PIMCO Canada Corp. et al.

Decision

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of reorganization of non-redeemable investment funds and fund-on-fund relief for reorganized fund-on-fund structure -- approval and relief granted subject to conditions.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.5(2)(c), 5.5(1)(b), 5.5(3), 5.6(1) and 19.1(2).

August 15, 2024

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
PIMCO CANADA CORP. (the Filer)

 AND

IN THE MATTER OF
PIMCO TACTICAL INCOME OPPORTUNITIES FUND,
PIMCO TACTICAL INCOME FUND,
PIMCO MULTI-SECTOR INCOME FUND
(the Existing Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Existing Funds, for a decision under the securities legislation of the Jurisdiction (the Legislation) granting:

(a) approval pursuant to clause 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) of the proposed reorganization (the Proposed Reorganization) pursuant to which the Existing Funds will become underlying funds of the (new) Continuing Fund, as further described in this decision (the Requested Approval); and

(b) relief from paragraph 2.5(2)(c) of NI 81-102 to permit the Continuing Fund, following the implementation of the Proposed Reorganization, to continue to hold units of each Existing Fund after such Existing Fund ceases to be a reporting issuer, subject to its application for same (the Requested Relief).

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 (Principal Regulator); and

(b) the Filer has provided notice that section 4.7(1)(c) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions (NI 14-101), MI 11-102 and NI 81-102 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 incorporated under the laws of the Province of Nova Scotia. The Filer's head office is located in Toronto, Ontario.

2. The Filer is registered as (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (ii) a portfolio manager and an exempt market dealer in each of the provinces of Canada; (iii) a commodity trading manager in Ontario; and (v) an adviser under the Commodity Futures Act (Manitoba).

3. The Filer is not in default of applicable securities legislation in any of the Jurisdictions.

4. The Filer is the manager of the Existing Funds, the trustee of PIMCO Multi-Sector Income Fund, and will be the manager and trustee of the new Continuing Fund. State Street Trust Company Canada is the trustee of PIMCO Tactical Income Fund and PIMCO Tactical Income Opportunities Fund.

5. Pacific Investment Management Company LLC (PIMCO) is the sub-adviser of the Existing Funds and will be appointed as the sub-adviser of the Continuing Fund.

6. The Filer's primary business is to act as manager for the Existing Funds and other investment funds in Canada.

Existing Funds

7. Each of the Existing Funds is a non-redeemable investment fund established under the laws of the Province of Ontario.

8. PIMCO Tactical Income Opportunities Fund initially distributed units pursuant to a final long-form prospectus dated May 26, 2021. As of December 5, 2023, PIMCO Tactical Income Opportunities Fund had a net asset value (or NAV) of approximately $266,383,671.81.

9. PIMCO Tactical Income Fund initially distributed units pursuant to a final long-form prospectus dated September 25, 2020. As of December 5, 2023, PIMCO Tactical Income Fund had a net asset value of approximately $269,377,297.78.

10. PIMCO Multi-Sector Income Fund initially distributed units pursuant to a final long-form prospectus dated February 17, 2022. As of December 5, 2023, PIMCO Tactical Income Opportunities Fund had a net asset value of approximately $219,839,211.88.

11. Units of each of the Existing Funds are currently redeemable monthly for a redemption price equal to the lesser of (i) 94% of the average market price, and (ii) 100% of the closing market price of a unit, subject to a maximum redemption price per unit equal to the net asset value per unit.

12. Each Existing Fund is a reporting issuer under the applicable securities legislation of each of the Jurisdictions.

13. The Existing Funds are subject to, among other laws and regulations, NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).

14. The Existing Funds are not in default of applicable securities legislation in any of the Jurisdictions.

Continuing Fund

15. The Continuing Fund will be structured as a non-redeemable investment fund, to be formed under the laws of the province of Ontario pursuant to a declaration of trust, for purposes of implementing the Proposed Reorganization.

16. The Continuing Fund will have substantially similar investment objectives and strategies as each of the Existing Funds.

17. The Filer anticipates that the Continuing Fund will become a reporting issuer by way of filing a non-offering or an offering prospectus, or by some other method to be determined by the Filer, and will become subject to NI 81-102, NI 81-106 and NI 81-107. Accordingly, the Continuing Fund will be a reporting issuer under the applicable securities legislation of each province and territory of Canada.

18. The Continuing Fund will be managed in a manner which is substantially similar to the manner in which the Existing Funds have been managed.

