GrowthWorks Canadian Fund Ltd. et al. - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- approval of a merger of certain Labour Sponsored Investment Funds and approval of suspension of redemptions in connection with the merger under National Instrument 81-102 Mutual Funds.
Rules Cited:
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.5(1)(d).
November 22, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR,
NORTHWEST TERRITORIES, YUKON
AND NUNAVUT (The Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
GROWTHWORKS CANADIAN FUND LTD.,
GROWTHWORKS OPPORTUNITY FUND LTD.,
CAPITAL ALLIANCE VENTURES INC. AND
CANADIAN SCIENCE AND TECHNOLOGY
GROWTH FUND INC. (the Filers)
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application (the Application) from the Filers dated September 23, 2005 for :
(a) approval of a proposed merger of the Filers (the Merger) pursuant to clause 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102); and
(b) approval pursuant to clause 5.5(1)(d) of NI 81-102 for the Filers to suspend the rights of the Filers' respective security holders to request redemptions of their Class A shares during a short data transfer and records update transition period (both (a) and (b) together shall be referred to as the Approval).
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 Filers:
The Filers
GrowthWorks Canadian Fund Ltd.
1. GrowthWorks Canadian Fund Ltd. (GWCF) was incorporated under the Canada Business Corporations Act.
2. GWCF is a registered labour-sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario) and is a registered labour-sponsored venture capital corporation under the Income Tax Act (Canada). GWCF is an approved fund under the Labour-sponsored Venture Capital Corporations Act (Saskatchewan). GWCF's investing activities are governed by such legislation (the "LSIF Legislation").
3. GWCF primarily invests in small and medium sized businesses with the objective of obtaining long term capital appreciation and must make "eligible investments" in "eligible businesses" as prescribed under the LSIF Legislation.
4. The labour sponsor of GWCF is the Canadian Federation of Labour.
5. The authorized capital of GWCF is as follows:
(a) an unlimited number of Class A shares issuable in series, which are widely held, of which there are currently 13 series issued;
(b) 1,000 Class B Shares which are held by the sponsor of GWCF; and
(c) an unlimited number of Class C shares issuable in series, of which there is one issued series designated as "IPA shares" held by the manager of GWCF to provide for a "participating" or "carried" interest in the venture investments of GWCF.
GrowthWorks WV Management Ltd. (the "Manager") is the manager of GWCF under a management contract.
6. GWCF's shares are not listed on an exchange, however GWCF currently offers 12 series of its Class A shares: Venture/Balanced Commission I and II, Venture/Growth Commission I and II, Venture/Income Commission I and II, Venture/Financial Services Commission I and II, Venture/Resource Commission I and II, and Venture/Diversified Commission I and II under a prospectus dated December 24, 2004, as amended (the "GWCF Prospectus").
7. As of August 31, 2005, GWCF had approximately $275 million in net assets.
8. The net asset value of GWCF is calculated at least weekly.
9. GWCF has complied with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106") in connection with the Merger proposal.
GrowthWorks Opportunity Fund Ltd.
10. GrowthWorks Opportunity Fund Ltd. (GWOF) was incorporated under the Canada Business Corporations Act.
11. GWOF is a registered labour-sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario) and is a registered labour-sponsored venture capital corporations under the Income Tax Act (Canada).
12. GWOF primarily invests in small and medium sized businesses with the objective of obtaining long term capital appreciation and must make "eligible investments" in "eligible businesses" as prescribed under the LSIF Legislation.
13. The labour sponsor of GWOF is the Canadian Federation of Labour.
14. The authorized capital of GWOF is as follows:
(a) an unlimited number of Class A shares issuable in series, which are widely held, of which there are currently 13 series issued;
(b) 1,000 Class B Shares, all of which are issued and held by the sponsor of GWOF; and
(c) an unlimited number of Class C shares issuable in series, of which 1,500,000 Series 1 shares are issued and held by GWCF.
