Next Edge Capital Corporation et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of merger of two investment funds into a mutual fund -- approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- the continuing fund does not have substantially similar fundamental investment objectives as the terminating funds -- the merger will not be a "qualifying exchange" or tax-deferred transaction under the Income Tax Act (Canada) -- the materials mailed to securityholders of the terminating funds did not contain the continuing funds' fund facts document -- securityholders of the terminating fund not permitted to redeem their securities prior to the date of the merger -- securityholders of terminating funds provided with timely and adequate disclosure regarding the merger and prospectus-level disclosure regarding the continuing fund.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, s. 5.5(1)(b).
December 16, 2014
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 NEXT EDGE CAPITAL CORPORATION (the Filer) AND IN THE MATTER OF NEXT EDGE GLG EMERGING MARKETS INCOME FUND and NEXT EDGE GLG EM INCOME FUND (collectively, the Terminating Funds) AND IN THE MATTER OF NEXT EDGE THETA YIELD FUND (the Continuing Fund and, together with the Terminating Funds, the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, the investment fund manager of each of the Funds, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the merger (the Merger Approval) pursuant to paragraph 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 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.
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 terms shall have the following meanings:
"Circular" means the notice of the meeting, management information circular and form of proxy of the Terminating Funds dated November 12, 2014.
"EM Income Fund" means Next Edge GLG EM Income Fund.
"GLG Emerging Markets Income Fund" means Next Edge GLG Emerging Markets Income Fund.
"IRC" means the independent review committee of the Terminating Funds.
"Meeting" means the adjourned meeting of the unitholders of the Terminating Funds scheduled to be held on or about December 17, 2014.
"Merger" means the proposed merger of the Terminating Funds into the Continuing Fund to be effective on the Merger Effective Date subject to the receipt of applicable unitholder and regulatory approvals.
"Merger Effective Date" means the date for effecting the Merger, which is expected to be the business day immediately following the date on which the required approvals are obtained for the Merger.
"Tax Act" means the Income Tax Act (Canada).
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a privately-owned corporation existing under the Business Corporations Act (Ontario) and its head office is located at 1 Toronto Street, Suite 200, Toronto, Ontario.
2. The Filer is the investment fund manager of each of the Funds and is registered as investment fund manager in the Provinces of Newfoundland and Labrador, Ontario and Quebec.
GLG Emerging Markets Income Fund
3. GLG Emerging Markets Income Fund is a closed-end investment fund established under the laws of the Province of Ontario on October 24, 2011 and its head office is located at 1 Toronto Street, Suite 200, Toronto, Ontario.
4. The beneficial interest in the net assets of GLG Emerging Markets Income Fund is divided into trust units of two classes, Class A Units and Class F Units. Since its initial public offering, which was completed in November 2011, GLG Emerging Markets Income Fund has not issued any additional securities.
5. As at December 8, 2014, the net asset value (NAV) of the Class A Units of GLG Emerging Markets Income Fund was $11,663,674.61 and the NAV per Class A Unit was $7.01 and the NAV of the Class F Units of GLG Emerging Markets Income Fund was $1,495,247.98 and the NAV per Class F Unit was $7.69.
6. GLG Emerging Markets Income Fund was created to provide exposure to an actively managed, liquid and diversified portfolio of securities and other instruments across various asset classes primarily within global emerging markets (the Portfolio).
7. GLG Emerging Markets Income Fund obtained economic exposure to the Portfolio through a forward agreement, as the Portfolio was held by GLG Emerging Markets Income Portfolio Ltd. (GLG Ltd.), an exempted company with limited liability incorporated in the Cayman Islands.
8. The Portfolio was actively managed by GLG Partners LP, a limited partnership registered under the Limited Partnership Act, 1907 of England and Wales. GLG Partners (Cayman) Limited acted as the manager of GLG Ltd.
9. Prior to June 2014, the manager of GLG Emerging Markets Income Fund as well as the manager and the portfolio manager of GLG Ltd. were indirectly wholly-owned subsidiaries of Man Group plc. (Man).
10. On October 28, 2014, the Manager announced that GLG Ltd. will be liquidated and, as a result, the forward agreement entered into by GLG Emerging Markets Income Fund was settled on November 18, 2014. GLG Emerging Markets Income Fund is currently invested in cash.
