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result of the merger, CHF increased its NAV from approximately $10.2 million to
approximately $44 million. Subsequent to the Fairway Transaction, CHF’s MER
was reduced to 1.8% for the six months ended June 30, 2009. (The CHDF MER
for the period ended June 30, 2008 was 3.62% and for MACCs was 5.10% (see
paragraph 183 of these reasons)). Further, the Fairway Transaction did not dilute
the interests of CHF unitholders (because the merger of CHF with the Fairway
Fund was carried out based on NAV) and the costs were represented by Pushka
in the Discussion Document as being a fraction of what they would have been if
CHF had carried out a public distribution of additional units (see paragraph 320
of these reasons).
[376] Those benefits were, however, much less significant than the increase in
management fees that CHCC received as a result of the acquisition of the rights
to the Fairway Management Agreement and the increase in NAV of CHF following
the merger of CHF with the Fairway Fund. For the year ended December 31,
2008, the management fees paid by CHF to CHCC were $44,218 and the
management fees paid by MACCs to CHCC were $21,767. For the year ended
December 31, 2009, the management fees paid by CHF to CHCC had increased
to $606,404 (we note that five Citadel Funds were merged with CHF in
December 2009) and for the year ended December 31, 2010, they were
$2,458,427 (see paragraph 522 of these reasons).
[377] The potential benefits to CHF unitholders in these circumstances did not relieve
CHCC from its obligation to carefully consider all of the implications of a loan by
CHF to CHCC or its affiliate. That loan was made on fixed terms that provided a
return to CHF but it also exposed CHF to an illiquid investment (constituting
approximately 10% of its assets) and the risk that the loan might not be repaid
by CHCC Holdco. It also permitted CHCC to receive the substantial continuing
benefit of increased management fees paid under the Fairway Management
Agreement and under the CHF Management Agreement once CHF was merged
with the Fairway Fund. One must ask why CHF should have taken that risk when
the benefit of increased management fees accrued solely to CHCC after
repayment of the loan. Clearly, the Fairway Loan was an illiquid investment that
raised valuation challenges for the purposes of determining CHF’s NAV. Further,
the Fairway Loan gave rise to the concern that redemptions of CHF units
following the merger could affect the repayment of the loan (see paragraph 343
of these reasons). In addition, by entering into the Fairway Loan, CHF had to
forego other investment opportunities that may have had a more favourable
risk/return profile. The opportunitycost of the Fairway Loan does not appear to
have been considered by the CHCC Board or the IRC aside from Pushka’s
representations referred to in paragraph 335(a) of these reasons.
[378] It is clear that CHCC and Pushka established the terms of the Fairway Loan.
Further, neither the independent directors of CHCC nor the IRC addressed the
on-going conflict of interest created by having to ensure compliance by CHCC
Holdco with the terms of the Fairway Loan Agreement going forward and to
address the implications of any potential default. Pushka testified that the
independent directors of CHCC were responsible for monitoring compliance with
the Fairway Loan Agreement, although he did not suggest that any process or
steps were taken for them to do so. CHCC had a direct conflict of interest in
bringing any issues with respect to on-going compliance by CHCC Holdco with
the terms of the Fairway Loan to the CHCC Board for its consideration. CHF’s
only mind and management was CHCC in its capacity as IFM.