Caldwell Investment Management Ltd.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from paragraph 13.5(2)(b) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit a one-time sale of certain portfolio assets for cash from a pooled fund to a related corporate issuer in connection with a timely termination and wind-up of the fund, subject to certain conditions.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligation, ss. 13.5(2)(b)(ii), 15.1.

May 3, 2019

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
CALDWELL INVESTMENT MANAGEMENT LTD.
(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from section 13.5(2)(b)(ii) 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 an associate of a “responsible person”, as such term is defined in NI 31-103, in order to permit Caldwell ICM Market Strategy Trust (the Trust) to sell its portfolio holdings in certain issuers (the Specified Holdings) to Urbana Corporation (the Corporation), which is a related party of the Filer, in connection with the proposed wind-up of the Trust (the Exemption Sought).

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 section 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 and Newfoundland and Labrador (together with Ontario, the Jurisdictions).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless otherwise defined.

Representations

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

The Filer

1.             The Filer was incorporated under the laws of Ontario on August 23, 1990. The head office, registered office and principal business address of the Filer is located in Toronto, Ontario.

2.             The Filer is registered as a portfolio manager and investment fund manager in Ontario, Quebec, Alberta, British Columbia, Manitoba and Saskatchewan. The Filer is registered as an investment fund manager in Newfoundland and Labrador.

3.             The Filer is the trustee, investment fund manager and portfolio manager of the Trust.

4.             The Filer provides portfolio management services to the Corporation.

5.             The Filer is a wholly-owned subsidiary of Caldwell Financial Ltd., a company controlled by an individual who is also a principal holder of the Corporation’s common shares. This individual is the Chairman, a director, and a portfolio manager of the Filer as well as the Chief Executive Officer and a director of the Corporation.

6.             The Filer is not a reporting issuer in any jurisdiction of Canada.

The Corporation

7.             The Corporation is a corporation incorporated under the Business Corporations Act (Ontario). The Corporation’s common shares and non-voting class A shares are listed on the Toronto Stock Exchange and on the Canadian Securities Exchange. The Corporation is subject to the Canadian securities regulatory requirements applicable to reporting issuers that are not investment funds. The strategy of the Corporation is to seek out, and invest in, private investment opportunities for capital appreciation and to invest in publicly traded securities to provide growth, income and liquidity. The Corporation has the scope to invest in any sector in any region. As of April 18, 2019, the Corporation’s total net assets were in excess of $224 million (approximately $4.49 per share), and the trading price of the Corporation’s common shares was approximately $2.40 per share.

The Trust

8.             The Trust is an open-end pooled fund established under the laws of the Province of Ontario and governed pursuant to a Declaration of Trust (the Declaration of Trust) dated as of January 29, 2007. The investment objective of the Trust is to generate long-term capital growth through both traditional and non-traditional investments and strategies. The investment strategies of the Trust include participating in private placements by public companies and investing in securities of unlisted companies and other illiquid entities.

9.             The Trust is not a reporting issuer in any jurisdiction in Canada and securities of the Trust are only distributed to investors pursuant to applicable prospectus exemptions under National Instrument 45-106 Prospectus Exemptions.

10.          All of the units of the Trust were sold by a member of the Mutual Fund Dealers Association of Canada (the Initial Dealer), to its accredited investor clients in reliance on available prospectus exemptions. In 2018, the Initial Dealer ceased to be registered under securities laws and assigned its customer accounts to another dealer (the New Dealer).

The Wind-Up

11.          On or about August 16, 2018, the New Dealer recommended to its clients that are unitholders of the Trust to redeem their units in the Trust.

12.          Subsequent to the redemption recommendation by the New Dealer, the pace and quantum of unitholder redemption requests increased significantly after September 2018.

13.          The Filer has determined that, in light of the New Dealer redemption recommendation to its clients, the liquidation and wind-up of the Trust and the distribution to Trust unitholders of all or substantially all of the assets of the Trust would be in the best interests of the Trust and its unitholders (the Wind-Up).

14.          In November 2018, Trust unitholders were provided with written notice informing them of the intention to terminate the Trust, suspend redemptions and begin the Wind-Up process of liquidating the Trust’s holdings.

The Portfolio Sale

15.          A significant share of the Trust’s assets is invested in securities that cannot be readily converted to cash at prices that approximate the values that the Filer believes reflect fair value for such securities. Accordingly, the Filer anticipates needing up to November 2019 to achieve a 100% cash position in the Trust.

16.          The Filer has had discussions with management of the Corporation about the possibility of raising cash by selling the four Specified Holdings to the Corporation (the Portfolio Sale), each of which the Corporation is familiar with because the Corporation holds two of the Specified Holdings in its portfolio and one of those two Specified Holdings holds the remaining two Specified Holdings.

17.          The board of the Corporation, including its independent directors, has unanimously approved the Portfolio Sale (the Corporation Board Approval).

18.          The Specified Holdings are securities of private companies that are not traded on an exchange and are not liquid. Consequently, the Portfolio Sale will help to maximize the amount of cash to be distributed to the unitholders of the Trust as part of the Wind-Up.

19.          The Declaration of Trust grants the Filer discretion regarding the manner in which interim distributions are made. The Filer is of the view that it will be neither practical nor economical to make an interim distribution “in kind” to Trust unitholders of any of the Trust’s portfolio holdings, including the Specified Holdings. The Declaration of Trust contemplates that, on wind-up, all net assets of the Trust are to be distributed to unitholders in cash and not by way of “in kind” distributions of securities.

