Timely Disclosure

Timely Disclosure

Updates and Commentary on Current issues in M&A, Corporate Finance and Capital Markets

On July 16, 2015 the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-344 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2015 summarizing the results of their Continuous Disclosure Review Program (Program).  The purpose of the Program is to monitor the compliance of continuous disclosure documents prepared by reporting issuers (issuers) and to help issuers understand and comply with their obligations under the continuous disclosure rules.

In fiscal 2015, there was a total of 1058 Continuous Disclosure Reviews, 280 of those being full reviews while 778 were issue oriented reviews focused on a specific accounting, legal or regulatory issue.  Highlights of the continuous disclosure reviews in fiscal 2015 are as follows:

  • 8% resulted in enforcement, cease trade orders or issuers being placed on a defaulting issuer list (compared to 9% in fiscal 2014);
  • 21% resulted in a requirement to amend and refile the applicable continuous disclosure document (compared to 14% in fiscal 2014);
  • 30% resulted in changes or enhancements required in the issuer’s next filing of the applicable continuous disclosure document (compared to 37% in fiscal 2014);
  • 9% 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 16% in fiscal 2014); and
  • 32% resulted in no action being required (compared to 24% in fiscal 2014).

To help issuers better understand their continuous disclosure obligations the CSA also highlighted areas where deficiencies were commonly found and provided some best practice examples on how to address the deficiencies.  Regarding MD&A, the CSA noted several issues, including:

  • failing to provide sufficient analysis of liquidity and capital resources;
  • providing inadequate results of operations disclosure;
  • including forward looking information and non-GAAP measures without clearly identifying them as such or including the appropriate disclosures; and
  • providing inadequate disclosure regarding related party transactions.

Interestingly, the CSA also noted that in some instances issuers are failing to file certain disclosure documents all together, the most common of those being material contracts and material change reports.

Of special interest to mining issuers, the CSA noted that mining issuer disclosure must comply with NI 43-101 Standard of Disclosure for Mineral Projects (NI 43-101), including written disclosure contained on an issuer’s website including investor presentations, media articles and links to third party content.  Regarding investor presentations of mining issuers, the CSA noted several areas where mining issuers need to improve to better comply with NI 43-101, including:

  • naming the qualified person who approved technical information and explaining their relationship to the issuer;
  • providing required cautionary statements so that investors can understand the limitations of study results;
  • including clear statements on whether mineral resources include or exclude mineral reserves;
  • for exploration targets, expressing potential quantity and grade as a range and including the required statements outlining the target limitations; and
  • avoiding overly promotional terms, such as “world class” and “spectacular and exceptional results”.

The CSA stressed the importance of the mining sector in Canadian capital markets and noted that they will continue to review mining issuers’ website disclosure as part of the Program.

Canadian Securities Administrators Propose Harmonized Exempt Distribution Reporting Rules

On August 13, 2015, the Canadian Securities Administrators (CSA) published proposed amendments to the reporting requirements in National Instrument 45-106 Prospectus Exemptions (NI 45-106).


Current Reporting Forms

The reporting forms required to report an exempt distribution presently consist of two forms, being Form 45-106F6 British Columbia Report of Exempt Distribution (Form 45-106F6) which is used for distributions in British Columbia and Form 45-106F1 Report of Exempt Distribution (Form 45-106F1) which is used for distributions in all other Canadian jurisdictions.  Issuers who meet an exemption under BC Instrument 45-533 may file a Form 45-106F1 in British Columbia instead of filing a Form 45-106F6.

In March 2014, the provinces of Alberta, Saskatchewan, Ontario and New Brunswick published proposed amendments to NI 45-106 that would result in the creation of two additional reporting forms which would be Form 45-106F10 Report of Exempt Distribution for Investment Fund Issuers and Form 45-106F11 Report of Exempt Distribution For Issuers Other Than Investment Funds (March 2014 Proposed Forms).

As described below, the CSA proposes to replace Form 45-106F1, Form 45-106F6 and the March 2014 Proposed Forms with a single, revised Form 45-106F1.

