Changes to Canada's securities early warning reporting system came into force this week. Disclosures of decreases in securities ownership of 2% or more and when a securityholder's ownership falls below the 10% threshold are now required, with additional information required in a certified signed report as well.
Gowling WLG Focus
Canadian securities regulators initially published a proposal for amendments to the early warning system in 2013 that, among other things, would have reduced the early warning reporting threshold from 10% to 5%, which would have been somewhat more in line with U.S. requirements. However, as a result of comments received from market participants, in 2014 Canadian securities regulators announced that while they planned to proceed with other aspects of the proposal, they would not be reducing the overall threshold. For background, please see our March 2013 and October 2014 articles. Instead, new form requirements are intended to provide greater transparency about significant securities holdings at the original threshold with a view to enhancing the quality and integrity of the early warning system in the Canadian public capital markets context.
Changes for Insiders Generally
Of relevance to typical insiders of Canadian public companies, the following will now be required:
- disclosure of decreases in ownership, control or direction of 2% or more;
- disclosure when a securityholder's ownership, control or direction falls below the 10% early warning reporting threshold;
- disclosure of any interest in a related financial instrument and any securities lending arrangement in respect of the securities to which the early warning report relates;
- more detailed information regarding the purpose of the transaction, intentions of the acquiror and any agreement, arrangement or understanding entered into in respect of the securities to which the early warning report relates; and
- certification and signature of the early warning report.
In respect of the purpose of the transaction, the new form requires disclosure of any plans or future intentions which relate to or would result in the additional acquisition or disposition of securities, a corporate transaction such as a merger, a sale or transfer of a material amount of assets, a change in the board of directors or management, a material change in the capitalization or dividend policy, a material change in the business or corporate structure, a change in the governing documents including anything that might impede the acquisition of control, a delisting or ceasing to be a reporting issuer, a solicitation of proxies, and anything similar to the foregoing, in each case in relation to the applicable issuer of the securities.
Clarity has also been provided on the material terms to be disclosed in respect of any agreements entered into in respect of the securities to which the early warning report relates. Terms relating to the transfer or the voting of the securities, finder's fees, joint ventures, loan or option arrangements, guarantees of profits, division of profits or loss and the giving or withholding of proxies must be disclosed, including for securities pledged or otherwise subject to a contingency where another person would obtain voting power or investment power over such securities.
The amendments also clarify that the timeframe to issue and file a news release is no later than the opening of trading on the next business day (i.e. it is no longer just "promptly"). They also further streamline the information required in the news release by permitting the news release to make reference to the early warning report for specified further details.
Changes for Eligible Institutional Investors and for Securities Lending Arrangements
The early warning amendments also affect the alternative monthly reporting system used by eligible institutional investors and those involved in securities lending arrangements. The amendments:
- make the alternative monthly reporting system unavailable for eligible institutional investors who solicit proxies from securityholders in certain circumstances (further clarification regarding "solicitation" has been provided since the original proposal);
- exempt lenders from including securities lent or transferred for the purposes of determining the early warning reporting threshold trigger if they lend securities pursuant to a specified securities lending arrangement; and
- exempt borrowers under securities lending arrangements from including securities borrowed for the purposes of determining the early warning reporting threshold trigger in certain circumstances.
For details of these changes, please see the updated instrument.
Application to Certain Derivative Arrangements
The amendments also clarify the current application of early warning reporting requirements to certain derivative arrangements. In particular, Canadian securities regulators provide guidance on when an investor may have to include in the early warning threshold calculation an equity swap or similar derivative arrangement, which could occur when the investor has the ability, formally or informally, to obtain the voting or equity securities or to direct the voting of voting securities held by any counterparties to the transaction.
5% Threshold in Take-over Bid Context Remains
Canadian securities regulators originally proposed to repeal the accelerated early warning reporting provisions during a take-over bid which require disclosure of acquisitions by a party other than the bidder at the 5% (instead of 10%) level. Since they are not reducing the early warning threshold from 10% to 5%, they are retaining this accelerated requirement. Thus it continues to be the case that when a take-over bid is outstanding, the early warning reporting threshold is reduced to 5%.
Amendments to Canada's take-over bid regime also came into force this week. For background, please see our February 2016 article.