Canada: Securities Regulators Provide Enhanced Guidance On Material Conflict Of Interest Transactions

Last Updated: August 18 2017
Article by Kris Miks and Lucas A. Tomei

Introduction

On July 27, 2017, staff of securities regulatory authorities in each of Ontario, Québec, Alberta, Manitoba, and New Brunswick (together, Staff) published a notice (Notice) setting out the recent experiences and approach of Staff in Ontario and Québec in reviewing insider bids, issuer bids, business combinations and related party transactions (collectively, material conflict of interest transactions), each as defined in Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (MI 61-101). In addition, Staff in Alberta, Manitoba and New Brunswick have indicated that they intend to adopt the same approach in reviewing material conflict of interest transactions. The Notice also provides an overview of factors considered by Staff in reviewing the role of a board of directors and/or special committee in material conflict of interest transactions, and provides guidance for issuers, insiders and other related parties who are required to comply with MI 61-101.

Background

MI 61-101 establishes a securities regulatory framework that is designed to mitigate the risks faced by minority security holders in connection with transactions where a related party of a reporting issuer may have superior access to information or significant influence with the issuer, or where a related party may be entitled to a benefit that is not generally available to all security holders. MI 61-101 applies to four categories of transactions, namely: "insider bids", where an insider of an issuer seeks to acquire more than 20 percent of the issuer's securities; "issuer bids", where the issuer offers to repurchase equity securities from shareholders; "business combinations", which involve the termination of an equity security without the holders' consent and which involve a related party component; and certain transactions between an issuer and a related party of the issuer. MI 61-101 is intended to ensure that all security holders are treated in a manner that is fair and perceived to be fair and, depending on the type of transaction, seeks to achieve such objectives through procedural protections for minority security holders, including formal valuations, enhanced disclosure and disinterested shareholder approval (majority of the minority approval) requirements. In achieving the objectives of MI 61-101, Staff has confirmed that it will apply a broad and purposive interpretation of the requirements of MI 61-101 that emphasizes its underlying policy rationale.

Staff review

The Notice provides key insight into the application of MI 61-101 by Staff with respect to material conflict of interest transactions and confirms that Staff reviews material conflict of interest transactions on a real-time basis to assess and ensure compliance with MI 61-101, and to determine whether a transaction raises potential public interest concerns. Specific items identified as part of Staff's review are: (i) compliance with disclosure requirements; (ii) compliance with the conditions required for reliance on an exemption from the formal valuation and disinterested shareholder approval requirements set out in MI 61-101; and (iii) the substance and disclosure of the process conducted by an issuer's board of directors or special committee in considering a material conflict of interest transaction.

Staff's review will generally commence upon an issuer filing public disclosure documents for the transaction. If, during its review, Staff identifies non-compliance with MI 61-101 or potential public interest concerns, Staff may contact the issuer or the issuer's legal counsel to seek additional information or documentation, which could include special committee meeting minutes, the special committee's mandate and other relevant materials. If Staff remains unsatisfied with its review, it may seek a variety of remedies, including corrective disclosure by the issuer or proceed to enforcement.

Special committees

The Notice confirms that while the formation of a special committee of independent directors is not mandated by MI 61-101, except in the case of insider bids, the formation of a special committee to ensure that the interests of minority security holders are fairly considered in the negotiation and review of such a transaction is a primary means for managing a conflict of interest. Further, Staff confirms that the formation of a special committee with a robust mandate is advisable for all material conflict of interest transactions.

The Notice provides the following specific guidance with respect to special committees of independent directors in connection with material conflict of interest transactions:

  • Timely formation and effectiveness: Special committees should be established early in the process for a material conflict of interest transaction and should be formed before a proposed transaction has been substantially negotiated;
  • Composition: The members of a special committee should be independent within the meaning of MI 61-101 and conduct themselves in a manner that is independent of the issuer. The special committee should have the authority and opportunity to discharge its mandate without undue influence from interested parties;
  • Role and process: In order to be effective, a special committee should: (i) have a robust mandate; (ii) engage independent advisors; (iii) supervise negotiations with respect to the transaction; (iv) keep accurate records; and (v) ensure non-coercive conduct by interested parties;
  • Mandate: A special committee's mandate should provide the special committee with the ability to:
    • negotiate or supervise the negotiation of a proposed transaction (rather than simply review and consider it);
    • consider alternatives to the proposed transaction that may be available, including maintaining the status quo or seeking other transactions that would enhance value to minority security holders;
    • make a recommendation regarding the proposed transaction or provide detailed reasons why the special committee was unable to make a recommendation; and
    • hire its own independent legal and financial advisors, without any involvement of, or interference from, interested parties or their representatives;
  • Negotiations: The exact nature of the involvement of a special committee in the negotiations pertaining to a particular transaction will depend on the context. A special committee should negotiate a transaction from the outset or, where a special committee has not been involved in preliminary negotiations, it should not be bound by such negotiations and should be authorized to further review, negotiate and/or consider alternatives; and
  • Fairness: It is the responsibility of the board of directors or the special committee to determine whether a fairness opinion is appropriate to assist in making a recommendation to security holders on a proposed transaction, and to determine the terms and financial arrangements for the engagement of a financial advisor. If a financial advisor is retained to provide an opinion with respect to the fairness of the consideration, such opinion does not absolve the special committee of its responsibility to conduct a broader review of the proposed transaction. In addition, the special committee should conduct a thorough review of the fairness opinion and utilize its own experience and knowledge of the issuer to consider the appropriateness of the assumptions and methodologies used by the financial advisor.