Current Filing Systems

Form 45-106F1 or Form 45-106F6, as applicable, are filed with the British Columbia Securities Commission (BCSC) through the BCSC eServices website and issuers are required to have a profile created on the BCSC eServices system before a filing can be completed.  Issuers who have a System for Electronic Document Analysis and Retrieval (SEDAR) profile automatically have a profile existing in BCSC eServices.  Issuers who do not have a SEDAR profile are required to submit a profile form to the BCSC to create their profile on BCSC eServices at least 24 hours before they can submit the reporting form.  BCSC eServices requires the filer to enter a few pieces of information from the Form 45-106F1/F6 into certain fields on the eServices submission page before attaching the reporting documents and completing the submission.  The Form 45-106F1 or Form 45-106F6 is typically populated in Word format, and then converted into PDF format before being uploaded to BCSC eServices.  In addition, the schedules to Form 45-106F1 and Form 45-106F6 are removed and filed as separate PDF documents.

Form 45-106F1 filings with the Ontario Securities Commission (OSC) are filed through the OSC’s Electronic Filing Portal (OSC Portal).  Unlike the BCSC eServices system, the OSC Portal does not require a profile to be created by an issuer in order to make a filing.  However, unlike the BCSC eServices system, where only a few pieces of information need to be entered into the submission page, the submission on the OSC Portal requires the filer to enter every piece of information in the entire Form 45-106F1 onto the submission page.  In addition, Schedule I to Form 45-106F1 must be completed in Excel format and uploaded to the submission page.  The Form 45-106F1 is typically originally populated in Word format, the Schedule I information is populated a second time in Excel format, and the filer populates the Form 45-106F1 in its entirety again electronically on the OSC Portal.  If the Form 45-106F1 is only being filed in Ontario, a filer may draft the Form 45-106F1 in the OSC Portal and the Excel version of Schedule I and forgo the creation of the Word version.

Form 45-106F1 filings in all other Canadian jurisdictions simply require the executed Form 45-106F1 to be mailed to the securities commission.  A recent proposal by the CSA would allow the filing of Form 45-106F1 reports through SEDAR.

The time and costs to issuers to complete the reporting for an exempt distribution have been increasing as a result of the introduction of BCSC eServices and OSC Portal filing systems requiring the creation of different forms, completion of different formats of the schedules, and population of the electronic submission pages.  The CSA have received this feedback from the industry in response letters to various proposed amendments to NI 45-106 and are therefore proposing the current amendments, in part, to harmonize the reporting forms into one.

In addition, the proposed amendments include the requirement to provide additional information to the CSA to assist them in regulatory oversight of the exempt market and to provide information for future policies.

Proposed Changes

Continue Reading

The Canadian Coalition for Good Governance Releases Policy Paper on Proxy Access

The Canadian Coalition for Good Governance (CCGG) has released a policy paper entitled “Shareholder Involvement in the Director Nomination Process:  Enhanced Engagement and Proxy Access”.

In the policy paper, CCGG refers to “proxy access” as the ability of shareholders to have meaningful input into the director nomination process, whether by being able to influence who the nominees are or through actually nominating directors.

Under Canadian corporate law, although shareholders elect directors, they typically are not involved with choosing the nominees for the board.  CCGG stated that its view is that board composition in Canada will benefit from meaningful shareholder input into the nomination process and that such input is an essential component of shareholder democracy.

The paper sets out CCGG’s recommendations including that companies adopt policies and procedures that will enable shareholders to communicate with independent directors about board composition on a regular basis, that corporate and securities statutes be amended as necessary to include proxy access provisions consistent with those set out in CCGG’s policy paper, and that issuers adopt a proxy access policy voluntarily prior to amendments to these statutes.   The paper also highlights the approach of other jurisdictions to proxy access including the United States where companies are beginning to adopt proxy access bylaws.

CCGG proposed that proxy access legislation or policy include the following components:

  • shareholders holding an aggregate economic and voting interest of at least 3% or 5% of outstanding voting shares (depending on the company’s market capitalization) should be able to nominate directors to be placed on the same form of proxy as the company’s nominees;
  • shareholders must hold the prescribed percentage of shares up to the time of the applicable meeting;
  • disclosure about a shareholder’s nominees should be set out fairly and with the same prominence as the company’s nominees in the proxy circular along with the use of a universal proxy form for all nominees;
  • shareholders do not need to hold their shares for a specific period of time before being permitted to nominate a director;
  • the number of directors to be nominated by shareholders cannot exceed the lesser of 3 directors or 20% of the board;
  • reasonable solicitation costs on the part of the shareholder should be paid by the company unless shareholders resolve otherwise; and
  • shareholders nominating directors must represent that they are not seeking control and have the minimum prescribed ownership.

Responding to the Activist: Compensating the Special Committee

As we have noted in our previous post, a special committee appointed to lead a company’s response to an activist can expect to receive a greater degree of public scrutiny, but may take comfort from the fact that the legal standard against which its members will be judged will not change.  While that should provide some comfort to committee members, the job of serving on a committee can nevertheless be time-consuming and challenging.  However, given the extra time and effort needed to properly discharge the committee’s mandate, it is customary and appropriate to compensate committee members for their efforts above and beyond their regular compensation as directors.

Compensation arrangements generally involve one or both of the following and are typically paid in cash:

  • a flat retainer fee (which could be a monthly or quarterly fee), often with the committee chair receiving a greater amount to account for the additional responsibilities of the chair; and/or
  • a per meeting fee, which may be lower when attending by phone given that there is less disruption or travel time involved to attend the meeting (the quantum is typically based on the attendance fee for regular board meetings). Where the work of the committee turns out to be more intensive than originally anticipated, the meeting fee can serve to balance a retainer fee that in hindsight could be viewed as providing insufficient compensation.

Committee members should also be reimbursed their reasonable expenses, often consistent with the board’s existing expense reimbursement policy.

There are no specific rules governing the quantum of compensation in these circumstances, though some guiding principles may be helpful:

  • The board should consider the organization’s general board compensation philosophy and practices.
  • Success fees, which may compromise the committee’s independence, should generally be avoided.
  • The quantum of compensation should not be excessive in relation to the fees paid to board members in connection with their regular board duties or, for that matter, the compensation paid to management.
  • As a further reference point, the board also may look to the compensation paid to members of the audit committee, a committee whose independence is legislatively mandated.

This is the fifth in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids.  For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees, a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.

Responding to an activist: While special committee members may face greater public scrutiny, they are not subject to a higher legal standard

As we discussed in our previous post, a special committee established in response to an activist’s approach should be comprised of independent board members with the relevant expertise and the time to participate meaningfully. While we have written about some of the benefits to the company of incorporating a special committee process into its response to the activist, it is understandable that directors may be reluctant to take on the role of committee member in what could become a very public process.

Given the committee’s role in advancing the company’s public response, committee members may be subjected to greater public scrutiny and, potentially, criticism, including from the activist. Among other things, committee members should consider that their actions could be viewed by the activist as obstructionist and could result in the activist targeting those directors for removal if a short slate is proposed. While this enhanced public role and attention may be unusual for directors, committee members should not fear that their role will result in a higher legal standard being used to judge their actions.

Provided the committee is staffed appropriately and acts in good faith and with due care, a director may take comfort from the protections afforded by the business judgment rule which requires a reasoned decision, not necessarily the “right” decision when judged in hindsight. It is true that the committee members take on distinct responsibility not shared by the other board members in discharging the committee’s mandate; however, this responsibility does not heighten the legal standard against which the committee members will be judged.

This is the fourth in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids. For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.

Responding to an activist: When appointing a special committee, select the members with care

As we discussed in our previous post, when a board finds itself in the crosshairs of an activist, establishing a special committee of unconflicted directors with clear marching orders from the board may allow for more thoughtful decision-making under pressure and lend credibility to the company’s response, particularly where management’s performance is under attack.  Equally important to the decision to establish a committee and the scope of its mandate, is the decision about who should serve on the committee.  While the prevailing consideration in selecting a committee member should be the individual’s independence, the board should also consider other factors, including the individual’s expertise, the availability of the individual to devote the necessary time to participate meaningfully, and the ability of committee members to work together as a group.

To enhance the committee’s credibility, all members should be free of competing interests that could reasonably be viewed as adversely impacting their judgment.  For example, in a proxy contest, allegations by an activist of management underperformance create an inherent conflict for any member of management who sits on the board since a win by the dissident may result in a loss of employment.  While the committee in these circumstances should consult with management where its expertise and knowledge of the business is required, management board members should be excluded from serving on the committee.

While independence is a prime consideration in establishing committee membership, it is also important to ensure that those on the committee have the expertise and experience to evaluate and respond to the activist’s proposals.  Given that a successful defense often requires the coordinated efforts of many team members, working closely with a number of professional advisors to communicate a clear and compelling vision for the company, a committee will benefit if one or more members has strong leadership experience or recognized industry expertise.

Responding to an activist, particularly where the activist has made its approach and proposals public, will also require committee members to devote a significant amount of time to attend meetings (preferably in person where feasible), engage with advisors and review a significant amount of materials, often in a very truncated time period and often with short notice.  To establish and maintain momentum it may be necessary to engage in a robust public relations campaign that may include press releases, letters to shareholders, media interviews, analyst conference calls and, of course, meetings with shareholders; directing or participating in these activities also takes a significant amount of time.

