Timely Disclosure

Timely Disclosure

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

Developments in Private Equity and Fund Formation – ILPA Principles 3.0

The Institutional Limited Partners Association (« ILPA ») is a global organization dedicated to advancing the interests and maximizing the performance of limited partners (« LPs ») in the context of private equity funds. The ILPA constitutes a forum for LPs and general partners (« GPs ») to engage in constructive dialog with respect to alignment of interests, governance, transparency and industry’s best practices.

In 2009, the ILPA published the ILPA principles which are regarded by market participants as the gold standard in respect of the terms, practices and overall management of private equity vehicles. Those principles were recently updated by the ILPA, expanding and clarifying existing industry themes and addressing emerging practices and concerns in the market. Here is a list of key topics addressed in ILPA Principles 3.0 which we believe should be of particular interest for GPs and LPs. For more information about the ILPA Principles 3.0 please read the Bulletin which the authors recently published on the subject by clicking here. For further information on the updated ILPA Principles 3.0, please contact the authors.

  • Management Fees. Management fees should be based on reasonable expenses arising from the normal operating costs of the fund. For instance, costs and expenses related to investment activities (i.e. travel, cost of research, computer software, remedial actions resulting from audit or regulatory exam), consultant’s fees, ESG-related expenses, placement agent fees and operating partners’ fees should not be allocated to the fund but be paid by the management fees paid to the GP.
  • GP Ownership. GP should proactively disclose the ownership of the management company and notify LPs of any change to such ownership during the term of the fund. Restrictions on any transfer of the GP interest seek to alleviate concerns of misalignment of interest with LPs.
  • GP Removal. GP removal without cause should require a supermajority (75%) vote of LPs whereas in the case of a GP removal for cause, LPs should be able to remove the GP upon a preliminary determination of cause, rather than a final unappealable court decision. The GP removed for cause shall also see a meaningful forfeit or reduction of carried interest, to ensure sufficient economics remain to incentivize the new manager.
  • LPAC Best Practices. The LPAC should be composed of a workable number of members accounting for investor representation in terms of commitments, type, tax status and relationship with the GP. Furthermore, LPAC should have clear mandates and defined meeting agendas, a rotating chair and greater accountability in terms of participation of meetings.
  • Lines of Credit. Credit facilities should be used primarily for the benefit of the fund as a whole and not to fund early distributions. Specifics on credit facilities should be disclosed to LPs and their terms provided to LPs upon request. Regular reporting should include performance information with and without the use of the credit line for comparison purposes.

Ontario Securities Commission and CoinLaunch Settle Regarding Unregistered Activities

On July 24, 2019, the Ontario Securities Commission (the “OSC”) approved a settlement agreement with CoinLaunch Corp. (“CoinLaunch”), a provider of various ICO-related services in the crypto industry. Following an investigation by the OSC, it was determined that CoinLaunch engaged in and held itself out as engaging in the business of trading in securities, without registration under Ontario’s Securities Act (the “Act”).

As a result of the investigation and resulting settlement, CoinLaunch was subjected to fines and repayments of approximately $50,000, and is prohibited from acquiring or trading in any securities or derivatives for five years. In addition, CoinLaunch’s former CEO, Reuven Cohen, agreed not to act as a director or officer of any unregistered company which engages in the business of trading in securities.

This settlement suggests that the OSC is broadening its scope of enforcement in the crypto industry beyond crypto exchanges and ICO issuers to include consultants, dealers, and advisers who may have conducted registrable activities without first registering.

The CoinLaunch Settlement

Between March 1, 2018 and September 30, 2018, CoinLaunch’s operations revolved around advertising “crypto-consulting”, i.e. marketing and promotional services, to two cryptocurrency offerings: Buggyra Coin Zero (“BCZERO”) and EcoRealEstate (“ECOREAL” and collectively, the “Issuers”). BCZERO’s business involves an off-road truck racing team in the Czech Republic, while ECOREAL is developing a resort in Portugal.

CoinLaunch provided various services to both BCZERO and ECOREAL including, but not limited to:

  • creating and preparing promotional materials for the Issuers;
  • introducing the Issuers to potential investors via an online forum;
  • providing advice to the Issuers regarding the structure of the offerings;
  • creating and managing websites to promote the Issuers’ offerings; and
  • taking the offerings on roadshows to help solicit investors.

Section 1(1) of the Act defines a “security” to include “any investment contract”[1] and while “investment contract” is not specifically defined within the Act, the Supreme Court of Canada in Pacific Coast Coin Exchange of Canada v. Ontario (Securities Commission) determined that an investment contract will be found where there is: (a) an investment of money; (b) with an intention of expectation of profit; (c) in a common enterprise, in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties; and (d) that the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.[2]

The OSC took the opinion, and CoinLaunch agreed in the settlement agreement, that the Issuers’ tokens constituted investment contracts pursuant to the Act. As such, the services that CoinLaunch provided to the Issuers constituted acts in furtherance of trades and considering that those services were central to CoinLaunch’s business, required CoinLaunch to register as a dealer with the OSC. While CoinLaunch eventually took mitigating actions upon investigation from the OSC including removing webpages from the internet, ceasing their business relationship with the Issuers, and deciding to cease their crypto-consulting business rather than initiating a registration process, the OSC still levied a punishment against CoinLaunch for having provided those services without being registered.

Pursuant to the settlement agreement, CoinLaunch was ordered to pay an administrative penalty of $30,000, disgorge $12,233.06 to the OSC, pay costs of $10,000, refrain from acquiring any securities for five years, and refrain from acquiring or trading in any securities or derivatives for  five years. Furthermore, CoinLaunch’s former CEO, Reuven Cohen, gave an undertaking to: (a) not become or act as a director or officer of any company which engages in or holds itself out as engaging in the business of trading in securities without applicable registration under Ontario securities law or an exemption from such requirement; and (b) ensure that all references to the private keys in respect of all BCZERO and ECOREAL tokens received by CoinLaunch as compensation are deleted and thereby rendered inaccessible such that those tokens may not be accessed or transferred in the future.


The OSC made it clear that its intention moving forward will be to investigate and sanction all non-registrants conducting registrable activities in the crypto-asset sector, stating:

“Notwithstanding the result in this settlement, firms that are found to have ignored the registration obligation in the future should be considered on notice and can reasonably expect to face more stringent consequences. Both specific and general deterrence will likely require stronger measures if such conduct arises in the future.”

We believe this decision represents a broadening of the Canadian regulatory landscape regarding the crypto industry. Following a review of the relevant case law, it appears as though the CoinLaunch case represents the first time in Canada, and perhaps also the United States, that a securities regulator has levied penalties against consultants in the crypto-asset sector rather than issuers or exchanges.

In light of this, actors in the crypto-asset sector should cautiously approach a decision to forego the registration process given that the OSC: (a) levied penalties of over $50,000 against CoinLaunch, and (b) highlighted, in its settlement decision, the undertakings of the former CEO to refrain from future capital markets activities. With this decision, as well as their words of caution in the settlement agreement, the OSC has communicated their intention to increase the scope of their enforcement measures to include non-issuers like CoinLaunch.

If you are operating in the crypto-asset sector and have questions about registration matters, please feel free to contact Daniel Fuke at Fasken at 416-865-4436 or dfuke@fasken.com.

[1] Securities Act, RSO 1990, c S 5, s 1(1).

[2] Pacific Coast Coin Exchange v Ontario (Securities Commission), 1977 CanLII 37 (SCC), [1978] 2 SCR 112 at 128.

Private Equity in the Cross-Hairs of the Competition Regulator: Lessons Learned from Thoma Bravo

In recent years, competition/antitrust enforcers around the world, including Canada, have taken a marked interest in private equity deals.  As part of a broader global trend of tougher merger enforcement, private equity firms that have taken ownership positions (controlling or minority) in portfolio companies that are competitors have been subject to heightened scrutiny.  The litigation and subsequent settlement in involving Canada’s Competition Bureau and Thoma Bravo is the most recent example.

The Transaction

On May 13, 2019, Thoma Bravo (a private equity firm based in the United States) acquired Aucerna, a Calgary-based company that supplies reserves software, known as Val Nav, to oil and gas producers.

Before the acquisition, Thoma controlled several software companies, including a company known as Quorum. Quorum supplies reserves software, known as MOSAIC, to oil and gas producers.

The Bureau’s Challenge

32 days after the transaction closed, the Bureau sought to unwind the transaction, alleging a substantial lessening of competition in the market for reserves software for oil and gas producers in Canada. By bringing Aucerna and Quorum under common ownership and control, the Bureau alleged a merger to monopoly among the two largest Canadian suppliers of reserves software. The Bureau identified Aucerna’s Val Nav software and Quorum’s MOSAIC software as built and developed specifically for the Canadian market, and further alleged international competition from Schlumberger and Halliburton as insufficiently tailored for Canadian customers.

The Resolution

Approximately two months later, the litigation settled by way of a Registered Consent Agreement before Canada’s Competition Tribunal.  As part of the settlement, Thoma agreed to divest Quorum to a purchaser acceptable to the Bureau. The Bureau and Thoma agreed to the divestment of Quorum rather than any of the assets Thoma acquired from Aucerna through the transaction.

Lessons Learned

  • Great Scrutiny of Private Equity: The Thoma Bravo litigation demonstrates that Canada is no exception to the growing global scrutiny of private equity deals. Whether taking controlling or minority interests, private equity firms need to analyze the antitrust/competition implications of their prospective transactions, whether or not the transaction is subject to pre-merger notification before the Bureau.
  • Greater Scrutiny of Non-Notifiable Transactions: While not entirely clear, Thoma’s acquisition of Aucerna was likely not subject to pre-merger notification before the Bureau. The Bureau’s challenge of a non-notifiable transaction aligns with recent statements by the Bureau regarding its expanded Merger Intelligence and Notification Unit. The Bureau’s newly created Unit aims to identify non-notifiable transactions that may have competition concern. The Unit also aims to incentivize merging parties involved in competitively sensitive non-notifiable transactions to engage the Bureau pre-closing.
  • Post-Closing Unwinding of Transactions: Most merger challenges by the Bureau take place pre-closing, thereby preventing the intermingling of the merger parties’ businesses. The Bureau actions – seeking to unwind a transaction over a month post-closing – represents a rare exercise of discretion and a signal that no comfort should be taken from the lack of a pre-merger challenge by the Bureau.

