Legal Updates

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Update

Tuesday, March 15, 2016

On February 25, 2016, the Canadian Securities Administrators (“CSA”) published CSA Notice of Amendments to Early Warning System and announced the adoption of amendments to Canada’s existing early warning reporting regime (the “Amendments”). The Amendments are meant to enhance the quality and integrity of the early warning regime by providing greater transparency about significant holdings of reporting issuers’ securities.

The Amendments will take effect on May 9, 2016, except in Ontario, where they will come into force on the later of (i) May 9, 2016, and (ii) the day on which certain sections of Schedule 18 of the Budget Measures Act, 2015 (Ontario) are proclaimed into force.

The early warning system rules applicable to all jurisdictions in Canada, except Ontario, are contained in Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids, National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (“NI 62-103”) and National Policy 62-203 Take-Over Bids and Issuer Bids (“NP 62-203”). In Ontario, substantively harmonized requirements for early warning reporting are contained in Part XX of the Securities Act (Ontario), Ontario Securities Commission Rule 62-504 Take-Over Bidsand Issuer Bids and NI 62-103.

Highlights of the Amendments

10% Reporting Threshold Unchanged

Under the current early warning regime, a purchaser who acquires beneficial ownership, control or direction over 10% or more of a class of voting or equity securities of a reporting issuer triggers early warning reporting obligations to promptly issue and file a news release and to file an early warning report (the “10% Threshold”). When the Amendments were originally proposed by the CSA in March 2013, the CSA proposed to reduce the 10% Threshold to a 5% threshold, mirroring the requirement under Schedule 13D of the United States Securities Exchange Act of 1934. However, following the comment period during which the CSA received feedback on the proposal from market participants, the CSA were persuaded to not lower the 10% Threshold. Accordingly, the Amendments in their final form leave the 10% Threshold unchanged. 

Reports of Decreases in Ownership

Currently, the early warning regime requires a securityholder to disclose decreases in ownership of securities of a reporting issuer only if the decrease represents a change in a material fact contained in the securityholder’s last filed early warning report. The Amendments will introduce the obligation to disclose all decreases in ownership of 2% or more, as well as a requirement to disclose a decrease that results in the securityholder’s ownership falling below the 10% Threshold.

Timing and Content of News Releases

The Amendments set out that news releases required by the early warning regime must be issued and filed no later than the opening of trading on the next business day following a relevant acquisition or disposition of securities. The Amendments also set out that news releases filed under the early warning system can be streamlined by referring to the related early warning report for a number of required details.

Timing and Content of Early Warning Reports

The timing requirements for early warning reports remain unchanged in the Amendments; reports are to be filed promptly and no later than 2 business days following the relevant acquisition or disposition of securities. However, the Amendments add to the disclosure currently required in early warning reports. Specifically, under the Amendments, early warning reports will now include disclosure about any future intention of the securityholder to acquire additional securities and descriptions of the material terms of any agreements between the securityholder and any other person with respect to the securities to which the report relates, including but not limited to the transfer or the voting of any of the securities. Early warning reports will now also require disclosure about the material terms of “related financial instruments” such as equity derivatives, securities lending arrangements and other agreements, arrangements or understandings that have the effect of altering, directly or indirectly, the securityholder’s economic exposure to the securities of the issuer to which the report relates. The Amendments further stipulate that early warning reports will need to be certified and signed by the relevant securityholder.

Alternative Monthly Reporting System (“AMRS”)

The AMRS allows eligible institutional investors to report ownership on a monthly basis, within 10 days of the end of the month, rather than the conventional early warning system’s “prompt” filing requirements. Under the current regime, eligible institutional investors are disqualified from relying on the AMRS if they make or intend to make a formal take-over bid, or propose or intend to propose a reorganization, amalgamation, merger, arrangement or similar business combination with respect to a reporting issuer that would result in the institutional investor having effective control of the issuer. Under the Amendments, eligible institutional investors will also be disqualified from relying on the AMRS if they engage in proxy solicitation in opposition to management in connection with director elections or corporate transactions.

Securities Lending

For lenders transferring or lending securities pursuant to a “specified securities lending arrangement”, the Amendments will now exempt such lenders from reporting loans (dispositions) in respect of securities lent or transferred. A “specified securities lending arrangement” includes one that gives the lender the unrestricted ability to recall all securities under the arrangement prior to the record date for a meeting of securityholders, or which requires the borrower to vote at the direction of the lender.

In addition, the Amendments include an exemption for borrowers engaged in short selling activities from including borrowed securities in their determinations of whether they have triggered an early warning reporting obligation. This exemption is subject to certain conditions, such as the requirement that the borrowed securities are disposed of by the borrower within 3 business days and that the borrower does not intend to vote and does not vote the relevant securities.

Derivatives

The CSA’s original proposal for the Amendments in March 2013 included “equity-equivalent derivatives” as part of those securities that could trigger early warning reporting requirements. However, the CSA have removed this requirement from the final form of the Amendments and instead have added guidance to NP 62-203 regarding how derivatives should be treated for the purposes of determining early warning reporting obligations. The guidance in NP 62-203 sets out that where an investor has the ability, formally or informally, to obtain the voting or equity securities or to direct the voting of securities held by any counterparties to the transaction, the investor may be deemed to have beneficial ownership, control or direction, over the referenced securities for the purposes of early warning reporting obligations.

Conclusion

The Amendments introduce incremental changes to the current early warning reporting regime, rather than a sweeping overhaul. However, the enhanced disclosure requirements provided in the Amendments nevertheless represent an important improvement to the transparency about significant holdings of reporting issuers’ securities.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

Authors

Rob Wortzman