The Corporate Finance Branch of the Ontario Securities Commission (OSC) recently released its annual report (http://www.osc.gov.on.ca/documents/en/Securities-Category5/sn_20091126_51-706_cf-rpt-2009.pdf) for 2009. The report reviews a number of the actions taken and issues considered by the Corporate Finance Branch over the last year, including certain actions taken in response to the market downturn, a summary of its continuous disclosure review activities, the pending transition to IFRS, and a review of certain significant decisions of the OSC on merger and acquisition matters over the past year. This article highlights a selection of topics found in the report.
Continuous Disclosure Review
A key theme of the OSC Staff's continuous disclosure review efforts this past year is the identification of the failure of several issuers to move beyond "boilerplate" and generic language when specific disclosure is in fact required. It is often mentioned that language for specific disclosure requirements (i.e., related party disclosure; liquidity and capital resources disclosure) is simply lifted from an issuer's financial statements. OSC Staff are clearly looking for more specific and directed language in response to disclosure requirements.
Pension plans, specifically of the defined benefit plan variety, appear to remain on the forefront of the OSC's issue list. It was notable that OSC Staff required most of the issuers that had their continuous disclosure documents reviewed to provide greater disclosure in their MD&A as to how pension funding obligations were affecting their financial position and any risks associated with funding the pension plans. Not surprisingly, if an issuer received any temporary solvency funding relief, the impact of such relief should be fully outlined in their MD&A.
As a result of the 2009 restructuring of the non-bank asset-backed commercial paper market in Canada, new notes were issued with maturities that coincide with the terms of the underlying assets. In the first two quarters of 2009, OSC Staff scrutinized the filings of significant holders of the new notes. Generally, the OSC was dissatisfied with the amount and detail of the disclosure provided by these significant holders of notes. Specifically, OSC Staff was concerned with:
- insufficient disclosure regarding assumptions and criteria used when determining fair market value for illiquid notes;
- improperly classifying new notes as "current assets" on the balance sheet (without actually clarifying how the new notes ought to be classified);
- not considering all market data in valuation procedure; and
- little mention of changes in material assumptions and how this affects fair market value over different periods of time.
The above comments should be considered by all issuers holding the new ABCP notes.
Mergers & Acquisitions
On M&A matters, OSC Staff included a brief analysis of some recent developments.
Firstly, commentary is provided regarding potential acquirors that modify their bid in a less favourable way, or that unilaterally withdraw a bid. This commentary was expounded upon when, on December 18, 2009, the CSA issued Staff Notice 62-305 (http://www.osc.gov.on.ca/documents/en/Securities-Category6/csa_20091218_62-305_take-over-bids.pdf), which expressed detailed concern about these types of actions. OSC Staff believe that these actions are inconsistent with the take-over bid framework, and have given notice that they will be scrutinizing such behaviour very closely.
The Corporate Finance Branch Report also reviews four key M&A decisions of the Commission from 2009. This review provides brief insights into OSC Staff's analysis of some of the issues raised by each decision.
- Re HudBay Minerals Inc: the Commission overruled the TSX's decision to not seek shareholder approval on a highly dilutive share issuance by an acquiror because the Commission believed that without such approval, the quality of the marketplace would be adversely affected and would be contrary to the public interest. In short, the Commission felt that the decision was not 'reasonable,' and ultimately ordered that shareholder approval be obtained by the acquiror.
- InterRent Real Estate Investment Trust: using the 'reasonable' standard of review used in HudBay, the Commission upheld the TSX's decision not to require shareholder approval for a private placement by InterRent. Unlike in the HudBay decision, the TSX was more thorough and detailed in its analysis and decision in this case.
- Re JLL Patheon Holding LLC: the Commission dismissed an application, with important conditions, by a special committee of directors of Patheon Inc. that alleged that certain shareholders who were "joint actors" with the bidder were receiving special treatment under a take-over bid in being permitted, at their option, to retain equity in the successor company. The Commission took steps to enforce the equal treatment of all Patheon shareholders.
- Pala Investment Holdings Inc: the Commission dismissed Pala's application to cease trade a second shareholder's rights plan adopted by Neo Material Technologies Inc, and approved by its shareholders in the face of the take-over bid of which the shareholders were fully informed.
Financial Hardship Exemption: MI 61-101
In the spring of 2009, the TSX issued a staff notice (http://tmx.complinet.com/en/display/display.html?rbid=2072&element_id=715) regarding the financial hardship exemption available to listed issuers under the TSX's rules. The notice detailed the stringent requirements an issuer must satisfy to qualify for such exemption, and reinforced the message that it should only be used by those issuers in "serious financial difficulty."
Multilateral Instrument 61-101— Protection of Minority Security Holders in Special Transations also has a financial hardship exemption. OSC Staff noted that the advice of the TSX in their notice is equally applicable to an issuer seeking to rely on the financial hardship exemption available under MI 61-101.
OSC Staff recapped its earlier comments regarding the upcoming changes to IFRS from Canadian GAAP, found in CSA Staff Notice 52-320 (http://www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20080509_52-320_fin-rpt-standards.pdf) Disclosure of Expected Changes in Accounting Policies Relating to Changeover to International Finance Reporting Standards. Among the key concerns, OSC Staff noted that many issuers are providing 'boilerplate IFRS transition disclosure,' thus not providing investors enough information regarding the status of the issuers' changeover plans.
A summary of regulatory impacts is provided in proposed National Instrument 52-107 (http://www.albertasecurities.com/securitiesLaw/ Regulatory%20Instruments/5/3266/3314291-v1-CSA_Notice_and_Request_for_Comment_for_NI_52-107.pdf ) Acceptable Accounting Principles and Auditing Standards, released in September, 2009. The summary provides commentary on changes the IFRS system will have to continuous disclosure, prospectus and certification rules, and details the most significant amendments in the transition.
Above all, Staff wants to ensure that issuers are prepared for the transition with a solid, tangible plan that will allow for 'business-as-usual' reporting of financial statements in this transitory period.
On February 5, 2010, the OSC published Staff Notice 52-718 IFRS Transition Disclosure Review, its review of annual 2008 and interim 2009 IFRS transitional disclosure. For further details, see our related article (http://mccarthy.ca/article_detail.aspx?id=4891).
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