15. The Manager is the manager of GWOF under a management contract.
16. GWOF no longer offers any series of its Class A shares.
17. As of August 31, 2005, GWOF had approximately $19.8 million in net assets.
18. The net asset value of GWOF is calculated at least weekly.
19. GWOF has complied with Part 11 of NI 81-106 in connection with the Merger proposal.
Capital Alliance Ventures Fund Inc.
20. Captial Alliance Ventures Fund Inc. (CAVI) is incorporated under the Canada Business Corporations Act.
21. CAVI is a registered labour-sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario) and is a registered labour-sponsored venture capital corporation under the Income Tax Act (Canada).
22. CAVI primarily invests in small and medium sized businesses with the objective of obtaining long term capital appreciation and must make "eligible investments" in "eligible businesses" as prescribed under the LSIF Legislation.
23. The labour sponsor of CAVI is the Canadian Federation of Labour, effective March 2, 2005.
24. The authorized capital of CAVI is as follows:
(a) an unlimited number of Class A shares, which are widely held;
(b) 25,000 Class B Shares, 10 of which are issued and held by the sponsor of CAVI; and
(c) an unlimited number of Class C shares issuable in series, none of which are issued.
25. Fullarton Capital Corporation ("Fullarton"), a wholly-owned subsidiary of the Manager, is the manager of CAVI pursuant to a management agreement dated October 7, 1994, as amended. On December 29, 2004, the Manager, GWL and certain other parties entered into a purchase agreement under which the Manager agreed to purchase all the shares of Fullarton. Approval of the securities regulatory authorities for the change of control of Fullarton was obtained on February 18, 2005. On March 2, 2005 it was announced that the purchase had been completed.
26. CAVI's securities are not listed on any exchange, however CAVI currently offers its Class A shares under a prospectus dated October 27, 2004, as amended.
27. As of August 31, 2005, CAVI had approximately $35.5 million in net assets.
28. The net asset value of CAVI is calculated at least weekly.
29. CAVI has complied with Part 11 of NI 81-106 in connection with the Merger proposal.
Canadian Science and Technology Growth Fund Inc.
30. Canadian Science and Technology Growth Fund Inc. (CSTGF) is incorporated under the Canada Business Corporations Act.
31. CSTGF is a registered labour-sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario) and is a registered labour-sponsored venture capital corporation under the Income Tax Act (Canada). CSTGF is a prescribed labour-sponsored venture capital corporation under the New Brunswick Income Tax Act.
32. CSTGF primarily invests in small and medium sized businesses with the objective of obtaining long term capital appreciation and must make "eligible investments" in "eligible businesses" as prescribed under the LSIF Legislation.
33. The labour sponsor of CSTGF is the Canadian Federation of Labour, effective March 2, 2005.
34. The authorized capital of CSTGF is as follows:
(a) an unlimited number of Class A shares, which are widely held;
(b) 25,000 Class B Shares, 1 of which is issued and held by the sponsor of CSTGF; and
(c) an unlimited number of Class C shares, issuable in series, none of which are issued.
35. Fullarton is the manager of CSTGF pursuant to a management agreement dated September 24, 1996. On December 29, 2004, the Manager, GrowthWorks Ltd. and certain others entered into a purchase agreement under which the Manager agreed to purchase all the shares of Fullarton. Approval of the securities regulatory authorities for the change of control of Fullarton was obtained on February 18, 2005. On March 2, 2005 it was announced that the purchase had been completed.
36. CSTGF's securities are not listed on any exchange, however CSTGF currently offers its Class A shares under a prospectus dated December 20, 2004, as amended.
