The Canadian Securities Administrators ("CSA") have published for comment proposed amendments to the early warning reporting regime in Canada, including to Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids, National Instrument 62-103 Early Warning System and Related Take-Over Bid and Insider Reporting Issues and National Policy 62-203 Take-Over Bids and Issuer Bids. Comments on the proposed amendments are due June 12, 2013. In Ontario, it is anticipated that corresponding amendments will be proposed to be made to the Securities Act (Ontario) and Ontario Securities Commission Rule 62-504 Take-Over Bids and Issuer Bids.
The objective of the proposed amendments is to provide greater transparency about significant holdings of issuers' securities by:
- reducing the early warning reporting threshold to 5%;
- requiring disclosure of both increases and decreases in ownership of at least 2%;
- proposing that certain equity derivative positions be included within the early warning calculation; and
- enhancing the content of the disclosure in the early warning disclosure to be filed.
One of the key changes proposed by the CSA is to reduce the early warning reporting threshold to 5% from the current 10%.
The reality of increasing shareholder activism, the ability of a shareholder holding 5% to requisition a shareholders' meeting and the possibility for a shareholder at the 5% level to influence control of an issuer, are, according to the CSA, some of the reasons why the early warning disclosure requirements should recognize that the accumulation of securities at the 5% threshold is relevant. The CSA also believes that a lower early warning reporting threshold will enhance market transparency by providing market participants with more information about the significant holders of an issuer's securities.
Although the CSA is retaining the current 2% threshold for reporting further acquisitions, it is proposing to also specifically require disclosure of decreases in ownership of at least 2%. The CSA regards both increases and decreases in ownership to be of interest to the market (and therefore disclosable). Decreases in ownership to less than 5% would also need to be disclosed under the proposed amendments.
Equity Equivalent Derivatives
The use of sophisticated investment arrangements, in which the economic interest of an investor may not be reflected in actual ownership, or the economic interest of an investor may be decoupled from the voting rights held by the investor, has led to regulatory difficulties. The CSA has expressed concern that hidden ownership strategies and "empty voting" can significantly undermine the early warning regime and other disclosure requirements that are based on beneficial ownership and control or direction. In order to ensure that investors' positions are fully disclosed, the proposed amendments require an investor to include "equity equivalent derivatives" when calculating whether the early warning reporting threshold has been reached.
According to the CSA, the term "equity equivalent derivatives" is intended to capture certain equity derivatives such as total return swaps, contracts for difference, and other derivatives that provide a notional long position that substantially replicates the economic consequences of ownership.
Under the proposed amendments, if an investor enters into an equity equivalent derivative that results in it having an economic position in an issuer that is equivalent to or greater than a 5% ownership position, the investor would be subject to the early warning requirements, regardless of whether the investor's direct holdings in the securities of the issuer is less than 5%.
The CSA is proposing to amend the disclosure requirements in order to address concerns by market participants that the disclosure included under the current regime is inadequate and to improve reporting in the face of the growing use of derivatives. Under the proposed amendments, an investor subject to the early warning requirements must ensure that its early warning news releases and reports provide more detailed disclosure about:
- the purpose of the acquisition or disposition and any plans or future intentions which the investor may have;
- the acquiror's actual economic interest in an issuer, as well as its voting interests (in the case of securities lending arrangements); and
- any related financial instruments and other arrangements with respect to the securities of the issuer into which the investor has entered.
Changes to Alternative Monthly Reporting Regime
The CSA are not proposing comprehensive reforms to the alternative monthly reporting regime for eligible institutional investors. Those may come later. However, some of the proposed amendments will apply to an eligible institutional investor reporting under the alternative monthly reporting regime. In addition, the proposed amendments will make the alternative monthly reporting regime unavailable for eligible institutional investors who solicit, or intend to solicit, proxies from security holders of a reporting issuer on matters relating to the election of directors of the reporting issuer or a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of the reporting issuer.
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