Stone & Co. Limited - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- NI 81-102 Mutual Funds, s.5.7 -- approval for change of manager of the Stone Mutual Funds -- Change in manager is change only in a technical sense, no change to the management and administration of the Funds -- Securityholders have received timely and adequate disclosure regarding the change of manager and the change is not detrimental to securityholders or the public interest
Mutual Reliance Review System for Exemptive Relief Applications -- NI 81-102 Mutual Funds, s.19.1 -- approval for relief from the requirement to obtain securityholder approval for a change of manager of the Stone Mutual Funds -- Change in manager is change only in a technical sense, no change to the management and administration of the Funds, thereby creating situation for potential confusion should approval be sought -- Securityholders have received timely and adequate disclosure regarding the change of manager and the cost of holding a securityholder meeting to obtain approval is not justifiable
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, s. 5.7 and s. 19.1
May 31, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUÉBEC,
NEW BRUNSWICK, NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR, YUKON TERRITORY,
NORTHWEST TERRITORIES AND NUNAVUT TERRITORY
(THE JURISDICTIONS)
AND
IN THE MATTER OF THE
MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
STONE & CO. LIMITED
(THE FILER)
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for:
(1) an exemption pursuant to section 19.1 of National Instrument 81-102 -- Mutual Funds (NI 81-102) from the requirement in section 5.1(b) of NI 81-102 to obtain the prior approval of the securityholders (the Securityholders) of the mutual funds listed in Appendix "A" (the Stone Mutual Funds) to the proposed change of manager (the Change of Manager) of the Stone Mutual Funds which will result from the SCL Reorganization (defined below); and
(2) approval pursuant to section 5.5(1)(a) of NI 81-102 of the proposed Change of Manager.
Under the Mutual Reliance Review System for Exemptive Relief Applications:
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. Effective on or about June 30, 2006, SCL will reorganize its corporate structure (the SCL Reorganization), subject to, among other things, obtaining all necessary regulatory relief and approvals.
2. The SCL Reorganization will be effected by way of a three-cornered amalgamation: A newly incorporated holding company (Holdco) will incorporate a wholly-owned subsidiary whose sole purpose is to amalgamate with SCL. The former shareholders of SCL will become shareholders of Holdco. The amalgamation between SCL and the Holdco subsidiary will result in the amalgamated company (New SCL) being a wholly-owned subsidiary of Holdco.
3. Mr. Richard Stone, a principal shareholder, and the largest shareholder, of SCL, will be a principal shareholder, and the largest shareholder, of Holdco following the completion of the SCL Reorganization, although Mr. Stone's precise ownership percentage of Holdco remains to be determined as relative valuations are settled.
4. The purpose of the SCL Reorganization is to organize SCL (through its successor, New SCL) as a wholly-owned subsidiary of Holdco in order to integrate and simplify the existing corporate ownership structure and facilitate future growth and financing.
THE PARTIES
Holdco
5. Holdco will be a corporation newly incorporated under the laws of the Province of Ontario. Holdco's head office will be located in the Province of Ontario. Holdco will not be registered as a dealer or adviser under the securities legislation of any Jurisdiction. Contemporaneously with the completion of the SCL Reorganization, Holdco will complete an initial public offering of certain debt securities and thereby become a reporting issuer in each of the Jurisdictions. Following the completion of the SCL Reorganization, Mr. Richard Stone will be a principal shareholder, and the largest shareholder, of Holdco.
SCL
6. SCL is a corporation incorporated under the laws of the Province of Ontario. SCL's head office is located in the Province of Ontario. SCL acts as the manager of the Stone Mutual Funds. SCL is not registered as a dealer or adviser under the securities legislation of any Jurisdiction. Mr. Richard Stone is a principal shareholder, and the largest shareholder, of SCL.
The Stone Mutual Funds
7. The Stone Mutual Funds are governed by National Instrument 81-101 and NI 81-102. The Stone Mutual Funds are reporting issuers in each of the Jurisdictions and are not in default of any of the requirements of the Jurisdictions. Securities of the Stone Mutual Funds are qualified for distribution in all of the Jurisdictions by a simplified prospectus and related annual information form, each dated July 29, 2005. Securities of the Stone Mutual Funds are sold in all of the Jurisdictions through registered dealers.
TECHNICAL "CHANGE OF MANAGER" ONLY
8. The objective of the SCL Reorganization is to integrate and simplify the existing corporate ownership structure of SCL and facilitate future growth and financing. It is contemplated that the financing will be completed contemporaneously with the completion of the SCL Reorganization before the end of June 2006. In particular, it is necessary to structure the SCL Reorganization as a three-cornered amalgamation in order to avoid triggering the formal take-over bid requirements under the Securities Act (Ontario), compliance with which would impose an unwarranted burden in the circumstances.
9. The formation of New SCL by amalgamation will result in a technical change of the manager of the Stone Mutual Funds because New SCL is a different legal entity than SCL and New SCL does not meet the definition of an affiliated entity under the Securities Act (Ontario).
REQUIRED APPROVALS
Approval of Securityholders
10. Pursuant to section 5.1(b) of NI 81-102, the approval of the Securityholders must be obtained prior to the proposed Change of Manager given by a resolution passed by at least a majority of the votes cast at a meeting of the Securityholders of each Stone Mutual Fund duly called and held to consider the matter, unless an exemption from this requirement can be obtained pursuant to section 19.1 of NI 81-102.
