Canadian regulators propose harmonized take-over bid approach

In a much anticipated development, the Canadian Securities Administrators today provided an update on the status of their proposals to regulate take-over bids and shareholder rights plans. While not publishing any detailed amendments at this time, all CSA members have joined together to announce that they are taking a harmonized approach that will ultimately result in amendments to take-over bid rules across Canada.

Mandatory “permitted bid” features

Specifically, the regulators propose to introduce amendments to the current take-over bid regime that would require all formal bids for Canadian public targets to contain the following mandatory features:

  • a minimum bid period of 120 days (60 days longer than the standard permitted bid period);
  • an irrevocable minimum tender condition requiring that more than 50% of the outstanding securities owned by persons other than the bidder and any joint actors be tendered and not withdrawn before the bidder can take up under the bid; and
  • a 10-day bid extension period after the minimum tender condition is achieved and the bidder announces its intention to take up and pay.

While CSA Notice 62-306 clarifies that the 120-day period could be waived (to a minimum of 35 days) by the target board, provided it is in a non-discriminatory manner in the face of multiple bids, if applicable, it is not clear whether the remaining two features could be subject to a board waiver.

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Proposal for Canadian cooperative capital markets regulator released

The federal Department of Finance yesterday announced that the federal government, Ontario, British Columbia, Saskatchewan and New Brunswick have signed a Memorandum of Agreement setting out the terms and conditions of a Cooperative Capital Markets Regulatory System. As we discussed in July, the Finance Minister had recently stated that the new regulator could be in operation by next year.

Under the proposed cooperative system, participating provincial and territorial jurisdictions would enact uniform legislation addressing all matters in respect of the regulation of capital markets within their jurisdictions. Complementary federal legislation would address criminal matters and systemic risk in national capital markets and data collection. Meanwhile, a common regulator, the Capital Markets Regulatory Authority, would administer the provincial and federal legislation and regulations under authority delegated by the participating jurisdictions. 

A backgrounder setting out the key features of the cooperative system was also released, as were consultation drafts of the proposed federal Capital Markets Stability Act and the proposed provincial Capital Markets Act, as well as commentary on the governance and legislative framework. Comments are being accepted until November 7, 2014.

Emerging market issuers face prospectus scrutiny

Donald G. Belovich and Ryan Kirvan

In preparing and filing the preliminary prospectus, we have recently noticed that regulators are commonly responding with requests for further disclosure from issuers with mining properties in emerging markets. Often, the information requested is of the nature that you would expect should be included an annual information form (AIF) except that the nature of the information sought is not actually covered by the scope of required AIF disclosure.

As we’ve discussed in previous posts, regulators have in recent years increased the scrutiny over emerging market issuers. Specifically, the OSC undertook a targeted review of issuers with significant business operations in emerging markets in 2011 and released a notice outlining areas of concern in March 2012. Meanwhile, in November 2012, the OSC released a guide to assist boards and management of emerging market issuers in addressing the risks of doing business in emerging markets and satisfying their governance and disclosure obligations. The TSX and TSX-V also issued a consultation paper in December 2012 intended to identify the potential risks with listing emerging market issuers and to provide guidance to issuers with respect to applicable listing considerations. 

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Thoughts on Finance Canada's recently issued consultation paper on bail-in capital

Peter E. Hamilton

Last month, Canada’s Department of Finance published a consultation paper outlining a proposed taxpayer protection and bank recapitalization (bail-in) regime. The implementation of such a regime is intended to avoid the “unacceptable costs to the economy” that would result were a domestic systematically important bank to fail. The proposed regime is thus intended to reduce the likelihood of failure and, in the unlikely event of such failure, ensure the restoration of a bank’s viability with minimal taxpayer exposure to loss.

Below are some of my thoughts on the proposal.

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TSX clarifies rules regarding appeals of listing decisions

The TSX has announced the adoption of amendments to its Company Manual and to the TSX Rules to clarify matters related to appeals of listing-related decisions, and to ensure consistency between the Manual and the Rules with respect to appeals.

As we discussed when the changes were first proposed in 2012, the amendments (i) address the composition of appeal panels; (ii) codify the existing practice of requiring written requests for appeals and submissions; (iii) clarify that certain decisions may be delegated to listing managers; (iv) clarify the time frame for appeals; and (v) clarify the rules regarding suspension and termination of participating organizations.

