Canada: Canadian Securities Laws - Overview

Last Updated: February 25 2017

Introduction

This Practice Guide provides a general overview of certain Canadian securities and other laws which may be relevant in the context of Merger and Acquisition transactions.

Securities Regulation in Canada

Provincial Regulation. There is currently no Canadian national federal securities legislation or national securities regulator and, instead, each Canadian province and territory has its own securities laws and its own securities regulator. In practice however, in respect of most (but not all) significant issues, requirements of various jurisdictions are generally fairly uniform. But there remain some significant differences.  Accordingly, in any proposed transaction it is necessary to determine the jurisdictions where the parties (including Target Company shareholders) reside or are located, or where the transaction can be considered to be occurring, and consider the applicable rules of each relevant jurisdiction.

Harmonization. Securities legislation in Canada is largely harmonized through the use of “national”or “multilateral” instruments implemented in the separate jurisdictions.  In addition, most provinces/ territories have adopted a ‘principal regulator’ or ‘passport’ system under which many aspects of securities law (e.g., review of prospectuses, oversight of continuous disclosure obligations for reporting issuers[1], and grant of discretionary exemptive relief) are effectively regulated by a single regulator, or the securities regulator in Ontario, and one other regulator.

Scope of Securities Regulation.  The scope of Canadian provincial/r territorial securities laws is very broad and extends to matters beyond public offering or issuance of securities. In particular, these laws generally apply to all issuances and transfers of securities within or to persons within a jurisdiction. In several provinces, distributions of securities by an issuer based in the province are subject to that province’s securities laws, even if the securities are only issued to persons outside the province. This is the case not only for transactions involving securities of “public” companies, or reporting issuers, but also other issuers.  However, privately held companies or private issuers can often rely on exemptions, subject to specified conditions.

Regulatory Vetting or Review Process. Take-over bid circulars (see the “Canadian Take-Over Bid Rules - Overview” Practice Guides), even in respect of securities exchange take-over bids where securities are to be issued to shareholders of the Target Company, are not generally subject to vetting, clearance, review or by securities regulators. Similarly, acquisition agreements in relation to statutory business combination transactions (see “Statutory Business Combination Transactions - Overview” Practice Guide) are also generally not subject to such vetting or review by securities regulators (whether or not securities of the Acquiror are being issued). Regulators may selectively review take-over bid circulars or information circulars in relation to a business combination (e.g., to monitor compliance with applicable disclosure or other requirements). This may, for example, be initiated as a result of objections made to regulators by competing prospective acquirors, or in the case of a hostile take-over bid, the Target Company. As described in the “Statutory Business Combination Transactions - Overview” Practice Guide, statutory acquisitions by way of a statutory “arrangement” are subject to approval by the court. In addition, for arrangements under the Canada Business Corporations Act (CBCA), the “Director” under that Act reviews court application documents to some extent.

Stock Exchange Rules. In addition to applicable securities laws, companies or other entities with securities listed on a Canadian stock exchange, such as the Toronto Stock Exchange or TSX Venture Exchange, are subject to the rules and regulations of the applicable exchange. Such rules include requirements for shareholder approval of certain transactions (including certain share issuances) that may otherwise not require approval under corporate or securities laws.

Canadian Corporate Legislation

Jurisdictions. Canadian corporations can be incorporated under the CBCA or under the corporate legislation of a province. The governing corporate legislation regulates the requirements for statutory business combination transactions, including amalgamations and arrangements, as well as compulsory acquisitions that are permitted under such legislation following a take-over bid pursuant to which an Acquiror acquires at least 90% of the shares of a Target Company(excluding shares already held). Corporate legislation does not generally otherwise regulate take-over bids.

Corporate Law Regulation of Statutory Transactions. For Target Companies governed by the CBCA, the draft shareholder meeting materials and court application documents in respect of arrangement transactions must be submitted to the “Director” for review.

See the “Statutory Business Combination Transactions - Overview” Practice Guide for a further discussion of these matters.

