ANNUAL INFORMATION FORM

Transcription

1 ANNUAL INFORMATION FORM FOR THE YEAR ENDED FEBRUARY 28, 2016 CLASS A CAPITAL SHARES CLASS B PREFERRED SHARES, SERIES 2 April 28, 2016

2 FORWARD-LOOKING STATEMENTS Certain statements contained in this annual information form constitute forward-looking statements. The use of any of the words anticipate, continue, estimate, expect, may, will, project, should, believe, and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes the expectations reflected in forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this annual information form should not be unduly relied upon. These statements speak only as of the date of this annual information form. In particular, this annual information form may contain forward-looking statements pertaining to distributions on the Class B Preferred Shares, Series 2 and Class A Capital Shares. The actual results could differ materially from those anticipated in these forward-looking statements. Allbanc Split Corp. II does not undertake any obligation to publicly update or revise any forward-looking statements.

3 ALLBANC SPLIT CORP. II ANNUAL INFORMATION FORM Table of Contents ALLBANC SPLIT CORP. II... 1 DESCRIPTION OF BUSINESS ACTIVITIES... 1 DESCRIPTION OF SHARE CAPITAL... 2 COMPANY S FINANCIAL CONDITION AND OPERATING RESULTS... 7 RESPONSIBILITY FOR OPERATIONS... 7 DIRECTORS AND OFFICERS... 8 PRINCIPAL SHAREHOLDERS... 9 CONFLICTS OF INTEREST... 9 CORPORATE GOVERNANCE... 9 INVESTMENT RESTRICTIONS CANADIAN FEDERAL INCOME TAX CONSIDERATIONS INVESTMENT CONSIDERATIONS AND RISK FACTORS MATERIAL CONTRACTS TRANSFER AGENT, REGISTRAR, CUSTODIAN AND AUDITORS ADDITIONAL INFORMATION... 13

4 ALLBANC SPLIT CORP. II Allbanc Split Corp. II (the Company ), incorporated under the laws of Ontario on December 7, 2005, is a mutual fund corporation whose principal undertaking is to invest in common shares ( Portfolio Shares ) of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank. The Company has its registered offices at 40 King Street West, Scotia Plaza, 26 th Floor, P.O. Box 4085, Toronto, Ontario, M5W 2X6. From January 30 to February 23, 2006, the Company purchased the Portfolio Shares through an agreement with two of its agents, Scotia Capital Inc. ( SCI ) and TD Securities Inc. On February 9, 2006 the Company raised net proceeds of $306,827,736 through the issuance of 13,460,000 Class A Capital Shares ( Capital Shares ) and 6,730,000 Class A Preferred Shares ( Preferred Shares ). The net proceeds of this initial public offering were used to fund the purchase of Portfolio Shares. Prior to January 30, 2006, the Company was inactive. On December 7, 2010, holders of Capital Shares approved a proposal to reorganize the Company under which: a) the Articles of the Company were amended to: i) extend the redemption date of the Capital Shares to February 28, 2016 (the Redemption Date ); ii) provide holders of Capital Shares who did not wish to continue their investment in the Company with a special retraction right which enabled such holders to retract their shares on February 28, 2011 on the same terms that would have applied had the Company redeemed all Capital Shares as originally contemplated; iii) make certain other amendments consequential to the foregoing; and b) an increase (from 0.20% to 0.25% per annum of the market value of the Portfolio Shares) in the fee payable to the Administrator under the Administration Agreement effective from and after February 28, 2011 was approved. The Preferred Shares were redeemed on February 28, 2011 in accordance with their terms for a redemption price of $ In order to maintain the leveraged split share structure of the Company, the Company completed a $47,435,841 public offering through the issuance of 2,175,956 Class B preferred shares, Series 1 (the Series 1 Preferred Shares ) at a price of $21.80 per share pursuant to a prospectus dated February 18, On December 11, 2015, the holders of the Capital Shares approved a share capital reorganization (the Reorganization ) which permitted holders of Capital Shares to extend their investment in the Company beyond the redemption date of February 28, 2016 for an additional 5 years to February 28, 2021 (the Redemption Date ). The Reorganization provided holders of Capital Shares who chose to exit with a special right of retraction to replace the originally scheduled final redemption. The Series 1 Preferred Shares were redeemed on February 26, 2016, in accordance with their terms for a redemption price of $ In order to maintain the leveraged split share structure of the Company, the Company completed a $17,649,845 public offering through the issuance of 687,567 Class B preferred shares, Series 2 (the Series 2 Preferred Shares ) at a price of $25.67 per share pursuant to a prospectus dated February 17, As at April 28, 2016 there were 687,567 Series 2 Preferred Shares and 1,375,134 Capital Shares outstanding. The Capital Shares and Series 2 Preferred Shares are listed on the Toronto Stock Exchange (the TSX ) under the symbols ALB and ALB.PR.C, respectively. DESCRIPTION OF BUSINESS ACTIVITIES The Company s Portfolio consists of publicly listed common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank in order to generate fixed cumulative preferred distributions of $ per annum for the holders of the Company s Series 2 Preferred Shares and to enable the holders of the Capital Shares to participate in any capital appreciation in the Portfolio Shares, as well as any increase in the dividends paid on the Portfolio Shares, and to receive dividends as and when declared by the Board of Directors of the Company. 1

