The Canadian securities regulators are implementing changes to the continuous disclosure and prospectus rules that may expand the number and types of agreements that issuers must disclose and file as "material contracts."
Currently, an issuer must disclose (in an Annual Information Form [AIF] or prospectus) particulars of any contract to which it or a subsidiary is a party and that is "material" to the issuer. Copies of contracts that are so disclosed must also be filed on SEDAR, although an issuer may redact from the filed copy certain provisions whose disclosure would either violate confidentiality provisions or be seriously prejudicial to the issuer’s interests. Contracts entered into before January 1, 2002 and contracts entered into in the "ordinary course of business" are not subject to the new disclosure and filing obligation.1
The New Regime
Narrowing the ordinary course of business exception. Under the new rules, a material contract cannot be treated as entered into in the ordinary course of business (and thereby exempted from disclosure and filing) if it is
- a contract to which directors, officers or promoters are parties (other than a contract of employment or another similar contract whose terms are disclosed under the executive compensation rules);
- a continuing contract to sell the majority of the issuer’s products or services or to purchase the majority of the 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 (including those between an issuer and a third party, the issuer’s parent entity or an affiliate of the issuer, under which management or other administrative services are provided to the issuer); or
- a contract on which the issuer’s business is substantially dependent.
Whether an issuer is "substantially dependent" on a particular contract will be a factual determination based on the contract’s terms and importance to the issuer from a financial and operational standpoint. The companion policy accompanying the new rules describes such a contract as one "so significant that the reporting issuer’s business depends on the continuance of the contract," and suggests the following examples where the substantially dependent test might apply:
- A financing or credit agreement providing a majority of the issuer’s capital requirements for which alternative financing is not readily available on comparable terms;
- A contract calling for the acquisition or sale of substantially all of the 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 issuer’s business.
This drafting suggests that it is not enough that the business would be adversely affected, or even materially harmed, by the loss or absence of the contract – the issuer would need to be seriously compromised, so that its ongoing operation would be cast in doubt.
Limiting the permitted redactions. The new rules also narrow the scope2 for redacting provisions from a material contract on the basis of prejudice to the issuer or confidentiality. In particular, the rule expressly prohibits redaction of the following types of information:
- Debt covenants and ratios in financing or credit agreements;
- Events of default of or other terms relating to the termination of the material contract; and
- Other terms necessary for understanding the impact of the material contract on the business of the issuer.
The companion policy states that "terms necessary for understanding the impact of the material contract" include these:
- The duration and nature of a patent, trademark, licence, franchise, concession or similar agreement;
- Disclosure about related party transactions; and
- Contingency, indemnification, anti-assignability, take-or-pay clauses or change of control clauses.
Note that this list is not exhaustive; issuers and their advisers must consider the nature of the contract, its terms as a whole and its importance to the business.
Where a redaction is allowed, the new rules require the filed copy of the contract to include an adjacent notation that explains to the reader the type of information that has been redacted.
Filing the whole agreement. The new rules confirm the securities regulators’ view that the material contract filing obligation includes any schedules, exhibits and side letters relating to the contract, as well as any amendments. In reviewing these filings, issuers should be alert to the inadvertent filing of personal information (such as employee names, salaries or other confidential details) that would typically be included in disclosure schedules or annexes to commercial agreements.
Planning And Transition
The new rules come into force on March 18, 2008 and are applicable to AIF filings on or after that date in respect of the 2007 year-end (AIFs are due by March 31, 2008). Accordingly, issuers that plan to file their AIFs on or after March 18, 2008 should review the new rules and provide the required information with their year-end filings. As part of this process, issuers should consider the material contracts to which they are a party, whether they have previously been filed and, if not, whether the exemption for contracts entered into before 2002 or the ordinary course of business exception continues to shelter them from the disclosure and filing obligations. If a particular contract must now be disclosed and filed, an issuer will want to review the permitted redactions under the new rules to ensure that it is not required to release sensitive information.
The new rules do not obligate issuers to refile previously filed material contracts or to reassess redactions made in those filings; existing filings need not therefore be reconsidered as part of an issuer’s review.
1. The carve-out for contracts entered into before 2002 does not apply to an IPO prospectus filing. An issuer that goes public must disclose and file all material contracts, subject only to the "ordinary course of business" exception.
2. The companion policy suggests that exemptive relief to allow for redactions not otherwise permitted by the new rules may be granted if a contract predates the rules’ implementation.
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.