In a move that could limit the options of potential acquirors
and activist investors, while significantly increasing the paper
burden for institutional investors and mutual funds, the Canadian
Securities Administrators have proposed a significant expansion to
the early warning obligations for investors in securities of
Canadian public issuers. The regulators aim to provide greater
transparency and address concerns regarding hidden ownership and
The key changes proposed include:
Decreasing the threshold for reporting from 10% to 5% of the
outstanding securities of a class.
Equity derivative positions that are substantially equivalent
to ownership and securities lending arrangements will be included
in determining the securities owned or controlled.
An eligible institutional investor that solicits, or intends to
solicit, proxies from the security holders of a reporting issuer
regarding the election of directors or a significant reorganization
or transaction will be disqualified from using the alternative
monthly reporting system.
Reporting will be specifically required for subsequent
decreases of 2% or more in holdings, in addition to the current
requirements for disclosure of 2% increases or a change in a
material fact contained in an earlier report.
Disclosure will be required where holdings decrease to less
The disclosure requirements for early warning and alternative
monthly reports will be significantly expanded and additional
The reduced threshold that applies when the reporting issuer is
subject to a take-over bid will be eliminated, since the 5%
threshold will apply generally.
The reduction in the reporting threshold to 5% of a class of
securities of a reporting issuer will significantly increase the
disclosure required under the early warning system. Since the
reporting threshold will now be lower than the portfolio
concentration limit for mutual funds, the number of investors
required to report positions will likely increase significantly. In
particular, it is relatively common for investors active in the
Canadian resource sector to hold positions in excess of 5% for
The rationale for the increased reporting goes beyond signaling
a potential take-over bid and includes the potential to influence
the reporting issuer or the outcome of a vote of security holders,
such as by activist investors, and address concerns regarding
hidden ownership and empty voting.
HIDDEN OWNERSHIP AND EMPTY VOTING
The new concept of an "equity equivalent derivative",
is defined broadly as "a derivative which is referenced to or
derived from a voting or equity security of an issuer and which
provides the holder, directly or indirectly, with an economic
interest that is substantially equivalent to the economic interest
associated with beneficial ownership of the security."
Interests in equity equivalent derivatives, such as total return
swaps and contracts for difference, will be treated as if the
underlying securities were directly owned or controlled. However,
the treatment of other derivatives and instruments will depend on
the interpretation of their economic equivalence to a long position
in the securities. The current requirements that deem securities
that may be acquired within 60 days to be beneficially owned will
also need to be considered. In addition, investors who also exceed
the insider reporting threshold of 10% based on voting interests,
will need to comply with the requirement to report positions in
related financial instruments related to securities under the
insider reporting requirements or as a condition to the insider
reporting exemption for eligible institutional investors under
National Instrument 62-103 Early Warning System and Related
Take-Over Bid and Insider Reporting Issues.
SECURITIES LENDING ARRANGEMENTS
The commentary provided by the CSA in the notice makes it clear
that they consider conventional securities lending arrangement to
be subject to the current early warning requirements, since such
arrangements generally involve the transfer of the securities.
However, the proposals include an exemption for reporting by a
lender of a "specified securities lending arrangement,"
that provides the lender has the right to recall the securities
prior to a record date for any meeting of security holders or
direct the manner in which the securities will be voted. The
borrower under such an arrangement will still be required to
include the securities in determining whether the reporting
threshold is exceeded.
Comments on the proposals are due by June 12, 2013. The CSA has
also included several questions regarding the proposals and the
early warning system generally in the notice and request for
comment, which is available here.1
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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