Timely Disclosure

Timely Disclosure

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

A New National Rights Offering Exemption

On November 27, 2014, the Canadian Securities Administrators (CSA) published for comment proposed amendments to various National Instruments which, if adopted, would overhaul how rights offerings under the rights offering prospectus exemption are conducted. The amendments would also have minor revisions to the requirements of rights offerings conducted by way of prospectus.  The CSA indicate that the amendments are meant to make the rights offering exemption more accessible by streamlining the process.

A rights offering is a financing where the issuer grants to its current securityholders one right per security held. The right or a certain number of rights would then be exercisable prior to the expiry date to purchase an additional security of the issuer at a certain subscription price. The issuer can issue these rights under a prospectus or by using a prospectus exemption.

The proposed amendments include amendments to National Instrument 41-101 General Prospectus Requirements (NI 41-101), National Instrument 44-101 Short Form Prospectus Distributions, National Instrument 45-102 Resale Restrictions, Companion Policy 45-106CP to NI 45-106 and Companion Policy 41-101CP to National Instrument 44-101.

Summary of Amendments

Currently, National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) provides a specific prospectus exemption (Current Exemption) for rights offerings which comply with National Instrument 45-101 Rights Offerings (NI 45-101). However, the CSA note that the Current Exemption is not commonly utilized because rights offerings complying with the Current Exemption are time consuming and costly. Under the proposed amendments, NI 45-101 would be repealed and the Current Exemption would be replaced by a new exemption in NI 45-106 (New Exemption) that would substantially change the requirements for a prospectus exempt rights offering.

Below is a summary of the major changes under the New Exemption:

  • Availability: Only reporting issuers, other than certain investment funds, would be able to utilize the New Exemption. In addition, the Current Exemption would be repealed, meaning there would no longer be an ability for non-reporting issuers to undertake a rights offering under a specific rights offering prospectus exemption. Continue Reading

Canadian Securities Regulators Publish Revised Notice for Enhanced Early Warning System

On March 14, 2013, the Canadian Securities Administrators (CSA) initially published for comment proposed rules relating to the early warning reporting system (2013 Notice).  The 2013 Notice identified the CSA’s concerns regarding the transparency of disclosure of significant holdings of reporting issuers’ securities under the existing early warning reporting system.  In particular, the 2013 Notice focused on whether the current reporting trigger of 10% of any class of voting or equity securities continues to be appropriate and on the adequacy of disclosure in early warning reports themselves. On October 10, 2014, the CSA published a revised notice that substantially amends the approaches suggested in the 2013 Notice.  Most importantly, the CSA have now concluded not to proceed with their earlier proposal to reduce the current reporting threshold from 10% to 5% and not to include “equity equivalent derivatives” for purposes of determining the threshold for early warning reporting. This latest notice states that the CSA intend to proceed with final amendments to the early warning system (Final Amendments) which will:

  • require disclosure of 2% decreases in ownership;
  • require disclosure when a shareholder’s ownership interest falls below the reporting threshold (i.e., below 10%);
  • make the alternative monthly reporting regime unavailable to eligible institutional investors in certain circumstances where the investor is engaged in proxy solicitation activities in respect of the issuer;
  • restrict the circumstances in which lenders and borrowers of securities are exempted from compliance with the early warning requirements in connection to specific securities lending arrangements;
  • provide guidance clarifying how the early warning system applies to certain derivative instruments;
  • enhance and improve the disclosure requirements in the form of early warning report, particularly in respect of the investor’s intentions with respect to its position; and
  • clarify the timeframes within which reports must be filed and news releases issued.

The Final Amendments are expected to be published in the first quarter of 2015.  While the Final Amendments are not as extensive an overhaul as the draft amendments proposed in the 2013 Notice, the CSA believe that the Final Amendments will enhance the quality and integrity of the Canadian early warning reporting regime.

Phase 2 Fund Modernization Amendments Now in Effect

The previously published amendments (Phase 2 amendments) to NI 81-102 as part of the CSA’s fund modernization project are now in effect.

For mutual funds, the changes include:

  • a new prohibition against investing in closed-end funds (subject to an 18-month transition period for existing mutual funds), and
  • new sales communications requirements for mutual funds following conversion from a closed-end fund structure.

For closed-end funds, the changes include:

  • a prohibition against issuing any warrants (whether as part of an initial public offering, or subsequently to existing unitholders),
  • 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 investment restrictions prohibiting:
  • investments in mortgages (other than government-guaranteed mortgages) and certain loans, and
  • investments in underlying funds that are not subject to Canadian securities laws,

subject, in each case, to an 18-month transition period for existing closed-end funds,

  • limits on the circumstances in which redemptions of units can be suspended and requiring that unitholders be reminded annually of their redemption rights,
  • new restrictions on sales communications (advertising), and
  • a variety of conflict of interest rules previously exclusive to mutual funds.

