On March 16, 2020, the Canadian Securities Administrators (CSA) issued a news release to address how reporting issuers should handle any delays in their reporting obligations (CSA Release).

Any reporting issuer that anticipates the current COVID-19 outbreak will result in an inability to comply with their obligations under securities legislation (including filing deadlines or delivery of meeting materials) is being asked to contact their principal regulator.

In addition, the CSA has asked that reporting issuers that foresee that they will not able to file their annual or interim financial statements by their prescribed deadline consider applying for a management cease-trade order (MCTO). Although applications for an MCTO are typically filed at least two weeks before the due date for the required filings, the CSA has advised that they will work to accommodate shorter periods where necessary.

A MCTO restricts certain officers and directors from trading securities of the reporting issuer and can be issued by a reporting issuer’s principal regulator instead of a failure-to-file cease-trade order. Conditions for granting a MCTO are provided in National Policy 12-203 Management Cease Trade Orders (NP 12-203). Reporting issuers that are applying for a MCTO are required to communicate to the securities marketplace by way of a news release that complies with the default announcement provisions under NP 12-203 and file a material change report. If an MCTO is issued, the reporting issuer must comply with alternative information guidelines as provided in NP 12-203 until the required documents are filed. This includes the issuances of default status reports every two weeks in the form of a news release. MCTOs issued in these circumstances will not be considered required disclosure in future documents.

On March 4, 2020, the Securities and Exchange Commission (SEC) issued an order providing companies filing deadline relief for issuers affected by COVID-19 (SEC Order). The SEC Order provides an additional 45 days to submit certain disclosure reports with original filing deadline dates falling between March 1 and April 30, 2020.  It is important that cross-border listed companies are aware that the CSA has not provided this same relief at this time.

The CSA Release advised that the CSA is continuing to monitor the impact of COVID-19 on Canadian capital markets and may issue further guidance in due course. The CSA provided a staff contact list in the CSA Release.

As concerns increase over COVID-19 and measures have been established by governmental authorities to limit public gatherings and restrict travel, corporations are considering alternatives to in-person annual shareholders’ meetings. Holding your corporation’s shareholders’ meeting virtually, whether wholly or in part, either by audio or video, if authorized under your corporation’s laws of incorporation and general by-laws, is an effective way of ensuring shareholder participation while protecting public health. Since the first virtual shareholders’ meeting held in the United States in 2001, this type of meeting has grown in popularity in North America, although at a slower pace in Canada.

Given the context surrounding the ongoing proxy season, virtual meetings will likely become common practice among both Canadian and American issuers. Indeed, Starbucks Corporation, Amazon.com, Inc., Enbridge Inc. and Telus Corporation have recently announced that their next shareholders’ meetings will be entirely virtual for these reasons.

What are your options?

There are three main options to take your shareholders’ meeting online:

  1. In-person meeting with webcasting. Webcasting (audio or video) is a practice which has been trending in recent years to allow shareholders who are not able to physically attend the meeting to watch or listen to the meeting. However, unless a valid proxy has been given prior to the meeting, this route does not satisfy legal requirements for attendance for quorum purposes nor does it provide a mechanism for remote voting. Since most shareholders exercise their right to vote at a meeting in advance via proxy, the practical impact of the absence of a remote voting tool is somewhat mitigated.
  2. Virtual meeting. Virtual meetings held entirely by electronic means constitute an interesting option for senior issuers. Integration of electronic voting systems results in reduced margins of error for voting results, potential cost efficiencies (compared to the hybrid meeting described below by eliminating the need to pay for a venue and transportation fees) and potential for increased shareholder participation, particularly by millennials. However, these meetings require a costly specialized technology that allows active participation and remote voting, as well as extensive upstream preparation, and are a more radical technological change for shareholders. Note that if topics to be discussed at the meeting are contentious, controversial or subject to a proxy contest, an exclusively virtual meeting may not be well suited to allow shareholders to communicate effectively at the meeting while maintaining order. Indeed, certain shareholders are worried that virtual meetings will limit the ability of shareholders to effectively influence a corporation’s behavior.
  3. Hybrid meeting. While webcasting offers limited participation and transitioning to an entirely virtual meeting may alienate part of your shareholder base and add complexity, a solution has emerged as an interesting and efficient compromise, namely a hybrid meeting. On the one hand, the meeting remains physically accessible, allowing those who wish to attend in person to do so without change (as long as they do not have symptoms of COVID-19 and comply with prescribed health and safety measures). On the other hand, shareholders who prefer avoiding an in-person meeting can participate as if they were present in person, with the assistance of live webcasting and the same specialized platform for voting and messaging used in virtual meetings.

How are meetings conducted in practice?

In-person Meeting with Webcasting Virtual Meeting Hybrid Meeting
For Shareholders Shareholders may not vote or participate virtually.  Votes are cast in advance by proxy or in person at the meeting.

Shareholders who participate virtually have access to the voting platform via their smartphone, tablet or computer by entering their own unique identifier and password. The platform allows viewing of the meeting, real time voting and active participation through direct messaging with management and other shareholders.

In the case of a hybrid meeting, shareholders who are physically present are encouraged to vote via voting interfaces provided at the meeting or with their smartphones to allow instant voting results.

