Newport Investment Counsel Inc. - MRRS Decision
Headnote
Applicant was granted relief from the provision in the Legislation that prohibits purchases or sales of any security in which an investment counsel or any partner, officer or associate of an investment counsel has a direct or indirect beneficial interest being made from or to a portfolio managed or supervised by the investment counsel in connection with the initial public offering of units of a fund and certain related transactions.
Statutes cited:
Securities Act, R.S.O. 1990, c. S.5, as am.
Regulations Cited
Regulation made under the Securities Act, R.R.O., Reg. 1015, as am., s.115(6).
July 29, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ONTARIO, ALBERTA, SASKATCHEWAN, NOVA SCOTIA,
PRINCE EDWARD ISLAND AND NEWFOUNDLAND AND LABRADOR
(THE "JURISDICTIONS")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM FOR
EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
NEWPORT INVESTMENT COUNSEL INC.
(THE "FILER" or "NICI")
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 (the "Legislation") of the Jurisdictions that the provision in the Legislation that prohibits purchases or sales of any security in which an investment counsel or any partner, officer or associate of an investment counsel has a direct or indirect beneficial interest being made from or to a portfolio managed or supervised by the investment counsel (the "IC Restriction") shall not apply in connection with the IPO Acquisitions and Redemptions described below (the "Requested Relief").
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.
"BML" means Brompton Management Ltd.;
"Brompton Acquisition" has the meaning given to it in paragraph 36;
"Disclosure Document" has the meaning given to it in paragraph 37;
"Exchangeable Units" means LP Units that are exchangeable for Fund Units;
"Fairness Opinion" has the meaning given to it in paragraph 40;
"Fund Units" means units of the Fund;
"Fund" means Newport Partners Income Fund;
"GP" means Newport Private Yield Inc.;
"IA Agreement" means the investment advisory agreement dated February 24, 2004 between the GP and NICI;
"ICPM" means the categories of investment counsel and portfolio manager under the securities legislation of Ontario or their equivalent in each of the Jurisdictions;
"Investee Businesses" means private businesses with a history of profitability and positive cash flows;
"IPO" means the initial public offering of Fund Units;
"IPO Acquisitions" means collectively the NICI Acquisition, the NPI LP Acquisition and the Brompton Acquisition;
"IPO Meeting" has the meaning given to it in paragraph 14;
"Limited Partners" means the holders of LP Units of NPY LP;
"LP Agreement" means the limited partnership agreement of NPY LP dated March 2, 2004, as amended and restated as of January 26, 2005 and again as of May 9, 2005;
"LP Units" means limited partnership units of NPY LP;
"NICI Acquisition" has the meaning given to it in paragraph 36;
"NPI" means Newport Partners Inc.;
"NPI LP Acquisition" has the meaning given to it in paragraph 36;
"NPY LP" means Newport Private Yield LP;
"Offering Memorandum" has the meaning given to it in paragraph 24;
"Performance Fee" has the meaning given to it in paragraph 32;
"Preliminary Prospectus" has the meaning given to it in paragraph 42;
"Principals" means the fifteen (15) individuals who beneficially own, directly or indirectly, all of the issued and outstanding shares in the capital of NPI;
"RBC DS" means RBC Dominion Securities Inc.;
"Redemption Letter" has the meaning given to it in paragraph 31;
"Special Meeting" has the meaning given to it in paragraph 37;
"the Redemptions" has the meaning given to it in paragraph 29; and
"Trust" means the commercial trust to be established in connection with the IPO.
Representations
This decision is based on the following facts represented by the Filer:
1. NPY LP will purchase ownership interests in NICI and the businesses of NPI and BML in connection with the IPO Acquisitions to be carried out concurrently and in conjunction with the IPO.
NPI
2. NPI is an independent wealth management company which provides investment counselling and sophisticated financial planning, management and solutions services to its personal and corporate clients, with a focus on understanding and servicing the needs of entrepreneurs. NPI's business is carried on through its wholly-owned subsidiaries which include NICI, the GP, Newport Securities Inc., Newport Insurance Inc., Newport Capital Partners Inc. and NAIF Management Ltd.
3. All of the issued and outstanding shares in the capital of NPI are beneficially owned directly or indirectly by the Principals.
4. None of the Principals own more than 25% of any class of NPI's issued and outstanding capital.
5. All of the directors and certain of the officers of NPI are Principals.
6. NPI is not a reporting issuer in any of the Jurisdictions.
NICI
7. NPI owns all of the issued and outstanding shares in the capital of NICI, and as a result, NICI is not a reporting issuer in any of the Jurisdictions.
8. All of the directors and officers of NICI are Principals.
9. NICI is registered in each of the Jurisdictions as an ICPM and is registered in Ontario as a dealer in the category of limited market dealer.
10. NICI engages in a number of advisory activities, including as an investment counsel and/or portfolio manager for numerous clients, as manager of a family of mutual funds, and as investment adviser for NPY LP under the IA Agreement.
11. Pursuant to the IA Agreement, NICI has full power and discretionary authority to manage that portion of the investment portfolio of NPY LP assigned to it by the GP. Section 2.2 of the IA Agreement states:
[NICI] agrees to provide advice to the [GP] in formulating overall investment policies and strategies for [NPY LP] from time to time and, subject always to the direction of the [GP], to manage on a day-to-day basis, with full power and discretionary authority that portion of the investment portfolio of [NPY LP] as is identified from time to time by the GP...[emphasis added.]
The GP
12. NPI owns all of the issued and outstanding shares in the capital of the GP.
13. The GP is the general partner of NPY LP pursuant to the terms the LP Agreement.
14. The Limited Partners will be asked to pass a special resolution approving amendments to the LP Agreement at a special meeting of the Limited Partners to be held prior to filing the final prospectus for the IPO (the "IPO Meeting").
15. Pursuant to the terms of the LP Agreement, the GP is responsible for managing and controlling the business of NPY LP in accordance with the terms of the LP Agreement.
16. All of the directors and officers of the GP are Principals.
NPY LP
17. NPY LP is an Ontario limited partnership formed in March of 2004 on the initiative of NPI. The objective of NPY LP is to invest in Investee Businesses.
18. NPY LP currently holds varying equity interests in six Investee Businesses in four principal areas: financial services, distribution, marketing and oil and gas services.
19. NPY LP is not an "investment fund" (as defined in National Instrument 81-106, Investment Fund Continuous Disclosure). Its LP Units are not redeemable on demand and it currently holds more than a 50% equity interest in a number of the Investee Businesses in which it is invested.
20. As of June 15, 2005, NPY LP had approximately 400 Limited Partners. Each Limited Partner purchased his, her or its LP Units in 2004 or 2005 pursuant to private placement exemptions for accredited investors available in Ontario and the other provinces and territories of Canada in which the Limited Partners resided. NPY LP is therefore not a reporting issuer in any of the Jurisdictions.
21. Each of the Limited Partners holds his, her or its LP Units in a non-discretionary account with NICI. In cases where the Limited Partner also has a discretionary account with NICI, the LP Units are not part of the discretionary account over which NICI exercises discretionary authority.
22. Prior to their purchases of LP Units, each Limited Partner was provided with a copy of the LP Agreement. Section 12.03 of the LP Agreement provides that the GP will not permit NPY LP to invest in any Investee Business in which a director or officer of the GP or any of its Affiliates (as defined in the Act) has an interest, directly or indirectly, unless such investment has been approved by a majority of the independent directors of the GP and NPY LP has obtained an independent valuation or an independent fairness opinion with respect to such investment.
