The Canadian Securities Administrators (the "CSA") have issued a notice and request for comment proposing a new national regime on insider reporting obligations and exemptions. The new rules would be set out in National Instrument 55-104 Insider Reporting Requirements and Exemptions (the "Proposed Instrument") and a related companion policy.
The new regime would replace National Instrument 55-101 Insider Reporting Exemptions ("NI 55-101"), Multilateral Instrument 55-103 Insider Reporting of Certain Derivative Transactions (Equity Monetization) ("MI 55-103") and each of their related companion policies.
A summary of the significant changes to the insider reporting rules proposed by the new regime is provided below.
1. New concept "reporting
The CSA proposes to focus the insider reporting requirements on a narrower, core group of insiders. The core group includes significant shareholders of the issuer and other insiders who satisfy both of the following criteria:
(i) the insider in the ordinary course receives or has access to material undisclosed information concerning the reporting issuer or a major subsidiary of the reporting issuer prior to general disclosure; and
(ii) the insider, directly or indirectly, exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer.
Accordingly, the new definition of "reporting insider" will comprise (i) a list of persons or companies that are thought to generally satisfy the criteria of routinely having access to material undisclosed information and significant influence over the reporting issuer, and (ii) a "basket" provision that explicitly cites the above-mentioned criteria.
The current insider reporting regime under NI 55-101 exempts from the reporting requirement persons who do not meet the first of these criteria, that is, persons who do not have routine access to material undisclosed information. The Proposed Instrument will further narrow the reporting requirement to include only those persons satisfying both this criterion and the criterion of having significant influence over the reporting issuer.
In addition, the Proposed Instrument will apply to certain persons who satisfy these two criteria but may not currently be required to file insider reports because they may not technically be insiders.
The CSA is concerned that certain persons who would be insiders of an operating entity underlying an income trust if the operating entity were a reporting issuer may not, for technical reasons, be insiders of the income trust. In this regard, the Proposed Instrument (section 1.2) expressly designates the following persons and companies as insiders:
(i) a management company that provides significant management or administrative services to the issuer or a major subsidiary of the issuer, and every director, officer and significant shareholder of the management company; and
(ii) every director, officer and significant shareholder of a principal operating entity in the case of an issuer that is an income trust.
2. Definition of "major subsidiary"
The CSA seeks to amend the percentage thresholds in the definition of "major subsidiary" (currently found in NI 55-101) from 20% of consolidated assets or revenues to 30% in the Proposed Instrument. This would reduce the number of insiders who will be reporting insiders since the definition of reporting insider includes various persons or companies at the major subsidiary level.
For example, if the proposed change is accepted, a director of a subsidiary the assets or revenues of which comprise 25% of the reporting issuer's consolidated assets or revenues on a consolidated basis will no longer be required to file insider reports, since the subsidiary will no longer be a major subsidiary.
3. Reporting deadline
The Proposed Instrument accelerates the reporting deadline from 10 days to five calendar days for insider reports disclosing changes to previously reported holdings.1
There will be no changes to the current 10 day timeline for filing initial reports to accommodate new filers and the time associated with creating new insider profiles on the System for Electronic Disclosure by Insiders ("SEDI").
4. Definition of "significant shareholder"
The Proposed Instrument contains a new term "significant shareholder" used to refer to a person or company who is an "insider" under securities legislation because the person has beneficial ownership of or control or direction over, or a combination of beneficial ownership of and control or direction over, whether direct or indirect, securities of an issuer carrying more than 10% of the voting rights attached to all of the issuer's outstanding voting securities. The definition of "significant shareholder" has the same meaning as the corresponding language in the definition of "insider" in securities legislation.
The definition of "significant shareholder" under the Proposed Instrument (and the corresponding language in the definition of "insider" in securities legislation) do not make a distinction between different classes of voting securities that may have different voting entitlements. The CSA has noted that this language may result in situations, particularly in the case of issuers with multiple-voting share structures, where a shareholder may hold a significant proportion of voting securities of a particular class but not be a significant shareholder (or an insider) because of the effect of a separate class of voting securities.
