LOGiQ Asset Management Ltd. and LOGiQ Capital 2016
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of change of manager of investment funds, and investment fund mergers – merger approval required because merger does not meet the criteria for pre-approval – continuing fund has different investment objectives than terminating fund – fee structure not substantially similar – merger not a “qualifying exchange” or a tax-deferred transaction under the Income Tax Act – manager of continuing fund is not an affiliate of the manager of the terminating fund - fund facts not delivered with circular – securityholders provided with timely and adequate disclosure regarding the change of manager and the mergers – change of manager and mergers are not detrimental to securityholders or contrary to the public interest.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(a) and (b), 5.7(1)(a) and (b), 19.1(2).
December 14, 2017
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
LOGiQ ASSET MANAGEMENT LTD.
(LAM)
AND
LOGiQ CAPITAL 2016
(LC) (together, LAM and LC , the Filers)
AND
IN THE MATTER OF
THE INVESTMENT FUNDS MANAGED BY LC AND LAM
(respectively, the LC Funds and the LAM Funds and, collectively, the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of:
(a) the proposed change of manager for all of the Funds (the Change of Manager) from LAM or LC to Redwood Asset Management Inc. (Redwood) under subsection 5.5(1)(a) of National Instrument 81-102 Investment Funds (NI 81-102); and
(b) three investment fund mergers (the Mergers) in connection with the proposed transaction between the Filers, LOGiQ Asset Management Inc. (LOGiQ) and Purpose Investments Inc. (Purpose), as described below, under subsection 5.5(1)(b) of NI 81-102;
(the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Filer 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 each of the other provinces and territories of Canada.
Interpretation
Terms defined in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filers.
LAM
1. LAM is currently the manager of the LAM Funds.
2. LAM is a corporation organized under the laws of the Province of Ontario, with its head office located in Toronto, Ontario. LAM is a wholly-owned subsidiary of LOGiQ.
3. LAM is currently registered as an investment fund manager in Newfoundland and Labrador, Ontario and Quebec, as an exempt market dealer and as a portfolio manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Quebec.
LC
4. LC is currently the manager of the LC Funds.
5. LC is a partnership established under the laws of the Province of Ontario, with its head office located in Toronto, Ontario. The partners of LC are LOGiQ with a 99.99% ownership interest and 2535706 Ontario Inc., a wholly-owned subsidiary of LOGiQ, with a 0.01% ownership interest.
6. LC is currently registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, as a portfolio manager in Ontario and British Columbia and as an exempt market dealer in Ontario and Alberta.
7. Neither LAM nor LC is in default of any requirements of applicable securities legislation.
The Funds
8. Each of the Funds is a reporting issuer in each of the provinces and territories of Canada (the Jurisdictions). The Funds include both mutual funds and non-redeemable investment funds.
9. None of the Funds is in default of any requirements of applicable securities legislation.
10. Securities of the LAM Funds, other than the LAM Funds that are non-redeemable investment funds, are currently qualified for sale by simplified prospectuses, annual information forms and fund facts, which have been filed and receipted in each of the Jurisdictions.
11. Securities of the LC Funds are currently qualified for sale by simplified prospectuses, annual information forms and fund facts, which have been filed and receipted in each of the Jurisdictions.
Purpose and Redwood
12. Purpose is a corporation established under the laws of the Province of Ontario.
13. Redwood is a corporation established under the laws of the Province of Ontario and is a wholly-owned subsidiary of Purpose.
14. Redwood is the manager of certain mutual funds, including exchange-traded funds, and non-redeemable investment funds (the Redwood Funds) and Redwood’s primary business is to act as investment fund manager for the Redwood Funds and to act as portfolio manager for certain Redwood Funds.
15. None of Purpose, Redwood or the Redwood Funds is in default of any applicable requirements of securities legislation.
Details of the Transaction
16. In press releases issued on September 11, 2017 and September 13, 2017 and a material change report issued on September 20, 2017, LOGiQ announced that it had entered into a purchase and sale agreement (the Purchase and Sale Agreement) with Purpose providing for the acquisition by Purpose of substantially all of the retail asset management agreements owned by LOGiQ, LAM and LC (the Transaction). The Transaction will result in the Change of Manager and the Mergers.
17. The Transaction is expected to be completed on or about December 15, 2017 (Closing), subject to receiving all necessary regulatory approvals and satisfying the conditions of closing contained in the Purchase and Sale Agreement.
18. Pursuant to the Mergers, the following terminating funds (each, a Terminating Fund) will be merged into the following continuing funds (each, a Continuing Fund) as follows:
(a) Canadian 50 Advantaged Preferred Share Fund, a non-redeemable investment fund, (the Merger 1 Terminating Fund) will merge into Redwood Canadian Preferred Share Fund, a mutual fund, (the Merger 1 Continuing Fund, and together with the Merger 1 Terminating Fund, the Merger 1 Funds) (Merger 1);
(b) LOGiQ Growth Class, a corporate class mutual fund, (the Merger 2 Terminating Fund) will merge into LOGiQ Special Opportunities Class, a corporate class mutual fund, (the Merger 2 Continuing Fund, and together with the Merger 2 Terminating Fund, the Merger 2 Funds) (Merger 2); and
(c) LOGiQ Millennium Fund, a mutual fund, (the Merger 3 Terminating Fund) will merge into LOGiQ High Income Fund, a mutual fund, (the Merger 3 Continuing Fund, and together with the Merger 3 Terminating Fund, the Merger 3 Funds) (Merger 3).
19. LAM and LC, as applicable, referred the Transaction to the applicable Independent Review Committee (IRC) of each of the Funds pursuant to section 5.1 of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) and received a recommendation that the Transaction, if implemented, would achieve a fair and reasonable result for each applicable Fund.
20. Upon Closing, the individuals that comprise the IRC of the Terminating Funds will cease to be members of the IRC by operation of subsections 3.10(1)(a) and (b) of NI 81-107. Immediately following Closing, Redwood has confirmed that the members of the IRC for the Funds (other than the Terminating Funds) will be changed to the same individuals that currently comprise the Independent Review Committee for the Merger 1 Continuing Fund (Redwood IRC), namely: Douglas G. Hall (Chair), Randall C. Barnes and Michael Hollend.
21. In addition to the press releases and material change report mentioned above, which were issued and filed on SEDAR, an amendment to the current simplified prospectuses, annual information forms and related fund facts documents (the Prospectus Amendments) of the applicable Funds that are mutual funds were filed on SEDAR on September 22, 2017.
22. Pursuant to NI 81-102, special meetings of the securityholders of the Funds (the Meetings) were held on November 3, 2017 and November 10, 2017. At the Meetings, securityholders of the Funds approved, among other things, the Change of Manager, and securityholders in the Terminating Funds approved the Merger of the relevant Terminating Fund into the corresponding Continuing Fund.
23. The notice of Meetings and the joint management information circular in respect of the Meetings (the Meeting Materials) describing the Mergers and the Change of Manager were sent to securityholders of the Funds on October 13, 2017 and copies thereof were filed on SEDAR following the mailing in accordance with applicable securities legislation. The Meeting Materials contain sufficient information regarding the business, management and operations of Redwood, including details of its officers and directors, and all information necessary to allow securityholders of the Funds to make an informed decision about the Change of Manager and the Mergers, as applicable. All other information and documents necessary to comply with applicable proxy solicitation requirements of securities legislation for the Meetings were also mailed to securityholders of the Funds.
The Change of Manager
24. LOGiQ, LAM and LC believe that the Change of Manager is in the best interests of the securityholders of the Funds, as the Transaction is expected to lead to greater efficiencies, economies of scale and a pooling of resources which will create an even stronger group of Redwood Funds to serve investors. The Transaction has been the result of extensive analysis by LOGiQ, LAM and LC of trends in the investment fund industry and the need for consolidation given increasing costs and regulatory requirements. Accordingly, and after considering several alternatives, LOGiQ, LAM and LC believe securityholders are better served by the Change of Manager.
25. Other than the Mergers, the Change of Manager is not expected to have any material impact on the business, operations or affairs of the Funds or the securityholders of the Funds and Redwood intends to manage and administer the Funds in a similar manner as LAM and LC. Following the Transaction, certain of the Funds will be converted from non-redeemable investment funds into exchange-traded funds, with conventional non-listed classes of units as well, as disclosed in the Meeting Materials and approved by securityholders at the Meetings.
