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Chou Associates Management Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from self-dealing provisions in section 4.2 of NI 81-102 and subsection 13.5(2)(b) of NI 31-103 to permit mutual funds to sell portfolio assets to an affiliate of the fund's manager -- sale is for illiquid securities of a private issuer to help funds reduce funds' overall illiquid asset exposure -- independent valuation confirmed sales price is reasonable -- proposed sale approved by funds' IRC.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 4.2(1), 19.1.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss 13.5(2)(b), 15.1.
June 25, 2020
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 CHOU ASSOCIATES MANAGEMENT INC. (the Filer) AND IN THE MATTER OF CHOU RRSP FUND AND CHOU BOND FUND (the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer under section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) and section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), on behalf of the Funds, for relief from:
(a) the requirement in section 4.2 of NI 81-102, which prevents an investment fund from purchasing a security from or selling a security to any of the following persons or companies:
1. The manager, portfolio adviser or trustee of the investment fund;
2. A partner, director or officer of the investment fund or of the manager, portfolio adviser or trustee of the investment fund;
3. An associate or affiliate of a person or company referred to in paragraph 1 or 2;
4. A person or company, having fewer than 100 securityholders of record, of which a partner, director or officer of the investment fund or a partner, director or officer of the manager or portfolio adviser of the investment fund is a partner, director, officer or securityholder,
if such persons or companies are acting as principal (the Self-Dealing Relief)
and (b) section 13.5(2)(b)(i) of NI 31-103, which restricts the registered adviser from knowingly causing the purchase or sale of a security from or to the investment portfolio to the investment portfolio of a responsible person (the Inter-Fund Trade Relief and together with the Self-Dealing Relief, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the 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 all of the provinces of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).
Interpretation
Defined terms contained in NI 31-103 and NI 81-102 have the same meaning in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer in respect of the Filer and the Funds.
The Filer
1. The Filer is a corporation under the laws of the Province of Ontario.
2. The Filer is registered as an investment fund manager, portfolio manager and exempt market dealer in Ontario.
3. The Filer is the investment fund manager and portfolio manager of the Funds.
4. The Filer is not in default of securities legislation in any jurisdiction in Canada.
The Funds
5. The Funds are open-ended mutual funds established under the laws of the Province of Ontario. The Funds are reporting issuers in each of the Jurisdictions.
6. The Funds filed a simplified prospectus on September 14, 2019, for which it received a receipt.
7. The investment objective of the Chou RRSP Fund (the RRSP Fund) is to provide long-term growth of capital by investing in equity and debt instruments of primarily Canadian businesses.
8. The investment objective of the Chou Bond Fund (the Bond Fund) is to provide conservation of principal and income production, along with capital appreciation.
9. The Filer has established an independent review committee (IRC) in respect of each of the Funds in accordance with the requirements of National Instrument 81-107 Independent Review Committee (NI 81-107)
10. Neither of the Funds is in default of securities legislation of any jurisdiction in Canada.
The Affiliate
11. 2665411 Ontario Inc. (the Affiliate) is a corporation under the laws of the Province of Ontario.
12. The Affiliate and the Filer are under common ownership by Francis Chou.
13. The Affiliate is not a reporting issuer in any jurisdiction in Canada and is not considered an "investment fund" as that term is defined in securities legislation.
The Proposed Sale
14. The Affiliate is proposing to purchase 242914 common shares of EXCO Resources Inc. (EXCO) from the RRSP Fund, and 60136 common shares of EXCO from the Bond Fund (the Proposed Sale).
15. EXCO is a private issuer that that is not listed for trading on an exchange. The Funds originally acquired the EXCO common shares pursuant to a corporate restructuring in which certain EXCO debt instruments held by the Funds were converted to common shares. The EXCO common shares held by the Funds are considered "illiquid assets" as that term is defined in NI 81-102.
16. The Proposed Sale is primarily to help reduce the amount of illiquid assets held in the Funds' portfolios, and completion of the Proposed Sale will result in a substantial reduction in the proportion of illiquid assets in each Fund's portfolio.
Generally
17. The Affiliate is proposing to purchase the EXCO shares as principal under the Proposed Sale. Absent the Self-Dealing Relief, the Affiliate would not be permitted to purchase the EXCO shares from the Funds.
18. The Filer is the portfolio manager of the Funds and is therefore a "responsible person" to the Funds as that term is defined in NI 31-103. Absent the Inter-Fund Trade Relief, the Filer, would not be permitted to cause the Funds to sell the EXCO shares to the Affiliate under the Proposed Sale.
19. The Filer has retained Duff & Phelps, LLC, (the Valuator), a firm which is independent of the Filer and the Affiliate, to provide an independent valuation of the EXCO common shares held by the Fund, and the Valuator's report is updated on quarterly basis. The proposed price to be paid for the EXCO common shares by the Affiliate under the Proposed Sale, is within the fair market valuation range provided by the Valuator as of December 31, 2019 in its most recent valuation report dated March 17, 2020. The proposed price is also consistent with how the EXCO shares are valued in the Funds' portfolios.
20. The Filer also submits that the proposed price to be paid for the EXCO common shares by the Affiliate under the Proposed Sale is higher than the price of EXCO common shares trades on the over the counter (OTC) market, and therefore higher than the price that would likely be offered by an arm's length third party.
21. Pursuant to section 5.1 of NI 81-107, the Proposed Sale was referred to the Funds' IRC. After reasonable inquiry, the IRC concluded on February 21, 2020 that the Proposed Sale will achieve a fair and reasonable result for the Funds.
22. The Filer submits that the Proposed Sale is in the best interests of the Funds to reduce the amount of illiquid investments held by each of the Funds.
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 Exemption Sought is granted provided that, at the time of the Proposed Sale:
1. The EXCO common shares are not listed for trading on an exchange.
2. There have been no changes to the material terms of the Proposed Sale, including the purchase price for the EXCO common shares.
3. The IRC approval of the Proposed Sale has not been revoked.
4. The Filer receives no remuneration with respect to the Proposed Sale. With respect to the delivery of securities, the only expenses that may be incurred by the Funds are nominal administrative charges levied by the custodian and/or recordkeeper of the Funds for recording the trades and/or any charges by a dealer in transferring the securities.
5. The Filer will keep written records of the Proposed Sale including the value assigned to the EXCO shares delivered to the Affiliate, for 5 years after the end of each Fund's fiscal year in with the Proposed Sale takes place, the most recent two years in a reasonably accessible place.
"Neeti Varma"
Manager, Investment Funds and
Structured Products
ONTARIO SECURITIES COMMISSION