Canada: Capital Markets Report - March 2015

Covering the period February 1 - 28, 2015

FROM THE REGULATORS

NEWS AND NOTICES

CSA Provides Guidance on Disclosure Requirements of Medical Marijuana Businesses

By: Justin Dick, Jessica Lee and Kyle Simpson

Guidance would be relevant to any issuer that is changing its business as this notice provides an example of the level of disclosure the regulators would expect.

On February 23, 2015, on behalf of the Canadian Securities Administrators (the "CSA"), staff from the British Columbia Securities Commission, the Alberta Securities Commission, the Ontario Securities Commission and the Autorité des marchés financiers (the "Staff") released Staff Notice 51-342 Staff Review of Issuers Entering Into Medical Marijuana Business Opportunities (the "Notice"). The Notice is the result of the Staff's review of certain reporting issuers that had publicly announced their intention to enter into Canada's medical marijuana industry and whether they were providing sufficient and balanced disclosure related to their change in industry.

The Staff found deficient disclosure on the part of a majority of the issuers reviewed, prompting them to require the issuance of clarifying disclosure. The Staff found that disclosure was often unbalanced and overly promotional, in a manner that emphasized the benefits of the medical marijuana industry but failed to address the risks, costs and time required before an issuer can begin licensed operations.

Other common disclosure deficiencies outlined in the Notice include:

1. lack of clear discussion regarding the issuer's stage of entry into the medical marijuana field;
2. lack of any discussion of Health Canada's medical marijuana licensing requirements;
3. failure to acknowledge that the issuer will not be able to grow or sell medical marijuana without a licence from Health Canada; and
4. no discussion of any approvals that were obtained or may be required before the issuer may proceed with its proposed business plans.

CSA Provides Update on an Alternative Funds Framework for Investment Funds

By: Justin Dick, Jessica Lee and Kyle Simpson

On February 12, 2015, the CSA released an update on their planned alternative funds framework for investment funds (the "Alternative Funds Proposal"). The update is part of a broader effort by the CSA to modernize investment fund product regulation.

The Alternative Funds Proposal relates to a class of publicly offered investment funds that wish to invest in assets or use investment strategies that are not permitted under National Instrument 81-102.

The Alternative Funds Proposal was first published for comment in March 2013. According to the CSA, the comment period generated significant discussion from stakeholders, with topics including:

1. attributes of an alternative investment fund (in particular, the criteria for differentiating a mutual fund and a non-redeemable investment fund from an alternative investment fund),
2. naming conventions,
3. whether alternative investment funds should be permitted to borrow cash, and if permitted, limits on borrowing,
4. use and measurement of leverage,
5. short selling (in particular, concerns about cash cover requirements),
6. other investment restrictions, and
7. proficiency standards for representatives selling alternative funds.

The CSA plans to continue gathering feedback from stakeholders and aims to complete its consultations by mid-2015, after which proposed rule amendments implementing the Alternative Funds Proposal will be published for comment.

RULE AMENDMENTS

OSC Adopts Amendments to Fee Model

By: Justin Dick, Jessica Lee and Kyle Simpson

On February 5, 2015, the Ontario Securities Commission ("OSC") published final amendments to OSC Rules 13-502 Fees and 13-503 (Commodities Futures Act) Fees (the "Final Amendments") after having reviewed and considered comments received on the proposed amendments initially published in September 2014. The OSC also approved the rescission and replacement of Companion Policy 13-502CP Fees and Companion Policy 13-503 (Commodity Futures Act) Fees (the "Final CP Changes").

The Final Amendments are intended to provide a simplified and streamlined fee regime, introducing adjustments to ensure that the fees charged by the OSC are aligned more closely with the OSC's costs, and will allow market participants to calculate their participation fees based on their most recent fiscal year information (for registrants, the most recent fiscal year ending in the calendar year), as opposed to the previous model which required calculating fees based on historical information from a market participant's reference fiscal year. By allowing market participants to use the most recent fiscal year, participant fees will more closely track current market conditions and the participant's current fiscal situation, resulting in an increase or decrease in fees payable which more closely reflects the actual changes in the business conditions and performance of a participant.

A small number of new activity fees have also been introduced, primarily for purposes of achieving better matching of revenues to costs incurred for specific activities, for instance, in the case of takeover bid fees, and to improve the fairness and consistency of approach within the rule more generally. Various minor administrative changes have also been introduced in an effort to improve fairness and compliance, and to reduce regulatory burden in certain areas, for example, by reducing the collection of minor fees.

Subject to necessary approvals, the Final Amendments and the Final CP Changes are expected to come into force on April 6, 2015, and will be effective in time for participants to avoid increases in participation fee rates that were scheduled to come into effect under the existing rules.

