Strathbridge Asset Management Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of investment fund merger -- approval required because merger does not meet the criteria for pre-approved reorganizations and transfers -- merger will not be a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- merger to otherwise comply with pre-approval criteria, including securityholder vote and IRC approval -- securityholders provided with timely and adequate disclosure regarding the mergers -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.6(1), and 19.1.
November 15, 2019
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 STRATHBRIDGE ASSET MANAGEMENT INC. (the Filer) AND IN THE MATTER OF LOW VOLATILITY U.S. EQUITY INCOME FUND AND NDX GROWTH & INCOME FUND
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Low Volatility U.S. Equity Income Fund (LVU), NDX Growth & Income Fund (NGI and together with LVU, the Terminating Funds) and Mulvihill Premium Yield Fund (the Continuing Fund and together with the Terminating Funds, the Funds) for a decision of the principal regulator under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the proposed merger of the Funds (the Merger) pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) in connection with (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 subsection 4.7(1) of Multinational Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Canadian Jurisdictions).
Interpretation
Defined terms contained 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 existing under the laws of Canada with its principal offices located in Toronto, Ontario.
2. The Filer is the manager of the Funds and the trustee of the Continuing Fund.
3. The Filer is registered as an investment fund manager in the Province of Ontario.
4. The Filer is not in default of the securities legislation of any province or territory of Canada.
The Funds
5. LVU is an investment fund established under the laws of the Province of Ontario pursuant to a trust agreement dated February 26, 2013.
6. NGI is an investment fund established under the laws of the Province of Ontario pursuant to a trust agreement dated November 28, 2013.
7. The Continuing Fund is a mutual fund governed by the laws of the Province of Ontario pursuant to an amended and restated declaration of trust dated September 18, 2019.
8. LVU and NGI are reporting issuers under the provinces of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.
9. The Continuing Fund is a reporting issuer under the laws of all of the Canadian Jurisdictions.
10. None of LVU, NGI or the Continuing Fund are in default of the securities legislation of any province or territory of Canada.
11. LVU is a non-redeemable investment fund that offered its units (the LVU Units) to the public and completed its initial public offering on March 13, 2013. LVU Units currently trade under the ticker symbol LVU.UN. NGI is a non-redeemable investment fund that offered its Class A units and Class U units (the NGI Units and together with the LVU Units, the Terminating Funds Units) to the public and completed its initial public offering on December 19, 2013. The Class A units of NGI currently trade under the ticker symbol NGI.UN. The Continuing Fund offers Class A units, Class UA units, Class F units and Class UF units.
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.
13. The investment objectives of LVU are: (a) to maximize risk adjusted returns for holders of LVU Units; and (b) to pay unitholders monthly cash distributions in an amount targeted to be 5.0% per annum on the net asset value (NAV) per LVU Unit. LVU was created been to provide investors with an actively managed investment in the common shares of low volatility, large capitalization, U.S. companies while mitigating downside risk and paying a monthly cash distribution. LVU invests in a conservative portfolio consisting primarily of large capitalization equity securities selected from the S&P 100 Index with a beta of less than 1.0 (the Investment Universe), combined with selected covered call option writing designed to enhance portfolio income and mitigate downside risk. The investment manager for LVU may also invest up to 25% of LVU's NAV in securities of other issuers included in the S&P 100 Index. The portfolio will generally consist of 20 to 30 securities of issuers selected from the Investment Universe.
14. NGI's investment objectives are to provide holders of units with: (a) stable quarterly cash distributions; and (b) the opportunity for capital appreciation. NGI was created to provide investors with an actively managed portfolio consisting of equity securities of any issuer included in the NASDAQ-100 IndexSM. NGI may invest up to 10% of its NAV in equity securities of any one issuer.
15. MPY has been designed to provide holders with: (i) high quarterly income on a tax efficient basis; (ii) long-term capital appreciation through investment in a portfolio of high quality equity securities; and (iii) lower overall portfolio volatility. MPY will write options to seek to earn tax efficient option premiums, reduce overall portfolio volatility and enhance the portfolio's total return. In order to achieve its investment objectives, MPY will (i) invest in an actively managed portfolio comprised of securities from the S&P/TSX Composite Index and S&P 500 Index; and (ii) use option writing strategies from time to time in response to market conditions to generate an enhanced tax efficient yield. MPY is also permitted to invest in public investment funds including exchange traded funds and other funds managed by the Filer (provided that no more than 15% of the net asset value of may be invested in securities of other funds managed by the Filer and provided there are no duplication of fees) that provide exposure to such securities in accordance with applicable law.
Reasons for Approval Sought
16. The Filer proposes to merge the LVU into the Continuing Fund on or about November 15, 2019 (the LVU Effective Date) and NGI into the Continuing Fund on or about November 19, 2019 (the NGI Effective Date, and together with the LVU Effective Date, the Effective Date). Currently, LVU has net assets of approximately $3.2 million. Currently, NGI has net assets of approximately $3.3 million. The Continuing Fund has accumulated non-capital losses and capital losses which will be available for future use by MPY.
17. The Approval Sought is required because the Merger does not meet all of the criteria for pre-approved reorganizations and transfers set out in subsection 5.6(1) of NI 81-102.
18. In particular, the Merger will not be a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the ITA) or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA.
19. Except as described above, the Merger will otherwise comply with all other criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102.
20. Although the Merger is being conducted on a taxable basis, in the Filer's view, it is in the best interest of the unitholders of the Funds to complete the Merger on a taxable basis so that the capital losses in the Continuing Fund will continue to be available to the Continuing Fund.
