Timely Disclosure

Timely Disclosure

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

Review of SEC’s Statement on Potentially Unlawful Online Platforms for Trading Digital Assets

On March 7, 2018 the U.S. Securities and Exchange Commission (SEC) released a “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets”. The statement is a warning to investors, service providers operating platforms through which digital assets are traded, and those providing ancillary services involving the transfer or maintenance of digital assets

With regard to investors, the SEC’s principal suggestion was to conduct diligence to ensure online trading platforms with which investors engage are SEC-registered and regulated marketplaces, whether as national securities exchanges, alternative trading systems, or broker-dealers.

For market participants operating online trading platforms, the SEC has confirmed that platforms which are effectively operating as an exchange, specifically by trading assets fitting into the definition of a “security” under U.S. federal securities laws, must either register as a national securities exchange or be exempt from registration, for example, by falling into the alternative trading system exemption.

Focusing on national securities exchanges, these platforms must “have rules designed to prevent fraudulent and manipulative acts and practices… have rules and procedures governing the discipline of its members and persons associated with its members, and enforce compliance by its members and persons associated with its members with the federal securities laws and the rules of the exchange”.  The national securities exchange itself must also comply with federal securities laws and file its rules with the SEC. As a cautionary note, a platform may be deemed to be participating in the unregistered offer and sale of securities if digital assets that fall under the definition of “security” are being offered and/or sold on the platform and the securities are not registered or exempt from registration.

Focusing on alternative trading systems, these platforms must become a member of a self-regulatory organization and register with the SEC as a broker-dealer. A number of additional regulatory requirements will apply, such as requirements for “reasonable policies and procedures to prevent the misuse of material non-public information, books and records requirements, and financial responsibility rules…” Self-regulatory organization membership further imposes additional regulatory requirements and rules.

Finally, for those platforms which do not meet the definition of a national securities exchange but directly or indirectly offer trading or other services related to digital assets that fall under the definition of “security”, certain regulations may still apply. For example, digital wallet services may trigger broker-dealer, transfer agent or clearing agency registration requirements under federal securities legislation.

The original statement may be viewed on the SEC’s website.

International Women’s Day Recap

Gender diversity during proxy season and National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101) are reviewed when CSA releases their staff notice regarding compliance for 2018 (as reported in our Timely Disclosure posts in 2017, 2016 and 2015). In celebration of international women’s day, here is a recap of gender diversity promotion and a preview of discussion points to come at the end of proxy season 2018:

Catalyst Report

Increasing the number of women in powerful positions has the potential to transform our workplaces and society.[1]

In a report commissioned by the Government of Ontario in 2016, Catalyst outlined recommendations for accelerating progress for gender diversity on boards of directors in Canada. The report noted that Canada continues to lag behind other developed nations in terms of gender balance on corporate boards. Although more women than men graduate annually from Canada’s universities and colleges, Canadian women continue to be underrepresented on boards and in senior management.[2]

ISS Governance

Canadian institutional investors have begun to voice their frustration with the slow movement on boardroom gender diversity through their voting policies.[3]

After a round table discussion in 2017, ISS announced it will adopt a board gender diversity policy in 2018 that will promote better disclosure by companies and higher levels of gender diversity in boardrooms. Under the proposed new policy, if: i) the company has not adopted a formal written gender diversity policy, and ii) no female directors serve on the board; then ISS will generally recommend withholding votes for the chair of the nominating committee or equivalent.

Canadian Coalition for Good Governance

While the quality of individual directors is paramount, we also expect boards as a whole to be diverse. A high performance board is comprised of directors with a wide variety of experiences, views and backgrounds which, to the extent practicable, reflects the gender, ethnic, cultural and other personal characteristics of the communities in which the corporation operates and sells its goods or services.[4]

In October 2015, Canadian Coalition for Good Governance (CCGG) provided a board gender diversity policy which outlined the need for enhanced gender diversity on boards and at the executive level, stating the current regulations should go beyond simply requiring disclosure under NI 58-101. Further, CCGG recognizes that a “comply or explain” approach may not be sufficient if the CSA rules do not lead to real progress.