19. The Filer will apply to list the units of the Continuing Fund on a designated stock exchange in Canada concurrent with the effective date of the Proposed Reorganization.

Proposed Reorganization

20. The Filer is proposing a reorganization pursuant to which the Continuing Fund will acquire the current units of each of the Existing Funds, and holders of units of each of the Existing Funds will become holders of listed units of the Continuing Fund, with the same aggregate net asset value as they held before the Proposed Reorganization as unitholders of the relevant Existing Fund. As a result, the Continuing Fund will become the sole unitholder of each of the Existing Funds and such units of the Existing Funds will be delisted from the Toronto Stock Exchange.

21. Following the reorganization, the Filer will be the manager of the Continuing Fund and each of the Existing Funds. In addition, the Continuing Fund will be the sole unitholder and beneficiary of the Existing Funds. Together, the Filer, and the Continuing Fund that is managed by the Filer, will have the sole authority to amend the declaration of trust of each of the Existing Funds to ensure that the units of each of the Existing Funds are considered liquid for purposes of NI 81-102. Furthermore, the portfolio assets owned by the Continuing Fund directly, together with the assets owned by the Continuing Fund indirectly through the Existing Funds, will at all times, in aggregate, comply with the illiquid asset restrictions in section 2.4 of NI 81-102.

22. It is anticipated that all of the assets of each Existing Fund will remain in the portfolio of each Existing Fund for the exclusive benefit of the Continuing Fund, until such time as the underlying assets mature or may be liquidated. Upon liquidation of assets by an Existing Fund, the proceeds of liquidation will be distributed to the Continuing Fund (by way of distribution or redemption), and the Continuing Fund will invest such proceeds in assets directly.

23. The Proposed Reorganization will not be effected as a "qualifying exchange" or a tax-deferred transaction. The management information circular sent to unitholders of the Existing Funds will disclose why the transaction is not effected as a "qualifying exchange", and the reasons the Filer is of the belief that the Proposed Reorganization is in the best interests of each of the Existing Funds despite the tax treatment of the Proposed Reorganization.

24. Following the Proposed Reorganization, the Existing Funds will no longer pay any management fees or other fees to the Filer. Accordingly, there will be no duplication of management fees payable by the Continuing Fund and the Existing Funds at any time.

25. Under the Proposed Reorganization, it is expected that each Existing Fund will be wound up when it no longer holds any assets in its portfolio. Based on the maturity dates and due to the nature of the debt instruments that are currently held in the respective portfolios of each of the Existing Funds, it is anticipated that it may take several years for each Existing Fund to liquidate its portfolio. Accordingly, the Existing Funds will not be wound up as soon as reasonably possible following the Proposed Reorganization.

26. No commission or other fee will be charged to unitholders of the Existing Fund on the issue or exchange of securities of the Continuing Fund.

27. In order to effect the Proposed Reorganization, all applicable material agreements regarding the administration of the Existing Funds will either be amended to include the Continuing Fund, or the Continuing Fund will enter into new agreements with the relevant service provider, as required.

28. As a result of the Proposed Reorganization, the unitholders of the Existing Funds will have rights as unitholders of the Continuing Fund that are substantially similar in all material respects to the rights they had as unitholders of the Existing Funds.

29. Following the Proposed Reorganization, the Filer intends to apply to the Canadian securities administrators for the Existing Funds to cease to be reporting issuers.

30. The Existing Funds have operated, and the Continuing Fund will operate, in accordance with NI 81-102, except for any exemptive relief that has been previously obtained. If the Existing Funds cease to be reporting issuers, the Existing Funds will continue to comply with the provisions of NI 81-102 applicable to non-redeemable investment funds.

31. The Proposed Reorganization is expected to be completed in 2024, subject to receiving all necessary unitholder, regulatory and other third party approvals.

Meetings

32. Special meetings of unitholders of the Existing Funds (the Meetings) will be held in 2024 in order to approve the Proposed Reorganization.

33. A notice-and-access document and voting instruction forms or forms of proxy, as applicable, in respect of the Meetings (the Meeting Materials) describing the Proposed Reorganization will be sent to unitholders of the Existing Funds and copies thereof will be filed on SEDAR+ following the mailing in accordance with applicable securities legislation using notice-and-access to send proxy-related materials to beneficial unitholders.

