Caldwell Investment Management Ltd. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- One-time transfer of portfolio securities between two pooled funds, both advised by the same portfolio adviser, to implement a merger between the funds -- Funds have substantially similar investment objectives and strategies and valuation policies -- Costs of the merger borne by manager -- Sale of securities exempt from the self-dealing prohibition in paragraph s. 13.5(2)(b)(iii), National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Applicable Legislative Provisions
National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b)(iii) and 15.1.
November 20, 2020
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) AND CALDWELL ICM MARKET STRATEGY TRUST (the Terminating Fund) AND CALDWELL GROWTH OPPORTUNITIES FUND (the Continuing Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Filer, the Terminating Fund and the Continuing Fund (together with the Terminating Fund, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Filer and the Funds from subparagraph 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements Exemptions and Ongoing Registrant Obligations (NI 31-103) in connection with the transfer of the investment portfolio of the Terminating Fund to the Continuing Fund in order to implement the Merger (the Merger) of the Terminating Fund into the Continuing Fund (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 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.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 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 is a corporation incorporated under the laws of Ontario with its head office located in Toronto, Ontario.
2. The Filer acts as manager and portfolio manager of the Funds.
3. The Filer is registered as an investment fund manager and portfolio manager in Alberta, British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan, and as an investment fund manager in Newfoundland and Labrador
4. The Filer is not a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation in any jurisdiction.
The Funds
5. Each of the Terminating Fund and Continuing Fund is an open-end mutual fund trust established under the laws of Ontario. On November 21, 2018, the Manager gave notice to unitholders of the Terminating Fund of its intention to terminate the fund on November 21, 2019. On November 6, 2019, the Manager gave further notice that the termination date would be extended as a number of investments remained unsold. The Funds are not reporting issuers in any jurisdiction and are not subject to National Instrument 81-102 Investment Funds.
6. As notice has been provided to unitholders of the Terminating Fund, the Terminating Fund is neither redeeming nor offering units of the Fund. The Continuing Fund offers its units in all provinces and territories of Canada pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions.
7. The Funds are not in default of securities legislation in any jurisdiction.
8. The Continuing Fund is a "mutual fund trust" as defined in the Income Tax Act (Canada) (the Tax Act). The Terminating Fund is a "registered investment" as defined in the Tax Act.
The Merger
9. The Filer wishes to merge the Terminating Fund into the Continuing Fund on or about November 30, 2020 (the Effective Date), subject to receipt of all regulatory, and other, approvals. The Filer has decided to effect the Merger because of the similarities in the Funds' investment portfolios. More than half of the Terminating Fund's portfolio is invested in the same private companies as the Continuing Fund. The Merger will increase the overall size of the Continuing Fund generating cost efficiencies for unitholders, particularly in respect of costs associated with the private equity component of the portfolio. The combined larger portfolio will continue to provide unitholders a (larger) traditional and liquid portion of the portfolio and will increase the potential opportunities to acquire, for long-term investment, mid-stage private companies within the alternative portion of the portfolio. Following the Merger the Continuing Fund will continue to qualify as a "mutual fund trust" under the Tax Act.
10. Unitholders of the Terminating Fund were provided written notice on November 21, 2018, of the intention to terminate the Terminating Fund, after which the Filer, in its capacity as trustee of the Terminating Fund, commenced the orderly disposition of portfolio assets and made two cash distributions to unitholders in 2019.
11. Unitholders of the Funds have approved the Merger at a special meeting of unitholders held on September 29, 2020 (the Meeting). In connection with the Meeting, the Filer sent the unitholders of each Fund a notice of meeting, management information circular and a related form of proxy (collectively, the Meeting Materials).
12. The Meeting Materials included all relevant facts concerning the Merger and described ways in which the securityholders could obtain the most recent interim and annual financial statements.
13. There will be no change in management fees or performance fees paid by unitholders of the Terminating Fund as a result of the Merger.
14. No redemption fees, other fees or commissions will be payable by the Funds' unitholders in connection with the Merger. No sales charges will be payable in connection with the acquisition by the Continuing Fund of the Terminating Fund's investment portfolio.
15. The costs associated with the Merger will be paid by the Filer.
16. The Merger will be implemented on a taxable basis. The Filer anticipates that the transfer of the assets of the Terminating Fund to the Continuing Fund at their current market value will not give rise to material adverse income tax consequences due to loss carry-forwards of the Terminating Fund. The exchange of units of the Terminating Fund for units of the Continuing Fund will be a taxable disposition for purposes of the Tax Act, and, accordingly, a taxable unitholder who holds units of the Terminating Fund will generally realize a capital gain or capital loss in connection with the Merger. Approximately one-half of the accounts in which Terminating Fund units are held are tax-deferred or tax-sheltered 'registered' accounts.
17. The investment objectives and portfolios of the Continuing Fund and the Terminating Fund are similar and both Funds primarily invest in publicly traded and private company securities. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger will be consistent with the investment objectives of the Continuing Fund.
18. The NAV of each of the Funds is determined using the same valuation principles and the Funds have the same redemption policies.
19. The following steps will be carried out to effect the Merger:
(a) the value of the Terminating 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 its declaration of trust;
(b) the Continuing Fund will acquire the portfolio assets and other assets of the Terminating Fund in exchange for units of the Continuing Fund;
(c) the Continuing Fund will not assume the liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;
(d) the units of the Continuing Fund received by the Terminating Fund will have an aggregate NAV equal to the value of the Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable NAV per security as of the close of business on the effective date of the Merger;
(e) if necessary, the Terminating Fund will distribute a sufficient amount of its income and capital gains, if any, to ensure that the Terminating Fund will not be liable for income tax under Part I of the Tax Act, other than alternative minimum tax, for its current taxation year. Currently, it is expected that there will not be any distributions by the Terminating Fund;
(f) immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund on a dollar-for-dollar basis in exchange for their units in the Terminating Fund; and
(g) as soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
20. Although the Funds are not subject to National Instrument 81-107 Independent Review Committee for Investment Funds, the Filer presented the Merger to the independent review committee (IRC). The IRC concluded the Merger would achieve a fair and reasonable result for unitholders.
21. The board of directors of the Filer has determined that the Merger is in the best interests of the Funds and has approved the Merger, subject to obtaining the Exemption Sought.
22. The Merger is not considered a material change for the Continuing Fund.
23. The assets of the Funds will be valued in accordance with the valuation policies and procedures outlined in the declaration of trust of each Fund, and, at this value, the assets of the Terminating Fund will subsequently be exchanged for units of the Continuing Fund as described above.
24. An independent external valuator was engaged to provide valuation support in respect of management's determination of the fair value of the Terminating Fund's illiquid assets that are priced manually by the Filer and are not also held by the Continuing Fund, but are being purchased by the Continuing Fund and are being purchased by conducting a review in accordance with the Practice Standards of the Canadian Institute of Chartered Business Valuators (the Independent Valuation Report). An Independent Valuation Report concluded that, based on the scope of the review and subject to assumptions, restrictions, restrictions and qualifications set out therein, the Filer's valuation conclusions regarding the illiquid assets covered by the Independent Valuation Report were reasonable and suitable for their stated purpose.
25. The transfer of the assets of the Terminating Fund to the Continuing Fund will not adversely impact the liquidity of the Continuing Fund.
26. The Filer believes that the Merger is in the best interests of unitholders of the Funds for the following reasons:
(a) the Continuing Fund is a "mutual fund trust" as defined in the Tax Act;
(b) units of the Terminating Fund are held by registered accounts. Units of the Continuing Fund which will be received on the Merger are "qualified investments" for such registered accounts. Certain assets held by the Terminating Fund are not qualified investments. If the Merger did not take place and these assets were distributed in specie, there would be adverse tax consequences to registered accounts on acquiring such assets;
(c) following the Merger, the Continuing Fund will have more assets, thereby allowing for increased portfolio diversification opportunities and operational cost efficiencies; and
(d) the Continuing Fund will benefit from its larger profile in the marketplace.
27. The portfolio securities and other assets of the Terminating Fund will be transferred from the Terminating Fund to the Continuing Fund in accordance with the steps described above. Because the transfer of portfolio securities and assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the portfolio securities and other assets received by the Continuing Fund and notice has been provided to unitholders and the Merger has been reviewed by the IRC to opine on its achieving a fair and reasonable result for unitholders, it is the Filer's submission that any potential conflict of interest has been adequately addressed and as a result, there is no conflict of interest for the Filer in effecting the Merger.
28. The sale of the assets of the Terminating Fund to the Continuing Fund, and the corresponding purchase of such assets by the Continuing Fund, as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolios of both Funds, from the Terminating Fund to, or by the Continuing Fund from, an investment fund for which a "responsible person" acts as an adviser, contrary to subparagraph 13.5(2)(b)(iii) of NI 31-103.
29. Unless the Exemption Sought is granted, the Filer would be prohibited from knowingly causing the units of the Terminating Fund to be transferred to the Continuing Fund in connection with the Merger.
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.