ANNUAL INFORMATION FORM

Transcription

1 ANNUAL INFORMATION FORM FOR THE YEAR ENDED SEPTEMBER 22, 2016 Capital Shares Preferred Shares November 23, 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 Series 2 Preferred Shares. The actual results could differ materially from those anticipated in these forward-looking statements. BNS Split Corp. II does not undertake any obligation to publicly update or revise any forward-looking statements.

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

4 BNS SPLIT CORP. II BNS Split Corp. II (the Company ), incorporated under the laws of Ontario on June 29, 2004, is a mutual fund corporation whose principal undertaking is to invest in common shares of The Bank of Nova Scotia ( BNS Shares ). The Company has its registered offices at 40 King Street West, Scotia Plaza, 26 th Floor, P.O. Box 4085, Toronto, Ontario, M5W 2X6. On September 22, 2005 the Company raised net proceeds of $182,372,125 through the one-time issuance of 8,750,000 Class A capital shares ( Capital Shares ) and 4,375,000 Class A preferred shares ( Preferred Shares ). From September 6 to September 15, 2005, the Company purchased the BNS Shares through a securities purchase agreement with Scotia Capital Inc. ( SCI ). The net proceeds of this initial public offering were used to fund the purchase of BNS Shares. Prior to September 6, 2005 the Company was inactive. On July 5, 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 September 22, 2015; 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 September 22, 2010 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) the fee payable to the Administrator under the Administration Agreement was increased from 0.20% to 0.25% per annum of the market value of the BNS Shares effective from and after September 22, The Preferred Shares were redeemed on September 22, 2010, 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 $23,354,283 public offering through the issuance of 1,238,954 Class B preferred shares, Series 1 (the Series 1 Preferred Shares ) at a price of $18.85 per share pursuant to a prospectus dated September 15, On August 7, 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 September 22, 2015 for an additional 5 years to September 22, 2020 (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 September 22, 2015, 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 $11,217,809 public offering through the issuance of 569,143 Class B preferred shares, Series 2 (the Series 2 Preferred Shares ) at a price of $19.71 per share pursuant to a prospectus dated September 15, Warrants In December 2010, the Company issued 1,239,204 warrants to Capital Shareholders of record on December 9, 2010 on the basis of one warrant for every two Capital Shares held. Each warrant entitled the holder to purchase one Unit consisting of two Capital Shares and one Series 1 Preferred Share at the subscription price of $ Warrants were exercisable commencing on December 10, 2010 and, if unexercised, expired on July 7, All warrants were exercised for gross proceeds of $63.0 million. As at November 23, 2016 there were 518,215 Series 2 Preferred Shares and 1,036,430 Capital Shares outstanding. The Capital Shares and Series 2 Preferred Shares are listed on the Toronto Stock Exchange (the TSX ) under the symbols BSC and BSC.PR.C, respectively. 2

5 DESCRIPTION OF BUSINESS ACTIVITIES The Company holds the BNS Shares in order to generate fixed cumulative preferential distributions of $ per annum for the holders of the Company s Series 2 Preferred Shares while providing the holders of the Capital Shares with a leveraged investment, the value of which is linked to the changes in the market price of the BNS Shares. Holders of the Capital Shares also receive excess distributions, if any, after payment of the operating and administrative expenses of the Company and dividends on the Series 2 Preferred Shares. The Company only trades the BNS Shares in limited circumstances as described in the Company s prospectus. As such, the BNS Shares are not actively traded and the Company can be considered a passive investment vehicle. BNS Holdings As at September 22, 2016, the Company owned common shares in the numbers indicated below for the average cost per share indicated: Portfolio Holdings as at September 22, 2016 Number of Common Shares Average Cost per Share Market Price per Share Bank of Nova Scotia 458,091 $49.23 $71.10 The Company s BNS Shares are held by State Street Trust Company Canada as custodian pursuant to a custodian agreement (the Custodian Agreement ) dated as of September 22, Securities Lending The Company may engage in securities lending transactions in order to generate additional returns. Under such transactions, the Company will lend BNS 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 Capital Shares, an unlimited number of Preferred Shares, an unlimited number of Class B, Class C, Class D, and Class E capital shares, issuable in series, an unlimited number of Class B, Class C, Class D and Class E preferred shares, issuable in series, and an unlimited number of Class J Shares and Class S Shares. The classes of capital shares other than the Capital Shares and the classes of preferred shares other than the Series 2 Preferred Shares are collectively referred to as the subsequent classes. If shares of the subsequent classes are issued, the holders of any such shares will have no rights in respect of the BNS Shares. The Series 2 Preferred Shares rank prior to the Capital Shares, the Class J Shares and the 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. Unit Value is defined as: (a) the amount received by the Company on the disposition of that number of BNS Shares represented by the Unit s pro rata share of the BNS Shares. In respect of any retraction by a holder and the calculation of Unit Value under this paragraph, the number of BNS Shares to be disposed of will be rounded down to the nearest 3