Reporting Issuers

Definition. Certain Canadian securities laws are applicable only to, or in relation to securities of, a “reporting issuer”. The definition of reporting issuer encompasses, among other things, issuers that have filed and obtained a receipt for a prospectus or have securities that have at any time been listed on a Canadian stock exchange. In addition, an issuer can become a reporting issuer by filing and issuing securities under a securities exchange take-over bid circular in relation to the acquisition of securities of a reporting issuer; or exchanging its securities with another issuer, or the security holders of another issuer, in connection with an amalgamation, merger, reorganization, arrangement or similar transaction, if one of the parties to the transaction was a reporting issuer. Further, pursuant to Multilateral Instrument 51-105 adopted by most Canadian provinces/territories, an issuer that is an OTC issuer may become a reporting issuer in various circumstances. These may include (i) an issuer that is an OTC issuer distributing a security to a Canadian resident, or (ii) an issuer that is not an OTC issuer which distributes a security in Canada and thereafter subsequently is assigned a ticker symbol for use on a U.S. over- the- counter market.

Effect of Status. Canadian securities laws impose continuous and timely disclosure obligations, and proxy solicitation and information circular requirements, on reporting issuers. In certain industries (e.g., mining and oil and gas industries) reporting issuers are subject to additional specific disclosure requirements. In addition, there are insider reporting requirements and early warning reporting requirements that apply to insiders or persons that acquire securities of reporting issuers. Further, certain resale restrictions imposed on securities distributed in reliance upon prospectus exemptions only permit resale if the issuer of the securities is a reporting issuer.  Some other requirements, however, including take-over bid requirements (other than early warning reporting requirements), are not dependent upon the issuer being a reporting issuer.

Dealer and Advisor Registration Requirements

Any person that is, in a Canadian province/territory, engaged in or holding itself out as engaging in,  the business of trading in securities, as principal or agent, or advising others regarding trading in securities, must be registered as a dealer or adviser, as applicable, subject to potential reliance on exemptions from such requirements.

Prospectus Requirements

Qualification of Distributions of Securities. The issuance by an issuer (whether public or private) of securities in any province/territory, and certain other trades in securities (e.g., by a holder that holds a sufficient number of securities so as to be a control person), must be made pursuant to a “prospectus” that is filed with the securities regulator in such jurisdiction, with a “receipt” issued (where the prospectus is vetted and reviewed by the regulator prior to issuance of the receipt), or be made in reliance on a prospectus exemption. A prospectus containing  full, true and plain disclosure regarding the securities being offered and the issuer and its business must be provided to each prospective investor. A prospectus qualifies trades in securities, not the securities, and must be current at the time a distribution is made.

Securities Exchange Offers. Canadian prospectus requirements apply in any case where securities are being issued or distributed in Canada. . This includes the issuance of securities pursuant to a securities exchange take-over bid or issuer bid (even if such bid may be exempt from take-over bid or issuer bid requirements) or in a business combination merger and acquisition transaction pursuant to which securities of an Acquiror (or other entity) are issued in exchange for Target Company shares. Such issuances are almost always made in reliance upon prospectus exemptions, but it is important to consider and confirm that an exemption is available.

Prospectus Exemptions

Exemptions. There are a number of exemptions from the prospectus requirement relevant to merger and acquisition transactions.

Distributions In Connection With a Take-Over Bid There is an exemption for distributions of securities made in connection with a take-over bid (e.g., securities of an Acquiror issued as consideration for Target Company shares). (Discussed further in the “Canadian Take-Over Bid Rules - Overview” Practice Guides).

Distributions In Connection With Certain Business Combinations. There is also an exemption for distributions of securities that are made in connection with certain business combinations (e.g., securities of an Acquirer issued under an  arrangement as consideration for Target Company shares). (Discussed further in the “Statutory Business Combination Transactions - Overview” Practice Guide.)