Finally, the board should consider the working dynamic between committee members.  In the pressure cooker of a public proxy campaign, it is vital that all committee members are able to work together cohesively and efficiently and resolve competing points of view amicably in order to present a united front.

This is the third in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids.  For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees, a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.

When responding to an activist, a special committee’s credibility is enhanced by a clear mandate from the board

As we discussed in our previous post, a board faced with the arrival of an activist on the scene can benefit from establishing a special committee of independent directors.  While a quick response time is one of the more obvious benefits of having a small group of directors lead the charge, a committee of unconflicted directors with clear marching orders from the board may allow for more thoughtful decision-making under pressure and lend credibility to the company’s response, particularly where management’s performance is under attack.

Proxy contests can often involve trench warfare with a daily barrage of press releases and other breaking developments.  In these circumstances, it is easy to revert to a reactionary, knee-jerk defence of management and the company’s strategy.  Mounting an informed and thoughtful defence is more likely with a small group of independent directors who can engage in an expeditious, yet thorough, analysis of the activist’s claims.  The company’s public response can be just as vigorous, but a skeptical shareholder may be more receptive to the company’s counter-attack if that attack was developed by independent decision-makers.

The committee’s credibility starts with its mandate: a committee with sufficient latitude to consider the activist’s claims, engage independent advisors and report to the board is more likely to bolster the company’s response than a committee whose mandate is more narrow and circumscribed.  A clear mandate adopted at the outset of the committee’s work will also clarify the committee’s duties, including its interactions with management, and will reduce the possibility of internal disputes later in the process.

A committee mandate in connection with a proxy contest could include the following:

  • meeting with the activist to receive details of the activist’s proposals;
  • considering and evaluating the activist’s proposals against the alternatives available to the company;
  • directing or approving any response by the company to the activist’s proposals;
  • negotiating with the activist, including with regard to any settlement discussions; and
  • supervising and participating in the company’s shareholder engagement efforts, including any proxy solicitation efforts.

This is the second in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids.  For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees, a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.

Ontario Business Law Panel releases report recommending changes to key corporate and commercial legislation

In June 2015, a 13-member panel created by the Minister of Government and Consumer Services (Ontario), known as the Business Law Agenda Stakeholder Panel, released “Business Law Agenda: Priority Findings & Recommendations Report”.

The panel reviewed corporate and commercial statutes in Ontario and made recommendations encompassing five key themes:

  • establishing a process to keep corporate and commercial law current;
  • making Ontario a jurisdiction of choice for business;
  • supporting greater market certainty and confidence in market transactions;
  • modernizing laws relating to secured lending and other commercial activity; and
  • facilitating market activity and promoting small business growth through greater certainty, clarity and efficiency in business legislation.

The report provided specific recommendations including the following:

  • Establish a regular formal process to promote the continuous review and updating of corporate and commercial statutes.
  • Review and update the Business Corporations Act (Ontario) (OBCA), taking account of technological advancements and legislative and case law developments in Canada, other Commonwealth jurisdictions, the United States and elsewhere including to.
    • contemplate electronic meetings and communications under the OBCA;
    • provide greater certainty about the standards to which directors and officers will be held under the OBCA, the liabilities to which they are exposed and the defences and protections available to them;
    • allow shareholders to effectively determine the composition of their boards of directors by eliminating certain legislative requirements including allowing shareholders to vote against candidates (rather than just withhold their vote) and removing the Canadian residency requirements; and
    • determine how best to make available to the ultimate investors in shares of a corporation, such as beneficial holders that hold their shares indirectly through book-based systems, the rights and remedies available to the registered holders of those shares.
  • Revise the Limited Partnerships Act (Ontario) by, among other things, reducing the risk of unlimited liability faced by limited partners in Ontario.
  • Permit the incorporation of unlimited liability corporations.
  • Repeal the Bulk Sales Act (Ontario).
  • Consider the continued need for licensing under the Extra-Provincial Corporations Act (Ontario).