6 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 (as defined below) determines that it is not practicable to sell a pro-rata share of the BNS 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 price for BNS Shares on the TSX on the trading day immediately preceding the relevant Valuation Date (as defined below); or, if no trading in BNS Shares occurred on such day on the TSX, the closing price for BNS Shares 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 BNS Shares, the average of the bid and ask prices for such shares 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 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 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. If, on the Redemption Date, the Company is entitled to a refund of refundable taxes but such refund is not immediately available, the Company will either defer payment of a portion of the redemption price until the refund is received by the Company or take steps to monetize or otherwise convert the refund into cash. In any event, for purposes of calculating the Residual Amount for redemptions on the Redemption Date (as defined below), any refundable taxes not then available to the Company will be treated as an asset equal to the realizable value thereof as determined by the Board of Directors. If it is not possible to sell BNS Shares due to the cessation or suspension of trading of the BNS Shares on the stock exchanges or markets on which BNS Shares are normally traded, the Company will sell those BNS Shares, which can then be lawfully sold and the applicable portion of such proceeds from such sale will be paid on the Retraction Payment Date (as defined below) and the remaining BNS Shares required to be sold to fund the cash retraction of the relevant shares will be sold by the Company as soon as possible following the resumption of trading of such BNS Shares and the applicable portion of such proceeds therefrom paid within five business days following such sale. The Unit Value is calculated daily and the net asset value per Capital Share is posted by the next business day on the Company s website located at The Unit Value information will also be provided to holders of Capital Shares and Series 2 Preferred Shares on request by calling the Administrator at (416) Capital Shares Holders of Capital Shares are entitled to receive any dividends that the Board of Directors of the Company (the Board ) may declare. On March 3, 2009, the Company announced that it had revised its Capital Share dividend policy and will not pay a dividend on the Capital Shares if the Unit Value at the time of declaration, after giving effect to the dividend, would be less than or equal to the original issue price of the Series 2 Preferred Shares. 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 September 22, 2020 (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 $19.71; or (ii) provided the holder tenders to the Company at least 20 business days prior to the Redemption Date, a cash amount of $19.71 for every two Capital Shares redeemed, such holder s pro rata share of the BNS Shares (rounded down to the nearest whole share) plus (minus) the Residual Amount. Any cash so tendered is to be tendered to CDS Clearing and Depository Securities Inc. ( CDS ) through a CDS Participant. 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 4

