Manulife Asset Management Limited and Manulife International Value Equity Fund

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, paragraph 5.5(1)(b) and section 19.1.

March 25, 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
MANULIFE ASSET MANAGEMENT LIMITED
(the Filer)

AND

IN THE MATTER OF
MANULIFE INTERNATIONAL VALUE EQUITY FUND
(the Terminating Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of the proposed merger (the Merger) of the Terminating Fund into Manulife EAFE Equity Fund (the Continuing Fund and together with the Terminating Fund, the Funds, and each, a Fund) under paragraph 5.5(1)(b) of National Instrument 81-102 – Investment Funds (NI 81-102) (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 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.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1.             The Filer is a corporation amalgamated under the Canada Business Corporations Act with its head office located in Toronto, Ontario.

2.             The Filer is registered in the following categories: portfolio manager in all provinces and territories of Canada; investment fund manager in Ontario, Newfoundland and Labrador, and Quebec; commodity trading manager in Ontario; and derivatives portfolio manager in Quebec.

3.             The Filer is the manager and trustee of the Funds.

4.             The Filer is not in default of any of the requirements of the securities legislation of any of the provinces and territories of Canada.

The Funds

5.             The Terminating Fund and the Continuing Fund are open-ended mutual fund trusts and are governed by the provisions of NI 81-102.

6.             The Funds were each established under the laws of Ontario by separate declarations of trust and a separate regulation or plan of establishment, as applicable, (together with the declarations of trust, the Declarations of Trust).

7.             Securities of the Terminating Fund, except for those described in paragraph 9 below, are qualified for sale in each of the provinces and territories of Canada pursuant to a simplified prospectus, annual information form and fund facts, each dated August 2, 2018, as amended. However, currently, securities of the Terminating Fund are not being publicly offered for distribution to the public.

8.             Securities of the Continuing Fund, except for those described in paragraph 9 below, are qualified for sale in each of the provinces and territories of Canada pursuant to a simplified prospectus, annual information form and fund facts, each dated August 2, 2018, as amended.

9.             Series X, Series O, Series G and Series M of the Terminating Fund (the Exempt Terminating Fund Series) and Series X, Series O, Series G and Series M of the Continuing Fund (the Exempt Continuing Fund Series) have only been offered by way of a prospectus exemption pursuant to National Instrument 45-106 – Prospectus Exemptions (NI 45-106).

10.          The Funds are reporting issuers as defined under the applicable securities legislation of each province and territory of Canada and are not in default of any of the requirements of the securities legislation of any of the provinces and territories of Canada.

11.          The net asset value for each of the Funds is calculated on a daily basis at the end of each day the Toronto Stock Exchange is open for trading.

12.          Other than under circumstances in which the securities regulatory authority or securities regulator of the 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.

Reason for Approval Sought

13.          The Filer is proposing to merge the Terminating Fund into the Continuing Fund.

14.          The Merger is anticipated to be implemented on or about April 5, 2019 (the Effective Date).

15.          The Approval Sought is required because the Merger will not be effected in reliance on the “qualifying exchange” or tax-deferred transaction provisions of the Income Tax Act (Canada) (the Tax Act) and as such, the Merger does not meet all of the pre-approval criteria in section 5.6 of NI 81-102.

16.          Although the Merger is being conducted on a taxable basis, in the Filer’s view, it is in the best interest of the securityholders of the Funds to complete the Merger on a taxable basis given that the Continuing Fund has significantly more capital losses than the Terminating Fund and such losses will be preserved by completing the Merger in this manner.

17.          Except as noted 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.

The Proposed Merger

18.          A press release with respect to the proposed Merger was issued and filed on the System for Electronic Document Analysis and Retrieval (SEDAR) on January 14, 2019, and a material change report was filed on SEDAR on January 24, 2019. The simplified prospectus, annual information form, and fund facts for the Funds were amended to include disclosure with respect to the Merger in accordance with applicable securities law and filed on SEDAR.

19.          Pursuant to National Instrument 81-107 - Independent Review Committee for Investment Funds, the independent review committee of the Funds (the IRC) has reviewed the Merger and the process to be followed in connection with the Merger, and has advised the Filer that, in the opinion of the IRC, having reviewed the Merger as a potential “conflict of interest matter”, the Merger achieves a fair and reasonable result for the Funds and their securityholders.

20.          A notice of meeting, management information circular (the Circular) and form of proxy (together, the Meeting Materials) in connection with the special meeting of securityholders of the Terminating Fund (the Terminating Fund Meeting) and the special meeting of securityholders of the Continuing Fund (the Continuing Fund Meeting), both held on March 14, 2019, were mailed to investors of record as at January 31, 2019 of the Funds and filed on SEDAR in accordance with applicable securities law.

21.          The Circular describes all of the relevant facts concerning the Merger, including the differences between the Funds, the tax implications and other consequences of the Merger, as well as the IRC’s recommendation of the Merger, so that securityholders of the Terminating Fund may make an informed decision before voting on whether to approve the Merger. The Circular also contains certain prospectus-level disclosure concerning the Continuing Fund, including information in respect of its investment objective, fund type, portfolio management, risk classification, registered plan eligibility, net asset value, fees and expenses, annual returns, valuation procedures and distribution policies.

22.          The Circular also describes the various ways in which securityholders can obtain a copy of the current simplified prospectus, most recently filed annual information form, most recently filed fund facts documents, most recently filed annual financial statements and interim financial reports, and most recently filed annual and interim management reports of fund performance for the Continuing Funds, at no cost.