PROPOSALS

OSC Proposes New Whistleblower Program

By: Justin Dick, Jessica Lee and Kyle Simpson

On February 3, 2015, the OSC released OSC Staff Consultation Paper 15-401, which proposes a framework for a new whistleblower program (the "Whistleblower Program") for reporting serious misconduct of Ontario securities law to the OSC. The Whistleblower Program is the first of its kind for securities regulators in Canada and is intended to identify possible breaches of securities law that may not otherwise come to the attention of the OSC. It is one of a number of OSC initiatives designed at resolving enforcement matters more quickly and effectively and is also aimed at motivating issuers and registrants to self-report any instances of misconduct.

Pursuant to the Whistleblower Program, an employee or individual with credible concerns would be eligible to receive a financial award of up to 15% of the total monetary sanctions (up to a total of $1.5 million), provided the information was provided voluntarily, was of high quality and was original in nature (i.e. that the OSC is not already aware of). The payment would be awarded upon the final resolution of certain significant administrative enforcement matters and only in instances where monetary sanctions or settlement payments exceed $1 million.

To ensure the success of the Whistleblower Program, the OSC intends to use all reasonable efforts to keep a whistleblower's identity confidential, subject to the following exceptions: (i) when disclosure is required to be made to a respondent in connection with certain administrative proceedings to permit such respondent to make a full answer and defence; (ii) when the relevant information is necessary to make the OSC's case against a respondent; and (iii) when the OSC provides such information to another regulatory authority or agency pursuant to the Securities Act (Ontario) (the "Act").

The OSC intends to request the addition of three provisions to the Act to protect whistleblowers from retaliation by employers. These provisions would (i) make it a violation of securities laws to retaliate against a whistleblower; (ii) provide whistleblowers with a civil right of action against an employer who violates the anti-retaliation provision; and (iii) render contractual provisions designed to silence a whistleblower unenforceable.

The OSC is seeking public comment from investors, market participants and the securities litigation bar until May 4, 2015 and intends to host a roundtable during the comment period in order to encourage further discussion. Details on the roundtable are expected to be announced by the OSC shortly.

New TSX Listing Requirements for Non-Corporate Issuers

By: Justin Dick, Jessica Lee and Kyle Simpson

On January 15, 2015, the Toronto Stock Exchange ("TSX") published for comment proposed amendments (the "Amendments") to the TSX Company Manual (the "Manual"). The Amendments are compiled in a new Part XI to the Manual and create listing requirements for non-corporate issuers such as exchange traded products ("ETPs"), closed-end funds and structured products. As a whole, the Amendments aim to clarify and codify these requirements for non-corporate issuers, which have developed on a largely ad hoc basis in recent years.

Among other topics, the Amendments set out minimum listing criteria for non-corporate issuers in three categories:

1. market capitalization,
2. structure and experience of management, and
3. net asset value calculation.

With respect to market capitalization, the Amendments will impose a $1 million minimum market capitalization for ETPs and structured products. For closed-end funds, the Amendments propose a minimum market capitalization of $20 million.

The Amendments also require that management of non-corporate issuers have "adequate and appropriate experience in the asset management industry, as determined by the TSX," along with having a CEO, a CFO, a secretary and an independent review committee.

The Amendments prescribe a minimum frequency for net asset value calculations, being daily for ETPs, and at least weekly for closed-end funds and structured products. The results of these calculations must be available on a publicly accessible website.

The Amendments also address requirements for the listing of additional securities and other ongoing listing requirements, including describing instances in which non-corporate issuers may be suspended or delisted from the TSX. The deadline for submitting comments to the TSX is March 16, 2015.

FROM THE COURTS

Contract Law: Maxam Opportunities Fund Limited Partnership v. 729171 Alberta Inc. (2015 BCSC 271)

By: Greg Hogan

Sophisticated parties held to the words of their bargain; making a credit facility "available" did not create an obligation on borrower to draw on the facility but was an option; parties could have used a "shall" to impose an obligation but did not; no implied term or collateral warranty to draw on facility; entire agreement provisions are high barriers to adding terms to agreements between commercial parties. Exclusivity for lender under a related term sheet read narrowly to apply only to a similar mezzanine debt arrangement; important to draft exclusivity to deal with result of another transaction and not just what it looks like.

In this action, the plaintiffs, the Maxam Opportunities Fund Limited Partnership and Maxam Opportunities Fund (International) Limited Partnership (collectively referred to as "Maxam") claimed that the defendant 893353 Alberta Inc. ("893") breached an agreement to borrow funds exclusively from Maxam when 893 borrowed funds from 729171 Alberta Inc. ("729"). The breach is asserted to have occurred under a credit agreement with Maxam, a collateral warranty between Maxam and 893 in relation to the provision of a bridge loan, or an exclusivity provision in a term sheet. The defendants asserted that there was no breach as there was no obligation to borrow funds from Maxam and that the scope of the exclusivity provision did not cover the transaction between 893 and 729. The credit agreement and term sheet were in respect of a mezzanine loan. The term sheet contained an exclusivity period during which 893 was not permitted to enter into any agreement, understanding or other arrangement with any person in respect of any "similar transaction." The credit agreement did not contain an exclusivity provision. The loan from 729 was short term and was not "mezzanine" in nature.

Interpretation of Written Agreement

The credit agreement stated that the "Credit Facility shall be made available." It contained no express wording requiring 893 to make a draw on the credit facility. Nevertheless, Maxam argued that based on the plain text of the agreement and the factual matrix that resulted in the credit agreement it was reasonable to conclude that 893 agreed to borrow money from Maxam and that it would be commercially absurd, both in law and on the facts, to interpret the credit agreement as an option for 893. Maxam argued that it would be absurd because it would have Maxam giving up the benefits of its exclusivity under the term sheet and Maxam committing to make available $25 million in financing but receiving (potentially) nothing in return.

The judge noted that:

• 893 and Maxam were sophisticated business entities,
• 893 and Maxam were represented by sophisticated business people and experienced solicitors,
• there was no imbalance in bargaining power - the parties were represented throughout by experienced solicitors,
• the transactions were highly structured, detailed and document intensive,
• the terms were negotiated and drafted with considerable care and attention was given to the significance of the overall transaction to the parties, and
• Maxam had in other circumstances in the course of the parties' dealings insisted on strict adherence by 893 to the terms of the applicable agreement.

As a result, he was of the opinion that Maxam viewed the relationship between it and 893 to be governed by a strict reading of the language in the documents. There was no express, mandatory obligation upon 893 stated anywhere and Justice Masuhara found no justification to read in an obligation on 893 to draw upon the credit facility. The absence of an express obligation upon 893 was particularly noteworthy, and even on considering the single recital to the credit agreement, the court could find no support for Maxam's interpretation. The credit agreement was thus found to oblige Maxam to make the credit facility "available" to 893, but 893 was not obliged to do anything, except in a certain instance, that did not arise. Nowhere in the credit agreement is the mandatory language of "shall request" used in relation to the $25 million provided through Maxam. The credit agreement was, in fact, an option.

Implied Term

Maxam argued that, in the alternative, there was an implied term requiring 893 to borrow. An implied term may be found based on the presumed intention of the parties where the implied term is necessary to give business efficacy to a contract or as a term which the parties would agree that they had obviously assumed. There is a presumption against adding an unexpressed term to a contract by implication unless: "(i) it is necessary to do so in order to give the contract business efficacy (this does not include a test of reasonableness for the contract); (ii) to correct an obvious oversight for which there is "no dispute" that the parties intended to include such a term in the contract (i.e., the implied term "goes without saying"); (iii) the term can be clearly and precisely formulated; and (iv) the term will not conflict or be inconsistent with an express term of the contract." In interpreting a commercial contract the exercise is to be conducted in accordance with business common sense so as to avoid a commercially absurd result. Resort to construing a term in a contract through the rule against absurdity occurs when an ambiguity exists. A seemingly unreasonable term is not determinative of absurdity, it must be beyond that. When there is no ambiguity, an interpretation that produces a "fair result" or a "sensible commercial result" is not determinative. Interpreting a plainly worded document in accordance with the parties' true intent is not hard, if it is presumed that the parties intended the legal consequences of their words. As there was no oversight or error asserted the judge did not find it necessary to imply a term to give business efficacy to the credit agreement. Characterization of the credit agreement as giving 893 an option was not absurd in his view. He also noted that there was an entire agreement provision that expressly excluded any prior understandings or agreements relating to the credit agreement.

Collateral Warranty

Maxam argued that it was induced to enter into the credit agreement by virtue of a collateral warranty that the credit facility would be drawn on to pay down 893's bridge loan. Justice Masuhara found the care and attention in drafting the documents and the absence of an express term obliging 893 to draw on the credit facility significantly weakened this argument. Further, even if there was a collateral warranty the entire agreement provision stated that the credit agreement "supercedes all prior understandings and agreements, whether written or oral, among the parties relating to the transactions provided herein." The Court noted that entire agreement provisions are routinely enforced, particularly in the case of commercial contracts, and no circumstances were shown by Maxam to not enforce in this case.

Exclusivity – Similar Transaction

As noted, the term sheet contained an exclusivity period during which 893 was not permitted to enter into any agreement, understanding or other arrangement with any person in respect of any "similar transaction." The loan that 893 actually obtained was not a mezzanine loan. It was short term, limited in security and did not have an equity component, while the credit facility had:

• a longer term,
• extensive security,
• equity-like participation, and
• significant controls over operations.

Maxam argued that "similar" does not mean "identical", which the court agreed with. However, the differences noted above led the court to conclude that the loan obtained by 893 from 729 was materially different and thus was not covered by the term sheet. This result was due to fact that the exclusivity provision was drafted so as to require that a competing arrangement would be assessed see if it was similar, rather than on the result of the a competing arrangement, which in this case was that 893 need not draw on the facility. An exclusivity provision could have been drafted that prohibited any arrangement that would result in 893 no longer needing access to the credit facility, but this was not done.

PUBLIC COMPANY ACTIVITY

Information and intelligence about what public companies are doing in the market.

Public Offerings - Launched February 1-28, 2015

Equity Offerings

Initial Public Offerings

Bought Deals

Marketed Deals

Rights Offerings

Debt Offerings

Bought Deals

Marketed Deals

WHAT WE'RE READING

CORPORATE FINANCE

Opinion: Stock Buybacks Are Killing the American Economy

Nick Hanauer, an entrepreneur, venture capitalist, billionaire and writer, makes a case in this article in The Atlantic that share repurchases by large companies – issuer bids under Canadian parlance – have drained money from the real economy and have inflated share prices and earnings per share, while providing no positive impact on the overall economy. He cites a paper, which calls shareholder value maximization "The World's Dumbest Idea," that attempts to show how share repurchases reduce business investment and increase inequality. Whether there is any reality to this claim is in dispute (e.g., here, and here), but the debate is a fascinating one. Our regulatory regime addresses fair treatment of shareholders but has little to say about the overall positive or negative impact of buyback for society. An interesting (if true) statistic noted in the article is that since the 1980s, public companies have spent more to buy shares back than they have received from new issues - "[s]hareholders aren't providing capital to the corporate sector, they're extracting it." The comments on this article are quite numerous (over 1200!) and provide some fascinating reading themselves.

WHAT WE'VE BEEN UP TO

RECENT TRANSACTIONS

We acted for The Intertain Group Limited in their bought-deal offering of 32,200,000 subscription receipts for aggregate gross proceeds of $483,000,000, which includes the full exercise by the underwriters of an over-allotment option. The Offering was completed through a syndicate of underwriters led by Canaccord Genuity Corp. Please click for more details.

We acted for Yamana Gold Inc. in its $300 million bought deal offering of common shares to a syndicate of underwriters led by Canaccord Genuity Corp. and National Bank Financial Inc. Please click for more details.

We acted for Sandstorm Gold Ltd. in its acquisition from IAMGOLD Corporation of a a 1% gross proceeds royalty over a property in Lac de Gras in the Northwest Territories, Canada, including a property constituting the Diavik Diamond Mine operated by Rio Tinto plc, for total consideration of US$52.5 million in cash and 3 million common share purchase warrants of Sandstorm. Please click for more details.

We acted for Aberdeen International Inc. in the negotiation of a settlement in a proxy contest whereby two dissident shareholders, Meson Capital Partners LLC and Nightscape Capital (U.K.) LLP, withdrew their request for a meeting of the shareholders of Aberdeen, withdrew the balance of their court application, and agreed to a five-year standstill. Please click for more details.

We acted for a syndicate of underwriters co-led by Cormark Securities Inc. and BMO Capital Markets, and including Clarus Securities Inc., Haywood Securities Inc., Raymond James Ltd. and RBC Capital Markets in Asanko Gold Inc.'s bought deal financing of 22,770,000 common shares for gross proceeds of approximately $46 million. Please click for more details.

We acted for a syndicate of agents led by Dundee Securities Ltd. and including Euro Pacific Canada Inc. in Imperus Technologies Corp.'s private placement financing of 70,644,500 subscription receipts for aggregate gross proceeds of approximately $25 million. Please click for more details.

We acted for a syndicate of underwriters led by National Bank Financial Inc. with a syndicate of underwriters that included GMP Securities L.P., Haywood Securities Inc., Raymond James Ltd., Clarus Securities Inc., Cormark Securities Inc., Laurentian Bank Securities Inc. and PI Financial Corp. in Grenville Strategic Royalty Corp.'s bought deal public offering of 19,828,300 common shares for gross proceeds of approximately $11.5 million. Please click for more detail.

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.