5 For the year ended February 28, 2016, the Company declared and paid dividends of $0.75 million or $ per Preferred Share ( $0.9 million or $0.9264). In addition, the Company declared and paid dividends of $0.9 million or $ per Capital Share ( $0.9 million or $0.50) representing dividends received on the Portfolio Shares in excess of the fixed Preferred Share dividends and expenses of the Company. The Company only trades the Portfolio Shares in limited circumstances as described in the Company s prospectus. As such, the Portfolio Shares are not actively traded and the Company can be considered a passive investment vehicle. The Company s Portfolio Shares are held by State Street Trust Company Canada as custodian pursuant to a custodian agreement (the Custodian Agreement ) dated as of February 9, Securities Lending The Company may engage in securities lending transactions in order to generate additional returns. Under such transactions, the Company will lend Portfolio Shares owned by it to securities borrowers acceptable to the Company pursuant to the terms of a securities lending agreement between the Company and any such borrower (a Securities Lending Agreement ). Under a Securities Lending Agreement: (i) the borrower will pay to the Company a negotiated securities lending fee and will make compensation payments to the Company equal to any dividends received by the borrower on the securities borrowed; (ii) the securities loans must qualify as securities lending arrangements for the purpose of the Income Tax Act (Canada); and (iii) the Company will receive prescribed collateral security. Any securities lending activities will be conducted in accordance with applicable securities legislation. The Company s custodian will be responsible for the ongoing administration of securities loans, including the obligation to mark-tomarket the collateral on a daily basis. No securities lending activities have been transacted by the Company to date. DESCRIPTION OF SHARE CAPITAL Authorized Share Capital The Company s authorized share capital consists of an unlimited number of Class A capital shares (the Capital Shares ), an unlimited number of Class A Preferred Shares, an unlimited number of Class B, C, D, and E capital shares, issuable in series, an unlimited number of Class B, C, D and E preferred shares, issuable in series, and an unlimited number of Class J Shares and Class S Shares.. The Series 2 Preferred Shares rank prior to the Capital Shares, Class J Shares and Class S Shares with respect to the payment of dividends, distributions upon a redemption, retraction or return of capital and distributions upon a dissolution, liquidation or winding-up of the Company. A Unit consists of two Capital Shares and one Series 2 Preferred Share. For the Unit Value calculation, Series 2 Preferred Shares will not be treated as liabilities and any tax loss carryforwards will not be treated as an asset. Unit Value is defined as: (a) the amount received by the Company per Unit on the disposition of that number of Portfolio Shares represented by the Unit s pro rata share of the Portfolio Shares. In respect of any retraction by a holder for a Valuation Date and the calculation of Unit Value under this paragraph for such purpose, the number of Portfolio Shares to be disposed of will be rounded down to the nearest whole share and such shares may be disposed of at any time between the date notice of any retraction is required to be given and the Retraction Payment Date or Annual Retraction Payment Date, as the case may be; or (b) in the event that the Administrator determines that it is not practicable to sell a pro rata share of the Portfolio Shares (for example, where a relatively small number of shares are tendered for cash retraction), the Company may fund such retractions in whole or in part out of cash on hand. Unit Value in this case will be calculated using, and paid on the basis of, the closing prices for the Portfolio Shares on the TSX on the trading day immediately preceding the relevant Valuation Date; or, if no trading in a Portfolio Share occurred on such day on the TSX, the closing price for such Portfolio Share on such other exchange or market as the Administrator may select on such day; or, if no closing price is available from any exchange or market for such Portfolio Share, the average of the bid and ask prices for such share at close of trading on the TSX on such day; less, in either case, brokerage fees, commissions and all other transaction costs relating to such sale plus (minus) the pro 2