Please contact any member of our Competition or Private Equity Group to discuss this development to ensure that appropriate consideration has been given to the heightened scrutiny from the Canadian competition regulators for private equity transactions.

Dianor Resolved – Jurisdiction to Vest Off Interests in Land in Receivership Upheld, but GORs Hard to Impair


In a number of recent cases, Canadian courts have demonstrated a willingness to vest mining claims free of royalty rights notwithstanding that those rights might constitute interests in land. One such case before the courts in Ontario is Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc.


On June 19, 2019 the Court of Appeal released its decision in Dianor upholding the jurisdiction of the courts to grant vesting orders impairing third party rights, and setting out a test for when assets can be vested free and clear of interests in land. This highly anticipated decision has provided much needed guidance on this issue.


Dianor was an early stage exploration company that owned a number of mining claims in Ontario and Quebec. On the application of its secured lender, Third Eye Capital Corporation, the Ontario Superior Court of Justice granted an order appointing a receiver over Dianor’s assets. Fasken acted as counsel to the receiver.

The receivership proceeding involved a contested sale by the receiver of Dianor’s Ontario mining claims free of gross overriding royalty (“GOR”) rights held by certain third parties. One of the royalty holders opposed court approval of the sale on the basis that the court has no jurisdiction to vest mining claims free of existing royalty rights (effectively terminating the royalty). The primary position of the opposing royalty holder was that its GOR was an interest in land that could not, or should not, be extinguished by a vesting order.

Prior Decisions

The receivership court found that the GORs did not constitute an interest in land and granted the order approving the sale free and clear of the GORs. In its reasons for decision, the receivership court stated as follows:

“I need not consider the claim of Third Eye that even if the royalty rights were an interest in land, a vesting order could be made vesting clear title in the assets being sold on the proviso that fair value be paid to the holder of the royalty rights. I see no reason in logic, however, why the jurisdiction would not be the same whether the royalty rights were or were not an interest in land.[1]”

The opposing royalty holder appealed the receivership court’s decision to the Court of Appeal. The Court of Appeal released a preliminary decision in March 2018 holding that the GORs did constitute an interest in land and requesting further submissions from the parties relating to the implications of that holding, and in particular whether and under what circumstances a court has jurisdiction to extinguish a third party’s interest in land by issuance of a vesting order.[2] Those further submissions were made in September 2018, and on June 19, 2019, the Court of Appeal released its highly anticipated decision.

The Second Court of Appeal Decision

The Court of Appeal found that receivership courts have jurisdiction under section 243(1) of the Bankruptcy and Insolvency Act[3] to authorize a receiver to enter into an agreement to sell property and, in furtherance of that power, to grant an order vesting the property in the purchaser free and clear of encumbrances.[4] In reaching this conclusion, the Court of Appeal undertook a lengthy review of the history of vesting orders, and of the interim and national receivership provisions in the BIA.

The Court of Appeal went on to consider whether such jurisdiction extends to the extinguishment of third party rights, including interests in land. With respect to interests in land, the Court of Appeal stated that the key inquiry is whether the interest in land is more akin to a fixed monetary interest that is attached to real or personal property subject to the sale, or whether the interest is more akin to a fee simple that is in substance an ownership interest.[5] The Court of Appeal set out the following test when considering whether to extinguish an interest in land:

“[109] Thus, in considering whether an interest in land should be extinguished, a court should consider: (1) the nature of the interest in land; and (2) whether the interest holder has consented to the vesting out of their interest either in the insolvency process itself or in agreements reached prior to the insolvency.

[110] If these factors prove to be ambiguous or inconclusive, the court may then engage in a consideration of the equities to determine if a vesting order is appropriate in the particular circumstances of the case. This would include: consideration of the prejudice, if any, to the third party interest holder; whether the third party may be adequately compensated for its interest from the proceeds of the disposition or sale; whether, based on evidence of value, there is any equity in the property; and whether the parties are acting in good faith. This is not an exhaustive list and there may be other factors that are relevant to the analysis.[6]”

The Court of Appeal found that, in this case, the GORs in question were less than a fee simple interest, but more than a fixed monetary interest that attached to the property. The GORs were in substance an interest in a continuing and inherent feature of the property itself.[7] On the facts of this case, the Court of Appeal found that, given the nature of the opposing royalty holder’s interest and the absence of any agreement that subordinated the priority of that interest, the receivership court erred in granting a vesting order extinguishing the GORs.[8]

The Court of Appeal ultimately held, however, that the applicable appeal period was 10 days from the date of the receivership court’s decision (as prescribed by rule 31 of the BIA) and that the opposing royalty holder’s appeal was out of time.[9] The Court of Appeal therefore dismissed the appeal.

