On October 10, 2014, the Canadian Securities Administrators (CSA) provided an update on the status of proposed amendments to Canada's early warning reporting (EWR) system first published in March 2013.1 After extensive public consultation, the CSA announced that they will proceed with the amendments except for two important proposals: to reduce the reporting threshold from 10% to 5% and to include "equity equivalent derivatives" for the purposes of determining the threshold for EWR disclosure. The CSA intends to publish final amendments to the EWR system and related guidance in the second quarter of 2015, subject to the receipt of necessary approvals.
The CSA's decision to abandon its original proposals regarding the beneficial ownership reporting threshold and equity equivalent derivatives appears to be based on concerns raised by some commentators including the large number of smaller issuers in Canada relative to other jurisdictions and the limited liquidity of those issuers and the Canadian capital markets; the possibility that those proposals would hinder an investor's ability to rapidly accumulate or reduce a large position and the signalling of investment strategies to the market; and the complexity and difficulty of applying a new early warning trigger in respect of equity equivalent derivatives.
As a result of the abandonment of the CSA's original proposals regarding the equity reporting threshold and equity equivalent derivatives, Canada may continue to be perceived as a bidder and activist-friendly jurisdiction for the stealth accumulation of securities as compared to the United States. In the United States, the threshold for reporting beneficial ownership is only 5% (albeit with a ten day lag on initial reporting which has been the subject of much attention recently). In addition, following the appeal of CSX Corporation v. The Children's Investment Fund Management (UK) LLP before the Second Circuit of the U.S. Court of Appeals, there remains some ambiguity in the United States as to whether equity equivalent derivatives are to be included in determining beneficial ownership of securities for reporting purposes. In that appeal, the Second Circuit was unable to reach agreement on whether the long party in an equity equivalent derivative was the beneficial owner of the underlying securities. While bidders and activists in the United States may continue to exercise caution in the use of equity equivalent derivatives as part of share accumulation programs, with the abandonment of certain elements of the CSA's original proposals, bidders and activists in Canada may have more latitude to make use of such derivatives.
For a summary of the CSA's original proposal, please refer to our blog released on March 18, 2013.
Summary of Proposed Changes
In addition to enhanced disclosure requirements in the early warning report, the CSA's proposed amendments to the EWR system will continue to include the following changes:
- Additional Required Disclosure of Decreases in Ownership. Disclosure will be required for both increases and decreases of 2% or more in ownership, and when a security holder's ownership interest falls below the 10% reporting threshold. The CSA had sought comment as to whether the 2% threshold for increases and decreases should be reduced to 1% but that proposal appears to have also been abandoned.
- Alternative Monthly Reporting System. The alternative monthly reporting system (AMR) will not be available to eligible institutional investors in the circumstances described in the CSA's original proposal. However, it is not clear what forms of solicitation activity will be disqualified. The CSA has indicated that it intends to provide further clarification on the circumstances in which use of the AMR will be prohibited.
- Derivatives. The amendments will require disclosure of derivatives in the early warning report. The CSA will provide guidance to clarify the current application of EWR requirements to certain derivatives.
- Securities Lending Arrangements. The amendments will require disclosure of securities lending arrangements in effect at the time of a reportable transaction. As described in the CSA's original proposal, lenders and borrowers will be exempt from that requirement in the case of certain securities lending arrangements.2
- Timing of Disclosure. The amendments will clarify the timeframe to file the early warning report and news release.
1. See CSA Notice 62-307 – Update on Proposed Amendments 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.
2. The CSA's original 2013 proposal provided that certain "specified securities lending arrangements" (which required, among other things, that the lender have an unrestricted right to recall the securities before the record date of a meeting of security holders and/or to instruct the borrower how to vote the securities) would be exempt from the early warning disclosure requirements. The CSA's recent update provided that specified securities arrangements will be exempt for lenders and that borrowers will be exempt from disclosure in certain circumstances. The exact requirements for such exemptions will be confirmed upon publication of the final amendments.
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