26. Subject to obtaining the Requested Approval, Redwood will become the manager and successor trustee (if applicable) of the Funds effective on Closing. On that date, Redwood will assume the role of manager of the Funds under each Fund’s management agreement.
27. On Closing, CIBC Mellon Trust Company will remain the custodian of the Funds and Redwood will become portfolio manager of the Funds currently advised by an affiliate of LOGiQ (other than the Terminating Funds), as disclosed in the Meeting Materials.
Details of the Mergers
28. The specific steps to implement each of the Mergers are described below. The result of the Mergers will be that investors in the applicable Terminating Fund will cease to be securityholders in the Terminating Fund and will become securityholders in the applicable Continuing Fund. Pursuant to the Mergers, securityholders of a Terminating Fund will receive securities of a Continuing Fund, as shown opposite in the table below:
|
Merger |
Terminating Fund Securities Held |
Continuing Fund Securities to be Received |
|
Merger 1 |
Class A units |
ETF units |
|
Merger 2 |
Series A shares |
Series A shares |
|
Merger 3 |
Series A units |
Series A units |
29. Merger 1 will be structured as follows:
(a) Prior to Closing, the Merger 1 Terminating Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the Merger 1 Continuing Fund. As a result, the Merger 1 Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger being effected.
(b) Prior to the Merger 1, each of the Merger 1 Terminating Fund and the Merger 1 Continuing Fund will distribute any net income and net realized capital gains for its current taxation year to the extent necessary to eliminate its liability for non-refundable income tax.
(c) The value of the Merger 1 Terminating Fund’s portfolio and other assets will be determined at the close of business on the business day prior to Closing in accordance with the constating documents of the Merger 1 Terminating Fund.
(d) The Merger 1 Continuing Fund will acquire the investment portfolio and other assets of the Merger 1 Terminating Fund in consideration for an amount (the Merger 1 Purchase Price) equal to the fair market value of the portfolio assets and other assets that the Merger 1 Continuing Fund is acquiring from the Merger 1 Terminating Fund.
(e) The Merger 1 Continuing Fund will satisfy the Merger 1 Purchase Price by issuing to the Merger 1 Terminating Fund that number of ETF units and Class F units of the Merger 1 Continuing Fund that have an aggregate net asset value equal to the Merger 1 Purchase Price, and the ETF units and Class F units of the Merger 1 Continuing Fund will be issued at the net asset value per unit of the applicable class as of the close of business on the business day prior to Closing.
(f) Immediately thereafter, all of the Class A units and Class F units of the Merger 1 Terminating Fund will be redeemed and the redemption price therefor will be paid by delivering the applicable number of ETF units and Class F units, as applicable, of the Merger 1 Continuing Fund to unitholders of the Merger 1 Terminating Fund based on the number of such units of the Merger 1 Terminating Fund then held, with each unitholder of the Merger 1 Terminating Fund receiving that number of units of the applicable class of the Merger 1 Continuing Fund (rounded down to the nearest whole unit) as is equal to an exchange ratio (which will be equal to the net asset value per class of units of the Merger 1 Terminating Fund at the close of business on the business day prior to Closing, divided by the net asset value per the equivalent class of units of the Merger 1 Continuing Fund on such date) multiplied by the number of units of the applicable class of the Merger 1 Terminating Fund held by such unitholder immediately prior to the completion of the Merger 1.
(g) The Merger 1 Terminating Fund and the Merger 1 Continuing Fund will file a joint tax election in respect of the transfer to the Merger 1 Continuing Fund of the assets of the Merger 1 Terminating Fund described above.
(h) Following Merger 1, the Merger 1 Terminating Fund will be wound up as soon as reasonably possible and a notice pursuant to section 2.10 of NI 81-106 Investment Fund Continuous Disclosure (NI 81-106) will be filed on the Merger 1 Terminating Fund’s SEDAR profile.
