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Friday, August 11, 2017

Read online or download the full update here.

On July 27, 2017, staff of the securities regulatory authorities in each of Ontario, Quebec, Alberta, Manitoba and New Brunswick (collectively, “Staff”) published Multilateral CSA Staff Notice 61-302 – Staff Review and Commentary on Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (the “Notice”). The Notice discusses Staff’s views on transactions subject to the requirements of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”) which often give rise to material conflict of interest concerns, focusing on the role of boards of directors and special committees as well as enhanced disclosure in respect of those types of transactions.

Staff’s Real-Time Review of MI 61-101 Transactions

The Notice sets out that Staff apply a broad and purposive interpretation to the requirements of MI 61-101, emphasizing its underlying policy rationale that all security holders should be treated in a manner that is fair and that is perceived to be fair when dealing with “material conflict of interest transactions.” In the Notice, “material conflict of interest transactions” is used to refer to insider bids, issuer bids, business combinations and related party transactions that give rise to substantive concerns as to the protection of minority security holders.

Staff review material conflict of interest transactions on a real-time basis, generally upon the filing of the disclosure document for the transaction, in order to assess compliance with the requirements of MI 61-101 and to determine whether a transaction raises potential public interest concerns. Staff endeavour to review material conflict of interest transactions prior to security holder approval, and if non-compliance with MI 61-101 is found, Staff may seek remedies such as corrective disclosure on the part of the issuer, orders under securities legislation or even enforcement action in certain circumstances.

Boards of Directors and Special Committees

The Notice discusses Staff’s views regarding the role of the board of directors and/or special committee in negotiating, reviewing and approving or recommending material conflict of interest transactions and appropriately managing conflicts of interests that arise in such transactions. Staff are of the view that the use of a special committee of independent directors is advisable in all material conflict of interest transactions, even though it is only mandated by MI 61-101 in the case of insider bids.

The Notice contains certain of Staff’s recommendations for the formation, role and mandate of special committees, including the following:

  • Formation and Composition. The special committee should be formed in a timely fashion prior to the negotiation of a particular transaction and be comprised of independent directors (as defined in MI 61-101). Non-independent persons should not be present at or participate in the decision-making deliberations of the special committee.

  • Mandate. Staff expect that special committees be given a robust mandate with the ability to:

i.  negotiate or supervise the negotiation of the proposed transaction (rather than simply reviewing and considering the transaction);

ii.  consider alternatives to the proposed transaction (including maintaining the status quo);

iii.  make a recommendation regarding the proposed transaction; and

iv.  hire their own independent legal and financial advisors.

Specifically, Staff may be concerned by mandates that limit the role of the special committee to reviewing a proposal developed by management or simply deciding whether a proposed transaction should be put to security holders for a vote.

  • Role and Process. Special committees must ensure that the interests of minority security holders are fairly considered in the negotiation of material conflict of interest transactions. Staff will look for special committees to maintain accurate records and be free from coercive conduct on the part of interested parties.

  • Fairness Opinions. Fairness opinions are not required to be obtained by special committees under MI 61-101, but it is the responsibility of the board of directors and a special committee to determine whether a fairness opinion is necessary. Special committees should also be careful not to substitute the results of a fairness opinion for its own judgment as to whether a transaction is in the best interests of the issuer and its minority security holders. 

  • Valuations. Special committees must consider whether previous financial work product constitutes a prior valuation or material information that needs to be disclosed, and to what extent that work product is relevant to the committee’s recommendation.

Enhanced Disclosure

MI 61-101 also includes requirements for enhanced disclosure surrounding material conflict of interest transactions, which are intended to address the asymmetry of information that may exist when minority security holders are asked to consider and approve, or tender into, such a transaction. Staff’s recommendations for enhanced disclosure relating to material conflict of interest transactions include the following:

  • Disclosure Standards. Insiders and issuers are expected to comply fully with the “spirit and intent” of MI 61-101 to ensure that minority security holders receive the information necessary to make an informed decision regarding the transaction.

  • Content. The disclosure document should contain a thorough discussion of:

i.  the board of directors’ and/or special committee’s review and approval process;

ii.  the reasoning and analysis of the board of directors and/or special committee;

iiii.  the views of the board of directors and/or special committee as to the desirability or fairness of the transaction, including any dissenting views of directors and any analysis provided by advisors;

iv.  reasonably available alternatives to the transaction (including the option to maintain the status quo); and

v.  the pros and cons of the transaction.

  • Recommendation. A recommendation by the board of directors and special committee in the context of a material conflict of interest transaction should address the interests of minority security holders and not be limited to whether the transaction is in the best interests of the issuer. In the rare circumstances where no recommendation is provided to security holders, Staff believe there should be a high level of disclosure such that minority security holders are provided with substantially the same information and analysis that the special committee received in considering the proposed transaction.
  • Fairness Opinion. If a fairness opinion is obtained, the disclosure document should:

i.  disclose the compensation arrangement with the financial advisor;

ii.  explain how the board and/or special committee took into account the compensation arrangement with the financial advisor when considering the advice provided;

iii.  disclose any other relevant relationship or arrangement between the financial advisor and the issuer or an interested party;

iv.  provide a clear summary of the methodology, information and analysis underlying the opinion; and

v.  explain the relevance of the fairness opinion to the board of directors and special committee in coming to the determination to recommend the transaction.

Interestingly, the Notice does not contain any requirement or recommendation that an advisor providing a fairness opinion be compensated using a fixed fee arrangement, nor does it contain a requirement to disclose the amount of an advisor’s fees – two of the main holdings of the Court of Appeal of Yukon in its decision in InterOil. It will also be interesting to monitor whether Staff’s views will prompt Canadian issuers and their financial advisors to trend towards significantly more detailed fairness opinions as are customary in the U.S.

  • Formal Valuation. The disclosure document should contain a summary or the entirety of any formal valuation.
  • Minority Security Holder Approval. All parties that are not properly part of the minority must be excluded from the vote of minority security holders.


The Notice provides important insight into Staff’s views regarding material conflict of interest transactions, some of which go beyond the explicit requirements of MI 61-101. Boards of directors of public companies should ensure that they review the recommendations for special committees and enhanced disclosure when dealing with potential material conflict of interest transactions in order to ensure that security holders are provided with sufficient information to make informed decisions and conflicts of interests are appropriately addressed.

If you have any questions with respect to the matters discussed above, please contact Troy Pocaluyko by email at or Rebecca Cochrane by email at or any other member of our Corporate Governance practice group.

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.