Becoming an executive officer of a publicly traded company brings on responsibilities with respect to compliance in a very complex and ever changing regulatory environment. A public company executive has to know how to navigate the obligations, restrictions and prohibitions under securities legislation and the regulations, notices, instruments and policies adopted thereunder, as well as stock exchange rules and governance best practices. It can be a daunting task just getting on top of the basics of securities law compliance. But it is a necessary exercise as any failure to comply with securities law can expose a company and/or its officers and/or directors to enforcement proceedings, prosecution and/or civil liability.
This booklet is meant to provide an overview of the Ontario securities law basics that an officer of a mining company listed on the Toronto Stock Exchange ("TSX") should know on a day to day basis. This document does not cover transactional aspects regulated by securities laws such as equity financings, take-over bids and mergers and acquisitions. Many securities laws, including those described in this document, are subject to nuances and exceptions. This document is intended to provide only a condensed overview, and is therefore limited in nature and should not be regarded in any way as containing legal advice.
2. CONTINUOUS DISCLOSURE AND RELATED LEGAL REQUIREMENTS
A company that is a "reporting issuer" (i.e., a public company) or the equivalent in a province or territory of Canada is subject to ongoing disclosure requirements under securities laws known as "continuous disclosure obligations."
Continuous disclosure obligations are divided in two main categories: (a) the timely dissemination of material information and (b) the mandatory periodic disclosure of financial and other information. It is very important for a public company executive in Canada to get a good grasp of these requirements which are outlined under National Instrument 51-102 – Continuous Disclosure Obligations ("NI 51-102").
2. 1 MATERIAL INFORMATION DISCLOSURE
2.1.1 News Release
A fundamental principle of securities law is the requirement on reporting issuers to disclose "material changes" in their affairs on a timely basis.
A "material change," where used in relation to the affairs of a reporting issuer, means 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 and includes a decision to implement such a change made by the board of directors of the issuer or by senior management of the issuer who believe that confirmation of the decision by the board of directors is probable.
When a material change occurs in the affairs of a reporting issuer, the reporting issuer is required to immediately issue a press release describing the change and, as soon as practicable (but no later than 10 days after the change), file with the securities commissions a material change report as prescribed by Form 51-102F3.
What can be a delicate exercise for public company executives is to make materiality determinations. In making materiality determinations, it is necessary to take into account a number of factors that cannot be captured in a simple bright-line standard or test, including the nature of the information itself, the volatility of the company's securities and prevailing market conditions.
Some guidance is provided by National Policy 51-201 – Disclosure Standards ("NP 51-201") in determining whether certain events or information could be considered material and therefore should be disclosed.1 The policy states that actual or proposed developments that are likely to give rise to material information and thus require prompt disclosure include, but are not limited to, the following types of events or information:
- changes in corporate structure– including changes in share ownership that may affect control of the company, major reorganizations, amalgamations or mergers, and take-over bids, issuer bids or insider bids;
- changes in capital structure– including the public or private sale of additional securities, planned repurchases or redemptions of securities, planned splits of common shares or offerings of warrants or rights to buy shares, a share consolidation, share exchange or stock dividend,changes in a company's dividend payment or policies, the possible initiation of a proxy fight, and material modifications to the rights of security holders;
- changes in financial results– including a significant increase or decrease in near-term earnings prospects, unexpected changes in the financial results for any period, shifts in financial circumstances such as cash flow reductions, major asset write-offs or write-downs, changes in the value or composition of the company's assets, and any material change in the company's accounting policy;
- changes in business and operations– including any development that affects the company's resources, technology, products or markets, a significant change in capital investment plans or corporate objectives, major labour disputes or disputes with major contractors or suppliers, significant new contracts, products, patents or services or significant losses of contracts or business, significant discoveries by resource companies, changes to the board of directors or executive management, the commencement of, or developments in, material legal proceedings or regulatory matters, waivers of corporate ethics and conduct rules for officers, directors and other key employees, any notice that reliance on a prior audit is no longer permissible, and the delisting of the company's securities or their movement from one quotation system or exchange to another;
- acquisitions and dispositions– including significant acquisitions or dispositions of assets, property or joint venture interests, and acquisitions of other companies, including take-over bids and mergers;
- changes in credit arrangements– including the borrowing or lending of a significant amount of money, any mortgaging or encumbering of the company's assets, defaults under debt obligations, agreements to restructure debt, or planned enforcement procedures by a bank or any other creditors, changes in rating agency decisions, and significant new credit arrangements.