Please read our firm’s detailed bulletin New Rules for Closed-End Funds and Mutual Funds Under Phase 2 Fund Modernization Amendment.

Notice of Publication of ISDA 2014 Multilateral Canadian Reporting Party Agreement (Deemed Dealer Version)

ISDA has published the deemed dealer version of the Multilateral Canada Reporting Party Agreement referenced in section 25(2)(a) of OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting. It is expected that there will be a different version of the Multilateral Agreement where neither counterparty is a derivatives dealer.   Under the agreement the parties agree to comply with the Canadian Transaction Reporting Party Requirements published by ISDA on April 4, 2014, as they may be replaced, amended or supplemented from time to time, which rules set out the ISDA methodology for determining which party to a derivatives transaction is the reporting counterparty for the purposes of the rule.  The adoption of the ISDA methodology is aimed at facilitating one-sided transaction reporting in circumstances where both counterparties may be subject to reporting obligations under OSC Rule 91-507 or the equivalent rules in Manitoba and Quebec.  Note that the ISDA Methodology is not available in respect of transactions between a dealer and non-dealer.

Notice of Publication of OSC FAQs in respect of OSC Rule 91-506 and OSC Rule 91-507

The Ontario Securities Commission (OSC)   has published Frequently Asked Questions (FAQs) (see http://www.osc.gov.on.ca/en/Derivatives_index.htm) in respect of OSC Rule 91-506  Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting.  The FAQs  provides guidance on the application of the two rules.

Notice of Designation Orders for Trade Repositories for Derivatives

The Ontario Securities Commission (OSC)  has issued three orders  (see http://www.osc.gov.on.ca/documents/en/Marketplaces/marketplaces_20140923_nco-chicago-dtcc-ice.pdf) pursuant to section 21.2.2(1) of the Securities Act (Ontario) designating the following three entities as trade repositories:

Chicago Mercantile Exchange Inc. (CME)

DTCC Data Repository (U.S.) LLC (DDR)

ICE Trade Vault, LLC ( ICE TV)

Pursuant to the designation orders, market participants that are required to report over-the-counter (OTC) derivatives transactions involving Ontario counterparties under OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting, can satisfy those obligations by reporting such trades to CME, DDR or ICE TV.  As noted by the OSC notice, Ontario OTC derivatives market participants will need to  contact and join the Ontario designated trade repository in a timely manner to comply with their obligations under OSC Rule 91-507.    As also noted, the on-boarding process for new users and participants of a trade repository ranges from two to four weeks.

The Autorite des marches financiers (AMF) has followed the OSC’s lead and  recognized CME, DDR and ICE TV as trade repositories for the equivalent derivatives reporting obligations in Quebec.  Staff of The Manitoba Securities Commission (MSC) has indicated the intention, subject to MSC approval, to issue a  designation order in respect of  CME, DDR and ICE TV similar in substance to the orders published by the OSC and the AMF.

OSC Publishes Annual Summary Report for Dealers, Advisers and Investment Fund Managers

On September 25, 2014, OSC Staff Notice 33-745 Annual Summary Report for Dealers, Advisers and Investment Fund Managerwas published (Report).  The Report is an overview of the main initiatives undertaken by the OSC’s Compliance and Registrant Regulation Branch within the last year and those initiatives underway, with a focus on those registrants directly overseen by the OSC, i.e., exempt market dealers, portfolio managers, scholarship plan dealers and investment fund managers.  The Report identifies certain decisions as they relate to registrant misconduct and also provides information regarding trends in registration and compliance and related guidance to firms.

The Report includes initiatives such as:

  • the exempt market review resulting in
    • proposed amendments relating to the accredited investor exemption and minimum amount investment prospectus exemption in NI 45-106; and
    • the proposal of four new prospectus exemptions;
  • the review and industry consultation of a best interest standard for dealers and advisers;
  • amendments to NI 31-103 as they relate to cost disclosure, performance reporting and client statements which are being phased in – some of these requirements became effective in July this year;
  • an amendment to NI 31-103 as it relates to registrants having an independent dispute resolution service, mandating registrants, except those in Quebec, to apply to the Ombudsman for Banking Services and Investments by August 1st this year;
  • the review of service arrangements between portfolio managers and IIROC dealer members
  • consultation relating to derivatives regulations resulting in OSC Rule 91-506 Derivatives: Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting, both effective December 31, 2013;
  • the Registrant Outreach program which includes providing registrants with educational seminars and increased communications through blast e-mails to registrants, e.g., notifying of new rules coming due and providing guidance to registrants;
  • the development of an enhanced review of firms applying for registration akin to a registrant’s first compliance review;
  • the issuance of new registration service standards; and
  • proposed amendments to NI 31-103 such as time limits on exams, amendments to registration forms and imposing a requirement on CCO’s to have 12 months of relevant securities industry experience at the time of application.

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.