Timely Disclosure

Timely Disclosure

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

OSC Unveils LaunchPad to Support Fintech Businesses


The Ontario Securities Commission (OSC) announced today its new initiative, OSC LaunchPad, described as the first dedicated team by a securities regulator in Canada to help fintech businesses navigate securities law requirements and accelerate time-to-market.

OSC LaunchPad will provide direct support to eligible new and early-stage fintech businesses through meetings with the OSC LaunchPad team on navigating the regulatory framework, flexibility around current regulatory obligations, or informal guidance at an early stage on potential securities regulation implications.  The OSC also indicated that it will consider time-limited registration or exemptive relief for fintech businesses to test their products, services and applications.

Eligible fintech businesses can apply for support through the OSC LaunchPad’s website.

The OSC is hosting an OSC LaunchPad Information Day on November 3, 2016. Registration is available through the OSC Launchpad webpage.

In addition, the OSC announced it will establish a fintech advisory committee to further understand the issues faced by start-ups in the space.

Canadian Issuers Continue To Have Success Against Activist Investors


As noted in the Globe and Mail’s recent article, “In Canada’s boardrooms, activist investors are striking out” (subscription to the Globe and Mail required), Canadian listed public companies have continued to have success against activist investors. In fact, since January 1, 2015, Canadian listed issuers have a perfect record against “professional” activists in formal proxy contests, having won all six such contests to make changes to the board which were initiated by hedge funds or institutional investors. This success may be driven, at least in part, by issuers’ increased emphasis on advance preparation, including shareholder engagement. If issuers are more attuned to the views of their shareholders, it stands to reason that they will be in a better position to assess the likelihood of successfully defending against an activist in a formal proxy contest and pre-emptively settle those situations that they do not believe they can win. This explanation, while compelling, may be incomplete. With that in mind, I offer the following five observations based on a review of the public record of unsuccessful contests recently initiated by “professional” activists.

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The Potential Costs of Public M&A Regulation: Lessons from Across the Pond


The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of Fasken Martineau DuMoulin LLP or any of my partners or associates.

A little over five years have passed since the U.K. Takeover Code was reformed on September 19, 2011 in order to prohibit deal protection provisions — including lock-ups, “no shop/no talk” covenants and termination or “break” fees — in M&A deals involving the acquisition of publicly-listed U.K. companies.  Seizing upon a rare and valuable opportunity to conduct some natural experiments into the effect on the U.K. M&A market of this regulatory change, a pair of students from Stanford and Harvard recently published a study on the impact of the 2011 Reforms on U.K. deal volumes, the incidence of competing offers, deal premiums and deal completion rates.[i]  The results of their study are both interesting and instructive.

Among other things, they found that:

  • the ratio of U.K. deals to non-U.K. deals[ii] decreased by approximately 50% after the 2011 Reforms;
  • this reduction in deal volume was not offset by any increase in the incidence of competing offers or deal premiums in the U.K.; and
  • as a result, the U.K. M&A market experienced an estimated quarterly loss of approximately US$19.3 billion in deal volume following the 2011 Reforms, implying a quarterly loss, assuming a conservative average deal premium of 20%, of approximately $3.3 billion to shareholders of U.K. public companies since the 2011 Reforms were put in place.

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Bill C-25: sweeping changes to corporate governance


Bill C-25: Major changes proposed to director elections and other governance matters for CBCA reporting issuers

On September 28, 2016, the federal Minister of Innovation, Science and Economic Development introduced Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act. Bill C-25, if enacted, would result in sweeping changes to the corporate governance regime for reporting issuers incorporated under the Canada Business Corporations Act (CBCA).

The CBCA is the incorporating statute for nearly 270,000 corporations. Although most of these are small- or medium-sized and privately held, a large number of Canada’s largest reporting issuers are also governed by the CBCA. The amendments proposed in Bill C-25 stem from a House of Commons committee-led statutory review in 2010, which, in turn, led to a further consultation undertaken in 2014 by Industry Canada.

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Alberta Securities Commission to Introduce Participation Fee Model for Reporting Issuers


On December 1, 2016, the Alberta Securities Commission (ASC) will be replacing the current fee rule in Alberta with ASC Rule 13-501 Fees (ASC Rule 13-501) which will increase registrant and capital market activity fees, and for the first time in Alberta, will introduce a participation fee model.

