Canada: Capital Markets Report - February 2015

From the Regulators

News and Notices

OSC Provides New Guidance on Related Party Transaction Disclosure 

By: Justin Dick, Jessica Lee and Kyle Simpson

On January 29, 2015, the Ontario Securities Commission released Staff Notice 51-723: Report on Staff's Review of Related Party Transaction Disclosure and Guidance on Best Practices following a review of reporting by 100 Ontario-based issuers selected at random across all industries.
 
The Report found that while there is a general awareness among issuers of the need to provide related party transaction ("RPT") disclosure in both financial statements and in management discussion and analysis ("MD&A"), such disclosure was sometimes lacking in the appropriate level of detail that was required. The Report points to areas of focus for issuers to improve their RPT disclosure, emphasizing that RPT disclosure in MD&As should complement and supplement the financial statements, and that it is intended to provide both qualitative and quantitative information that is necessary for an understanding of the business purpose and economic substance of a transaction. Disclosure must be specific and detailed, and it is not sufficient for RPT disclosure in MD&As to simply repeat that which is contained in an issuer's financial statements. 

CSA Releases Progress Report on Proxy Voting Infrastructure 

By: Justin Dick, Jessica Lee and Kyle Simpson

On January 29, 2015, members of the Canadian Securities Administrators ("CSA") published CSA Staff Notice 54-303 - Progress Report on Review of the Proxy Voting Infrastructure (the "Progress Report") to update the progress of their ongoing review. The Progress Report concludes that the current proxy voting infrastructure is in need of modernization and improvement.
 
The Progress Report enumerates five improvements that CSA members feel must be made regarding vote reconciliation:

  1. modernizing how meeting tabulators receive information about who is entitled to vote;
  2. ensuring that the information meeting tabulators receive is accurate and complete;
  3. enabling each intermediary who submits proxy votes on behalf of clients to find out how many shares the intermediary is entitled to vote, according to calculations made by meeting tabulators (its "Official Vote Entitlement");
  4. increasing consistency in how meeting tabulators reconcile proxy votes submitted by intermediaries to Official Vote Entitlements; and
  5. establishing communication between meeting tabulators and intermediaries about whether proxy votes are accepted, rejected or pro-rated.

The CSA is directing all entities that play key roles in vote reconciliation to assess their processes and identify ways to improve vote reconciliation for the 2015 proxy season. The CSA has released a Request for Proposals for expert advice from a proxy solicitor and plans to continue their review throughout 2015. 

IIROC Publishes Annual Consolidated Compliance Report

By: Justin Dick, Jessica Lee and Kyle Simpson

On January 27, 2015, the Investment Industry Regulatory Organization of Canda ("IIROC") published its Annual Consolidated Compliance Report to assist IIROC Dealer Members in focusing their supervision and risk management efforts to ensure compliance with regulatory requirements. The Report seeks to address a number of current issues and challenges to be addressed by Dealer Members in order to improve investor protection and foster market integrity in a rapidly evolving and increasingly complex environment.
 
The Report, together with IIROC's body of guidance notes, its annual compliance conferences, and the day-to-day contact IIROC regulatory teams have with Dealer Member staff, are all intended to help Dealer Members better understand and ensure compliance with IIROC's requirements.
 
IIROC will continue to proactively oversee and regulate IIROC Dealer Members to protect investors and promote fair, efficient and competitive capital markets, and will continue to focus on and take action against Dealer Members that fail to address significant compliance findings and/or fail to demonstrate a commitment to the development of a strong compliance culture.

OSC Provides New Guidance on REIT Distribution Disclosure

By: Justin Dick, Jessica Lee and Kyle Simpson

On January 26, 2015, the OSC published Staff Notice 51-724: Report on Staff's Review of REIT Distribution Disclosure following a review of the public disclosure of 30 Real Estate Investment Trusts ("REITs") with head offices in Ontario. The Report focuses on disclosure relating to cash flow and situations in which a REIT distributes more cash than it generates from operations, referred to as "excess distributions."
 
The OSC believes that investors should be provided with more transparent disclosure about the risks of excess distributions and identifies four target areas for improvement:

  1. the content of disclosure where excess distributions are paid;
  2. the consistency of disclosure about excess distributions;
  3. timely disclosure where a reduction or termination of distributions occurs; and
  4. presentation of non-GAAP metrics, such as adjusted funds from operations.

The OSC will continue to monitor reporting, and REITs that do not comply with the updated disclosure expectations will be expected to take corrective action. 

Rule Proposals

TSX Publishes Proposed Amendments to Rules for Voluntary Delisting

By: Justin Dick, Jessica Lee and Kyle Simpson

On January 22, 2015, the Toronto Stock Exchange published for comment proposed amendments to the voluntary delisting requirements (the "Delisting Amendments") in section 720 of the TSX Company Manual (the "Manual").
 
Under the Delisting Amendments, the TSX will require majority approval by the holders of the affected class or series of securities for a voluntary delisting application, unless the TSX is satisfied that:

  1. an acceptable alternative market exists or will exist for the listed securities on or about the proposed delisting date;
  2. security holders have a near term liquidity event, such as a going private transaction, for which all material conditions have been satisfied and the likelihood of non-completion is remote;
  3. the listed issuer is under delisting review and it is unlikely that TSX will be satisfied that the deficiencies will be cured within the prescribed period; or
  4. in the case of listed securities other than shares, if the listed securities are not convertible, exercisable or exchangeable at the holder's option into another class of listed securities.

Insiders who have an interest that materially differs from other securityholders or any securityholder that holds more than 50% of the issued securities of the affected class or series will not be eligible to vote.
 
The Delisting Amendments would require an issuer to submit an application for voluntary delisting to the TSX, accompanied by a resolution of the issuer's board of directors authorizing the application to delist and a draft copy of the press release to be pre-cleared by the TSX. In addition, a draft copy of the information circular or form of written consent used to obtain security holder approval for the voluntary delisting application must be submitted to the TSX for pre-clearance at least five business days prior to finalization.
 
The Delisting Amendments, which will be effective upon approval by the OSC following a public notice and comment period, are aimed at ensuring fair treatment for all securityholders when an issuer delists and improving the consistency of information available to the market. The 30-day comment period is open until February 23, 2015.

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Gregory Hogan
Adria Leung Lim
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