Proposed amendments to the TSX rules will require an investment fund listed on that exchange to seek security holder approval if it is being "acquired" or if it proposes to acquire another investment fund by issuing securities in payment of the purchase price for that fund in excess of a specified threshold. Exemptions from these requirements will be available assuming that specified conditions are met. These proposed amendments can be viewed as a direct result of regulatory concerns raised about recent transactions involving listed investment funds and, at least in part, as an attempt by the TSX to fill a perceived regulatory gap, in that no other rules directly address mergers or other acquisitions of investment funds that are not mutual funds.
The proposed amendments to Part VI of the TSX Company Manual are available [here] and the TSX asks for comments to be delivered by December 14, 2009. We intend to provide comments on the proposed amendments and would be pleased to assist you in providing comments.
Security holder Approval for Listed Investment Funds Being "Acquired": Under the proposed amendments, investors of an investment fund that is the subject of an acquisition would be required to approve the proposed transaction unless the following conditions are met:
- The investment fund has a "permitted merger clause" in its constating documents that permits it to merge with another entity without security holder approval.
- The aggregate consideration offered to security holders of the fund in connection with the acquisition has a value that is not less than the net asset value of the fund.
- The independent review committee of the investment fund has determined that the investment objectives, valuation procedures and fee structure of the investment fund and the purchasing entity are substantially the same and has approved the acquisition.
- The investment fund has provided its security holders with a redemption right for cash proceeds that are not less than its net asset value, together with adequate notice and description of such redemption right and the acquisition.
Security holder Approval for Listed Investment Funds that are "Acquiring" Another Investment Fund: TSX rule amendments that will be effective on November 24, 2009 will require all listed issuers, including listed investment funds, to obtain security holder approval if they propose to acquire another entity and issue securities as payment for the purchase price where such share issuance results in excess of 25 percent dilution.1 The TSX now proposes to exempt an investment fund from these requirements if the following conditions are met.
- The target is an investment fund that calculates and publishes its net asset value at least once a month.
- The consideration being offered for the purchase does not exceed the net asset value of the target investment fund.
- The independent review committee of the acquiring investment fund has determined that the investment objectives of the applicable investment funds are substantially the same and has approved the acquisition.
- The number of securities issued or issuable in payment of the purchase price must not exceed 100 percent of the number of outstanding securities of the acquiring investment fund calculated on a nondiluted basis.
Rationale for Proposed Amendments: The TSX is concerned about the appropriate protection of investors in funds where the constating documents of such funds permit mergers to be carried out without security holder approval (generally only if certain conditions are met) because, in its view, these provisions can permit fundamental alterations in an investment to occur without investor approval. Historically, the TSX required investment funds that relied on so-called "permitted merger clauses" to provide a redemption right to investors for cash proceeds based on net asset value. The proposed amendments codify this existing practice.
As noted above, an investment fund that is issuing securities to acquire another investment fund is proposed to be exempt from the requirement to obtain investor approval, but only if the dilution does not exceed 100 percent. In providing this proposed exemption, the TSX acknowledges that investors in an investment fund do not suffer the same economic dilution as investors in operating companies and that the cost of holding a meeting of investors is an important consideration.
While we believe that the proposed exemptions are generally appropriate, in our view, further thought should be given as to the prescriptiveness of the proposed conditions, including the right of redemption that must be provided, the necessity for IRC "approvals" and the matters that the IRC must "determine", as well as the technically imprecise language used in the proposed rule changes. On a more fundamental level, we also query whether such requirements should be imposed by the TSX on investment funds, rather than by the securities regulatory authorities (the CSA), who have primary jurisdiction over the regulation of investment funds and have prescribed rules governing similar matters for publicly offered mutual funds.
Our Structured Products practice group has been involved in many leading edge transactions in the structured products and closed-end fund markets in Canada. By being creative, persuasive and flexible, we provide innovative solutions and help our clients achieve their business objectives. We monitor regulatory developments and make information available on a regular basis.
1 See TSX Introduces New Securityholder Approval Requirements for Takeover Bids and Mergers Involving Share Exchanges Securities & Capital Markets Alert October 2009 Borden Ladner Gervais LLP [available here]
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