Generally

20.          None of the Filer, the Corporation or the Trust is in default of securities legislation in any of the Jurisdictions.

21.          The Filer is a “responsible person” as that term is defined in NI 31-103. The Corporation is an associate of the Filer through the ownership position by an individual in both the Filer and the Corporation. In the absence of the Exemption Sought, the Portfolio Sale would engage the self-dealing restrictions in Section 13.5(2)(b) of NI 31-103 and would therefore be prohibited.

22.          The Filer has determined that disposing of the Specified Holdings by selling them to the Corporation for cash is appropriate for the Trust to maximize the amount of cash that can promptly be distributed to Trust unitholders in connection with the Wind-up.

23.          The Filer has determined that, in light of the liquidity needs of the Trust and the illiquid nature of the Specified Holdings, pursuing the Portfolio Sale to the Corporation would be more likely to maximize the amount of cash that will ultimately be distributed to the unitholders of the Trust as part of the Wind-Up than engaging in a process of seeking expressions of interest from other third parties.

24.          The decision to sell the Specified Holdings on behalf of the Trust’s portfolio to the Corporation has been made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Trust and the Corporation and the investors in the Trust and the Corporation.

25.          The sale by the Trust to the Corporation of the Specified Holdings will be regulated as a “related party transaction” as defined in section 1.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101), but will not engage the requirements in Part 5 of MI 61-101 because the Trust is not a reporting issuer. The acquisition by the Corporation from the Trust of the Specified Holdings pursuant to the Portfolio Sale will be regulated as a “related party transaction”, but will not engage the requirements in sections 5.3, 5.4 and 5.6 of MI 61-101 because the fair market value of the Specified Holdings that are the subject of the Portfolio Sale does not exceed 25% of the Corporation’s current market capitalization.

26.          Neither the Trust nor the Corporation is subject to National Instrument 81-107 Independent Review Committee for Investment Funds and so an independent review committee (IRC) would not review the Portfolio Sale in the ordinary course. If an IRC were to review the Portfolio Sale, it would necessarily have to base its conclusions largely on the Independent Valuation Report which is already available. As a result, IRC review of the Portfolio Sale to supplement the Independent Valuation Report was not considered necessary under the circumstances.

27.          The Filer is of the view that the Portfolio Sale will avoid the cost and delay associated with seeking an alternative purchaser and that the increased costs associated with an alternative sale process will negatively impact the Trust’s net asset value. As well, there is no assurance that such a process will result in any sale or a sale of the Specified Holdings at a sale price that is higher than the price to be obtained under the Portfolio Sale.

28.          The Specified Holdings will be sold by the Trust to the Corporation at fair value. An independent external auditor has provided valuation support in respect of the fair value of three of the four Specified Holdings by conducting a review in accordance with the Practice Standards of the Canadian Institute of Chartered Business Valuators (the Independent Valuation Report). The fourth Specified Holding was not covered by the Independent Valuation Report because live bid/offer and last sale information is publicly available in respect of this holding. The Independent Valuation Report concludes that based on the scope of review and subject to the assumptions, restrictions and qualifications set out therein, the Filer’s valuation conclusions regarding the Specified Holdings covered by the Independent Valuation Report are reasonable and suitable for their stated purpose.

29.          The Filer will receive no remuneration with respect to the sale of the Specified Holdings by the Trust to the Corporation. With respect to the delivery of securities, the only expenses incurred by the Trust are nominal administrative charges levied by the registrar and transfer agent of the Trust for recording the trades.

30.          The Trust has been audited since inception and will have final audited financial statements prepared for the year ended December 31, 2019.

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 under the Legislation is that the Exemption Sought is granted, provided that:

1.             The Specified Holdings are securities of a private company that are not traded on an exchange. The Specified Holdings will be sold by the Trust to the Corporation at fair value.

2.             The Specified Holdings held by both the Trust and the Corporation are fair valued in the Trust and the Corporation’s portfolios at the same price.

3.             The Independent Valuation Report concludes that the Filer’s valuation conclusions regarding the three Specified Holdings covered by the Independent Valuation Report are reasonable and suitable for their stated purpose.

4.             There have been no material changes to the Specified Holdings that are the subject of the Independent Valuation Report that would impact the value of those assets since the date of the Independent Valuation Report.

5.             The Filer’s valuation of the fourth Specified Holding not covered by the Independent Valuation Report will be consistent with the most recent publicly available pricing of those securities.

6.             The Corporation Board Approval has not been revoked.

7.             The Filer receives no remuneration with respect to the sale of the Specified Holdings by the Trust to the Corporation. With respect to the delivery of securities, the only expenses incurred by the Trust are nominal administrative charges levied by the custodian and/or recordkeeper of the trust for recording the trades and/or any charges by a dealer in transferring the securities.

8.             The Specified Holdings are paid for in cash by the Corporation and the cash proceeds from the Portfolio Sale will be paid to the Trust unitholders as an interim distribution as soon as is practicable following completion of the Portfolio Sale, in connection with the Wind-Up.

9.             The Filer will keep written records of the transactions reflecting details of the portfolio securities delivered by the Trust to the Corporation under the Portfolio Sale and the value assigned to such securities, for five years after the effective date of the Trust’s termination in a reasonably accessible place.

“Neeti Varma”
Acting Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission