Timely Disclosure

Timely Disclosure

Updates and Commentary on Current Issues in Corporate Finance, Securities and Mergers and Acquisitions

The End of Poison Pills?

The Canadian Securities Regulators (the CSA) have just agreed on major changes that are set to transform the take-over bid regime that has prevailed in Canada during the last three decades.  CSA Notice 62-306 (the CSA Proposal), issued on September 11, 2014, reconciles the competing proposals for poison pill reform initially introduced in March 2013 by the CSA and Autorité des marchés financiers (the AMF) by amending the take-over bid rules themselves rather than changing the CSA’s policy on defensive tactics set out in National Policy 62-202 – Defensive Tactics (the Defensive Tactics Policy). The proposed changes legislatively mandate key elements from the “permitted bid” regime in most poison pills, thereby strengthening a target board’s ability to respond to a hostile bid while still giving shareholders the final say.

Previously, both the CSA and the AMF published proposals to modify the Defensive Tactics Policy to address concerns raised with the CSA’s approach to reviewing defensive tactics taken in response to hostile bids. In essence, the CSA proposal preserved the current Defensive Tactics Policy while introducing specific rules governing rights plans and mandating their lifespan (90 days or, if approved by shareholders, up to a year). The AMF proposal proposed a more dramatic rethinking of  the Defensive Tactics Policy by proposing greater deference to the directors’ exercise of their fiduciary duty to the company in responding to a hostile bid, opening the door to a “just say no” defence.

What are the changes being proposed?

Under the CSA Proposal, take-over bids would be required to remain open for a 120-day period, a substantial increase from the current 35-day period and roughly double the period typically mandated by the “permitted bid” provisions of most rights plans. Target boards would be empowered to waive such period, in a non-discriminatory manner when there are multiple bids, to not less than 35 days, once again replicating the typical waiver provisions of most rights plans.

The CSA Proposal also introduces amendments to address concerns about potentially coercive elements of the current regime by permitting take-up under a bid only after a majority of the securities not held by the bidder and its joint actors have been tendered. Moreover, bidders would be required to extend their bid for an additional 10 days after achieving the minimum tender condition and announcing their intention to take up and pay for the securities tendered under the bid. Such measures are referred to below as the “Anti-Coercive Measures”.

The foregoing requirements would not apply to exempt take-over bids, and the CSA advised in their notice that they are not considering making any changes to current take-over bid exemptions, or the Defensive Tactics Policy.

Does this signal the end of poison pills in Canada?

Shareholder rights plans in Canada typically mandate a 60-day period and include the Anti-Coercive Measures described above for a bid to be a “permitted bid” under the rights plan.

By extending the bid period to 120 days and introducing the Anti-Coercive Measures, some might argue that rights plans are bound to disappear from the Canadian landscape. However, the CSA Proposal does not address other circumstances in which a rights plan may serve a purpose, including by preventing creeping takeovers that will still be possible through exempt take-over bid transactions and preventing “hard” lock-up agreements that could precede a bid.

Moreover, tactical rights plans may still prove useful to a target board faced with circumstances similar to those in the Neo Material and Pulse Data decisions.  In that regard, it is conceivable that if a rights plan is adopted and overwhelmingly supported by shareholders, securities regulators might be willing to allow the plan to remain in place.  In the Neo Material case, regulators allowed a tactical rights plan to remain in place following its ratification by an overwhelming number of shareholders. The target board adopted the plan to fend off a bid it considered opportunistic, without a sufficient premium for control  and launched in market conditions that were not considered favourable to an auction of the company. The target board considered in the circumstances that the company’s long-term interests would be best served by pursuing the company’s business plan rather than engaging in a transaction with the bidder or other potential suitors.

However, the CSA Proposal clearly seeks to preserve the shareholder choice model on which the Defensive Tactics Policy is based, such that a “just say no” defence, absent very special circumstances, appears unlikely to find favour with the CSA.

What are some other potential implications of the CSA Proposal?

Will target boards faced with an unsolicited bid be permitted to simply wait out the 120-day period by “sitting on their hands”? Given their fiduciary duties, it would seem unadvisable for directors to take such an approach and we would expect boards to continue to diligently assess the bid and consider alternatives. In addition, it would not be unreasonable to expect a board, in furtherance of its fiduciary duties, to waive the remainder of the 120-day period if itcame to the conclusion prior to the expiration of such period, after canvassing the market,  that there were no better alternatives available,  in order to allow shareholders to accept the offer without further delay.

It will also be interesting to see if the detailed amendments reflecting  the CSA Proposal will extend the period allowed for target boards to send out their directors’ circular containing their recommendation on the take-over bid (currently fixed at 15 days following the bid) and if such additional period is adequate in light of the shareholders’ right to receive timely feedback on the bid from the directors.

When will the changes be effective?

The CSA intend to publish detailed take-over bid amendments for comment in the first quarter of 2015.

In the meantime, it will be interesting to see if the CSA Proposal will translate into greater tolerance for pills by regulators.

Canadian Securities Administrators adopt amendments to National Instrument 52-108 Auditor Oversight

In October 2013, the Canadian Securities Administrators proposed amendments to the auditor oversight rules with the aim of strengthening public confidence in the integrity of financial reporting by reporting issuers. The final version was announced in a recent notice and substantially mirrors the October 2013 version.  Subject to ministerial approvals, National Instrument 52-108 Auditor Oversight (Instrument) and related amendments to National Instrument 41-101, National Instrument 51-102 and National Instrument 71-102 will come into force on September 30, 2014.

The amended auditor oversight rules will require the following:

  • a public accounting firm to provide notice to the relevant regulator when certain remedial actions have been imposed by the Canadian Public Accounting Board;
  • a public accounting firm to provide notice to clients that are reporting issuers if such public accounting firm is not in compliance with certain portions of the Instrument;
  • a reporting issuer to include additional prospectus disclosure when financial statements included in the prospectus were audited by an auditor who was not subject to oversight by the Canadian Public Accountability Board; and
  • a foreign reporting issuer to comply with the Instrument.

In addition, the rules have also reduced the applicable time periods for making, filing, or sending notices and other documents relating to a change of auditors.

CSA Staff Notice 51-341 – Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2014

On July 17, 2014, the Canadian Securities Administrators (CSA) published the results of their continuous disclosure review program (Program) in CSA Staff Notice 51-341 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2014 (Staff Notice).  The purpose of the Program is to monitor the compliance, reliability and accuracy of continuous disclosure documents prepared by reporting issuers (issuers).

Pursuant to the Program, the CSA conducted a total of 991 reviews in fiscal 2014, down from the 1,336 reviews conducted in fiscal 2013.  Of the reviews conducted in fiscal 2014, 221 were full reviews and 770 were issue-oriented reviews.

In fiscal 2014, the CSA applied both qualitative and quantitative criteria in determining the level of review and type of review required, with a goal of obtaining more substantive outcomes from issuers.  As a result, only 24% of the reviews conducted in fiscal 2014 resulted in no action being required, down from 53% in fiscal 2013.

Other highlights of the continuous disclosure reviews in fiscal 2014 are as follows:

  • 9% resulted in enforcement, cease trade orders or issuers being placed on a defaulting issuer list (compared to 5% in fiscal 2013);
  • 14% resulted in amending and refiling the applicable continuous disclosure document (the same percentage as fiscal 2013);
  • 37% resulted in changes or enhancements required in the issuer’s next filing of the applicable continuous disclosure document (compared to 26% in fiscal 2013); and
  • 16% resulted in a letter to the issuer, designed to educate or make the issuer aware of certain disclosure enhancements, best practices and expectations (compared to 2% in fiscal 2013).

To help issuers better understand their continuous disclosure obligations, the Staff Notice also identifies certain areas where deficiencies were commonly found and provides some examples to help issuers address such deficiencies.  These include: (a) deficiencies in financial statements relating to disclosure of interests in other entities, revenue recognition and impairment of assets; (b) deficiencies in management’s discussion and analysis relating to non-GAAP measures, forward looking information and additional disclosure for TSX Venture issuers without significant revenue; and (c) other regulatory disclosure deficiencies relating to mineral projects, executive compensation and the filing of news releases and material change reports.

In addition to the Staff Notice, some local securities regulatory authorities may also publish staff notices and reports summarizing the results of the continuous disclosure reviews conducted in their local jurisdictions.

TSXV Revises Definition of Tier 1 Property

On May 6, 2014, the TSX Venture Exchange (TSXV) amended the definition of “Tier 1 Property” contained in Policy 1.1 – Interpretation of the TSXV Corporate Finance Manual (TSXV Manual).

