Manulife Investment Management Limited and Manulife Floating Rate Income Fund
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of investment fund merger -- approval required because the merger does not meet all the pre-approval criteria in National Instrument 81-102 Investment Funds -- existing fund and terminating fund do not have substantially similar investment objectives -- merger is not a "qualifying exchange" -- securityholders of the terminating fund provided timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.6(1), 5.7(1)(b) and 19.1(2).
September 9, 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 MANULIFE INVESTMENT MANAGEMENT LIMITED (the Filer) AND MANULIFE FLOATING RATE INCOME FUND (the Terminating Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer and the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the proposed merger (the Merger) of the Terminating Fund into Manulife U.S. Unconstrained Bond Fund (the Continuing Fund and together with the Terminating Fund, the Funds, and each a Fund) under 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):
(a) the Ontario Securities Commission 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 the Jurisdiction, the Canadian 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:
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 following categories: portfolio manager in all Canadian Jurisdictions; investment fund manager in Ontario, Newfoundland and Labrador, and Quebec; commodity trading manager in Ontario; and derivatives portfolio manager in Quebec.
3. The Filer is the manager and trustee of the Funds.
4. The Filer is not in default of any of the requirements of the securities legislation of any of the Canadian Jurisdictions.
The Funds
5. The Terminating Fund is an open-ended mutual fund trust and is governed by the provisions of NI 81-102.
6. The Filer is proposing to merge the Terminating Fund into the Continuing Fund, which is also a mutual fund trust and is governed by the provisions of NI 81-102.
7. The Funds were each established under the laws of Ontario by a declaration of trust and separate regulations (together with the declaration of trust, the Declarations of Trust).
8. Securities of the Funds are currently qualified for sale in each of the Canadian Jurisdictions pursuant to a simplified prospectus, annual information form and fund facts documents (Fund Facts), each dated August 4, 2020.
9. Series I, Series G and Series M of the Terminating Fund (the Exempt Terminating Fund Series) and Series I, Series X, Series G and Series M of the Continuing Fund (the Exempt Continuing Fund Series) have only been offered by way of a prospectus exemption pursuant to National Instrument 45-106 -- Prospectus Exemptions (NI 45-106). The Exempt Terminating Fund Series and the Exempt Continuing Fund Series are therefore not required to distribute Fund Facts to their securityholders.
10. The Funds are reporting issuers as defined under the applicable securities legislation of each province and territory of Canada and are not in default of any of the requirements of the securities legislation of any of the Canadian Jurisdictions.
11. 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.
12. Other than under circumstances in which the securities regulatory authority or securities regulator of the Canadian Jurisdictions has expressly exempted a Fund therefrom, each of the Funds is governed and follows the standard investment restrictions and practices established by NI 81-102.
Reason for Approval Sought
13. The Approval Sought is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. The pre-approval criteria are not satisfied in the following ways:
(i) a reasonable person may not consider the fundamental investment objectives of the Terminating Fund and its Continuing Fund to be "substantially similar" as required by subsections 5.6(1)(a)(ii) of NI 81-102; and
(ii) contrary to clause 5.6(1)(b) of NI 81-102, the Merger will not be effected in reliance on the "qualifying exchange" or tax-deferred transaction provisions of the Income Tax Act (Canada) (the Tax Act).
14. Except as noted herein, the Merger will otherwise comply with all other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Merger
15. Subject to receipt of all necessary approvals, the Merger is anticipated to be effective on or about October 23, 2020 (the Effective Date).
16. Pursuant to subsection 5.1(f) of NI 81-102, the Terminating Fund will seek approval of the securityholders for the Merger at a special meeting to be held virtually on or about October 1, 2020.
17. Pursuant to National Instrument 81-107 -- Independent Review Committee for Investment Fund, the independent review committee of the Funds (the IRC) has reviewed the proposed Merger and the process to be followed in connection with the Merger, and has advised the Filer that, in the opinion of the IRC, having reviewed the Merger as a potential "conflict of interest matter", the Merger achieves a fair and reasonable result for the Funds. Such opinion of the IRC was disclosed in the Circular (as defined below).
18. The Filer intends to reorganize by merging the Terminating Fund into the Continuing Fund such that securityholders of the Terminating Fund will become securityholders of the Continuing Fund.
19. No costs or expenses will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.
20. The investment objectives of the Funds are not substantially similar as the Terminating Fund focuses on floating rate fixed income securities while the Continuing Fund focuses on investment grade and high yield fixed income securities. Although they both focus on fixed income securities, the nature of the securities and asset allocation varies between the Funds, not without some overlap.
21. The portfolio and other assets of the Terminating Fund to be acquired by the Continuing Fund as a result of the Merger will be acceptable to the portfolio advisor of the Continuing Fund prior to the merger and consistent with the investment objective of the Continuing Fund.
22. The Filer will pay for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing, brokerage costs and regulatory fees.
23. The board of directors of the Filer has approved the Merger.
24. Although the Merger is being conducted on a taxable basis, in view of the Filer, it is in the best interest of the securityholders of the Funds to complete the Merger on a taxable basis given the Continuing Fund losses will be preserved by completing the Merger in this manner.
Securityholder Disclosure
25. A press release was issued and filed on the System for Electronic Document Analysis and Retrieval (SEDAR) on July 28, 2020, and a material change report was filed on SEDAR on August 4, 2020, with respect to the proposed Merger. The simplified prospectus and Fund Facts for the Funds include disclosure with respect to the Merger in accordance with applicable securities law.
26. A notice of meeting, a management information circular (Circular) and a form of proxy (together, the Meeting Materials) in connection with the special meeting of securityholders of the Fund being held on or about October 1, 2020, were mailed to investors of record as at August 21, 2020 of the Terminating Fund and filed on SEDAR in accordance with applicable securities law.
27. The Circular provided securityholders of the Terminating Fund with sufficient information to permit them to make an informed decision as to whether to approve the Merger or not, including a discussion regarding the tax implications of the Merger and the potential benefits of the Merger.
28. The Circular also contained certain prospectus-level disclosure concerning the Continuing Fund, including information in respect of its: investment objective; investment structure; registered plan eligibility; portfolio management responsibility; net asset value; fees and expenses; annual returns; valuation procedures; and distribution policy. In addition, the Circular highlighted the similarities and differences between the Terminating Fund and the Continuing Fund with respect to such matters.
29. The Circular also disclosed that securityholders could obtain the simplified prospectus, annual information form, Fund Facts, the most recent financial statements and the most recent management report of fund performance for the Continuing Fund from the Filer upon request or on SEDAR at www.sedar.com. Also accompanying the Circular delivered to securityholders of the Terminating Fund were copies of the Fund Facts, as applicable, for the Continuing Fund. Accordingly, investors of the Terminating Fund will have an opportunity to consider this information prior to voting on the Merger at the special meetings.
Merger Steps
30. The Merger will be structured substantially as follows:
(i) The value of the Terminating Fund's portfolio and other assets will be determined at the close of business on the Effective Date.
(ii) The Declarations of Trust governing the Funds will be amended to permit such actions as are necessary to complete the Merger.
(iii) Immediately following the close of business on the Effective Date, the Terminating Fund will transfer all of its assets and liabilities to the Continuing Fund.
(iv) In exchange, the Terminating Fund will receive securities of the relevant series of the 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 the Continuing Fund, in each case calculated as of the close of business on the Effective Date.
(v) Immediately thereafter, the Terminating Fund will cause all of its securities to be redeemed and pay the redemption price by distributing 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 NAV equal to the NAV of the securities of the relevant series of the Terminating Fund that were held by such securityholder.
(vi) As required, the Terminating Fund will declare, pay and automatically reinvest a distribution to its unitholders of net income, if any, to ensure that it will not be subject to tax for its current tax year.
