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
insider"
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.
Footnotes
1 In Ontario, this reporting requirement will continue to
be set out in section 107 of the Securities Act (Ontario) (the
"OSA").
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.
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.