Announcements of material changes should be factual and balanced. Unfavourable news must be disclosed just as promptly and completely as favourable news.
The TSX requires that all persons investing on the exchange have equal access to information that may affect investment decisions.2 Accordingly, the TSX has timely disclosure requirements that are in addition to applicable statutory requirements under securities laws discussed above. The TSX requires timely disclosure of "material information" of a listed company, which it defines as any information relating to the business and affairs of a company that results in or would reasonably be expected to result in a significant change in the market price or value of the company's listed securities. The term "material information" is considered by the TSX to be broader in scope than the term "material change" used in the Securities Act (Ontario) ("Act"). "Material information" also includes the disclosure of material facts that may not entail a material change.
According to securities law, a material fact is a fact that would reasonably be expected to have a significant effect on the market price or value of securities. A "material fact" unlike a "material change" is not confined to a change in business, operations or capital of the reporting issuer.
A TSX listed company is required to disclose "material information" immediately upon the information becoming known to management or, in the case of information previously known, when it becomes apparent that the information is material. The immediate disclosure of the information is required to ensure that the information is available to all investors promptly and to reduce the possibility of people acting on undisclosed information.
Trading on the TSX is occasionally affected by rumours and speculations surrounding a listed company. When market activity is unduly influenced by the existence of rumours or speculations, the TSX, through Market Surveillance (the Market Surveillance Department of the Investment Industry Regulatory Organization of Canada), may require an announcement by the listed company stating whether the rumours or speculations are factual or not. Disseminations by way of a press release are generally the most effective way to dispel rumours unduly influencing the market.
The overriding rule regarding disclosure is that significant announcements are required to be released immediately. While the TSX may permit certain press releases to be issued after the close of trading, the policy of immediate disclosure frequently requires press releases to be issued during trading hours, especially when an important corporate development has occurred.
The disclosure of "material information" may be delayed temporarily for reasons of corporate confidentiality where the immediate release of the information would be unduly detrimental to the interests of the listed company (e.g., it would prejudice the company's ability to pursue specific and limited objectives or to complete a transaction or series of transactions that are underway). Disclosure of the information is unduly detrimental to the company if the potential harm to the company or investors, reasonably considered, outweighs the undesirable consequences of delaying disclosure.
Regardless of when an announcement of "material information" is released, Market Surveillance must be advised of its contents and supplied with a copy in advance of its release. Market Surveillance must also be advised of the proposed method of dissemination. If an announcement will be made during trading hours, Market Surveillance must receive advance notice. Where an announcement is to be released after the TSX has closed, Market Surveillance staff should be advised of the announcement before trading opens on the next trading day.
2.1.2 Speaking with Analysts
Issuers should not selectively disclose significant data, particularly financial information such as earnings forecasts and sales, cash costs, all-in sustaining costs and profit figures, or material operational information such as new reserves, resources and production numbers to analysts, investors, media representatives and other market professionals rather than to the market as a whole. The issuer should not attempt to transform material information into non-material information by simply breaking the information into seemingly non-material pieces.3
An issuer should not selectively confirm that a financial estimate in an analyst's report is "on target" or "too high" or "too low," whether directly or indirectly through implied "guidance."4
An issuer must also consider, when confirming information that was previously made public, whether the selective confirmation itself communicates information above and beyond the initial forecast and whether the additional information is material. A materiality determination will depend in large measure on how much time has passed between the original statement and the subsequent confirmation, as well as the timing of the two statements relative to the end of the company's fiscal reporting period and any intervening events.
One recommendation for avoiding selective disclosure issues is to provide details concerning areas of interest to analysts within the issuer's regular periodic disclosure documents. Regular and timely public dissemination of qualitative and quantitative information can assist in ensuring that analyst expectations are in line with the issuer's own expectations.
Issuers should also avoid redistributing analyst reports and third-party newsletters and tip sheets to their employees or persons outside the company. If a company posts on its website or otherwise publishes the names of the analysts who cover the company and/or their recommendations, the issuer should similarly post or publish the names and/or recommendations of all analysts who cover the company.
Analysts, investors, investment dealers and other market professionals who receive material undisclosed information from a company are "tippees" (discussed below).5 There is no exception to the tipping provisions under securities legislation for selective disclosures made to analysts or other third parties under the cover of a confidentiality agreement.
Other forms of "earnings guidance" that are disclosed by issuers can also run afoul of the selective disclosure provisions. An issuer should have a reasonable basis for presenting "financial outlooks" and other voluntary disclosure presenting certain forecast information such as expected revenues, net income, earnings per share and cash costs that are disseminated through news releases or posted on an issuer's website and forward-looking statements should include appropriate statements of risks and other cautionary language.6
2.1.3 Insider Trading and Tipping
Securities law prohibits a person or company in a special relationship with a reporting issuer from purchasing or selling securities of the reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.7 In addition, securities law prohibits a reporting issuer and a person or company in a special relationship with a reporting issuer from informing, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed.
The filing of insider trading reports does not give licence to insiders to "trade" or "tip" with knowledge of undisclosed information.
Persons or companies in a "special relationship" with a reporting issuer include, but are not limited to, directors, officers or employees of the issuer and other insiders, affiliates or associates of the issuer.
Persons or companies in a "special relationship" with a reporting issuer consist of:
- insiders, affiliates or associates of (a) the reporting issuer, (b) a person or company that is proposing to make a take-over bid for the securities of the reporting issuer, or (c) a person or company proposing to become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its property;
- persons or companies engaged in or proposing to engage in any business or professional activity with or on behalf of the reporting issuer or with or on behalf of a person or company described in (i)(b) or (c);
- directors, officers or employees of the reporting issuer or any person or company described in (i)(b) or (c) or (ii);
- persons or companies that learn of a material fact or material change with respect to the reporting issuer while the person or company was a person or company described in (i), (ii) or (iii); or
- persons or companies that learn of a material fact or material change with respect to the reporting issuer from any other person or company described in (i), (ii), (iii), or (iv), including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship.
The Act also provides that every person or company in a special relationship with a reporting issuer who purchases or sells the securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is liable (in addition to other criminal and regulatory penalties) to compensate the seller or purchaser of the securities, as the case may be, for damages as a result of the trade.8
In addition, the Act provides that every reporting issuer, person or company in a special relationship with a reporting issuer and a person or company that proposes to make a take-over bid for the securities of a reporting issuer, to become a party to a reorganization, amalgamation, etc. or to acquire a substantial portion of the property of a reporting issuer who informs another person or company of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is liable (in addition to other criminal and regulatory penalties) to compensate for damages any person or company that thereafter sells securities of the reporting issuer to or purchases securities of the reporting issuer from the person or company that received the information.
The statutory defence available under the Act for these contraventions is that the person or company in the special relationship with the reporting issuer had reasonable grounds to believe that the material fact or material change had been generally disclosed or the material fact or change was known or ought reasonably to have been known to the seller or purchaser, as the case may be.
It is imperative that all officers, directors, employees and professional advisors of reporting issuers understand the necessity to: (a) keep undisclosed material information concerning the issuer confidential, (b) release any such information only to authorized individuals on a "need-to-know" basis and only in the necessary course of business (and emphasize the confidential nature of such information to the recipients thereof), and (c) refrain from buying or selling securities of the issuer during periods where material facts or material changes remain undisclosed.
2.1.4 Insider Reporting
Insider reporting is a reporting requirement of "insiders" being the persons or entities subject to such a requirement (directors, officers and 10% holders). The main purpose of this requirement is to track trading patterns to enforce breaches of the insider trading prohibitions.
The main insider reporting requirements and exemptions as well as those requirements for certain insiders of reporting issuers are set out in National Instrument 55-104.
The term "insider" is broadly defined in the applicable legislation and includes:
- a director or officer of a reporting issuer;
- a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer;
- a person or company that has,
- beneficial ownership of, or control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuer's outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, or
- a combination of beneficial ownership of, and control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuer's outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution,
- a reporting issuer that has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security;
- a person or company designated as an insider in an order made by the Commission in the public interest;
- a person or company that would reasonably be expected to have, in the ordinary course, access to material information about the business, operations, assets or revenue of the issuer.
One of the most critical definitions for the purposes of the insider reporting requirements is "reporting insider." It must be noted that to be a "reporting insider," you must first be an "insider." But only certain "insiders" fall within the definition of a "reporting insider."