(vii) Securityholders of the Terminating Fund will receive securities of the corresponding Continuing Fund as follows:
Terminating Fund
Continuing Fund
Manulife Floating Rate Income Fund
Manulife U.S. Unconstrained Bond Fund
Advisor Series securities
Advisor Series securities
Series F securities
Series F securities
Series FT securities
Series FT securities
Series T securities
Series T securities
Series D securities
Series D securities
Series I securities
Series I securities
Series G securities
Series G securities
Series M securities
Series M securities
31. As soon as reasonably practicable after the distribution of securities of the Continuing Fund to the Terminating Fund's securityholders, the Terminating Fund will be terminated.
32. Securityholders of the Exempt Terminating Fund Series (the Exempt Terminating Fund Securityholders), will receive corresponding Exempt Continuing Fund Series upon completion of the Merger. The resultant distribution of securities to Exempt Terminating Fund Securityholders will be completed in reliance on the prospectus exemption contained in section 2.11 of NI 45-106. As no Fund Facts are required in connection with the distribution of the Exempt Continuing Fund Series on a prospectus exempt basis, no Fund Facts will be provided to the Exempt Terminating Fund Securityholders in connection with the Merger.
33. With respect to the Merger as it pertains to Exempt Terminating Fund Securityholders, the Filer included prospectus level disclosure in the Circular describing the applicable securities and Merger in sufficient detail to enable the Exempt Terminating Fund Securityholders to form a reasoned judgement concerning the Merger. In particular, the Circular disclosed information regarding fees, expenses, investment objectives, risk ratings, valuation procedures, the manager, the portfolio advisor, sub-advisor, income tax considerations and net asset value of the Terminating Fund and Continuing Fund.
34. Securityholders of the 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. The Circular disclosed that, upon acquisition of securities of the 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 the Merger occurring.
35. The Terminating Fund will be capped to switches and transfers out over Fundserv after 4:00pm (Toronto time) on the day before the Effective Date, expected to be October 22, 2020. Securityholders will have the right to redeem the securities of the Terminating Fund up to 4:00pm (Toronto time) on the Effective Date for direct orders and as of 4:00pm (Toronto time) two days before the Effective Date, expected to be October 21, 2020 for wire orders over Fundserv.
Benefits of Merger
36. The Filer believes that the Merger will benefit securityholders of the Fund because:
(i) The Terminating Fund has a similar investment mandate as the Continuing Fund and would generally attract the same type of investor with a similar risk-return profile. As a result, the Merger will contribute towards reducing duplication and redundancy across the Manulife fund line-up and may potentially reduce the administrative and regulatory operating costs and expenses associated with the Terminating Fund.
(ii) The Terminating Fund has shown an increased liquidity risk profile for its fixed income portfolio. The Merger would result in a reduction of the liquidity risk for the Terminating Fund securityholders while allowing an exposure to floating rate loans and other floating rate debt securities in a diversified fixed income portfolio.
(iii) The Merger has the potential to lower costs for securityholders. If the Merger is completed, expenses for which the Continuing Fund is responsible will be spread over a greater pool of assets, potentially resulting in a lower management expense ratio for the Continuing Fund than may not occur otherwise. No securityholder of the Terminating Fund will be subject to an increase in management fees as a result of the Terminating Fund merging into the Continuing Fund (and many will experience a decrease in management fees). The fixed administration fee chargeable to both Funds is also the same, other than the fixed administration fee of Series M of the Continuing Fund which is 1 bps lower than the fixed administration fee of the corresponding series of the Terminating Fund.
(iv) The 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. 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.
(v) The Continuing Fund is expected to attract more assets as marketing efforts will be concentrated on fewer Funds, rather than two Funds with similar investment mandates. The ability to attract assets to the Continuing Fund will benefit investors by ensuring that the Continuing Fund remains viable, long-term, attractive investment vehicles for existing and potential investors.
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 with respect to the Merger, provided that the Filer obtains the prior approval of the securityholders of the Terminating Fund for the Merger at a special meeting held for that purpose.
"Darren McKall"
Manager
Investment Fund & Structured Products Branch
Ontario Securities Commission