Canada: TSX Issues Staff Notice On Emerging Market Issuers

Following its 2012 public consultation on emerging market issuers (EMIs) the Toronto Stock Exchange has published a staff notice on the application of the TSX original and continued listing requirements to EMIs. EMIs are generally considered by the TSX to have higher risk profiles than other issuers. The staff notice sets out the TSX's expectations when it is considering listing an EMI and should be read in conjunction with the requirements of the TSX Company Manual.

Which issuers will be considered EMIs by the TSX?

The TSX will consider each of the following factors in determining whether a listing applicant is an EMI:

  • the residency of its mind and management;
  • the jurisdiction of the principal business operations and location of assets;
  • the nature of the EMI's business;
  • the jurisdiction of its incorporation; and
  • its corporate structure.

It is not necessary that all factors be present for an issuer to be considered an EMI. The TSX is focusing on jurisdictions outside Canada, the US, the UK, Western Europe, Australia and New Zealand.

What are the risks identified by the TSX as being applicable to EMIs and how are they addressed?

The staff notice outlines the risks associated with such issuers, which are similar to the risks identified by the Ontario Securities Commission in its review of EMIs in 2012. The TSX considers some but not all of the EMI risk factors to be mitigated for resource issuers who have produced independent technical reports, have management and board directors who have been resident or reside in Canada or another non-emerging jurisdiction, and have title opinions with respect to their properties that have been reviewed by the author of the independent technical report. The principal emerging market risk factors identified and the TSX's expectations are as follows:

Risk Factor TSX Expectations
Management's lack of knowledge of Canadian securities laws and TSX rules, resulting in non-compliance, inadequate corporate governance and less sensitivity regarding market concerns regarding related party transactions Sufficient number of key management (CEO, CFO, COO or corporate secretary) and directors should have adequate North American public company experience (although UK or Australia and other country expertise may be considered) as well as technical expertise relevant to the business.

TSX stresses the importance of adequate independent oversight of management, especially where the EMI has a substantial or controlling shareholder (over 50%). Where an EMI has such a shareholder, the TSX may also require a majority of directors to be unrelated to that shareholder.

Adequate independence may be demonstrated by:
  • appointing an independent chair of the board;
  • having at least one independent director with relevant work experience in the jurisdiction (or a similar jurisdiction) where the issuer principally operates (the EMI jurisdiction); and
  • having at least two independent directors with North American public company experience, one of whom is a resident Canadian.
Communication issues due to board of directors and management not sharing a common language or not being fluent in the language of EMI jurisdiction, resulting in inadequate oversight by board of management TSX may require an EMI to prepare a communications plan that addresses communication issues, such as translation and time zone issues. In addition, one senior member of management (CEO, CFO, COO, corporate secretary or senior IR person) must be fluent in English or French to ensure adequate communication with shareholders.
Lack of local business knowledge At least one director (ideally independent) should have significant knowledge and experience in the EMI jurisdiction obtained through work or having lived there. Other members should have thorough understanding of the EMI jurisdiction and director education should be put in place.
Financial reporting concerns regarding qualifications of CFOs, audit committee composition and external auditors Factors to be considered in suitability:

a) as CFO include:
  • professional accounting designation (otherwise significant experience in accounting or financial role may be acceptable);
  • previous North American listed company experience as CFO or in another financial capacity or alternatively experience listing North American issuers;
  • proposed frequency of CFO local site visits;
  • experience applying IFRS; and
  • understanding of Canadian securities law.
b) for audit committee members (individually and collectively) include:
  • financial literacy work or board experience in EMI jurisdiction;
  • Canadian financial reporting skills; and
  • experience supervising international audit engagements.
c) for the external auditors include:
  • experience and expertise in EMI jurisdiction;
  • size of firm and resources;
  • experience in auditing other Canadian reporting issuers, including industry expertise;
  • oversight by Canadian regulatory authorities, including ability of authorities to access working papers;
  • whether the firm is a participating audit firm with the Canadian Public Accountability Board; and
  • ability to execute or supervise the work in EMI jurisdiction.
Adequacy of internal controls (IC)
  • may require CEO/CFO certification as to IC as condition of listing
  • in exceptional circumstances, may request evaluation of IC by independent auditors
  • may require yearly reporting
  • will not generally request IC review of an exploration-stage resource issuer
Non-traditional corporate structure and title to assets held by non-affiliate
  • explanation of why structure is necessary and how shareholders will be protected
  • comprehensive disclosure of structure in disclosure documents
  • legal opinions as to title
  • may be important factor in listing EMIs
  • may also classify an EMI as a non-exempt market issuer, even if it meets quantitative requirements of an exempt issuer, and accordingly sponsorship may apply
Related party transactions (RPTs)
  • TSX concerned about RPTs, especially in context of an EMI with a controlling shareholder
  • TSX may take extended approach to reviewing an RPT of an EMI even where the transaction does not meet definition of RPT
  • RPT policy may be required

In connection with an original listing application, the TSX recommends an early pre-filing meeting to address any potential concerns in the above and other areas.

A copy of the TSX staff notice can be accessed here.

Norton Rose Fulbright Canada LLP

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Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

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