6 rata share of the amount (the Residual Amount ) by which the value of the other assets of the Company (excluding any refundable taxes not then available to the Company) exceeds (is less than) the liabilities (including any extraordinary liabilities which, for greater certainty, shall include any accrued termination costs) of the Company as at the relevant Valuation Date and the redemption value of the Class J Shares and Class S Shares, all as determined by the Board of Directors of the Company. For greater certainty the Series 2 Preferred Shares will not be treated as liabilities for these purposes and the amount if any tax loss carryforwards will not be treated as an asset for these purposes. The amount received on the disposition of Portfolio Shares may vary from the trading price of the Portfolio Shares on the relevant valuation date as the Company may dispose of its Portfolio Shares on or after such date. Capital Shares Holders of Capital Shares are entitled to receive any dividends that the Board of Directors of the Company (the Board ) may declare. It will be the policy of the Board to declare and pay quarterly dividends in an amount equal to the dividends received by the Company on the Portfolio Shares minus the distributions payable on the Series 2 Preferred Shares and all administrative and operating expenses unless the Unit Value at the time of declaration, after giving effect to the dividend, would be less than or equal to the redemption value of the Series 2 Preferred Shares. In such circumstance, any excess dividends received on the underlying portfolio securities minus the dividend payable on the Series 2 Preferred Shares and all administrative and operating expenses will be reinvested in short-term debt securities or underlying portfolio securities. In addition, if the Company realizes capital gains, and would be liable to pay tax thereon, the Company may declare a capital gains dividend on the Capital Shares. Any Capital Shares outstanding on February 28, 2021 (the Redemption Date ) will be redeemed by the Company on such date. On such redemption, each holder will receive for every two Capital Shares redeemed, at the holder s option, either: (i) the amount, if any, by which the Unit Value exceeds $25.67; or (ii) provided the holder tenders to the Company at least 20 business days prior to the Redemption Date, a cash amount of $25.67 for every two Capital Shares redeemed, such holder s pro rata share of the Portfolio Shares (rounded down to the nearest whole share) plus (minus) the pro rata share of the amount (the Residual Amount ) by which the value of the other assets of the Company (excluding any refundable taxes not then available to the Company) exceed (are less than) the liabilities (including any extraordinary liabilities and accrued termination costs) of the Company as at the Redemption Date and the redemption value of the Class J Shares and Class S Shares, all as determined by the Board. Any cash so tendered is to be tendered to CDS Clearing and Depository Services Inc. ( CDS ) through a CDS Participant. If for two consecutive valuation dates the aggregate market value of the Portfolio Shares held by the Company is $15,000,000 or less, then the Board of Directors has the right to redeem at the next Annual Retraction Payment Date (i) all Capital Shares then outstanding for a cash amount per share equal to the redemption price of the Capital Shares calculated as if such date was the Redemption Date; and (ii) all Series 2 Preferred Shares then outstanding for a cash amount per share equal to $ In such circumstances, the Company will not provide holders of Capital Shares and Series 2 Preferred Shares with 45 days prior notice of the redemption but will forthwith issue a press release and will provide holders of Capital Shares and Series 2 Preferred Shares with notice of the redemption as soon as practicable. The Capital Shares may be surrendered for retraction at any time by the holders. Holders may surrender their Capital Shares for retraction by exercising a Regular Retraction, a Concurrent Retraction or a Special Annual Retraction, all as described below. Retraction payments for Capital Shares will be made on the last day of each month or, where such day is not a business day, on the preceding business day (a Retraction Payment Date ), provided the Capital Shares have been surrendered for retraction at least five business days before the 15th day of such month (the Valuation Date ). A holder who surrenders two Capital Shares under a regular retraction (a Regular Retraction ) will receive on the Retraction Payment Date the amount, if any, by which 95% of the Unit Value exceeds the aggregate of (i) the average cost to the Company, including commissions, of purchasing a Series 2 Preferred Share in the market; and (ii) $1.00. The retraction price of a Capital Share may be more or less than the market price of a Capital Share at the time of retraction. A holder who surrenders two Capital Shares together with one Series 2 Preferred Share under a concurrent retraction (a Concurrent Retraction ) will receive on the Retraction Payment Date an amount equal to 95% of the Unit Value less 3

