Bloom Investment Counsel, Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund merger -- approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- the merger is not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- securityholders of terminating fund are provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
October 21, 2015
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 BLOOM INVESTMENT COUNSEL, INC. (the Filer) AND IN THE MATTER OF BLOOM INCOME & GROWTH CANADIAN FUND (the Terminating Fund) AND IN THE MATTER OF BLOOM SELECT INCOME FUND (the Continuing Fund and, together with the Terminating Fund, 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 forms of proxy of the Funds dated August 21, 2015.
"Continuing Fund Declaration of Trust" means the declaration of trust of the Continuing Fund dated March 22, 2012, as amended and restated effective March 7, 2014.
"IRC" means the independent review committee of the Funds.
"Meeting" means the adjourned special meeting of the unitholders of the Funds scheduled to be held on or about October 8, 2015.
"Merger" means the proposed merger of the Terminating Fund 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 October 23, 2015, provided all required approvals are obtained for the Merger.
"Tax Act" means the Income Tax Act (Canada).
"Terminating Fund Declaration of Trust" means the declaration of trust of the Terminating Fund dated September 29, 2011, as amended and restated effective October 17, 2011, and as further amended and restated effective March 7, 2014.
Representations
This decision is based on the following facts represented by the Filer:
The Filers
1. The head office of each of the Manager and the Funds is located at Suite 1710, 150 York Street, Toronto, Ontario M5H 3S5.
2. Neither the Manager nor the Funds are in default of securities legislation in any jurisdiction of Canada.
The Manager
3. The Manager is a privately-owned corporation existing under the Business Corporations Act (Ontario).
4. The Manager is the investment fund manager and portfolio manager of the Funds.
The Terminating Fund
5. The Terminating Fund is a closed-end investment trust established under the laws of the Province of Ontario pursuant to the Terminating Fund Declaration of Trust. Its units were qualified for distribution pursuant to a prospectus dated September 29, 2011, that was prepared and filed in accordance with the securities legislation of each of the provinces and territories of Canada. Accordingly, the Terminating Fund is a reporting issuer or the equivalent in each of the provinces and territories of Canada. The units of the Terminating Fund are listed and posted for trading on the Toronto Stock Exchange (the "TSX") under the symbol "BI. UN".
6. The Terminating Fund is authorized to issue an unlimited number of a single class of transferable, redeemable units of beneficial interest, each of which evidences the proportionate ownership interest of a Unitholder in the capital of the Fund.
7. The investment objectives of the Terminating Fund are to provide unitholders with monthly cash distributions that have a large component of Canadian eligible dividends and the opportunity for capital appreciation.
8. The Terminating Fund has substantially similar valuation procedures and fee structures as the Continuing Fund, except that the Manager eliminated the service fee the Manager paid in respect of units of the Continuing Fund effective end of day September 30, 2015, resulting in a reduction in the management fee of the Continuing Fund.
9. The Terminating Fund is not considered to be a mutual fund under securities legislation of the provinces and territories of Canada. While the Terminating Fund is subject to NI 81-102, it is not subject to all of the investment restrictions and operating policies that apply to mutual funds under such legislation. The Terminating Fund is managed in accordance with such applicable requirements and restrictions as well as the investment restrictions set out in the Terminating Fund Declaration of Trust.
The Continuing Fund
10. The Continuing Fund is a closed-end investment trust established under the laws of the Province of Ontario pursuant to the Continuing Fund Declaration of Trust. Its units were qualified for distribution pursuant to a prospectus dated March 22, 2012, that was prepared and filed in accordance with the securities legislation of the each of the provinces and territories of Canada. Accordingly, the Continuing Fund is a reporting issuer or the equivalent in each of the provinces and territories of Canada. The units of the Continuing Fund are listed and posted for trading on the TSX under the symbol "BLB.UN".
11. The Continuing Fund is authorized to issue an unlimited number of a single class of transferable, redeemable units of beneficial interest, each of which evidences the proportionate ownership interest of a Unitholder in the capital of the Fund.
12. The investment objectives of the Continuing Fund are to provide Unitholders with an investment in an actively managed portfolio comprised mainly of Canadian equity securities that exhibit low volatility at the time of investment, monthly cash distributions that have a large component of Canadian eligible dividends, and the opportunity for capital appreciation.
13. The Continuing Fund has substantially similar valuation procedures and fee structures as the Terminating Fund, except that the Manager eliminated the service fee the Manager paid in respect of units of the Continuing Fund effective end of day September 30, 2015, resulting in a reduction in the management fee of the Continuing Fund.
14. The Continuing Fund is not considered to be a mutual fund under securities legislation of the provinces and territories of Canada. While the Continuing Fund is subject to NI 81-102, it is not subject to all of the investment restrictions and operating policies that apply to mutual funds under such legislation. The Continuing Fund is managed in accordance with such applicable requirements and restrictions as well as the investment restrictions set out in the Continuing Fund Declaration of Trust.
The Merger
15. As required under National Instrument 81-107 -- Independent Review Committee for Investment Funds, the Manager presented the terms of the Merger to the Funds' IRC for its review. The IRC considered both the proposed Merger and the proposed actions described in this Circular to implement the Merger (the Proposed Actions) and has provided the Manager with a positive recommendation to proceed with the Merger and to implement the Proposed Actions. In making this recommendation, the IRC was of the opinion, after due inquiry, that (a) the Proposed Actions will achieve a fair and reasonable result for the Terminating Fund and for the Continuing Fund; and (b) the Merger, if implemented in the manner contemplated by the Proposed Actions and as presented to the IRC by the Manager, will achieve a fair and reasonable result for each of the Funds.
16. At concurrent adjourned special meetings held on October 8, 2015, Unitholders of the Terminating Fund approved the Merger and Unitholders of the Continuing Fund approved the acquisition from the Terminating Fund of certain securities in connection with the Merger which have a Beta equal to or greater than 1.0 but less than 1.5 that are identical to securities currently owned by Continuing Fund on a one-time basis in connection with the Merger.
17. On October 8, 2015, the Manager issued and filed a news release disclosing that, subject to receipt of regulatory approval, (i) the Merger will proceed; (ii) unitholders of the Terminating Fund will have the right to redeem their units pursuant to the special redemption right by submitting a redemption request through their broker prior to 5:00 p.m. (Toronto time) on October 20, 2015; (iii) the units submitted for redemption in accordance with subparagraph (ii) will be redeemed at a price equal to the net asset value of the Terminating Fund on the Merger Effective Date; and (iv) the Manager will commence the implementation of the Merger on the Merger Effective Date.
18. The Manager has filed a press release and a material change report announcing the Merger in accordance with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure.
19. The Manager will pay for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees.
20. Following the Merger, the Continuing Fund will continue as a closed-end investment trust and the Terminating Fund will be wound up as soon as reasonably practicable.
21. Pursuant to the Merger, holders of Units of the Terminating Fund will receive Units of the Continuing Fund having a value that is equal to the net asset value of the Terminating Fund on the Merger Effective Date.
22. The management fees of the Continuing Fund will be lower than the management and administration fees of the Terminating Fund.
23. No sales charges will be payable by unitholders of the Terminating Fund in connection with the Merger.
Merger Steps
24. Pursuant to the Merger:
A. The unitholders of the Terminating Fund will be asked to consider and, if thought fit, to approve the Merger of the Terminating Fund.
B. The unitholders of the Continuing Fund will be asked to consider, and if thought fit, to approve certain amendments to the Continuing Fund Declaration of Trust to allow for the acquisition from the Terminating Fund of certain securities in connection with the Merger which have a Beta of equal to or greater than 1.0 but less than 1.5 that are identical to securities currently owned by the Continuing Fund on a one-time basis. If this approval is not obtained, such securities will be sold by the Terminating Fund prior to the Merger.
C. The fair market value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the business day immediately prior to the Merger Effective Date, after giving effect to the redemption of units of the Terminating Fund pursuant to the special redemption right and after the disposition of any securities required to be disposed of by the Terminating Fund prior to the Merger.
D. The Terminating Fund will transfer all of its assets to the Continuing Fund for a purchase price equal to the fair market value of the assets transferred. The Continuing Fund will satisfy the obligation to pay the purchase price for the assets of the Terminating Fund acquired by the Continuing Fund by assuming the Terminating Fund's liabilities and by issuing to the Terminating Fund units of the Continuing Fund having an aggregate net asset value equal to the fair market value of the assets acquired less the amount of the liabilities assumed.
E. To the extent necessary to ensure that the Terminating Fund is not subject to non-refundable income tax under Part I of the Tax Act, the Terminating Fund will declare and pay a distribution to its unitholders of net income and net capital gains in respect of its current taxation year. Due to the fact that the Terminating Fund pays a high fixed monthly distribution, the Manager does not anticipate that any further distributions will be required for these purposes.
F. Immediately thereafter, the Terminating Fund will redeem all of its outstanding units at their net asset value which will be paid and satisfied by delivering to its unitholders units of the Continuing Fund acquired in (d) above.
G. The Terminating Fund will be wound up as soon as reasonably possible following the Merger.
Unitholder Disclosure
25. The Circular was mailed to unitholders of the Funds on August 28, 2015 and filed on SEDAR in accordance with applicable securities legislation. The management information circular includes a summary of the IRC's approval.
26. The management information circular also includes information about the tax consequences of the Merger including the fact that the Merger will not be effected on a tax-deferred basis, and the creation of a special redemption right pursuant to which unitholders of the Terminating Fund will have the right to redeem their units prior to the Merger Effective Date. Accordingly, unitholders of the Terminating Fund will have an opportunity to consider this information prior to voting on the Merger.
27. As disclosed in the Circular mailed to unitholders of the Funds on August 28, 2015, additional information relating to the Funds, including financial information, is contained in the Funds' interim management report of fund performance and interim unaudited financial statements for the six months ended June 30, 2015, annual management report of fund performance and comparative annual audited financial statements for the year ended December 31, 2014, and annual information forms, which are available on the Funds' website at www.bloomfunds.ca or on SEDAR at www.sedar.com. Copies are also available at no cost by calling collect at (416) 861-9941 or toll-free at 1-855-BLOOM18.
Reasons for Merger Approval
28. The Merger satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6(1) of NI 81-102, except that the Merger will not be a "qualifying exchange" or a tax deferred transaction within the meaning of the Tax Act.
29. The Filer believes that the Merger will be beneficial to unitholders of the Funds for the following reasons:
A. unitholders of the Terminating Fund 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 Fund will be subject to lower management fees as the management fees of the Continuing Fund will be lower than the management fees currently charged by the Terminating Fund;
C. the unitholders of the Terminating Fund will not be responsible for the costs associated with the Merger; and
D. the Continuing Fund will likely have a larger asset base which will allow for greater portfolio diversification and a smaller proportion of assets set aside to fund redemptions.
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.