Timely Disclosure

Timely Disclosure

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

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.

When an activist comes knocking, consider a special committee to develop a quick and credible response.

Much has been written about how companies can prepare for, and hopefully avoid, a confrontation with an activist shareholder.  While many boards are heeding the call for greater shareholder engagement and oversight of management, each year witnesses a significant number of activist campaigns and proxy contests.  So what is a board to do when its fears are realized and an activist comes knocking?  One of a board’s first considerations should be whether to establish a special committee to lead the response.

In most public companies, the board plays a supervisory role, providing oversight to the management team who are responsible for day-to-day operations.  Accordingly, the board is not expected to delve into the daily workings of the company’s operations but instead sets the strategic goals of the company and monitors management’s performance against the strategy.  However, when an activist shareholder appears and challenges the company’s strategy or management’s performance, the board is well-advised to take a greater hands-on role in responding.  Failure to do so in a timely and informed way can result in potentially disruptive change, not to mention tremendous cost, both in dollars and lost management time. As a result, expedience may dictate that a board form a special committee to spearhead the response strategy, but there may be sound legal reasons to do so as well.

When an activist arrives on the scene, time is of the essence.  Corralling board members on short notice for what could be frequent meetings presents many challenges, particularly if an in-person meeting is warranted.  In addition, board members who are part of the management team may well be conflicted if their performance is being challenged as part of the activist’s campaign. In these circumstances, the establishment of a special committee of independent directors assists as a procedural safeguard to ensure any decision is made by individuals whose judgment will be free of conflicts. A decision made in this way will carry significant weight with a court in determining whether a board has exercised appropriate business judgment.  Shareholders and proxy advisory firms may also accord greater weight to decisions made in this fashion.

This is the first 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.

Canadian Securities Administrators Propose New Disclosure Document for ETFs

On June 18, 2015, the Canadian Securities Administrators (CSA) published proposed legislative amendments to the disclosure framework for exchange-traded funds (ETFs).  If implemented, such amendments will require ETF managers to produce a summary disclosure document called “ETF Facts”.  The ETF Facts for an ETF will need to be filed at the same time as the ETF’s prospectus.  Dealers will also be required to deliver the ETF Facts to investors within two days of the purchase of an ETF’s securities.   Delivery of an ETF’s prospectus will not be required (unless an investor requests it) and the use of ETF Facts will mirror that of “Fund Facts” currently applicable to regular mutual funds.

The intent of the ETF Facts is to provide investors with key information about an ETF in a more easily understandable format. This new regime is also intended to replace the existing disclosure regime currently potentially available to ETF managers as a result of exemptive relief.  Managers who have obtained such relief are permitted to fulfil the prospectus delivery requirements for an ETF through delivery of a summary disclosure document instead.

For more information, including a sample of the proposed ETF Facts, please see CSA Notice and Request for Comment – Mandating a Summary Disclosure Document for Exchange-Traded Mutual Funds and its Delivery.

Comments on the rule changes are due by September 16, 2015, with the amendments due to come in force by early 2016.  Implementation is expected to occur in stages between 2016 to 2018.

Amendments to the TSX Company Manual to Reflect Trends Towards Dematerialization of Physical Evidence of Security Ownership

On May 21, 2015, the TSX announced one set of amendments and one request for comment on proposed amendments to the TSX Company Manual (Manual), both respecting physical certificate requirements for securities. The amendments should not have a noticeable impact for many listed issuers or industry participants, but they do highlight a few trends to be aware of.

The amendments and proposed amendments were promulgated in response to the trend of increasing dematerialization of physical securities the securities industry has experienced over approximately the last decade, initiated on the part of industry participants such as transfer agents, exchanges, brokers, and especially, clearing agencies and depositories, like the Canadian Depository for Securities (CDS). Legal practitioners, transfer agents, issuers and underwriters should all be familiar with the effects of the trend, noting the continual increase in electronic closings in recent years, for both financing and M&A transactions. Topically, this trend is reflected in the increasing number of electronic issuances of securities to even United States purchasers by Canadian listed issuers, which until very recently would have required physical certificates to be delivered to those purchasers, mainly for legending and transfer restriction purposes.

The dematerialization of evidence of securities ownership is itself an industry response to mitigate the costs and risks associated with the physical evidence of security ownership, including the costs of printing, storing, transferring, and physical handling of certificates, and the risk of theft and loss. CDS especially, through its rules, has been at the fore of implementing the shift for participants to embrace dematerialization to reduce such costs and risks, as CDS was often the entity with the responsibility to securely store physical certificates, and maintain facilities, staff and processes for their handling and transfer.