23. Section 14.08 of the LP Agreement provides that, in addition to all other powers conferred on them by the LP Agreement, the Limited Partners together with the GP may by special resolution authorize a change in the restrictions in Section 6.03 of the LP Agreement, which includes a restriction on making an investment contrary to the provisions regarding conflicts of interest in Section 12.03, described in paragraph 22 above.
24. Each Limited Partner also received an offering memorandum (the "Offering Memorandum") in connection with his, her or its investment in LP Units. In the Offering Memorandum, it was noted that when NPY LP achieved $100 million in invested assets, the GP would consider offering LP Units to the public in order to access capital at a lower cost and provide liquidity to the GP and the Limited Partners.
25. That milestone was reached and, as a result, the GP notified the Limited Partners in January of 2005 that it intended to pursue the IPO of NPY LP in 2005.
The IPO
26. NPY LP intends to access capital in the public market through the IPO, using an income fund structure. Under that structure, a lawyer engaged by the GP will establish the Fund, and all of the Fund's holdings in NPY LP will be indirectly held through the Trust.
27. Prior to the closing of the IPO, the LP Units and general partnership units of NPY LP held by the Limited Partners and the GP, respectively, will be exchanged for Exchangeable Units which are exchangeable for Fund Units at a unitholder's election.
28. A portion of the net proceeds from the IPO will be used by the Fund (through the Trust) to subscribe for LP Units, and the subscription monies received by NPY LP will be used to pay for the acquisitions of additional equity interests in certain of the Investee Businesses in which it currently holds equity interests, to pay for the IPO Acquisitions and to acquire interests in other new Investee Businesses.
29. A portion of the net proceeds from the IPO will be used by the Fund (through the Trust) to make a capital contribution to NPY LP so that NPY LP can purchase or redeem LP Units (which will immediately prior to the IPO closing be exchanged into Exchangeable Units) from those Limited Partners who choose to sell their Exchangeable Units to NPY LP ("the Redemptions") in connection with the IPO.
30. NPY LP will effect the Redemptions by redeeming Exchangeable Units held by the Limited Partners at the IPO offering price to the extent that Limited Partners wish to sell any of their units.
31. In connection with the Redemptions, NICI sent a letter (the "Redemption Letter") to the Limited Partners recommending that the Limited Partners sell a portion of their interests in NPY LP by way of Redemption on the closing of the IPO. In this manner, the Limited Partners will be able to realize on the increase in value of their Exchangeable Units of NPY LP as a result of the IPO and the related transactions, while maintaining a similar weighting in NPY LP as part of their overall portfolio of investments. The Redemption Letter requests that each Limited Partner provide written instructions as to what steps should be taken with respect to his, her or its interests in NPY LP (i.e., whether to sell the recommended amount or a different amount).
32. NPY LP will use a portion of the net proceeds from the IPO that it receives as subscription monies to pay the performance fee (the "Performance Fee") payable to NICI under the IA Agreement in connection with the IPO. The Performance Fee would be paid to NICI on the IPO regardless of whether the IPO Acquisitions were involved as part of the IPO.
33. NICI will pay the Performance Fee, net of any applicable taxes, to the Principals and to align the interests of the Principals with the Limited Partners, each of the Principals will use his or her portion of the Performance Fee, less an amount to be paid in respect of taxes, to subscribe for Exchangeable Units at the IPO offering price. The Principals have each entered into an undertaking with the underwriters not to sell any of the Exchangeable Units they acquire on the closing of the IPO for a period of six (6) months.
34. RBC DS has been retained by NPY LP to act as the lead underwriter.
35. During initial discussions with RBC DS about the IPO, RBC DS advised that NPY LP should be purchasing NPI as an Investee Business, to further align the interests of the GP with those of the Limited Partners, as this is customary among income trusts and would be expected by the public markets and potential investors in the Fund. This led to the initiative to expand one of the principal areas of NPY LP's investments, being financial services, and to search for complimentary financial services businesses for NPY LP to acquire as Investee Businesses to further improve the attractiveness of the IPO to investors. The result has been the agreement for NPY LP to acquire interests in the businesses of BML (a mutual fund manager) and Morrison Williams Investment Limited (an institutional adviser) in addition to the businesses of NPI (a wealth manager with an entrepreneurial focus). These acquisitions are contingent on and will occur contemporaneously with the closing of the IPO and are considered by the GP and the Limited Partners to be part of the IPO.