37. As of August 31, 2005, CSTGF had approximately $31.2 million in net assets.
38. The net asset value of CSTGF is calculated at least daily.
39. CSTGF has complied with Part 11 of NI 81-106 in connection with the Merger proposal.
The Merger
40. On June 27, 2005, GWCF, GWOF, CAVI and CSTGF announced that GWCF had submitted a proposal (the "Merger Proposal") to the Boards of the other Funds that contemplates the Merger of GWOF, CAVI and CSTGF into GWCF. Under the Merger Proposal, the Merger is subject to approval by the boards and shareholders of all of the Funds, as well as applicable regulatory approvals.
41. It is anticipated that the shareholders of the Funds will vote on the Merger at shareholders' meetings to be held on or about November 23, 2005, and, if approved, the Merger would be effective on or about November 29, 2005 (the "Effective Date").
42. In connection with the shareholders' meetings, shareholders of the Funds will be sent information circulars (the "Circulars") which contain details of the proposed Merger, including income tax considerations associated with the Merger.
43. The Merger will be effected by the following steps:
(a) GWCF will purchase the net assets of each of GWOF, CAVI and CSTGF in exchange for Class A shares of GWCF (the "Merger Shares"); and
(b) Each of GWOF, CAVI and CSTGF will redeem all of their own issued Class A shares through an automatic redemption procedure in exchange for transferring Merger Shares to their shareholders.
The end result of these steps is that the net assets of GWOF, CAVI and CSTGF will be held by GWCF and shareholders of each of GWOF, CAVI and CSTGF will become shareholders of GWCF.
Each of GWOF, CAVI and CSTGF will retain sufficient assets to pay their respective liabilities, if any, as of the Effective Date. With no public shareholders and no assets or liabilities, each of GWOF, CAVI and CSTGF will be dissolved or wound-up as soon as reasonably possible following the Effective Date.
44. The Merger does not meet the requirement of s. 5.6(1)(b) of NI 81-102 as it will not be a "qualifying transaction" within the meaning of section 132.2 of the Income Tax Act. Therefore, the distribution of Merger Shares of GWCF on the redemption of Class A shares of each of GWOF, CAVI and CSTGF will be a taxable event resulting in a capital gain or capital loss to the shareholders of GWOF, CAVI and CSTGF depending on each shareholder's adjusted cost base of the shares. However, about 93% of the Class A shares of GWOF, CAVI and CSTGF are held in registered retirement savings plans not subject to tax. Moreover, based on historical selling prices and the anticipated relative values of the Merger Shares and the Class A shares of each of GWOF, CAVI and CSTGF on the Merger Effective Date, very few of the shareholders of GWOF, CAVI and CSTGF will realize a capital gain as a result of the Merger.
45. The last scheduled pricing date for Class A shares of each of the Funds before the anticipated Effective Date of the Merger will be on or about November 24, 2005, two business days before the Effective Date of the Merger. If the Merger is approved by shareholders, the Class A shares of each of the Funds will go off-sale and off-redemption as at the close of business on this date while back office data transfers/conversions from existing service providers to CAVI and CSTGF takes place and the Merger transaction is completed and reported out to dealer back-offices. Shareholder approval for going off-redemption temporarily during this short transition period will be sought at the shareholder meeting at which shareholder approval of the Merger transaction is sought. Sales and redemptions of Class A shares of GWCF will resume after GWCF receives a receipt for its renewal prospectus, expected to be on or about December 12, 2005. Post-Merger, the Merger Shares will be redeemable on similar terms to those that apply to GWOF, CAVI and CSTGF Class A shares now. The net asset value of the funds except for CSTGF are determined weekly and therefore the suspension period would only cover two valuation periods for those funds.
46. Shareholders of each of GWOF, CAVI and CSTGF will be entitled to exercise dissent rights pursuant to and in the manner set forth in Section 190 of the Canada Business Corporations Act with respect to the resolution approving the sale of all or substantially all of the assets of each of GWOF, CAVI and CSTGF to GWCF. Shareholders that validly exercise these rights and do not withdraw their dissent ("Dissenting Shareholders") will be entitled to receive the "fair value" of their GWOF, CAVI or CSTGF Class A shares as at the day before the resolution approving the sale is adopted by shareholders. Any Dissenting Shareholders who held their GWOF, CAVI or CSTGF Class A shares for less than eight years will be required, in accordance with applicable rules, to repay federal and provincial tax credits granted when the shares were originally purchased.
