For many family businesses, control of long-term direction and management of the family corporation are key issues, particularly during times of growth or periods of succession. The Institute for Governance of Private and Public Organizations (“IGOPP”) recently published a new policy paper that should be of interest to family businesses and their advisors in planning the capital structure for their enterprises: The Case for Dual-Class of Shares, Policy Paper No. 11 (2019). The paper revisits the state of dual-class public corporations in Canada, emphasizes their value to entrepreneurs, family businesses and Canadian society as a whole and makes a number of structuring recommendations, which are outlined below.
On April 8, 2019, the federal government introduced Bill C-97 to implement measures from its spring budget. The bill proposes amendments to many federal statutes, including several important amendments to the Canada Business Corporations Act (CBCA) relevant to both private and public companies. Our summary of the proposed changes is set out below, some of which deal with familiar issues, while others would introduce new requirements for companies.
If the Hillary Clinton email scandal wasn’t a clear enough lesson that one should not conduct “official” work using personal electronic communication tools (be it personal email, texts or other methods), a number of recent court decisions have required executives to produce communications from their personal accounts and devices. Executives and advisors should not assume that communications using methods other than corporate email will somehow be protected or otherwise not find the light of day in the event of a dispute or investigation.
The Competition Bureau announced the 2019 transaction-size pre-merger notification threshold under the Competition Act increased to C$96 million from C$92 million, effective February 2, 2019. Innovation, Science and Economic Development Canada also announced new foreign investment review thresholds under the Investment Canada Act, effective January 1, 2019.
For more information about the new thresholds under the Competition Act and Investment Canada Act, see the Competition Chronicle.
As of June 13, 2019, private corporations incorporated under the Canada Business Corporations Act (CBCA) must maintain a register regarding individuals who have “significant control” over the corporation through direct or indirect influence. This requirement was one of several new initiatives included in Bill C-86, the Budget Implementation Act, 2018, No. 2 which received Royal Assent on December 13, 2018.
Now in its fifth week, the U.S. federal government shutdown has become the longest in U.S. history. The partial shutdown began on December 22, 2018, following a stalemate between Congress and President Donald Trump over funding for a wall at the Mexican border. Many government services and agencies have been halted: NASA, the Smithsonian museums, the National Gallery of Art, the National Park Service. Others, like the postal service, social security, the Pentagon and the FBI, remain open due to the critical nature of the services they provide. To date, more than 800,000 federal employees have been furloughed or are working without pay, resulting in more than US$200 million in unpaid wages every workday. By tomorrow, federal district courts will have run out of funds.
North of the border, the situation is not as dire, although Canada is feeling the ripple effect of the budget impasse. For one, Canadian businesses contracting directly with the U.S. government are likely searching for ways to cope with, and in some cases survive, the shutdown. Travellers heading south may experience delays as many Transportation Security Administration workers have been calling in sick, refusing to work without pay. And as a result of partial closures at the U.S. Department of Agriculture (USDA) and the Food and Drug Administration (FDA), Canadian restaurants and grocery stores may be under pressure to find alternative sources of produce in cases where routine assessment or clearance by the USDA or the FDA is required for food imports into Canada.
Not the least of the negative ramifications of the shutdown this side of the border has been the impact on Canada’s capital markets.
Since December 27, 2018, the U.S. Securities and Exchange Commission (SEC) has been operating with very limited staff. Departments that perform key functions, such as monitoring the markets and responding to emergencies, continue to operate pursuant to the agency’s Operations Plan Under a Lapse in Appropriations and Government Shutdown. The SEC’s Division of Enforcement, for instance, continues to monitor the Tips, Complaints and Referrals system for reports alleging misconduct or harm to investors. Applications for restraining orders and investigations into fraud remain in play. The SEC’s electronic filing system, EDGAR, also remains open, allowing filers to obtain access codes and make certain filings.
A number of the SEC’s major functions have been temporarily discontinued, however. Non-emergency interpretative advice is currently unavailable, so inquiries relating to cross-border mergers, for example, are being put on hold. Processing of new and pending applications for exemptive relief and non-emergency assistance to Canadian authorities under any bilateral or multilateral arrangements have been suspended. And although the SEC continues to receive registration statements, offering statements and other documents, declaring registration statements effective and approving offerings have been halted, leading to a growing backlog of applications by registrants and issuers in the United States and Canada alike. Long-anticipated IPOs will need to wait for the standoff to end.
It is unclear how long the shutdown will last. Analysts estimate, though, that if the fallout continues for an extended period of time, the American economy (and consequently the Canadian economy) could face significant setbacks. For the sake of all those affected by the shutdown, including Canadian businesses and individuals, it is hoped that the standstill will come to an end sooner rather than later.
