Manulife Asset Management Limited
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund reorganization -- Approval required because mergers do not meet the criteria for pre-approval -- Funds have differing investment objectives and mergers conducted on a taxable basis -- Securityholders 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, 2015
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 MANULIFE ASSET MANAGEMENT LIMITED (the "Filer") AND IN THE MATTER OF STANDARD LIFE CORPORATE BOND CLASS, STANDARD LIFE CANADIAN BOND CLASS, STANDARD LIFE CONSERVATIVE PORTFOLIO CLASS, STANDARD LIFE MODERATE PORTFOLIO CLASS, MANULIFE U.S. LARGE CAP EQUITY FUND, MANULIFE U.S. LARGE CAP EQUITY CLASS, MANULIFE SPECIAL OPPORTUNITIES CLASS, STANDARD LIFE CANADIAN EQUITY FUND, STANDARD LIFE EUROPEAN EQUITY FUND, MANULIFE CANADIAN CONSERVATIVE BALANCED FUND, STANDARD LIFE CANADIAN EQUITY VALUE FUND (each a "Terminating Fund" and, collectively, the "Terminating Funds")
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer and the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for approval of the proposed mergers (the "Proposed Mergers") of the Terminating Funds into the applicable Continuing Funds (as defined below) under subsection 5.5(1)(b) of National Instrument 81-102 -- Investment Funds ("NI 81-102").
Under the process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the "OSC") 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 each of the other provinces and territories of Canada (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.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation amalgamated under the Canada Business Corporations Act with its head office located in Toronto, Ontario.
2. The Filer is registered in the categories of commodity trading manager, portfolio manager and investment fund manager. The Filer is the manager of the mutual funds listed in representation 11 (each a "Fund" and, collectively, the "Funds").
3. Each of Standard Life Corporate Bond Fund, Standard Life Conservative Portfolio, Standard life Moderate Portfolio, Standard Life Canadian Equity Fund, Standard Life Dividend Income Fund, Standard Life European Equity Fund, Standard Life Diversified Income Fund, and Standard Life Canadian Equity Value Fund (the "SL Trust Funds"), and Manulife Bond Fund, Manulife U.S. All Cap Equity Fund, Manulife U.S. Large Cap Equity Fund, Manulife World Investment Fund, Manulife Canadian Conservative Balanced Fund, and Manulife Dividend Income Fund (the "Manulife Trust Funds" and together with the Standard Life Trust Funds, the "Trust Funds") are open-ended mutual fund trusts established under the laws of Ontario by declarations of trust and, where applicable, separate Regulations and are governed by the provisions of NI 81-102.
4. Each of Standard Life Corporate Bond Class, Standard Life Canadian Bond Class, Standard Life Conservative Portfolio Class, and Standard Life Moderate Portfolio Class, (collectively, the "SL Corporate Classes") are currently classes of mutual fund shares of Standard Life Corporate Class Inc. ("SLCCI"). SLCCI is a mutual fund corporation formed under the laws of Canada by articles of incorporation dated December 28, 2009, as amended. Each SL Corporate Class is an open-ended mutual fund governed by the provisions of NI 81-102.
5. Each of Manulife U.S. Large Cap Equity Class, Manulife Special Opportunities Class and Manulife U.S. All Cap Equity Class (collectively, the "Manulife Corporate Classes") are classes of mutual fund shares of Manulife Investment Exchange Funds Corp. ("MIX Corp"). MIX Corp is a mutual fund corporation formed under the laws of Ontario by articles of amalgamation dated October 23, 2010, as amended. Each Manulife Corporate Class is an open-ended mutual fund governed by the provisions of NI 81-102.
6. Prior to the effective date of the Mergers ("Merger Date") SLCCI is intended to be continued under the laws of Ontario (the "Continuance") and amalgamated with MIX Corp pursuant to Section 174 of the Business Corporations Act (Ontario) (the "OBCA") (the "Amalgamation"), with the amalgamated corporation being referred to as "Manulife Investment Exchange Funds Corp."("Amalco"). Upon completion of the Amalgamation, and prior to the Mergers, both the SL Corporate Classes and the Manulife Corporate Classes will be classes of shares of Amalco. Securityholders of SLCCI approved the Continuance and Amalgamation at special meetings held on November 5, 2015.
7. The securities of each continuing fund ("Continuing Fund") and Terminating Fund listed below are qualified for distribution in the Jurisdictions (except Nunavat with respect to the SL Trust Funds and SL Corporate Classes) pursuant to a simplified prospectus and annual information form prepared and filed in accordance with the securities legislation of the Jurisdictions.
8. A Terminating Fund will cease distribution of new securities as of the close of business on the Monday immediately preceding its Merger.
9. Other than under circumstances in which the securities regulatory authority or securities regulator of the Jurisdictions has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established by NI 81-102.
10. The net asset value for each of the Funds is calculated on a daily basis at the end of each day the Toronto Stock Exchange is open for trading. The securities of each Fund are issuable and redeemable each business day.
11. This application is being made in connection with the following Proposed Mergers:
TERMINATING FUND
CONTINUING FUND
EFFECTIVE DATE
Manulife U.S. Large Cap Equity Fund
Manulife U.S. All Cap Equity Fund
On or about March 11, 2016
Manulife U.S. Large Cap Equity Class
Manulife U.S. All Cap Equity Class
On or about March 11, 2016
Manulife Special Opportunities Class
Manulife U.S. All Cap Equity Class
On or about March 11, 2016
Standard Life Canadian Equity Fund
Standard Life Dividend Income Fund
On or about April 15, 2016
Standard Life European Equity Fund
Manulife World Investment Fund
On or about April 15, 2016
Manulife Canadian Conservative Balanced Fund
Standard Life Diversified Income Fund
On or about April 15, 2016
Standard Life Canadian Equity Value Fund
Manulife Dividend Income Fund
On or about April 15, 2016
Standard Life Corporate Bond Class
Standard Life Corporate Bond Fund
On or about May 27, 2016
Standard Life Canadian Bond Class
Manulife Bond Fund
On or about May 27, 2016
Standard Life Conservative Portfolio Class
Standard Life Conservative Portfolio
On or about May 27, 2016
Standard Life Moderate Portfolio Class
Standard Life Moderate Portfolio
On or about May 27, 2016
12. Neither the Filer nor any Fund is in default of securities legislation in any Jurisdiction.
13. In accordance with National Instrument 81-106 -- Investment Fund Continuous Disclosure, a press release announcing the Proposed Mergers was filed on SEDAR on September 14, 2015, and a material change report was filed on SEDAR on September 15, 2015. Amendments to the Funds' simplified prospectus and annual information form and to the Terminating Funds' Fund Facts were filed on SEDAR on September 23, 2015.
14. Pursuant to National Instrument 81-107 -- Independent Review Committee for Investment Funds, the independent review committee of the Funds (the "IRC") has reviewed the proposed Merger of each Terminating Fund with its corresponding Continuing Fund and the process to be followed in connection with each such Merger, and has advised the Filer that, in the opinion of the IRC, having reviewed each Merger as a potential "conflict of interest matter", each Merger achieves a fair and reasonable result for the Terminating Funds and the Continuing Funds. This information was disclosed in the Circular.
15. Regulatory approval of the Proposed Mergers is required because the Proposed Mergers do not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102 in the following ways:
(a) The Proposed Mergers between:
(i) Manulife U.S. Large Cap Equity Fund and Manulife U.S. All Cap Equity Fund;
(ii) Manulife U.S. Large Cap Equity Class and Manulife U.S. All Cap Equity Class;
(iii) Manulife Special Opportunities Class and Manulife U.S. All Cap Equity Class;
(iv) Standard Life Canadian Equity Fund and Standard Life Dividend Income Fund;
(v) Standard Life European Equity Fund and Manulife World Investment Fund;
(vi) Manulife Canadian Conservative Balanced Fund and Standard Life Diversified Income Fund; and
(vii) Standard Life Canadian Equity Value Fund and Manulife Dividend Income Fund.
do not meet the requirements of clause 5.6(1)(a)(ii) of NI 81-102, as the investment objectives of each Terminating Fund may not be considered by a reasonable person to be substantially similar to the investment objectives of the Continuing Fund into which it will be merged.