34. The Meeting Materials, including the management information circular that will be made available, will contain sufficient information to allow unitholders to make an informed decision about the Proposed Reorganization. All other required information and documents necessary to comply with applicable proxy solicitation requirements of securities legislation for the Meetings will be mailed to applicable unitholders of the Existing Funds.

35. At each Meeting, an affirmative vote from unitholders in accordance with the declaration of trust for each Existing Fund present in person or represented by proxy at that Meeting is required for approval of the Proposed Reorganization.

36. Subject to and following receipt of all required unitholder and regulatory approvals, the Proposed Reorganization will occur as soon as reasonably practicable, at the discretion of the Filer to not proceed with the Proposed Reorganization for one or more Existing Funds if considered in the best interests of the Existing Funds.

Requested Approval

37. The Proposed Reorganization follows a lengthy and extensive review by the Filer of the activities and portfolios of the Existing Funds, upon which the Filer has determined that it would be in the best interests of the unitholders of the Existing Funds to merge into a single fund, which would permit the Continuing Fund to:

(a) increase liquidity on the secondary market,

(b) benefit from significant economies of scale, including greater investment flexibility, as position sizing of potential investments is less of a constraint for a larger fund,

(c) improve operational efficiency, and

(d) avoid complexity and costs associated with effecting the transfer of title of the underlying debt instruments included in the portfolio of each Existing Fund to the Continuing Fund.

38. Following completion of the Proposed Reorganization, the Continuing Fund is expected to preserve all of the benefits offered by the Existing Funds, which primarily use an asset allocation strategy among multiple sectors in order to achieve their investment objectives.

39. The Filer and the Existing Funds require approval of the Proposed Reorganization because they cannot rely on section 5.6(1) of NI 81-102 for the following reasons:

(a) contrary to section 5.6(1)(c), the Existing Funds will not be wound-up after the Proposed Reorganization because the portfolios of the Existing Funds include certain debt instruments for which it would be impractical and costly to the Existing Funds to transfer title to the Continuing Fund. Accordingly, under the Proposed Reorganization, it is proposed that the Continuing Fund will instead acquire the units of each of the Existing Funds, and the Existing Funds will continue to manage and maintain their existing portfolios of securities. After the Proposed Transaction, the Existing Funds will not be offered to the public, their units will be delisted, and their continued existence will confer no direct benefit on the Filer;

(b) contrary to section 5.6(1)(f)(iii)(A)(IV) and (V), the most recently filed annual financial statements and interim financial reports and the most recently filed annual and interim management reports of fund performance for the Continuing Fund will not be sent to unitholders of the Existing Funds, since that information will not be available for the Continuing Fund. Instead, the Filer will make available to each unitholder of an Existing Fund a management information circular containing information and documents necessary for unitholders of the Existing Funds to consider the Proposed Reorganization, as further described below; and

(c) contrary to paragraphs 5.6(1)(j)(ii) and 5.6(1)(j)(iii), each Existing Fund will not offer its unitholders the right to redeem their units (at a price equal to their net asset value per unit) at a date that is after the date on which the Proposed Reorganization is announced pursuant to a news release and before the effective date of the Proposed Reorganization;

40. Except as described in paragraph 38 above, the Proposed Reorganization would satisfy the other criteria in section 5.6(1) for pre-approved reorganizations and transfers.

41. The Filer, as manager of the Existing Funds, has determined that the Proposed Reorganization, including the steps necessary to effect the Proposed Reorganization, are in the best interests of the unitholders of the Existing Funds. The steps are substantially as follows:

(a) The new Continuing Fund will be established under the laws of a jurisdiction of Canada;

(b) The trust agreement governing each Existing Fund will be amended to, among other matters require that every unitholder of each Existing Fund transfer their units of such Existing Fund to the Continuing Fund in consideration for the issuance by the Continuing Fund of a number of units determined based on an exchange ratio;

(c) The exchange ratio will differ for each Existing Fund and will be calculated based on the relative net asset values of each Existing Fund and the units of the Continuing Fund;

(d) Upon the Continuing Fund acquiring the units of the Existing Funds, the Continuing Fund will be the sole unitholder of each Existing Fund. Each Existing Fund will be delisted from the TSX.

42. The Existing Funds are being reorganized with the Continuing Fund to which NI 81-102 shall apply, that will be managed by the Filer and PIMCO, and that will have a substantially similar fundamental investment objective, valuation procedures, redemption rights, fee structure and risk profile as the Existing Funds.