Section 1.1(1) of NI 55-104 provides that "reporting insider" means an insider of a reporting issuer if the insider is
- the CEO, CFO or COO of the reporting issuer, of a significant shareholder of the reporting issuer or of a major subsidiary of the reporting issuer;
- a director of the reporting issuer, of a significant shareholder of the reporting issuer or of a major subsidiary of the reporting issuer;
- a person or company responsible for a principal business unit, division or function of the reporting issuer;
- a significant shareholder (i.e., a 10% holder) of the reporting issuer;
- a significant shareholder based on post-conversion beneficial ownership of the reporting issuer's securities and the CEO, CFO, COO and every director of the significant shareholder based on post-conversion beneficial ownership;
- a management company that provides significant management or administrative services to the reporting issuer or a major subsidiary of the reporting issuer, every director of the management company, every CEO, CFO and COO of the management company, and every significant shareholder of the management company;
- an individual performing functions similar to the functions performed by any of the insiders described in paragraphs (a) to (f);
- the reporting issuer itself, if it has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security; or
- any other insider that:
- in the ordinary course receives or has access to information as to material facts or material changes concerning the reporting issuer before the material facts or material changes are generally disclosed; and
- directly or indirectly exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer.
Basically, a "reporting insider" includes all of the directors and the CEO, CFO, COO of the reporting issuer, of its significant shareholders, of its major subsidiaries and of its management company. It also includes any person responsible for a principal business unit, division or function of the reporting issuer as well as a management company. The definition also captures the significant shareholders of the reporting issuer and its management company and those significant shareholders based on post-conversion beneficial ownership. Any other "insider" who falls within the "basket clause" as described in (i) above as having received or access to material undisclosed information AND significant power or influence over the reporting issuer is also included in the definition of "reporting insider."
All insiders who also fall within the definition of "reporting insider" must file insider reports.
Section 107(1) of the Act provides that an insider of a reporting issuer must file an initial insider report within 10 days of becoming an insider. This initial insider report must disclose all securities of the issuer which the insider "beneficially owned" or exercised control or direction over on the day he became an insider. The definition of "security" is very broad and includes an interest in a mining option agreement, a net profits interest, a net smelter returns interest, a stock option, warrant or a share subscription. All "securities" of the reporting issuer and "related financial instruments" held by the insider must be reported.
Section 107(2) of the Act, as modified by NI 55-104 provides that where an insider's direct or indirect beneficial ownership of, or control or direction over, securities of the reporting issuer changes from the latest insider report filed, he must file an updated insider report within 5 days after the date the change takes place.
There is no fee for filing an insider report, unless it is filed late. In such case, there is a fee of $50 per calendar day per issuer up to a maximum of $1,000 per issuer within any one year beginning on April 1st and ending on March 31st payable to the Ontario Securities Commission ("OSC").
An issuer is permitted to file on SEDI an "issuer grant report" in order to assist its insiders in reporting option grants. If the issuer files an issuer grant report, then the reporting insider subject to such report will be exempt from filing an insider report about the grant within the required time frame and instead may file an alternative report on an annual basis. This exemption is available for the acquisition or specified disposition of a security of the reporting issuer under a compensation arrangement if (a) the reporting issuer has previously disclosed the existence and material terms of the compensation arrangement in an information circular or other public document filed on SEDAR, (b) in the case of an acquisition of securities, the reporting issuer has previously filed in respect of the acquisition an issuer grant report on SEDI in accordance with section 6.3, and (c) the director or officer complies with the alternative reporting requirement in section 6.4 of NI 55-104.
The System for Electronic Disclosure by Insiders ("SEDI") is an internet based system for insider reporting. The SEDI website is located at www.sedi.ca. The aim of SEDI is to facilitate the filing of insider information by insiders and to provide easy access of this information to the public. The SEDI system is available at all times. To file information through the SEDI system, a person must first register as a SEDI user.
It should be noted that it is ultimately the insider's obligation to file and that prior to filing an Insider Report (defined below), the insider or the insider's agent must certify the information is true and complete in every respect. In the case of an agent, the certification is based on the agent's best knowledge, information and belief, but the insider is still responsible for ensuring that the information filed by the agent is true and complete.
Should you require any assistance in connection with the SEDI system, the help desk phone number is 1 800 219 5381.
1 s. 4.3 of NP 51-201.
2 s. 406, Part IV of the Toronto Stock Exchange Company Manual.
3 s. 5.1(4) of NP 51-201.
4 s. 5.2 of NP 51-201.
5 s. 5.4 of NP 51-201.
6 See s. 5.5 of NP 51-201 for details on earnings guidance.
7 See s. 76(1) of the Act.
8 s. 134 of the Act.
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.