Canada: CSA Finalize Amendments To Continuous Disclosure System

On October 13, 2006, the Canadian Securities Administrators published their final notice of amendments to NI 51-102 – Continuous Disclosure Obligations (NI 51-102), its related forms and companion policy (CP 51-102), NI 51-107 – Acceptable Accounting Principles, Auditing Standards and Reporting Currency, NI 71-102 – Continuous Disclosure and Other Exemptions relating to Foreign Issuers, and consequential amendments to NI 44-101 – Short Form Prospectus Distributions and Form 44-101F1 (collectively referred to as the Amendments). This latest overhaul of the Canadian continuous disclosure regime is targeted at clarifying and streamlining various existing provisions of the respective instruments, as well as codifying discretionary exemptions that the CSA have granted in the past.

NI 51-102 sets out the obligations of reporting issuers, other than investment funds, relating to financial statements, AIFs, MD&A, business acquisitions, material change reporting, information circulars, proxies and proxy solicitation and other disclosure matters. This update focuses on some of the key changes to be introduced specifically under the Amendments to NI 51-102, its related forms and CP 51-102.

The definition of "Executive Officer" will be expanded to include any person who performs a policy-making function in respect of the issuer. This expanded definition means that if a reporting issuer’s executive management is provided through an external management company, the officers of the external management company who are acting as executive officers of the issuer may be treated as executive officers of the issuer with the same disclosure obligations (including disclosure in Form 51-102F6 – Statement of Executive Disclosure (Form 51-102F6) discussed below).

NI 51-102 provides that any proxy "solicitation" (whether by management or a dissident group) requires the provision of an information circular containing certain prescribed information and accompanied by a prescribed form of proxy. As part of the Amendments, the definition of "solicit" will be amended to exempt a wider range of activities from these requirements, bringing it into line with the Canada Business Corporations Act.

The definition of "venture issuer" will be revised so that reporting issuers with securities listed on the Alternative Investment Market of the London Stock Exchange (AIM) or the market known as OFEX (now rebranded as PLUS) will be treated as venture issuers (with the effect that such issuers will not need to file AIFs and will have more time in which to file their financial statements). This replaces the blanket orders that were implemented in some jurisdictions, making the definition consistent throughout Canada.

• Financial Statements

Issuers will, unless exempted as discussed below, continue to be required to send a request form annually to their securityholders to obtain instructions regarding the delivery of financial statements and MD&A. If such a request is made by securityholders, a copy of the requested documents must be sent by the later of ten calendar days after the respective filing deadline and ten calendar days after the issuer receives the request. Those issuers who send their annual financial statements and MD&A to all of their securityholders as a matter of course in order to rely on the exemption from having to send a request form and respond within the prescribed time frame will now have within 140 days of their financial year end to do so.

• Financial Reporting Requirements For Reverse Take-Overs

The requirements relating to filing financial statements after a reverse take-over have been modified with a view to ensuring that there is no gap in the financial record after the reverse take-over has been completed. Accordingly, unless the relevant financial statements for the reverse take-over acquirer have already been filed, the reporting issuer completing the reverse take-over must file:

• financial statements for all annual and interim periods ending before the date of the reverse take-over and after the date of the financial statements included in previous filings prepared in connection with the transaction (e.g. in the information circular or similar document, or a material change report); or
• financial statements before the date of the reverse take-over if no information circular or similar disclosure document was filed or if any such disclosure document did not include financial statements for the reverse take-over acquirer that would be required to be included in a prospectus.

A reporting issuer will not be required to provide comparative financial information for the reverse take-over acquirer for periods ending before the date of a reverse take-over if it is impracticable to do so, provided that the information that is available is presented, and provided that the notes to the interim financial statements expressly state that prior-period information has not been prepared.

• Business Acquisition Reports

The Business Acquisition Report (BAR) filing requirements will be streamlined with the adoption of several changes. For example, the requirement to file historical financial statements for significant acquisitions will be reduced in certain circumstances, and interim financial statements of an acquired business included in a BAR are no longer required to be reviewed (subject to the proviso that if the issuer later incorporates the BAR into a prospectus, the interim financial statements will have to be reviewed according to the prospectus disclosure requirements). Other changes permit an issuer to calculate the significance of an acquisition based on the issuer’s audited financial statements for the year before the issuer’s most recent financial year if it has not yet been required to file, and has not filed, its audited financial statements for its most recent year.

A further key change is that a BAR will no longer be required for reverse take-overs in certain circumstances. Instead, issuers must provide disclosure about the reverse take-over in an information circular or material change report, or file financial statements as required under s.4.10 of NI 51-102 (which, as mentioned above, is targeted at ensuring that there is a seamless continuation of the financial record after a reverse take-over).

Under the Amendments, BARs may now incorporate disclosure by reference to another document, and are themselves no longer required to be incorporated by reference into the AIF. The timing requirements for filing a BAR will also be relaxed slightly if the most recently completed financial year of the acquired business ended forty-five days or less prior to the date of the acquisition.

