On February 25, 2016, the Canadian Securities Administrators (CSA) published final amendments to the rules governing early warning reporting in Canada. These changes are expected to come into force on May 9, 2016.
Canadian securities laws currently impose “early warning” obligations relating to the acquisition of securities of public companies. When a purchaser acquires beneficial ownership or control or direction over 10% or more of a class of voting or equity securities, the purchaser is required to issue and file a press release and file an early warning report with the securities regulators. Further press releases and reports are required upon the acquisition of each additional 2% or more of the outstanding securities or a change in a material fact contained in an earlier report. The CSA has indicated that the changes to the early warning reporting regime have been introduced to enhance the integrity and quality of the early warning system.
The following is a brief overview of the changes to the early warning reporting regime and a look at their implications.
10% reporting threshold
The CSA had previously entertained the notion that the early warning threshold be reduced to 5%, consistent with the requirements under U.S. law. However, the CSA ultimately decided against this reduction and has maintained the 10% threshold.
Disclosure for decreases
The final amendments require disclosure where the ownership of, or control or direction over, securities owned by the securityholder decreases by 2% or more or falls below the 10% reporting threshold.
Alternative monthly reporting (“AMR”) regime
The AMR regime will be unavailable to eligible institutional investors soliciting proxies from securityholders in certain instances.
The CSA has stated equity equivalent derivatives will not be included in determining whether a securityholder has crossed the early warning threshold. However, the CSA has provided further guidance on specific types of derivative arrangements that have the potential to trigger the threshold under the early warning system.
Exemption for lenders
Arrangements whereby securities are transferred temporarily between parties for a fee are to be included in the determination of whether the early warning threshold has been met. An exemption is available for lenders that engage in “prescribed securities lending arrangements”, which includes circumstances where the borrower is required to pay the lender the amount of any dividends or interest payments paid on the securities during the term of the loan and must grant the lender an unrestricted right to recall all of the securities under the lending arrangement prior to the record date for a meeting of securityholders at which the borrowed securities may be voted or, alternatively, require the borrower to vote the securities at the direction of the lender.
In a change from the original proposal, a new exemption for short selling borrowers has also been introduced. The exemption is subject to certain conditions, including that the borrowed securities are disposed of within three business days and that the borrower does not intend to vote and does not vote the securities during the term of the loan.
There are more detailed disclosure obligations on securityholders that must be filed in their early warning report. These new obligations require additional disclosure about the material terms of related financial instruments, as well as any securities lending arrangement and other agreements, arrangements or understandings involving the securities. The final amendments also require more detailed disclosure regarding investors’ intentions in acquiring securities and the purpose of the transactions.
The CSA is now requiring early warning reports to be certified and signed.
Timing for filing
The CSA has clarified that the early warning news release must be filed promptly and no later than the opening of trading on the business day following the acquisition of the securities and the early warning report must be filed promptly and no later than two business days following such acquisition.
Implications of changes to regime
The CSA’s decision not to reduce the early warning threshold to 5%, and to not include equity equivalent derivatives in determining whether a securityholder has crossed the threshold, will be welcomed by institutional investors that argued a lower threshold would reduce access to capital for small and mid-cap companies and reduce liquidity as investors restricted investments to avoid triggering the lower threshold.
While the early warning threshold will remain at 10%, the published changes should result in more detailed and frequent disclosure by investors and allow for a better understanding of the investors’ economic and voting interests in the issuer.
In summary, the final published amendments reflect a decision by the CSA to opt for incremental changes to the early warning reporting regime, rather than the sweeping overhaul that was hinted at in earlier proposed amendments.
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 have any questions about this bulletin or if you would like further information about these changes, please contact the authors.