(b) Contrary to clause 5.6(1)(b) of NI 81-102, the Proposed Mergers between:
(i) Standard Life Corporate Bond Class and Standard Life Corporate Bond Fund;
(ii) Standard Life Canadian Bond Class and Manulife Bond Fund;
(iii) Standard Life Conservative Portfolio Class and Standard Life Conservative Portfolio; and
(iv) Standard Life Moderate Portfolio Class and Standard Life Moderate Portfolio.
will not be effected in reliance on the "qualifying exchange" or tax-deferred transaction provisions of the Income Tax Act (Canada) (the "Tax Act") as there are currently no provisions under the Tax Act to allow a tax-deferred merger between a class of shares of a multi-class mutual fund corporation (each of the Terminating Funds is a corporate fund which is a class of shares of a multi-class mutual fund corporation) and a mutual fund trust (each of the Continuing Funds is a mutual fund trust). Each of the Proposed Mergers described in this paragraph (b) is therefore intended to be a taxable merger.
16. Except as noted above, the Proposed Mergers will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
17. The Filer has determined that the Proposed Mergers do not result in a material change for any of the Continuing Funds.
18. The portfolios and other assets of a Terminating Fund to be acquired by its Continuing Fund as a result of a Merger are currently, or will be, acceptable to the portfolio advisors of the applicable Continuing Fund prior to the effective date of the Merger, and are or will also be consistent with the investment objectives of the applicable Continuing Fund.
19. A Continuing Fund will be able to promptly invest any significant amounts of cash that the Continuing Fund receives from the Terminating Fund.
20. Pursuant to subsection 5.1(f) of NI 81-102, securityholders of the Terminating Funds approved the Proposed Mergers at special meetings held on November 5, 2015. The Proposed Mergers are expected to become effective on or about the Merger Date.
21. Securityholders of a Terminating Fund will continue to have the right to redeem securities of such Terminating Fund for cash at any time up to the close of business on the effective date of its Merger. The Circular (as hereinafter defined) will disclose that, upon acquisition of securities of a Continuing Fund, Terminating Fund securityholders will be subject to the same redemption charges to which their securities of the Terminating Fund were subject to prior to their Merger occurring.
22. The Proposed Mergers will be structured as follows:
(i) A resolution will be signed by the board of directors of the Filer or Amalco, SLCCI or MIX Corp., as applicable, approving the completion of each Merger.
(ii) Securityholders of each Terminating Fund and, pursuant to the requirements of the OBCA, Manulife U.S. All Cap Equity Class (with respect to its Mergers with Manulife U.S. Large Cap Equity Class and Manulife Special Opportunities Class) approved the respective Mergers.
(iii) The Regulation governing Manulife U.S. Large Cap Equity Fund, Standard Life Canadian Equity Fund, Standard Life European Equity Fund, Manulife Canadian Conservative Balanced Fund, and Standard Life Canadian Equity Value Fund and the articles of Amalco will be amended to permit such actions as are necessary to complete the Mergers.
(iv) As soon as reasonably practicable after the distribution of securities of a Continuing Fund to the Terminating Fund's securityholders, such Fund will be terminated or wound up.
(v) As soon as reasonably practicable following the Mergers, the articles of Amalco, SLCCI or MIX Corp, as applicable, will be amended to delete each terminating SL Corporate Class and Manulife Corporate Class.
23. It is proposed that the following steps will be carried out to effect the Proposed Merger of each Terminating Fund that is a mutual fund trust, or each Terminating Fund that is a class of a mutual fund corporation and that is merging into a mutual fund trust:
(i) Immediately following the close of business on the Merger Date, the Terminating Fund will transfer all of its assets and liabilities to the applicable Continuing Fund with which the Terminating Fund is merging.
(ii) In exchange, the Terminating Fund will receive securities of the relevant series of the applicable Continuing Fund, the aggregate value of which is equal to the aggregate net asset value (the "NAV") of the assets of the Terminating Fund transferred to such Continuing Fund, in each case calculated as of the close of business on the Merger Date.
(iii) Immediately thereafter, the Terminating Fund will cause all of its securities to be redeemed in exchange for securities of the Continuing Fund. This will result in each securityholder of the Terminating Fund receiving securities of the applicable series of the Continuing Fund with a value equal to the NAV of the securities of the relevant series of the Terminating Fund that were held by such securityholder.
