IA Clarington Investments Inc. et al.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – approval of mutual fund mergers – approval required because certain mergers do not meet the criteria for pre-approved reorganizations and transfers in Regulation 81-102 – mergers not a “qualifying exchange” or a tax-deferred transaction under the Income Tax Act (Canada) – securityholders of terminating funds are provided with timely and adequate disclosure regarding the mergers.

Applicable Legislative Provisions

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

[Translation]

March 15, 2019

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

 IN THE MATTER OF
IA CLARINGTON INVESTMENTS INC.
(the Filer)

AND

IA CLARINGTON STRATEGIC INCOME CLASS,
IA CLARINGTON SHOT-TERM BOND FUND,
IA CLARINGTON TACTICAL BOND FUND,
IA CLARINGTON TACTICAL BOND CLASS,
IA CLARINGTON STRATEGIC CORPORATE BOND CLASS,
IA CLARINGTON SHORT-TERM INCOME CLASS,
IA CLARINGTON SARBIT ACTIVIST OPPORTUNITIES CLASS,
IA CLARINGTON CANADIAN GROWTH CLASS,
(each a Terminating Fund, and collectively, the Terminating Funds)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Makers) has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdictions (the Legislation) approving the proposed mergers (each a Merger, and collectively the Mergers) of each of the Terminating Funds into the applicable Continuing Funds (each as defined below) pursuant to paragraph 5.5(1)(b) of Regulation 81-102 respecting Investment Funds (CQLR V-1.1, r. 39) (Regulation 81-102) (the Mergers Approval).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a)           the Autorité des marchés financiers is the principal regulator for this application;

(b)           the Filer has provided notice that section 4.7 (1) of Regulation 11-102 respecting Passport System (chapter V-1.1, r. 1) (Regulation 11-102) is intended to be relied upon in the provinces and territories of Canada other than the Jurisdictions; and

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 14-101 respecting Definitions (c. V-1.1, r. 3), Regulation 11-102, Regulation 81-101 respecting Mutual Funds Prospectus Disclosure (c.V-1.1, r. 38) (Regulation 81-101) and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.

Continuing Corporate Fund means each of IA Clarington Sarbit U.S. Equity Class (Unhedged) and IA Clarington Canadian Leaders Class;

Continuing Fund or Continuing Funds means, individually or collectively, IA Clarington Strategic Income Fund, IA Clarington Core Plus Bond Fund, IA Clarington Strategic Corporate Bond Fund, IA Clarington Money Market Fund, IA Clarington Sarbit U.S. Equity Class (Unhedged) and IA Clarington Canadian Leaders Class;

Continuing Trust Fund means IA Clarington Strategic Income Fund, IA Clarington Core Plus Bond Fund, IA Clarington Strategic Corporate Bond Fund and IA Clarington Money Market Fund;

Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;

Income Tax Act means the Income Tax Act (Canada);

Sector Fund means Clarington Sector Fund Inc.;

Terminating Corporate Fund means each of IA Clarington Strategic Income Class, IA Clarington Tactical Bond Class, IA Clarington Strategic Corporate Bond Class, IA Clarington Short-Term Income Class, IA Clarington Sarbit Activist Opportunities Class and IA Clarington Canadian Growth Class;

Terminating Trust Fund means each of IA Clarington Short-Term Bond Fund and IA Clarington Tactical Bond Fund.

Representations

This decision is based on the following facts represented by the Filer:

The Filer and the Funds

1.             The Filer is a corporation amalgamated under the laws of Canada. The Filer’s head office is in Québec City, Québec.

2.             The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador, as an exempt market dealer in Québec and Ontario, and as a portfolio manager in all of the provinces of Canada.

3.             The Filer acts as the manager of the Funds.

4.             Each Fund is a mutual fund created under the laws of the Province of Ontario and is subject to the provisions of Regulation 81-102.

5.             Each Continuing Corporate Fund and Terminating Corporate Fund is an open-ended mutual fund class of Sector Fund.

6.             Each Continuing Trust Fund is an open-ended mutual fund trust governed by a declaration of trust.

7.             Neither the Filer nor the Funds are in default of securities legislation in any of the Jurisdictions.

8.             Each Fund is a reporting issuer or the equivalent in each of the Jurisdictions and is subject to the requirements of Regulation 81-102 and Regulation 81-101.