Any issuers that are currently a reporting issuer in Ontario are already familiar with the concept of a participation fee.  The participation fee is an annual payment based on the capitalization of the issuer (the larger the issuer’s capitalization is, the larger the fee is).  The ASC participation fee will be payable at the time that the issuer files its annual financial statements on SEDAR.  Under the ASC’s current fee rule, the maximum an issuer would pay when it file its annual financial statements is $2,400 (which is the amount paid by short form eligible issuers).

As a result of the introduction of the new participation fee model, any reporting issuer with a capitalization of over $50 million will see an increase in the payment that it submits to Alberta with its annual financial statements.  In some cases, issuers will see a significant increase as the maximum amount payable under the participation fee model is $48,000.

Types of Reporting Issuers

The ASC participation fee rates are based on the type of reporting issuer it is – either a Class 1 reporting issuer, a Class 2 reporting issuer, a Class 3A reporting issuer or a Class 3B reporting issuer.  Each type of reporting issuer is defined below:

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Is There Method in Seagate’s Madness in Inviting an Activist Wolf into the Fold?


Seagate Technology’s Unusual Alliance with ValueAct Capital: Is There Method in Seagate’s Madness in Inviting an Activist Wolf into the Fold?

Last month, Seagate Technology plc, an $11 billion company in the data-storage business, announced a secondary block trade in which it facilitated the transfer of roughly 9.5 million ordinary shares, representing an approximate 4% stake in the company, from one of its existing investors to ValueAct Capital.

It’s not uncommon for publicly listed companies to facilitate such trades.  Among other things, they allow for the orderly unwinding of potentially market-moving positions by major shareholders that plan to sell, helping to protect the stock price.

It is, however, exceedingly uncommon for a company to solicit a large investment by a well-known activist hedge fund and, in connection with that investment, to invite the activist to have an observer present at board meetings, as Seagate did.  Historically, corporations have been hesitant to bring activists into the boardroom for fear of the disruption and conflict it might cause.  But Seagate seems willing to take that risk, conceivably in the hope of preventing an even more disruptive future public conflict.  The danger, of course, is that, like political theorist John Locke’s hypothetical lamb, Seagate is securing an “admirable peace” by “without resistance yield[ing] its throat to be torn by the imperious wolf”.

In fairness, ValueAct does have a reputation for practicing a kinder and gentler brand of activism, to which companies have shown some receptiveness in recent years.  You may recall that it used a comparatively soft touch, quietly working behind the scenes with mutual fund shareholders while applying significant private pressure on the board and a small dose of public pressure, in order to secure a board seat with Microsoft Corp. in September 2013.  At the time, ValueAct was a relatively small $12 billion hedge fund with a mere 0.8% stake in Microsoft, underlining the effectiveness of its less aggressive brand of activism.  Not only was it able to parlay its modest shareholding into a boardroom presence but there was considerable speculation back then that the announcement by Steve Ballmer, days before the announcement of ValueAct’s board seat, that he would (within a year) be resigning his position as Microsoft CEO had ValueAct’s fingerprints all over it.

It appears, moreover, that ValueAct managed to impress some of the right people with the work it did on Microsoft’s board.  Seagate Chairman and CEO Stephen Luczo briefly served on the Microsoft board with Mason Morfit, ValueAct’s president, after ValueAct acquired its board seat.  And now Seagate has turned to ValueAct for help in its ongoing struggle to adapt to the rapid market shift from physical data-storage devices to cloud-based storage.  Mr. Luczo explained the ostensibly odd alliance in the press release announcing the transaction:

“Seagate approached ValueAct to execute this transaction and become an investor in our company, given their commitment to and success in creating long-term value for the companies in which they invest. The Seagate Board and management team are looking forward to engaging with the ValueAct team as we leverage their experience and resources to further strengthen the company and create long-term investment appreciation for Seagate shareholders.”

There is no reason to doubt Seagate’s claim that it sees long-term strategic value in the relationship.  ValueAct has a reputation for helping other technology companies, including Microsoft and Adobe Systems Inc., find their way through comparable difficult transitional periods.