Bill C-25

Nearly half of all companies listed on the TSX [in 2017] still had zero women on their boards of directors, virtually unchanged from the year before [and] only 10 per cent had set targets for the number of female representatives on their board, only slightly up from the year before.[5]

Bill C-25 may encourage corporations to place women on boards and in executive positions. Bill C-25 is an Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act to, among other things, (a) reform some aspects of the process for electing directors of certain corporations and cooperatives; (b) modernize communications between corporations or cooperatives and their shareholders or members; (c) clarify that corporations and cooperatives are prohibited from issuing share certificates and warrants, in bearer form; and (d) require certain corporations to place before the shareholders, at every annual meeting, information respecting diversity among directors and the members of senior management. It further amends the Competition Act to expand the concept of affiliation to a broader range of business organizations.[6]

Canadian Budget 2018

Engineers Canada is encouraged by the government’s funding of $5 million per year for Status of Women Canada to undertake research and data collection, including support for a project that analyzes the unique challenges visible minority and newcomer women face in finding employment in STEM occupations.[7]

With Budget 2018, the Government of Canada set a new standard of gender budgeting as a core pillar of budget-making. Going forward, the Government is committed to adopting a comprehensive and permanent approach to gender budgeting. Budget 2018 and future budgets under this Government will be guided by the new Gender Results Framework with its six pillars of i) Education and Skills Development, ii) Economic Participation and Prosperity, iii) Leadership and Democratic Participation, iv) Gender-Based Violence and Access to Justice, v) Poverty Reduction, Health and Well-Being, and vi) Gender Equality Around the World. The framework will outline meaningful indicators under each pillar to track success or failure.[8]

[1] Deborah Gillis, President & CEO, Catalyst

[2] Catalyst. Gender Diversity on Boards in Canada, Recommendations for Accelerating Progress. 2016 [http://www.catalyst.org/system/files/gender_diversity_on_boards_in_canada_final_pdf_version.pdf]

[3] ISS. 2018 Benchmark Policy Consultation. [https://www.issgovernance.com/file/policy/5-2017-comment-period-template-canada-director-elections-board-gender-diversity.pdf]

[4] CCGG. CCGG Pilocy, Board Gender Diversity. October 2015. [https://www.ccgg.ca/site/ccgg/assets/pdf/gender_diversitypolicy.pdf ]

[5] The Star. Amend Bill C-25 to push companies harder to get more women on boards. February 4, 2018. [https://www.thestar.com/opinion/editorials/2018/02/04/amend-bill-c-25-to-push-companies-harder-to-get-more-women-on-boards.html]

[6] Open Parliament Canada. Bill C-25 [https://openparliament.ca/bills/42-1/C-25/]

[7] Newswire. Budget 2018 acknowledges gender gap in STEM, particularly in engineering. February 28, 2018.  [https://www.newswire.ca/news-releases/budget-2018-acknowledges-gender-gap-in-stem-particularly-in-engineering-675408843.html]

[8] Government of Canada. Budget 2018. [https://www.budget.gc.ca/2018/docs/plan/chap-05-en.html]

Hostile Bids on Ice: Canadian Hostile Bid Activity Trends Substantially Lower

In May 2016, sweeping changes to the Canadian take-over bid regime came into effect.  The stated purpose of the new rules included the goal of rebalancing the dynamics between hostile bidders and target boards by extending the minimum bid period to 105 days, and mandating a 50% mandatory minimum tender condition and a ten-day extension once all bid conditions have been satisfied or waived.  We published our Canadian Hostile Take-Over Bid Study in the spring of 2015, just over a year before the new rules came into force.  In that study, we expressed concern that strengthening a target board’s hand could result in a decrease in hostile bid activity.  Over the past year, various commentators have suggested that the new rules have had no adverse impact on hostile bid activity.  We are not so sure.

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The Saga Continues: Marijuana, United States Federal Law and the Canadian Securities Administrators

We noted in our post of January 18, 2018 that the Canadian Securities Administrators (CSA) were reconsidering whether the CSA’s disclosure-based approach for issuers with U.S. marijuana-related activities remained appropriate.  The CSA’s reconsideration was triggered by an announcement on January 4, 2018 by Jeff Sessions, Attorney General of the United States, which expressly rescinded previous nationwide guidance from the Obama-era specific to marijuana enforcement (or forbearance therefrom) in the United States, including a “Memorandum for All United States Attorneys” dated August 29, 2013 from James M. Cole, then-Deputy Attorney General of the United States.  As we noted, while medicinal marijuana is legal in numerous American states and recreational marijuana is legal in several states, marijuana remains illegal at the federal level in the United States, thus creating a dilemma for the CSA with respect to Canadian issuers with marijuana-related activities in the United States.