The amendments are effective as of today.

A closer look at Orange Capital's unconventional tender offer for units of Partners REIT

Adam Kline and Alex Colangelo - 

On May 28, Orange Capital announced that it was launching a tender offer at a premium to market to purchase up to 10% of the outstanding units of Partners REIT. While it did not constitute a takeover bid, the tender offer was structured similar to a takeover bid, asking for willing shareholders to tender their securities to be potentially purchased by Orange Capital in accordance with the terms of the offer. Notably, the tender offer required that depositing unitholders be holders of record as of the record date in respect of the 2014 annual general meeting and appoint Orange Capital as their nominee and proxy for all deposited units in respect of the AGM.

In the event that more than the maximum number of units were delivered in accordance with the tender, the units purchased from each depositing unitholder were to be determined on a pro rata basis according to the number of units delivered by each unitholder. Orange Capital pledged to vote all proxies solicited in favour of a new slate of independent trustees to be nominated by Orange at the AGM.

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OSC publishes The Investment Funds Practitioner for July 2014

Darin Renton -

The Investment Funds and Structured Products Branch of the Ontario Securities Commission recently released the July 2014 issue of The Investments Funds Practitioner, which provides an overview of recent issues arising from applications for discretionary relief, prospectuses and continuous disclosure documents filed by investment funds. Below is a summary of a few issues identified.

Structured Products

According to the Practitioner, Branch staff have noticed that some pricing supplements for linked notes whose reference asset is a fund or ETF do not disclose the fees associated with the ownership of the reference asset. As such, funds are reminded to disclose any fees charged by the reference asset that affect the return of the notes.

Meanwhile, the Practitioner states that Branch staff are increasingly scrutinizing linked notes that have autocall features. Staff are specifically concerned that autocall notes could be mistaken for, and sold as, alternatives to fixed income or money market securities. Staff are thus now asking that the front page of autocall note prospectus supplements include a textbox disclosing the existence of downside risk and that such notes are not designed to be alternatives to fixed income or money market instruments.

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Delaware Chancery provides important guidance to boards of directors and financial advisors

Stéphane Rousseau and Benoît Dubord -

The recent Rural Metro decision in the Delaware Court of Chancery provides important guidance to boards of directors and financial advisors in change of control situations. Specifically, the decision underscores the need for boards to be actively engaged in the sale process and to be well-informed about the conflicts of interests of key players. For financial advisors in particular, Rural Metro teaches that full disclosure of conflicts of interest is expected, as financial advisors function as gatekeepers when they advise boards in sales processes.

Given the views expressed by Canadian courts and securities regulators on the role of boards and financial advisors, Rural Metro’s teachings are highly relevant from a Canadian perspective.

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New UK measures to counter avoidance schemes involving transfer of corporate profits

Jeffrey Keey

A new section 1305A of the UK Corporation Tax Act 2009 (CTA 2009) has been introduced by the UK Finance Act 2014 that applies to payments made from March 19, 2014 under avoidance schemes involving the transfer of corporate profits within a group.

This new measure applies if:

  • two companies (“A” and “B”) are members of the same “group”;
  • A and B are party to “arrangements” (whether or not at the same time);
  • the arrangements equate to, in essence, A (directly/indirectly) paying B “all or a significant part” of A’s profits (the “profit transfer”); and
  • one of the main purposes is to gain a “tax advantage”.

If applicable, the profits of A are reassessed for corporation tax on the basis that the profit transfer did not occur.

HM Revenue & Customs (HMRC) released amended guidance on the section on July 24. Groups should examine any arrangements with UK based members to ensure they are not caught by this new anti-avoidance measure.

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AMF extends comment period on draft derivatives data reporting regulation

The period to provide comments on Quebec’s draft Regulation to amend Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting, which was initially set to expire on August 2, 2014, has been extended until August 21. As we reported last month, Quebec’s Autorité des marchés financiers (AMF) published the draft amending regulation on July 3. 

The extension is intended to allow interested parties to consider the amending regulation in light of the AMF’s Decision No. 2014-PDG-0084 – Blanket decision regarding exemption from reporting obligation under Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting (available in French only) that was rendered on July 31.

The stated purpose of the decision is to permit the use of the reporting counterparty determination methodology developed by the International Swaps and Derivatives Association, Inc. (ISDA) by exempting the counterparty that is not the reporting counterparty under that methodology from the reporting obligation under Regulation 91-507 under certain conditions. According to the AMF, the decision is intended to ensure that the implementation of Regulation 91-507 will be harmonized with Ontario and Manitoba. As previously discussed, the Ontario Securities Commission incorporated the ISDA methodology through amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting, which received Ministerial approval on August 14. The rule in Manitoba was similarly amended effective July 2.

A closer look at investment fund modernization

Darin Renton and Nick Badeen

The Canadian Securities Administrators recently announced the adoption of final amendments that will implement certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project (the Amendments). As we discussed in an earlier post, the stated objective of Phase 2 was to achieve fair and consistent product regulation across the spectrum of retail investment funds, by broadly imposing certain “core” operational requirements on all types of publically offered (prospectus qualified) investment funds, whether such funds are traditional mutual funds or non-redeemable investment funds (NRIFs), which include closed-end funds and exchange traded mutual funds.

Subject to Ministerial approval requirements, the Amendments come into force on September 22, 2014. The Amendments, among other things, introduce the imposition of core investment restrictions for non-redeemable investment funds relating to investments for control, investments in real property, investments in non-guaranteed mortgages, investments in loan syndications and investments in other investment funds (fund-on-fund structure), and extend the framework in respect of securities lending, repurchase and reverse repurchase transactions to NRIFs.

Other elements of NI 81-102 that will be extended to, and to a certain extent expanded in relation to, NRIFs include requirements relating to conflicts of interest and securityholder and regulatory approval for fundamental changes. New requirements and restrictions with respect to the issuance of additional securities will also be implemented.

We will discuss some of the key aspects of the Amendments applicable to NRIFs in further detail below, as well as the applicable transition periods and limited grandfathering provided.

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OSC releases 2014 annual report

The Ontario Securities Commission recently released its 2014 annual report, which provides an overview of the OSC's key accomplishments over the course of the last year in relation to its stated goals.

Among other things, the report notes that in the last year OSC staff initiated 14 investigations into fraud and other egregious types of misconduct through its Joint Serious Offences Team in partnerships with police agencies, as well as four quasi-criminal proceedings in the Ontario Court of Justice. 

Meanwhile, the report also states that the OSC will continue to review market structure issues and assess the need for regulatory action in respect of such things as the order protection rule, high frequency trading, mutual fund fee structures and whether to introduce a best interest standard for dealers and advisers.

Constitutional challenge of FATCA agreement launched

Roanne C. Bratz, Vince Imerti and Jonathan Willson

On August 11, a constitutional challenge to the Agreement between the Government of the United States and the Government of Canada to Improve International Tax Compliance through Enhanced Exchanges of Information that was signed on February 5, 2014 (referred to as the “ US-Canada IGA”) and the new Foreign Account Tax Compliance Act (FATCA) provisions contained in Part XVIII of the Income Tax Act (Canada) was filed in Federal Court in Vancouver, British Columbia.

The plaintiffs instituted the lawsuit in the hopes of stopping the Government of Canada from turning over private bank account information from more than one million “United States persons” and their families living in Canada to the Internal Revenue Service. In doing so, the plaintiffs argue, in part, that portions of the US-Canada IGA violate provisions of the Canadian Charter of Rights and Freedoms by distinguishing and prejudicing citizens and residents of Canada who are “United States persons” from those who are not.

IIROC to provide extension for including terms in existing DEA agreements

IIROC announced this week that it will grant extensions to the September 1 deadline that requires that certain terms be included in routing arrangements and written agreements to provide direct electronic access. The 60-day extension only applies to pre-existing agreements and must be requested in writing. 

For more information, see IIROC Notice 14-0198.

Additional designated persons added to Russia and Ukraine sanctions lists

The Canadian government further expanded sanctions against Russia and Ukraine this week by adding persons and entities to the existing lists of designated persons to which sanctions apply. The sanctions were previously expanded late last month.

As we've previously stated, the sanctions prohibit Canadians and any person in Canada from, among other things (i) dealing in any property held by or on behalf of a designated person; (ii) providing any financial or other related service in respect of the property of a designated person; and (iii) providing any financial or related service to or for the benefit of a designated person. The sanctions also require that various financial entities, including securities dealers and advisers determine on a continuous basis whether they are in possession or control of property owned or controlled by or on behalf of a designated person.