The TSXV views its Tier 1 as its premier tier reserved for its most advanced issuers with the most significant financial resources.  As such, the listing requirements for Tier 1 issuers are more substantial than those of Tier 2 issuers (where the majority of the TSXV’s listed issuers trade).  On the other hand, however, the TSXV affirms that Tier 1 issuers benefit from decreased filing requirements and improved service standards.

The “Tier 1 Property” definition contained in the TSXV Manual sets out the property-related criteria an issuer must satisfy to qualify to list as a Tier 1 Mining Issuer on the TSXV.  The amended definition is not intended to substantially change the nature of this requirement, but instead looks to clarify ambiguities in the previous definition in an effort to provide greater interpretative certainty.

The amendments to the definition include the following: Continue Reading

OSC Staff Released Guidance for Investment Fund Managers on Sales Practices, Expense Allocation and Other Matters

On June 19, 2014, the Ontario Securities Commission (OSC) released Staff Notice 33-743 – Guidance on Sales Practices and Expense Allocation for Investment Fund Managers which resulted from the targeted review of large investment fund managers (IFMs) conducted by Staff of the Compliance and Registrant Regulation Branch of the OSC.  The Notice provides a summary of Staff findings and related guidance along with examples and decision trees to assist IFMs.

Staff identified the following areas where deficiencies were more prevalent and additional guidance was needed:

  1. sales practices
  2. allocation of expenses to investment funds
  3. mutual fund borrowings
  4. prohibited cross trades
  5. outsourcing and oversight of service providers

The Notice includes guidance on the following:

  • assessing whether the primary purpose for certain sales practices is met through content and time including examples of non-permitted topics such as business practice management sessions, motivational speakers, award ceremonies and recreational activities
  • the reasonableness of costs of sales practices including with respect to gifts, entertainment and promotional items
  • the appropriate types of expenses that may be charged to an investment fund (including with respect to compliance-related costs and costs of in-house service providers)
  • the appropriate method to equitably allocate these expenses to investment funds under management
  • disclosure of expense policies
  • policies regarding overdraft positions and cash management to ensure compliance with the restrictions on borrowing by a mutual fund
  • compliance with cross-trade rules under NI 31-103 and NI 81-102 and, to the extent applicable, NI 81-107
  • the level of oversight that should be performed on a related service provider by the IFM including in respect of globally centralized functions
  • consideration of conflict of interest matters associated with related party service providers.

Staff encouraged Investment Fund Managers to use the Notice as a self-assessment tool to strengthen their compliance with Ontario securities law and, as appropriate, to make changes to their systems of compliance, internal controls and supervision.

New Rules for Closed-End Funds and Mutual Funds Under Phase 2 Fund Modernization Amendments

On June 19, 2014, the Canadian Securities Administrators (CSA) released, in final form, amendments that will apply a number of new requirements and restrictions to closed-end funds (Phase 2 amendments).  These include:

  • a prohibition against issuing any warrants (whether as part of an initial public offering, or subsequently to existing unitholders),
  • a prohibition against investments in mortgages (other than government-guaranteed mortgages) and certain loans,
  • restrictions on investing in underlying funds that are not subject to Canadian securities laws,
  • limiting the circumstances in which redemptions of units can be suspended and requiring that unitholders be reminded annually of their redemption rights,
  • a requirement to obtain unitholder approval for any type of reorganization (including conversion to a mutual fund structure), including that the fund not incur the costs associated with any such reorganization,
  • new restrictions on sales communications (advertising) by investment funds, and
  • a variety of conflict of interest rules previously exclusive to mutual funds.

Previously proposed investment restrictions relating to leverage, illiquid investments, short selling and derivatives have been deferred until the new regime for alternative investment funds is devised and proposed.  (No such proposals were included with these latest amendments.)  The CSA also have deferred the previous proposal to require that closed-end funds not pay their organizational costs.

The Phase 2 amendments also impact public mutual funds in a number of respects, including:

  • a new prohibition against investing in closed-end funds,
  • new sales communications requirements for mutual funds following conversion from a closed-end fund structure, and
  • new securities lending disclosure

Faskens will be publishing a more detailed Bulletin shortly on the Phase 2 amendments.

Faskens also will be hosting a seminar in Toronto on Wednesday, July 9 from 4:00 p.m. to 6:00 p.m. to provide a detailed analysis of the impact of the Phase 2 amendments.  Register to the Fund Modernization Seminar.