The Merger
21. A press release with respect to the Merger was issued on September 27, 2019 and filed on the System for Electronic Document Analysis and Retrieval (SEDAR) on September 30, 2019.
22. A material change report with respect to the Merger was filed on SEDAR for the Terminating Funds on September 30, 2019.
23. Pursuant to National Instrument 81-107 Independent Review Committee for Investment Funds, the independent review committee of the Terminating Funds (the IRC) reviewed the Merger as a potential "conflict of interest matter", and provided its positive recommendation for the Merger, after determining that the Merger would achieve a fair and reasonable result for the Terminating Funds.
24. Pursuant to paragraph 5.1(1)(f) of NI 81-102, unitholders of each of the Terminating Funds approved the Merger at a special meeting of unitholders held on November 1, 2019 (the Meeting), as required by NI 81-102.
25. A notice of meeting, management information circular dated October 2, 2019 (the Circular) and forms of proxy in connection with the Meeting (the Meeting Materials) were mailed to the unitholders of the Terminating Funds on October 11, 2019 and filed on SEDAR in accordance with applicable securities laws.
26. The Circular describes all of the relevant facts concerning the Merger, including a description of the proposed Merger, information about the Funds, including the differences between the respective investment objectives of the Funds, and income tax considerations for unitholders of the Terminating Funds, as well as the IRC's recommendation of the Merger, so that unitholders of the Terminating Funds may make an informed decision before voting on whether to approve the Merger.
27. The Circular also describes the various ways in which unitholders can obtain for each of the Funds, as applicable, at no cost, the simplified prospectus, the annual information form, the comparative financial statements and the management report of fund performance.
28. Investors of the Terminating Funds had an opportunity to consider this information prior to voting on the Merger at the Meeting.
29. The Merger will not be a "material change" for the Continuing Fund and accordingly, the Filer has no intention to convene a meeting of unitholders for the Continuing Fund to approve the Merger.
30. The Filer will pay for the costs and expenses associated with the Merger, including the cost of holding the meeting and of soliciting proxies, including the costs of mailing the Circular and accompanying materials. None of the Funds will bear any of the costs and expenses associated with the Merger.
31. No fees or sales charges will be payable by unitholders of the Funds in connection with the Merger.
32. The investment portfolio and other assets of the Terminating Funds to be acquired by the Continuing Fund in order to effect the Merger are currently, or will be on the applicable Effective Date, acceptable to the portfolio manager of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.
33. The cash and any other assets of the Terminating Funds acquired by the Continuing Fund in connection with the Merger will be acquired in compliance with NI 81-102.
34. The Merger will be structured substantially as follows:
(a) The value of the Terminating Funds' portfolios and other assets will be determined as of the close of trading on the business day immediately preceding the applicable Effective Date.
(b) Immediately following the close of business on the applicable Effective Date, the Terminating Funds will transfer all or substantially all of its net assets to the Continuing Fund in consideration for the issuance by the Continuing Fund to the applicable Terminating Fund of a number of the Continuing Fund's Class F units (the Continuing Fund Units) determined based on an exchange ratio calculated based on the relative NAVs of the Continuing Fund Units and Terminating Funds Units (the Exchange Ratio).
(c) Immediately following the transfer of assets of the Terminating Funds to the Continuing Fund and the issuance of Continuing Fund Units to the Terminating Funds, all of the Terminating Funds Units will be automatically redeemed.
(d) Each unitholder of Terminating Funds Units will receive such number of the Continuing Fund Units, as determined by the Exchange Ratio.
(e) The Terminating Funds Units will, subject to the approval of the Toronto Stock Exchange (TSX), be de-listed from the TSX in advance of the applicable Effective Date.
(f) As soon as reasonably possible following the Merger, the Terminating Funds will be wound up and the Continuing Fund will continue as an open-ended mutual fund existing under the laws of Ontario.
35. The result of the Merger will be that unitholders of the Terminating Funds will cease to be unitholders of the Terminating Funds and will become unitholders of the Continuing Fund. The Continuing Fund will continue as a publicly offered open-ended mutual fund.
36. If the Merger is approved by the unitholders of the Terminating Funds, unitholders will have a special redemption right to redeem their units if they so choose on November 15, 2019 (Special Redemption Date), if they do not wish to participate in the Merger.
37. In addition, unitholders of the Terminating Funds were able to trade their Terminating Funds Units on the TSX in the ordinary course up until at least the close of business on the business day which is one week before the Special Redemption Date.
Benefits of the Merger
38. The Filer believes that the Merger is beneficial to unitholders of the Terminating Fund for the following reasons:
(a) Unitholders will be provided with an opportunity to invest in a continuing fund with improved operational efficiencies and enhanced economic viability. The merger is expected to eliminate the duplicative administrative and regulatory costs of operating the Terminating Funds as separate investment funds.
(b) The Merger is expected to reduce operational costs on a per unit basis and correspondingly improve returns by spreading fixed costs over a greater number of units.
(c) As an open-ended mutual fund, the Continuing Fund will also be able to accept subscriptions daily and thereby have the ability to grow in size and increase in value, with lower administrative costs. In addition, the Continuing Fund's units will be redeemable daily at NAV.
(d) Given the similarities in the investment strategies of the Funds, unitholders of the Terminating Funds will continue to receive exposure to a blue-chip portfolio of common shares of major U.S. issuers with enhanced income generated by option strategies.
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 is that the Approval Sought is granted.