43. The underlying portfolio assets of the Existing Funds are acceptable to the Filer, in its capacity as manager, and to PIMCO, in its capacity as sub-adviser, of the Continuing Fund and will be consistent with the investment objective of the Continuing Fund.

44. The Existing Funds' Independent Review Committee (IRC) has had an opportunity to review the conflicts of interests matters associated with the Proposed Reorganization, including the process to be followed in connection with such Proposed Reorganization and the preservation of some or all of the Existing Funds for the benefit of the holders of the Continuing Fund and the fact that each Existing Fund will not offer its unitholders the right to redeem their units at net asset value prior to the effective date of the Reorganization, and has advised the Filer that it has determined that the Proposed Reorganization will achieve a fair and reasonable result for each of the Existing Funds.

45. The management information circular that will be made available to unitholders of the Existing Funds will provide sufficient information about the Proposed Reorganization to permit unitholders to make an informed decision about the Proposed Reorganization, including a full description of:

(a) the Proposed Reorganization and the steps to effect it;

(b) the similarities and material differences between the Existing Funds and the Continuing Fund;

(c) the income tax considerations of the Proposed Reorganization; and

(d) the investment objectives and investment strategies, fee structures and risk factors and other features of the Existing Funds and the Continuing Fund, as well as a summary of the IRC's decision with respect to the Proposed Reorganization.

46. Unitholders of the Existing Funds will only vote on the Proposed Reorganization after receiving detailed information about the Proposed Reorganization in the Meeting Materials and may sell their units on the TSX prior to the effective date of the Proposed Reorganization should they wish to do so.

47. None of the costs and expenses associated with the Proposed Reorganization will be borne by the Existing Funds, and all such costs will be borne by the Filer.

48. There are no charges payable by unitholders of the Existing Funds as a result of the Proposed Reorganization.

49. The units of the Continuing Fund to be received by unitholders of the Existing Funds will have an aggregate net asset value that is equal to the aggregate net asset value of the corresponding class of units of the Existing Funds held by such unitholders, calculated on the date of the Proposed Reorganization.

50. None of the Existing Funds currently offers its unitholders a regular redemption right that includes payment equal to the applicable net asset value per unit.

51. Units of each of the Existing Funds are only redeemable monthly for a redemption price equal to the lesser of (i) 94% of the average market price, and (ii) 100% of the closing market price of a unit, subject to a maximum redemption price per unit equal to the net asset value per unit and the Continuing Fund will offer a similar redemption feature.

52. In order to preserve the benefits of increased liquidity, which the Filer believes is a significant benefit of the Proposed Reorganization, the Filer believes that it would not be in the best interests of unitholders of the Existing Funds to offer a redemption right at a price equal to the net asset value per unit to unitholders of each Existing Fund in accordance with paragraphs 5.6(1)(j)(ii) and 5.6(1)(j)(iii) of NI 81-102, and as such a redemption right could defeat this benefit for the unitholders who decided to remain invested in the Existing Funds and participate in the Proposed Reorganization.

53. The capital gain or loss that a unitholder would realize on a redemption of units at NAV prior to the Proposed Reorganization would generally be equal to net asset value minus the unitholder's adjusted cost base. This is the same amount of capital gain or loss that a unitholder would realize on the exchange of Existing Fund units for Continuing Fund units. Therefore, the absence of a redemption right at NAV prior to the Reorganization should not adversely affect unitholders from a tax perspective.

54. The Filer submits that the absence of regular redemption rights with reference to net asset value per unit forms part of the commercial bargain that unitholders accepted at the time they invested in the Existing Funds, and the Proposed Reorganization represents a continuation of that initial commercial bargain (including as to investment objectives and strategies as well as the fees of the Continuing Fund, which will be the same as those of the Existing Funds). This commercial bargain and the advantages of the intended objectives of the Proposed Reorganization would potentially be disrupted if structure of the Proposed Reorganization were required to incorporate a one-time redemption right with reference to the net asset value per unit. In particular, it would potentially weaken the unitholder benefits of achieving economies of scale through the Proposed Reorganization.

55. The units of the Existing Funds will continue to trade on the TSX until the date of the Proposed Reorganization, and unitholders who wish to vote against the Proposed Reorganization will always have the ability to sell their units of the Existing Funds on the exchange at any time up to the effective date of the Proposed Reorganization, and furthermore, will have the ability to sell their units of the Continuing Fund on the exchange following the effective date of the Proposed Reorganization.