For observers/third parties The webcast is generally available to the public and broadcast on the corporation’s website. The corporation may determine beforehand whether the meeting will be open to non-shareholder observers. If such access is authorized, the observers’ identifiers will allow only viewing of the meeting, without allowing access to voting. The messaging function may also be granted to allow interaction, at the discretion of the corporation. Access may also be limited to shareholders only, although this adds an extra layer of complexity for both the shareholders (particularly those who are less familiar with technological devices) and the corporation.
For the corporation The process is identical to in-person meetings, except for setting up the webcast.

The service provider will help the corporation broadcast the meeting, whether management is gathered at the in-person meeting in the case of a hybrid meeting or in a conference room at its offices or elsewhere in the case of a virtual meeting.

Via electronic voting, the corporation has access to voting results in real time.

The messaging function is entirely controlled by management and may be open for a limited time or for the entire meeting. Given that electronic messaging may be conducive to greater abuses, this function also allows management to determine which messages will be made available to all shareholders and which will be kept private and answered subsequently. However, as this filtering function may be contested, best practice is to appoint a moderator to review messages and remove inappropriate comments after they have been posted (just as for in-person meetings where shareholders may be asked to leave a meeting in similar circumstances). This is especially relevant under Québec corporate law where participants must be able to communicate “directly” with each other during the meeting.

Formal rules of conduct should be adopted beforehand concerning messaging and communication with shareholders.

Who should you call to ensure a successful hybrid or virtual meeting?

  1. Legal counsel. Under the Canada Business Corporations Act and most provincial corporate laws, meetings may generally be held by any means that comply with the general by-laws of the corporation and that allow participants to communicate adequately with each other. Fasken professionals can guide you through these legal requirements.
  2. Transfer agent. As with an in-person meeting, the transfer agent will coordinate the process, namely by sending required documentation to shareholders, compiling voting instructions and proxies from shareholders wishing to vote in advance by proxy, and acting as scrutineer at the meeting.
  3. Service provider. Specialized service providers will provide you with the necessary technological tools to organize a hybrid or virtual meeting and will facilitate the proper conduct of the meeting. These firms work in collaboration with management, legal counsel and transfer agents to ensure the security of the voting process, namely with regards to confirming shareholders’ and proxyholders’ identities and protecting personal data used and stored during the meeting. As these service providers are physically present to support management during the meeting and offer technical support lines to shareholders, potential IT issues are significantly reduced.

How do you inform your shareholders of a hybrid or virtual meeting?

If you are considering a shift to a virtual meeting, it is best practice to issue a press release informing shareholders that the upcoming meeting will be held virtually, once the decision is made. You will then inform your shareholder base by explaining the procedure in detail in your management information circular. The circular will explain how to register as a virtual participant (usually by providing the issuer with an email address). Shareholders will then receive an information package from the service provider with a link and personalized access code to attend the meeting virtually.

If, however, your circular has already been mailed, a review of the corporation’s laws of incorporation and general by-laws will be required to determine the formalities required to take your shareholders’ meeting online. In such a case, switching to a fully virtual meeting, although advisable, will likely lead to a more cumbersome process (which may include the need to mail an amended notice of meeting) and therefore opting for webcasting or a hybrid meeting could be a more interesting option. In light of the multiple considerations involved, Fasken professionals can assist to ensure a smooth transition in compliance with applicable legal requirements.

No matter the means of communication ultimately used, it is important to provide full disclosure as to how shareholders can attend, vote and participate in the virtual meeting in order to ensure an orderly meeting. We note that Glass Lewis has indicated in its 2020 proxy guidelines that it will recommend voting against members of the governance committee if disclosure regarding how the issuer will safeguard shareholder participation rights is not adequate.

Whether you are a private corporation with a few shareholders or a public issuer with a broad shareholder base, hybrid and virtual meetings may constitute interesting alternatives to in-person meetings while ensuring (and potentially increasing) shareholder participation and, in the present context, helping to stop the spread of COVID-19.

For a more comprehensive legal analysis of the topic, we invite you to consult the following articles prepared by our colleagues Neil Wiener and Matthew Quadrini and posted on Timely Disclosure:

  • https://www.timelydisclosure.com/2018/01/30/bringing-your-annual-meeting-into-the-digital-age/#more-3361
  • https://www.timelydisclosure.com/2020/03/12/bringing-your-annual-meeting-into-the-digital-age-two-years-later/

The authors wish to thank Neil Wiener, Jean Michel Lapierre and Tristan Lalumière-Roberge for their contributions.

In January 2018, we posted this article on Timely Disclosure, “Bringing Your Annual Meeting into the Digital Age”. Virtual annual meetings have become highly relevant in light of the Coronavirus or COVID-19 pandemic. Shareholders may well be reluctant to attend annual meetings; numerous public companies are examining measures they can take so that COVID-19 does not spread, including eliminating public events.

In our 2018 article, we noted that the Canada Business Corporations Act (CBCA) and provincial corporate statutes provide a legal framework for a traditional shareholders’ meeting, that is, a “physical meeting” attended by shareholders, and for a “virtual meeting”, in which all shareholders participate entirely by electronic means. We noted that a traditional physical meeting is often a lost opportunity to maximize shareholder participation. On the other hand, a virtual meeting, available only online, presents technical issues, notably with respect to registration of shareholders as well as voting and speaking during the meeting, all of which entail additional costs.

In light of the COVID-19 situation, a “hybrid” annual meeting, that is, a substantially scaled-down physical meeting with a webcast of the proceedings, provides corporations with a cost-effective means of complying with their legal obligations and supporting shareholder engagement, while substantially reducing, if not eliminating, physical interaction among participants. The corporation can issue press releases encouraging shareholders to vote by proxy prior to the annual meeting and directing them (and others) to the corporation’s website or other platform, where they will be able to access the webcast of the meeting and submit questions in writing through the webcasting platform. As we identified in 2018, the only people who have to be present at the meeting are, for quorum purposes, one or more proxy holders, depending on the specific requirements of the corporation’s by-laws; the chairperson and secretary of the meeting (both of whom can be proxyholders); and a scrutineer (typically from the corporation’s transfer agent and registrar), in short, as few as three people. While registered shareholders and proxyholders have the legal right to attend a hybrid meeting in person, the corporation can encourage them by way of press release and other communications to view the meeting online, in accordance with the recommendations of Canadian public health authorities.

In the 2018 article, we discussed whether the webcast of the meeting should be made available to shareholders only, or to everyone. If one objective of an annual meeting is to raise the corporation’s profile in the investment community, our view is that the meeting should be open to all.

At a time when “self-isolation” has become a common term, we believe that hybrid or virtual annual meetings will be accepted, if not welcomed, by shareholders and the investment community. As we wrote in 2018, as technology improves, as it inevitably will, virtual annual meetings of Canadian public companies will become more prevalent and eventually the norm.  COVID-19 is accelerating that process.

For those issuers who want to better understand virtual meetings, Timely Disclosure will post an article addressing the technical issues involved in holding a virtual meeting.

On February 13, 2020, the Canadian Securities Administrators (the CSA) published revised versions of proposed National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (Proposed Instrument), Companion Policy 52-112 Non-GAAP and Other Financial Measures Disclosure (Proposed Companion Policy) and the related proposed consequential amendments or changes to other instruments and policies that would be affected by the proposed changes (collectively, the Proposed Materials).  The original versions of the Proposed Materials (the Original Materials) were first published on September 6, 2018  The current disclosure requirements are set out in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (SN 52-306).

The CSA notice and request for comments includes the following summary of the substantive changes to the Original Materials made in the Proposed Instrument:

Definitions

  • The defined term “non-GAAP financial measure” was changed to be more consistent with SN 52-306 and with rules and guidance of other securities regulators, including the U.S. Securities and Exchange Commission (SEC). This revised definition reduces the scope of financial measures captured compared to the Original Materials. Ratios are specifically excluded from the defined term. The scope of what is captured as a “non-GAAP ratio” has also been substantially reduced. Only ratios where a non-GAAP financial measure is used in the numerator or the denominator, or both, are captured. This is dealt with in a separate section within the Proposed Instrument.
  • The defined term “segment measure” has been changed to “total of segments measure”, and the definition has the revised term captures only a subtotal or total of two or more reportable segments.
  • The defined term “supplementary financial measure” has been changed to reflect the changes in the defined term “non-GAAP financial measure”.
  • Transcripts of an oral statement are specifically excluded. Only oral statements were excluded in the Original Materials.

 Reduced Scope

  • In addition to excluding SEC foreign issuers, the CSA reduced the scope of application of the Proposed Instrument by:
  • only capturing disclosures by reporting issuers (for example, press releases and MD&A) and non-reporting issuers in a document that is subject to prospectus requirements, filed in connection with reliance on the offering memorandum exemption, and other similar documents submitted to a recognized exchange
  • excluding issuers that are investment funds and designated foreign issuers, and
  • excluding disclosures that are required under National Instrument 43-101 Standards of Disclosure for Mineral Projects and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (except for voluntary disclosures using oil and gas metrics under section 5.14).
  • The CSA expanded the list of specific documents and financial measures that the Proposed Instrument does not apply to including valuations reports and pro forma financial statements.
  • The CSA also excluded financial measures disclosed in compliance with a requirement under law or by a self-regulatory organization to which the issuer is a member. This includes any system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the issuer, not just limited to the laws of a jurisdiction of Canada as originally included in the Original Materials.

 Incorporating Information by Reference

  • The CSA introduced a form of cross-referencing in certain discrete documents back to an issuer’s MD&A through incorporating information by reference.

 Disclosure Requirements

  • A section on disclosure requirements for non-GAAP financial measures that are historical information, has been added to clarify that disclosure of a non-GAAP financial measure must be accompanied by the disclosure of the most comparable financial measure presented in the primary financial statements.
  • A section on disclosure requirements for non-GAAP financial measures that are historical information, has been added to clarify that disclosure of a non-GAAP financial measure must provide an explanation of the composition of the measure.
  • The section on disclosure requirements for non-GAAP financial measures that are forward-looking information has been substantially revised to reduce the disclosure requirements and enhance readability. The requirement for a quantitative reconciliation has been removed and replaced with a requirement to describe each reconciling item between the non-GAAP financial measure that is forward-looking information and the historical non-GAAP financial measure. SEC Issuers, as defined in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, may instead comply with Regulation G under the 1934 Act to comply with this disclosure requirement.
  • Disclosures of non-GAAP financial measures used in ratios has been separated, with reduced disclosure requirements from the Original Materials.
  • A section was added to allow issuers to make certain disclosures related to capital management measures within their financial statements to comply with the Proposed Instrument instead of directly within documents outside the financial statements.
  • The section on disclosure for supplementary financial measures has been revised to remove requirements to present the comparative period and explain the reason for a change, if any, from the comparative period.

