The Canadian Securities Administrators (CSA) today released final amendments to the early warning requirements (Early Warning Amendments) in National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103), Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids (MI 62-104) and National Policy 62-203 Take-Over Bids and Issuer Bids (NP 62-203). The Early Warning Amendments are generally consistent with the CSA's 2014 status update which announced that the CSA would not be moving forward with plans to reduce the early warning reporting threshold from 10% to 5%, as previously proposed. The Early Warning Amendments do however incorporate a number of other previously proposed reforms, including requiring disclosure of 2% decreases in ownership as well as mandated "exit" reports when ownership falls below the reporting threshold, with a view to providing greater transparency about significant holdings of reporting issuers' securities and enhance the quality and integrity of the early warning system.
Securities Lending Arrangements
One significant component of the Early Warning Amendments addresses securities lending arrangements. As previously proposed, lenders will be exempt from the early warning trigger for securities lent or transferred pursuant to a "specified securities lending arrangement". A "specified securities lending arrangement" requires, among other things, that the lender have an unrestricted ability to recall the securities before a meeting of securityholders and/or that the lender the require the borrower to vote the securities as instructed by the lender. Going beyond the original proposal, the CSA have also introduced a new exemption from the reporting trigger for borrowers in connection with certain short sales. This exemption can be relied upon where, in connection with a securities lending arrangement, the borrowed securities are disposed of by the borrower within three business days, the borrower will later acquire those or identical securities and transfer or return them to the lender and that the borrower does not intend to, and does not, vote the securities during the relevant period. Notwithstanding these exemptions from the reporting trigger, securities lending arrangements in effect at the time of a reportable transaction will be required to be disclosed in an early warning report even if the transaction triggering the report did not involve such arrangement.
Alternative Monthly Reporting and Eligible Institutional Investors
Pursuant to the Early Warning Amendments, eligible institutional investors (EIIs) will be disqualified from alternative monthly reporting (AMR) where an EII solicits proxies from securityholders of a reporting issuer in connection with the election of a director of the reporting issuer or a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of a reporting issuer in certain circumstances. Reflecting comments received, the CSA have clarified in the final Early Warning Amendments that it is only in circumstances where the EII is soliciting proxies in support of a director nominee other than nominees proposed by management, in support of a corporate action not supported by management or in opposition to a corporate action recommended by management where the AMR regime will be unavailable. By way of clarification the CSA have added that the definition of "solicit" for these purposes has the same meaning as in National Instrument 51-102 Continuous Disclosure Obligations.
Derivatives Reporting
While the CSA had originally proposed to include "equity equivalent derivatives" for the purposes of determining whether an early warning reporting requirement is triggered, commenters raised concerns that doing so would complicate the early warning regime and create a compliance burden, without providing any real benefit to the investing community. As such, the CSA have abandoned this original proposal but have provided guidance regarding certain derivative arrangements (such as equity swaps) that may be captured under the early warning system. Specifically, guidance has been added to NP 62-203 noting that where an investor has the ability to, formally or informally, obtain the voting or equity securities or to direct the voting of voting securities held by any counterparties to the transaction, an investor may be deemed to have beneficial ownership, control or direction, over the referenced voting or equity securities.
Enhanced Disclosure
In addition to the changes to the reporting trigger described above, early warning disclosure has also been enhanced to include, among other things, disclosure regarding the material terms of related financial instruments, securities lending arrangements and other agreements, arrangements or understanding involving the securities. Early warning reports will also be required to be certified by the acquirer. Finally, the CSA has clarified that a news release filed under the early warning system must be filed no later than the opening of trading on the business day following the acquisition of the securities, although it can be further streamlined by referring to the related report for a number of required details. As is currently the case, the reporting threshold is reduced from 10% to 5% during a take-over bid.
Provided all necessary approvals are obtained, the Early Warning Amendments will come into force concurrent with the changes to the take-over bid regime on May 9, 2016.
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