On February 8, 2018, the CSA published CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities (Revised 51-352), setting out the expectations of CSA staff with respect to disclosure for specific risks faced by issuers with marijuana-related activities in the United States.  In short, the CSA have maintained their disclosure-based approach for Canadian issuers with marijuana-related activities in the United States, as opposed to prohibiting such issuers from raising funds in Canada or listing on a Canadian stock exchange.  Issuers will continue to be able to raise funds and list in Canada, notwithstanding the fact that their operations may be illegal under United States federal law and that they may face prosecution at any time, as long as such risks are adequately disclosed.

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OSC’s Proposed Amendment to Whistleblower Program

On January 18, 2018, the Ontario Securities Commission (OSC) published and requested comments for a proposed change to OSC Policy 15-601 Whistleblower Program (Policy). The  Whistleblower Program came into effect in July 2016 and is intended to encourage individuals to report information on serious securities-related misconduct to the OSC to prevent or limit harm to investors, in exchange for financial compensation.


Under the Whistleblower Program, individuals who report original information that is of meaningful assistance to OSC staff in investigating the matter and obtaining a decision under section 127 of the Securities Act (Ontario) (Securities Act) or section 60 of the Commodity Futures Act, and resulting in sanctions of $1,000,000 or more, may be eligible for an award between 5 and 15% of the total sanctions imposed and/or voluntary payments made in the relevant proceedings.

Concurrent with the Policy coming into effect, the Securities Act was amended to provide Whistleblowers with protection against retaliatory action by employers for seeking advice on whistleblowing or for reporting securities violations.

Proposed Change: In-House Counsel Eligibility

As the Policy stands, those who  provide legal services to an employer that is the subject of the whistleblower submission, i.e. legal professionals working in-house, are permitted to make a submission where:

  1. the whistleblower has a reasonable basis to believe that disclosure of the information is necessary to prevent substantial injury to the financial interest or property of the entity or investors of the entity to which the submission relates;
  2. the whistleblower has a reasonable basis to believe that the violating entity is engaging in conduct that will impede an investigation of the misconduct; or
  3. at least 120 days have passed since the whistleblower reported the information to the entity’s audit committee, chief legal officer, CCO or the individual’s supervisor, or at least 120 days have passed since the whistleblower learned that one or more of those individuals were already aware of the information.

In-house counsel often work in a unique legal/business advisor role. Consequently, the Law Society of Ontario had raised concerns that allowing in-house counsel to be eligible for the Whistleblower Program could encourage reporting on information that is subject to solicitor-client privilege and go against other such professional obligations. In response, the proposed change would make in-house counsel acting in their legal capacity ineligible for the Whistleblower Program. In-house counsel acting in a non-legal capacity would continue to be eligible where they meet the above exemption requirements and where the disclosure would not go against applicable law society rules. How this distinction is to be made is less clear.

Comments on the proposed change will be received by the OSC until March 20, 2018.

Bringing Your Annual Meeting into the Digital Age

Annual meetings of shareholders of public companies often feature: attendance by a modest number of shareholders, and by the company’s external legal counsel, auditor, investor-relations firm, service providers and other assorted hangers-on; the casting of virtually all votes prior to the meeting by way of proxy; perfunctory reviews of the past fiscal year by the Chief Executive Officer and Chief Financial Officer; and one or two desultory questions from shareholders.  In short, annual meetings haven’t evolved in the last 30 years.  Excitement arises only if activist shareholders storm the meeting or if unionized employees speak, particularly if a strike is threatened or in progress.

It’s time for public companies to bring their annual meetings into the digital age and to use them as an effective means of communicating with a large number of shareholders and with the investment community in general.  A revamped annual meeting may even lead to reduced costs when compared to the traditional model of renting a conference room at a hotel and providing refreshments, as modest as they may be, for shareholders.  Canadian corporate law provides a framework which can be used to increase shareholder access to annual meetings and to maximize the impact of annual meetings.

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When Jeff Sessions Talks About Marijuana, the Canadian Securities Administrators Listen

As noted in our post of October 18, 2017, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities on October 16, 2017.  The CSA Staff Notice noted the discrepancy between United States federal and state law as it relates to the use and sale of marijuana.  In short, while medicinal marijuana is legal in numerous American states and recreational marijuana is legal in several states, marijuana remains illegal at the federal level in the United States.

The CSA Staff Notice stated that how a company with marijuana activities in the United States ensures compliance with U.S. state-level regulatory frameworks forms an important part of that company’s Canadian continuous disclosure record, and set out specific, detailed disclosure requirements for issuers with marijuana-related activities in the United States, applicable to continuous disclosure documents such as an annual information form (AIF) or management’s discussion and analysis (MD&A), and to a prospectus in the event of a public offering.

