B.E.S.T. Investment Counsel Limited
Headnote
Relief granted from s. 13.5(2)(b) of NI 31-103 based on unique factual circumstances to permit responsible person to purchase illiquid assets from the Fund in connection with the termination of the Fund -- Relief subject to conditions including independent valuation and IRC approval.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5, 15.1.
March 27, 2019
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
AND
IN THE MATTER OF
B.E.S.T. INVESTMENT COUNSEL LIMITED
(the Filer)
DECISION
Background
The Ontario Securities Commission (the Commission) has received an application from the Filer for a decision under the securities legislation of Ontario (the Legislation) exempting the Filer from section 13.5(2)(b)(i) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibits an adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of a "responsible person" in order to permit the purchase of the Illiquid Assets (defined below) held by B.E.S.T. Total Return Fund Inc., an investment fund managed and advised by the Filer, to John Richardson, a "responsible person", as such term is defined in NI 31-103 and as further described below (the Exemption Sought).
Interpretation
Terms defined in National Instrument 14-101 Definitions, 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 a corporation incorporated on November 24, 1998, under the Business Corporations Act (Ontario). Its head office is located in Toronto, Ontario.
2. The Filer is registered only in the Province of Ontario as an adviser in the category of portfolio manager, an investment fund manager and a dealer in the category of exempt market dealer.
3. The Fund was incorporated under the Canada Business Corporations Act (CBCA) by articles of incorporation dated October 31, 2003, as amended on November 30, 2004, and December 20, 2005. It is registered as a labour-sponsored venture capital corporation under the Income Tax Act (Canada).
4. The Fund is sponsored by the Christian Labour Association of Canada (CLAC). The Fund's primary objective is to generate interest and dividend income as well as long-term capital appreciation through investments in a diversified portfolio of small and medium-sized private and public companies.
5. The authorized capital of the Fund consists of an unlimited number of Class A Shares (the Class A Shares), an unlimited number of Class B Shares (the Class B Shares) and an unlimited number of Class C Shares (the Class C Shares). As at January 25, 2019, there were 103 holders of Class A Shares who held a total of 59,794 Class A Shares. CLAC is the owner of 1 Class B Share. John M.A. Richardson (the Purchaser) is the sole owner of the 357,995 issued and outstanding Class C Shares. As at January 25, 2019, the net asset value of the Fund was $3,841,254 of which approximately 14% is allocable to the Class A Shares, 86% is allocable to the Class C Shares and less than 1% of the Fund's net asset value is allocable the Class B Share.
6. The Filer is not in default of the Legislation.
7. The Filer also acts as the Fund's investment advisor and provides investment advisory services to the Fund and sources and monitors the Fund's investments.
8. As at February 8, 2019, the Fund's assets comprised (i) cash representing approximately 28% of the Fund's total assets, (ii) securities of publicly traded issuers representing approximately 10% of the Fund's total assets and (iii) shares of 18 private issuers representing approximately 62% of the Fund's total assets. The shares of the private issuers are "illiquid assets" (the Illiquid Assets) as such term is defined in National Instrument 81-102 Investment Funds (NI 81-102).
9. The Filer has determined that, due to the reduced size of the Fund and the inability to raise additional capital, the distribution to holders of Class A Shares and Class C Shares of the Fund of all or substantially all of the assets of the Fund is in the best interests of the Fund and its shareholders.
10. In order to maximize the net assets that will ultimately be distributed to the Class A Shareholders, the Purchaser, who is the sole owner of the Manager and the President and Chief Executive Officer of the Fund, proposes to make a one-time purchase of all of the Illiquid Assets held by the Fund (the Illiquid Asset Sale).
11. Although the Illiquid Asset Sale will be a "related party transaction" as such term is defined in National Instrument 61-101 Protection of Minority Security Holders in Special Transactions (NI 61-101), pursuant to section 5.1 of NI 61-101, that instrument does not apply since the Purchaser is not a reporting issuer and the Fund is a mutual fund.
12. The Filer cannot distribute the Illiquid Assets on a pro rata basis to the shareholders of the Fund because such shareholders may not all qualify as accredited investors and, as private issuers, the constating documents of many issuers of the Illiquid Assets restrict the number of shareholders they can have.
13. The Filer is of the view that the Illiquid Asset Sale will avoid the cost and delay associated with seeking an alternative purchaser. Increased costs associated with an alternative sale process will negatively impact the net asset value of the Fund and there is no assurance that such a process will result in any sale or a sale of the Illiquid Assets at a sale price that is higher than the price to be obtained under the Illiquid Asset Sale.
14. Based on a number of discussions with potential purchasers of the Illiquid Assets, the Manager has determined that other potential purchasers would seek to purchase the Illiquid Assets at a significant discount to their current carrying value, if at all.