23.          Accompanying the Circular delivered to securityholders of the Terminating Fund, except for securityholders of the Exempt Terminating Fund Series (the Exempt Terminating Fund Securityholders), were copies of the most recently filed fund facts for the Continuing Fund.

24.          Investors of the Terminating Fund had an opportunity to consider this information prior to voting on the Merger at the Terminating Fund Meeting.

25.          Pursuant to paragraph 5.1(1)(f) of NI 81-102, securityholders of the Terminating Fund approved the Merger at the Terminating Fund Meeting.

26.          Pursuant to paragraph 5.1(1)(g) of NI 81-102, securityholders of the Continuing Fund also approved the Merger at the Continuing Fund Meeting.

27.          No costs or expenses will be payable in connection with the acquisition by the Continuing Fund of the investment portfolio of the Terminating Fund.

28.          The Filer will pay for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing, and brokerage costs, as well as regulatory fees.

29.          No fees or sales charges will be payable by securityholders of the Funds in connection with the Merger.

30.          The investment portfolio and other assets of the Terminating Fund to be acquired by the Continuing Fund in order to effect the Merger are currently, or will be on the 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.

31.          The Merger will be structured substantially as follows:

(i)            The value of the Terminating Fund’s portfolio and other assets will be determined at the close of business on the Effective Date.

(ii)           The Declarations of Trust governing the Funds will be amended to permit such actions as are necessary to complete the Merger.

(iii)           Immediately following the close of business on the Effective Date, the Terminating Fund will transfer all of its assets and liabilities to the Continuing Fund.

(iv)          In exchange, the Terminating Fund will receive securities of the relevant series of the Continuing Fund, the aggregate value of which is equal to the aggregate net asset value (the NAV) of the assets of the Terminating Fund transferred to the Continuing Fund, in each case calculated as of the close of business on the Effective Date.

(v)           Immediately thereafter, the Terminating Fund will cause all of its securities to be redeemed and pay the redemption price by distributing securities of the Continuing Fund. This will result in each securityholder of the Terminating Fund receiving securities of the applicable series of the Continuing Fund with a NAV equal to the NAV of the securities of the relevant series of the Terminating Fund that were held by such securityholder.

(vi)          Securityholders of the Terminating Fund will receive securities of the corresponding Continuing Fund as follows:

(vii)         As soon as reasonably practicable after the distribution of securities of the Continuing Fund to the Terminating Fund’s securityholders, the Terminating Fund will be terminated.

32.          The result of the Merger will be that securityholders of the Terminating Fund will cease to be securityholders of the Terminating Fund and will become securityholders of the Continuing Fund. The Continuing Fund will continue as a publicly offered open-end mutual fund.

33.          Securityholders of the Terminating Fund will continue to have the right to redeem securities of the Terminating Fund for cash at any time up to the close of business on the Effective Date. The Circular disclosed that, upon acquisition of securities of the Continuing Fund, Terminating Fund securityholders will be subject to the same redemption charges to which their securities of the Terminating Fund were subject to prior to the Merger occurring.

34.          The Terminating Fund will be capped to switches and transfers out over Fundserv after 4:00pm (Toronto time) on April 4, 2019. Securityholders will have the right to redeem the securities of the Terminating Fund up to 4:00pm (Toronto time) on the Effective Date for direct orders and as of 4:00pm (Toronto time) on April 3, 2019 for wire orders over Fundserv.

35.          The Exempt Terminating Fund Securityholders will receive corresponding Exempt Continuing Fund Series upon completion of the Merger. This distribution of Exempt Continuing Fund Series securities to Exempt Terminating Fund Securityholders will be completed in reliance on the prospectus exemption contained in section 2.11 of NI 45-106. The Filer included prospectus-level disclosure in the Circular describing the applicable securities and the Merger in sufficient detail to enable the Exempt Terminating Fund Securityholders to form an informed decision concerning the Merger.

Benefits of Merger

36.          The Filer believes that the Merger will benefit securityholders of the Funds because:

(i)            The Terminating Fund has a similar investment mandate as the Continuing Fund and would generally attract the same type of investor with a similar risk-return profile. As a result, the Merger will contribute towards reducing duplication and redundancy across the Manulife fund line-up.

(ii)           The Merger has the potential to lower costs for securityholders. If the Merger is completed, expenses for which the Continuing Fund is responsible will be spread over a greater pool of assets, potentially resulting in a lower management expense ratio for the Continuing Fund than may not occur otherwise. No securityholder of the Terminating Fund will be subject to an increase in management fees as a result of the Terminating Fund merging into the Continuing Fund (and many will experience a decrease in management fees). The fixed administrative fee chargeable to both Funds is also the same.

(iii)           The Continuing Fund will have an asset base of greater size, potentially allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions. The ability to improve diversification may lead to increased returns and a reduction of risk, while at the same time creating a higher profile that may attract more investors.

(iv)          The Continuing Fund is expected to attract more assets as marketing efforts will be concentrated on fewer Funds, rather than two Funds with similar investment mandates. The ability to attract assets to the Continuing Fund will benefit investors by ensuring that the Continuing Fund remains viable, long-term, attractive investment vehicles for existing and potential investors.

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 Approval Sought is granted.

“Stephen Paglia"
Manager, Investment Funds and Structured Products
Ontario Securities Commission