7 described below. Retraction payments for Capital Shares will be made on the 22 nd 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 on or before the first business day before the 8 th 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. 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 $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 September 22 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 and tenders either one Series 2 Preferred Share for every two Capital Shares retracted or a cash amount equal to $19.71 for every two Capital Shares retracted plus 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 BNS Shares (rounded down to the nearest whole share) represented by the Capital Shares retracted plus (minus) the pro rata share of the Residual Amount. For greater certainty, the Series 2 Preferred Shares will not be treated as liabilities for these purposes and any tax loss carryforwards will not be treated as an asset for these purposes. It should be noted that all the above retractions constitute a taxable disposition of the Company s Capital Shares by the shareholders at the time of the retraction whether the retraction is received in the form of cash or BNS Shares. Except as required by law, holders of Capital Shares are not entitled to receive notice of, to attend or to vote at any meetings of shareholders of the Company other than the meetings of the holders of Capital Shares. Holders of Capital Shares are not entitled to vote any of the BNS Shares held by the Company. The independent directors of the Company will determine the manner in which the BNS Shares will be voted at any meeting of BNS shareholders. The Company s proxy voting record for the twelve month period ended June 30 is available free of charge to any shareholder upon request. In addition, the articles of the Company provide that the Company shall not, without 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 BNS 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) upon receipt of stock dividends; (C) in the event of a take-over bid for any of the BNS Shares; or (D) to fund liabilities ; (iv) change (other than a change permitted by applicable law without the consent of securityholders 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 dividends equal to $ per Series 2 Preferred Share. Quarterly dividends on the Series 2 Preferred Shares are expected to be paid by the Company on or before the 22 nd day of December, March, June, and September in each year. 5

8 Series 2 Preferred Share distributions will be funded from the dividends received on the BNS Shares. If necessary, any shortfall in the distributions on the Series 2 Preferred Shares will be funded by proceeds from the sale of BNS Shares or, if determined appropriate by the Board, premiums earned from writing covered call options on the BNS Shares. Any portion of Series 2 Preferred Share distributions which is derived from the proceeds of sale of the BNS 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. 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 $19.71 and the Unit Value. The Series 2 Preferred Shares may be surrendered for retraction at any time. Retraction payments will be made on the Retraction Payment Date in a month unless they are retracted after the relevant Valuation Date. A holder retracting Series 2 Preferred Shares will receive a cash price per Series 2 Preferred Share equal to the amount, if any, by which 95% of the Unit Value exceeds the aggregate of the average cost to the Company, including commissions, of purchasing two Capital Shares in the market and $1.00. In addition, the Company may redeem Series 2 Preferred Shares on any Annual Retraction Payment Date for $19.71 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. In addition, Series 2 Preferred Shares may be redeemed by the Company at any time prior to the Redemption Date at a price which, until September 22, 2016 will equal the issue price of the Series 2 Preferred Shares multiplied by a premium which will initially be 4% and which will decline by 1% each year to nil after September 22, It should be noted that either of the above retraction or redemption constitutes a taxable disposition of the Company s Series 2 Preferred Shares by the shareholders at the time of the retraction or redemption. Except as required by law holders of Series 2 Preferred Shares are not entitled to receive notice of, to attend or to vote at any meetings of the shareholders of the Company other than meetings of the holders of Series 2 Preferred Shares. Holders of Series 2 Preferred Shares are not entitled to vote any of the BNS Shares held by the Company. The independent directors of the Company will determine the manner in which the BNS Shares will be voted at any meeting of BNS shareholders. The Company s proxy voting record for the twelve month period ended June 30 is available free of charge to any shareholder upon request. In addition, the articles of the Company provide that the Company shall not, without prior approval of the holders of Series 2 Preferred Shares, (i) amend the rights, privileges, restrictions and conditions attached 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 BNS 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) upon receipt of stock dividends; (C) in the event of a take-over bid for any of the BNS Shares; or (D) to fund liabilities; (iv) change (other than a change permitted by applicable law without the consent of securityholders 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 quorum. Class S Shares Holders of Class S Shares are entitled to receive dividends, if, as and when declared by the Board. 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. Holders of 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 6

9 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. Scotia Managed Companies Administration Inc. ( SMCAI ) pays operating expenses on behalf of the Company as and when incurred. Reimbursement of such expenses, together with payment of the administration fee, may be satisfied by payment of a dividend on the Class S Shares held by SMCAI. Accordingly during the year, the Company declared and paid dividends on its Class S Shares in an amount of $287,215 ( $294,345) in satisfaction of the Company s annual administrative fees and operating expenses. SMCAI owns the 100 issued and outstanding Class S Shares of the Company. See Principal Shareholders. Class J Shares 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 Shares 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. 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. The Class J 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. Each Class J Share entitles the holder thereof to participate in the distribution of the remaining net assets of the Company on a dissolution, liquidation or winding-up of the Company. BNS Split II Holdings Corp. owns the 150 issued and outstanding Class J Shares of the Company. See Principal Shareholders. 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 only 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 7