Recently, the Ontario Securities Commission, in coordination with the Ministry of Finance, created a Burden Reduction Task Force. The goal of this initiative is to enable Ontario’s businesses and markets to innovate, better compete with other jurisdictions and flourish as the regulatory load is reduced while not diminishing the safeguards in place for Ontario investors.
This Task Force will support the Government of Ontario’s Open for Business Action Plan by identifying short- medium- and long-term steps that can benefit Ontario by facilitating increased competitiveness by saving money and time for investors, issuers, registrants and other members in the financial markets. The comprehensive consultation is fully supported by the government and seeks to enable the transformation of inefficient past practices.
Areas for Market Input
The Task Force has selected various areas of interest where it encourages feedback from stakeholders concerning ways to reduce unnecessary burdens that include:
- Increased efficiencies concerning day-to-day engagement with the OSC through cost savings as it pertains to procedural or operational processes
- Eliminating filings and forms which are not needed or unnecessarily difficult for market participants along with providing easier access to information provided by the OSC
- Harmonization of OSC requirements with other jurisdictions thereby reducing inconsistencies and costs
By March 1 stakeholders are encouraged to share suggestions with the OSC by using the Burden Reduction Survey or through e-mail at email@example.com. On March 27 market participants interested in discussing proposed changes should join the OSC hosted roundtable which will require the submission of a comment letter to the OSC.
Days ago, the Supreme Court of the State of Delaware issued an order succinctly affirming the Delaware Court of Chancery’s judgment from October this year that found Fresenius Kabi AG had no obligation to close its proposed merger with Akorn, Inc. and Fresenius properly terminated the merger agreement on April 22, 2018 largely as a result of Akorn having suffered a material adverse effect (MAC).
The Court of Chancery’s decision is notable for a number of reasons, but the main attraction is the fact that the decision is generally understood to represent the first time a Delaware court has allowed a buyer to walk away from a public company merger on the basis of a contractual MAC provision.
Why it Matters
Merger agreements almost always allow the buyer to “walk” if the target suffers a MAC before closing or if the target’s representations are not true at closing subject to a MAC qualifier. As a result, the MAC definition is often hotly contested notwithstanding the fact that prior to Akorn nobody was successful in walking away on the basis that a MAC occurred. The Delaware courts have been very reluctant to find a MAC, trying to balance respect for the written terms of an agreement with an aversion to facilitating buyer’s regret.
In a 246 page document, the Court of Chancery described the question of whether Akorn had experienced a MAC as a “straightforward issue” of contractual interpretation. It helped that the facts were ugly: during each of the four quarters following signing, on a year-over-year basis, Akorn’s revenues declined between 29% and 34%, its operating income declined between 84% and 124%, and its earnings per share declined between 96% and 300%. In reaching its decision, the Court of Chancery confirmed prior guidance that a MAC must be both “material when viewed from the longer-term perspective of a reasonable acquirer” and “durationally significant”.
The case does not create new law, but it does confirm that it is possible to find a MAC and provides a factual point of reference that others will turn to when a MAC is inevitably asserted in the future. Although not binding on courts in Canada, the decision is expected to be highly influential given the lack of jurisprudence on the point in Canada and the fact that the Delaware Courts are considered the leading commercial courts in the United States.
On October 10, 2018, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-357 Staff Review of Reporting Issuers in the Cannabis Industry (Staff Notice) summarizing a review of the disclosure of 70 reporting issuers in the cannabis industry (Cannabis Issuers). The purpose of the review was to highlight best disclosure practices and common deficiencies among Cannabis Issuers. The CSA concluded that Cannabis Issuers need to improve their disclosure in the following areas:
- insufficient information is provided by licensed cannabis producers (LPs) in their financial statements and their Management’s Discussion & Analysis (MD&A);
- Cannabis Issuers are sometimes not consistently complying with securities requirements to provide forward-looking information and balanced disclosure; and
- 74% of Cannabis Issuers that currently engage in, or are developing, cannabis-related activities in the U.S. (U.S. Cannabis Issuers) failed to include adequate disclosure as set out in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities (U.S. Disclosure Notice) about the risks related to their U.S. operations.
The CSA focused their review on the following areas: a need for more transparent financial disclosure, U.S. Cannabis Issuers and their disclosure requirements and other key considerations.
- Financial Disclosure
Impact of Fair Value Accounting on Financial Statements
LPs are required to measure living plants or biological assets at their fair value under International Financial Reporting Standards. The CSA noted that LPs often did not properly disclose fair value amounts in their statement of profit and loss. As such, the CSA reported that investors were unable to understand how much LPs actually paid to produce their cannabis.