56. The Proposed Reorganization is unlike conventional mergers because the Existing Funds will continue to manage the portfolios currently managed by each of them following the Proposed Reorganization, and will not be immediately wound up and, in the Filer's view, a forced redemption right would potentially limit the benefits of the Proposed Reorganization sought to be achieved by the Filer.

57. The Proposed Reorganization is not expected to have any material adverse impact on the business, operations or affairs of the Existing Funds.

Requested Relief

58. As noted above, the Filer does not intend to wind up the Existing Funds. Instead, as part of the steps for the Proposed Reorganization, the Filer proposes to have the Continuing Fund acquire all of the outstanding units of each Existing Fund, and in so doing the Continuing Fund shall become the sole unitholder of each Existing Fund (the Private Trust Investments).

59. The Filer submits that preserving (and not winding up) the Private Trust Investments would be beneficial to investors in the Continuing Fund by avoiding the inconvenience and significant costs associated with transferring title to the underlying debt securities held by each Existing Fund to the Continuing Fund.

60. The Filer does not, and shall not, obtain any direct benefit from the Private Trust Investments, and any value that is ultimately realized through the Existing Funds that are not wound up shall be for the benefit of the Continuing Fund and its unitholders. The Filer submits that there is limited or no downside risk to unitholders of the Continuing Fund in permitting the Private Trust Investments. The assets remaining in an Existing Fund in connection with the Private Trust Investments shall be consistent with the Continuing Fund's investment objectives and strategies, and shall be acceptable to the Filer as manager and PIMCO as sub-adviser of the Continuing Fund.

61. Absent the Requested Relief, the continuation of the Existing Funds as Private Trust Investments would be prohibited because the Private Trust Investments will not be subject to NI 81-102 (although the Existing Funds will continue to comply with the provisions of NI 81-102 applicable to non-redeemable investment funds following the Proposed Reorganization) because the Filer intends to apply to the Canadian securities administrators for the Existing Funds (which will not be wound up following the Proposed Reorganization) to cease being reporting issuers, contrary to paragraph 2.5(2)(c) of NI 81-102.

62. The Continuing Fund will prepare and file financial reporting under NI 81-106 (and which will include information on each of the Existing Funds). The Filer intends that the financial statements of the Continuing Fund will consolidate with the Existing Funds, such that financial information would be presented on a look-through basis. Accordingly, the audit of the Continuing Fund's financials will also include a review of the holdings of the Existing Funds (which will be reported in the audit of the Continuing Fund's financials). In effect, Continuing Fund investors will continue to receive audited information about the Existing Funds (through the Continuing Fund's audited financials).

63. The IRC to be appointed to the Continuing Fund, in considering conflict of interest matters on behalf of the Continuing Fund, will continue to consider any conflicts involving the Existing Funds and the Filer (which will continue to be the manager of each of the Existing Funds, as well as the new Continuing Fund, following the Proposed Reorganization).

64. Subject to receiving the Requested Relief from section 2.5(2)(c) of NI 81-102, the Proposed Reorganization will benefit from the exemptions available in section 2.1(2)(c) of NI 81-102 (concentration restriction) and 2.2(1.1)(a) of NI 81-102 (control restriction).

65. The Private Trust Investments shall have no business or undertaking other than that of the Existing Funds, shall have no unitholders other than the Continuing Fund, and shall only be continued for the benefit of the unitholders of the Continuing Fund.

66. The Filer has determined that maintaining the Existing Funds in connection with the Private Trust Investments following the Proposed Reorganization is in the best interest of unitholders of the 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 Requested Approval is granted, provided that before implementing the Proposed Reorganization, the Filer obtains the prior approval of the securityholders of the Existing Funds at a special meeting held for that purpose.

The decision of the Principal Regulator under the Legislation is that the Requested Relief is granted, provided that:

(i) the Continuing Fund will remain in compliance with NI 81-102, including section 2.4 of NI 81-102;

(ii) each Existing Fund does not issue any new securities;

(iii) the investment of the Continuing Fund in securities of the Existing Funds otherwise complies with section 2.5 of NI 81-102 (other than paragraph 2.5(2)(c) as permitted hereby);

(iv) the Existing Funds will remain in compliance with NI 81-102 and will not make any new investments; and

(v) the prospectus of the Continuing Fund discloses the fact that the Continuing Fund has obtained the Requested Relief to permit the relevant transactions on the terms described in this decision.

"Darren McKall, Manager"
Investment Management Division
Ontario Securities Commission

Application File #: 2023/0615

SEDAR File #: 6060607