15. The Illiquid Assets will be sold for a price equal to their fair value market determined by a national accounting firm independent of each of the Manager, the Fund and the Purchaser (the Independent Valuator) experienced in the valuing of private assets (the Independent Valuation). The board of directors of the Fund will be responsible for oversight and approval of the valuation of the Illiquid Assets provided by the Independent Valuator.
16. Following the Illiquid Asset Sale, the Fund proposes to redeem all of the issued and outstanding Class A Shares and Class C Shares at the net asset value per share (the Redemption). The Purchaser will bear the cost of any early redemption penalties incurred by holders of Class A Shares, which penalties are estimated to be approximately $15,000 as at March 2, 2019.
17. As required by the CBCA, the Manager will convene a special meeting of the Fund (the Meeting) to obtain the approval of shareholders of the Fund to amend the articles of the Fund to make the Class A Shares and Class C Shares redeemable at the option of the Fund to facilitate the Redemption. The notice of the Meeting and the management information circular of the Fund and a related proxy form (the Circular) will be mailed to shareholders and filed in accordance with applicable securities legislation.
18. The Circular, among other things, will include a description of:
a. the Fund, including disclosure concerning the Fund's investment objectives, strategies and restrictions, distribution policy, redemption process, organization and management and historical performance;
b. where securityholders can obtain the financial statements and management reports of fund performance of the Fund that have been made public; namely, from the Filer upon request or on SEDAR at www.sedar.com;
c. the purpose of the Illiquid Asset Sale and the Redemption;
d. the process for completing the Illiquid Asset Sale and the Redemption;
e. the tax considerations applicable to the Illiquid Asset Sale and the Redemption; and
f. the decisions of the board of directors and the IRC (as defined below).
19. The Purchaser will pay the difference in price, if any, received by holders of Class A Shares that redeem such Class A Shares prior to the Redemption (and after the mailing date for the Meeting), on the one hand, and the price received by holders of Class A Shares pursuant to the Redemption, on the other hand.
20. The Purchaser is a director and officer of, and indirectly controls, the Manager. He is also the Manager's ultimate designated person, a dealing representative (exempt market dealer) and an advising representative (portfolio manager) of the Manager. As a result, the Purchaser is a "responsible person" as defined in section 13.5(1) of NI 31-103.
21. Absent the Exemption Sought, the Filer is prohibited by section 13.5(2)(b)(i) of NI 31-103 from causing the Fund to sell securities to the Purchaser. The exemption from this prohibition in Section 6.1 of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) does not apply because, among other reasons, the Illiquid Asset Sale is not an inter-fund trade.
22. Subject to the completion of the Independent Valuation, the Filer and the board of directors of the Fund has determined the Illiquid Asset Sale is in the best interests of the Fund and the holders of the Class A Shares. The Independent Review Committee of the Fund (the IRC) will review and approve the proposed Illiquid Asset Sale from a conflict of interest perspective under section 5.2(2) of NI 81-107.
23. The decision to sell the Illiquid Assets to the Purchaser has been made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
24. The Illiquid Assets will be sold by the Fund to the Purchaser at their fair value determined by the Independent Valuator.
25. The Filer will receive no remuneration with respect to the sale of the Illiquid Assets by the Fund to the Purchaser.
26. None of the Illiquid Assets are securities of an entity that is a related party of the Filer.
27. The Fund has been audited since inception and has final audited financial statements prepared for the year ended August 31, 2018.
Decision
The Commission is satisfied that the decision meets the test set out in the Legislation for the Commission to make the decision.
The decision of the Commission under the Legislation is that the Exemption Sought is granted, provided that the following conditions are satisfied with respect to the Illiquid Assets Sale:
(a) The Illiquid Assets are securities of a private company that are not traded on an exchange. The Illiquid Assets will be sold by the Fund to the Purchaser at fair value based on an independent determination of the fair value of the Illiquid Assets obtained from the Independent Valuator.
(b) The Filer referred the purchase of the Illiquid Assets to the IRC for review. The IRC will oversee the Illiquid Assets Sale described herein after making the determinations provided under sub-sections 5.2(2)(a), (b) and (d) of NI 81-107, as if the Fund was subject to NI 81-107.
(c) The Filer will receive no remuneration with respect to the sale of the Illiquid Assets by the Fund to the Purchaser. With respect to the delivery of the securities, the only expenses incurred by the Fund are nominal administrative charges levied by the custodian and/or recordkeeper of the Fund for recording the trades and/or any charges by a dealer in transferring the securities.
(d) The Fund will keep written records of the Illiquid Assets Sale reflecting details of the portfolio securities delivered by the Fund to the Purchaser and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place.