New Proposed Prospectus Exemption for Retail Investors

On April 16, 2015, the securities regulators in British Columbia, New Brunswick and Saskatchewan published for comment Multilateral CSA Notice 45-315 – Proposed Prospectus Exemption for Certain Distributions through an Investment Dealer whereby the regulators proposed a new prospectus exemption that, if approved, would greatly increase the potential private placement investor base for a listed issuer (Retail Exemption). The Retail Exemption is meant to recognize that many retail investors are unable to access private placements, which typically offer securities at a discount to the market price. Because most retail investors do not fall under the definition of “accredited investor”, issuers do not have a prospectus exemption to rely on as required in a private placement.  The result is that most retail investors are purchasing their securities through secondary public markets, relying on information provided through the continuous disclosure record of the issuer and often with advice from an investment dealer.

The Retail Exemption is meant to allow retail investors to participate in private placements through a prospectus exemption in a manner similar to how investors are currently purchasing securities on the public markets. The main requirements of the Retail Exemption are that the issuer offering the securities must be a reporting issuer in Canada with up to date continuous disclosure filings and listed on a Canadian exchange (Toronto Stock Exchange, TSX Venture Exchange, Canadian Stock Exchange or Aequitas Neo Exchange Inc.) and that the investor must obtain advice regarding the suitability of the investment from an investment dealer. Because the intention is to have the investor rely on the advice from the investment dealer and the continuous disclosure record, no further offering document would be required. The Retail Exemption is not available if the investment dealer providing advice to the investor is a restricted or exempt market dealer.

Some of the other significant requirements are as follows:

  • the offering must be of the security listed on the applicable exchange, a unit consisting of the listed security and a warrant exercisable into such security, or a security convertible into the listed security;
  • a news release must be issued announcing the offering with certain prescribed information;
  • investors must be provided a contractual right of action for any misrepresentations in the issuer’s continuous disclosure record or in any offering document, if produced; and
  • securities offered would be subject to a four month plus one day resale restriction and issuers would be required to file reports of exempt distribution with respect to the offering.

Based on the proposal, the Retail Exemption appears to be a broad prospectus exemption which would allow listed issuers to expand the available investors of a private placement to include most retail investors. The main factor limiting the usefulness of the proposed Retail Exemption is that currently it appears that it will be available only in British Columbia, New Brunswick and Saskatchewan. The comment period for the Retail Exemption proposal concluded on June 15, 2015 and the regulators are now reviewing the responses.

Are Canadian wrappers gone for good?

On June 25, 2015, the Canadian Securities Administrators (CSA) announced rule amendments, slated to come into force September 8, 2015, which are intended to eliminate certain disclosure requirements that give rise to the need to prepare a Canadian “wrapper” for foreign securities offered by way of prospectus exemption in Canada as part of a global offering.  The CSA’s intention is to codify and expand the discretionary relief previously granted in 2013 to several investment dealers in respect of Canadian wrappers.

In general, the amendments provide relief from the standard disclosure requirements relating to (i) underwriter conflicts of interest, and (ii) the availability of statutory rights of action.  The amendments also provide relief from the prohibition on making certain listing representations in offering documents.

The exemptions are available only where (i) the offering is made to “permitted clients”, and (ii) the offering is in respect of “eligible foreign securities”, which includes securities issued by a foreign issuer that is incorporated, formed or created under the laws of a foreign jurisdiction, is not a reporting issuer anywhere in Canada, has its head office outside of Canada, and has a majority of its executive officers and directors resident outside of Canada, or securities issued or guaranteed by a foreign jurisdiction’s government.

In general, for non-government issuers, the conditions to rely on the underwriter conflict of interest exemption include:

  • a concurrent distribution of the security to investors in the United States;
  • delivery to the Canadian investors of an offering document containing the same disclosure as provided to investors in the United States; and
  • compliance with applicable U.S. federal securities law and, if applicable, the disclosure requirements of FINRA Rule 5121.

There are still notice requirements under these CSA amendments, however, the notice requirement is now greatly simplified and there is no requirement to obtain a signed acknowledgement.

Under the amendments, notice must be provided to Canadian investors which refers to the reliance on the exemption from the underwriter conflicts disclosure requirements, and the requirement to disclose statutory rights will be deemed to be satisfied if a prescribed disclosure statement is provided. Such notice may be provided in three ways:

  • the offering document may include a notice to Canadian investors;
  • a dealer can provide the notice to its clients at the same time as the offering document but in a separate document; or
  • a dealer can provide a one-time notice to each Canadian investor covering all future Canadian securities offerings, which notice must state that the dealer intends to rely on the exemption for any distribution in the future of eligible foreign securities to the permitted client.

Although these rule amendments will help alleviate the need for Canadian wrappers it is important to remember that private placement post-trade reports must still be filed with the Canadian regulators.