The published amendments to the Manual are characterized by TSX as being of a “housekeeping” nature, which characterization the Ontario Securities Commission did not disagree with. The amendments have been in force since May 21, 2015. The amendments update the language of the Manual to contemplate additional forms of evidence of security ownership other than physical certificates, such as holding securities through CDSX, the electronic deposit system of CDS, and direct registration systems, (commonly referred to as “DRS”). The amendments otherwise update the Manual to codify or clarify existing practices and dematerialization trends as they apply to transactions for TSX listed issuers, including amendments to, among other things, the listing agreement, and the rules for supplemental listings, stock splits, and consolidations. One practical change in the amendments to highlight is that the Manual now codifies that TSX listed issuers may have a transfer agent with a principal office in one or more of each of Vancouver, Calgary, Toronto, Montreal, or Halifax, whereas the Manual previously required that issuers have a transfer agent with a principal office in Toronto. Continue Reading

Relief from certain Client Relationship Model Phase 2 (CRM2) Amendments

The OSC has published decisions relating to certain relief from the CRM2 requirements that were to come into effect during 2015 and 2016.  The relief is consistent with that set out in CSA Staff Notice 31-341 – Omnibus/Blanket Orders Exempting Registrants from Certain CRM2 Provisions of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

The OSC also issued an e-mail blast to registrants advising them that the CSA plans to amend NI 31-103 in order that the relief be permanent.

The following links provide details of the relief in Ontario:

Non-SRO Firms Registered as of July 15, 2015


IIROC Member Firms Registered as of July 15, 2015


MFDA Member Firms Registered as of July 15, 2015


Please contact Garth Foster or Donna Leitch if you have any questions.



Certain Canadian Securities Regulators to Adopt Start-Up Crowdfunding Exemptions

In recent years, crowdfunding has proven an exceptionally popular and efficient means by which individuals and companies make use of the internet to attract investors for a variety of purposes. The traditional model generally involves a large number of individuals contributing small sums of money to finance specific ideas or projects. Increasingly, however, equity crowdfunding is emerging as a way for start-ups and early-stage companies that are non-reporting issuers to raise capital at an earlier stage of development through the issuance of securities. Equity crowdfunding has already proven successful in certain foreign jurisdictions, and is expected to make an impact in Canada.

Following a consultation period held early last year, the securities regulators of British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan (Jurisdictions) announced on May 14, 2015 that they have implemented, or expect to implement in the near future, changes to their securities legislation to provide for registration and prospectus exemptions for start-ups and early-stage companies that wish to raise capital through crowdfunding. Businesses wishing to rely on the exemptions will be able to conduct crowdfunding distributions in the Jurisdictions.

The start-up crowdfunding exemption actually consists of two distinct exemptions. The first is a prospectus exemption for start-up companies seeking to raise capital. The second is a dealer registration exemption for persons wishing to operate a funding portal, a platform which facilitates start-up crowdfunding distributions.

The Jurisdictions plan to implement these exemptions by way of local blanket orders. The conditions associated with the two exemptions are outlined in Multilateral CSA Notice 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions (CSA 45-316), and are summarized below. The start-up crowdfunding exemptions will be effective in each Jurisdiction concurrently with, or as soon as possible after, the publication of the notice of CSA 45-316. Each exemption order is available, or will be available shortly, on the websites of each Jurisdiction’s securities regulatory authority.

The start-up prospectus exemption

The start-up prospectus exemption permits non-reporting issuers to issue eligible securities, subject to a number of conditions. The key conditions are: Continue Reading

OSC Staff Notice 32-505 Conditional Exemption from Registration for United States Broker-Dealers and Advisers Servicing U.S. Clients from Ontario

Firms and individuals located/residing in Ontario that trade to, with, or on behalf of, or advise U.S. resident clients may be required to be registered in Ontario, regardless of the client not residing in Ontario.

The Ontario Securities Commission (OSC) is proposing dealer and adviser registration relief for U.S. broker-dealers and U.S. advisers servicing U.S. clients from Ontario, in the form of OSC Rule 32-505 Conditional Exemption from Registration for United States Broker-Dealers and Advisers Servicing U.S. Clients from Ontario (the Rule).  The Rule was delivered to the Minister of Finance on April 23, 2015 and is expected to come into force July 7, 2015.

The exemption set out in the Rule, will be available to U.S. broker-dealers and the representatives acting on their behalf (Brokers), and to U.S. adviser firms and the representatives acting on their behalf (Advisers) (collectively, Brokers and Advisers) and is subject to conditions as set out below.

Brokers and Advisers may rely on the exemption set out in the Rule if they

  • are appropriately registered in the United States to trade for U.S. residents or advise U.S. residents, or are relying on an exemption from registration under U.S. federal securities laws;
  • do not trade, directly or indirectly, for an Ontario resident or advise an Ontario resident without appropriate registration or an exemption from the applicable registration requirement under Ontario securities laws; and
  • have filed Form 32-505F1 Information Report for United States Broker-Dealers and Advisers Servicing U.S. Clients from Ontario (Form 32-505F1) with the OSC, and an updated Form 32-505F1 is filed with the OSC within 10 days of any changes to the information previously filed.

Brokers or Advisers that rely on the exemption set out in the Rule will become a market participant as defined under subsection 1(1) of the Securities Act (Ontario) (the Act) and therefore subject to Ontario securities laws with respect to record-keeping and compliance reviews, as set out in Part VII of the Act.

The Rule will align with the blanket orders issued by the other 12 Canadian jurisdictions on March 26, 2015, exempting Brokers and Advisers from the dealer/adviser registration requirement in the applicable local jurisdiction, and subject to substantially the same conditions set out above.