Timely Disclosure

Timely Disclosure

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

At-The-Market Offerings In The Canadian Capital Markets: Flexibility At A Lower Cost

When seeking to access capital in the public markets in an uncertain economy, traditional follow-on financing methods might not be the right choice for some issuers. It may be that “bought deal” and “best efforts” public financings are unavailable or otherwise available but on terms that are unsuitable.

In these circumstances, issuers may consider an alternative financing method provided for in Canadian securities legislation: namely, an at-the-market (ATM) public offering. Under an ATM offering, an issuer sells its shares directly into the market through the facilities of a stock exchange or marketplace. In establishing an ATM offering, the issuer sets a maximum number of securities to be issued, and then determines on an ongoing basis how many securities to issue and sell (if any) by setting the specific minimum price, quantity of securities, and sales timing.

This post discusses the framework for ATM offerings and explores some of the advantages and disadvantages associated with this kind of financing.

General Framework

Base Shelf Prospectus

The first formal step by the issuer in setting up an ATM offering is to file a base shelf prospectus in accordance with National Instrument 44-102 Shelf Distributions (NI 44-102). A base shelf prospectus is a type of short-form prospectus where an issuer normally qualifies the distribution of various types of securities up to a specified maximum dollar amount, which can then be issued over a 25-month period.

While the general rule under securities laws is that all distributions of securities under a prospectus must be made at a fixed price, NI 44-102 provides an exception to this rule for ATM offerings. To give effect to this exception, the shelf prospectus must disclose that the issuer may undertake non-fixed price offering transactions by way of ATM offerings.

Note that NI 44-102 places certain limits on ATM offerings. First, it limits the securities that may be issued by way of an ATM offering to “equity securities”, which are securities that carry a residual right to participate in the earnings of an issuer and, upon liquidation or winding-up of the issuer, in its assets. This typically excludes ATM offerings in respect of preferred shares and debt securities. Second, NI 44-102 limits the market value of equity securities that can be distributed under an ATM offering to 10% of the aggregate market value of the equity securities of that class (for this calculation, securities controlled by persons holding more than 10% of the issuer’s total outstanding equity securities are excluded). Finally, it prohibits an overallotment of securities or any other transaction made with the intention of stabilizing or maintaining the market price of securities.

Prospectus Supplement

Once the final base shelf prospectus has been receipted by the applicable securities regulators and all other above steps are complete, the issuer then files a prospectus supplement to the final base shelf prospectus. The prospectus supplement sets out the parameters and terms of the ATM offering and describes the securities that are the subject of such offering. This document generally is not reviewed by the securities regulators and can be quite brief. However, it must set out either the maximum number of shares to be sold or the maximum aggregate offering size, and it must identify the securities dealers that are implementing the ATM offering and specify any commissions to be paid.

Distribution Agreement

Concurrent with the filing of the prospectus supplement for an ATM offering, the issuer typically executes a distribution or sales agency agreement (Distribution Agreement) with the securities dealer selected to act as the issuer’s agent for the ATM offering. Distribution Agreements for ATM offerings contain standard securities dealer protections, including customary covenants, representations and warranties made by the issuer, and customary closing conditions for each placement of securities. Securities dealers are subject to statutory underwriter liability, and so will engage in standard due diligence practices. Because ATM offerings are ongoing affairs, securities dealers will seek comfort letters and legal opinions both as of the time of execution of the Distribution Agreement and on a periodic basis.

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ETF Facts – Upcoming Transition Date

Exchange-traded fund (ETF) managers are reminded that, as of September 1, 2017, they will be required to file an “ETF Facts” document in conjunction with the filing of any ETF prospectus.

Similar to “Fund Facts” for conventional mutual funds, “ETF Facts” are summary disclosure documents for ETFs.  Amendments to National Instrument 41-101 General Prospectus Requirements came into force on March 8, 2017 (Amendments) and established the regime and content requirements under which ETF Facts must be produced and delivered.  The Amendments also serve to replace the disclosure regime that has previously been in place for ETFs.  Such previous disclosure regime required ETF managers to obtain exemptive relief and to produce, for delivery through selling dealers, an ETF “Summary Document”.  Delivery by a dealer of a Summary Document, and now ETF Facts, to a purchaser of an ETF security within required time frames satisfies the prospectus delivery requirement under applicable securities legislation.