7 $1.00. A holder of Capital Shares who surrenders two Capital Shares under a special annual retraction (a Special Annual Retraction ) for the Retraction Payment Date occurring on February 28 in each year or, where such day is not a business day, the preceding business day (each such date being an Annual Retraction Payment Date ) will receive on the applicable Annual Retraction Payment Date, the amount, if any, by which the Unit Value exceeds $ A holder who surrenders two Capital Shares together with one Series 2 Preferred Share under a Special Annual Retraction will receive on the applicable Annual Retraction Payment Date an amount equal to the Unit Value. Provided a holder of Capital Shares surrenders 10,000 or more Capital Shares for retraction under a Special Annual Retraction and tenders either one Series 2 Preferred Share for every two Capital Shares retracted or a cash amount equal to $25.67 for every two Capital Shares retracted plus in each case a delivery charge of $0.05 for every two Capital Shares retracted payable to the Administrator, such holder may elect to receive his or her pro rata share of the Portfolio Shares (rounded down to the nearest whole share) represented by the Capital Shares retracted plus (minus) the Residual Amount (payable at the Company s discretion in cash or by adjustment to the number of Portfolio Shares to be delivered to the holder) as at the relevant Valuation Date, all as determined by the Board of Directors of the Company. For greater certainty, in determining the Residual Amount the Series 2 Preferred Shares will not be treated as liabilities and any tax loss carryforwards will not be treated as an asset. It should be noted that all the above retractions constitute a taxable disposition of the Company s Shares by the shareholders at the time of the retraction whether the retraction is received in the form of cash or Portfolio Shares. Except as required by law, holders of Capital Shares will not be entitled to receive notice of, to attend or to vote at any meetings of shareholders of the Company (including with respect to reductions of capital and share consolidations) other than meetings of the holders of Capital Shares. Holders of Capital Shares will not be entitled to vote any of the Portfolio Shares held by the Company. The Board of Directors of the Company will determine the manner in which the Portfolio Shares other than the BNS Shares will be voted at any meeting of shareholders of a Portfolio Company and the independent directors of the Company will determine the manner in which the BNS Shares will be voted at any meeting of shareholders of The Bank of Nova Scotia. In addition, the articles of the Company provide that the Company shall not, without the prior approval of the holders of Capital Shares, (i) amend the rights, privileges, restrictions and conditions attached to the Capital Shares; (ii) amend the provisions in the articles of the Company relating to the restrictions on the business that the Company may carry on; (iii) sell any Portfolio Shares otherwise than (A) to fund the retraction or redemption of any Capital Shares or Series 2 Preferred Shares or a portion of the distribution on the Series 2 Preferred Shares; (B) pursuant to a rebalancing of the Portfolio by the Board of Directors; (C) upon receipt of stock dividends; (D) in the event of a take-over bid for any of the Portfolio Shares; or (E) to fund liabilities; (iv) change (other than a change permitted by applicable law without the consent of security holders of a mutual fund) any contract or enter into any contract as a result of which the basis for calculating the fees or other expenses that are charged to the Company could result in an increase in charges to the Company; or (v) wind-up or dissolve voluntarily. Approval of amendments to the provisions of the Capital Shares may be given by a special resolution carried by an affirmative vote of not less than two-thirds of the votes cast at a meeting of the holders of Capital Shares duly called and held for such purpose at which the holders of 10% of the outstanding Capital Shares are present in person or represented by proxy or, if no quorum is present at such meeting, at an adjourned meeting at which the holders of Capital Shares then present would form the quorum. Series 2 Preferred Shares Holders of Series 2 Preferred Shares are entitled to receive quarterly fixed cumulative preferential distributions equal to $ per Series 2 Preferred Share. Quarterly distributions on the Series 2 Preferred Shares are expected to be paid by the Company on or about the last day of May, August, November and February in each year. Series 2 Preferred Share distributions will be funded from the dividends received on the Portfolio Shares. If necessary, any shortfall in the distributions on the Series 2 Preferred Shares will be funded by proceeds from the sale of Portfolio Shares or, if determined appropriate by the Board, premiums earned from writing covered call options on the Portfolio Shares. Any portion of Series 2 Preferred Share distributions which is derived from the proceeds of sale of the Portfolio Shares will, for tax purposes, consist of a non-taxable return of capital or a combination of a capital gains dividend and a non-taxable return of capital. 4

8 Any Series 2 Preferred Shares still outstanding on the Redemption Date will be redeemed by the Company on such date at a price per share equal to the lesser of $25.67 and the Unit Value. If for two consecutive valuation dates the aggregate market value of the Portfolio Shares held by the Company is $15,000,000 or less, then the Board of Directors has the right to redeem at the next Annual Retraction Payment Date (i) all Capital Shares then outstanding for a cash amount per share equal to the redemption price of the Capital Shares calculated as if such date was the Redemption Date; and (ii) all Series 2 Preferred Shares then outstanding for a cash amount per share equal to $ In such circumstances, the Company will not provide holders of Capital Shares and Series 2 Preferred Shares with 45 days prior notice of the redemption but will forthwith issue a press release and will provide holders of Capital Shares and Series 2 Preferred Shares with notice of the redemption as soon as practicable. The Series 2 Preferred Shares may be surrendered for retraction at any time. Retraction payments for Series 2 Preferred Shares will be made on the Retraction Payment Date in a month provided the Series 2 Preferred Shares have been surrendered for retraction at least five business days before the 15 th day of such month. A holder who surrenders a Series 2 Preferred Share for retraction will receive on the Retraction Payment Date the amount, if any, by which 95% of the Unit Value exceeds the aggregate of (i) the average cost to the Company, including commissions, of purchasing two Capital Shares in the market; and (ii) $1.00. In addition, the Company may redeem Series 2 Preferred Shares on any Annual Retraction Payment Date for $25.67 per share. The Company will only redeem Series 2 Preferred Shares to the extent that unmatched Capital Shares have been tendered for retraction under the Special Annual Retraction. Where less than all the Series 2 Preferred Shares are to be so redeemed, the shares shall be redeemed on a pro rata basis or in such other manner as is approved by the Board. Except as required by law, holders of Series 2 Preferred Shares will not be entitled to receive notice of, to attend or to vote at any meeting of shareholders of the Company (including with respect to reductions of capital and share consolidations of the Capital Shares) other than meetings of the holders of Series 2 Preferred Shares. Holders of Series 2 Preferred Shares will not be entitled to vote any of the Portfolio Shares held by the Company. The Board of Directors of the Company will determine the manner in which the Portfolio Shares other than the BNS Shares will be voted at any meeting of shareholders of a Portfolio Company and the independent directors of the Company will determine the manner in which the BNS Shares will be voted at any meeting of shareholders of The Bank of Nova Scotia. In addition, the articles of the Company provide that the Company shall not, without the prior approval of the holders of Series 2 Preferred Shares, (i) amend the rights, privileges, restrictions and conditions attaching to the Series 2 Preferred Shares; (ii) amend the provisions in the articles of the Company relating to the restrictions on the business that the Company may carry on; (iii) sell any Portfolio Shares otherwise than (A) to fund the retraction or redemption of any Capital Shares or Series 2 Preferred Shares or a portion of the distribution on the Series 2 Preferred Shares; (B) pursuant to a rebalancing of the Portfolio by the Board of Directors; (C) upon receipt of stock dividends; (D) in the event of a take-over bid for any of the Portfolio Shares; or (E) to fund liabilities; (iv) change (other than a change permitted by applicable law without the consent of security holders of a mutual fund) any contract or enter into any contract as a result of which the basis for calculating the fees or other expenses that are charged to the Company could result in an increase in charges to the Company; or (v) wind-up or dissolve voluntarily. Approval of amendments to the provisions of the Series 2 Preferred Shares may be given by a special resolution carried by an affirmative vote of not less than two-thirds of the votes cast at a meeting of the holders of Series 2 Preferred Shares duly called and held for such purpose at which the holders of 10% of the outstanding Series 2 Preferred Shares are present in person or represented by proxy or, if no quorum is present at such meeting, at an adjourned meeting at which the holders of Series 2 Preferred Shares then present would form the quorum. Class J Shares The Class J Shares of the Company are retractable at any time. For retractions occurring at a time when any Capital Shares or Series 2 Preferred Shares are outstanding, the retraction price will be $1.00 per share; for other retractions, the retraction price will be based on the net asset value of the Company. The Class J Shares are redeemable by the Company at any time for a redemption price equal to $1.00 per share, being the amount paid-up thereon. Holders of Class J Shares are entitled to receive dividends, if, as and when declared by the Board. However, holders of Class J Shares are not entitled to receive any dividends on the Class J Shares at any time when there are any Capital or Series 2 Preferred Shares issued and outstanding unless approved by all of the independent directors of the Company. Holders of Class J Shares are entitled to one vote per share. 5