36. As a result, concurrently with and conditional upon the closing of the IPO, NPY LP will acquire interests in three wealth management companies. Two of those acquisitions, namely the IPO Acquisitions, involve Principals directly or indirectly on both sides of the transactions. More particularly, NPY LP will acquire the following interests under the IPO Acquisitions:
(i) NPI, all of the issued and outstanding securities in the capital of NICI (the "NICI Acquisition") and all of the limited partnership interests in NPI LP (the "NPI LP Acquisition"), a limited partnership created for the purpose of holding all of the business assets of NPI other than NICI; and
(ii) BML, 45% of the limited partnership interests in Brompton LP (the "Brompton Acquisition"), a limited partnership created for the purpose of holding all of the fund management assets of BML, whose shareholders include four directors of NPI who collectively hold 9% of the issued and outstanding capital of BML.
37. On April 18, 2005, the GP delivered a solicitation of proxies to the Limited Partners accompanied by a disclosure document (the "Disclosure Document") in connection with a special meeting of the Limited Partners (the "Special Meeting") held May 9, 2005 for the purposes of approving the IPO and the IPO Acquisitions in principle.
38. The Disclosure Document includes a description of the IPO and the transactions being carried out as part of the IPO (which include the IPO Acquisitions). In addition to providing the reasons for the GP's recommendation to proceed with the IPO and the accompanying transactions, the Disclosure Document includes a description of the interests of related parties in the IPO Acquisitions.
39. The Disclosure Document also includes disclosure related to the Performance Fee which NICI is entitled to receive under the IA Agreement, and arrangements under the IA Agreement in connection with the IPO.
40. Orion Securities Inc., an independent financial adviser retained to provide a fairness opinion (the "Fairness Opinion"), determined that the proposed purchase price to be paid by NPY LP for NPI is fair from a financial point of view to the Limited Partners. A copy of the Fairness Opinion was delivered to the Limited Partners with the Disclosure Document.
41. At the Special Meeting, the resolution of the Limited Partners to approve the IPO received the unanimous support of the votes cast in person or by proxy, representing approximately 78% of the outstanding LP Units allowed to vote. The Principals and their immediate families were excluded from voting any LP Units held directly or indirectly by them.
42. The Fund filed a preliminary prospectus dated June 29, 2005 in respect of the IPO and an amended and restated preliminary prospectus (the "Preliminary Prospectus") dated July 7, 2005 for which MRRS decision documents evidencing receipt by the regulators in each of the provinces and territories of Canada were issued on June 30, 2005 and July 8, 2005, respectively.
43. It is anticipated that a final prospectus will be filed in respect of the IPO on July 27, 2005 and that the closing of the IPO, the IPO Acquisitions and the Redemptions will occur on or about August 4, 2005.
44. At the IPO Meeting, which is scheduled to be held prior to the filing of the final prospectus, the Limited Partners will be asked to vote on a resolution to approve amendments to the LP Agreement which are necessary to enable NPY LP and the Fund to proceed with the IPO and the related transactions (including the IPO Acquisitions and the payment of the Performance Fee). Notice of the IPO Meeting, a solicitation of proxies and an accompanying disclosure document providing disclosure relating to the items for approval will be sent to the Limited Partners in advance of the IPO Meeting.
Decisions
Each of the relevant Decision Makers is satisfied that the tests contained in the Legislation that provide the Decision Maker with the jurisdiction to make the decisions have been met.
The decision of the Decision Makers in each of the Jurisdictions under the Legislation is that the Requested Relief is granted.