The Canadian Securities Administrators (the "CSA") have announced the adoption of a new national regime on insider reporting obligations and exemptions. The new regime, scheduled to come into force on April 30, 2010, is set out in National Instrument 55-104 Insider Reporting Requirements and Exemptions (the "New Instrument") and a related companion policy. The new regime is substantially similar to the proposed regime announced by the CSA on December 18, 2008.
The new regime will 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. Consequential amendments will be made to Multilateral Instrument 11-102 Passport System, National Instrument 14-101 Definitions, and National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues. In Ontario, the new regime will require legislative amendment, which is anticipated to be in effect by April 30, 2010.
A brief summary of the significant changes made to the insider reporting rules in Canada by the new regime is provided below.
New concept "reporting insider"
The new regime is designed to focus the insider reporting requirements on a narrower, core group of insiders than the group currently subject to insider reporting. This has been achieved by shortening the list of positions that are always required to report and including a "basket" provision that captures any other insider that satisfies both of the following criteria:
(i) the insider in the ordinary course receives or has access to material undisclosed information concerning 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.
Under the new regime, the core group of insiders that are always required to file insider reports is now the chief executive officer, the chief operating officer, the chief financial officer (or individuals acting in a similar capacity), directors and major shareholders, whereas under the previous regime, this core group was all senior officers, directors and major shareholders.
In addition, the New Instrument will apply to certain persons who satisfy the two specified 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 New Instrument 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.
Definition of "major subsidiary"
The percentage thresholds in the definition of "major subsidiary" (currently found in NI 55- 101) will be increased from 20% of consolidated assets or revenues of the subject issuer to 30% in the New Instrument. This will 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.
The New Instrument accelerates the reporting deadline from 10 days to five calendar days for insider reports disclosing changes to previously reported holdings. This accelerated reporting requirement will apply, however, only to transactions that occur on or after November 1, 2010.
The CSA has also clarified that, for the purposes of the insider reporting regime, they are of the view that changes in beneficial ownership occur at the time that an offer to sell or to buy is accepted. It will therefore be from the time of this acceptance that the reporting deadline should be calculated as opposed to the date of settlement of the trade.
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").
Exemption from reporting stock compensation grants where issuer files reports
The CSA proposes to introduce a new exemption that would permit an issuer, if it so chooses, to file on SEDI an "issuer grant report" to assist its insiders in their reporting of grants of option and other stock-based compensation. 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.
Definition of "significant shareholder"
The New Instrument contains a new term "significant shareholder" used to refer to a person or company that 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.
Part 3 of the New 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 New 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 New 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 New 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.
Report by certain designated insiders for certain historical transactions
The New Instrument provides that that the CEO, CFO, COO and each director of an issuer may, in certain circumstances, be designated or determined to be insiders of a second issuer. These individuals are required 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 New Instrument. 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 "front running" the acquisition through personal purchases of shares of the second company.
Concept of "post-conversion beneficial ownership"
The New Instrument introduces the defined term "significant shareholder based on postconversion beneficial ownership". The CSA suggests that this concept, based on a similar concept in the early warning regime, 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 the New Instrument. In calculating post-conversion beneficial ownership, one includes only the convertible securities held by the potential reporting insider, without assuming conversion of the entire class of convertible securities outstanding.
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.