9 AllBanc Split Holdings II Corp. owns the 150 issued and outstanding Class J Shares of the Company. Class S Shares The holders of the Class S Shares are entitled to receive dividends, if, as and when declared by the Board of Directors of the Company. However, holders of Class S Shares are not entitled to receive any dividends on such shares at any time when there are any Capital Shares or Series 2 Preferred Shares issued and outstanding unless approved by all of the independent directors of the Company. Scotia Managed Companies Administration Inc. ( SMCAI ) may pay operating expenses on behalf of the Company as and when incurred. Payment of such expenses, together with payment of the administration fee, may be satisfied by payment of a dividend on the Class S Shares. The holders of the Class S Shares are not entitled to vote except as may be required by applicable law. The Class S Shares of the Company are retractable at any time at a retraction price of $1.00 per share. The Class S Shares are redeemable by the Company at any time for a redemption price equal to $1.00 per share, being the amount paid-up thereon. The Class S Shares rank subsequent to both the Capital Shares and the Series 2 Preferred Shares with respect to dividends and with respect to distributions upon a retraction, redemption or reduction of capital and distributions on the dissolution, liquidation or winding-up of the Company. SMCAI owns the 100 issued and outstanding Class S Shares of the Company. Book-Entry Only System Registration of interests in and transfers of the Capital Shares and Series 2 Preferred Shares will be made only through the book-entry system administered by CDS. Capital Shares and Series 2 Preferred Shares must be purchased, transferred and surrendered for retraction or redemption through a CDS Participant. All rights of an owner of Capital Shares or Series 2 Preferred Shares must be exercised through and all payments or other property to which such owner is entitled will be made or delivered by, CDS or the CDS Participant through which the owner holds such Capital Shares or Series 2 Preferred Shares. An owner of Capital Shares or Series 2 Preferred Shares who desires to exercise retraction privileges must do so by causing a CDS Participant to deliver to CDS (at its office in the City of Toronto), on behalf of the owner, a written notice (the Retraction Notice ) of the owner s intention to retract shares sufficiently in advance of the relevant notice date so as to permit the CDS Participant to deliver notice to CDS by the required time. Any expenses associated with the preparation and delivery of a Retraction Notice shall be for the account of the owner exercising the retraction privilege. Where a beneficial owner of Capital Shares is required to tender cash to the Company in connection with a Special Annual Retraction or redemption of Capital Shares, such cash must be tendered to CDS through the relevant CDS Participant. By causing a CDS Participant to deliver a Retraction Notice to CDS, an owner shall be deemed to have irrevocably surrendered his or her shares for retraction and appointed such CDS Participant to act as his or her exclusive settlement agent with respect to the exercise of the retraction privilege and the receipt of payment in connection with the settlement of obligations arising from such exercise. Any Retraction Notice which CDS determines to be incomplete, not in proper form or not duly executed shall for all purposes be void and of no effect, and the retraction privilege to which it relates shall be considered for all purposes not to have been exercised thereby. In the event of a determination that a Retraction Notice is incomplete, not in proper form or not duly executed, CDS shall promptly notify the CDS Participant which delivered the Retraction Notice. A failure by a CDS Participant to exercise retraction privileges or to give effect to the settlement thereof in accordance with the owner s instructions will not give rise to any obligations or liability on the part of the Company to the CDS Participant or the owner. The Company has the option to terminate registration of the Capital Shares and the Series 2 Preferred Shares through the book-entry only system in which case certificates for Capital Shares and Series 2 Preferred Shares in fully registered form will be issued to beneficial owners of such shares or their nominees. 6