In addition to the important holdings regarding vesting orders and interests in land, the Court of Appeal also made findings regarding the appropriateness of a receiver closing a sale transaction in the face of a threatened (but not commenced) appeal of an approval and vesting order. Having regard to the history of dealings between the parties, the Court of Appeal held that the receiver had not acted improperly in closing the transaction in the face of a threatened appeal from the royalty holder (which was only made after the expiry of the appeal period).[10] As a practice point, the Court of Appeal did state that, absent some emergency that is highlighted to the court in a receiver’s report, a receiver should wait until the expiry of the 10-day appeal period before closing a sale transaction to which a vesting order relates.[11] The Court of Appeal also refused to grant the royalty holder an extension of the time to appeal nunc pro tunc.[12]

Concluding Remarks

In its reasons for decision, the Court of Appeal recognized that there has been no consistently applied framework of analysis in the case law to determine whether a vesting order extinguishing interests should be granted.[13] This decision provides courts in Ontario and elsewhere with meaningful guidance on how to approach the analysis.

[1] Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2016 ONSC 4472 at para 40.

[2] Third Eye Capital Corporation v. Ressources Dianor Inc., 2018 ONCA 253 at para 121.

[3] Bankruptcy and Insolvency Act, RSC 1985, c. B-3 (“BIA”).

[4] Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508 at para 85.

[5] Ibid, at para 105.

[6] Ibid, at paras 109-110.

[7] Ibid, at para 111.

[8] Ibid, at para 115.

[9] Ibid, at para 131.

[10] Ibid, at para 140.

[11] Ibid, at para 139.

[12] Ibid, at paras 144-145.

[13] Ibid, at para 101.

Alive and Kik-ing: Kik Interactive Faces SEC Action but Vows to Fight Back

On June 4, 2019, the US Securities and Exchange Commission (SEC) sued Kik Interactive Inc. (Kik), a privately-held Canadian corporation based in Waterloo, Ontario, for conducting an unregistered securities offering of its digital token “Kin” in violation of section 5 of the Securities Act of 1933. The SEC is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil penalties against Kik.

Kik’s offering was structured as an initial coin offering (ICO), a novel style of digital fundraising that was enormously successful in 2017, but which also generated controversy due to its similarities to traditional securities offerings. The Kik offering took place from May to September 2017 and raised proceeds of $100 million, half of which came from US-based investors.

The United States District Court must now determine whether Kik’s ICO was an offering of securities, thus requiring registration. Since 2017, securities regulators in the US and Canada have approached this question by applying decades-old case law to this novel structure and have faced few challenges. This case means that regulators’ reliance on historical case law, and their interpretation of it, is now open to judicial scrutiny.


Founded in 2009, Kik has developed and operates a mobile messaging application called “Kik Messenger” with about 300 million users, and has raised US$120 million in venture capital along the way. Despite the application’s initial success, according to the SEC by early 2017 Kik had begun experiencing financial difficulty and at one point had only eight months of financial “runway” before running out of money.

In May 2017, Kik launched the Kin ICO. An ICO is a fundraising event in which digital assets such as “coins” or “tokens” are offered by a company, rather than shares or debt, in exchange for consideration in the form of cryptocurrency or fiat money. Pursuant to its ICO, Kik proposed to sell up to one trillion Kin to a combination of institutional and retail purchasers.

The rights attaching to these coins vary from ICO to ICO, but are generally some combination of the ability to “spend” the coin (which often presents no securities laws issues) and market value appreciation (which often does present such issues).

In the Kin Whitepaper Kik described Kin as “an enable currency” that can “transform attention, curation, and creation into real-world value”. Users were to earn Kin as a form of reward after completing certain tasks, creating content or giving attention to an advertisement. Kin was to be spent within the application through multiple use cases like accessing a private chat group or tipping a writer. The Whitepaper further notes that “like other cryptocurrencies, units of Kin are fungible and transferable.”

These rights and promotional materials suggest that Kik viewed Kin as a non-security. However, the SEC alleges that the ICO represented a dramatic shift to Kik’s business strategy and that Kik’s founder repeatedly made public references to Kin’s potential for appreciation.

Applying the Howey Test

Both the US and Canada have adopted a broad definition of “security”, which generally includes any transactions where an investor (a) invests money, (b) in a common enterprise, (c) with the reasonable expectation of profits, (d) to be derived from the entrepreneurial or managerial efforts of others (the “Howey Test” in the US and the “Pacific Coast Coin Exchange Test” in Canada).

Both the SEC and the Canadian Securities Administrators (CSA) published guidance in 2017 explaining that they intended to apply the existing case law tests in determining whether a particular coin is a security. Nevertheless, the novel nature of ICOs and coins make application of those tests difficult, and accordingly, ICO issuers have been forced to operate without much certainty as to how they would be regulated.

The SEC’s Arguments

As noted above, Kik described Kin as having been designed to be used as a “currency” to buy goods and services or as a form of rewards within the “Kin Ecosystem” which was to be developed by Kik.

According to the SEC, however, Kin was marketed as an investment opportunity. In applying the Howey test, the SEC first contended that any purchase of Kin from Kik in its ICO would satisfy the first two prongs of the test, namely an investment of money in a common enterprise.

