Canada: Ensuring Governance Oversight Of Shared Services And Management Services Agreements Among Affiliated Companies: Disclosure Obligations

This is Part II to January's update entitled, Ensuring Governance Oversight of Shared Services and Management Services Agreements Among Affiliated Companies, by Duncan Card and Barry Reiter.

Part I of this two-part update alerted directors, corporate officers, and corporate counsel to the need to ensure that management (shared) service agreements between affiliated companies are negotiated on a defensible basis, are priced fairly and contain adequate compliance oversight, supervision and remedial provisions. Part II now examines the legal and regulatory requirements for publicly-traded companies to disclose shared services agreements that are material to their business.

Part I of this update addressed the growing trend of affiliated companies to consolidate and centralize many of their common business, administrative, and operational "back office" functions by retaining one of their affiliated companies to provide those common services to it and other of their affiliates. In that Update, we examined the requirement of directors to ensure that all of their governance, compliance and oversight duties (that would previously have been discharged through direct internal management controls and authority) are fully enabled by the intercompany management services agreement that is entered into between the affiliates. Whenever any part of a company's business operation is provided by third parties (even affiliates) operating externally to that company's internal chain of corporate command, governance oversight and supervision concerning those operations must be achieved through the service contract.

There are numerous statutory and regulatory circumstances in which management service contracts among affiliates may come under governance scrutiny. For example, these contracts may be scrutinized whenever consumer pricing within a regulated industry is related to a vendor's internal business costs (such as utilities), or in a situation where a regulator determines that regulated operations are being "outsourced" to an unregulated affiliate (such as pursuant to the OSFI Outsourcing Guidelines).

Disclosure Obligations

For publicly traded companies, service contracts may also trigger disclosure obligations.1 At the outset, reporting issuers should consider whether, as a result of such a service contract, they will need to file a material change report pursuant to s. 75(2) of the Ontario Securities Act (OSA). Section 1(1) of the OSA defines a material change as:

[A] change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer.

National Instrument 51-102 of the Canadian Securities Administrators (NI 51-102) stipulates that reporting issuers must file certain material contracts on SEDAR. NI 51-102 defines a "material contract" as a contract that a reporting issuer or any of its subsidiaries has entered into "that is material to the issuer". In the context of the filing of a material contract, it seems likely that materiality will be determined by using the "reasonable investor standard". According to this standard, a contract would be material if there is a substantial likelihood that a reasonable investor would consider the statement to be important in making an investment decision. In Re Biovail,2 the Commission looked at the treatment of the term "material". Although the decision rendered in that case was in the context of whether a press release issued by Biovail was materially misleading, the decision is noteworthy for the Commission determining that the reasonable investor standard was the appropriate standard of materiality. Further support for the reasonable investor standard comes from the Supreme Court of Canada's decision in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.3 In determining what is meant by the term "material" in British Columbia's Real Estate Act, as well as in the law more generally, the Court also used the reasonable investor standard.

Intercompany management service arrangements must be assessed on a graduated and proportional scale when considering whether or not they are material contracts. There may be companies who retain affiliates to provide non-essential "back-office" services with little material relevance to investor value or risk. At the other end of the continuum, there may be companies who have outsourced vital and essential management, compliance, financial and commercial services to affiliates, with a tremendous potential risk of detrimental impact on investor value should the service affiliate fail to perform as contemplated. Although the assessment of materiality is not a science, and involves a contextual assessment, it is very likely that the importance of the management services to the reporting issuer (and the reporting issuer's dependence on them), the significance or materiality of service fees payable (as a matter of transfer pricing), and/or the potential detrimental impact on the reputation or business affairs of the reporting issuer if the management services fail, are all reasonable factors when determining the materiality of service contracts.

Assuming that affiliated companies enter into management service arrangements that are material to their business and operations, Part 12.2 of NI 51-102 requires reporting issuers who are party to these contracts to file the material contracts on SEDAR in the following circumstances:

(i) unless previously filed, a reporting issuer must file a material contract that has been entered into within the last financial year (or before the last financial year if that material contract is still in effect); but,

(ii) as a general rule, material contracts that are entered into in "the ordinary course of business" are not required to be filed unless they constitute any one of six types of "ordinary course" material contracts – one of which includes "an external management or external administration agreement".

The CSA's Companion Policy for NI 51-102 provides the following guidance concerning what contracts constitute management service agreements:

External management and external administration agreements include agreements between the reporting issuer and a third party, the reporting issuer's parent entity, or an affiliate of the reporting issuer, under which the latter provides management or other administrative services to the reporting issuer.

Compliance Facts

Although reporting issuers in Canada are required to file the "material" management service contracts in the ordinary course of business with affiliated companies entered into, in practice, filing of this sort is rare. However, the Canadian Securities Administrators' Staff Notices 51-329 and 51-332 indicated that disclosure of material contracts will receive greater attention in reviews. Reporting issuers should consider being more vigilant in meeting their filing obligations. In October 2010, the Ontario Securities Commission's Staff Notice 51-706 addressed the connection between the fundamentals of corporate governance best practices and existing disclosure requirements as follows:

In addition to initiatives regarding shareholder rights, we continued our focus on disclosure surrounding the practices of those charged with "representing" shareholder interests, such as the board of directors. As part of our corporate sustainability reporting initiative, we reviewed the existing disclosure requirements regarding corporate governance matters during fiscal 2010. We heard feedback from stakeholders consulted that the existing disclosure requirements are adequate. However, they noted that compliance by reporting issuers with these requirements could be enhanced.

Further Regulatory Interest

Issuers should expect that the issue of material service contracts will be of increasing interest to regulators. Multilateral Instrument 61-101 (MI 61-101) deals with a reporting issuer's obligations when it engages in related party transactions. It is arguable that, in certain circumstances, service contracts may be included in MI 61-101's definition of a related party transaction. It is worth noting that the first draft of MI 61-101 explicitly included "service contracts" in this definition (although it was later removed). Reporting issuers should determine whether their service contracts will be caught by the definition in MI 61-101. If so, issuers may have to fulfill the requisite obligations of obtaining a formal valuation of the transaction, and obtaining minority approval for it.

The Ontario Securities Commission also announced recently that it is considering changes to its regulation concerning related party transactions. Under the proposal, where an exemption would have applied in the past, now, a special committee of a company's board of directors would be required to evaluate the proposed transaction and either recommend it, or at least deem it fair to minority shareholders, and then have it put to a vote without a recommendation.

Action Steps – Now

As we described in Part I of this update, as scrutiny over corporate governance continues to focus on the ability of directors and executive officers to effectively supervise and oversee the conduct of material business processes, operations and administration, it will become increasingly important to ensure that each management services contract between affiliated companies stands as an effective, practical and adequate implementation of governance oversight. Publicly traded companies are well advised to bring their material intercompany management service agreements up to "governance scratch" before any disclosure obligations are required to be met, and the ensuing transparency becomes embarrassing.


1 For the purposes of the update we have assumed that the affiliate is not a wholly-owned subsidiary.

2 Biovail Corp. (Re), 2010 LNONOSC 729.

3 Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., [2011] S.C.J. No. 23.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.