10 COMPANY S FINANCIAL CONDITION AND OPERATING RESULTS A discussion of the Company s financial condition and operating results for the year ended February 28, 2016 may be found in the Company s 2016 Annual Report in the section entitled Financial Performance on page 1. The Company s Portfolio Shares are carried at fair value. The fair value is computed using the closing market price on the TSX. Other assets and liabilities therein are recorded in accordance with International Financial Reporting Standards ( IFRS ) including dividend income recorded on the ex-dividend date and interest income and expenses recorded on an accrual basis. The Company s financial statements have been prepared in compliance with IFRS commencing March 1, 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Company prepared its financial statements in accordance with Part V of the CPA Canada Handbook ( Canadian GAAP ). The Company has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at March 1, 2013 and throughout all periods presented, as if these policies had always been in effect. As a result, upon adoption of IFRS, an adjustment was recognized to increase the carrying amount of the Company s net assets by $5,329 at March 1, 2013 and $27,779 as at February 28, As well, there are additional disclosures in the financial statements and a change in the presentation of Capital Shareholders equity to a financial liability. RESPONSIBILITY FOR OPERATIONS SMCAI, a wholly-owned subsidiary of SCI, is the administrator of the Company under an administration agreement (the Administration Agreement ) dated February 17, 2016 to administer the ongoing operations of the Company. Under this agreement the Administrator is responsible for most day-to-day operations of the Company including accounting services, daily net asset valuations, payment of distributions on the Capital Shares and Series 2 Preferred Shares and attending to the retraction or redemption of the Capital Shares and Series 2 Preferred Shares in accordance with their terms. The Administration Agreement has a term expiring upon the redemption or retraction of all Capital Shares and Series 2 Preferred Shares. In consideration for the services provided by the Administrator, the Company pays the Administrator a quarterly fee of ¼ of 0.50% of the market value of the Portfolio Shares. SMCAI may pay operating expenses on behalf of the Company as and when incurred. Reimbursement of such expenses, together with payment of the administration fee referred to above, may be satisfied by payment of a dividend on shares held by SMCAI. Holders of Capital Shares and Series 2 Preferred Shares, by a two-thirds majority vote at a meeting called and held for such purpose, may cause the Administration Agreement to be terminated upon not less than six months notice. On such termination, the Administrator will be entitled to a termination payment from the Company equal to the quarterly fee paid to the Administrator for the quarter immediately preceding the date of termination multiplied by the number of quarters remaining in the term of the Administration Agreement. The Administration Agreement may also be terminated by the Company if the Administrator has committed certain events of bankruptcy or insolvency or is in material breach of the terms thereof and such breach has not been cured within 60 days after notice thereof has been given to the Administrator. The Administrator will not be entitled to a termination payment under such circumstances. 7

11 DIRECTORS AND OFFICERS The following are the directors and officers of the Company: Name and Municipality of Residence Office(s) Held Principal Occupation Director Since Shares Held* % of Shares D. Anthony Ross Toronto, Ontario Director and Chairman of the Board Chair of the Board of Infrastructure Ontario ,500 Capital Shares 0.54 David M. Mann Chester, Nova Scotia Kenneth G. Copland Toronto, Ontario Brian D. McChesney Unionville, Ontario Director and Chairman of the Audit Committee Director and Chairman of the Independent Review Committee President, Chief Executive Officer and Director Counsel, Cox and Palmer Chairman, KGC Ltd Corporate Director Stephen D. Pearce Toronto, Ontario Chief Financial Officer, Secretary and Director Director, Scotia Capital Inc Michael K. Warman Georgetown, Ontario Director Corporate Director Robert Hall Toronto, Ontario Director Managing Director, Scotia Capital Inc * Includes shares held directly, indirectly, or over which direction is exercised. Holdings are as at April 28, During the past five years, all the directors and officers have held the principal occupations noted opposite their respective names, or other similar occupations with their current employer or a predecessor company except for the following: Mr. Brian D. McChesney was Managing Director, Scotia Capital Inc. prior to April Under applicable corporate legislation, the Company is required to have an Audit Committee. The Audit Committee is composed of Messrs. Mann (Chairman), Ross and Copland. The Company does not have an Executive Committee. The independent directors have been appointed to the Company s Independent Review Committee ( IRC ). Remuneration of Directors and Officers The directors and officers of the Company who are employees of Scotia Capital do not receive any remuneration from the Company in connection therewith. Each of the directors who is not employed by Scotia Capital or one of its affiliates (Messrs. Mann, Ross, Copland and Warman) is paid an annual fee of $7,500 plus $500 per meeting attended. Mr. McChesney, in his role as Chief Executive Officer and President, is paid an annual stipend of $15,000. Audit Committee members who are not employed by Scotia Capital or one of its affiliates (Messrs. Mann, Ross and Copland) are paid an additional fee of $400 per Audit Committee meeting. The aggregate compensation paid by the Company to the directors for the year ended February 28, 2016 was $54,150. The aggregate amount of expenses reimbursed to the directors in the year was nil. Remuneration of Members of the IRC IRC members are paid an annual fee of $2,000 plus $500 per meeting attended. The aggregate compensation paid by the Company to the members for the year ended February 28, 2016 was $7,500. 8