With respect to the expectation of profits portion of the Howey Test, the SEC alleges that (a) Kik made numerous public statements that the value of Kin would increase[1], (b) Kik engaged in activities that resembled a traditional road show for an initial public offering of securities[2], and (c) Kik indicated that Kin would be listed on an exchange, which would allow purchasers to easily liquidate their Kin[3]. The SEC argues that all of the foregoing are evidence that investors would expect appreciation of value, or profit, from their investment.

With respect to the efforts of others portion of the Howey Test, the SEC alleges that the efforts of the Kik team will play a central role in building the ecosystem and increasing the future value of Kin. The SEC alleges that Kik has “repeatedly promised” to spur the demand of Kin and increase the token’s future value through the management team’s expertise and experience[4].

The SEC further alleges that Kik was fully aware that Kin would likely be considered a security. The DAO report, in which the SEC first warned ICO issuers about securities law compliance, was published prior to Kik’s token offering. In addition, the Ontario Securities Commission (“OSC”) has informed Kik that its sale of Kin to the public constituted an offering of securities and after learning the OSC’s position, Kik barred Canadians from purchasing Kin in the public sale.

Implications and Impact

This lawsuit is a continuation of SEC’s enforcement action against unregistered ICOs. However, unlike prior actions, Kik has vowed to fight back by initiating a crowdfunding campaign to help pay for its defence named “Defend Crypto”, which has raised over $5 million. Ted Livingston, CEO of Kik stands by the company’s earlier statements that Kin was designed and used as a currency within the network of applications and that it was not created, as the SEC alleges, to save Kik from financial troubles. The blockchain and cryptocurrency community has contributed to the “Defend Crypto” fundraising with hopes that the case will provide clarity on how securities laws will be applied to characterize digital tokens.

The case may also offer guidance to businesses who are developing their own virtual currencies that enable users to trade goods and purchase services, such as Facebook’s recently announced Libra coin.

As the regulatory framework is expecting some clarification and changes, we will continue to monitor the development of this case and encourage issuers and stakeholders to consult advisors and securities commissions for further guidance.

[1] See paragraph 62 – 68, SEC’s Complaint, filed June 4, 2019,https://www.sec.gov/litigation/complaints/2019/comp-pr2019-87.pdf

[2] See paragraph 69-78, SEC’s Complaint, filed June 4, 2019, https://www.sec.gov/litigation/complaints/2019/comp-pr2019-87.pdf

[3] See paragraph 79-84, SEC’s Complaint, filed June 4, 2019, https://www.sec.gov/litigation/complaints/2019/comp-pr2019-87.pdf

[4] See paragraph 112 – 114 and 118-122, SEC’s Complaint, filed June 4, 2019, https://www.sec.gov/litigation/complaints/2019/comp-pr2019-87.pdf

IIROC Provides Guidance on Soliciting Dealer Arrangements

Since it costs a lot to win, and even more to lose,

You and me bound to spend some time wondering what to choose.

Deal – The Grateful Dead

IIROC recently published guidance regarding managing conflicts of interest arising from soliciting dealer arrangements. The guidance elaborates on existing conflict of interest rules in the context of takeover bids, plans of arrangement, proxy contests and other securities transactions involving various types of solicitation fees.

Soliciting dealer arrangements are relatively common in Canadian M&A transactions, but less so in connection with contested director elections. Contested director elections where a company pays fees to incentivize dealers to advise their clients to vote in favour of management’s nominees have proven controversial. In this regard, IIROC states that:

We believe that in some cases the conflicts of interest arising from these arrangements can be addressed for example by, appropriate policies and procedures. However, there are other arrangements where the conflicts are, in our view, unmanageable and therefore should be avoided. An example of this type of arrangement is one that relates to a contested director election involving fees that are paid only for votes in favour of one-side and /or only if a particular side is successful.

Contested director elections are, in IIROC’s view, unique in that they involve qualitative assessments—often without measureable or quantifiable supporting information—about an issuer’s future business strategy and the ability of competing slates of directors to successfully implement the strategy.

The guidance does not provide an absolute prohibition on one-sided and/or contingent arrangements in situations outside contested director elections. In other situations, IIROC’s guidance indicates that dealers should consider the specific situation in light of the relevant facts and circumstances, and consider if they can adequately address conflicts of interest. In such circumstances, IIROC notes that disclosure alone is generally an inadequate mechanism because of its limited, and sometimes contradictory, impact on the client’s decision-making process. As a result, IIROC advises that dealers should not only disclose the conflict, but also identify how it has addressed the conflict in the best interest of the client.

For further information on this development, please contact any member of our Securities and Mergers and Acquisition Group.

OSC Update re: Suppression of Terrorism Notice

On June 5, 2019, the Ontario Securities Commission (the OSC) sent out a notice by means of a broadcast e-mail (the Notice) with respect to certain amendments regarding the suppression of terrorism or Canadian sanctions (STCS) applicable to all registered firms, exempt dealers and exempt advisers (each a Firm).