30. The proposed Merger 2 will be structured as follows:
(a) Series A, Series B, Series F and Series X mutual fund shares of the Merger 2 Terminating Fund will be exchanged for Series A, Series B, Series F and Series X mutual funds shares, respectively, of the Merger 2 Continuing Fund. The number of shares of a series of the Merger 2 Continuing Fund received will be determined by multiplying the number of shares of each applicable series of the Merger 2 Terminating Fund outstanding at the close of business prior to Closing by an exchange ratio (which will be equal to the net asset value per series of shares of the Merger 2 Terminating Fund at the close of business on the business day prior to the effective date of the Merger 2, divided by the net asset value per the equivalent series of shares of the Merger 2 Continuing Fund on such date).
(b) All of the net assets of the Merger 2 Terminating Fund will become assets of the Merger 2 Continuing Fund. As such, there will be no pre-merger liquidation of any portion of the Merger 2 Terminating Fund’s portfolio.
(c) Following Merger 2, the Merger 2 Terminating Fund will be wound up as soon as reasonably possible and a notice pursuant to section 2.10 of NI 81-106 will be filed on the Merger 2 Terminating Fund’s SEDAR profile.
31. The proposed Merger 3 will be structured as follows:
(a) Prior to Closing, the Merger 3 Terminating Fund will sell any securities in its portfolio that do not meet the investment objectives and investment strategies of the Merger 3 Continuing Fund. As a result, the Merger 3 Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested in accordance with its investment objectives for a brief period of time prior to the Merger being effected.
(b) Prior to the Merger 3, the Merger 3 Terminating Fund will distribute any net income and net realized capital gains for its current taxation year to the extent necessary to eliminate its liability for non-refundable income tax.
(c) The value of the Merger 3 Terminating Fund’s portfolio and other assets will be determined at the close of business on the business day prior to Closing in accordance with the constating documents of the Merger 3 Terminating Fund.
(d) The Merger 3 Continuing Fund will acquire the investment portfolio and other assets of the Merger 3 Terminating Fund in consideration for an amount (the “Merger 3 Purchase Price”) equal to the fair market value of the portfolio assets and other assets that the Merger 3 Continuing Fund is acquiring from the Merger 3 Terminating Fund.
(e) The Merger 3 Continuing Fund will satisfy the Merger 3 Purchase Price by issuing to the Merger 3 Terminating Fund that number of Series A, Series B, Series F and Series I mutual fund units of the Merger 3 Continuing Fund that have an aggregate net asset value equal to the Merger 3 Purchase Price, and the Series A, Series B, Series F and Series I mutual fund units of the Merger 3 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 Closing.
(f) Immediately thereafter, all of the Series A, Series B, Series F and Series I mutual fund units of the Merger 3 Terminating Fund will be redeemed and the redemption price therefor will be paid by delivering the applicable number of Series A, Series B, Series F and Series I mutual fund units, as applicable, of the Merger 3 Continuing Fund to unitholders of the Merger 3 Terminating Fund based on the number of such units of the Merger 3 Terminating Fund then held, with each unitholder of the Merger 3 Terminating Fund receiving that number of units of the applicable series of the Merger 3 Continuing Fund (rounded down to the nearest whole unit) as is equal to an exchange ratio (which will be equal to the net asset value per series of units of the Merger 3 Terminating Fund at the close of business on the business day prior to Closing, divided by the net asset value per the equivalent series of units of the Merger 3 Continuing Fund on such date) multiplied by the number of units of the applicable series of the Merger 3 Terminating Fund held by such unitholder immediately prior to the completion of the Merger 3.
(g) Following Merger 3, the Merger 3 Terminating Fund will be wound up as soon as reasonably possible and a notice pursuant to section 2.10 of NI 81-106 will be filed on the Merger 3 Terminating Fund’s SEDAR profile.
32. The total value of the securities of each Continuing Fund offered to securityholders of the relevant Terminating Fund will have a value that is equivalent to the net asset value of the Terminating Fund calculated on the date immediately preceding the date of the Merger.