New Venture Issuer Disclosure

On May 22, 2014 the Canadian Securities Administrators (CSA) published, for a 90 day comment period, proposed amendments to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), National Instrument 41-101 General Prospectus Requirements (NI 41-101) and National Instrument 52-110 Audit Committees (NI 52-110) (collectively, the Proposed Amendments). In July 2011 and September 2012, the CSA had proposed new rules and rule amendments designed to streamline and tailor venture issuer disclosure while improving corporate governance (the Previous Proposals). These proposals provided for a separate continuous disclosure and corporate governance regime for venture issuers. The Previous Proposals contained many of the same elements as the Proposed Amendments, including streamlined quarterly reporting, executive compensation disclosure and business acquisition reporting. Although support for the Previous Proposals was initially strong, support for them fell as venture issuers felt that the benefits from streamlining and tailoring disclosure were outweighed by the burden of transitioning to a new regime (especially at a time when venture issuers faced significant economic challenges).

Below is a summary of the Proposed Amendments. 

  • Quarterly Highlights: The Proposed Amendments would permit venture issuers without significant revenue tofulfill the requirement to file quarterly interim Management’s Discussion & Analysis (MD&A) by preparing and filing a streamlined “quarterly highlights” disclosure document, in each of their first three quarters. The “quarterly highlights” consist primarily of a short discussion about the venture issuer’s operations and liquidity. Venture issuers could still choose to file the existing MD&A as an alternative. 
  • Business Acquisition Reports. The Proposed Amendments would increase the asset, investment and profit or loss thresholds for “significant acquisitions” for venture issuers from 40% to 100%, which would reduce the instances in which a Business Acquisition Report would be required for a venture issuer. The Proposed Amendments would also eliminate the requirement to include pro forma financial statements in Business Acquisition Reports filed by venture issuers.
  • Executive Compensation Disclosure. The Proposed Amendments provide for a new executive compensation disclosure form for venture issuers (Proposed Form 51-102F6V) that would tailor disclosure specifically for venture issuers and that would:
    • reduce the number of individuals for whom disclosure is required from a maximum of five to a maximum of three (i.e., the CEO, CFO and one additional highest-paid executive officer);
    • reduce the number of years of disclosure from three to two; and
    • eliminate the requirement for venture issuers to calculate and disclose the grant date fair value of stock options and other share-based awards in the summary compensation table. 

Venture issuers would still be able to choose whether to comply with Form 51-102F6 or the Proposed Form 51-102F6V.

  • Amendments to NI 51-110. The Proposed Amendments would require venture issuers to have an audit committee of at least three members, the majority of whom could not be executive officers, employees or control persons of the issuer. This requirement mirrors the requirement under the TSX Venture Exchange’s policies.
  •  Amendments to NI 41-101.
    • Audited Financial Statements. The Proposed Amendments would reduce the number of years of audited financial statements required in an initial public offering prospectus for a company that will become a venture issuer on completion of the initial public offering from three to two years.
    • A description of the business and history of the venture issuer would only be required for two years, rather than three years.
    • The Proposed Amendments would also conform the interim MD&A, executive compensation and business acquisition disclosure in an initial public offering prospectus with the continuous disclosure amendments summarized above.

In addition to the Proposed Amendments described above, the CSA is proposing to make the following amendments to NI 51-102 for all issuers:

  • Mining Issuer Disclosure. The Proposed Amendments include revisions to Form 51-102F2 Annual Information Form, to conform to changes made to National Instrument 43-101 Standards of Disclosure for Mineral Projects in 2011.
  •  Filing Requirements for Form 51-102F6 and Proposed Form 51-102F6V. The Proposed Amendments would require:
    • non-venture issuers that are required to file an information circular to file a Form 51-102F6 not later than 140 days after their most recently completed financial year;
    • venture issuers that are required to file an information circular to file a Form 51-102F6 or Proposed Form 51-102F6V not later than either 140 days or 180 days (to be determined by the CSA following the comment period) after their most recently completed financial year; and
    • the executive compensation requirements in section 11.6 of NI 51-102 will apply only to issuers that do not have a requirement to send an information circular and do not send an information circular.