 The comment period is open until May 13, 2020.

For further information, please contact:

Neil Kravitz – 514 397 7551
Andrea Kruyne – 416 865 4537
or any of our Corporate Finance team.

Introduction

The Yukon Court of Appeal recently released its decision in Carlock v. ExxonMobil Canada Holdings ULC,[1] overturning the Supreme Court of Yukon’s unexpected decision to award dissenting shareholders a 43% premium over the negotiated deal price in ExxonMobil Canada Holdings ULC’s (“ExxonMobil”) acquisition of InterOil Corporation (“InterOil”) in 2017.

The Court of Appeal’s decision confirms that courts can (and probably should in an open and unrestricted market) rely on a negotiated transaction price as objective evidence of fair value. This decision re-aligns Yukon law with that of other Canadian and American jurisdictions and reduces the potential uncertainty regarding share valuation in public M&A transactions introduced by the lower court decision.

Background

The Yukon Court of Appeal’s decision is the latest (and likely final) decision in the long-running saga of ExxonMobil’s acquisition of InterOil.

On July 21, 2016, the first arrangement agreement between ExxonMobil and InterOil received court approval. ExxonMobil agreed to pay US$45 per InterOil share paid in ExxonMobil shares plus a contingent resource payment (“CRP”).

That approval order was later set aside by the Yukon Court of Appeal in InterOil Corporation v. Mulacek (November 4, 2016) on the basis that the arrangement had not been shown to be “fair and reasonable” as required by the Yukon Business Corporations Act. The Court of Appeal pointed to, among other things, the absence of a fairness opinion from an independent expert, the fact that the CEO was in a position of conflict and the probability that the “independent” special committee was not independent of management.

The decision focused on the process followed by InterOil’s Board of Directors in negotiating the sale of its assets and determining the fair value of InterOil’s shares. Following the Court of Appeal’s decision, InterOil reconvened its special committee, which retained Fasken to assist the committee in its review of the Yukon Court’s decisions and to provide recommendations to the InterOil Board regarding the strategic options available to InterOil. Ultimately, the InterOil shareholders approved the arrangement for a second time, with 91% of votes cast in favour of the arrangement.

Certain shareholders dissented and, in 2019, the Supreme Court of Yukon rendered the extraordinary decision under appeal in this most recent case, rejecting the transaction price as indicative of fair value. The court awarded a significant premium (43%) to the dissenting shareholder, despite: (a) a board-supervised sale process with multiple bids; (b) approval of over 80% of InterOil’s voting shareholders at first instance; and (c) a second vote with 91% in favour after the implementation of enhanced corporate governance practices and an increase to the value of the CRP.

Ultimately, the lower court focused considerably on the sales process prior to the first Court of Appeal decision. Most notably, the Court emphasized that although InterOil implemented significant corporate governance enhancements in response to the Court of Appeal’s decision, “the transaction price, borne of a flawed process, cannot be resurrected as the “fair value” as defined by the experts.”

ExxonMobil appealed the decision.

Appellate Decision

The Court of Appeal allowed ExxonMobil’s appeal and set fair value of the dissenting shareholders’ shares at the negotiated deal price of US$49.98. The Court held that the lower court judge erred in finding that the defects in the first arrangement precluded him from effectively giving any weight to the transaction price in assessing fair value of the InterOil shares.

The Court of Appeal found that it was open to InterOil to remedy the earlier deficiencies and properly inform and advise shareholders of the merits of the transaction and to ensure that such advice was adequate, objective and not undermined by conflicts of interest. With InterOil having done so, the lower court ought to have given adequate weight to objective evidence as to value and wrongly overvalued the theoretical valuation of the dissenting shareholder’s expert.

The Court of Appeal summarized the various factors which supported utilizing the negotiated deal price as fair value in the present case: [2]

  • The transaction price reflected a negotiated price in a competitive market consisting of well-informed and sophisticated parties.
  • There was no indication that any other process could have led to a higher price.
  • All potential purchasers or partial investors were fully informed.
  • There was no impediment to other potential purchasers outbidding Exxon.
  • The deal price was at a substantial premium to the pre-deal stock price.
  • The shares were widely traded and held by large and sophisticated investors, expert in assessing value, none of whom dissented.
  • Share value was driven by an asset in the early stages of development, the future prospects of which were highly uncertain.
  • Theoretical derivations of value were rife with uncertainty and speculation. Such assumptions were surely factored into the decision by institutional investors to accept the deal price.

Conclusion

While a robust sales process will, as ever, remain necessary, the Yukon Court of Appeal’s decision should provide comfort to capital market participants that a deal price borne of such a process will generally be recognized as representative of fair value.

[1] 2020 YKCA 4 [“ExxonMobil C.A.”].

[2]       ExxonMobil C.A., supra, at para. 45.

Institutional Investor Services (“ISS”) and Glass Lewis have released their updates to proxy voting guidelines for 2020. These guidelines shape the recommendations both bodies will give in reports concerning specific issuers which are often followed by institutional investors. For issuers with an institutional investor as a majority shareholder, these guidelines can be determinative of votes on matters put to shareholders. Key changes impacting TSX-listed companies are outlined below. Changes generally take effect for the 2020 proxy season.

Director Attendance & Committee Meeting Disclosure
ISS

ISS generally recommends withholding votes for individual directors where:

  • the company has not adopted a majority voting director resignation policy and they have attended fewer than 75% of their board and key committee meetings held within the past year; or
  • the company has adopted a majority voting director resignation policy and they have attended fewer than 75% of their board and key committee meetings held within the past year and a pattern of low attendance exists based on previous years’ attendance.

