An investment fund generally holds a passive stake in the businesses in which it invests that is, an investment fund generally does not seek to obtain control of, or become involved in, the management of investee companies. This key restriction on the type of investment activities that may be undertaken by an investment fund is codified in section 2.2 of the instrument. Exceptions to this are labour sponsored or venture capital funds, where some degree of involvement in the management of the investees is generally an integral part of the investment strategy. In determining whether an investment fund exercises control over, or is involved in the management of, an investee company, for the purposes of compliance with section 2.2 of the instrument, the Canadian securities regulatory authorities will generally consider indicators, including the following:
(a) any right of the investment fund to appoint directors, or observers, of the board of the investee company
(b) any right of the investment fund to restrict the management of the investee company, or to approve or veto decisions made by the management of the investee company
(c) any right of the investment fund to restrict the transfer of securities by other securityholders of the investee company.
The Canadian securities regulatory authorities will take the above factors into consideration when considering the nature of an investment fund’s investment in an issuer to determine whether the investment fund is in compliance with section 2.2 of the Instrument. The Canadian securities regulatory authorities will also refer to the applicable accounting standards in determining whether an investment fund is exercising control over an issuer.