Pursuant to the Amendments, a staged transition was established for the implementation of the new disclosure regime using ETF Facts.  Under the transition rules, as of September 1, 2017, ETF managers may no longer utilize Summary Documents and must file ETF Facts in connection with the filing of any new or renewal prospectus.  The last date on the transition calendar is November 12, 2018 – as of such date, all ETFs that have not yet filed ETF Facts must do so.

Sale of ETFs – Proficiency Standards Approved

Last month, provincial securities regulators approved Policy No. 8 (Policy) of The Mutual Fund Dealers Association of Canada (MFDA).  The Policy establishes proficiency standards for mutual fund dealing representatives (Representatives) who wish to sell exchange-traded fund (ETFs).

Although Representatives are legally permitted to sell certain types of ETFs (which are a type of mutual fund), to date, the number of Representatives actually doing so has been limited.  Representatives have been restricted both in their access to systems permitting the settlement of an ETF sale, as well as educational opportunities that would allow for required proficiency standards to be met.

Under MFDA rules, in order to sell any mutual fund security, Representatives must ensure they have the education, training and experience necessary to perform such activity competently.  Historically, however, educational courses available to Representatives in order to sell conventional mutual funds did not include material pertaining to ETFs.

As ETFs differ from conventional mutual funds in a number of respects, the Policy, and its approval by provincial securities regulators, provides important regulatory guidance as to the minimum training standards required for Representatives to sell ETFs. As outlined in the Policy, such training must at a minimum include:

  • detailed product information in respect of ETFs approved for sale by the Representative’s firm
  • how market quotes will be obtained
  • the types of trades accepted and the information required for each trade accepted
  • the disclosure information required for each transaction
  • how evidence of trade instructions, whether executed or unexecuted, and disclosures will be maintained
  • how trade orders will be processed.

The Policy, and the approval of the minimum training standards it describes, is expected to provide clarity to Representatives as to how to meet their proficiency standards.  Combined with technical advances relating to the settlement of ETF trades, Representatives should be optimistic about increasing their access to the ETF market.

Canada’s Move to a T-2 Settlement Cycle

Effective September 5, 2017, the settlement cycle in the Canadian and US securities markets will be shortened from three days after the date of a trade (T+3) to two days after the date of a trade (T+2). In Canada, this change follows the announcement on April 27, 2017 by the Canadian Securities Administrators of their intentions to adopt amendments to National Instrument 24-101 Institutional Trade Matching and Settlement and its companion policy, to achieve a smooth transition to T+2 for equity and long-term debt market trades.

Benefits of the Change to T+2

The change from T+3 to T+2 will keep Canadian markets in line with simultaneous changes in the US markets, providing a uniform period for settling securities by T+2. It will also harmonize Canadian markets with the markets in Asia-Pacific, Europe, Australia and New Zealand, which have already made the move to T+2 settlement cycle. Overall, the move to T+2 is expected to enhance market efficiency, simplify cross-border trading, and reduce counterparty, market and liquidity risks.

Transition Period  

The change to a T+2 settlement cycle will result in ex-dates for dividends, distributions and other corporate actions changing from two business days prior to the record date to one business day prior to the record date. As a result of this transition, no listed security will commence ex trading on Tuesday, September 5, 2017. The chart below provides examples of the ex-dates under the new T+2 settlement cycle:

Record Date Ex-Date
September 1, 2017(1) August 30, 2017
September 5, 2017(2) August 31, 2017(3)
September 6, 2017 September 1, 2017(3)
September 7, 2017 September 6, 2017

(1) Last day of T+3 settlement cycle.
(2) First day of T+2 settlement cycle.
(3) September 4, 2017 is a holiday and there will be no ex-date on this date.