12 PRINCIPAL SHAREHOLDERS Allbanc Split Holdings II Corp. ( Holdings ) owns all of the 150 issued and outstanding Class J Shares of the Company. The three independent directors of the Company each own 33 1/3 % of the common shares of Holdings. All of the Class J Shares of the Company are lodged in escrow with Computershare Trust Company of Canada pursuant to an agreement among Holdings, Computershare Trust Company of Canada and the Company and the common shares of Holdings (the Holdings Shares ) are lodged in escrow with Computershare Trust Company of Canada pursuant to an agreement among the holders thereof, Computershare Trust Company of Canada and Holdings (collectively, the Escrow Agreements ). Under the Escrow Agreements, none of the Class J Shares or the Holdings Shares may be disposed of or dealt with in any manner until all the Capital Shares and Series 2 Preferred Shares have been retracted or redeemed, without the express consent, order of direction in writing of the Ontario Securities Commission except that the Holdings Shares may be pledged to a Canadian chartered bank as collateral to secure a bona fide debt to such bank. CONFLICTS OF INTEREST Certain of the officers and directors of the Company are currently employees of Scotia Capital Inc. In consideration for the services as administrator, SMCAI currently receives a quarterly fee of ¼ of 0.50% of the market value of the Portfolio Shares. Scotia Capital, as agent, sells Portfolio Shares to fund cash retractions and certain other transactions and may purchase, as principal, such Portfolio Shares from the Company. CORPORATE GOVERNANCE The Board of the Company has oversight responsibility for the overall stewardship of the Company's business and affairs. Many of the Board's and management's responsibilities are set forth and provided for in the Company's prospectus. The Board also has a mandate setting out its duties and responsibilities. The Board consists of seven directors, four of whom are independent and three of whom are senior officers or former senior officers of the Administrator or its affiliates within the past three years. The Board believes that this number of directors is appropriate for the Company. The Chairman of the Board is not the Chief Executive Officer of the Company and is an independent director. All directors except for senior officers of the Administrator or its affiliates are compensated by the Company. Compensation is considered appropriate given the risk and responsibilities placed on each director. The only standing committee of the Board is the Audit Committee. The Audit Committee consists of three members, all of whom are independent directors. The Audit Committee has responsibility to oversee the Company's financial statements and reports and makes recommendations in respect thereof to the Board before their approval by the Board. The Board is responsible for developing the Company's approach to governance issues and for proposing new nominees to the Board (should the need arise) and has not assigned these responsibilities to a committee. An independent director may engage outside advisors at the Company's expense subject to the approval of the independent directors. The Company has an IRC to which the Administrator must refer all conflict of interest matters for review or approval as required by National Instrument Independent Review Committee for Investment Funds ( NI ). The Administrator has established written policies and procedures for dealing with conflict of interest matters in accordance with NI The IRC consists of three members, each of whom is independent of the Company, the Administrator and any entity related to the Administrator. The IRC members are the independent board members. The Company, through its Administrator, maintains a telephone line and web site to respond to inquiries from shareholders. The Board is responsible for reviewing, approving and monitoring compliance with the Company s proxy voting policies and procedures. With respect to the voting of the Portfolio Shares at an annual general meeting ( AGM ), the Company s standard practice is to vote as recommended by management of the applicable underlying company on standard business/proposals. Ordinarily, standard business/proposals would include the following: receiving annual financial statements together with the auditors report thereon electing directors appointing auditors and authorizing the Board to fix their remuneration 9

