Originally published in Blakes Bulletin on Securities Regulation, February, 2008
Effective March 17, 2008, amendments to the continuous disclosure and prospectus requirements and policies under Canadian provincial securities laws will come into force and change the requirements for the disclosure and filing of material contracts by reporting issuers.
Currently, as part of its continuous disclosure obligations and in connection with its filing of a prospectus or an annual information form (AIF), a reporting issuer is required to file on SEDAR a copy of any contract that it or any of its subsidiaries is a party to, other than a contract entered into in the ordinary course of business, that is material to the issuer and that was entered into before the last financial year, but after January 1, 2002 and is still in effect, or within the last financial year. The issuer is also permitted to redact or omit certain provisions from the filed copy of a material contract if an executive officer has reasonable grounds to believe that disclosure of such provisions would be seriously prejudicial to the interests of the issuer or would violate contractual confidentiality provisions. The issuer is also required to list and provide particulars for such material contracts in its AIF.
Potentially significant changes resulting from the amendments include:
- the deeming of certain categories of material contracts to not be in the ordinary course and therefore not excepted from the disclosure and filing requirements;
- restrictions on the extent to which an issuer may redact or omit provisions from the filed copy of a material contract; and
- notice of the policy of the Canadian Securities Administrators (CSA) that, generally, a material contract includes a schedule, side letter or exhibit referred to in such a contract.
Reporting issuers should now consider the following questions with respect to their contracts:
I. Is The Contract Material?
A material contract is defined as a contract that a reporting issuer or any of its subsidiaries is a party to, that is material to the issuer. In the amendments, the CSA have stated their policy that, generally, a material contract includes a schedule, side letter or exhibit referred to in such a contract. The CSA have not provided any additional guidance in the amendments as to what will be considered to be material to an issuer, so issuers should continue to make this determination based on the same criteria that they currently apply.
II. When Was The Material Contract Entered
A material contract must be filed pursuant to applicable continuous disclosure requirements or in connection with the filing of a prospectus only if the material contract was entered into before the last financial year, but after January 1, 2002 and is still in effect, or within the last financial year.
III. Is The Material Contract In The Ordinary Course
If the issuer determines that a contract is material and was entered into during the relevant time frame, the issuer must then determine if the contract was entered into in the ordinary course of business and therefore potentially excepted from the disclosure and filing requirements. The CSA have stated that this is a question of fact that the issuer should consider in the context of its business and industry.
However, even if the issuer determines that the contract has been entered into in the ordinary course of business, the amendments provide that the following categories of contracts are deemed not to have been entered into in the ordinary course of business:
- a contract to which directors, officers, or promoters are parties other than a contract of employment;
- a continuing contract to sell the majority of the reporting issuer's products or services or to purchase the majority of the reporting issuer'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 reporting issuer's business is substantially dependent.
The CSA have provided guidance, including the following, relating to these categories of deemed non-ordinary course contracts:
A. What is a contract of employment?
One way for a reporting issuer to determine whether a contract is a contract of employment is to consider whether it contains payment or other provisions that are required to be disclosed as executive compensation in a management information circular.
B. What is a contract on which the reporting issuer's business is substantially dependent?
Generally, a contract on which the reporting issuer's business is substantially dependent is a contract so significant that the reporting issuer's business depends on the continuance of the contract. Examples provided by the CSA of such contracts include:
- a financing or credit agreement providing a majority of the reporting issuer'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 reporting issuer'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 reporting issuer's business.
IV. What Portions Of The Material Contract Can Be
Redacted Or Omitted?
Once an issuer has determined that a contract is material and the disclosure and filing exceptions are unavailable, the CSA may permit an issuer to redact or omit certain provisions of the contract if an executive officer of the reporting issuer reasonably believes that disclosure of such provisions would be seriously prejudicial to the interests of the reporting issuer or would violate confidentiality provisions.
The CSA have provided the following guidance on permitted redaction or omission:
A. What constitutes disclosure seriously prejudicial
to the interests of the reporting issuer?
The CSA cite the disclosure of information contrary to applicable Canadian privacy laws as an example of disclosure that may be seriously prejudicial to the interests of a reporting issuer. However, in situations where securities legislation requires disclosure of particular information, applicable privacy legislation generally provides an exemption for such disclosure. The CSA have stated that, generally, disclosure of information that has already been publicly disclosed should not be considered as seriously prejudicial to the interests of the reporting issuer.
B. What Disclosure Cannot Be Redacted Or Omitted
From A Filed Contract?
The CSA have stated that a blanket confidentiality provision covering the entire document will not suffice to permit redaction of the agreement. The amended rules and policies provide that the following provisions in a material contract cannot be redacted or omitted:
- debt covenants and ratios in financing or credit agreements;
- events of default or other terms relating to the termination of the material contract; or
- other terms necessary for understanding the impact of the material contract on the business of the reporting issuer, which may include the following:
- the duration and nature of a patent, trademark, license, franchise, concession, or similar agreement;
- disclosure about related party transactions; and
- contingency, indemnification, anti-assignability, take-or-pay clauses, or change-of-control clauses.
C. Are Discretionary Disclosure Exemptions
The CSA have stated that, in certain limited circumstances, a securities regulatory authority may consider granting an exemption to permit a provision of the type listed in section IV(B) above to be redacted.
If provisions of a material contract are redacted or omitted from the filed copy, the reporting issuer is required to describe the type of omitted information in the filed copy. The CSA have stated that a brief one-sentence description immediately following the omitted or redacted information is generally sufficient for this purpose.
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.