Public Company Directors Take Note: Canadian Securities Regulators weigh in on Material Conflict of Interest Transactions

On Thursday, July 27, 2017, staff of the Ontario Securities Commission and its counterparts in Québec, Alberta, Manitoba and New Brunswick (Staff) published important guidance on Staff’s expectations of market participants, including boards and their advisors, in material conflict of interest transactions.[1]  The guidance highlights the important role of public company directors in such transactions, including conducting a sufficiently rigorous and independent process while appropriately addressing the interests of minority security holders and ensuring detailed public disclosure of the board’s review and approval process.  In addition, the guidance confirms that Staff are actively reviewing such transactions “on a real-time basis” to assess compliance, to determine whether a transaction raises potential public interest concerns, and, if appropriate, to intervene on a timely basis prior to any security holder vote or closing of the transaction.

“material conflict of interest transactions” and “minority security holders”

Staff note that a “material conflict of interest transaction” is a transaction governed by Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) that gives rise to substantive concerns as to the protection of minority security holders, being equity security holders who are not “interested parties” in the transaction.  For example, a transaction pursuant to which an insider of the company acquires the company would be considered to be a material conflict of interest transaction.  Among other things, MI 61-101 prescribes detailed procedural safeguards when a company undertakes an insider bid, issuer bid, business combination, or related party transaction, including enhanced disclosure and, absent an exemption, a requirement to obtain “minority approval” (essentially an affirmative vote by a majority of the votes cast by minority security holders) and a formal valuation of the subject matter of the transaction.  In interpreting MI 61-101, Staff note that they apply a “broad and purposive interpretation” to these requirements that emphasizes the instrument’s underlying policy rationale.

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SEC Concludes that Slock.It’s DAO Digital Currency Tokens are Securities

On July 25, 2017, the United States Securities and Exchange Commission (SEC) issued a report of investigation (Report) concluding that the digital currency “tokens” sold by DAO (DAO Tokens) in a 2016 initial coin offering (ICO) are securities for purposes of federal United States securities laws. This conclusion could have far-reaching implications for businesses that have completed or are contemplating an ICO, businesses dealing with tokens or cryptocurrencies, such as cryptocurrency exchanges, as well as the still-developing legal landscape relating to ICOs and distributed ledger or “blockchain” technology.

Beginning in 2013, many entities that use blockchain technology as their operational foundation have raised funds through ICOs. While precise data is not available, various sources estimate that since the beginning of 2016, between 84 and 139 ICOs have been completed, raising gross proceeds of between U.S.$281 million and U.S.$1.35 billion.(1) In some cases, ICOs have sold out in a matter of seconds, such as the Basic Attention Token ICO in May 2017 which raised U.S.$35 million in less than 30 seconds.(2)

Pursuant to an ICO, an entity offers digital currency tokens to purchasers, typically in exchange for digital consideration such as Bitcoin or Ether. The rights attaching to these tokens vary greatly, with some resembling “kick-starter” style crowd-funding in that token holders have pre-paid for goods or services offered by the entity and others resembling common shares in a company in that token holders have certain voting rights and certain rights to dividend-like payments from the entity.

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Update on Use of the Rights Offering Exemption

On April 20, 2017, the Canadian Securities Administrators (CSA) released Staff Notice 45-323 (Notice). The Notice provided an update on the use of the rights offering exemption available to reporting issuers (Exemption) under section 2.1 of National Instrument 45-106 Prospectus Exemptions, as of December 31, 2016, approximately one year after it was adopted in its current form.

A rights offering is intended to allow reporting issuers to raise capital, while providing an opportunity for existing security holders to protect themselves from dilution by participating in the offering on the basis of their proportional interest. In its original form, prospectus-exempt rights offerings were underutilized, as the excessive time and costs associated with such offerings made them an unappealing option for issuers. On December 8, 2015, in an effort to encourage greater use of prospectus-exempt rights offerings, the Exemption was amended to require simplified plain-language offering materials, often using a question and answer format, and allowing for an increased dilution limit of 100%.

In the Notice, the CSA noted that in the first year of the amended Exemption, the time required to complete a rights offering was reduced from approximately 85 days to approximately 38 days. It is therefore not surprising that a total of 30 rights offerings were completed across all industries, raising approximately $247.6 million – a marked increase from the past average of 13 rights offerings per year. In these 30 rights offerings, an average of 39% of the outstanding securities of a certain class were issued and 48% of the amounts being raised were from insiders who often acted as stand-by guarantors.

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Securities Regulators to IIROC: Get Tougher!

The Canadian Securities Administrators (CSA) have demanded that the Investment Industry Regulatory Organization of Canada (IIROC) boost business conduct compliance activities after the CSA noted serious deficiencies in multiple consecutive oversight reviews. In an Oversight Review Report on IIROC published July 4, 2017 (Report), CSA flagged ‘Business Conduct Compliance’ as a high priority area requiring immediate action. This public censure will likely result in stricter enforcement of IIROC dealer members.

The Report comes out of an oversight review of IIROC conducted by staff of seven provincial securities regulators, covering a period from April 1, 2015 to July 31, 2016. The purpose of the review was to assess whether the selected regulatory processes of IIROC were “effective, efficient, and applied consistently and fairly, and whether IIROC complied with the terms and conditions of the [CSA members’] recognition orders.” The Report also evaluated whether recommendations in the previous Oversight Review Report published on March 3, 2016 (covering the year before the period addressed by the current Report) (Previous Report) had been dealt with satisfactorily. The Report categorized deficiencies as high, medium, or low priority. High priority items “will result in IIROC not meeting its mandate” and require IIROC to “immediately put in place an action plan,” the implementation of which is to be directly monitored by the CSA.

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The Supreme Court of Canada rules on the personal liability of corporate directors

(The full version of this bulletin was originally published on Fasken.com – “The Supreme Court of Canada rules on the personal liability of directors in the context of the oppression remedy” – July 17th, 2017.)

The Supreme Court of Canada rendered a decision in Wilson v. Alharayeri, in which it discusses situations that could lead to the personal liability of a corporate director in the context of an action for corporate oppression under section 241 of the Canada Business Corporations Act (‘‘CBCA’’).

The Court stated that there is no doubt that a director can be held personally liable under this provision, as it confers broad powers to the courts and provides an impressive number of remedies in favour of the complainant. The Court added, however, that section 241 does not identify the situations in which an order for compensation may properly lie against the corporate directors personally, as opposed to the corporation itself. This question was the focus of the Supreme Court’s decision.

In line with the decisions rendered by the Superior Court and the Quebec Court of Appeal, the Supreme Court held that the two directors were personally liable considering that (i) the oppressive conduct was properly attributable to them because of their personal involvement in the oppressive conduct and (ii) this personal liability was relevant in light of the circumstances. In doing so, the Supreme Court refused to depart from the lessons learned from the Ontario Court of Appeal’s decision in Budd v. Gentra Inc (hereafter ‘‘Budd’’).

In reaching this conclusion, the Supreme Court of Canada reiterates that the remedial purpose of the oppression remedy is one of commercial fairness. As such, the slavish respect of rigid criteria is to be avoided in favor of an analysis of the circumstances of each particular case. Having said this, the good or bad faith of the director and whether or not he obtained personal gain are factors to consider.

Continue reading to learn how this SCC decision affects the personal liability of a corporate director in the context of oppression remedy.

A Review of CSA Consultation Paper 52-403: Auditor Oversight Issues in Foreign Jurisdictions

On April 25, 2017, the Canadian Securities Administrators (CSA) published a consultation paper to obtain stakeholders’ views on introducing enhanced oversight requirements for foreign audit firms. Specifically, the paper discusses a proposal by the Canadian Public Accountability Board (CPAB) to amend National Instrument 52-108 Auditor Oversight (NI 52-108) to require foreign audit firms to register with CPAB as a Participating Audit Firm (PAF) should they be auditing a reporting issuers’ financial statements.

Foreign auditors, also referred to as “component auditors”, are often engaged when a reporting issuer’s operations are in a jurisdiction different from that of the issuer’s head office. In such instances, the issuer or its primary auditor may decide to engage a component auditor to conduct an audit on financials related to foreign operations.

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