EM Income Fund
11. EM Income Fund is a commodity pool structured as an open-end investment trust established under the laws of the Province of Ontario on May 18, 2012 and its head office is located at 1 Toronto Street, Suite 200, Toronto, Ontario.
12. The beneficial interest in the net assets of EM Income Fund is divided into trust units of 11 classes of which only Class L Units, Class M Units, Class N Units and Class O Units are issued and outstanding.
13. As at December 8, 2014, the NAV of the Class L Units of EM Income Fund was $3,899,603 and the NAV per Class L Unit was $6.97, the NAV of the Class M Units of EM Income Fund was $1,308,632 and the NAV per Class M Unit was $7.26, the NAV of the Class N Units of EM Income Fund was $2,232,986 and the NAV per Class N Unit was $8.10 and the NAV of the Class O Unit of EM Income Fund was $155,914 and the NAV per Class O Unit was $8.42.
14. EM Income Fund was created to provide exposure to an actively managed, liquid and diversified portfolio of securities and other instruments across various asset classes primarily within global emerging markets (the EM Portfolio).
15. EM Income Fund obtained economic exposure to the EM Portfolio through a forward agreement, as the EM Portfolio was held by GLG Emerging Markets Income Portfolio II Ltd. (GLG II Ltd.), an exempted company with limited liability in the Cayman Islands.
16. The EM Portfolio was actively managed by GLG Partners LP. GLG Partners (Cayman) Limited acted as the manager of GLG II Ltd.
17. Prior to June 2014, the manager of EM Income Fund as well as the manager and the portfolio manager of GLG II Ltd. were indirectly wholly-owned subsidiaries of Man.
18. On October 28, 2014, the Manager announced that GLG II Ltd. will be liquidated and, as a result, the forward agreement entered into by EM Income Fund was settled on November 3, 2014. EM Income Fund is currently invested in cash.
The Continuing Fund
19. The Continuing Fund is an open-ended mutual fund established under the laws of the Province of Ontario on December 1, 2014 and its head office is located at 1 Toronto Street, Suite 200, Toronto, Ontario.
20. The beneficial interest in the net assets of the Continuing Fund is divided into Class A Units, Class A1 Units, Class F Units and Class F1 Units.
21. The Continuing Fund seeks to achieve uncorrelated returns to the market for its investors over the long term by simultaneously writing and buying options on the same underlying interests (such as options on indices and exchange-traded funds) with the expectation of earning a positive return from changes in the values of the options as they approach expiration.
22. Securities of the Continuing Fund are currently qualified for sale by a simplified prospectus, an annual information form and fund facts documents dated December 1, 2014.
The Funds
23. Each of the Funds is a reporting issuer in each province and territory of Canada.
24. Neither the Filer nor any of the Funds is in default under the securities legislation in any province or territory of Canada.
The Merger
25. The Filer proposes to effect the Merger on or about the Merger Effective Date subject to the required unitholder approvals.
26. On December 3, 2014, the quorum requirements for the special meeting of unitholders of each Terminating Fund, at which unitholders were to consider the Merger, were not met and, as a result, the meetings were adjourned to December 17, 2014. At the adjourned Meeting, the unitholders then present in person or represented by proxy shall constitute quorum.
27. Unitholders of the Terminating Funds will be asked to approve the Merger at the Meeting.
28. Pursuant to National Instrument 81-107 -- Independent Review Committee for Investment Funds, the IRC reviewed the Merger, and advised the Filer that, in the IRC's opinion, having reviewed the Merger as a potential conflict of interest, following the process proposed, the Merger, if approved by unitholders, would achieve a fair and reasonable result for the unitholders of the relevant Fund.
29. No sales charges will be payable by unitholders of the Terminating Funds in connection with the Merger and no redemption fee will be payable with respect to the Class A1 Units and Class F1 Units received by unitholders of the Terminating Funds as a result of the Merger.
30. If an affirmative vote of unitholders of the Terminating Funds and regulatory approval is received, the Terminating Funds will merge into the Continuing Fund on or about the close of business on the Merger Effective Date. If unitholder or regulatory approval for the Merger is not received, the Terminating Funds will be terminated.
31. The management fees of each applicable class of the Continuing Fund will be lower than the management and administrative fees of the corresponding class of the Terminating Funds.