Private Placements. Private placement offerings of securities are very common. They are most often made in reliance upon the accredited investor prospectus exemption. Other commonly relied upon exemptions are the “family, friends and business associates” exemption, and the “minimum amount investment” exemption for securities with an acquisition cost of not less than $150,000 paid in cash at the time of distribution. Private issuers may distribute securities on an exempt basis to accredited investors, and to other persons that do not constitute the “public”.

Resale Restrictions

Hold Period Resale Restrictions. Securities acquired under certain prospectus exemptions, including private placement exemptions, are subject to a restricted period resale restriction pursuant to which, among other conditions, the issuer must be and have been a reporting issuer in a Canadian province/territory for the four months immediately preceding the trade with at least four months having elapsed from the distribution date. In addition, there are requirements that certificates representing such securities carry a legend that refers to the restricted period.

Seasoning Period Resale Restrictions. Securities acquired under certain other prospectus exemptions, including the take-over bid, issuer bid, business combination and reorganization exemptions, are subject to a “seasoning period”. This requires, among other conditions, that the issuer of the securities be and have been a reporting issuer in a Canadian province for the four months immediately preceding the trade, but does not include a four month restricted period from the distribution date.

Resale Pursuant to Exemptions. In general, securities that are subject to the foregoing resale restrictions can be resold in reliance on prospectus exemptions (e.g., to another accredited investor).

OTC Issuer Resale Restrictions. If an issuer is or becomes an OTC issuer, Multilateral Instrument 51-105 imposes resale restrictions, and securities legending requirements, that are more onerous than otherwise applicable resale restrictions, and securities can only be resold in compliance with more restrictive conditions.

Canadian Take-Over Bid Rules

Take-Over Bid. Canadian securities laws regulate take-over bids where there is an offer to acquire outstanding voting securities or equity securities of a class of an issuer if the securities subject to the bid, together with the offeror’s securities, constitute at least 20% of the securities of the class. These requirements are summarized in the “Canadian Take-Over Bid Rules - Overview” Practice Guides.

Insider Reporting and Trading and Early Warning Reporting Requirements

Insider Reporting Requirements. Canadian securities laws impose requirements on insiders (including persons that own or exercise control or direction over more than 10% of voting securities, and directors and officers of such persons) of an issuer; to file insider reports disclosing their ownership or control or trading in all securities of the issuer, or related financial instruments, as well as certain equity monetization or derivative transactions. These requirements include the concept of “post conversion beneficial ownership” which, for purposes of determining whether the 10% threshold has been reached, require inclusion of securities (including unissued securities, on a partially diluted basis) which are convertible into securities within 60 days and rights or obligations permitting or requiring the person, whether or not on conditions, to acquire beneficial ownership of securities. These requirements are applicable to insiders who are Canadian, as well as non-residents.

Insider Trading and Tipping. Canadian securities laws prohibit insiders of reporting issuers, and others who are in a special relationship and have access to undisclosed material information, trading in securities while in possession of such information or  ‘tipping’ others regarding such information.

Early Warning Reporting Requirements. Canadian securities laws also impose “early warning” reporting requirements requiring press release notification and filing of a public report on SEDAR in the event of an acquisition of equity securities, voting securities, or convertible securities (on an as-converted basis) representing 10% (reduced to 5% when a take-over bid has already been made) of a class of securities of a reporting issuer. There are further requirements to report 2% increases and decreases in securities owned, controlled or directed, and material changes in reports previously filed. Early warning reporting requirements are applicable to Canadian and non-resident offerors. Finally, until a 20% threshold is reached, the rules impose a moratorium on additional purchases until required reports are filed.

Aggregation. The thresholds applicable under the take-over bid rules and early warning requirements require aggregation and inclusion of securities that are owned, controlled or directed by certain affiliates, associates, joint actors and other persons. In addition, insider reporting requirements include certain “deemed ownership” provisions pursuant to which insiders are deemed to own securities in various circumstances.

Application. Insider reporting requirements and early warning reporting requirements only apply in respect of securities of reporting issuers.

Related Party and Other Transactions

Additional Ontario and Québec Requirements. Ontario and Québec have (in Multilateral Instrument 61-101)  adopted additional rules governing certain take-over bids, issuer bids, business combinations and related party transactions. Where applicable, unless exemptions apply, these rules may impose a requirement to prepare a formal valuation of the subject matter of a transaction (e.g. Target Company  shares) by an independent valuator under the supervision of the Target Company’s board of directors (or an independent special committee) and “majority of minority” shareholder approval (in general, shareholders unrelated to the Acquiror and who otherwise receive no additional benefit from or have no special interest in the transaction), and requirements for inclusion of prescribed information in an information circular where such minority approval is required.

Application. These requirements only apply to certain reporting issuers carrying out business combination or related party transactions.

TSX Venture Exchange Listed Companies. Although the rules referred to above have only been adopted in Ontario and Québec, under the rules of the TSX Venture Exchange, these requirements are generally applicable to all companies listed on the TSXV.

Foreign Investment Laws

Reviewable Transactions. A business combination transaction may be subject to review, or require approval, under the Investment Canada Act if, among other things, a “non-Canadian” (which can include a Canadian incorporated entity ultimately controlled outside of Canada) acquires control (which is presumed for this purpose at one-third for corporations) of a “Canadian Entity” or “Canadian Business”, and the “enterprise value[2], or the asset value (or book value),[3] exceeds specified thresholds.

Review Threshold. In most cases, for 2016, the threshold for review is CDN $600 million[4], for acquisitions by a person or entity from countries that are members of the World Trade Organization (a “WTO Investor”) or by another “non-Canadian” where the Canadian business is controlled by a WTO investor. The threshold for a WTO investor that is state-owned is CDN $375 million. The threshold is much lower (CDN $5 million) if neither the Acquiror nor target are controlled in a WTO member country (other than Canada) or if the target operates in certain sensitive industries such are uranium production, financial services, or transportation.

Indirect Acquisition of Control. The Investment Canada Act requirements are also applicable to an indirect acquisition of control of a Canadian business. This may occur, for example, through the acquisition of a foreign parent corporation of a corporation incorporated in Canada, if the Canadian corporation has assets valued at $50 million or more or represents more than 50% of the assets of the acquired group of entities and the Canadian business has assets valued at $5 million or more. This only applies for indirect acquisitions that are not by or from a WTO investor. (There is no review of indirect acquisitions by or from a WTO investor, regardless of the value of Canadian assets.)

Other Reviewable Transactions. Review may also be required under the Investment Canada Act if the transaction involves the acquisition of control of a Canadian business (regardless of the value of the assets) or the establishment of a new Canadian business in an area concerning Canada’s “cultural heritage or national identity” (this includes book publishing, magazine publishing, film production and distribution, television and radio and music production and distribution). Also, the Canadian government has authority to conduct a national security review of a foreign investment, where it determines whether the investment could be injurious to national security. The timeline for completing such a review is 200 days.

Disclosure Requirements. A non-Canadian investor, despite not exceeding the review thresholds, must nonetheless provide notification to the Canadian government of an investment by completing and filing the prescribed form within 30 days of closing of the investment.

Competition Act

Pre-Merger Notification Requirements. A merger” transaction (acquisition of control over a significant interest in the whole or a part of a business) may be subject to pre-merger notification requirements under the Competition Act (Canada), if both (i) the parties to the transaction and affiliates have combined assets in Canada or gross revenues from sales in, from and into Canada in excess of CDN $400 million in the aggregate and (ii) the target entity has assets in Canada or gross revenues from sales in and from Canada in excess of CDN $87 million.


[1] Certain terms used in this Practice Guide (in bold font) which are defined in applicable securities legislation, rules, regulations or other instruments have the meanings so defined, without the definition necessarily being included or summarized in this Practice Guide.

[2] The enterprise value applies to non-state owned enterprise WTO investors.

[3] The asset value thresholds apply to state owned enterprise WTO investors.

[4] This threshold will rise to CDN $800 million in 2017 and CDN $1 billion in 2019.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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