10 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. COMPANY S FINANCIAL CONDITION AND OPERATING RESULTS A discussion of the Company s financial condition and operating results for the year ended September 22, 2016 may be found in the Company s 2016 Annual Report in the section entitled Financial Performance on page 1. The Company s BNS Shares are carried at fair value on its financial statements. 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 including dividend income recorded on the ex-dividend date and interest income and expenses recorded on an accrual basis. RESPONSIBILITY FOR OPERATIONS Scotia Managed Companies Administration Inc. ( SMCAI ), a wholly-owned subsidiary of Scotia Capital ( SCI ), is the administrator of the Company under an administration agreement (the Administration Agreement ) dated September 22, 2015 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, the payment of distributions on its Capital Shares and Series 2 Preferred Shares and attending to the retraction or redemption of its 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 0.25% of the market value of the BNS 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. 8

11 DIRECTORS AND OFFICERS The following are the directors and officers of the Company: Name and Municipality of Residence Office(s) Held Principal Occupations and Positions Held During the Last 5 Years Director Since Shares Held* % Of Shares Allan D. Rowe Chance Harbour, Nova Scotia Michael Grandin Calgary, Alberta Brian D. McChesney Unionville, Ontario Director and Chairman of the Board Director and Chairman of the Audit Committee President, Chief Executive Officer and Director Corporate Director Corporate Director 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 Tim Spark Unionville, Ontario Director and Chairman of the IRC President, RTM Benefits Partners Inc 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 November 23, During the past five years, all of the directors have held the principal occupations noted opposite their respective names, or other similar occupations with their current employer or a predecessor company except as follows. Brian D. McChesney was Managing Director, Scotia Capital Inc. prior to April 1, Under applicable corporate legislation, the Company is required to have an Audit Committee. The Audit Committee is composed of Messrs. Grandin (Chairman), Spark and Rowe. 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. Grandin, Rowe, Spark 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. Grandin, Spark and Rowe) 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 September 22, 2016 was $58,540. 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 of the IRC for the year ended September 22, 2016 was $7,500. 9

12 PRINCIPAL SHAREHOLDERS BNS Split II Holdings Corp. ( Holdings ) owns all of the 150 issued and outstanding Class J Shares of the Company. Three independent directors of the Company each own 33⅓% 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, Scotia Managed Companies Administration Inc., a wholly-owned subsidiary of Scotia Capital, currently receives a quarterly fee of ¼ of 0.25% of the market value of the BNS Shares. Scotia Capital, as agent, sells BNS Shares to fund cash retractions and certain other transactions and subject to compliance with regulatory approvals received may purchase, as principal, such BNS Shares from the Company. CORPORATE GOVERNANCE The Board of Directors 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. 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 review 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 current independent Board members. The Board is responsible for reviewing, approving and monitoring compliance of the Company s proxy voting policies and procedures. With respect to the voting of the BNS Shares at an annual general meeting or on account of an extraordinary proposal/engagement, the standard practice is to vote as recommended by the management of The Bank of Nova Scotia. To eliminate any possibility for conflict of interest, only the independent board members vote the BNS Shares. 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 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 Where there are extraordinary proposals and/or arrangements to be considered and passed at an AGM or a special 10

