BMO Special Equity Fund - MRRS Decision
Headnote
Standard exemption from subsection 4.1(1) of National Instrument 81-102 Mutual Funds (NI 81-102) to enable the Dealer Managed Fund, as defined in section 1.1 of NI 81-102, to invest in the shares of an issuer during the 60 days after the period in which an affiliate of the Dealer Manager, as defined in section 1.1 of NI 81-102, has acted as an underwriter in connection with a private placement offering of subscription receipts of the issuer, representing the right to receive that class of shares.
Rule Cited
National Instrument 81-102 Mutual Funds, ss. 4.1(1), 19.1.
July 12, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF BRITISH COLUMBIA, ALBERTA,
SASKATCHEWAN, MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND, NEWFOUNDLAND AND LABRADOR,
YUKON, NUNAVUT AND THE NORTHWEST TERRITORIES (THE JURISDICTIONS)
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
BMO SPECIAL EQUITY FUND
(the "Fund" or "Dealer Managed Fund")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Jones Heward Investment Counsel Inc. (the "Applicant" or "Dealer Manager"), the portfolio adviser of the Fund for a decision under section 19.1 of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Legislation") for
• an exemption from subsection 4.1(1) of NI 81-102 to enable the Dealer Managed Fund to invest in the outstanding common shares (the "Shares") of Mega Bloks Inc. (the "Issuer") on the Toronto Stock Exchange during the 60-days (the "Prohibition Period") after the period in which an affiliate of the Dealer Manager has acted as an underwriter in connection with a private placement offering (the "Offering") of subscription receipts (the "Subscription Receipts") of the Issuer which each represent the right to receive one Share (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) this MRRS decision document evidences the decision of each Decision Maker.
It is the responsibility of each of the Decision Makers to make a global assessment of the risks involved in granting exemptive relief from subsection 4.1 of NI 81-102 in relation to the specific facts of each application.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Applicant:
1. The Applicant is a "dealer manager" with respect to the Fund, and the Fund is a "dealer managed fund", as such terms are defined in section 1.1 of NI 81-102.
2. The head office of the Dealer Manager is in Toronto, Ontario.
3. The investment objective of the Dealer Managed Fund permits it to invest in equity securities.
4. The securities of the Dealer Managed Fund are qualified for distribution in all of the provinces and territories of Canada pursuant to a simplified prospectus and annual information form that has been prepared and filed in accordance with applicable securities legislation.
5. The Subscription Receipts are being offered in Canada, and in the U.S. to accredited investors under Section 4(2) of the Securities Act of 1933, as amended, pursuant to a private placement term sheet (the "Term Sheet").
6. According to the Term Sheet the Offering is expected to be for approximately 3.1 million Subscription Receipts with the gross proceeds of the Offering expected to be approximately $68,975,000. Currently, the closing (the "Closing") of the Offering is expected to occur on or about July 11, 2005.
7. Each of the Subscription Receipts represents the right to receive one Share of the Issuer upon the Acquisition Closing (as defined below) for no additional consideration.
8. The co-lead Underwriters of the Offering are BMO Nesbitt Burns Inc. (the "Related Underwriter", and together with the rest of the syndicate, the "Underwriters") and Scotia Capital Inc. with the rest of the syndicate comprised of Canaccord Capital Corporation and National Bank Financial.
9. On June 15, 2005, the Issuer announced that it had entered into a definitive agreement to acquire (the "Acquisition") Rose Art Industries Inc., Warner Industries Inc. and their respective subsidiaries (collectively the "Rose Art Group"). Under the terms of the Acquisition, the Issuer will acquire all of the issued and outstanding shares of the Rose Art Group entities and assume $35 million of outstanding debt from the Rose Art Group for a total purchase price of approximately $350 million. The consideration for the purchase price will include Shares of the Issuer and cash payable on the Acquisition Closing as well as certain future payments contingent on the performance of the Rose Art Group.
10. Based on the information provided in the Term Sheet, the gross proceeds of the Offering, less half of the commission payable to the agents for services rendered, will be held in escrow and invested in short-term obligations of the Government of Canada or in other short term investment grade obligations until the earlier of the Acquisition closing (the "Acquisition Closing") and the Termination Date (as defined below). Upon the Acquisition Closing, the net proceeds of the Offering will be used to partially finance the Acquisition.
11. The Term Sheet states that if the Acquisition Closing does not occur on or before 5:00 p.m. (Montreal time) on September 30, 2005 or the Acquisition is terminated at any earlier time (in either case, the "Termination Date"), holders of the Subscription Receipts will receive a refund of the full purchase price of the Subscription Receipts, together with their pro rata portion of interest earned thereon between the Closing and the Termination Date.