 As a result, for issuers whose corporate law or organizing documents permit them to hold an annual general meeting of shareholders at a later date, an earlier deadline could result in an issuer having to file its executive compensation disclosure twice (i.e., once as a stand-alone form to meet the new deadline and a second time with its information circular). Although the Proposed Amendments in most cases assist venture issuers in streamlining their disclosure and saving costs, this requirement would become burdensome on both venture and non-venture issuers.

 As with the Previous Proposals, it will be interesting to see whether the Proposed Amendments will be supported.


OSC Staff Release Recommendations Regarding Disclosure of Investment Funds Fees and Expenses

On May 8, 2014, the Staff of the Investment Funds Branch of the Ontario Securities Commission (Staff) released a notice setting out recommendations based on their observations from a targeted continuous disclosure review of the fees and expenses disclosure practices of investment funds.

Staff conducted a targeted, continuous disclosure review of the fees and expenses disclosure practices of a sample of 18 fund managers offering various types of investment funds, including conventional mutual funds, exchange-traded funds and closed-end funds.


Staff made the following recommendations:

1.  Transparency in Disclosure of Management Fees and Expenses

  • Prospectus and continuous disclosure documents should disclose the specific services that the fund manager provides to the fund in consideration of the management fees and the types of expenses charged to the fund as operating expenses. General “catch all” terminology should be avoided.
  • The prospectus should provide details sufficient for investors to clearly distinguish the types of expenses, in particular the types of administrative and operating expenses, that are covered by management fees from those that are covered by operating expenses. Investors should not have to refer to the management or trust agreement for the information.
  • Fund managers should clearly describe the major services paid for out of the management fees in their funds’ MRFPs, as well as provide the required line items in the funds’ financial statements.  Relevant and descriptive line items, in addition to the mandated line items, should be used.

2.  Transparency in Disclosure of Expense Allocation

Fund modernization through the back-door

Easily overlooked in the drama of last Friday’s Ontario election call was that the Budget bill which brought down the Liberal government included proposed amendments to extend the conflict of interest investment restrictions in Part XXI of the Securities Act to public closed-end funds.  Last year’s proposed amendments to NI 81-102 and NI 81-104 (Phase 2 of the Fund Modernization project) did not mention these possible changes.  While the first CSA status report on Phase 2 (May 26, 2011) sought input on which restrictions should apply to closed-end funds, the CSA have not specifically discussed the merits of and issues with applying Part XXI to closed-end funds.

Had the Budget bill been passed, these changes would have created a number of implementation issues including:

  • Increased likelihood of prohibited “substantial securityholder” investments resulting from aggregation of all holdings of mutual funds and closed-end funds under common management.
  • Prohibition of fund-on-fund structures by closed-end funds since the Budget bill did not simultaneously create a fund-on-fund exception equivalent to section 2.5 of NI 81-102.

Hopefully, the OSC will seek public consultation on these changes before its next attempt to implement them.

Exigences en matière de règlement des différends du Règlement 31-103

Fasken Martineau souhaite rappeler aux courtiers et conseillers inscrits des modifications apportées au Règlement 31-103 sur les obligations et dispenses d’inscription et les obligations continues des personnes inscrites (le Règlement 31-103). Ces modifications sont entrées en vigueur le 1er mai 2014.

Pour obtenir de plus amples renseignements au sujet de ces modifications, consultez notre bulletin récent, Entrée en vigueur de nouvelles exigences en matière de règlement des différends pour les sociétés inscrites et/ou téléchargez la présentation de la Commission des valeurs mobilières de l’Ontario et la Commission des valeurs mobilières de la Colombie-Britannique sur le Règlement 31-103 et d’autres questions réglementaires d’actualité. Cette présentation a été donnée dans le cadre d’une conférence animée par Fasken Martineau et l’Association des gestionnaires de portefeuilles du Canada le 17 avril 2014.

Nous vous invitons également à consulter les lignes directrices émises hier par les Autorités canadiennes en valeurs mobilières (ACVM) concernant les nouvelles exigences en matière de règlement des différends dans l’Avis 31-338 du personnel des ACVM, Indications à l’intention des courtiers et conseillers inscrits qui ne sont pas membres d’un organisme d’autoréglementation sur l’information à fournir aux clients au sujet des services de règlement des différends. Dans l’Annexe A de cet avis, vous trouverez un exemple de l’information que les courtiers et conseillers inscrits sont tenus de fournir à leurs clients au sujet des obligations de la société inscrite relativement aux services indépendants de règlement des différends.