24. It is proposed that the following steps will be carried out to effect the Proposed Merger of each Terminating Fund that is a class of a mutual fund corporation merging into another class of a mutual fund corporation:
(i) Immediately following the close of business of the Merger Date, each outstanding share of the Terminating Fund will be exchanged for shares of the equivalent series of the Continuing Fund based on the relative NAVs of the shares of each series being exchanged.
(ii) The assets and liabilities of the applicable mutual fund corporation attributable to the Terminating Fund will be reallocated to the Continuing Fund. The mutual fund corporation will not dispose of any of its property as a result of the Proposed Merger.
25. On October 15, 2015, a management information circular (the "Circular") and proxy in connection with the Proposed Mergers was both filed on SEDAR and mailed to investors of record of the Terminating Funds as at October 1, 2015. Each such investor was also mailed the Fund Facts of the applicable Continuing Funds. The Circular highlights the differences in investment objectives and investment structures (ie: trust or corporation) between each Terminating Fund and its applicable Continuing Fund. Other information contained in the Circular includes a summary of IRC determination, a comparison of the management expense ratios and performance of each Terminating Fund and the applicable Continuing Fund, as well as disclosure as to whether each Proposed Merger will be effected on a tax-deferred or taxable basis. Accordingly, investors of the Terminating Funds will have an opportunity to consider this information prior to voting on the Proposed Mergers at the special meetings.
26. The Filer will pay for the costs of the Mergers. These costs consist mainly of legal, proxy solicitation, printing, mailing, brokerage costs and regulatory fees. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of its corresponding Terminating Fund.
27. The Filer believes that the Mergers will benefit securityholders of the Funds because:
(i) The Filer submits that each Terminating Fund has a similar investment mandate as its corresponding Continuing Fund and would generally attract the same type of investor with a similar risk-return profile. As such, each Merger will reduce duplication and redundancy within the Filer's mutual funds line-up. Securityholders of the combined Continuing Funds may therefore benefit from increased economies of scale in administrative and regulatory operating costs which are significant costs that can contribute to higher management expense ratios.
(ii) Each Merger has the potential to lower costs for securityholders as the operating costs and expenses of the Continuing Funds will be spread over a greater pool of assets when the Terminating Funds merge into the corresponding Continuing Funds, potentially reducing each Continuing Fund's management expense ratio. No securityholder of the Terminating Funds will be subject to an increase in management fees as a result of the Terminating Funds merging into the corresponding Continuing Funds. Holders of Advisor Series and Series F securities of Standard Life European Equity Fund will be merged into newly created series of Manulife World Investment Fund in order to maintain existing management fees for such securityholders. Holders of Advisor Series and Series H securities of Manulife Canadian Conservative Balanced Fund will be merged into newly created series of Standard Life Diversified Income Fund in order to maintain existing management fees for such securityholders. Holders of Series F securities of Standard Life Canadian Equity Value Fund will be merged into a newly created series of Manulife Dividend Income Fund in order to maintain existing management fees for such securityholders.
(iii) Each Continuing Fund will have an asset base of greater size, potentially allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions. Each Continuing Fund is also expected to benefit from an increased profile in the marketplace. The ability to improve diversification may lead to increased returns and a reduction of risk, while at the same time creating a higher profile that may attract more investors.
(iv) Each of the Continuing Funds is expected to attract more assets as marketing efforts will be concentrated on fewer funds, rather than multiple funds with similar investment mandates. The ability to attract assets in the Continuing Funds will benefit investors by ensuring that the Continuing Funds remain viable, long-term, attractive investment vehicles for existing and potential investors.
(v) The IRC has determined, after reasonable inquiry that the Mergers achieve a fair and reasonable result for the Funds, and has provided its favourable recommendation for the Mergers.
28. The foregoing reasons for the Mergers will be set out in the Circular. In addition, the Circular will include certain prospectus-level disclosure concerning the Continuing Funds, including information regarding fees, expenses, investment objectives, valuation procedures, the manager, the portfolio advisor (or sub-advisor, as applicable), income tax considerations and net asset value. The Circular will also disclose that securityholders can obtain the simplified prospectus, annual information form, the fund facts, the most recent financial statements and the most recent management report of fund performance of the Continuing Funds that have been made public, from the Filer upon request, on the Filer's website or on SEDAR at www.sedar.com. Also accompanying the Circular delivered to securityholders will be a copy of the fund facts document for the relevant Continuing Fund.
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 Mergers are approved.