• Annual Information Form

Information may still be incorporated in the AIF by reference to another document, but the underlying referenced document (or portion) must be filed with the AIF unless it has already been filed under SEDAR. This filing requirement now also extends to documents incorporated by reference into the referenced document.

Bankruptcy and similar procedures proposed for the current financial year will now need to be disclosed in an issuer’s AIF, as must (for income trusts) stability ratings that an issuer requests (i.e. not unsolicited ratings).

As mentioned above, BARs will no longer be required to be incorporated by reference into the AIF, with disclosure of significant acquisitions in the AIF now limited to a brief summary of the acquisition and a statement as to whether a BAR has been filed.

• Material Change Reporting

The Amendments include a requirement to provide disclosure for restructuring transactions if the issuer has an interest in the resulting entity. Apart from the usual suspects (a take-over, amalgamation, merger, arrangement or reorganization), the definition of "restructuring transaction" includes a transaction (or series of transactions) involving a reporting issuer acquiring assets and issuing securities resulting in:

• new securityholders owning or controlling more than 50 % of the reporting issuer’s outstanding voting securities, and
• a new control person or company, or new control group (being persons, companies or groups who are able to materially affect the control of the reporting issuer or who hold more than 20 % of the outstanding voting securities, unless there is clear evidence that such a holding does not materially affect the control of the reporting issuer).

CP 51-102 indicates that "new securityholders" includes those who did not hold any of the reporting issuer’s securities before the restructuring transaction, and existing securityholders who have increased their previous holdings to exceed 50 % of the outstanding voting securities.

Subdivisions, consolidations or other transactions that do not alter a securityholder’s proportionate interest in the issuer or the issuer’s proportionate interest in its assets are excluded from the definition of "restructuring transaction," and there is no material change reporting requirement if the issuer sends an information circular in respect of the transaction to all securityholders or files a prospectus or take-over bid circular.

Disclosure of such a restructuring transaction is required for each entity resulting from the transaction, but this information may be incorporated by reference to another document.

• Information Circular

The existing executive compensation disclosure requirements in the information circular will be amended so that an issuer will only be required to disclose the information required by Form 51-102F6 if the information circular is being sent in respect of an annual general meeting, a meeting at which directors will be elected, or a meeting at which executive compensation will be voted on.

Equity compensation plan information will now only need to be disclosed in the information circular if the meeting is an AGM or a meeting at which directors are being elected, or a meeting at which a vote involving executive compensation or the issuing of securities is contemplated. Similarly, indebtedness of directors and executive officers under securities purchase and other programs will now only need to be disclosed in the information circular if it is being sent in connection with an AGM or a meeting at which directors are to be elected, or a meeting at which a vote relating to executive compensation will be taken.

Further, disclosure will now be required in the information circular of any securities law related penalties or sanctions imposed on any proposed director by a court or a regulatory body, or any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable securityholder in deciding whether to elect a director. This mirrors the same disclosure requirement in the AIF.

• Statement Of Executive Compensation

Management information circular disclosure requirements with respect to executive compensation will also be expanded. If the issuer’s executive management is employed or retained by an external management company (e.g. as was the case in the Hollinger situation, and as applies to certain externally managed income trusts and closed-end investment trusts) and there is an understanding, arrangement or agreement for the provision of executive management services to the issuer, the issuer must disclose any compensation payable (by the issuer or the external management company) to any person employed or retained by the external management company who is acting as an executive officer or director of the issuer.

• Exemptions For Exchangeable Share And Credit Support Issuers

Both the exemption for exchangeable share issuers and the credit support issuer exemption will also be amended as follows:

• If the parent issuer is both a Canadian reporting issuer and an SEC issuer, it will have to comply with Canadian laws for the exchangeable share/credit support issuer to rely on the exemption;
• Exchangeable share and credit support issuers will be permitted to issue securities under the short-term debt exemption in NI 45-106 – Prospectus and Registration Exemptions;
• The parent issuer will be permitted to rely on the insider reporting exemption if it holds designated exchangeable securities, provided it does not trade those securities.

In addition, specifically with respect to the credit support issuer exemption, the concept of alternative credit support from NI 44-101 – Short Form Prospectus Distributions will be added to the credit support issuer exemption in NI 51-102 and the exemption will be expanded to permit designated credit support securities to be convertible debt or convertible preferred shares that are convertible into securities of the credit supporter.

• Further Changes

Further changes introduced by the Amendments include the following:

• An issuer will now only have to file an amendment to previously filed constating documents, securityholders’ rights plans, securityholder or voting trust agreements or similar if that amendment is material;
• Revisions to the proxy requirements mean that a person or company only has to file a copy of any information circular, form of proxy or similar document it sent in connection with a meeting, not all materials it has sent;
• The requirement to issue a news release giving notice of a restatement of information in a filed document will now only apply if the issuer restates financial information for comparative periods in financial statements for reasons other than retroactive application of a change in accounting standards or policies, and if the information in the re-filed document differs materially from the information originally filed.

Provided all ministerial approvals are obtained, the Amendments are expected to come into force on December 29, 2006. This means that the Amendments will be in force and be required to be incorporated in continuous disclosure documents prepared and filed in 2007.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.