On December 17, 2012, the Toronto Stock Exchange (the "TSX") and the TSX Venture Exchange (the "TSXV" and together with the TSX, the "Exchanges") released a joint consultation paper in connection with the review of the listing requirements applicable to emerging market issuers (the "Consultation Paper"). The Consultation Paper is a response to the Ontario Securities Commission's Emerging Markets Issuer Review (Staff Notice 51-719) which raised concerns with the listing approval process for emerging market issuers.
The Consultation Paper defines emerging market issuers as those with a significant connection to an emerging market jurisdiction, being any jurisdiction outside of Canada, the United States, Western Europe, Australia and New Zealand. The Consultation Paper has a significant impact on the exploration and mining industry given the large and growing number of projects located in emerging markets. The purpose of the Consultation Paper is to (i) identify the risks with emerging market issuers, (ii) present potential new listing requirements for emerging market issuers and (iii) solicit comments from market participants on matters relating to emerging market issuers including the proposed new listing requirements. The Consultation Paper and the trend towards stronger listing requirements for emerging market issuers will lead to better safeguards and greater transparency for investors which should help prevent cases such as Bre-X and Sino-Forest in the future.
Risks Associated with Emerging Market Issuers
Given the recent trend towards globalization and the increased focus on new and emerging markets (especially in China, Africa and South America), the Exchanges have outlined certain risks that may disproportionally affect emerging market issuers. These risks were identified through a review of emerging market issuers which included consultations with market participants such as the Canadian Securities Administrators, the Canadian Public Accounting Board and the Investment Industry Regulatory Organization of Canada. The Consultation Paper provides that emerging market issuers may have members of management with limited knowledge of Canadian securities law requirements and stock exchange policies which may indicate an increased risk of insufficient corporate governance standards and inadequate compliance with continuous and timely disclosure obligations. It also provides that the management, board and committees of emerging market issuers may face difficulties in carrying out their duties in cases where they are not all able to communicate in a common language. Further, the Consultation Paper describes how an emerging market issuer may carry increased risk relating to proper financial reporting and internal controls given differences in business practices and banking systems and considering the possible lack of expertise of its auditors, chief financial officer and audit committee members. Finally, the Consultation Paper notes that emerging market issuers have a higher risk in demonstrating title to its key assets and the ability to validly operate its business due to specific requirements placed on foreign companies operating in emerging markets. Title issues can become even more complicated if a foreign jurisdiction requires the issuer to hold its assets indirectly through a foreign-domiciled entity by way of a contractual arrangement or otherwise. These non-conventional corporate structures can invite risks to ownership of the issuer's assets, depending on the laws and political climate in the particular jurisdiction.
Questions for Public Consultation from the TSX
The TSX plans to use this consultation process in order to determine the necessity to strengthen its listing requirements for emerging market issuers so that the risks relating to these issuers can be mitigated in the future. The Consultation Paper focuses on the following principal areas for public comment and consideration as they relate to an emerging market issuer applying for listing on the TSX:
- What factors should be used to determine what constitutes an "emerging market issuer"?
- Should there be a minimum level of knowledge and experience required of management (in particular the chief financial officer), the board and audit committee members with respect to the emerging market jurisdiction?
- Should there be a minimum level of knowledge and experience required of the auditors with respect to the emerging market jurisdiction?
- Should the Exchanges require additional comfort from management and/or auditors with respect to the emerging market issuer's internal controls?
- Should there be an expanded view of "related party transactions"?
- Should emerging market issuers with non-conventional corporate structures be denied listing or undergo additional scrutiny such as a legal opinion to support the validity of the corporate structure?
- Should sponsorship be required in all cases, whether or not the emerging market issuer is eligible for an exemption from sponsorship?
Proposed TSXV Appendix 2B – Listing of Emerging Market Issuers
The TSXV has included in the Consultation Paper a draft policy titled Appendix 2B – Listing of Emerging Market Issuers ("Appendix 2B") which outlines new listing requirements for emerging market issuers. It defines an "emerging market issuer" as one with its principal business operations or operating assets located in an emerging market jurisdiction. Certain exemptions from the proposed requirements in Appendix 2B are available for a mining and oil and gas issuer whose majority of senior officers or board members have not been resident in an emerging market jurisdiction for the majority of the past 10 years prior to the listing application. The TSXV has asked for comment from market participants on Appendix 2B and has also posed questions relating to its proposed new listing policy. If implemented, Appendix 2B would impact all new listings on the TSXV, however, the TSXV may (and likely would) also apply these new listing requirements to any transaction that will result in a listed issuer becoming an emerging market issuer, such as in the case of a reverse-takeover or qualifying transaction. Appendix 2B includes the following key new requirements for emerging market issuers applying for listing on the TSXV:
- The proposed chief executive officer and chief financial officer and collectively, the board, must have Canadian public company knowledge/experience.
- In the event that some or all of the issuer's senior officers and board members are not fluent in either English or French and the primary language of the relevant emerging market jurisdiction, the issuer must show how the language barrier will be overcome. The TSXV may require that the issuer develop a formal communication plan.
- The TSXV will require enhanced requirements for the proposed chief financial officer, such as (i) a strong understanding of the business environment in the emerging market jurisdiction and (ii) the ability to design and apply effective internal controls over financial reporting relating to all transactions in the emerging market jurisdiction. Further, the issuer will be required to confirm the frequency with which the proposed chief financial officer will travel to the emerging market jurisdiction to fully discharge his or her duties. These requirements will be enforced at the time of listing and on an on-going basis.
- Every member of the audit committee must be independent and at least one member must have (i) Canadian financial reporting skills and (ii) experience with audit engagements for public companies. Currently, the TSXV requires that only a majority of audit committee members be independent.
- The TSXV will require the issuer to adopt a written policy specific to "Related Party Transactions" and transactions with non-arms length parties that addresses independent director approval procedures and compliance with securities law and regulatory requirements.
- Auditors for the issuer must be pre-cleared by the TSXV and must demonstrate sufficient expertise in the emerging market jurisdiction. This also applies to any change of auditors that may occur post-listing.
- Auditors are required to perform reviews of the issuer's interim financial statements for each interim period in the two years following listing.
- The issuer's internal controls must be reviewed and evaluated by its auditors prior to listing and the issuer must confirm in writing that its internal controls are sufficient for its financial reporting. For the first two fiscal years after listing, the issuer will be required to file the full chief executive officer and chief financial officer certifications under National Instrument 52-109 – Certification of Disclosure in Issuer's Annual and Interim Filings which includes disclosure relating to internal controls. Generally, these requirements will not be applicable to emerging market issuers whose business operations are not revenue generating.
- The issuer will need to justify any non-conventional corporate structure, and the TSXV may require a legal opinion on its validity. The TSXV may deny listing if it considers that the issuer's corporate structure is unnecessary.
- A legal opinion will generally be required to confirm title of principal assets and properties and that the issuer holds the required permits, licences and other approvals to carry out its operations in the emerging market jurisdiction. A corporate opinion will generally be required to confirm the issuer's ownership of any direct or indirect affiliated entities which own the principal assets and properties.
- General exemptions from sponsorship will not be available in cases where the issuer is effecting an initial public offering or a brokered financing. The TSXV will require an enhanced sponsor report addressing listing matters specific to emerging market issuers.
The release of the Consultation Paper signals a major shift in listing requirements for emerging market issuers. It is important to note that the TSXV has already begun imposing some of the requirements set out in Appendix 2B and it is a matter of time until the Exchanges formally implement new and more onerous listing requirements for emerging market issuers. It is important for those involved in the potential listing of an emerging market issuer to contact their legal advisors for guidance on the significance and applicability of the proposed listing requirements provided in the Consultation Paper.
A copy of the Consultation Paper containing the full list of questions posed by the Exchanges to market participants including the proposed Appendix 2B can be found on the Exchanges' website. The Exchanges have requested submission of comments from market participants by February 28, 2013.
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.