But what Mr. Luczo didn’t mention is that the alliance offered a number of immediate tactical advantages to Seagate as well.  ValueAct has traded in and out of the company’s stock for years.  As public company directors have by now heard ad nauseam, early engagement with activists in an attempt to solicit and be in a position to respond to any concerns they may have can be crucial in avoiding public conflict later.  Seagate has taken this logic one step further: where more naïve boards have historically made the mistake of stiff-arming activist investors, serving only to rile them up and increase the potential for public conflict, the Seagate board chose to get in front of any possible issue by proactively seeking investment from, and voluntarily opening its boardroom doors to, an activist shareholder that has been hovering over the company’s stock for some time.

Beyond the goodwill that was likely generated by this gesture of openness and transparency, there are other, less obvious but also valuable, benefits that Seagate stood to gain by giving ValueAct observer status at its board meetings.  When ValueAct was offered a position on Microsoft’s board, it was required to enter into a cooperation agreement, which among other things prevented ValueAct from initiating a proxy contest, limited the stake it could build in the company and forbade ValueAct from making disparaging statements about the company or its directors and officers.  Seagate has not publicly announced or filed a cooperation agreement with ValueAct, but it would be shocking if it hasn’t extracted these or other similar, protective covenants, including confidentiality and trading black-out covenants, in exchange for providing ValueAct with a presence in the boardroom.

Unlike what happened at Microsoft, ValueAct hasn’t taken an actual board seat this time, so any representative present at Seagate board meetings will not be subject to additional constraints arising from the fiduciary duty owed by directors to the corporation.  That makes it all the more imperative, and therefore likely, that ValueAct’s future dealings with the company and its stock are contractually constrained.  Far from yielding its throat without resistance to an activist wolf, it’s highly probable that Seagate has taken steps to muzzle ValueAct and blunt any possible attack as a condition to being invited into the fold.

It will be interesting to monitor the extent to which this sort of thing becomes a trend.  In Canada, public company boards have demonstrated increasing savvy in avoiding public fights with activists.  The number of public proxy battles has steadily declined in recent years, from a high of 27 in 2012, to only 10 in 2015 and 7 so far this year.  Seagate’s bold alliance with ValueAct may provide an instructive example of how those numbers might be further reduced.

Results of Gender Diversity and Term Limit Disclosure Review Released

Securities Regulatory Authorities Release Results of Gender Diversity and Term Limit Disclosure Review

Securities regulatory authorities in Ontario and nine other provinces and territories of Canada published CSA Multilateral Staff Notice 58-308 Staff Review of Women on Boards and in Executive Officer Positions – Compliance with NI 58-101 Disclosure of Corporate Governance Practices on September 28, 2016.  The staff notice summarizes a review of the gender diversity and term limit disclosure of 677 non-venture issuers (being those listed on the Toronto Stock Exchange with year-ends between December 31, 2015 and March 31, 2016).  As a result, these statistics do not include data regarding most banks.

Key findings of the gender diversity disclosure review include:

  • there are more women on boards than last year. Of the 215 issuers with over $1 billion market capitalization, 18% of board seats are held by women (up from 10% last year);
  • only 21% of issuers adopted a policy relating to the identification and nomination of women directors (up from 15% last year) and issuers with such a policy had higher average female board representation (18%) as compared to those with no policy (10%);
  • only 9% of issuers set a target for the representation of women on boards (up from 7% last year) and those issuers with targets had a greater number of women on their boards (25%) than those without a target (10%);
  • 66% of issuers disclosed that they consider the representation of women on their boards as part of their director identification and nominating process (up from 60% last year);
  • board and executive officer representation by women varied significantly by industry.

Key findings of the board renewal disclosure review include:

  • 20% of issuers adopted director term limits (up from 19% last year);
  • of those issuers with term limits, 48% set age limits, 23% had tenure limits and 29% had both;
  • the most common reason cited for not adopting board renewal mechanisms was that term limits reduce continuity or experience on the board.

This release follows Ontario Securities Commission Chair and CEO Maureen Jensen’s call for leadership on women on boards.  Chair Jensen highlighted the low number of women filling board vacancies.  She noted that “of the 521 board seats vacated during the year, just 15% were filled by women” and “without an improvement in the vacancy fill rate, we will never reach 30% female board representation”.

