Originally published January 2008
This article outlines recent changes in securities laws that public companies should be aware of as they prepare their 2008 annual filings.
New Requirements for Forward-Looking Information
On December 31, 2007, the Canadian Securities Administrators amended the instrument governing the continuous disclosure obligations of public companies (National Instrument 51-102) to create new disclosure requirements for forward looking information and financial forecasts. Related new requirements were also created for MD&A.
Forward Looking Information
"Forward looking information" refers to statements made about current expectations and views of future events. The new requirements extend to all publicly disclosed forward looking information, other than forward looking information contained in oral statements. These new requirements will effect the preparation of this year's AIFs, management information circulars, annual reports and MD&A, as well as all news releases and material change reports. In addition to materials filed with securities regulatory authorities, the requirements also govern forward looking information in a public company's promotional materials and on its website.
Under the new requirements, a public company is prohibited from disclosing forward looking information unless it has a "reasonable basis" for the forward looking information. Also, all "material" forward looking information must be accompanied by disclosure that:
- indentifies forward looking information as such;
- cautions that actual results may vary from the forward looking information;
- identifies material risk factors that could cause actual results to differ materially from the forward looking information;
- states material factors or assumptions used to develop the forward looking information; and
- describes the public company's policy for updating forward looking information (to the extent it includes procedures in addition to the requirements described below under the heading "MD&A Update Requirements").
These elements are consistent, in part, with the elements required for a defence to civil liability under certain provincial laws for misrepresentations in secondary market disclosures.
Disclosure of Financial Outlooks
Additional new requirements exist for disclosure of financial outlooks, such as guidance on earnings, financial position or cash flows. In preparing a financial outlook, a public company must:
- use assumptions that are reasonable in the circumstances;
- limit the period covered by the financial outlook to a period for which the information in the financial outlook can be reasonably estimated (the Canadian Securities Administrators believe, in many cases, that period will not extend beyond the end of the next fiscal year);
- use the accounting policies the public company expects to use to prepare its historical financial statements for the period covered by the financial outlook;
- state the date management approved the financial outlook (if the document containing the financial outlook is undated); and
- explain the purpose of the financial outlook and caution readers that the information may not be appropriate for other purposes.
Similar requirements apply where future oriented financial information (FOFI) is presented in the form of financial statements. The historical requirement that FOFI be accompanied by an auditor's report has been removed.
The Canadian Securities Administrators recommend that a financial outlook and FOFI be reviewed by the board and audit committee prior to its public release.
MD&A Update Requirements
Public companies must discuss in their MD&A events and circumstances that occurred during the MD&A period that are reasonably likely to cause actual results to differ materially from previously disclosed "material" forward-looking information for a period which is not yet complete, as well as discussing the expected differences. Material differences between actual results and any previously disclosed FOFI or financial outlooks for the periods to which the MD&A relates must also be disclosed.
If a decision was made during the MD&A period to withdraw previously disclosed "material" forward-looking information, then a public company must disclose this fact in its MD&A and discuss the events which led to such decision, including any underlying assumptions which are no longer valid.
Forward-looking information will generally be "material" if a reasonable investor's decision whether or not to buy, sell or hold securities of the public company would be influenced or changed if the information is misstated. FOFI and most financial outlooks will be considered material forward looking information.
Changes to CEO and CFO Certifications
Proposed changes to the instrument governing certification of disclosure in annual and interim filings (National Instrument 52-109) have been delayed and further amendments to the instrument have been proposed.
Relief for Venture Issuers
Pursuant to the currently proposed amendments, "venture issuers" (public companies whose securities are not listed on the Toronto Stock Exchange, a U.S. exchange or an exchange outside Canada and the U.S. other than London's AIM market) will no longer be required to certify as to the design and evaluation of disclosure controls and procedures or internal control over financial reporting. In anticipation of these changes, certain Canadian Securities Administrators will permit venture issuers to file the abbreviated form of certificate for the financial year ended December 31, 2007 (and related interim periods). This certification will contain an explanation for investors of how it differs from the full certificate required to be filed by public companies other than venture issuers. Newfoundland & Labrador, Prince Edward Island and the territories have not yet adopted a temporary exemption order to permit venture issuers to file the abbreviated certification in these jurisdictions, but are expected to do so. A public company may be able to file an election under the Canadian Securities Administrators' passport system (National Instrument 11-101) so as to not have to comply with the requirements of the jurisdictions that have not yet adopted an exemption order.
Anticipated Amendments to Certification Requirements
Currently proposed changes will require CEOs and CFOs, in addition to the current certifications required in the annual certificate, to further certify:
- that they have evaluated the effectiveness of the public company's internal controls over financial reporting and that the public company has disclosed in its annual MD&A: (i) their conclusions respecting the effectiveness of internal controls over financial reporting; (ii) a description of the process used to evaluate such internal controls over financial reporting; (iii) a description of any reportable deficiency relating to the operation of internal controls over financial reporting; and (iv) the issuer's plans, if any, to remediate any reportable deficiency;
- that the public company has included in its MD&A a statement identifying the control framework used to design internal controls over financial reporting or a statement that a framework was not used, as applicable; and
- based on the evaluation of internal controls over financial reporting, they have disclosed to the auditors, the board, and the audit committee any fraud that involves management or other employees who have significant roles in internal controls over financial reporting.
The proposed new requirements mean that a public company's board and audit committee will have to consider and approve disclosure with regard to the effectiveness of internal controls over financial reporting as part of its overall approval of the public company's MD&A. The amendments proposed for interim certificates will also expand the certifications in respect of internal controls over financial reporting.