13 amending any employee compensation plan including options, warrants and rights approving an amendment increasing the number of shares of the company reserved for issuance under a compensation plan or for future acquisitions transacting such other shareholder proposals as may properly be brought before the meeting. The independent directors of the Company will determine the manner in which The Bank of Nova Scotia common shares will be voted at any shareholder meeting. Where there are extraordinary proposals and/or arrangements to be considered and passed at an AGM or a special meeting, the standard practice is also to vote as recommended by management of the applicable underlying company. Examples of extraordinary proposals could include: approval of a shareholder rights plan plan of arrangement to sell assets or a business line, merge with another company or agreement to sell the company outright. With respect to any meeting, the Administrator has discretion to seek additional guidance from the Board. Finally, any time Scotia Capital is acting as an advisor to a company holding a vote, the Administrator will send all relevant materials and information to the Board and the independent directors will decide how to vote a company s shares to eliminate any possibility of a conflict of interest. INVESTMENT RESTRICTIONS The Company is considered to be a mutual fund subject to certain restrictions and practices contained in securities legislation, including National Instrument ( NI ) but applied for and obtained an exemption from certain of its provisions applicable to continuously offered non-listed mutual funds. The Company is managed in accordance with the applicable restrictions and practices. The Company obtained exemption from the following requirements of NI : Section 2.1(1) Concentration Restriction to permit the Company to invest all of its net assets in the Portfolio Shares; Section 2.6(a) to permit the Company to borrow under a revolving credit facility and to pledge Portfolio Shares for any amounts borrowed thereunder; Section 3.3 Prohibition Against Reimbursement of Organization Costs to permit the Company to pay for organizational and offering costs at the time of its initial public offering; Section 10.3 Retraction Price of Securities to permit the Company to calculate the retraction price of its shares in accordance with their terms; Section 10.4(1) Payment of Retraction to permit the Company to pay the retraction prices for its shares on the retraction and redemption dates set forth in the share terms; Section 12.1(1) Compliance Reports to exempt the Company from the requirement to prepare and file certain reports; and Section 14.1 Record Date to permit the Company to determine the record date for the shareholders entitled to receive dividends declared in accordance with the rules of the Toronto Stock Exchange. The Company is not a conventional mutual fund, is not in continuous distribution and its Capital Shares and Series 2 Preferred Shares are listed for trading on the TSX and are redeemable monthly and not daily. As a result, the Company does not have policies and procedures relating to the monitoring, detection and deterrence of short term trades of the Company s shares by investors. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS This summary is based upon the current provisions of the Income Tax Act (Canada) (the Act ), the Regulations thereunder (the Regulations ), the specific proposals for amendments to the Act and the Regulations which have been publicly announced by the Minister of Finance prior to the date hereof (the Proposed Amendments ) and current 10

14 published administrative practices of the Canada Revenue Agency. The summary is not exhaustive of all possible Canadian federal income tax consequences and does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations. The Company qualifies and intends to continue to qualify as a mutual fund corporation under the Act and is subject to tax under Part 1 of the Act in respect of its net realized capital gains. The Company will be entitled to refunds in accordance with the provisions of the Act of substantially all tax paid with respect to net taxable capital gains upon payment of sufficient capital gains dividends or in respect of sufficient redemptions of Capital Shares or Series 2 Preferred Shares. Also the Company is subject to a tax of 38 1/3 % ( /3 %) under Part IV of the Act on taxable dividends received in the year. This tax is fully refundable upon payment of sufficient dividends. As a result, the Company does not anticipate that it will be subject to any material net Canadian income tax liability. Dividends other than capital gains dividends received by individuals on the Series 2 Preferred Shares or Capital Shares will be subject to the normal gross-up and dividend tax credit rules applicable to dividends received on shares of a taxable Canadian corporation. Return of capital payments to a holder of Series 2 Preferred Shares will not be subject to tax but will reduce the adjusted cost base of the Series 2 Preferred Shares to the holder. The amount of any capital gains dividend received by a holder of Series 2 Preferred Shares or Capital Shares will be considered to be a capital gain of the holder from the disposition of capital property in the taxation year of the holder in which the capital gains dividend is received. Capital Shares received by a holder of Capital Shares as payment of a capital gains dividend will be deemed to have been acquired by such holder at a cost equal to the amount of such dividend. A disposition of a Capital Share or a Series 2 Preferred Share held as capital property, whether to the Company or otherwise, may result in a capital gain or a capital loss to the holder thereof. A redemption or retraction of Capital Shares or Series 2 Preferred Shares, including where a holder elects to receive Portfolio Shares, is considered a disposition for these purposes. The Capital Shares and the Series 2 Preferred Shares are qualified investments under the Income Tax Act (Canada) for trusts governed by the registered retirement saving plans, registered retirement income funds, deferred profit sharing plans, tax-free savings accounts, registered education savings plans and registered disability savings plans. INVESTMENT CONSIDERATIONS AND RISK FACTORS The following are certain considerations relating to an investment in the Capital Shares or Series 2 Preferred Shares of the Company. Leverage Holders of the Capital Shares enjoy a form of leverage in that any capital appreciation in the Portfolio Shares after payment of any accrued and unpaid distributions on the Series 2 Preferred Shares, redemption or retraction value of the Series 2 Preferred Shares and expenses are for the benefit of the holders of the Capital Shares. In the event of a decrease in the value of the Company s underlying investment in the Portfolio Shares, this leverage works to the disadvantage of holders of the Capital Shares, with the result that any net capital loss incurred by the Company on its investment in the Portfolio Shares is effectively first for the account of the holders of the Capital Shares. If the Unit Value is less than or equal to $25.67 plus accrued and unpaid distributions on the Series 2 Preferred Shares on the Redemption Date, the Capital Shares will have no value. Significant Redemptions Capital Shares are retractable annually and monthly as described under Description of Share Capital Capital Shares. The purpose of the special annual retraction right is to prevent the Capital Shares from trading at a substantial discount to the Unit Value and to provide holders of Capital Shares with the right to realize their investment once annually without any trading discount to the value of a Capital Share. If a significant number of Capital Shares are retracted, the trading liquidity of the shares could be significantly reduced. In addition, the expenses of the Company would be spread among fewer shares resulting in a higher management expense ratio and a lower Unit Value. 11