Proposed Amendments to CBCA

In addition, the Government of Canada released proposed amendments to the Canada Business Corporations Act which, among other things, would require that distributing CBCA corporations identify the gender composition of their boards and senior management and disclose their diversity policies or explain why none are in place.

Crowdfunding Prospectus Exemptions for B.C. Issuers

On May 6, 2016, the B.C. Securities Commission (Commission) adopted BC Instrument 72-505 Exemption from prospectus requirement for crowdfunding distributions to purchasers outside British Columbia (BCI 72-505).  BCI 72-505 creates an exemption from the prospectus requirement for B.C. issuers that distribute securities to purchasers resident outside of B.C. using Multilateral Instrument 45-108 Crowdfunding (MI 45-108), which has not been otherwise adopted in B.C.

To qualify for the prospectus exemption under BCI 72-505, the following conditions must be met:

  • the distribution must not be made to a purchaser resident in B.C.;
  • the purchaser must purchase the security as principal;
  • the purchaser must certify in the subscription agreement that the purchaser is not resident in B.C.;
  • the issuer must comply with the requirements of MI 45-108 in the jurisdiction where the purchaser is resident; and
  • if the issuer is concurrently offering securities to a purchaser resident in B.C. using British Columbia Instrument 45-535 Start-up Crowdfunding Registration and Prospectus Exemptions (BCI 45-535), the issuer must provide the purchaser resident in B.C. with the same disclosure provided to purchasers in other jurisdictions under MI 45-108.

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Hemostemix Proxy Contest: Will Dissidents Succeed in Making a Clean Sweep of the Boardroom?

On August 22, 2016, a group of shareholders commenced a proxy contest to change the entire board of Hemostemix Inc. (Hemostemix), a widely-held, micro cap, clinical-stage biotechnology company (TSXV:HEM, OTCQX:HMTXF).

Hemostemix’s business activities focus on the development and planned future commercialization of ACP-01, a proprietary, blood-derived cell product designed to treat critical limb ischemia, a painful obstruction of the arteries that reduces blood flow to the extremities. Hemostemix had reached an agreement in 2014 with a contract research organization (CRO) to manage most aspects of the phase 2 clinical trial of ACP-01, but Hemostemix announced on June 28, 2016, that the CRO had terminated the agreement, and that phase 2 clinical trials would be placed on hold.

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Hostile Bid Launched Targeting Nordex Explosives Ltd.

Nordex Explosives Ltd. (Nordex), a Canadian explosives manufacturer listed on the TSX Venture Exchange, and Société Anonyme d’Explosifs et de Produits Chimiques (EPC) entered into a private placement and subsequent going private transaction on June 15, 2016. EPC was to purchase Nordex shares for $0.12 per share.

However, subsequent to Nordex’s announcement of the EPC offer, Omnia Holdings Limited, through its mining division BME (BME), issued a press release on July 14, 2016, stating its intention to make an offer to acquire all of the outstanding shares of Nordex at $0.20 per share. As a response to BME’s higher offer, on July 18, 2016, EPC increased its original offer from $0.12 to $0.18 per share.

Even though BME’s offer provided a higher premium to Nordex’s shareholders, Nordex’s Board of Directors (Nordex Board) favoured EPC’s offer as they concluded BME’s offer to be contingent upon too many conditions. Specifically, BME’s offer required two-thirds of all outstanding Nordex shares to be tendered and afforded BME with multiple avenues to cleanly walk away from the deal. As a result, the Nordex Board has taken the position that the EPC offer was in the best interest of Nordex’s shareholders as it offered greater deal certainty.

In response, BME filed a take-over bid circular on August 3, 2016 relating to a bid for all the outstanding shares of Nordex at a price of $0.22 per share. This BME offer represents a 57% premium to the closing price of Nordex shares on July 13, 2016 of $0.09 per share. The Nordex Board is currently reviewing the unsolicited offer and has urged its shareholders to take no action at this time.

Nordex will be holding an annual and special meeting of its shareholders on August 12, 2016, where its shareholders will have the opportunity to vote on the EPC offer. In order to be approved, the EPC offer will require a two-thirds majority shareholder vote.

We will continue to monitor the advancement of the BME hostile bid as we await the Nordex Board’s response in its directors’ circular and the results of the shareholder vote at the annual and special meeting of the shareholders regarding the EPC offer.