13 meeting, the Administrator will send all relevant materials and information to the Board of Directors of the Company for review. 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. Finally, any time Scotia Capital is acting as an advisor to BNS holding a vote, the Administrator will send all relevant materials and information to the Board and the independent directors will decide how to vote the BNS shares to eliminate any possibility of a conflict of interest. The Company is not a conventional mutual fund, is not in continuous distribution and its Capital Shares and Series 2 Preferred Shares are listed on the TSX and redeemable monthly 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. 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 (although, as a result of changes to NI , the exemptions would no longer be required): Section 2.1(1) Concentration Restriction to permit the Company to invest all of its net assets in BNS Shares; Section 2.6(a) to permit the Company to borrow under a revolving credit facility and to pledge BNS Shares for any amounts borrowed thereunder, to a maximum of 5% of the Company s net assets; 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 the Capital Shares in accordance with their terms; Section 10.4(1) Payment of Retraction to permit the Company to pay the retraction prices for the Capital 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. 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 and current 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 % 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. 11

14 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 BNS Shares, is considered a disposition for these purposes. The Capital Shares and the Series 2 Preferred Shares continue to be 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, registered education savings plans and tax free savings accounts. 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 BNS 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 BNS 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 BNS Shares is effectively first for the account of the holders of the Capital Shares. If the Unit Value is less than or equal to $19.71 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 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. Market and Economic Risk The value of the Capital Shares and Series 2 Preferred Shares varies according to the value of the BNS Shares. The value of the BNS Shares is influenced by factors which are not within the control of the Company including the financial performance of BNS, interest rates and other financial market conditions. Accordingly, the value of the Capital Shares and Series 2 Preferred Shares varies from time to time. No Ownership Interest An investment in Capital Shares or Series 2 Preferred Shares does not constitute an investment in the BNS Shares. Holders of Capital Shares and Series 2 Preferred Shares do not own the BNS Shares held by the Company. Mutual Fund Policies 12

15 The Company is considered to be a mutual fund but does not generally operate in accordance with the policies of Canadian securities regulators applicable to conventional mutual funds. Dividends on the BNS Shares The Bank of Nova Scotia may decide at any time or from time to time to decrease or discontinue dividends on the BNS Shares. The decrease in the dividends on the BNS Shares will decrease the dividend coverage for the Series 2 Preferred Shares. In the event The Bank of Nova Scotia were to decrease dividends to an extent that the Company does not have sufficient cash to pay the fixed quarterly dividends on the Series 2 Preferred Shares, it would have to sell BNS Shares to fund the dividends on the Series 2 Preferred Shares. The selling of the BNS Shares would result in a decline in the Unit Value and would therefore decrease the downside protection for the Series 2 Preferred Shares. In the event that the Unit Value falls below the original issue price of the Series 2 Preferred Shares as a result of selling of the BNS Shares, the holders of Series 2 Preferred Shares will receive redemption proceeds which will be less than the original issue price of the Series 2 Preferred Shares. Global Financial Developments Global financial markets have experienced substantial volatility in recent years. Significant sources of this volatility have included the revaluation of assets on the balance sheets of international financial institutions resulting in a reduction in liquidity among financial institutions and generally reduced availability of credit, substantial intervention by central banks as well as global governments in financial markets, low economic growth in various markets and economies, substantial changes in currency valuations and commodity prices and concerns regarding both inflation and deflation. Continuation of this market volatility may adversely affect the prospects of the Company and the value of the Company. A substantial drop in the markets in which the Company invests could be expected to have a negative effect on the value of the Shares of the Company. MATERIAL CONTRACTS Contracts material to shareholders that have been entered into by the Company are: (1) the Administration Agreement; and (2) the Custodian Agreement. Copies of these agreements have been filed on SEDAR at and may be inspected during business hours at the head office of the Company. TRANSFER AGENT, REGISTRAR, CUSTODIAN AND AUDITORS The transfer agent and registrar of the Capital Shares and the Series 2 Preferred Shares is Computershare Investor Services Inc., 100 University Avenue, Toronto, Ontario M5J 2Y1. The register of securities is kept in Toronto, Ontario. The custodian of the Company s portfolio securities is State Street Trust Company Canada, State Street Financial Centre, 30 Adelaide Street East, Suite 1400, Toronto, Ontario M5C 3G6. The auditors of the Company are PricewaterhouseCoopers LLP, 18 York Street, Suite 2600, Toronto, Ontario M5J 0B2. 13