Timely Disclosure

Timely Disclosure

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

OSC Publishes Report on its Review of REIT Distributions Disclosure

After reviewing the continuous disclosure records of 30 Ontario-based real estate investment trusts (REITs), the Ontario Securities Commission (OSC) staff, in OSC Staff Notice 51-724 Report on Staff’s Review of REIT Distributions Disclosure issued January 26, 2015, has provided additional guidance on its expectations for disclosure by REITs regarding the source of distributions paid to equityholders, and the sustainability of those distributions. This report reiterates and further explains guidance provided in National Policy 41-201 Income Trusts and Other Indirect Offerings (NP 41-201), which sets out certain requirements applicable to REITs’ continuous disclosure and offering documents.

In its report, the OSC staff noted the expectation of investors that REITs, as an investment vehicle, provide a predictable cash flow stream, and therefore that it is critical that REITs provide transparent disclosure that enables investors to evaluate the source of funding for the distributions paid by the REIT and their sustainability. Although the OSC characterized the majority of the disclosure they reviewed as fulsome, they did identify the following four areas of concern where disclosure should be improved:

  • the content of disclosure where distributions in excess of cash flows generated from operations are paid,
  • consistency of disclosure about excess distributions,
  • timely disclosure where a reduction or termination of distributions occurs, and
  • presentation of metrics common to the real estate industry such as adjusted funds from operations (AFFO).

All four concerns were heightened where the distributions paid by REITs exceeded the cash flows generated by the REIT’s underlying real estate portfolios.

The report provides examples of disclosure the OSC staff regards as inadequate, as well as examples of how that disclosure could be improved.

The report also notes that the OSC staff will continue to assess these disclosure items in their continuous disclosure and prospectus review programs and that REITs who have not complied with disclosure expectations will be expected to take corrective action. We recommend, therefore, that REITs review their continuous disclosure filings for compliance with the items highlighted in the report, particularly in advance of any proposed prospectus offerings.

TSX Proposes Listing Requirements for Investment Funds

On January 15, 2015, the Toronto Stock Exchange (TSX) published for comment proposed amendments to the TSX Company Manual which would introduce listing requirements for non-corporate entities, such as exchange-traded products, closed-end funds and structured products, as those terms are defined in the proposed amendments.

The proposed amendments address the following, among other matters:

  • minimum and continued listing requirements
  • distribution requirements
  • management
  • net asset value calculation and website display
  • additional listings (including the requirement for non-dilutive pricing in specified instances)
  • management fees paid in securities
  • securityholder approval requirements for changes to declarations of trust and other constating documents.

Comments on the proposed amendments are due on March 16, 2015.

IIROC Publishes Guidance to Underwriters in respect of Due Diligence for Public Offerings


On December 18, 2014, the Investment Industry Regulatory Organization of Canada (IIROC) published its final guidance note outlining common due diligence practices and suggestions for IIROC dealer members (Dealer Members) in underwritten public offerings of securities.  The guidance note follows IIROC’s March 6, 2014 proposed guidance and a three month public comment period.

The guidance note urges Dealer Members to take an approach to due diligence that goes beyond the mere avoidance of liability and mitigation of risk to the underwriter as Dealer Members play a role in protecting investors, fostering fair and efficient capital markets and creating and maintaining confidence in the capital markets.

The guidance note was prepared specifically to address Dealer Members involved in public offerings of securities. Although the March 6, 2014 proposed guidance indicated that some aspects of the guidance may be helpful to Dealer Members in the context of private placements, such reference to private placements was removed in the final guidance note.

Nine Principles of Underwriting Due Diligence

The guidance note is designed to promote consistency and enhanced underwriting due diligence standards among Dealer Members.  It sets out nine principles which underwriters should consider in the context of their due diligence of the issuer. These are: Continue Reading

2015 ISS and Glass Lewis Updates

Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) have both released updates to their Canadian proxy voting recommendation guidelines for the 2015 proxy season. The items updated include those pertaining to the definition of independence, advance notice requirements, by-law amendments, private placements, treatment of majority voting policies, shareholder rights plans and advance notice policies.

The following summary outlines the significant changes made by ISS (ISS Updates) and Glass Lewis to their respective Canadian proxy advisory guidelines.


Definition of Independence. The current guidelines recommend that votes be withheld for any “insider” or “affiliated outside director” where the board does not have a majority of independent directors or the board lacks a separate compensation or nominating committee.  The ISS Updates provide that an assessment as to independence will be made on a case-by-case basis.  ISS will deem a former CEO to be independent for the purposes of serving on the board or any key committee, including the audit committee, after a five year cooling off period unless certain factors indicate otherwise.  Specifically, the ISS Updates include a provision that deems any director nominee who has any material relationship with the issuer or with any one or more members of management of the issuer not to be independent.  A material relationship is defined as a relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.  ISS will also recommend a withhold vote from any director who has served as the CEO of the issuer within the past five years and is a member of the audit or compensation committee.

Advance Notice Policies. With respect to Advance Notice Policies, ISS will generally recommend that investors withhold votes from individual directors, committee members, or the entire board as appropriate in situations where an Advance Notice Policy has been adopted by the board but has not been included on the voting agenda at the next shareholders’ meeting.  The rationale behind the recommendation is that certain problematic provisions included within these bylaws/policies could potentially interfere with a shareholder’s ability to nominate directors.  ISS is of the view that the ability for shareholders to put forward potential nominees is a fundamental right and should not be amended by management or the board without shareholders’ approval.  ISS considers the following features problematic:

  • for a notice of annual meeting given not less than 50 days prior to the meeting date, the notification timeframe within the advance notice requirement should allow shareholders the ability to provide notice of director nominations at any time not less than 30 days prior to the meeting.  The notification timeframe should not be subject to any maximum notice period for annual meetings.  If notice of annual meeting is given less than 50 days prior to the meeting date, a provision to require shareholder notice by close of business on the 10th day following first public announcement of the annual meeting is supportable.  In the case of a special meeting, a requirement that a nominating shareholder must provide notice by close of business on the 15th day following first public announcement of the special shareholders’ meeting is also acceptable;
  • the board’s inability to waive all sections of the advance notice policy, in its sole discretion; Continue Reading

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.