While these recommendations are not new, ISS has clarified for 2020 that there is an exception for nominees who have served for only part of the fiscal year or issuers that are newly publicly listed or have recently graduated to the TSX. In these cases, decisions will be made on a case-by-case basis.

Glass Lewis

Glass Lewis will generally recommend withhold votes for a governance committee chair when attendance records for board and committee meetings are not disclosed. Beginning in 2021, they will also recommend withholding votes for a governance committee chair when the number of audit committee meetings that took place in the most recent year are not disclosed. Beginning in 2021, Glass Lewis will also recommend withholding votes for an audit committee chair when the audit committee met fewer than four times in the most recent year.

Board Diversity

Neither ISS or Glass Lewis have updated their board diversity policies in light of the recent changes to the CBCA which expand diversity disclosure requirements.

Overboarded Directors
ISS

For the 2020 proxy season ISS has clarified its preferred methodology for directors to transition on and off of boards. ISS will generally recommend withholding votes for a non-CEO director who serves on the boards of more than five public companies, and CEOs who serve on boards of more than two public companies besides their own.

ISS now recommends directors step down at annual meetings, recognizing that this may result in a director being temporarily “overboarded.” Where it has been publicly disclosed that the director will be stepping down at the next annual meeting, that board membership will generally not be counted for the purposes of this policy. Conversely, for the purposes of this policy, ISS will count boards that directors will be joining even if the relevant meetings and elections have yet to take place.

Glass Lewis

Glass Lewis has not changed its policy regarding overboarded directors—they continue to recommend shareholders withhold votes for any directors who serve as an executive officer of any public company while serving on more than two public company boards and any other director who serves on more than five public company boards.

Company Responsiveness
ISS

Assessment of a board’s responsiveness to investor concerns relating to say-on-pay votes and the clarity of compensation disclosure remains a primary factor in ISS’s case by case assessment of say-on-pay proposals.

Glass Lewis

Absent robust disclosure on engagement activities following a low say-on-pay vote at the previous annual meeting, Glass Lewis may recommend voting against subsequent say-on-pay proposals.

Glass Lewis considers 20% or more opposition to a say-on-pay proposal to constitute “significant” opposition, which should trigger responsiveness to shareholders and their concerns. Their expectations of what will constitute sufficient responsiveness will vary depending on the magnitude and duration of the opposition, but examples can include engaging with large shareholders and, if reasonable, implementing changes to directly address their concerns.

Auditors and Audit Fees
ISS

ISS broadened the scope of other or “non-audit” fees that can be incurred by the auditors and considered separately from the standard “non-audit” fees when the latter are evaluated for excessiveness. In 2019, this list was limited to IPOs, emergence from bankruptcy and spinoffs, but going forward these will only serve as a non-exhaustive list of examples.

Glass Lewis

Glass Lewis may recommend withholding votes for all members of the audit committee in the event of a second successive year of excess non-audit fees (making an exception regarding minimum board sizes they expect to see for public companies).

Other Changes
ISS

ISS will continue its policy of recommending to withhold votes for any director serving on the audit or compensation committee who has served as the CEO of the company within the past five years. Going forward, this will also apply to those who have served as CEO of an affiliate or a company acquired within the past five years.

Similarly, ISS will continue its policy of recommending to withhold votes for any director who has served as CFO in the past three years and is a member of the audit or compensation committee. Beginning in 2020, this will also apply to those who have acted as CFO of an affiliate or a company acquired within the last three years.

Glass Lewis

Following 2019 amendments, Glass Lewis believes companies should make sufficient disclosure to ensure shareholders can meaningfully evaluate a director nominee or an entire board’s competencies. Glass Lewis’ Board Skills Appendix provides guidance on the types of skills expected for different industries and how these skills may be gained.

Glass Lewis has also stated a general concern regarding compensation arrangements that are overly favourable to the executive. For example, this includes overly generous severance payments, single-trigger change of control arrangements, or multi-year guaranteed awards.

The Investment Management Group of Fasken has provided the Canadian Securities Authorities (the “CSA”) with an extensive comment letter in response to the proposals described in Reducing Regulatory Burden for Investment Fund Issuers – Phase 2, Stage 1 (the “Proposals”) set out in the CSA Notice and Request for Comment dated September 12, 2019.

Our comments were based mainly on our experience advising clients in the investment funds industry, and took into consideration feedback we have received through consultations with a number of industry participants about the Proposals.

This blog summarizes our comments and suggestions to further reduce the regulatory burden of investment fund issuers and their managers, and further discusses two specific comments that we believe would foster such objectives in a meaningful manner.

