The Special Committee of the VenGrowth Funds

July 07, 2011 20:21 ET

Covington Offer Improves Terms for VenGrowth Shareholders

Definitive merger agreement signed

Shareholder mailing next step

Highlights

- Redemption fee reduced from 25% to 15% on applicable funds

- Shareholder meetings on August 25, 2011-closing on or about August 31, 2011

- Beneficial redemption options for shareholders begin immediately on closing

- Cash resources to finance redemptions and follow-on investing

- MERs expected to decrease overall by an average of 79 basis points on a weighted average basis

TORONTO, ONTARIO--(Marketwire - July 7, 2011) - The Boards of Directors of the VenGrowth Funds today announced that a definitive merger agreement has been signed with Covington Capital Fund II Inc. ("Covington Fund II"). Under the proposed transaction, Covington Fund II would merge with the five retail VenGrowth funds: VenGrowth I, VenGrowth II, VenGrowth III, VenGrowth Advanced Life Sciences, and VenGrowth Traditional Industries (collectively the "VenGrowth Funds") and the New Generation Biotech (Equity) Fund ("NGBE") in exchange for shares of Covington Fund II. Shareholders of the VenGrowth Funds who do not elect to redeem these shares on the terms set out in the agreement will become shareholders of Covington Fund II.

"There have been important improvements made to the transaction terms since first announcing the letter agreement with Covington Fund II on May 31. The transaction will now provide a lower redemption fee of 15% and continue to lower overall costs. In addition, the combined liquidity profile of VenGrowth and Covington has recently improved to the point where it is no longer necessary to take on debt to finance any aspect of the transaction," said John Crow, Chair of the Board of the VenGrowth Funds and Co-Chair of the Special Committee of the VenGrowth Funds.

"Signing the definitive merger agreement, which sets out improved terms for VenGrowth's Class A shareholders, is an important step forward," said Scott Clark, Managing Partner, Covington Capital Corporation (the "Covington Manager"). "We look forward to taking the next step by putting the terms in front of shareholders for their consideration and moving towards a timely close to provide certainty and a clear path forward for the VenGrowth shareholders."

Mr. Crow continued, "A management information circular (the "Circular") is in the process of being mailed to shareholders. We have moved the shareholder meetings to August 25 to give shareholders as much time as possible to consider the transaction. However, we have kept our target closing date at August 31."

Terms and Conditions

Redemption fee reduced from 25% to 15% on applicable funds

Shareholders in VenGrowth Traditional Industries and VenGrowth III will continue to have no redemption restrictions.

VenGrowth I, VenGrowth II, VenGrowth Advanced Life Sciences, and NGBE shareholders will have two options – they may elect to redeem immediately up to $35.3 million in aggregate of the Covington Fund II shares they receive under the transaction for cash at a value that is equal to the net asset value ("NAV") per share at closing less a redemption fee of 15%. Alternatively, they can choose to hold Covington Fund II shares reflecting the full value of their VenGrowth Fund shares, determined at the date of closing.

If shareholders request redemptions in excess of $35.3 million, redemptions will be processed on a pro rata basis.

All funds generated from the 15% redemption fee will remain in Covington Fund II.

Shareholders in VenGrowth I, VenGrowth II and VenGrowth Advanced Life Sciences that receive Covington Fund II shares may also redeem 15% of their shareholdings in Covington Fund II for cash each year without any additional redemption discount. Such annual redemptions will be provided in each of the first four years from the date of closing. These annual redemption options are non-cumulative and will expire if not exercised in any given year. After these four years, there will be no redemption restrictions.

Financing Redemption Options

Financing for the redemption options and follow-on investment requirements will be managed through cash resources. Therefore, there will be no need to establish a debt facility to finance redemption options, as had been previously announced.

Closing Date

The transaction is targeted to close on or about August 31, 2011.

Overall Fees Reduced

The ongoing Management Expense Ratios ("MERs") are expected to decrease overall by an average of 79 basis points on a weighted average basis.

For shareholders in VenGrowth I Series E (approximately 10% of the VenGrowth Class A shareholders), the MER is expected to increase by 46 basis points to 4.89%. However, as noted above, these shareholders will have access to improved redemption options. As investments are exited and redemptions are processed, it is expected that the actual MER for this series of shares over time will be less than if the VenGrowth I Fund had not merged with Covington Fund II.

Preserving Shareholder Value

The parties have agreed on a portfolio valuation process involving their respective external valuation experts. This process ensures a fair approach to determining relative value at closing in order to protect the interests of the Class A shareholders of the VenGrowth Funds, Covington Fund II and NGBE.

Managers and Sponsor Arrangements

Negotiated arrangements have been agreed to under the supervision of the Special Committee with both the VenGrowth Managers and the Sponsor.

To facilitate the transaction, the VenGrowth Funds, Covington Fund II, the VenGrowth Managers and Covington have agreed that the combined payments to the Covington Manager and the VenGrowth Managers after the transaction shall not exceed 2.75%, which is the total amount of management fees currently charged by Covington thereby facilitating the elimination of the VenGrowth Managers' existing agreements with no incremental cost borne by either the VenGrowth Funds or Covington Fund II. The VenGrowth Managers will receive a payment at a rate of 1.4% of the NAV of Covington Fund II annually.

The VenGrowth Managers will receive a portion of the IPA currently paid by the Fund. However, under a revised arrangement the IPA payable on the assets being acquired will be reduced from 20% to 15% and a condition added that for these assets, no IPA payment can be made unless the entire amount invested in the particular investment has been returned to Covington Fund II including all amounts invested by the predecessor fund. In addition, management fees payable for any new retail funds raised and managed by the Covington Manager will also be shared equally between the Covington Manager and the VenGrowth Managers.

Lastly, the VenGrowth Managers will be entitled to receive a payment equal to on-going capital maintenance fees and the recovery of any deferred sales commissions on shares in the predecessor funds until such time as shares reach maturity.

This arrangement is described in more detail in the Circular that is in the process of being mailed to shareholders of the VenGrowth Funds.

The VenGrowth Managers will provide reasonable transition services as required at no additional cost.

The Canadian Police Association and the Association of Canadian Financial Officers will become co-sponsors of the merged Covington Fund II, but the total sponsor fees will not exceed 16 basis points of the combined fund's NAV, which is less than the sponsor fees being paid by the VenGrowth Funds.

Fairness Opinions

The transaction with Covington Fund II has been reviewed by the Special Committee's financial advisor, Crosbie & Company Inc., which has provided an opinion to the Board of Directors of each of the VenGrowth Funds that the Transaction is fair from a financial point of view to the Class A shareholders of that VenGrowth Fund.

The complete fairness opinion will be published in the information circular.

Additionally, Crosbie & Company Inc. has reviewed this transaction against a wide range of alternatives and advised that the transaction is superior to other known alternatives, including any involving GrowthWorks.

Conditions

The completion of the transaction remains subject to several customary conditions, including the following:

  • VenGrowth Class A shareholders approve the transfer of at least $200 million of fund assets to Covington Fund II
  • Receipt of all applicable regulatory, shareholder and other third-party approvals and consents

Non Solicitation, Fiduciary Out and Transaction Expenses

The definitive merger agreement contains non-solicitation provisions restricting the ability of the VenGrowth Funds to solicit alternative transactions. This restriction is subject to a "fiduciary out" allowing the boards of the VenGrowth Funds to accept an alternative offer that they consider to be superior.

The definitive merger agreement provides for the payment of a break fee of $1 million to the Covington Manager (a) if the definitive merger agreement is terminated following the acceptance by the boards of a VenGrowth Fund of a superior offer or a change of its recommendation in favour of the merger with Covington Fund II or (b) the definitive merger agreement is terminated and the merger with Covington Fund II is not completed in certain circumstances, but within 18 months of the date of the definitive merger agreement with Covington Fund II, a merger by VenGrowth Funds holding at least $200 million of assets is completed with a third party. In either of these circumstances, the VenGrowth Funds would reimburse the VenGrowth Managers for certain transaction costs incurred by it up to a maximum of $1 million.

The Covington Manager and the VenGrowth Managers have agreed to a costs sharing arrangement with respect to certain costs and expenses incurred and expected to be incurred to complete the merger. Under this arrangement, the Covington Manager and the VenGrowth Managers will each pay 50% of specified transaction costs and expenses up to $1.75 million each. The VenGrowth Funds have agreed that, in certain specified circumstances, they will reimburse Covington and the VenGrowth Managers for a portion of those transaction costs.

Rigorous Process Followed

The proposed transaction with Covington is the result of a rigorous, open and competitive process to find the best deal for VenGrowth Class A shareholders.

The process was led by the Special Committee of the VenGrowth Funds, which was co-chaired by John Kingston and John Crow, a former Governor of the Bank of Canada.

Based on an extensive review of 54 entities, the Special Committee, with the aid of its independent financial advisor Crosbie & Company Inc., concluded that the Covington Fund II transaction represents the most attractive alternative for the Class A shareholders of the VenGrowth Funds.

The proposed transaction has been unanimously endorsed by the Boards of Directors of the VenGrowth Funds.

Disclaimer

THIS COMMUNICATION DOES NOT CONSTITUTE A SOLICITATION OF PROXIES FOR OR AGAINST ANY PROPOSED OR POTENTIAL TRANSACTION OR IN RESPECT OF ANY MEETING OF SHAREHOLDERS. ANY SUCH SOLICITATION BY VENGROWTH FUNDS WILL ONLY BE MADE IN ACCORDANCE WITH APPLICABLE LAWS. There can be no assurance that the Covington transaction will be completed on the basis proposed or at all. Any transaction will be subject to the need to secure shareholder and regulatory approvals for the merger.

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