Enhanced disclosure

Staff notes that the enhanced disclosure requirements in MI 61-101 constitute one of the fundamental protections imposed by MI 61-101, and attempts to address the asymmetry of information that may exist when minority security holders are asked to consider and approve, or tender into, a material conflict of interest transaction.

The Notice provides that issuers and insiders discharging their duties under MI 61-101 are expected to ensure the fair treatment of minority security holders and fully comply with the "spirit and intent" of MI 61-101. In light of this requirement, the Notice provides the following guidance for ensuring that an issuer and/or its insiders comply with such obligation:

  • Disclosure standards: The disclosure should include a thorough discussion of: (i) the review and approval process that was undertaken; (ii) the reasoning and analysis of the board of directors and/or special committee; (iii) the views of the board of directors and/or special committee as to the desirability or fairness of a proposed transaction; (iv) reasonably available alternatives to a proposed transaction, including maintaining the status quo; and (v) the pros and cons of a proposed transaction;
  • Disclosure regarding background and process: The disclosure should include a fulsome discussion of: (i) the context and background to a proposed transaction; (ii) the board of directors' or special committee's process and their rationale for supporting a proposed transaction; (iii) dissenting views of directors in respect of a transaction, if any; and (iv) potential concerns with a proposed transaction or available alternatives to the transaction to ensure the presentation of balanced disclosure;
  • Desirability or fairness of transaction: The disclosure should contain a meaningful discussion of the analysis provided by the advisors and how the board of directors and special committee considered the advice provided in concluding that the transaction should be recommended to security holders. The disclosure should address the interests of minority security holders and not be limited to whether the transaction is in the best interests of the issuer as required under corporate law; and
  • Recommendations: In the exceptional circumstances where a board of directors determines not to make a recommendation as to how minority security holders should vote or tender their securities, there should be a high level of disclosure such that minority security holders are provided with equivalent information and analysis to the special committee to enable security holders to consider a proposed transaction.

Financial advisors and fairness opinions

While MI 61-101 does not require a fairness opinion in connection with material conflict of interest transactions, Staff asserts that if a fairness opinion has been obtained, the disclosure document should:

  • disclose compensation arrangements with the financial advisor, including whether the financial advisor is being paid a flat fee, a fee contingent on delivery of the final opinion, or a fee contingent on the successful completion of the proposed transaction;
  • explain how the board of directors or special committee took into account the compensation arrangement with the financial advisor when considering the advice provided;
  • disclose any other relationship or arrangement between the financial advisor, and the issuer or other interested party that may be relevant to a perception of lack of independence in respect of the advice received or opinion provided;
  • provide a clear summary of the methodology, information and analysis underlying the opinion so as to enable a reader to understand the basis for the opinion; and
  • explain the relevance of the fairness opinion to the board of directors and special committee in coming to the determination to recommend the transaction.

Additionally, if a fairness opinion is requested and a financial advisor is not able or willing to provide one, the disclosure document should set out the financial advisor's reasons for not providing the fairness opinion, and explain how the special committee and board of directors took the financial advisor's decision into account and its relevance to any recommendation made to security holders concerning the transaction.

Conclusion

The Notice advises issuers and their advisors of Staff's real time review of continuous disclosure documents that are filed in connection with material conflict of interest transactions, and provides clear guidance with respect to Staff's perception and consideration of various issues that frequently arise in connection with such transactions that fall within the purview of MI 61-101, including the utility of a properly-constituted special committee, required compliance with the enhanced disclosure requirements imposed by MI 61-101 and disclosure in connection with fairness opinions.

Directors and officers of issuers that are considering material conflict of interest transactions should carefully consider the guidance provided in the Notice, as such transactions are often fraught with uncertainty and subject to heightened scrutiny, and the Notice provides beneficial guidance with respect to Staff's expectations.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

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. Specific Questions relating to this article should be addressed directly to the author.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
14 Nov 2018, Other, Toronto, Canada

Save the date. It’s that time of the year to mark your calendars for the opportunity to earn the rest of your CPD credits all in one day!

27 Nov 2018, Other, Toronto, Canada

Dentons is pleased to sponsor the Global Property Market Forum taking place November 27, 2018 in Toronto.

30 Nov 2018, Conference, Toronto, Canada

Dentons is proud to be the presenting sponsor for Autonomous Vehicle P3s: Visions of the Future at this year’s CCPPP conference in Toronto on Nov 5-6, 2018.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions