Canadian securities regulators recently republished for comment proposed National Instrument 51-102 – Continuous Disclosure Obligations. This rule, first published for comment in June 2002, will establish a uniform set of continuous disclosure requirements across the country and harmonize the Canadian rules with those of the United States. Comments on the proposed rule must be submitted by August 19, 2003.
The rule will not apply to investment funds and most issuers of exchangeable shares, and the securities regulators are still considering the extent to which it should apply in credit support situations. Although the continuous disclosure obligations apply to non-Canadian issuers that are reporting issuers in Canada, many non-Canadian issuers will be exempt from the requirements. Non-Canadian issuers should refer to our client memo no. 2003-20T dated July 15, 2003, which discusses exemptions in proposed National Instrument 71-102 – Continuous Disclosure and Other Exemptions Relating to Foreign Issuers.
The major changes proposed to the existing continuous disclosure obligations of Canadian issuers are summarized below. Venture issuers will be subject to less stringent requirements or be exempted from some requirements altogether. A "venture issuer" is a reporting issuer that does not have securities listed on the TSX, the NYSE, the AMEX, the Pacific Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or a market outside of Canada and the United States.
Earlier Filing Deadlines for Financial Statements, MD&As and AIFs
Reporting issuers that are not venture issuers will be required to file their annual audited financial statements, annual MD&A and AIF within 90 days of the end of their financial year. These issuers will be required to file their interim financial statements and interim MD&A within 45 days of the end of the interim period. The filing deadlines for venture issuers will be 120 days for annual audited financial statements and MD&A and 60 days for interim financial statements and MD&A. Venture issuers will not be required to file an AIF. If the issuer files any of these documents in a foreign jurisdiction before these deadlines, the documents must be concurrently filed in Canada.
It is expected that the new deadlines will apply to documents for financial years beginning on or after January 1, 2004, at the earliest.
Disclosure of Auditor Review of Interim Financial Statements
There will continue to be no requirement for the auditor to review the interim financial statements. However, if the auditor has not reviewed the interim financial statements, the issuer will have to state this fact in the notes to the interim financial statements or in the interim MD&A. If the auditor has reviewed the interim financial statements and has expressed a qualified or adverse communication or denied any assurance, the written review report from the auditor will have to accompany the interim financial statements.
Approval of Interim Financial Statements and Annual and Interim MD&A
The interim financial statements will have to be reviewed by the audit committee and approved by the board of directors before they are filed. The board will not be permitted to delegate the approval function to the audit committee. Likewise, the annual and interim MD&A will have to be reviewed by the audit committee and approved by the board.
Delivery of Financial Statements and MD&A to Securityholders
Issuers will no longer be required to send each securityholder a copy of their financial statements and MD&A. Instead, issuers will be required to send registered and non-registered securityholders a request form each year that the securityholder may use to request copies of the annual and interim financial statements and MD&A. Non-registered securityholders who have declined to receive materials under NI54-101 – Communication With Beneficial Owners of Securities of a Reporting Issuer , need not be canvassed. If either the financial statements or MD&A are requested, both must be sent by the later of the filing deadline and 10 days of receipt of the request.
Issuers should be mindful of any corporate law requirements to deliver financial statements to registered shareholders. Generally, corporate statutes (including the CBCA and the OBCA) require registered shareholders to receive copies of the annual audited financial statements.
More Content and Plain Language in the AIF and Annual MD&A
More content will be added to the form of AIF and annual MD&A, and both documents will be required to be written in plain language.
The form of AIF will be revised to add certain disclosure that is currently in the prospectus form. These disclosure changes reflect the possibility that Canadian securities regulators will adopt an integrated disclosure system that would require the AIF to be a comprehensive disclosure document. Other disclosure enhancements include requirements to (a) describe any contracts (including ordinary course contracts) that the company depends on; (b) disclose the company’s social and environmental policies; (c) disclose whether any of the directors, executive officers, or significant shareholders of the issuer were, in the last 10 years, directors or executive officers of any entity at the time an event took place for which the entity was sanctioned, or within one year of an entity becoming insolvent (this information will also have to be disclosed in the proxy circular).
The annual MD&A form is also being revised to permit a more informed analysis of the issuer’s true financial picture. Information about liquidity and capital resources will be required, as will additional information about off-balance sheet arrangements and related party transactions. Issuers other than venture issuers will have to give more detailed disclosure of critical accounting estimates. Issuers will be required to discuss and analyze any changes in accounting policies, including those that are expected to be adopted in the future as well as those adopted during the year. Venture issuers that have had no significant revenue from operations in the prior two financial years will be required to disclose a breakdown of the material components of their expenditures. Forward-looking information presented in a prior MD&A will have to be updated if intervening events make that prior disclosure misleading.
Business Acquisition Reports
A new "business acquisition report" will have to be filed within 75 days of the completion of a significant acquisition (unless an information circular concerning the acquisition has been filed). This report will include a description of the business acquired, one or two year’s historical financial statements of the business acquired and pro forma financial information. An acquisition is significant if the assets or income from the continuing operations of the acquired business (or related businesses) exceed 20% of the issuer’s assets or income from continuing operations, or it the investment in and advances to the acquired business (or related businesses) exceed 20% of the assets of the issuer. The initial publication of the rule proposed that issuers present pro forma financial statements giving effect to significant dispositions. This proposal has been abandoned.
Additional Filing Requirements
Reporting issuers will be required to file a number of other documents or reports with the securities regulators, including:
- a notice informing the regulators that the issuer has either become or ceased to be a venture issuer;
- all news releases disclosing information about the issuer’s results of operations or financial condition for a financial year or interim period (these news releases will then be certain to be documents to which civil liability will attach once the Ontario Bill 198 amendments to the Securities Act (Ontario) are proclaimed into force); and
- certain material documents, such as constating documents, shareholder or voting trust agreements, shareholders’ rights plans and any other contracts (other than those entered into in the ordinary course of business) that materially affect the rights or obligations of securityholders.
In addition, reporting issuers other than venture issuers will be required to file a report with the securities regulators containing a brief description of each matter voted upon by the shareholders and the results of the vote. If the vote was conducted by ballot, the report must also include the number or percentage of votes cast for and against the resolution as well as the number or percentage of votes withheld.
Generally, Canadian early warning rules require that a news release be issued and that an early warning report be filed when a person acquires more than 10% of a reporting issuer’s securities. NI71- 102 – Continuous Disclosure and Other Exemptions Relating to Foreign Issuers exempts from these early warning requirements the acquisition of securities of many non-Canadian companies that are subject to the requirements of the SEC or 15 other designated foreign jurisdictions, if the comparable requirements of the SEC or the designated foreign jurisdiction are complied with, and if copies of the reports that are filed with the SEC or foreign securities regulators are also filed in Canada. This exemption will be available to Canadian issuers that acquire securities of these foreign issuers.
This article is a general discussion of certain legal and related developments and should not be relied upon as legal advice.