Canada: Continuous Disclosure Obligations - Further Amendments To National Instrument 51-102 Regarding Material Contracts To Come Into Force On March 17, 2008

Last Updated: June 7 2008
Article by Peter Villani and Nicolas Morin

In addition to the amendments to National Instrument 51-102 – Continuous Disclosure Obligations (National Instrument 51-102) which we have discussed in our previously released bulletin of January 2008 (Securities Law Update Bulletin - January 2008), further amendments to National Instrument 51-102 will be coming into effect on March 17, 2008.

These changes concern the notion of "material contract" and the obligation for reporting issuers to file their material contracts with the securities authorities and on SEDAR.

First, National Instrument 51-102 defines material contract as "any contract that an issuer or any of its subsidiaries is a party to, that is material to the issuer". Companion Policy 51-102CP – Continuous Disclosure Obligations (CP 51-102) further defines material contracts as "contracts that can reasonably be regarded as materially affecting the rights of their securityholders generally". If these definitions do not provide more insight on what the securities laws mean exactly by a material contract per se, CP 51-102 identifies for example a warrant indenture to be a contract that can be reasonably regarded as materially affecting the securityholders' rights. Furthermore, the new amendments to National Instrument 51-102 provide a list of deemed material contracts which are required to be filed by reporting issuers. Hence, a reporting issuer would be required to file the following material contracts 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 issuer's products or services or to purchase the majority of the issuer's requirements of goods, services or raw materials;

  • a franchise or license 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;1

  • an external management or external administration agreement (including an agreement between the issuer and a third party, the issuer's parent entity or an affiliate of the issuer); or

  • a contract on which the issuer's business is substantially dependent.2

Thus, any material contract entered into in the ordinary course of business that is not included in the above list would not be considered as affecting the rights of securityholders generally and would not have to be filed. However, CP 51-102 considers that whether a contract has been entered into in the ordinary course of business is a question of fact to be considered by the issuer in the context of its business and industry.

CP 51-102 also states that a material contract will generally include a schedule, side letter or exhibit referred to therein and any of its amendment.

National Instrument 51-102 still requires that, unless previously filed, issuers must file a material contract entered into within the last financial year or before the last financial year if that material contract is still in effect.

The new amendments to National Instrument 51-102 also provide a possibility for issuers to omit or mark to be unreadable a provision in a material contract if an executive officer of the issuer has reasonable ground to believe that a disclosure of that provision would be seriously detrimental to the issuer (such as information in violation of applicable Canadian privacy legislation, if not already disclosed) or would infringe confidentiality provisions. For the latter exception, CP 51-102 mentions however that issuers should consider their disclosure obligations under securities legislation when negotiating material contracts with third parties.

If the issuer decides to omit or to mark to be unreadable a provision in a material contract, it must nevertheless include a brief one-sentence description of the type of information that has been omitted or marked to be unreadable in lieu of the provision in the copy of the material contract that is to be filed. However, an issuer may not omit or mark to be unreadable a provision in a material contract if the provision relates to (i) debt covenants and ratios in financing or credit agreements, (ii) events of defaults or other terms relating to the termination of the material contract or (iii) terms that are essential to understand the impact of such material contract on the business of the issuer.3 However, the issuer may seek an exemptive relief from securities regulators to allow him to redact such provisions if (a) the disclosure of such provision would violate a confidentiality provision, and (b) the material contract was negotiated before December 21, 2007.

Also, the new amendments to National Instrument 51-102 have maintained the non-obligation originally set forth in National Instrument 51-102 for issuers to file material contracts that were entered into before January 1, 2002.

Finally, all material contracts that are filed under the new amendments to National Instrument 51-102 will have to be described in the issuer's annual information form under the new subitem 15.1 of Form 51-102F2 – Annual Information Form.

Second Phase of Passport System to Come into Force on March 17, 2008 – A Reminder

The previously announced second phase of the passport system is now confirmed to come into force on March 17, 2008 in all Canadian securities jurisdictions, except Ontario. Multilateral Instrument 11-102 – Passport System, National Policy 11-202 – Process for prospectus reviews in multiple jurisdictions and National Policy 11-203 – Process for exemptive relief applications in multiple jurisdictions are implemented to allow market participants access to the capital markets in multiple jurisdictions in Canada without having to deal with any other regulator but its principal regulator and without having to meet different sets of securities laws.

For further information on the second phase of the passport system, please click on the hyperlink below:

Securities Law Update Bulletin - October 2007

Footnotes:

1 We note that this provision uses the term "anticipated cash distribution" instead of "cash dividend" or "anticipated cash dividend". This allows us to conclude that this obligation is specifically aimed at income funds instead of corporations.

2 CP 51-102 refers to this type of contract as to generally be so significant that the issuer's business depends on the continuance of such contract. CP 51-102 lists some examples:

  • a financing or credit agreement providing a majority of the issuer's capital requirements for which alternative financing is not readily available at comparable terms;

  • a contract for the acquisition or sale of substantially all of the issuer's property, plant and equipment, long-lived assets, or total assets; or

  • 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.

3 Under CP 51-102, terms that may be necessary for understanding the impact of the material contract on the business of the issuer 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.

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