32. The Merger will not constitute a material change for the Continuing Fund.
Merger Steps
33. Pursuant to the Merger:
a. holders of Class A Units of GLG Emerging Markets Income Fund will receive Class A1 Units of the Continuing Fund;
b. holders of Class F Units of GLG Emerging Markets Income Fund will receive Class F1 Units of the Continuing Fund;
c. holders of Class L Units and Class N Units of the EM Income Fund will receive Class A1 Units of the Continuing Fund; and
d. holders of Class M Units and Class O Units of the EM Income Fund will receive Class F1 Units of the Continuing Fund.
34. The Terminating Funds are currently holding cash and will continue to hold cash until the Merger Effective Date. Accordingly, the Continuing Fund will acquire cash on the Merger.
35. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Funds will be wound up as soon as reasonably practicable.
36. The Filer will be responsible for all costs associated with the Merger.
Unitholder Disclosure
37. The Circular was mailed to unitholders of the Terminating Funds on November 12, 2014 and filed on SEDAR in accordance with applicable securities legislation.
38. The Circular includes a summary of the IRC approval, information about the differences in the investment objectives of the Continuing Fund and each of the Terminating Funds, including that the investment objective of the Continuing Fund is not substantially similar to the investment objectives of the Terminating Funds, and the fact that the Merger will be effected on a taxable basis. Accordingly, unitholders will have an opportunity to consider this information prior to voting on the Merger at the Meeting.
39. The material sent to securityholders of the Terminating Funds did not include a fund facts document of the Continuing Fund, since the Continuing Fund had not filed a fund facts document at the time the Circular was mailed. However, the Circular contained prospectus level disclosure about the Continuing Fund.
Reasons for Merger Approval
40. The Filer requires Merger Approval and cannot rely on subsection 5.6(1) of NI 81-102 for the following reasons:
a. a reasonable person would not consider the Continuing Fund to have substantially similar investment objectives, valuation procedures and fee structure as the Terminating Funds;
b. the Merger will not be a "qualifying exchange" or a tax deferred transaction within the meaning of the Tax Act;
c. the fund facts document of the Continuing Fund was not sent to unitholders of the Terminating Funds; and
d. unitholders of GLG Emerging Markets Income Fund will not have the right to redeem their units at a price equal to their net asset value per security prior to the Merger Effective Date.
41. The Filer believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
a. unitholders of the Terminating Funds and the Continuing Fund will enjoy increased economies of scale and lower fund operating expenses (which are borne directly by unitholders) as part of a larger combined Continuing Fund;
b. unitholders of the Terminating Funds will be subject to lower management fees as the management fees on the Class A1 Units and Class F1 Units of the Continuing Fund are lower than the management fees currently charged by the Terminating Funds on corresponding classes of units;
c. the units of the Continuing Fund are redeemable daily at a price based on the net asset value per unit; and
d. the Continuing Fund, as a result of its greater size, may benefit from its larger profile in the marketplace.
42. The Filer also believes that unitholders will benefit from the investment objective of the Continuing Fund, which is to seek to achieve uncorrelated returns to the market for its investors over the long term by simultaneously writing and buying options on the same underlying interests (such as options on indices and exchange traded funds) with the expectation of earning a positive return from changes in the values of the options as they approach expiration.
43. The Merger will not be effected on a tax-deferred "rollover" basis to unitholders of the Terminating Funds. However, the Filer expects that unitholders of the Terminating Funds who have held units from inception would not have benefited from a tax-deferred rollover as they generally would realize a loss rather than a gain on a taxable disposition of their units on a redemption in exchange for units of the Continuing Fund.
44. The unitholders of GLG Emerging Markets Income Fund will not have the right to redeem their units at a price equal to their net asset value per security prior to the Merger Effective Date. However, the Filer believes that an additional redemption right is not necessary, since the Continuing Fund is redeemable daily at a price based on the net asset value per unit and no redemption fee will be payable with respect to the Class A1 Units and Class F1 Units received by unitholders of GLG Emerging Markets Income Fund as a result of the Merger.
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 Merger Approval is granted, provided that the Filer obtains the prior approval of the unitholders of the Terminating Funds for the Merger at the Meeting, or any adjournments thereof.