5. Reportable transactions
Part 3 of the Proposed Instrument contains the primary insider reporting requirements. Reporting insiders are generally required to file insider reports disclosing the reporting insider's:
(i) beneficial ownership of, or control or direction over, directly or indirectly, securities of the reporting issuer; and
(ii) interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer.
Part 4 of the Proposed Instrument contains a supplemental insider reporting requirement relating to certain agreements, arrangements or understandings that may not technically trigger the above tests for reporting under Part 3 but that otherwise satisfy the CSA's policy rationale for insider reporting.
The supplemental insider reporting requirement follows the insider reporting requirement for derivatives that previously existed under MI 55-103. However, because Part 3 of the Proposed Instrument requires insiders to file insider reports about transactions involving "related financial instruments", most transactions that were previously subject to a reporting requirement under MI 55-103 will instead be subject to the primary insider reporting requirement under Part 3 of the Proposed Instrument.
If a reporting insider enters into an equity monetization transaction or other derivative-based transaction that falls outside of the primary insider reporting requirement in Part 3 of the Instrument, the reporting insider must report the transaction under Part 4.
6. Report by certain designated insiders for certain historical transactions
Sections 1.2(2) and (3) of the Proposed Instrument provide that directors and officers of an issuer may, in certain circumstances, be designated or determined to be insiders of a second issuer. Section 3.6(1) of the Proposed Instrument requires these individuals to file, within 10 days of being designated or determined to be an insider of the second issuer, insider reports for transactions involving securities of the second issuer for a historical period of up to six months. These provisions are based on the "deemed insider look-back" provisions in the securities legislation of some jurisdictions, which will be effectively repealed on the coming into force of the Proposed Instrument.2 With this look-back provision, the CSA seeks to address concerns over directors and officers of a company proposing to acquire a significant interest in another company by "frontrunning" the acquisition through personal purchases of shares of the second company.
Under the current regime, insiders who are required to file insider reports in accordance with deemed insider look-back provisions must file these reports on SEDI. Under the Proposed Instrument, these individuals will be required to file insider reports in respect of these historical transactions in paper format on SEDAR. The CSA's rationale behind this filing change is two-fold. First, the CSA reports that insiders have experienced difficulties in filing reports about these historical transactions on SEDI and have inadvertently triggered late fees. Second, because these filings have commonly arisen in a takeover bid context, the CSA considers it helpful for market participants to view these filings in conjunction with other filings relating to the take-over bid.
The CSA has noted that the change in filing procedures may raise a concern about fragmenting an insider's disclosure where historical transactions are disclosed on SEDAR but current and future transactions are disclosed on SEDI.
7. Concept of "post-conversion beneficial ownership"
The Proposed Instrument introduces the defined term "significant shareholder based on post-conversion beneficial ownership." The CSA suggests that this concept, based on a similar concept in the early warning regime,3 will ensure that a person crosses a disclosure threshold (either the early warning disclosure threshold or disclosure obligations associated with insider status) by holding a convertible security and not just the underlying security directly. For example, the same reporting requirements would apply to a person holding 9.8% of an issuer's common shares together with special warrants convertible into an additional 10% of the issuer's common shares as a person holding 19.8% of the issuer's common shares directly. The first-mentioned person will be a reporting insider because the person will be a "significant shareholder based on post-conversion beneficial ownership" under section 3.2 of the Proposed Instrument.
8. Exemption for certain issuer grant reports
The CSA proposes to introduce a new exemption that would permit an issuer, if it so chooses, to file on SEDAR an "issuer grant report" to assist its insiders in their reporting of option grants. If the issuer files an issuer grant report, the insider recipients of this grant would then be exempt from the requirement to file an insider report about the grant by the ordinary filing deadline and could instead file an alternative report on an annual basis.
The CSA's rationale for this exemption is to help insiders that have experienced difficulties in filing insider reports by the required deadline about transactions that originate at the issuer level. For example, where the issuer grants stock options to insiders but fails to provide the insiders with the necessary information in a timely manner.
1 In Ontario, this reporting requirement will continue to
be set out in section 107 of the Securities Act (Ontario) (the
2 The "look back" provision in the OSA at section 107(3) has been repealed (2006, c. 33, Schedule Z.5, s. 10).
3 See section 1.8 of Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids and section 90(1) of the OSA.
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