9.             Each Fund currently distributes its securities in all Jurisdictions pursuant to an amended and restated simplified prospectus and annual information form dated October 11, 2018.

Reasons for Mergers Approval

10.          Regulatory approval of the Mergers is required because none of the Mergers satisfies all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of Regulation 81-102. In particular, no Merger will be a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Income Tax Act.

11.          Other than the criteria described in paragraph 10 above, each Merger meets all of the other criteria for pre-approved reorganizations and transfers under section 5.6 of Regulation 81-102.

The Proposed Mergers

12.          The Filer intends to merge each Terminating Fund into the Continuing Fund shown opposite its name in the table below:

Terminating Fund

Continuing Fund

IA Clarington Strategic Income Class

IA Clarington Strategic Income Fund

IA Clarington Short-Term Bond Fund

IA Clarington Core Plus Bond Fund

IA Clarington Tactical Bond Fund

IA Clarington Core Plus Bond Fund

IA Clarington Tactical Bond Class

IA Clarington Core Plus Bond Fund

IA Clarington Short-Term Income Class

IA Clarington Money Market Fund

IA Clarington Strategic Corporate Bond Class

IA Clarington Strategic Corporate Bond Fund

IA Clarington Sarbit Activist Opportunities Class

IA Clarington Sarbit U.S. Equity Class (Unhedged)

IA Clarington Canadian Growth Class

IA Clarington Canadian Leaders Class


13.          The proposed Mergers were announced in:

(a)           a press release dated October 11, 2018;

(b)           a material change report dated October 19, 2018; and

(c)           an amended and restated simplified prospectus for each of the Funds dated October 11, 2018,

each of which has been filed on the System for Electronic Document Analysis and Retrieval (SEDAR).

14.          Securityholders of the Terminating Funds approved the Mergers at a meeting held on March 5, 2019 (the Meeting).

15.          In accordance with section 5.3 of Regulation 81-107 respecting Independent Review Committee for Investment Funds (V-1.1, r. 43), the Filer presented the terms of the proposed Mergers to the Independent Review Committee of the Funds (the IRC) for its recommendation during a meeting of the IRC held on November 22, 2018. The IRC provided its positive recommendation regarding the proposed Mergers on the basis that the Mergers, if implemented, would achieve a fair and reasonable result for the Funds.

16.          In accordance with corporate law requirements, securityholders of each Terminating Corporate Fund that are merging with a Continuing Corporate Fund voted positively in order to approve an amendment to the articles of Sector Fund in connection with the exchange of securities for the applicable Continuing Corporate Fund.

17.          The Filer has concluded that the Mergers are not material changes to the Continuing Funds, and accordingly, there is no intention to convene a meeting of securityholders of the Continuing Funds to approve the Mergers pursuant to paragraph 5.1(1)(g) of Regulation 81-102.

18.          By way of order dated September 8, 2016, the Filer was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of Regulation 81-106 Investment Fund Continuous Disclosure to send printed management information circulars to securityholders 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 securityholders.

19.          Pursuant to the requirements of the Notice-and-Access Relief, a Notice-and-Access document and applicable proxies in connection with the Meeting, along with the fund facts of the applicable series of the Continuing Fund, were mailed to securityholders of the Terminating Funds on February 1, 2019 and were filed via SEDAR on the same day. The management information circular (the Circular), which the notice-and-access document provides a link to, was also filed via SEDAR at the same time.

20.          It is intended that the Mergers will occur after the close of business on or about March 22, 2019 (the Effective Date). The Filer therefore anticipates that each securityholder of a Terminating Fund will become a securityholder of its respective Continuing Fund after the close of business on the Effective Date. Each Terminating Fund will be wound-up as soon as possible following its Merger.