Our comments to the CSA on each of the workstreams may be summarized as follows:

  • Workstream One: We believe that the proposed consolidation of the simplified prospectus and annual information form will not reduce regulatory burden and may, in fact, increase burden. To reduce regulatory burden, we have recommended that (i) more immaterial prescribed disclosure be removed from the prospectus, (ii) formatting and drafting style expectations for the prospectus be relaxed, and (iii) the prospectus filing system be changed to a regime similar to shelf prospectuses of public companies.
  • Workstream Two: We believe that the proposal for mandatory websites will create a significant new regulatory burden without an offsetting burden reduction in other areas. We have recommended that (i) websites not become mandatory until other regulatory changes involving the use of those websites also come into effect (for example, extending the notice-and-access approach to any regulatory disclosure requirement), and (ii) regulatory oversight of websites be limited to ensuring that information is posted to the website when required.
  • Workstream Three: We view the codification of notice-and-access relief as a housekeeping matter that does not change regulatory burden. In order to reduce regulatory burden, we have recommended a wider use of the notice-and-access approach.
  • Workstream Four: We agree with eliminating the requirement for personal information forms in certain circumstances, and have recommended that the CSA collaborate with Canadian stock exchanges to assist with removing their equivalent requirements.
  • Workstream Five: We view the codification of various conflict of interest relief as a housekeeping matter that does not change regulatory burden. To reduce regulatory burden, we have recommended that the CSA (i) eliminate or streamline conflict of interest prohibitions that will become unnecessary with the coming into force of a clear duty for registered firms to avoid material conflicts of interest when they cannot be addressed in the best interest of the clients (as part of the Client Focused Reforms) (ii) codify other relief which has not yet been widely obtained by industry participants, (iii) adopt measures to prevent such codification from becoming obsolete, and (iv) replace certain technical requirements with a principles-based approach.
  • Workstream Six: We agree that eliminating the need for CSA approval of certain fund mergers will reduce regulatory burden. We have recommended that further burden reduction occur by no longer requiring securityholder approval of the fund mergers in those same circumstances.
  • Workstream Seven: We agree that eliminating the need for CSA approval of certain changes relating to the managers of investment funds potentially reduces regulatory burden if the eliminated requirements do not resurface in the context of approval under NI 31-103. We have also recommended the repeal of OSC Staff Notice 81-710, which we believe created substantial new regulatory requirements outside the rule-making process.
  • Workstream Eight: We view the codification of various prospectus delivery relief as a housekeeping matter that does not change regulatory burden. To reduce regulatory burden, we have recommended replacing certain technical requirements in that relief with a principles-based approach.

For each of the above workstreams, we have made specific and detailed proposals aimed at increasing the reduction of the regulatory burden, and have outlined the reasons supporting them. In some cases, we examined what we understand were the initial underlying policy reasons supporting the current disclosure requirements or regulatory regime, and noted that subsequent regulatory changes and actual industry practices warranted the elimination or reduction of a variety of additional requirements, the whole without compromising investor protection or the general quality of disclosure provided to investors. For example, we have made detailed proposals to improve and shorten the preparation of the new disclosure document combining the current annual information form and short form prospectus.

Changing the prospectus filing system

We have also proposed that the current process for filing and reviewing the simplified prospectus for mutual funds be substituted by a regime similar to that applicable to base shelf prospectuses for public companies. Our view is that when compared to the prospectus review process for public companies that frequently raise capital by public offering, the level of scrutiny by CSA staff of mutual fund prospectuses, the extent of the technical comments made by CSA staff during those reviews, and the timespans for completing such filings appear unduly onerous, burdensome and inefficient. We have consequently come to the conclusion that the prospectus filing and review process applicable to mutual funds has become obsolete and should be modernized, and believe that it should be possible for mutual funds to achieve the same level of efficiency as is currently available to public companies using the shelf prospectus system.

Consequently, we have proposed that the prospectus filing process for mutual funds include the following features:

  • the simplified prospectus should be usable for at least 24 months before expiring and needing to be renewed;
  • the principal regulator should be required to provide its comments within 3 business days such that the refiling process can be completed within 10 business days;
  • a longer review period should only be required if the simplified prospectus raises novel issues;
  • the review should include a template for the mutual funds’ fund facts. However, like a prospectus supplement to a shelf prospectus for a public company, the fund facts should not be reviewed when filed during the lifespan of the simplified prospectus unless the fund facts raise a novel issue; and
  • a mutual fund should not be required to file an amendment nor obtain a receipt when the mutual fund files fund facts during the lifespan of its simplified prospectus.

We believe these changes would not compromise investor protection since it would be adopting a prospectus filing process already in place for public companies in Canada. The main impact of these changes is that they would achieve a level of efficiency comparable to public companies, which, we believe, should be made available to all public mutual funds.

New regulation and guidance

We have also noted that a significant amount of regulatory burden results from the CSA creating new requirements for the investment fund industry without using the rule-making process. This occurs by a variety of means including;

  • comments made by CSA staff in the course of reviewing prospectuses or following desk and field audits of specific issues;
  • CSA staff notices and informal publications such as the OSC Investment Funds Practitioner; and
  • positions taken during enforcement proceedings.

In order to produce better regulation which (i) takes into account issues which may not have been considered by CSA staff, (ii) is proportional to the protection provided to investors by considering relative costs and benefits, and (iii) is implemented fairly by applying to all industry participants at the same time and in the same manner, we have encouraged CSA staff to discontinue the practice of effectively creating new regulations through positions and guidance issued outside the rule-making process.

While we do not support the creation of new regulation outside the rule-making process, we endorse and encourage the dissemination of true “guidance”. In our view, a statement by CSA staff that limits the possible interpretation of a securities law requirement is effectively amending those securities laws. Similarly, guidance which states that an industry participant will be treated as non-compliant if it does not adopt the procedures described in the guidance is effectively creating new securities legislation.

In our view, “guidance” only should provide industry participants with confirmation when various practices are sufficient to meet the requirements of securities legislation. It should not preclude other possible interpretations of securities law requirements, nor trigger adverse consequences for industry participants that choose not to follow that guidance.

Our comment letter contains a number of additional proposals together with a number of suggestions; any Fasken Investment Management Group member will be pleased to further discuss any of those with you.

The latest edition of the American Bar Association’s (ABA) Canadian Private Mergers & Acquisitions Deal Points Study was released on December 19, 2019. The study focused on deals signed in 2016 and 2017. A number of members of the Fasken team were involved in the preparation of the study, including the authors of this post.

The ABA deal points studies have been cited in numerous court decisions and are a leading source in seeking to answer the dealmaker’s most basic question: what’s market?  This article highlights some of the key findings from the study and compares certain deal points to recent US studies.

Notwithstanding the importance of the study, readers should be mindful of the nature of the sample used before applying it too broadly. The agreements reviewed are sourced from the System for Electronic Documents and Analysis and Retrieval (SEDAR) maintained by Canadian securities regulatory authorities for reporting issuers. As result, the study necessarily reviews only a small portion of transactions completed during the relevant time period and is limited to Canadian private targets that are being acquired or sold by public companies. The latest study reviews just 90 agreements and is heavily skewed towards smaller deals (48% are under $50 million and 60% are under $100 million). That said, one of the biggest changes since the last Canadian study is the increase in deals over $200 million (up to 29% from 20% in the 2016 study). As a result of the how the transaction samples are developed for the study, 87% of the deals involved corporate buyers (unchanged from 2016 study) and only 6% involved private equity buyers (down from 10% in the 2016 study). 70% of deals in the study involved corporate sellers (71% in the 2016 study) and 9% involved private equity sellers (8% in the 2016 study).

Of note, the study shows that 21% of deals were in the oil & gas sector (up from 16% in the 2016 study and up from 8% in the 2014 study) and that 4% of deals were in the chemical & basic (natural) resources sector (down from 17% in each of the 2016 and 2014 studies).

Purchase Price Adjustments

The study shows a number of shifts in market practice with respect to post-closing purchase price adjustments. First, 79% of transactions include such an adjustment (up from 72%) with the vast majority of deals adjusting for working capital. Second, and somewhat puzzling, is that that the buyer prepares the first draft of the closing balance sheet in only 59% of deals (down from 76% in 2016 and 61% in 2014). That is in stark contrast to the US study, in which the buyer prepares the first draft of the closing balance sheet in 95% of deals. Some of the change might be attributable to data collection challenges, as 19 of the agreements reviewed did not specify who prepared the closing balance sheet. Finally, Canadian deals tend not to use earn-outs to bridge valuation gaps to the same degree as deals in the US (16% in Canada and 28% in the US), which is consistent with previous studies.

Continue Reading Latest Canadian ABA Private M&A Deal Points Study Released

Après près de quinze ans de règne paisible, les exigences relatives à la déclaration d’acquisition d’entreprise (« DAE ») applicables aux émetteurs non émergents sont sur le point d’être assouplies.

Aux termes des modifications proposées, un émetteur assujetti qui n’est pas un émetteur émergent devra déposer une DAE uniquement si deux des trois critères de significativité actuels sont satisfaits, comparativement à un seulement dans le cas présent, tandis que le seuil de ces critères de significativité sera rehaussé de 20 % à 30 %.

L’objectif principal est d’éliminer tout fardeau inutile imposé aux émetteurs assujettis et d’éviter les résultats anormaux obtenus par le passé sans compromettre la protection des investisseurs.

En 2015, les ACVM avaient déjà allégé le fardeau imposé aux émetteurs émergents en faisant passer le seuil des critères de significativité de 40 % à 100 % et en éliminant l’obligation selon laquelle leurs DAE devaient renfermer des états financiers pro forma.

Un juste compromis

Ce que l’on appelle la « condition à deux critères » est le résultat d’un processus de consultation (disponible uniquement en anglais) mené par les Autorités canadiennes en valeurs mobilières (les « ACVM »).

Les suggestions exposées dans les commentaires reçus par les ACVM allaient de l’élimination complète des obligations relatives à la DAE à la remise en question de certains aspects des critères de significativité, tandis que d’autres soulignaient que la DAE renferme de  l’information pertinente que l’on ne retrouve pas nécessairement ailleurs.

Le critère du résultat était particulièrement visé par les critiques parce qu’il donne souvent lieu à des résultats anormaux comparativement aux deux autres critères (le critère de l’actif et celui des  investissements).

S’appuyant sur les commentaires reçus et sur leur propre analyse des données pertinentes, les ACVM ont choisi de remplacer la « condition à un critère » par une « condition à deux critères ». En particulier, les ACVM ont jugé que la condition à deux critères permet de mieux traiter les résultats anormaux obtenus que la plupart des autres suggestions, notamment l’élimination du critère du résultat.

Règles actuelles

Actuellement, un émetteur assujetti qui n’est pas un émetteur émergent doit déposer une DAE après la réalisation d’une acquisition significative si la valeur obtenue pour l’un ou l’autre des trois critères de significativité établis dans le Règlement 51-102 sur les obligations d’information continue excède 20 %.

La DAE décrit l’opération, la contrepartie payée, la source des fonds et les projets de l’émetteur pour l’entreprise et, surtout, elle doit comprendre des états financiers historiques de l’entreprise acquise et de l’information financière pro forma.

La préparation d’une DAE entraîne des délais et des coûts non négligeables et l’information requise pour se conformer aux exigences de la DAE est parfois difficile à obtenir, ce qui nuit à la capacité de l’émetteur assujetti à accéder aux marchés des capitaux, à réaliser des acquisitions et à obtenir du financement. En particulier, les états financiers historiques de l’entreprise acquise sont rarement disponibles sous la forme exigée et leur préparation prend du temps.

Les modifications seront aussi très favorablement accueillies par les sociétés fermées en voie de s’inscrire en bourse, car celles-ci réalisent souvent plusieurs acquisitions dans les mois précédant leur premier appel public à l’épargne (PAPE), dont certaines pourraient être considérées comme significatives. Par conséquent, les exigences relatives à la DAE intégrées aux règles sur les prospectus de PAPE peuvent rendre le processus de PAPE considérablement plus long et plus coûteux.

Réduction significative des coûts

On s’attend à ce que les modifications proposées entraînent une diminution globale du nombre de dépôts de DAE.

Une analyse des DAE déposées et des dispenses accordées au cours d’une période de trois ans réalisée par la Commission des valeurs mobilières de l’Ontario (CVMO) révèle que les émetteurs pourraient réaliser des économies d’environ 15 millions de dollars sur dix ans si les modifications proposées sont adoptées.

Selon les estimations de la CVMO, les coûts engagés par un émetteur pour déposer une demande de dispense discrétionnaire liée à une DAE pourraient atteindre 18 770 $, comparativement à un montant maximal de 67 570 $ pour le dépôt d’une DAE. Ces estimations reposent sur des taux horaires moyens qui tiennent compte des différents niveaux d’ancienneté et de compétence des professionnels intervenant dans chaque activité. Toutefois, nous savons que les coûts liés au dépôt d’une DAE peuvent être significativement plus élevés, selon l’ampleur du travail nécessaire pour préparer les états financiers historiques y compris, s’il y a lieu, le rapprochement avec les mesures conformes aux PCGR canadiens, l’établissement des états financiers détachés et les frais de traduction.

Tendance internationale

Les ACVM entendent continuer de suivre l’évolution de la situation réglementaire à l’échelle internationale, et notamment aux États-Unis. La Securities and Exchange Commission des États-Unis a récemment proposé de réviser ses exigences concernant l’information contenue dans les états financiers en lien avec les acquisitions et les cessions d’entreprises significatives afin de faciliter et d’accélérer l’accès aux capitaux et de réduire la complexité et les coûts de la communication de cette information. Pour en savoir plus, veuillez consulter le document Amendments to Financial Disclosures about Acquired and Disposed Businesses (en anglais seulement).

Période de consultation

La période de consultation sur le projet de modifications concernant la DAE présenté par les ACVM prend fin le 4 décembre 2019.

Pour en savoir plus, veuillez consulter le document CSA Notice and Request for Comment Proposed Amendments to National Instrument 51-102 Continuous Disclosure Obligations and Changes to Certain Policies related to the Business Acquisition Report Requirements.

The BC government proposes sweeping changes to the Securities Act (British Columbia) (the “Act”), which will allow the British Columbia Securities Commission (“BCSC”) to better address white collar investment crime. Proposed through Bill 33 Securities Amendment Act, 2019, the amendments will provide the BCSC with some of the strongest powers in Canada to protect investors and enforce sanctions. These are the first major revisions to the legislation in almost a decade.

Government Sought Changes Two Years Ago

The changes were prompted two years ago, when Finance Minister Carol James asked the BCSC to come up with a plan to increase fine collection. Ms. James encouraged the BCSC to propose new mechanisms that would allow it to more effectively collect fines and deter future misconduct. Postmedia News reported that between 2007 and 2017, the BCSC collected less than 2% of the $510 million in fines that it ordered to be paid. During fiscal 2018/2019, the BCSC imposed sanctions of $35.4 million. During the same year, it collected  $5.2 million of which $0.3 million related to sanctions imposed in that year and $4.9 million related to sanctions imposed in prior years. It also returned $7 million to investors through a court-appointed receiver. Two years after Ms. James’ plea, the proposed amendments would give the Act stronger powers and better assist the BCSC with its enforcement mechanisms.

Changes Will Assist In Collecting Fines And Enforcing Orders

The proposed changes, many of which are unprecedented in Canada, enhance the BCSC’s power to collect fines and enforce orders. A key change would allow the BCSC to seize property that was transferred to third parties for below market value. Sanctioned individuals often transfer properties to spouses or relatives for small amounts, such as $10, which has allowed them to shield properties from regulators. Other proposed changes to the Act include:

  • Increase in maximum fines;
  • Increase in maximum jail terms;
  • New minimum sentences for repeat offenders;
  • Power to seize RRSPs; and
  • Power to direct ICBC to refuse renewal or issuance of driver’s licences or license plates.

Changes Aimed At Protecting The Integrity of Capital Markets

The BCSC welcomed the amendments and the government’s goal to contribute to a fair capital market. “We’d like to thank the B.C. government for taking action to crack down on white collar crime with these ground-breaking amendments,” said Brenda Leong, chair and CEO of the BCSC. “We now have new and better tools to go after the bad actors who break the law and cause significant harm to investors and the capital markets.” The changes will help victims of investment fraud recover funds and make it less desirable for individuals to create investment scams. The second reading of Bill 33 was on Monday, October 28, 2019 and a copy of it can be found here.