The Canadian Securities Administrators have made changes to the continuous disclosure rules that require a reporting issuer in Canada to disclose and file material contracts on SEDAR. These amendments (effective as of March 17, 2008) do not represent a fundamental change to the existing regime regarding material contracts, but a reporting issuer will need to more carefully consider whether it will be required to file a contract that is material to it and the extent to which it may redact information it considers commercially sensitive or subject to confidentiality restrictions. In addition, it may be more difficult for a reporting issuer to consider side letters, exhibits and schedules to agreements (such as a disclosure schedule to a purchase agreement) to not be subject to a filing obligation.
Existing Requirements to File Material Contracts
The requirement for a reporting issuer to disclose and publicly file, as a matter of continuous disclosure, contracts that are material to the issuer has existed in Canada since the introduction of National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102) in March 2004. A similar requirement exists in the United States.
NI 51-102 has given reporting issuers some flexibility to determine that a particular contract did not have to be disclosed or filed on SEDAR if it was entered into "in the ordinary course of business", even if the contract was material to the issuer. It has also allowed a reporting issuer to redact information in a material contract filed on SEDAR if there are reasonable grounds to believe that the disclosure of that information would be "seriously prejudicial" to the interests of the reporting issuer or would violate confidentiality provisions to which the issuer is subject. Issuers have sometimes used this provision to avoid the disclosure of commercially sensitive information that could benefit competitors or information that the counterparty to a contract (such as a supplier or lender) did not want to be made publicly available.
The New Rules
The changes to NI 51-102 have not altered the general requirement to disclose and file contracts that are material to the issuer, nor have the changes altered the basic standard for determining whether information in a material contract that is filed on SEDAR may be redacted. However, the changes clarify and restrict the use of the ordinary course of business exemption and impose some additional restrictions on the ability to redact information in material contracts that are filed.
Narrowing the ordinary course of business exemption
The changes to NI 51-102 specify six types of material contracts that a reporting issuer must file in all circumstances, even if the contract was entered into in the ordinary course of business. These are:
- contracts to which directors, officers or promoters are parties (other than employment contracts);
- 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 required goods, services or raw materials;
- franchise and licence agreements or other agreements 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;
- external management or administration agreements; and
- a contract on which the issuer's business is "substantially dependent."
The Canadian Securities Administrators (CSA) consider this latter category to consist of contracts so significant that the reporting issuer's business depends on the continuance of the contract in question. The Companion Policy to the amendments provides a short list of examples of the types of contracts that would fall into the "substantially dependent" category.
While the concept of a list of mandatory filings is new, the list itself should not have a significant impact on the practice of filing material contracts for a number of reasons. Firstly, the overriding test under NI 51-102 for whether a contract must be filed continues to be whether the contract is material to the issuer. Accordingly, the new rules do not require that every supply and customer contract, franchise and licence agreement or credit agreement, as the case may be, be filed – only such contracts that are material to the issuer and which fall within the list of mandatory filings referred to in NI 51-102.
Accordingly, reporting issuers must still exercise their judgement to determine whether a contract is material to the issuer within the meaning of accepted securities law principles. The new amendments have not removed the ordinary course of business exemption in its entirety; therefore, reporting issuers may still choose to not file a material contract if it was entered into in the ordinary course of business and is not in the list of mandatory filings. We believe that the clarifications represented by the new list of mandatory filings represent mostly uncontroversial categories of agreements that most issuers would have previously filed in any event.
Limits on redacting
The new amendments to NI 51-102 also contain a list of the types of contractual provisions that cannot be redacted in material contracts filed under NI 51-102 even if disclosure of those provisions would meet the "seriously prejudicial" test or would violate confidentiality provisions. These provisions consist of debt covenants and ratios in financing or credit agreements, events of default 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 reporting issuer." The Companion Policy provides some examples of terms that may fall into this broad category, including the duration and nature of a patent, trademark or licence, and contingency, indemnification and change-of-control clauses.
A new provision in the amendments is the requirement that a reporting issuer describe the type of information that has been redacted in the version of the agreement that is filed. The description must appear immediately after the provision that has been redacted. A brief and general description should suffice for these purposes.
Clarification Regarding the Filing of Credit Agreements
The amendments to NI 51-102 clarify the treatment of credit agreements under the filing requirements. Henceforth, it appears that a credit agreement will generally only be required to be filed where it either:
- has "a direct correlation with anticipated cash distributions" (as, for example, in the case of certain income trust issuers), or
- provides a majority of the reporting issuer's capital requirements for which alternative financing is not readily available at comparable terms (on the basis that such a credit agreement would meet the threshold of being a contract on which the issuer's business is "substantially dependent").
In the absence of these circumstances, the regulators appear to have accepted that credit agreements can generally be considered agreements that are entered into in the ordinary course of business and, therefore, are not contracts that must be filed in all circumstances. However, whether this is the case remains a question of fact that each issuer will need to address.
Treatment of Side Letters and Schedules
The changes to the Companion Policy provide that a material contract generally includes "a schedule, side letter or exhibit referred to in the material contract" and that the redaction provisions in NI 51-102 apply to those documents. Note that this statement appears only in the Companion Policy, not in the new definition of a "material contract" in NI 51-102 itself. Nevertheless, it does appear that the CSA is taking aim at the existing practice by many issuers of not generally filing disclosure letters or similar ancillary documents that relate to material contracts (including notably disclosure schedules to acquisition agreements). It remains to be seen how this clarification by the CSA will impact the practice in this area going forward.
Impact on Material Contracts Previously Filed
The new amendments come into force on March 17, 2008. Any material contracts that have not been filed by a reporting issuer prior to that date will be subject to the new rules. We understand that it was not the intention of the regulators to require reporting issuers to "un-redact" information in previously filed material contracts to the extent that such redacted information is of the type that cannot be redacted under the new rules. Accordingly, we do not recommend that issuers re-examine material contracts they have previously filed on SEDAR.
However, reporting issuers will have to consider whether they or their subsidiaries are party to any other material contracts that have not been previously filed but would have to be filed under the new rules (including amendments to previously filed contracts). Going forward, issuers will need to consider more carefully whether filing on SEDAR will be required and, if so, whether the redaction of information in newly-filed contracts or amendments is permissible under the new rules.
Desmond Lee practises corporate and securities law in the firm's Toronto office. Doug Bryce is a partner in the firm's Business Law Department practising in the Mergers & Acquisitions and Corporate Finance Groups.
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