12. The Issuer's outstanding Shares are listed on the Toronto Stock Exchange under the symbol "MB".
13. There is no indication in the Term Sheet that the Subscription Receipts will be listed.
14. The Term Sheet does not provide any disclosure with respect to the "connected issuer"/ "related issuer" provisions in National Instrument 33-105 -- "Underwriting Conflicts". The press release relating to the Acquisition states that the Bank of Nova Scotia and Bank of Montreal, an affiliate of the Related Underwriter, provided and arranged credit facilities for the Acquisition and for working capital purposes and that the purpose of the Offering will be to reduce these facilities.
15. The Dealer Managed Fund is not required or obliged to purchase any Shares during the Prohibition Period.
16. Despite the affiliation between the Dealer Manager and the Related Underwriter, they operate independently of each other. In particular, the investment banking and related dealer activities of the Related Underwriter and the investment portfolio management activities of the Dealer Manager are separated by "ethical" walls. Accordingly, no information flows from one to the other concerning their respective business operations or activities generally except in the following or similar circumstances:
(a) in respect of compliance matters (for example, the Dealer Manager and the Related Underwriter may communicate to enable the Dealer Manager to maintain an up to date restricted-issuer list to ensure that the Dealer Manager complies with applicable securities laws); and
(b) the Dealer Manager and the Related Underwriter may share general market information such as discussion on general economic conditions, bank rates, etc.
17. The Dealer Manager may cause the Dealer Managed Fund to invest in Shares during the Prohibition Period. Any purchase of Shares will be consistent with the investment objectives of the Dealer Managed Fund and represent the business judgment of the Dealer Manager uninfluenced by considerations other than the best interests of the Dealer Managed Fund, or in fact be in the best interests of the Dealer Managed Fund.
18. To the extent that the same portfolio manager or team of portfolio managers of a Dealer Manager manages the Dealer Managed Fund and other client accounts that are managed on a discretionary basis (the "Managed Accounts") the Shares purchased for them will be allocated:
(a) in accordance with the allocation factors or criteria stated in the written policies or procedures put in place by the Dealer Manager for the Dealer Managed Fund and the Managed Accounts, and
(b) taking into account the amount of cash available to the Dealer Managed Fund for investment.
19. There will be an independent committee (the "Independent Committee") appointed in respect of the Dealer Managed Fund to review the Dealer Managed Fund's investments in Shares during the Prohibition Period.
20. The Independent Committee will have at least three members and every member must be independent. A member of the Independent Committee is not independent if the member has a direct or indirect material relationship with the Dealer Manager, the Dealer Managed Fund, or any affiliate or associate thereof. For the purpose of this Decision, a material relationship means a relationship which could, in the view of a reasonable person, reasonably interfere with the exercise of the member's independent judgement regarding conflicts of interest facing the Dealer Manager.
21. The members of the Independent Committee will exercise their powers and discharge their duties honestly, in good faith, and in the best interests of investors in the Dealer Managed Fund and, in so doing, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
22. The Applicant will notify a member of staff in the Investment Funds Branch of the Decision Maker in Ontario, in writing of any SEDAR Report (as defined in paragraph 0 below) filed on SEDAR, as soon as practicable after the filing of such report, and the notice shall include the SEDAR project number of the SEDAR Report and the date on which it was filed.
Decision
Each of the Decision Makers has assessed the conflict of interest risks associated with granting an exemption in this instance from subsection 4.1(1) of NI 81-102 and is satisfied that, at the time this Decision is granted, the potential risks are sufficiently mitigated.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met.
The Decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:
I. At the time of each purchase of Shares (a "Purchase") by the Dealer Managed Fund pursuant to this Decision, the following conditions are satisfied:
(a) the Purchase
(i) represents the business judgment of the Dealer Manager uninfluenced by considerations other than the best interests of the Dealer Managed Fund, or
(ii) is, in fact, in the best interests of the Dealer Managed Fund;
(b) the Purchase is consistent with, or is necessary to meet, the investment objective of the Dealer Managed Fund as disclosed in its simplified prospectus; and
(c) the Dealer Managed Fund does not place the order to purchase, on a principal or agency basis, with its Related Underwriter;
II. Prior to effecting any Purchase pursuant to this Decision, the Dealer Managed Fund has in place written policies or procedures to ensure that,
(a) there is compliance with the conditions of this Decision; and
(b) in connection with any Purchase,
(i) there are stated factors or criteria for allocating the Shares purchased for the Dealer Managed Fund and one or more other Managed Accounts, and
(ii) there is full documentation of the reasons for any allocation to the Dealer Managed Fund or the Managed Account that departs from the stated allocation factors or criteria;
III. The Dealer Managed Fund has an Independent Committee to review the Dealer Managed Fund's investments in the Shares during the Prohibition Period;
IV. The Independent Committee has a written mandate describing its duties and standard of care which, as a minimum, sets out the conditions of this Decision;
V. The members of the Independent Committee exercise their powers and discharge their duties honestly, in good faith, and in the best interests of investors in the Dealer Managed Fund and, in so doing, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances;
VI. The Dealer Managed Fund does not relieve the members of the Independent Committee from liability for loss that arises out of a failure to satisfy the standard of care set out in paragraph 0 above;
VII. The Dealer Managed Fund does not incur the cost of any portion of liability insurance that insures a member of the Independent Committee for a liability for loss that arises out of a failure to satisfy the standard of care set out in paragraph 0 above;
VIII, The cost of any indemnification or insurance coverage paid for by the Dealer Manager, any portfolio manager of the Dealer Managed Fund, or any associate or affiliate of the Dealer Manager or any portfolio manager of the Dealer Managed Fund to indemnify or insure the members of the Independent Committee in respect of a loss that arises out of a failure to satisfy the standard of care set out in paragraph 0 above is not paid either directly or indirectly by the Dealer Managed Fund;
IX. The Dealer Manager files a certified report on SEDAR (the "SEDAR Report") in respect of the Dealer Managed Fund, no later than 30 days after the end of the Prohibition Period, that contains a certification by the Dealer Manager that contains:
(a) the following particulars of each Purchase:
(i) the number of Shares purchased by the Dealer Managed Fund;
(ii) the date of the Purchase and purchase price;
(iii) whether it is known whether any underwriter or syndicate member has engaged in market stabilization activities in respect of the Shares;
(iv) if the Shares were purchased for the Dealer Managed Fund and one or more Managed Accounts of the Dealer Manager, the aggregate amount so purchased and the percentage of such aggregate amount that was allocated to the Dealer Managed Fund; and
(v) the dealer from whom the Dealer Managed Fund purchased the Shares and the fees or commissions, if any, paid by the Dealer Managed Fund in respect of such Purchase;
(b) a certification by the Dealer Manager that the Purchase:
(i) was made free from any influence by the Related Underwriter or any affiliate or associate thereof and without taking into account any consideration relevant to the Related Underwriter or any associate or affiliate thereof; and
(ii) represented the business judgment of the Dealer Manager uninfluenced by considerations other than the best interest of the Dealer Managed Fund, or
(iii) was, in fact, in the best interests of the Dealer Managed Fund;
(c) confirmation of the existence of the Independent Committee to review the Purchases by the Dealer Managed Fund, the names of the members of the Independent Committee, the fact that they meet the independence requirements set forth in this Decision, and whether and how they were compensated for their review;
(d) a certification by each member of the Independent Committee that after reasonable inquiry the member formed the opinion that the policies and procedures referred to in Condition II(a) above are adequate and effective to ensure compliance with this Decision and that the decision to Purchase made on behalf of the Dealer Managed Fund and each Purchase by the Dealer Managed Fund:
(i) was made in compliance with the conditions of this Decision;
(ii) was made by the Dealer Manager free from any influence by the Related Underwriter or any affiliate or associate thereof and without taking into account any consideration relevant to the Related Underwriter or any associate or affiliate thereof; and
(iii) represented the business judgment of the Dealer Manager uninfluenced by considerations other than the best interests of the Dealer Managed Fund, or
(iv) was, in fact, in the best interests of the Dealer Managed Fund.
X. The Independent Committee advises the Decision Makers in writing of:
(a) any determination by it that the condition set out in paragraph 0 has not been satisfied with respect to any Purchase;
(b) any determination by it that any other condition of this Decision has not been satisfied;
(c) any action it has taken or proposes to take following the determinations referred to above; and
(d) any action taken, or proposed to be taken, by the Dealer Manager or a portfolio manager of the Dealer Managed Fund, in response to the determinations referred to above;
XI. Each Purchase of Shares during the 60-Day Period is made on the TSX; and
XII. An underwriter provides to the Dealer Manager written confirmation that the "dealer restricted period" in respect of the Offering, as defined in Ontario Securities Commission Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions, has ended.