33. The Mergers will not be considered a material change for any of the Continuing Funds.
34. LAM, LC and Purpose believe the Mergers are in the best interest of investors of the Terminating Funds and Continuing Funds for the following reasons:
(a) there is little opportunity to reduce the fixed costs individually associated with, and currently paid by, the Terminating Funds and the Continuing Funds, including expenses such as audit, legal, trustee, custody, transfer agency, independent review committee, filing and fund accounting fees. The fixed costs associated with the Continuing Funds after the Mergers will be less than the total fixed costs currently paid by the Terminating Funds and the Continuing Funds and will be spread over a larger number of shares or units. Further, the Continuing Funds are expected to have a larger asset base which will allow for greater portfolio diversification and a smaller proportion of assets set aside in the form of cash to fund redemptions. This may lead to the reduction of risk and increased returns;
(b) the Terminating Funds are relatively small in size and face issues such as more limited portfolio diversification opportunities and higher expense ratio, compared to larger funds. Larger funds tend to have a greater profile in the marketplace, enabling the fund to attract more investors, which in turn offers the potential for greater portfolio diversification and fixed expenses are spread over a larger asset base. As a result of the proposed Mergers, investors in the Terminating Funds will become part of a larger, combined fund; and
(c) if a Merger were not approved, LAM or LC, as applicable, would have terminated the applicable Terminating Fund following Closing. Since LAM, LC and/or Purpose will pay the costs of the Mergers, the Mergers will save the Terminating Funds the costs of dissolution and wind-up, which would otherwise be borne by the Terminating Funds.
35. LAM, LC and/or Purpose, and not the Funds, will bear all costs and expenses associated with calling and holding the Meetings and implementing the Change of Manager and the Mergers.
36. The Merger 1 Terminating Fund is a “non-redeemable investment fund” as defined in securities legislation and units of the Merger 1 Terminating Fund are listed on the TSX. Securityholders of the Merger 1 Terminating Fund will have the right to sell their securities through the TSX prior to the Merger, and had the right to redeem their securities on the second to last business day of November at a price equal to the net asset value per security pursuant to the terms of the Trust Agreement of the Merger 1 Terminating Fund dated April 24, 2012, as supplemented July 31, 2017. Following the Merger, securityholders of the Merger 1 Terminating Fund will have the right to redeem the securities of the Continuing Fund they receive pursuant to the Merger on a daily basis.
37. Securityholders of the Merger 2 Terminating Fund and the Merger 3 Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash at any time up to the close of business on the business day immediately prior to Closing. Securities so redeemed will be redeemed at a price equal to their net asset value per security on the redemption date.
38. In the opinion of the Filers, the Mergers satisfy all of the criteria for pre-approved reorganizations and transfers set forth in s. 5.6(1) of NI 81-102 except that
(a) the Terminating Funds and Continuing Funds
(i) do not have the same or affiliated managers, and
(ii) may be considered to not have substantially similar fundamental investment objectives or fee structure;
(b) due to inadvertence, the materials sent to securityholders of the Terminating Funds did not include the most recently filed fund facts of the Continuing Fund as required by sub-paragraph 5.6(1)(f)(ii) of NI 81-102;
(c) with respect to Merger 2 and Merger 3, the transaction is not a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act (Canada) (Tax Act) or is not a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act.
39. It is not expected that securityholders will experience any adverse tax consequences as a result of the Mergers. The Filers, and with respect to Merger 1, Purpose, are of the view that almost all of the portfolio assets of the applicable Terminating Fund can be transferred to the applicable Continuing Fund. Where a portion of the portfolio is required to be disposed of for smaller positions, LAM or LC, as applicable, expect that the applicable Terminating Fund has sufficient tax loss carry-forwards to cover the amount of the gain generated from these sales.
40. The Meeting Materials provided:
(a) a comparison of the Terminating Funds and Continuing Funds with respect to the investment objectives, investment strategies, fees, expenses, net asset values and other material differences of the Terminating Funds and the Continuing Funds;
(b) a summary of the anticipated tax consequences of the Mergers to the Terminating Funds and to the Continuing Funds and their securityholders; and
(c) a description of the various ways in which investors can obtain a copy of the simplified prospectus and annual information form of the Continuing Funds, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Funds, as applicable.
41. Accordingly, in the opinion of the Filers, securityholders of the Terminating Funds were provided with sufficient information to make an informed decision about the Mergers.
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.
“Vera Nunes”
Manager
Investment Funds and Structured Products
Ontario Securities Commission