All of that may have changed on January 4, 2018, when Jeff Sessions, Attorney General of the United States, issued a one-page “Memorandum for All United States Attorneys” regarding “Marijuana Enforcement” (Sessions Memorandum).  The Sessions Memorandum expressly rescinded, effective immediately, previous nationwide guidance specific to marijuana enforcement in the United States, including a “Memorandum for All United States Attorneys” dated August 29, 2013 from James M. Cole, then-Deputy Attorney General of the United States, entitled “Guidance Regarding Marijuana Enforcement”.  A press release issued by the U.S  Department of Justice contemporaneous with the Sessions Memorandum announced that the Sessions Memorandum constitutes a “return to the rule of law” and that “Attorney General Jeff Sessions directs all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities”.

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TSX & TSXV Allow Electronic Filing of PIFs

On December 18, 2017, the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV, together with the TSX, the TMX Exchanges) introduced electronic versions of TSX Form 4 and TSXV Form 2A Personal Information Form and the related TSX Form 4B and TSXV Form 2C1 Declaration (the Electronic Documents).

Individuals are now able to populate their Electronic Documents on the TMX Portal.

The Electronic Documents do not need to be notarized and are executed by the individual with an electronic signature, thereby eliminating the previous requirement for an originally executed copy to be delivered the TMX Exchanges.

In addition, the TSX listing application was also amended to remove the requirement to have the listing application notarized.

Individuals may continue to submit notarized and originally executed documents in paper format to the TMX Exchanges on a voluntary basis until June 30, 2018.

2018 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 2018 proxy season.

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


Definition of Independence.  ISS has updated its definitions relating to director independence.  Previously, ISS categorized each director as an Inside Executive Director, Affiliated Outside Director or Independent Director.  The new categories are Executive Director, Non-Independent, Non-Executive Director (including former CEOs, controlling shareholders, Non-CEO executives, relatives of executives and persons with professional/financial relationships, among other things) or Independent Director.

Board Gender Diversity.  Beginning February 2019, ISS will generally recommend withholding votes for the chair of the nominating committee, or board chair if no nominating committee chair, where a company has not disclosed a formal written gender diversity policy and has no female directors.  ISS indicates that a written policy should include measurable goals or targets and clear commitments to increasing gender diversity within a reasonable period of time.  The ISS Updates also state that boilerplate or contradictory language may result in withhold recommendations.  The ISS policy will apply to all TSX companies, except companies first listed or graduated from the TSXV within two fiscal years or companies with four or fewer directors.

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British Columbia and Alberta Start-Up Crowdfunding Exemption Expanded

On September 21, 2017, following the results of a stakeholder survey conducted over the course of the year to date, the British Columbia Securities Commission (BCSC) announced changes to the existing equity crowdfunding rules found in British Columbia Instrument 45-535 – Start-up Crowdfunding Registration and Prospectus Exemptions (BCI 45-535) to address two of the most common pain points felt by investors and issuers.

The first amendment is a step to address concerns with respect to a lack of harmonization across provinces by creating a regime to allow access for investors and issuers across the B.C. and Alberta border. The amendments to BCI 45-535 provide that Alberta as a “participating jurisdiction” and include specific reference to Alberta Securities Commission Rule 45-517 Prospectus Exemptions for Start-up Businesses (ASC Rule 45-517) in the definition of the term “corresponding start-up crowdfunding order”. A similar change to ASC Rule 45-517 was announced on October 3, 2017, by the Alberta Securities Commission. As a result, a British Columbia issuer can now sell securities to an investor in Alberta and an Alberta issuer can now sell securities to an investor in British Columbia relying on both BCI 45-535 and ASC Rule 45-517; however, the issuer will be held to the most restrictive limit as between the two instruments. For example, to comply with BCI 45-535 the B.C. issuer would be required to use a funding portal and, to comply with ASC Rule 45-517 that portal would be required to be registered either as an investment dealer or an exempt market dealer.

The second improvement, addressing concerns from survey respondents with respect to investment limits, is an amendment to raise an investor’s limit from $1,500 to $5,000, but only if the investor has obtained advice from a registered dealer that the investment is suitable for them.

While these amendments are clearly a step in the right direction, they will have limited application to market participants in the short term. As noted above, these two changes are relevant in the context of an equity crowdfunding campaign conducted through a registered dealer. Currently, there are 10 start-up crowdfunding portals permitted to operate in British Columbia according to the BCSC website, only one of which is currently registered as an exempt market dealer in both British Columbia and Alberta.

Further information about BCI 45-535, including user-friendly guides, can be found on the BCSC’s Start-Up Crowdfunding webpage.