Approval of Decision Makers
11. Pursuant to section 5.5(1)(a) of NI 81-102, the approval of the Decision Makers must be obtained prior to the proposed Change of Manager.
IMPACT OF THE SCL REORGANIZATION ON THE STONE MUTUAL FUNDS
12. Following the completion of the SCL Reorganization:
(a) Mr. Richard Stone will be a principal shareholder, and the largest shareholder, of Holdco;
(b) Holdco will own 100% of the issued and outstanding shares of New SCL;
(c) New SCL will act as the manager of the Stone Mutual Funds;
(d) in all material respects, New SCL will have the same offices, directors, officers and employees as SCL;
(e) New SCL will have the same name as SCL, except for a different legal suffix;
(f) Stone Asset Management Limited (SAM) will remain as the portfolio adviser of the Stone Mutual Funds; and
(g) from an operational perspective, there will be no change in the management, or investment management, of the Stone Mutual Funds. In connection with the SCL Reorganization, all material agreements and other documents regarding the administration of the Stone Mutual Funds to which SCL is a party will be assigned to New SCL as required, and continue in force on the same terms, to ensure that the Stone Mutual Funds are operated in the same manner before, and following the completion of, the SCL Reorganization.
SUBMISSIONS
(a) The SCL Reorganization Will Only Result in a Technical "Change of Manager"
The formation of New SCL by amalgamation will result in a technical change of the manager of the Stone Mutual Funds because New SCL is a different legal entity than SCL.
(b) Integrity and Experience of Proposed Indirect Shareholder of New SCL
By virtue of his status as a principal shareholder, and the largest shareholder, of SCL, Mr. Richard Stone has demonstrated that he has the necessary integrity and experience to be (indirectly, through Holdco) a principal shareholder, and the largest shareholder, of New SCL.
(c) Integrity and Experience of Proposed Management of New SCL
In connection with their roles as directors and/or officers of SCL, the Decision Makers have already conducted security checks on the proposed directors and officers of New SCL and have had demonstrated to their satisfaction that such persons have the necessary integrity and experience to be directors and/or officers of New SCL.
(d) No Material Change
The management and administration of the Stone Mutual Funds will not be materially affected by the proposed Change of Manager because following the completion of the SCL Reorganization: (i) Mr. Richard Stone will remain a principal shareholder, and the largest shareholder (indirectly, through Holdco), of New SCL; (ii) in all material respects, New SCL will have the same offices, directors, officers and employees as SCL; (iii) SAM will remain as the portfolio adviser of the Stone Mutual Funds; and (iv) from an operational perspective, there will be no change in the management, or investment management, of the Stone Mutual Funds.
(e) Avoidance of Securityholder Confusion
In the normal course, the securityholders of a mutual fund are only required to approve "fundamental" changes. Requiring the Securityholders to approve the proposed Change of Manager may suggest, misleadingly, that a fundamental change in the management and administration of the Stone Mutual Funds may result from the proposed Change of Manager which is not, in fact, the case.
(f) Similarity to Change in Control of Manager
Conceptually, New SCL is simply SCL in another corporate form. The proposed Change of Manager will be a necessary result of the mechanics of the SCL Reorganization. This being the case, the considerations and attendant requirements regarding a conventional change of manager to a third party are not appropriate in respect of the Change of Manager. In this scenario, there is no need to inform the Securityholders of material details of the new manager in order to afford them an opportunity to assess the potential impact of the change. Rather, the considerations and attendant requirements regarding a change of manager to an affiliate, or regarding a change in control of a manager, are more appropriate in these circumstances. Neither a change of manager to an affiliate nor a change in control of a manager require the approval of the securityholders of a mutual fund.
(g) Prior Notice to Securityholders
Notice (the Notice) of the proposed Change of Manager will be mailed to the Securityholders on or about April 20, 2006 (the Notice Date).
(h) Substantial Cost
The substantial cost of holding meetings of the Securityholders regarding the proposed Change of Manager is not justifiable in light of SCL's expectation: (1) of a low participation rate by the Securityholders; and (2) that the proposed Change of Manager would be overwhelmingly approved by voting Securityholders because it will not result in a material change in the management or administration of the Stone Mutual Funds.
(i) Formality
In substance, New SCL is the same entity as SCL notwithstanding that, by operation of corporate law, New SCL is, in form, a separate legal entity.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that:
(a) an exemption pursuant to section 19.1 of NI 81-102 from the requirement of section 5.1(b) of NI 81-102 to obtain the prior approval of the Securityholders to the proposed Change of Manager is granted provided that the Notice is mailed to the Securityholders as described in section 13(g) above;
(b) the proposed Change of Manager is approved pursuant to section 5.5(1)(a) of NI 81-102; and
(c) the approval and exemption provided herein is subject to compliance with all applicable provisions of NI 81-102.
APPENDIX "A"
LIST OF THE STONE MUTUAL FUNDS
{•}A mutual fund constituted as a class of shares of Stone & Co. Corporate Funds Limited, a mutual fund corporation.
{••}A mutual fund trust.