Timely Disclosure

Timely Disclosure

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

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.

ISS

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.

Amendments to Toronto Stock Exchange Company Manual – Start Calculating Your Incentive Plan’s “Annual Burn Rate”

On October 19, 2017, the Toronto Stock Exchange (TSX) announced that it had adopted two sets of amendments to the TSX Company Manual after a lengthy consultative process — see our earlier posts of June 4, 2016 and May 5, 2017.  In short, the amendments relate to disclosure requirements for security-based compensation arrangements such as stock option plans and to website disclosure of certain corporate documents.  This post will deal with each in turn.

Security-Based Compensation Arrangements

The amended disclosure requirements for security-based compensation arrangements will be effective for financial years ending on or after October 31, 2017.  In other words, these changes are effective almost immediately.  Technically, the new requirements are set out in amendments to section 613(d) and in new section 613(p) of the TSX Company Manual.

Under section 613(d), as amended, for a shareholders’ meeting at which approval is sought for a security-based compensation arrangement such as a stock option plan or other similar plan, and also on an annual basis, the management information circular must set out, as applicable, (i) the maximum number of securities issuable under the plan as a fixed number together with the percentage which the fixed number represents of the number of issued and outstanding shares, or the fixed percentage of the number of issued and outstanding shares; (ii) the number of outstanding securities awarded under the plan, together with the percentage this number represents of the number of issued and outstanding shares; and (iii) the total number of securities that remain available for grant under the plan together with the percentage that this number represents of the number of issued and outstanding shares.

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Toronto Stock Exchange Issues Staff Notice on U.S. Marijuana Companies

On October 16, 2017, the Toronto Stock Exchange (TSX) issued Staff Notice 2017-0009 regarding listed companies engaged in the marijuana business, whether directly or indirectly, in the United States.  At the same time, the TSX Venture Exchange (TSXV) issued a Notice to Issuers virtually identical to the TSX Staff Notice.  It is well-known that recreational cannabis has been legalized in certain American states (in alphabetical order, Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington) yet remains illegal at the federal level in the United States.  The TSX Staff Notice and TSXV Notice to Issuers clarify the position of the two Exchanges in light of this legal conundrum.  In short, marijuana, the United States and listing on the TSX/TSXV do not mix.

The TSX Staff Notice states the general rule that a TSX-listed company must act in compliance with the rules and regulations of all regulatory bodies having jurisdiction over it.  The Staff Notice notes that marijuana remains a Schedule I drug under the United States Controlled Substances Act, such that it is illegal under United States federal law to cultivate, distribute or possess marijuana, and that financial transactions involving proceeds generated by, or intended to promote, marijuana-related business activities in the United States may form the basis for prosecution under applicable U.S. federal money-laundering legislation.

According to the Staff Notice, companies listed on the TSX with ongoing business activities that violate United States federal law regarding marijuana are not in compliance with the requirements of the TSX.  These business activities may include, among other things, (i) direct or indirect ownership of, or investment in, businesses engaged in the cultivation, distribution or possession of marijuana in the United States (which the Staff Notice refers to as “Subject Entities”), (ii) other commercial arrangements with Subject Entities (presumably, a joint venture, a “streaming” deal, or other similar contractual arrangement), (iii) providing services or products that are specifically designed for, or targeted at, Subject Entities, or (iv) commercial interests or arrangements with entities (CSA) engaging in the business activities described in (iii).

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CSA Prohibits Sale of Binary Options

On September 28, 2017, the securities regulatory authorities in all Canadian jurisdictions, other than British Columbia (CSA), issued CSA Multilateral Notice of Multilateral Instrument 91-102 Prohibition of Binary Options and Related Companion Policy (Instrument) in response to an increased number of complaints received relating to the marketing of binary options. Subject to the necessary approvals, the Instrument will come into force on December 12, 2017.

The Instrument defines a “binary option” as a contract or instrument that provides for only (a)  a predetermined fixed amount if the underlying interest referenced in the contract or instrument meets one or more predetermined conditions, and (b) zero or another predetermined fixed amount if the underlying interest referenced in the contract or instrument does not meet one or more predetermined conditions.  The underlying interest could include a security, index, currency, precious metal, price or other thing.  Some examples provided by the CSA of yes/no propositions that a binary option could be based on include: a change in the value of a currency, the outcome of an election or a change in a benchmark interest rate. Binary options are sometimes referred to as: all-or-nothing options, asset-or-nothing options, bet options, cash-or-nothing options, digital options, fixed-return options and one-touch options.

A binary option automatically exercises. This means that the option holder does not have the ability to choose whether to buy or sell the underlying asset. Often, the time period specified in the product’s contract for meeting the predetermined condition is very short. Sometimes, it is mere minutes.

The Instrument states that no person or company may advertise, offer, sell or otherwise trade a binary option having a term to maturity of less than 30 days with or to:

  • a person or a company established or used exclusively for trading a binary option; and
  • an individual.

Trade includes a person offering or soliciting transactions using a website or alternative electronic mechanism and acts in furtherance of a trade.

Of particular concern to the CSA was the fact that a number of online binary options platforms are unregistered dealers who operate off-shore. Although trading may occur on some platforms, the CSA have discovered that it is extremely difficult for investors to ‘win’ on their bets. For the most part, such platforms are fraudulent and the investor’s advanced payment on their credit card is simply taken without a trade ever occurring.

Once the Instrument is implemented, no offering of the type of binary options contemplated by the Instrument, even via a registered broker, dealer or platform will be permitted. Currently, there are no authorized platforms offering these options in Canada.

The CSA also reminded market participants that binary options that are not subject to the Instrument are nevertheless derivatives and/or securities in each jurisdiction of Canada and therefore subject to local securities legislation including with respect to registration, prospectus requirements, market conduct and disclosure, as applicable.

CSA Review of Women on Boards and in Executive Officer Positions

On October 5, 2017, the staff of securities regulatory authorities (SRA) in Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Quebec, Saskatchewan and Yukon published CSA Multilateral Staff Notice 58-309, Staff Review of Women on Boards and in Executive Officer Positions – Compliance with NI 58-101 Disclosure of Corporate Governance Practices. The Staff Notice provides this year’s summary of the disclosure reviewed by the SRA relating to the Women on Boards and in Executive Positions Rules (WB/EP Rules).

The WB/EP Rules require that, on an annual basis, each non-venture issuer disclose:

  • the number and percentage of women on the issuer’s board of directors and in executive officer positions;
  • whether it has a policy relating to the identification and nomination of women directors;
  • whether it has director term limits or other mechanisms of board renewal;
  • whether it has targets for women on its board and in its executive officer positions; and
  • if it considers the representation of women in its director identification and selection process and in its executive officer appointments.

The Staff Notice focused on the disclosure of 660 TSX-listed issuers with year-ends between December 31, 2016 and March 31, 2017, who had filed information circulars or annual information forms by July 31, 2017. This is down from the 722 issuers who provided disclosure as part of the 2015 initial review. The SRA noted that Canadian banks, who are often early adopters of diversity programs, are not included in this summary. This is the third such annual review to have taken place.

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Lessons of the Crew Gold Decision on M&A Engagement Letters

Financial advisors are often critical to the success of an M&A transaction. Often, but perhaps not always. Should the fees payable to a financial advisor be denied if, through no fault of its own, an M&A transaction is completed without any involvement of the advisor? This question is the subject matter of Crew Gold[1] a decision of the Ontario Superior Court which was recently affirmed by the Ontario Court of Appeal.

In M&A sell-side roles, financial advisors are typically retained to advise boards on strategy, as well as perform a number of related tasks, including: preparing a timetable, identifying prospective purchasers, preparing a confidential information memorandum (CIM) and standstill agreement, providing a market check on any offers received, assisting in the due diligence process, providing an opinion as to the financial fairness of any offers, reviewing various deal documents and assisting with communications to, and at times interacting with, the public, key stakeholders, rating agencies and proxy advisory firms.

M&A advisory fees for sell-side roles are typically success-based, payable on completion of a transaction. Prior to completion, the advisor may receive a fee for the delivery of an opinion relating to financial fairness and periodic work fees, all of which are usually credited against the success fee. Work fees are typically modest compared to the success fee, as most issuers prefer not to run up huge advisory costs if no transaction is ultimately completed. Besides, it is often argued, any success fee is effectively for the account of the acquirer.

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