds and the Continuing Fund will distribute any net income and net realized capital gains for their current taxation years to the extent necessary to eliminate their liability for non-refundable income tax;
(c) the exchange ratio at which each Merger will be effected (the Exchange Ratio) will be calculated by dividing the NAV of the units of the applicable Terminating Fund by the NAV of the units of the Continuing Fund, each as determined at the close of business on the business day prior to the Effective Date;
(d) prior to the effective time of the Mergers, each Terminating Fund will transfer all of its assets to the Continuing Fund in consideration for an amount (the Purchase Price) at the effective time of the Mergers on the Effective Date;
(e) the Continuing Fund will satisfy the Purchase Price by assuming each Terminating Fund’s liabilities and by issuing to each Terminating Fund that number of units of the Continuing Fund equal to the number of units of the applicable Terminating Fund then outstanding multiplied by the Exchange Ratio. Such issued units of the Continuing Fund will be listed on the TSX at all times while they are held by the Terminating Funds;
(f) immediately thereafter, all of the units of the Terminating Funds that are listed on the TSX will be redeemed and the redemption price therefore will be paid by delivering the applicable number of units of the Continuing Fund to unitholders of each Terminating Fund based on the number of units of the applicable Terminating Fund then held, with each unitholder of a Terminating Fund receiving that number of units of the Continuing Fund (rounded down to the nearest whole unit) as is equal to the Exchange Ratio multiplied by the number of units of the Terminating Fund held by such unitholder prior to the completion of the applicable Merger;
(g) each Terminating Fund and the Continuing Fund will file a joint tax election in respect of the transfer to the Continuing Fund of all of the assets of the applicable Terminating Fund;
(h) the Terminating Funds’ units will be de-listed from the TSX and the Terminating Funds will cease to be reporting issuers in each of the provinces and territories of Canada; and
(i) the Terminating Funds will be terminated within 30 days following the Mergers.
Benefits of the Mergers
28. In the opinion of the Filer, the Mergers will be beneficial to unitholders of the Funds for the following reasons:
(a) the Continuing Fund, an ETF, will maintain its stock exchange listing and will therefore offer intra-day market liquidity for its units, but with the added benefit of posted two-way markets as a result of the market-making function provided by the designated broker and dealers. Accordingly, the units can be expected to trade at a market price approximately equal to their intrinsic net asset value;
(b) both the Terminating Funds and the Continuing Fund seek to provide unitholders with exposure to portfolios consisting primarily of bonds and debentures which can be converted into equity securities at the option of the holder and/or issuer at a specified price. Therefore, unitholders of the Terminating Funds will continue to have exposure to similar securities after completion of the Mergers;
(c) unlike the Terminating Funds, the Continuing Fund does not charge a trustee fee or a service fee. In addition, the annual management fee payable by the Continuing Fund is lower than the annual management fee payable by each of the Terminating Funds, at 0.65% of the NAV of the Continuing Fund as compared to 1.35% of NAV for NCD and 1.20% of NAV for DCD;
(d) the Terminating Funds are currently responsible for all ordinary expenses incurred in connection with their operation and administration, whereas the Filer is responsible for paying certain substantial operating expenses incurred by the Continuing Fund, including fees payable to the custodian, registrar, transfer agent and plan agent of the Continuing Fund; and
(e) due to the continuous offering of the Continuing Fund’s units, the Continuing Fund’s asset base has the potential to grow, thereby further increasing economies of scale and the ability to share any expenses borne by the Continuing Fund over a greater number of units.
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 Merger Approval is granted, provided that the Filer obtains the prior approval of the unitholders of each Terminating Fund for the applicable Merger at the applicable Meeting, or any adjournments thereof.
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission