IA Clarington Investments Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of mutual fund mergers -- approval required because certain mergers do not meet the criteria for pre-approved reorganizations and transfers in NI 81-102 -- 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) and 5.7(1)(b).
[TRANSLATION]
November 23, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF IA CLARINGTON INVESTMENTS INC. (the Filer) AND IA CLARINGTON FOCUSED CANADIAN EQUITY CLASS IA CLARINGTON NORTH AMERICAN OPPORTUNITIES CLASS (each a Terminating Fund, and collectively, the Terminating Funds)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Makers) has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdictions (the Legislation) approving the proposed mergers (each a Merger, and collectively the Mergers) of each of the Terminating Funds into the Continuing Fund (as defined below) pursuant to paragraph 5.5(1)(b) of Regulation 81-102 respecting Investment Funds, CQLR c. V-1.1, r. 39, (Regulation 81-102) (the Mergers Approval).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
a) the Autorité des marchés financiers is the principal regulator for this application;
b) the Filer has provided notice that section 4.7 (1) of Regulation 11-102 respecting Passport System, CQLR c. V-1.1, r.1, (Regulation 11-102) is intended to be relied upon in the provinces and territories of Canada other than the Jurisdictions; and
c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Interpretation
Terms defined in Regulation 14-101 respecting Definitions, CQLR c. V-1.1, r. 3, Regulation 11-102, Regulation 81-101 respecting Mutual Funds Prospectus Disclosure, CQLR c. V-1.1, r. 38, (Regulation 81-101) and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.
CSFI means Clarington Sector Fund Inc., the holding entity of the Terminating Funds;
Continuing Fund means IA Clarington Canadian Small Cap Fund;
Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Fund;
Income Tax Act means the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.);
Representations
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is a corporation amalgamated under the laws of Canada. The Filer's head office is in Québec City, Québec.
2. The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador, as an exempt market dealer in Québec and Ontario, and as a portfolio manager in all of the provinces of Canada.
3. The Filer acts as the manager of the Funds.
4. Each Fund is a mutual fund created under the laws of the Province of Ontario and is subject to the provisions of Regulation 81-102.
5. Each of the Terminating Funds is an open-ended mutual fund class of CSFI.
6. The Continuing Fund is an open-ended mutual fund trust governed by a declaration of trust.
7. Neither the Filer nor the Funds are in default of securities legislation in any of the Jurisdictions.
8. Each Fund is a reporting issuer or the equivalent in each of the Jurisdictions and is subject to the requirements of Regulation 81-101 and Regulation 81-102.
9. Each Fund currently distributes its securities in all Jurisdictions pursuant to a simplified prospectus and annual information form dated June 15, 2020, as amended by an amendment dated June 29, 2020.
Reasons for Mergers Approval
10. Regulatory approval of the Mergers is required because neither of the Mergers satisfies all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of Regulation 81-102. In particular, neither Merger will be a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Income Tax Act.
11. Other than the criteria described in paragraph 10 above, each Merger meets all of the other criteria for pre-approved reorganizations and transfers under section 5.6 of Regulation 81-102.
The Proposed Mergers
12. The Filer intends to merge each Terminating Fund into the Continuing Fund as shown in the table below:
Terminating Fund
Continuing Fund
IA Clarington Focused Canadian Equity Class
IA Clarington North American Opportunities Class
IA Clarington Canadian Small Cap Fund
13. The proposed Mergers were announced ineach of which has been filed on the System for Electronic Document Analysis and Retrieval (SEDAR).
a) a press release dated June 29, 2020;
b) a material change report dated June 29, 2020; and
c) an amendment to the simplified prospectus for each of the Funds dated June 29, 2020,
14. Securityholders of the Terminating Funds [approved the Mergers at a meeting held on November 12], 2020 (the Meeting).
15. In accordance with section 5.3 of Regulation 81-107 respecting Independent Review Committee for Investment Funds, CQLR, c. V-1.1, r. 43, the Filer presented the terms of the proposed Mergers to the Independent Review Committee of the Funds (the IRC) for its recommendation during a meeting of the IRC held on June 23, 2020. The IRC provided its positive recommendation regarding the proposed Mergers on the basis that the Mergers, if implemented, would achieve a fair and reasonable result for the Funds.
16. The Filer has concluded that the Mergers are not material changes to the Continuing Fund, and accordingly, there is no intention to convene a meeting of securityholders of the Continuing Fund to approve the Mergers pursuant to paragraph 5.1(1)(g) of Regulation 81-102.
17. By way of order dated September 8, 2016, the Filer was granted relief from the requirement set out in paragraph 12.2(2)(a) of Regulation 81-106 Investment Fund Continuous Disclosure, CQLR, c. V-1.1, r. 42, to send printed management information circulars to securityholders while proxies are being solicited and, subject to certain conditions, instead allows a notice-and-access document to be sent to such securityholders (the Notice-and-Access Relief).
18. Pursuant to the requirements of the Notice-and-Access Relief, a Notice-and-Access document and applicable proxies in connection with the Meetings, along with the fund facts of the applicable series of the Continuing Fund, were mailed to securityholders of the Terminating Funds on October 6, 2020 and were filed via SEDAR on the same day. The management information circular (the Circular), which the notice-and-access document provides a link to, was also filed via SEDAR at the same time.
19. It is intended that the Mergers will occur after the close of business on or about November 27, 2020 (the Effective Date). The Filer therefore anticipates that each securityholder of a Terminating Fund will become a securityholder of its the Continuing Fund after the close of business on the Effective Date. Each Terminating Fund will be wound-up as soon as possible following its Merger.
Merger Steps
20. The specific steps to implement the Mergers are as follows:
Terminating Fund
Continuing Fund
IA Clarington Focused Canadian Equity Class
IA Clarington North American Opportunities Class
IA Clarington Canadian Small Cap Fund
a) Prior to the Merger, if required, CSFI will sell any securities in the portfolio of each Terminating Fund that do not meet the investment objective and investment strategies of the Continuing Fund. As a result, the portfolio of each Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objective for a brief period of time prior to the Merger begin effected.
b) The value of each Terminating Fund's investment portfolio and other assets will be determined at the close of business on the Effective Date of the Mergers in accordance with the constating documents of the Terminating Funds.
c) CSFI may declare, pay and automatically reinvest ordinary dividends or capital gains dividends to securityholders of the Terminating Funds, as determined by IA Clarington at the time of the Mergers.
d) The Continuing Fund will acquire all of the portfolio assets and liabilities of the applicable Terminating Fund in consideration for an amount equal to the net asset value of the portfolio assets that the Continuing Fund is acquiring from the Terminating Fund (the "Purchase Price").
e) The Continuing Fund will satisfy the Purchase Price by issuing to the applicable Terminating Fund the number of units of the Continuing Fund that have an aggregate net asset value equal to the Purchase Price of the assets of that Terminating Fund, and the units of the Continuing Fund will be issued at the net asset value per unit of the applicable series as of the close of business on the business day prior to the Effective Date of the Merger.
f) Immediately thereafter, all of the shares of the applicable Terminating Fund will be redeemed and the redemption price therefor will be paid by delivering the applicable number of units of the Continuing Fund to the securityholders of that Terminating Fund based on the number of such shares of the applicable Terminating Fund then held.
g) The Terminating Funds will be wound-up within 30 days following its Merger.
21. The tax implications of the Mergers as well as the differences between the investment objectives and other features of the Terminating Funds and the Continuing Fund and the IRC's recommendation of the Mergers are described in the Circular, so that securityholders could make an informed decision before voting on whether to approve a Mergers. The Circular also describes the various ways in which securityholders could obtain a copy of the simplified prospectus, annual information form and fund facts for the Continuing Fund and their most recent interim and annual financial statements and management reports of fund performance.
22. Securityholders of each Terminating Fund will continue to have the right to redeem securities of the applicable Terminating Fund at any time up to the close of business on the business day immediately preceding 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 Funds will be re-established in comparable plans with respect to the Continuing Fund unless securityholders advise otherwise.
23. The costs of effecting the Mergers (consisting primarily of brokerage charges associated with the merger-related trades that occur both before and after the Effective Date and, proxy solicitation, printing, mailing and regulatory fees) will be borne by the Filer. The Funds will bear none of the costs and expenses associated with the transaction.
24. No sales charges, redemption fees or commissions will be payable by securityholders of the Funds in connection with the Mergers.
25. The investment portfolio and other assets of each Terminating Fund to be acquired by the Continuing Fund in order to effect the Mergers are currently, or will be, acceptable on or prior to the Effective Date, to the portfolio manager(s) of the Continuing Fund and are, or will be, consistent with the investment objective of the Continuing Fund.
Benefits of the Mergers
26. In the opinion of the Filer, the Mergers will be beneficial to securityholders of the Funds for the following reasons:
a) the Mergers will eliminate similar fund offerings, which is expected to result in a more simplified product line-up that is easier for investors to understand;
b) generally, the historical performance of the Continuing Fund has been better than that of the applicable Terminating Fund;
c) the Continuing Fund will have a portfolio of greater value, allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions. The ability to improve diversification may lead to potentially enhanced risk-adjusted returns; and
d) the combined management fee and administration fee with respect to each series of the Continuing Fund will be the same as, or lower than, the combined management fee and administration fee of the corresponding series of each Terminating Fund.
27. The Mergers Approval is not detrimental to the protection of investors.
Decision
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Mergers Approval is granted.
"Frédéric Belleau"
Senior Director Investment Fund