The CSA have concluded that LPs should disclose both:
- unrealized gains/losses resulting from fair value changes relating to the growth of cannabis; and
- any realized fair value amounts included in the cost of inventory sold.
Disclosure of Accounting Policies Related to Biological Assets
The Staff Notice concluded that the majority of LPs had profit and loss line items allocated to “production costs” or “cost of goods sold”. However, LPs did not typically discuss the composition of these line items. Therefore, LPs should consider:
- identifying the direct and indirect costs of the production associated with cannabis; and
- whether the direct and indirect costs of cannabis are capitalized or whether they are expensed.
If these costs are expensed as they are incurred, the CSA concluded that LPs typically did not include sufficient financial disclosure relating to:
- the price of the cannabis sold;
- the calculation of the gross profit subtotal;
- the fair value measurement process; and
- non-GAAP financial measures (an example includes, “cash cost per gram”).
- Issuers with U.S. Cannabis-Related Activities
The Staff Notice referenced the U.S. Disclosure Notice and reminded Cannabis Issuers that US Cannabis Issuers are expected to disclose:
- a description of the Cannabis Issuer’s involvement in the U.S.;
- disclosure that cannabis is illegal under U.S. federal law and any significant risks associated with this, such as restrictions provided by regulatory bodies;
- a quantification of the Cannabis Issuer’s balance sheet and operating statement which identifies exposure to U.S. cannabis-related activities;
- an analysis of the Cannabis Issuer’s ability to access public and private capital; and
- additional disclosures depending on whether the Cannabis Issuer has direct, indirect or ancillary involvement in U.S. cannabis activities.
The CSA have been actively reviewing U.S. Cannabis Issuers’ disclosure and as a result of the review conducted, in connection with drafting the Staff Notice, 17% of U.S. Cannabis Issuers were required to refile their most recent MD&A.
- Other Key Considerations
The CSA highlighted other important considerations for Cannabis Issuers which included:
Material Contracts – Consider filing licence agreements or lease facility agreements as material contracts.
Regulatory Frameworks – For those operating outside North America, appropriate disclosure must be made relating to the international regulatory framework applicable to their business. For example, the need for Cannabis Issuers with U.S. operations to disclose recent statements made by the U.S. Customs and Border Protection Agency about the admissibility of those working in, or facilitating the legal cannabis industry into, the United States.
Production Estimates – When disclosing anticipated production capacity in new facilities, consider disclosing the material factors and assumptions related to those projects.
Moving forward, Cannabis Issuers should consider reading the Staff Notice to ensure their disclosure conforms to CSA guidance. For further information on the Staff Notice or continuous disclosure requirements, please contact a member of our Corporate Finance & Securities Law Group.
 Of the 70 Cannabis Issuers reviewed, 21 were LPs, 23 were U.S. Cannabis-Issuers and 31 were classified as other Cannabis Issuers.
Recently, a group of prominent executives released an open letter and document known as Commonsense Principles 2.0. Signatories include Mark Machin of the Canada Pension Plan Investment Board and Warren Buffett of Berkshire Hathaway. The purpose of the letter and the principles is to encourage companies to embrace a long-term view and enhance trust between investors and companies to improve the health of public capital markets. By virtue of the parties to the letter and the thoughtful nature of the principles themselves, the principles are expected to have a meaningful influence on governance practice and debate. Although American in focus, the principles and issues they address are meaningful for Canadian companies and investors as well.
The Commonsense Principles 2.0 update a set of principles known as the Commonsense Principles of Corporate Governance, released slightly more than two years ago. The revised principles generally reflect incremental, yet important, changes. For example, the first principle, which concerns the directors’ duty of loyalty and care, previously stated that the directors’ loyalty “should be to the shareholders and the company”. The revised principle now states that “[d]irectors are accountable to shareholders and owe duties of loyalty and care to the company” and that director performance “should be evaluated through a company’s long-term performance, financial and otherwise”. Other changes largely reflect recent developments in governance best practices in areas such as director elections, shareholder engagement and proxy access and the explicit change that the principles should apply to asset managers and institutional asset owners.
Each of the letter’s signatories has committed to applying the principles in their businesses. A list of the companies and investors that have agreed to follow the principles will be maintained on the website for Columbia Law School’s Millstein Center for Global Markets and Corporate Ownership. However, the authors acknowledge that there is significant variation among public companies, and that not every principle will be applied in the same fashion (or at all) by every company, board or institutional investor.