CI Investments Inc. et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of mutual fund mergers – approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – the fundamental investment objectives of the terminating funds and the continuing funds are not substantially similar for certain mergers – certain 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, ss. 5.5(1)(b), 19.1.
November 11, 2016
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
CI INVESTMENTS INC.
(the Manager)
AND
SIGNATURE SELECT GLOBAL FUND,
CI U.S. EQUITY PLUS FUND,
RED SKY CANADIAN EQUITY CORPORATE CLASS,
CI SHORT-TERM ADVANTAGE CORPORATE CLASS
(the Terminating Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed mergers described below (the Mergers) of the Terminating Funds into the Continuing Funds (defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Manager has provided notice that subsection 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, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:
Continuing Fund means each of CI Global Fund, Cambridge American Equity Fund, Cambridge Canadian Growth Companies Fund and CI Short-Term Corporate Class;
Continuing Trust Fund means each of CI Global Fund, Cambridge American Equity Fund and Cambridge Canadian Growth Companies Fund;
Corporate Class Fund means each of Red Sky Canadian Equity Corporate Class, CI Short-Term Advantage Corporate Class and CI Short-Term Corporate Class;
Corporation means CI Corporate Class Limited;
Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;
IRC means the independent review committee for the Funds;
Tax Act means the Income Tax Act (Canada);
Terminating Trust Fund means each of Signature Select Global Fund and CI U.S. Equity Plus Fund; and
Trust Fund means each of the Terminating Trust Funds and the Continuing Trust Funds.
Representations
This decision is based on the following facts represented by the Manager:
The Manager
1. The Manager is a corporation amalgamated under the laws of Ontario. The Manager is registered in all provinces as an adviser in the category of portfolio manager, as an exempt market dealer, commodity trading counsel, commodity trading manager and investment fund manager in Ontario, and as a non-resident investment fund manager in Quebec and Newfoundland and Labrador.
2. The Manager is the investment fund manager of each Fund.
The Funds
3. Each Trust Fund is an open-end mutual fund trust governed by a declaration of trust.
4. Each Corporate Class Fund is an open-end mutual fund comprised of two or more classes of convertible special shares of the Corporation.
5. The Manager and each Fund are not in default of securities legislation in any Jurisdiction, except with respect to a registration matter in certain Jurisdictions for which registration applications have since been filed.
6. Each Fund is a reporting issuer (or the equivalent) under the securities legislation of each Jurisdiction and is subject to the requirements of NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure.
7. Each of the Funds follows the standard investment restrictions and practices established under the securities legislation of the Jurisdictions except to the extent that the Funds have received an exemption from the securities regulatory authority of a Jurisdiction to deviate therefrom.
8. Signature Select Global Fund and CI Short-Term Advantage Corporate Class currently distribute their securities in all the Jurisdictions pursuant to a simplified prospectus and an annual information form, each dated July 27, 2016, as amended.
9. Securities of CI U.S. Equity Plus Fund were previously offered and distributed in all Jurisdictions pursuant to a simplified prospectus and an annual information form, each dated July 26, 2012. Securities of CI U.S. Equity Plus Fund are no longer in distribution.
10. Securities of Red Sky Canadian Equity Corporate Class were previously offered and distributed in all Jurisdictions pursuant to a simplified prospectus and an annual information form, each dated July 29, 2014. Securities of Red Sky Canadian Equity Corporate Class are no longer in distribution.
11. Each Continuing Fund currently distributes its securities in all the Jurisdictions pursuant to a simplified prospectus and an annual information form, each dated July 27, 2016, as amended.
12. Each Fund calculates its net asset value at 4:00 p.m. (Toronto time) on each business day.
The Proposed Mergers
13. The Manager intends to merge each Terminating Fund into the Continuing Fund shown opposite its name in the table below:
|
Merger # |
Terminating Fund |
Continuing Fund |
|
1. |
Signature Select Global Fund |
CI Global Fund |
|
2. |
CI U.S. Equity Plus Fund |
Cambridge American Equity Fund |
|
3. |
Red Sky Canadian Equity Corporate Class |
Cambridge Canadian Growth Companies Fund |
|
4. |
CI Short-Term Advantage Corporate Class |
CI Short-Term Corporate Class |
14. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, the proposed Mergers were announced in:
(a) a press release dated September 23, 2016;
(b) a material change report dated September 26, 2016; and
(c) an amendment dated September 30, 2016 to the prospectuses of Signature Select Global Fund, CI Short-Term Advantage Corporate Class and the Continuing Funds,
each of which has been filed on SEDAR.
15. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Manager presented the terms of the Mergers to the IRC for its review. The IRC determined that the Mergers, if implemented, will achieve a fair and reasonable result for each of the Funds.
16. The Manager is convening a special meeting (each, a Meeting and, collectively, the Meetings) of the securityholders of each Terminating Fund in order to seek the approval of the securityholders of each Terminating Fund to complete its Merger, as required by paragraph 5.1(1)(f) of NI 81-102. The Meetings will be held on or about November 24, 2016.
17. In connection with the Meetings, the Manager sent to securityholders of the Terminating Funds a management information circular, a related form of proxy and the fund facts document of the applicable Continuing Fund (collectively, the Meeting Materials) on November 3, 2016. The Meeting Materials were filed on SEDAR on November 3, 2016.
18. The tax implications of the Mergers, as well as a comparison of the investment objectives and fee structures of the Terminating Funds and the Continuing Funds, and the IRC’s recommendation regarding the Mergers are described in the Meeting Materials so that the securityholders of the Terminating Funds may consider this information before voting on the Mergers. The Meeting Materials also describe the various ways in which investors can obtain a copy of the simplified prospectus, annual information form and fund facts document for each Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.
19. The Manager has concluded that none of the Mergers will be material to their Continuing Funds and, accordingly, there is no intention to convene meetings of the securityholders of the Continuing Funds to approve their Mergers pursuant to paragraph 5.1(1)(g) of NI 81-102.
20. If all required approvals for a Merger are obtained, it is intended that the Merger will occur after the close of business on or about December 2, 2016 (the Effective Date). The Manager therefore anticipates that each securityholder of a Terminating Fund will become a securityholder of its Continuing Fund after the close of business on the Effective Date. Each Terminating Fund will be wound-up as soon as reasonably possible following its Merger.
21. The cost of effecting the Mergers (consisting primarily legal and regulatory fees, proxy solicitation, and printing and mailing, as applicable) will be borne by the Manager.
22. No sales charges will be payable by securityholders of the Funds in connection with the Mergers.
23. Securities of the applicable Continuing Funds received by securityholders of the Terminating Funds as a result of the Mergers will have the same sales charge option and, for securities purchased under a deferred sales charge option, the same remaining deferred sales charge schedule, as their securities in the Terminating Funds.
24. 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 of the Mergers, 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.
25. Securityholders of each Terminating Fund will continue to have the right to redeem their securities of the Terminating Fund at any time up to the close of business on 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.
Merger Steps
26. Due to the different structures of the Funds, the procedures for implementing the Mergers will vary. The specific steps (taking into account the particular features of each Fund) to implement each Merger are as follows:
(a) With respect to the Merger of a Terminating Trust Fund into a Continuing Trust Fund (i.e., Mergers #1 and #2):
(i) Prior to the Merger, if required, each Terminating Trust Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the applicable Continuing Trust Fund. As a result, the Terminating Trust Funds may temporarily hold cash or money market instruments and may not be fully invested in accordance with their investment objectives 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 in accordance with the constating documents of the Terminating Trust Fund.
(iii) Each of the 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 tax 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 units 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) Each Continuing Trust Fund will not assume liabilities of the applicable Terminating Trust Fund and the Terminating Trust Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date.
(vi) Immediately thereafter, units of the Continuing Trust Fund received by the Terminating Trust Fund will be distributed to securityholders of the Terminating Fund in exchange for their securities in the Terminating Fund on a dollar-for-dollar and class-by-class basis.
(vii) The Terminating Trust Fund will be wound-up within 30 days following its Merger.
(b) With respect to the Merger of Red Sky Canadian Equity Corporate Class into Cambridge Canadian Growth Companies Fund (i.e., Merger #3):
(i) Prior to the Merger, if required, the Corporation will sell any securities in the portfolio underlying Red Sky Canadian Equity Corporate Class that do not meet the investment objectives and investment strategies of Cambridge Canadian Growth Companies Fund. As a result, the portfolio underlying Red Sky Canadian Equity Corporate Class may temporarily hold cash or money market instruments and may not be fully invested in accordance with their investment objectives for a brief period of time prior to the Merger being effected.
(ii) The value of Red Sky Canadian Equity Corporate Class’s investment portfolio and other assets will be determined at the close of business on the Effective Date in accordance with the constating documents of Red Sky Canadian Equity Corporate Class.
(iii) The Corporation may declare, pay and automatically reinvest ordinary dividends or capital gains dividends to securityholders of Red Sky Canadian Equity Corporate Class, as determined by the Manager at the time of the Merger. Cambridge Canadian Growth Companies 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 Cambridge Canadian Growth Companies Fund will not be subject to tax for its current tax year.
(iv) The Corporation will transfer substantially all of the assets attributed to Red Sky Canadian Equity Corporate Class to Cambridge Canadian Growth Companies Fund. In return, the Cambridge Canadian Growth Companies Fund will issue to the Corporation units of Cambridge Canadian Growth Companies Fund having an aggregate net asset value equal to the value of the assets transferred to Cambridge Canadian Growth Companies Fund.
(v) Cambridge Canadian Growth Companies Fund will not assume any of the liabilities of the Corporation attributed to Red Sky Canadian Equity Corporate Class. Instead, the Corporation will retain sufficient assets to satisfy Red Sky Canadian Equity Corporate Class’s estimated liabilities, if any, as of the date of the Merger.
(vi) Immediately thereafter, units of Cambridge Canadian Growth Companies Fund received by the Corporation will be distributed to securityholders of Red Sky Canadian Equity Corporate Class in exchange for their shares in Red Sky Canadian Equity Corporate Class on a dollar-for-dollar and class-by-class basis, so that securityholders of the Red Sky Canadian Equity Corporate Class become securityholders of Cambridge Canadian Growth Companies Fund.
(vii) As soon as reasonably possible following the Merger, the articles of incorporation, as amended, will be further amended so that the shares of Red Sky Canadian Equity Corporate Class are cancelled.
(c) With respect to the Merger of CI Short-Term Advantage Corporate Class into CI Short-Term Corporate Class (i.e., Merger #4):
(i) Prior to the Merger, if required, the Corporation will sell any securities in the portfolio underlying CI Short-Term Advantage Corporate Class that do not meet the investment objectives and investment strategies of the CI Short-Term Corporate Class. As a result, the portfolio underlying CI Short-Term Advantage Corporate Class may temporarily hold cash or money market instruments and may not be fully invested in accordance with their investment objectives for a brief period of time prior to the Merger being effected.
(ii) The value of CI Short-Term Advantage Corporate Class’s investment portfolio and other assets will be determined at the close of business on the Effective Date in accordance with the constating documents of CI Short-Term Advantage Corporate Class.
(iii) The Corporation may declare, pay and automatically reinvest ordinary dividends or capital gains dividends to securityholders of CI Short-Term Advantage Corporate Class and/or the CI Short-Term Corporate Class, as determined by CI at the time of the Merger.
(iv) Each outstanding share of CI Short-Term Advantage Corporate Class will be exchanged for shares of equivalent classes of CI Short-Term Corporate Class based on their relative net asset values.
(v) The assets and liabilities of the Corporation attributed to CI Short-Term Advantage Corporate Class will be reallocated to CI Short-Term Corporate Class.
(vi) As soon as reasonably possible following the Merger, the articles of incorporation of the Corporation, as amended, will be further amended so that all of the issued and outstanding shares of CI Short-Term Advantage Corporate Class will be exchanged for shares of CI Short-Term Corporate Class on a dollar-for-dollar and class-by-class basis, so that securityholders of CI Short-Term Advantage Corporate Class become securityholders of CI Short-Term Corporate Class and so that the shares of CI Short-Term Advantage Corporate Class are cancelled.
27. Although the procedures for implementing the Mergers will vary, the result of each Merger will be that investors in each Terminating Fund will cease to be securityholders of the Terminating Fund and will become securityholders of its Continuing Fund and the Continuing Funds will continue as publicly-offered open-end mutual funds.
Benefits of the Mergers
28. In the opinion of the Manager, the Mergers will be beneficial to securityholders of the Funds for the following reasons:
(a) it is expected that the Mergers will result in a more streamlined and simplified product line-up that is easier for investors to understand;
(b) the Mergers will eliminate similar fund offerings across product line-ups, reducing duplication and redundancy;
(c) following the Mergers, each Continuing Fund will have more assets, thereby allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions; and
(d) each Continuing Fund will benefit from its larger profile in the marketplace.
29. In respect of the Merger of Signature Select Global Fund into CI Global Fund, and the Merger of Red Sky Canadian Equity Corporate Class into Cambridge Canadian Growth Companies Fund, securityholders of the applicable Terminating Fund will also benefit by moving to a mutual fund with a much larger net asset value (approximately $387.96 million versus $159.09 million in the case of Signature Select Global Fund and approximately $489.81 million versus $1.11 million in the case of Red Sky Candian Equity Corporate Class, both as at September 30, 2016), while retaining a substantially similar investment mandate and an identical fee structure.
30. In respect of the Merger of CI U.S. Equity Plus Fund into Cambridge American Equity Fund, securityholders of CI U.S. Equity Plus Fund will benefit:
(a) by moving to a mutual fund with a much larger net asset value (approximately $259.17 million versus $18.90 million as at September 30, 2016); and
(b) due to the broader investment mandate of Cambridge American Equity Fund. As noted above, Cambridge American Equity Fund’s investment objective does not restrict it to medium and large U.S. companies, which presents Cambridge American Equity Fund with a broader universe of securities from which to select.
31. In respect of the Merger of CI Short-Term Advantage Corporate Class into CI Short-Term Corporate Class, securityholders of CI Short-Term Advantage Corporate Class will also benefit by moving, on a tax-deferred basis, to a mutual fund with a much larger net asset value (approximately $181.17 million versus $18.15 million as at September 30, 2016), a similar investment mandate and an identical fee structure.
Reasons for Approval Sought
32. Regulatory approval of the Mergers is required because each Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular,
(a) in respect of the Merger of (i) CI U.S. Equity Plus Fund into Cambridge American Equity Fund, and (ii) CI Short-Term Advantage Corporate Class into CI Short-Term Corporate Class, a reasonable person may not consider the Terminating Fund to have substantially similar fundamental investment objectives as its corresponding Continuing Fund; and
(b) other than the Merger of CI Short-Term Advantage Corporate Class into CI Short-Term Corporate Class, no Merger will be a “qualifying exchange” within the meaning of section 132.2 of the Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act.
33. The fundamental investment objective of CI Short-Term Advantage Corporate Class explicitly permits the Fund to invest in money market instruments issued in developed countries (Canada or otherwise). However, the fundamental investment objective of CI Short-Term Corporate Class states that the Fund will primarily invest in Canadian money market instruments. Therefore, a reasonable person may not consider the fundamental investment objectives of CI Short-Term Advantage Corporate Class and CI Short-Term Corporate Class to be substantially similar.
34. The fundamental investment objective of CI U.S. Equity Plus Fund states that the Fund will invest a majority of its assets in common stocks of medium and large U.S. companies. The fundamental investment objective of Cambridge American Equity Fund, however, states that the Fund invests primarily in equity and equity-related securities of companies in the United States, with no reference to the size of the companies. Therefore, a reasonable person may not consider the fundamental investment objectives of CI U.S. Equity Plus Fund and Cambridge American Equity Fund to be substantially similar.
35. In respect of the Merger of (i) Signature Select Global Fund into CI Global Fund, and (ii) CI U.S. Equity Plus Fund into Cambridge American Equity Fund, each Continuing Fund has loss carryforwards for tax purposes that will be lost if these Mergers are implemented on a tax-deferred basis. Consequently, each Merger will be effected on a taxable basis so that such Continuing Funds will preserve their unutilized loss carryforwards for use to shelter income and capital gains realized by the Continuing Funds in future years.
36. In respect of the Merger of Red Sky Canadian Equity Corporate Class into Cambridge Canadian Growth Companies Fund, under current tax laws, the Merger cannot be effected on a tax-deferred basis. However, CI anticipates that immediately prior to effecting the Merger, the portfolio attributed to Red Sky Canadian Equity Corporate Class will have sufficient realized and unrealized losses and loss carryforwards or insignificant unrealized net capital gains to enable the Corporation to transfer those portfolio assets to Cambridge Canadian Growth Companies Fund at their current market value without triggering any material adverse tax consequences to the Corporation.
37. Other than as described above, the Mergers comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
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 Approval Sought is granted.
“Darren McKall”
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission