Historically, reporting issuers have been required to file with the securities regulatory authorities material contracts when they file a prospectus and, since 2005, as part of their continuous disclosure obligations. If filed, the contract is publicly available on the Sedar website. A "material contract" of an issuer was "any contract that it or any of its subsidiaries is a party to, other than a contract entered into in the ordinary course of business, that is material to the issuer". Many reporting issuers took the position that a financing or credit agreement was in the ordinary course of business and therefore, even if it was material, it did not need to be filed.
Effective March 17, 2008, the requirements for the filing of documents in connection with prospectuses filed with Canadian securities regulators were changed in connection with a wholesale change to the prospectus rules, and the continuous reporting obligations were amended to be consistent. The filing obligation now includes certain specified types of material contracts, even if entered into in the ordinary course. The specified types of material contracts that would be relevant to a lender are "a financing or credit agreement with terms that have a direct correlation with anticipated cash distributions" and "a contract on which the issuer's business is substantially dependant". We understand that the former type was meant to capture certain credit agreements that income trusts might enter into to enable them to make regular distributions. With respect to the latter type of contract, the securities regulators have indicated that it includes a "financing or credit agreement providing a majority of the issuer's capital requirements for which alternative financing is not readily available at comparable terms".
The filing requirements contemplate that certain provisions of material contracts that are required to be filed may be omitted or marked to be unreadable if an executive officer of the issuer reasonably believes that disclosure of that provision would be seriously prejudicial to the interests of the issuer or would violate confidentiality provisions. However, provisions may not be omitted or marked to be unreadable if they relate to debt covenants and ratios in financing or credit agreements, events of default or other terms relating to the termination of the material contract or other terms necessary for understanding the impact of the material contract on the business of the issuer. If a provision is omitted or marked to be unreadable, the issuer must include a description of the type of information that has been omitted or marked to be unreadable. The requirement does not apply to contracts entered into before January 2002 if the issuer was a reporting issuer in at least one province or territory of Canada immediately before filing the prospectus.
We believe that the changes provide support for the view that credit agreements are often contracts that are entered into in the ordinary course of business. A vast majority of such contracts will continue to be exempt from the filing requirements since they would not "have a direct correlation with anticipated cash distributions" or be "a contract on which the issuer is substantially dependent". However, we recommend that any lender that is entering into a financing or credit agreement with a reporting issuer, or an entity that may become a reporting issuer, consider whether it wishes any of the provisions of the agreement to remain confidential. If so, it should add a term to the agreement providing for the confidentiality of such provisions, although this term cannot protect the confidentiality of those provisions which the securities regulators will not allow to be omitted or marked to be unreadable if the contract does have to be filed.
For an issuer that is not now a reporting issuer, the obligation to file a material contract would arise when it files a preliminary prospectus. For an existing reporting issuer, the requirement to file a material contract arises (a) at the time of filing a material change report if the entering into of the agreement constitutes a material change for the issuer, or (b) at the time of filing its annual information form, if one is required to be filed, or within 120 days after the issuer's most recently completed financial year otherwise.
Co-Editors:
Kendall E. Andersen -
kandersen@blgcanada.com
Howard S. Silverman -
hsilverman@blgcanada.com
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