Under Canadian federal law, Firms are required to file a monthly STCS report by the 14th day of each month (each a Monthly STCS Report) with their principal regulator in order to determine and disclose whether the Firm is in possession or control of property owned or controlled by or on behalf of an entity or person listed or designated in a particular federal provision (each a Designated Person).

Many of these federal provisions required a Firm to file a “Nil” Monthly STCS Report if it was determined that none of the Firm’s clients were Designated Persons.

The Notice confirms that Firms are now only required to submit a “Nil” Monthly STCS Report with their principal regulator with respect to Designated Persons under the Criminal Code (Canada) and the Justice for Victims of Corrupt Foreign Officials Act (Canada).

However, this effectively means that each Firm must still file a “Nil” Monthly STCS Report by the 14th of each month as was the case previously.

For further information regarding the Notice, please view a copy of the STCS Guide, which reflects the changes that have been made.

It Stays in the Family – Dual Voting Share Structures for Family Businesses

For many family businesses, control of long-term direction and management of the family corporation are key issues, particularly during times of growth or periods of succession. The Institute for Governance of Private and Public Organizations (“IGOPP”) recently published a new policy paper that should be of interest to family businesses and their advisors in planning the capital structure for their enterprises: The Case for Dual-Class of Shares, Policy Paper No. 11 (2019). The paper revisits[1] the state of dual-class public corporations in Canada, emphasizes their value to entrepreneurs, family businesses and Canadian society as a whole and makes a number of structuring recommendations, which are outlined below.

What is a Dual-Class Share Structure?

Canadian corporate statutes generally permit companies to adopt capital structures with multiple classes of shares with different rights or attributes (for example voting and non-voting shares or shares with preferential dividend, conversion or redemption rights). While the default approach is one vote per share, the flexibility of corporate laws permits the creation of several share classes with multiples votes, no voting rights or differential voting rights on certain matters (such as the election of the board of directors).[2] In this context, IGOPP’s paper focuses on share structures with two classes, one of which is given multiple votes per share. Among publicly traded Canadian corporations with dual class structures, voting ratios can range from 1:0 (a class of voting shares and a class of non-voting shares) to 100:1 (a class of superior voting shares with 100 votes per share and a class of subordinate shares with one vote each). The central feature of a dual-class share structure is that ownership and control over the corporation can be decoupled. Or, to put it differently, a minority ownership position in the corporation’s equity may still hold the majority of the votes.

Benefits of a Dual Class Share Structure for Family Businesses

Dual-class share structures for public companies are controversial and the debate has been raging for a considerable time.[3] The principal arguments against such structures are based on notions of shareholder democracy and protection of minority rights. Perhaps as a result, the number of publicly traded companies in Canada with a dual-class share structure has dropped from 100 in 2005 to 69 in 2018.[4]

Nevertheless, the benefits of such structures identified by IGOPP and other commentators may be of particular interest to family-run businesses. Superior voting rights permit families to plan and manage their businesses in the long term and facilitate generational change, while, at the same time, being able to access outside investor capital to support the growth of the business. The dual-class structure affords protection against hostile take-overs and what IGOPP perceives as shareholder activism driven by short-term (and perhaps short-sighted) profit maximization. Or, as put by IGOPP: “… the coupling of dual-class and family ownership brings about longer survivorship, better integration the social fabric of host societies, less vulnerability to transient shareholders and more resistance to strategic and financial fashions.”[5]

Recommended Features for a Dual Class Share Structure

In order to balance the advantages of a family controlled business, access to outside capital and the interests of minority shareholders, IGOPP recommends a number of features, including the following:

  • A voting ratio of 4:1 – This ratio retains a voting majority for family business at an ownership level above 20% and a blocking minority with respect to fundamental changes with an ownership interest of 11.1%. Reflecting research indicating that increasing variances between voting power and ownership level tends to negatively affect the quality of overall governance and favour self-interested, rather than business focused decision-making, this recommendation aims to balance legitimate family and overall business interests.
  • Minority Board Representation – One third of board members should be elected by the single-vote share class. This measure would give non-family investors a substantial indirect say in the management or supervision of the family business. To ensure continuity and compatibility with the family vision and values, IGOPP further proposes that minority directors be elected from a candidate pool nominated by the existing board.
  • “Coat Tail” Provisions – A major point of criticism of dual share structures has been price premium placed on multiple voting shares in case of a sale. The “uniquely Canadian” response to this issue is to treat all share classes equally on a sale.[6] IGOPP’s recommendation that family corporations adopt such “coat tail” provisions in their articles or bylaws to guarantee that all shareholders can participate in a sale of the family business on the same terms and conditions at the same price, would thus overcome the “private benefit” concerns.
  • Dilution Sunset Clauses – In the context of dual share structures, a sunset clause would trigger the abolition of superior voting rights if the justification for their existence has fallen away. For family businesses, this would typically be the case when the business loses its essential character as a family enterprise. There is a wide range of possible triggers. Examples are time-based (e.g. 20 years after an IPO) or event-based (e.g. on the exit, retirement or death of the founder). However, these approaches typically do not meet the needs of a multi-generational family business. On the other hand, as family involvement the business may diminish over the years, a sunset clause could be tied to a level of family ownership interest. This notion is connected to the proposed voting ratio and its rationale. For example, at a 4:1 voting ratio, the dilution sunset could be triggered if and when the controlling shareholders’ equity dropped below the blocking minority of 11.1% – the point when self-interest may typically outweigh the overall business interests.