Merger Steps

21.          Due to the different structures of the Terminating Funds and the Continuing Funds, the procedures for implementing the Mergers will vary. The specific steps to implement each type of Merger are as follows:

(a)           Merger of Terminating Trust Fund into a Continuing Trust Fund, namely:

Terminating Trust Fund

Continuing Trust Fund

IA Clarington Short-Term Bond Fund

IA Clarington Core Plus Bond Fund

IA Clarington Tactical Bond Fund


(i)            Prior to the Merger, if required, the Terminating Trust Fund will sell any securities in its portfolio that do not meet the investment objective and investment strategies of the Continuing Trust Fund. As a result, the Terminating Trust Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger being effected.

(ii)           The value of the Terminating Trust Fund’s investment portfolio and other assets will be determined at the close of business on the Effective Date of the Merger in accordance with the constating documents of the Terminating Trust Fund.

(iii)           Each Terminating Trust Fund and the Continuing Trust Fund will declare, pay and automatically reinvest a distribution to its securityholders of net realized capital gains and net income, if any, to ensure that it will not be subject to tax for its current year.

(iv)          The Terminating Trust Fund will transfer substantially all of its assets to the Continuing Trust Fund. In return, the Continuing Trust Fund will issue to the Terminating Trust Fund securities of the Continuing Trust Fund having an aggregate net asset value equal to the value of the assets transferred to the Continuing Trust Fund.

(v)           The Continuing Trust Fund will not assume liabilities of the Terminating Trust Fund and the Terminating Trust Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date of the applicable Merger.

(vi)          Immediately thereafter, units of the Continuing Trust Fund received by the Terminating Trust Fund will be distributed to securityholders of the Terminating Trust Fund in exchange for their securities in the Terminating Trust Fund on a dollar-for-dollar and series-by-series basis.

(vii)         The Terminating Trust Fund will be wound-up within 30 days following the Merger.

(b)           Merger of a Terminating Corporate Fund into a Continuing Corporate Fund, namely:

Terminating Corporate Fund

Continuing Corporate Fund

IA Clarington Sarbit Activist Opportunities Class (“Sarbit Activist Class”)

IA Clarington Sarbit U.S. Equity Class (Unhedged) (“Sarbit U.S. Equity Class”)

IA Clarington Growth Class

IA Clarington Leaders Class

(i)            Prior to the Merger, if required, Sector Fund will sell any securities in the portfolio of the Terminating Corporate Fund that do not meet the investment objective and investment strategies of the Continuing Corporate Fund. As a result, the portfolio of the Terminating Corporate Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger being effected.

(ii)           The value of the Terminating Corporate Fund’s investment portfolio and other assets will be determined at the close of business on the Effective Date of the Merger in accordance with the constating documents of the Terminating Corporate Fund.

(iii)           Sector Fund may declare, pay and automatically reinvest ordinary dividends or capital gains dividends to securityholders of the Terminating Corporate Fund and/or the Continuing Corporate Fund, as determined by the Filer at the time of the Merger.

(iv)          Outstanding shares of the Terminating Corporate Fund will be exchanged for shares of its equivalent series of the Continuing Fund based on their relative net asset values. However, Series A, Series E and Series EF of Sarbit Activist Class will be exchanged for Series X, Series EX and Series EFX (respectively) of Sarbit U.S. Equity Class.

(v)           The assets and liabilities of Sector Fund attributed to the Terminating Corporate Fund will be reallocated to the Continuing Corporate Fund.

(vi)          The articles of amalgamation of Sector Fund will be amended so that all of the issued and outstanding shares of the Terminating Corporate Fund will be exchanged for shares of the Continuing Corporate Fund on a dollar-for-dollar and series-by-series basis, so that the securityholders of the Terminating Corporate Fund become securityholders of the Continuing Corporate Fund and so that the shares of the Terminating Corporate Fund are cancelled.

(vii)         The Terminating Corporate Fund will be wound-up within 30 days following the Merger.

(c)           Merger of a Terminating Corporate Fund into a Continuing Trust Fund, namely:

Terminating Corporate Fund

Continuing Trust Fund

IA Clarington Short-Term Income Class

IA Clarington Money Market Fund

IA Clarington Strategic Corporate Bond Class (“SCBC”)

IA Clarington Strategic Corporate Bond Fund (“SCBF”)

IA Clarington Strategic Income Class

IA Clarington Strategic Income Fund

IA Clarington Tactical Bond Class

IA Clarington Core Plus Bond Fund

(i)            Prior to the Merger, if required, Sector Fund will sell any securities in the portfolio of the Terminating Corporate Fund that do not meet the investment objective and investment strategies of the Continuing Trust Fund. As a result, the portfolio of the Terminating Corporate Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger begin effected.

(ii)           The value of the Terminating Corporate Fund’s investment portfolio and other assets will be determined at the close of business on the Effective Date of the Merger in accordance with the constating documents of the Terminating Corporate Fund.

(iii)           Sector Fund may declare, pay and automatically reinvest ordinary dividends or capital gains dividends to securityholders of the Terminating Corporate Fund, as determined by the Filer at the time of the Merger.

(iv)          Each Continuing Trust Fund will acquire all of the portfolio assets of the applicable Terminating Corporate Fund in consideration for an amount equal to the net asset value of the portfolio assets that the Continuing Trust Fund is acquiring from the Terminating Corporate Fund (the “Purchase Price”).

(v)           The Continuing Trust Fund will satisfy the Purchase Price by issuing to the Terminating Corporate Fund the number of units of the Continuing Trust Fund that have an aggregate net asset value equal to the Purchase Price, and the units of the Continuing Trust Fund will be issued at the net asset value per unit of the applicable series as of the close of business on the business day prior to the Effective Date of the Merger. However, series A investors of SCBC will be issued Series X units of SCBF.

(vi)          Immediately thereafter, all of the shares of the Terminating Corporate Fund will be redeemed and the redemption price therefor will be paid by delivering the applicable number of units of the Continuing Trust Fund to the securityholders of the Terminating Corporate Fund based on the number of such shares of the Terminating Corporate Fund then held.

(vii)         The Terminating Corporate Fund will be wound-up within 30 days following the Merger.

22.          The tax implications of the Mergers as well as the differences between the investment objectives and other features of the Terminating Funds and the Continuing Funds and the IRC’s recommendation of the Mergers are described in the Circular, so that securityholders could make an informed decision before voting on whether to approve a Merger. The Circular also describes the various ways in which securityholders could obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Funds and their most recent interim and annual financial statements and management reports of fund performance.

23.          Securityholders of each Terminating Fund 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 preceding the Effective Date. Following each Merger, all optional plans (including pre-authorized purchase programs, automatic withdrawal plans, systematic switch programs and automatic rebalancing services) which were established with respect to the Terminating Fund will be re-established in comparable plans with respect to its Continuing Fund unless securityholders advise otherwise.

24.          The costs of effecting the Mergers (consisting primarily of brokerage charges associated with the merger-related trades that occur both before and after the Effective Date and, proxy solicitation, printing, mailing and regulatory fees) will be borne by the Filer. The Funds will bear none of the costs and expenses associated with the transaction.

25.          No sales charges, redemption fees or commissions will be payable by securityholders of the Funds in connection with the Mergers.

26.          The investment portfolio and other assets of each Terminating Fund to be acquired by the applicable continuing Fund in order to effect the Mergers are currently, or will be, acceptable on or prior to the Effective Date, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objective of the applicable Continuing Fund.

Benefits of the Mergers

27.          In the opinion of the Filer, the Mergers will be beneficial to securityholders of the Funds for the following reasons:

(a)           each Merger has the potential to lower costs for securityholders as the operating costs and expenses of a Continuing Fund will be spread over a greater pool of assets after the Merger, potentially resulting in a lower management expense ratio for the Continuing Fund than may occur otherwise;

(b)           the Mergers will eliminate similar fund offerings, which is expected to result in a more simplified product line-up that is easier for investors to understand;

(c)           generally, the historical performance of the Continuing Funds have been better than that of the applicable Terminating Fund;

(d)           the Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions. The ability to improve diversification may lead to potentially enhanced risk-adjusted returns; and

(e)           the combined management fee and administration fee with respect to each series of the Continuing Fund will be the same as, or lower than, the combined management fee and administration fee of the corresponding series of the Terminating Fund.

28.          The Mergers Approval is not detrimental to the protection of investors.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Mergers Approval is granted.

“Hugo Lacroix”