47. The Manager will continue to serve as manager for GWCF post-Merger.
48. The Board of Directors of each of CAVI and CSTGF decided to appoint special committees (the "Special Committees") to review, consider and make recommendations to the boards with respect to the Merger Proposal. The Special Committees have retained Borden Ladner Gervais LLP to provide legal advice relating to the Merger and have retained KPMG LLP as financial advisors to assess the cost savings associated with the Merger.
49. The costs of effecting the Merger, excluding the costs associated with the activities of the Special Committees, will be paid by the managers (or their affiliates) of the Funds, not the Funds and are estimated to be approximately $1,000,000. Costs of the Special Committees, including additional meeting fees and expenses payable to the members of those committees for their extra work in assessing the proposed Merger and costs of the professional advisors retained by the Special Committees to help them review and assess the Merger, will be paid by the Fund for which the Special Committee acts. Therefore, the Merger would not also meet the requirements of s. 5.6(1)(h) of NI 81-102.
50. The costs of the Special Committees are estimated to be approximately $80,000. These costs are independent of the implementation costs of the Merger and do not duplicate costs that would normally be incurred with respect to the implementation of the Merger. The professional advisors retained by the Special Committees are independent of the Manager, the Manager's professional advisors with respect to the Merger and the auditors of CAVI and CSTGF.
Shareholder Disclosure
51. The materials to be sent to shareholders of GWOF, CAVI and CSTGF will not include: a copy of the GWCF Prospectus or a copy of the annual and interim financial statements of GWCF, as required by Section 5.6(1)(f)(ii) of NI 81-102. However, the Circulars sent to these shareholders will instead:
(a) include prospectus-like disclosure concerning GWCF and the shares of GWCF to be issued under the Merger including information regarding fees, expenses, investment objective, investment strategy, valuation procedures, the manager, the investment manager, redemptions, income tax considerations, dividend policy and risk factors;
(b) disclose that shareholders can obtain the most recent annual and interim financial statements of GWCF, that have been made public, at no cost by accessing the SEDAR website at www.sedar.com, by accessing the GrowthWorks website at www.growthworks.ca or by calling a toll-free telephone number (in which case the Manager of GWCF will cause the requested statements to be promptly mailed to the requesting shareholder);
52. The Circulars will contain a description of the Merger, including the tax considerations associated with the Merger. Disclosure will be provided to shareholders to allow them to make an informed decision with respect to the Merger. This will be in addition to the prospectus-like disclosure concerning GWCF and the shares to be issued under the Merger.
53. Since a Labour Sponsored Investment Fund does not use the simplified prospectus and annual information form model of disclosure, and NI 81-106 does not require the filing of an annual information form by investment funds that have a current prospectus, an annual information form for GWCF will not be available to shareholders of GWOF, CAVI and CSTGF, as required by Section 5.6(1)(f)(iii) of NI 81-102.
Decision
Each of the Decision Makers is satisfied that the test contained in NI 81-102 that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under NI 81-102 is that the Approval is granted subject to the following:
(a) the Filers have prominently disclosed in the first few pages of the Circulars of CAVI, CSTGF and GWOF that shareholders can obtain the most recent annual and interim financial statements of GWCF, that have been made public, at no cost by accessing the SEDAR website at www.sedar.com, by accessing the GrowthWorks website at www.growthworks.ca or by calling a toll-free telephone number, and
(b) the Filers have prominently disclosed in the first few pages of the Circulars of CAVI, CSTGF and GWOF a reference to where shareholders can find the prospectus-like disclosure referred to above in paragraph 51 concerning GWCF.