Changes to Executive Compensation Disclosure
The CSA proposed, but has recently postponed, the implementation of amendments to disclosure requirements for executive compensation. We expect to see some of the following significant new requirements:
- Compensation Discussion & Analysis:A new narrative compensation discussion and analysis section will be required to explain the rationale for specific compensation programs for executives. The following six key principles regarding the compensation awarded are expected to be required to be addressed in the discussion:
- objectives of the compensation program;
- what the program is designed to reward;
- each element of compensation;
- why the public company chooses to pay each element;
- how the public company determines the amount and formula for each element; and
- how each element and related decisions fit into the issuer's overall compensation objectives.
- Total Compensation: The summary compensation table will include a new column showing the total compensation, expressed in dollars, provided to each named executive officer. A narrative description of any material factors that are necessary to understand the information in the table is also expected to be required.
- Director Compensation: Expanded disclosure of director compensation is expected to be required, including a summary table and equity disclosure similar to what is required for named executive officers.
Changes Relating to Material Contracts
The Canadian Securities Administrators amended the instrument governing continuous disclosure obligations of public companies (National Instrument 51-102) to add, effective March 17, 2008, additional requirements relating to material contracts.
Additional Material Contracts Need to be Filed
Public companies are currently required to file with the Canadian Securities Administrators contracts, other than those entered into in the ordinary course of business, that are material to the public company and that were entered into within the last financial year or prior to the last financial year but are still in effect. Under the new requirements, in addition to filing material contracts which are "outside" the ordinary course of business, public companies must now file material contracts which are "in" the ordinary course of business, where the material contract is:
- one to which directors, officers, or promoters are parties, other than a contract of employment;
- a continuing contract to sell the majority of the public company's products or services or to purchase the majority of the public company's requirements of goods, services, or raw materials;
- a franchise or licence or other agreement to use a patent, formula, trade secret, process or trade name;
- a financing or credit agreement with terms that have a direct correlation with anticipated cash distributions;
- an external management or external administration agreement; or
- a contract on which the public company's business is "substantially dependent"
The Canadian Securities Administrators are of the view that for a public company business to be "substantially dependant" on a contract, the contract needs to be so significant that the public company's business depends on the continuance of it. Examples of such contracts include:
- a financing or credit agreement providing a majority of the public company's capital requirements for which alternative financing is not readily available at comparable terms;
- a contract calling for the acquisition or sale of substantially all of the public company's property, plant and equipment, long-lived assets, or total assets; and
- an option, joint venture, purchase or other agreement relating to a mining or oil and gas property that represents a majority of the public company's business.
All schedules, exhibits and side letters relating to a material contract must also be filed. Ad discussed below non-public personal information protected by privacy legislation can and should be redacted.
Total Compensation: The summary compensation table will include a new column showing the total compensation, expressed in dollars, provided to each named executive officer. A narrative description of any material factors that are necessary to understand the information in the table is also expected to be required.
Director Compensation: Expanded disclosure of director compensation is expected to be required, including a summary table and equity disclosure similar to what is required for named executive officers.
Redactions of Material Contracts has been Limited
A provision in a material contract may be omitted or redacted if an executive officer of the public company reasonably believes that disclosure of that provision would be seriously prejudicial to the interests of the public company or would violate confidentiality provisions. If a provision is omitted or redacted, a description of the type of information that has been omitted or redacted must be included in the copy of the contract which is filed. Despite the foregoing, a public company may not omit or redact a provision of a material contract which relates to: (i) debt covenants and ratios in financing or credit agreements; (ii) events of default or other terms relating to the termination of the material contract; or (iii) other terms necessary for understanding the impact of the material contract on the business of the public company.
According to the Canadian Securities Administrators, disclosure of information in violation of applicable Canadian privacy legislation may be considered seriously prejudicial to the interests of the public company, and as a result, may be redacted, provided that such privacy legislation has not provided an exemption for such disclosure. Generally, disclosure of information that a public company or other party has already publicly disclosed will not be considered seriously prejudicial to the interests of the public company.
Disclosure of Material Contracts in AIF
Commencing March 17, 2008, public companies are required to list and describe in their AIF the particulars of all of the material contracts it files, which includes the dates of, parties to, consideration provided for in, and general nature and key terms of, the contract.
Other Changes to Annual Filings
The Canadian Securities Administrators also made changes to the disclosure requirements for AIFs and management information circulars. Public companies should take care to amend the language in those documents, and any director and officer questionnaires used in relation thereto, to reflect the changes.
In addition to securities subject to escrow arrangements, public companies are required, commencing March 17, 2008, to disclose in their AIF the number and class of securities which are subject to contractual restrictions on transfer, such as lock-up agreements, and the percentage of the class such securities represent.
Disclosure of Cease Trade Orders
Public companies are no longer required to disclose in their AIF or information circular whether any significant shareholder is or was a director or executive officer of a company that was subject to a cease trade or similar order. Also, disclosure in respect of cease trade and similar orders now applies only where a director or executive officer of the public company was a director, "chief executive officer" or "chief financial officer" of a company subject to a cease trade or similar order, rather than if they were an "executive officer" of such a company, thus reducing the scope of the disclosure required.
Beneficial Ownership and Control
Effective March 17, 2008, in AIFs and management information circulars, the phrase "beneficially owned, directly or indirectly, or over which control or direction is exercised" and similar such phrases have been replaced with the phrase "beneficially owned, or controlled and directed, directly or indirectly".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.