There are, of course, many possible variations and combinations on how these basic recommendations could be implemented to meet the specific goals and needs of each family business. If you have any questions about corporate share structures, legal issues affecting family businesses or wish to learn more about Fasken’s private client services, please see here: Fasken Private Client Services.

[1] IGOPP first examined dual-class corporations in 2006: see Dual-class share structures in Canada:Review and Recommendations, Policy Paper No. 1 (October 2006).

[2] See, for example, ss. 24(3) and (4) and 140 of the Canada Business Corporations Act or ss. 58 and 173(1) of the Business Corporations Act (British Columbia).

[3] See, for example, Ryan Modesto, “The case for investing in companies with dual class sharesThe Globe and Mail (April 16, 2016, last updated June 19, 2017) or Shannon Bond and Nicole Bullock, “Lyft IPO revs up debate on dual class shares structures”, Financial Times (February 25, 2019).

[4] IGOPP, Policy Paper No. 11, p. 15.

[5] IGOPP, Policy Paper No. 11, p. 12.

[6] The Toronto Stock Exchange has, for over 30 years, listings for classes of “restricted securities”, that do not provide “takeover protective provisions”, which in effect ensure that these securities would be acquired for the same price as common securities.  For more detail, please see s. 624 of the TSX Company Manual.

Something old, something new: Proposed amendments to the CBCA in the 2019 budget implementation bill

On April 8, 2019, the federal government introduced Bill C-97 to implement measures from its spring budget. The bill proposes amendments to many federal statutes, including several important amendments to the Canada Business Corporations Act (CBCA) relevant to both private and public companies. Our summary of the proposed changes is set out below, some of which deal with familiar issues, while others would introduce new requirements for companies.

The codification of BCE

The federal government is proposing to codify in the CBCA the Supreme Court of Canada’s landmark ruling in BCE Inc v 1976 Debentureholders. In BCE the Supreme Court made clear that acting “in the best interests of the company” does not mean merely acting in the best interests of shareholders or any particular stakeholder group. Instead, the Supreme Court recognized that

“…conflicts may arise between the interests of corporate stakeholders inter se and between stakeholders and the corporation.  Where the conflict involves the interests of the corporation, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen.” (BCE, paragraph 81.)

Bill C-97 would codify such a view. The bill would insert a new section in the CBCA that provides that directors and officers, when acting with a view to the best interests of a company, may consider, but are not limited to, certain listed factors, namely:

  • the interests of shareholders, employees, retirees and pensioners, creditors, consumers, and governments,
  • the environment, and
  • the long-term interests of the company.

Say on Pay comes to the CBCA

Bill C-97 would introduce a new section 125.1 into the CBCA requiring prescribed corporations to develop an approach with respect to the remuneration of members of senior management. A report on the company’s approach would then be placed before the shareholders at each annual meeting, at which meeting a “Say on Pay” vote would be held. Companies would also be required to disclose the voting results. As is common practice in Canada, the Say on Pay vote would be non-binding, however shareholders will often agitate for change where the support level for the Say on Pay vote fails to reach a sufficiently high threshold.

New reports to be tabled at the annual meeting

Bill C-97 also proposes requiring prescribed corporations to place before their shareholders at each annual meeting several reports.

  • First, a report respecting diversity among the directors and members of senior management. Such a report was first proposed as part of Bill C-25, and we have canvassed its contents in a previous post. There are no substantive changes from the report as earlier proposed in Bill C-25.
  • Second, the report concerning the remuneration of members of senior management, as discussed above.
  • Third, a report concerning “the recovery of incentive benefits or other benefits” as included in the above remuneration report. This appears to be a new type of report, and there is no further detail in Bill C-97 about its required contents, such detail being left to regulations. However, it may be similar to the existing practice, which is somewhat common across larger Canadian issuers, to disclose the existence and nature of any clawback policy.
  • Finally, a report respecting the well-being of employees, retirees and pensioners. This also appears to be a new type of report not previously contemplated in legislation and not commonly presented by issuers in Canada. There is no further detail in Bill C-97 about the required contents of such a report, such detail being left to regulations.

Control register to be made accessible to investigative bodies

The final major change relates to private companies governed by the CBCA and the pending requirement to prepare and maintain a register of individuals with significant control over the company. (See our previous post on this issue. This requirement was introduced in Bill C-86 and will take effect on June 13, 2019.)

Questions have arisen as to which parties external to the company would have access to the new register. Amendments in Bill C-97 clarify that companies would have to turn over their register on request to any police force, the Canada Revenue Agency and equivalent provincial bodies, and any other prescribed body with investigative powers as determined by the federal cabinet.

Such investigative bodies would be limited in making such requests in two key ways.

  • First, a request could be made only if the investigative body has reasonable grounds to believe that information in the register would be relevant to investigating a specified offence as set out in a new schedule to the CBCA. The contents of the schedule would be set, and could be revised by, the federal cabinet. A draft schedule is provided at the end of Bill C-97 and contains a long list of proposed offences.
  • Second, the investigative body must also have reasonable grounds to suspect that certain specified entities either (1) committed the offence, or (2) were used to commit the offence, facilitate its commission, or protect from detection or punishment a person who committed the offence. Such specified entities include the company itself, or some other company or entity that is controlled or otherwise influenced by an individual that is also an individual with significant control of the company that is the target of the request.

Failure to comply with the request can result in serious penalties. In particular, a director or officer of a company who knowingly authorizes, permits or acquiesces in the contravention of the above requirement to turn over information to investigative bodies is liable on summary conviction to a fine of up to $200,000, six months’ imprisonment, or both.

Coming into force

The proposed amendments to the CBCA in Bill C-97 will come into force at different times.

  • The amendments regarding the factors that may be considered concerning the best interests of the company come into force on the date Bill C-97 is granted royal assent.
  • In the case of the amendments concerning the register of individuals with significant control, no coming-into-force date has been fixed, but it will likely be a date in June of 2019.
  • The requirements to prepare and disclose the four reports will not kick in until regulations have been drafted and enacted, and such a process normally entails a consultation period. The standard Treasury Board guidance is that it takes 6–24 months for regulations to be enacted starting from the date of royal assent of the statute that delegated the power to make such regulations.

We will continue to monitor Bill C-97 as it winds its way through the legislative process.

Think Before You Send: The Legal Risks of Emails and Text Messages from Personal Accounts

If the Hillary Clinton email scandal wasn’t a clear enough lesson that one should not conduct “official” work using personal electronic communication tools (be it personal email, texts or other methods), a number of recent court decisions have required executives to produce communications from their personal accounts and devices. Executives and advisors should not assume that communications using methods other than corporate email will somehow be protected or otherwise not find the light of day in the event of a dispute or investigation.

John Schnatter v. Papa John’s International, Inc.

During an earnings call in November 2017, John Schnatter (“Schnatter”), the founder of Papa John’s International, Inc. (the “Company”), criticized the National Football League’s handling of the dispute between players and owners regarding national anthem protests. Some months later, Forbes reported that Schnatter had used a racial slur during a Company diversity training exercise. Schnatter subsequently resigned as chairman of the Company’s board of directors (the “Board”) at the Board’s request, but declined to resign as a director. The Board then established a special committee which decided to terminate agreements that the Company had with Schnatter.

In the wake of these events, Schnatter requested books and records from the Company, including emails and text messages from personal accounts and devices of the Company’s executives.

On January 15, 2019, the Court ordered the Company to permit Schnatter to inspect the personal accounts and devices of certain executives that were used to communicate about the possibility of changing Schnatter’s relationship with the Company. Chancellor Bouchard stated that executives should expect to provide such information in litigation if they choose those mediums to discuss corporate matters. Although there is no bright-line rule with respect to the inspection of executive’s personal accounts and devices, Chancellor Bouchard noted several factors that influenced the Court’s decision, including:

  • the Company’s directors did not have Company email addresses; and
  • the Company did not introduce at trial “a policy indicating that it views any information from the personal accounts or on the personal devices of its directors or officers to be ‘personal unrestricted information’ outside the control of the Company.”

In re Appraisal of Kate Spade & Co.

In 2017, former shareholders of Kate Spade & Co. (“Kate Spade”) sought appraisal of their securities following Coach Inc.’s (“Coach”) acquisition of Kate Spade. In response to interrogatories, Kate Spade asserted that none of its executives engaged in communications over email or text from their personal accounts or devices concerning the negotiation of the transaction with any executives of Coach. However, documents produced by Kate Spade indicated the possible existence of text messages between two of the executives. The former shareholders then moved to compel the production of such communication arguing that some of the executives had prior social relationships that could have given Coach an advantage in the negotiation process.

In a transcript ruling, the Court ordered Kate Spade to produce the relevant text messages. Chancellor Bouchard took the opportunity to discuss the value that can be derived from text messages: “It has been my experience that text messages can be the source of a lot of probative information in cases, particularly when they’re covered with emojis and other things of that nature. … Maybe a text message will show a personal relationship. Maybe it won’t show that. But, frankly, just the precision of timing of exactly when certain things happened is extremely important in cases. … And so I have found, frankly, text messages to be probative in that regard.”


These cases should serve as a useful reminder that directors, officers and advisors should endeavor to conduct company business only on their company accounts and devices and not on their personal accounts and devices. Once it is established that an executive uses a personal email account or device to conduct company business, those personal accounts or devices will likely be subject to discovery, which could result in sensitive or embarrassing personal information being produced. Although these rulings are not binding on courts in Canada, it was not too long ago that the Ontario Superior Court of Justice allowed a tier-one Canadian bank to inspect the emails of its former executives in connection with their move to form a competing financial services firm.

In order to protect information on an executive’s personal devices and accounts, companies should consider: (1) providing company email addresses and devices to the exectuive on which to communicate regarding company business; and (2) adopting a policy restricting the communication of company business on personal accounts and devices.