Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

Richard Clark and Curtis Cusinato

As the global financial storm subsides, Canada’s economy is commanding unaccustomed attention and some new-found respect. A solid regulatory system and strong demand for Canadian resources and commodities have kept the country in the business headlines for all the right reasons. In the M&A sector, there is every indication that the rebound experienced in 2010 will continue in 2011, as market players continue to adjust and adapt. We believe that each of the trends identified below will play a part in shaping the market – whether it’s creative methods of financing, more realistic valuation methods, adjustment to deal terms or regulatory developments in the areas of foreign investment, taxation and securities law.

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Our colleague Susan Hutton recently published a short article discussing the BHP Billiton attempt to acquire PotashCorp on the competition group's blog, The Competitor. The post is available here.

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The U.S. SEC proposed rules last week that would require domestic and foreign issuers that must file annual reports with the SEC and that engage in the commercial development of oil, natural gas, or minerals, to disclose certain payments made to the U.S. and foreign governments. The types of payments that would have to be disclosed include taxes, royalties, fees and bonuses. The proposed rules stem from Dodd-Frank amendments to the Securities Exchange Act of 1934. The SEC is accepting comments on the proposed rules until January 31, 2011.

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On November 19, the SEC announced new rules to give effect to provisions of Dodd-Frank that amend the Investment Advisers Act of 1940. Specifically, the provisions include increasing the asset threshold for advisers to register with the SEC and repealing the private adviser registration exemption. Private advisers able to rely on one of the new exemptions from registration under Dodd-Frank, however, would still be required to satisfy certain reporting requirements.

The SEC also proposed rules to implement the new exemptions under Dodd-Frank, including one available to investment advisers that solely advise private funds if the adviser has assets under management in the United States of less than $150 million. A further exemption would be available to foreign private advisers that: (i) have no place of business the United States; (ii) have fewer than 15 U.S. clients and private fund investors; (iii) have less than $25 million in aggregate assets under management from U.S. clients and private fund investors; and (iv) do not hold themselves out generally to the public in the U.S. as an investment adviser. The SEC's proposals would also clarify the application of this exemption by defining a number of terms in the statutory definition of foreign private adviser.

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Staff of the Ontario Securities Commission (OSC) released a notice this week summarizing their findings on the adequacy of disclosures in financial statements and MD&A related to the going concern assumption. Canadian GAAP requires management to assess an issuer’s ability to continue as a going concern, and where this assessment identifies material uncertainties that give rise to a going concern risk, ensure the risk is disclosed in the financial statements. Disclosure in the MD&A should then complement and expand upon the financial statement disclosure to provide a complete discussion of the uncertainties and the effect that they have on the issuers’ operations, liquidity and capital. Staff’s review included an assessment of the timeliness and adequacy of this required disclosure related to the going concern assumption. 

The OSC reviewed the disclosure of 105 issuers with indications of financial difficulty or that had recently ceased operations. As a result, the findings provide guidance on improving the quality and sufficiency of going concern disclosure. Generally, the OSC found that issuers with indications of financial difficulty where there was some going concern disclosure needed some improvement in their MD&A discussion related to going concern risk. Staff have also advised that disclosure of going concern risks will continue to be an area of focus in the future, resulting in refilings being required in appropriate circumstances.

For more information, see OSC Staff Notice 52-719.

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A recent Financial Post article by Ed Waitzer, Director of the Hennick Centre for Business and Law at York University and partner at Stikeman Elliott and Marshall Cohen, chair of the Hennick Centre's Advisory Board and counsel at Cassels Brock & Blackwell, considers the difficulty in regulating corporate governance. Essentially, the authors argue that

[b]uilding layers of governance mechanisms in the hope of channelling behaviour often serves to frustrate meaningful stewardship on the part of corporate directors and management. Regulation of compensation, independence or other structural requirements will never be the answer, in isolation.

...

 

Perhaps we must look deeper into the DNA of the corporate model to understand and affirm its role in creating long-term value for individuals, firms, shareholders and communities. For example, we need to understand better the role of culture, character and reputation — on management, on the board, on the institutional owner community — in defining and implementing a meaningful sense of “ownership” and responsibility. Perhaps we have to challenge the structural paradigm itself, if we are to achieve meaningful and permanent change.

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On Wednesday, the Investment Industry Regulatory Organization of Canada released proposed guidance intended to make transparent the criteria it would use to determine whether to vary or cancel a trade under the authority of the Universal Market Integrity Rules.

Under Rule 10.9 of UMIR, IIROC may vary or cancel a trade that is "unreasonable" or not in compliance with UMIR or any policy. IIROC's regulatory intervention powers are currently exercised under its broad discretion. The proposed guidance is intended to elaborate upon and set out more transparent standards in regard to the exercise of these powers, particularly with respect to its power under 10.9(1)(d) respecting "unreasonable" trades.

In addition to the factors provided by Rule 10.9(2) for determining whether a trade is unreasonable, the proposed guidance also sets out a number of additional factors IIROC will consider, such as whether the volume or number of trades is unusual in the context of the market and whether the trade was made in error or as the result of a deliberate trade. The notice also includes information regarding halts with respect to situations where there has been "asymmetric" dissemination of material information. In this regard, IIROC acknowledges that intervention in trading related to asymmetric dissemination of material information is fairly unique to Canada, but maintains it has intrinsic value in protecting market integrity and providing a clear and transparent remedy to parties harmed by such activity. The relative certainty and immediacy of this remedy being distinguished from the remedy under the statutory regime for civil liability in secondary markets.

With respect to trades that are not in compliance with UMIR, IIROC stated that it may intervene in cases of rule violations that are self-evident at the time of execution, including violations of the client-principal trading requirement under Rule 8.1 of UMIR, the market stabilization price restrictions under Rule 7.7, the requirement not to "abuse" a person with Market Maker Obligations under Part 1 of Policy 2.1 or the requirement to move the market in an orderly manner over a period of time when executing a pre-arranged trade or intentional cross under Part 2 of Policy 2.1.

IIROC is accepting comments on the proposed guidance until February 14, 2011. For more information, see IIROC Notice 10-0331.

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The Investment Industry Regulatory Organization of Canada has confirmed that it has rescheduled the industry-wide test of dealers' business continuity plans, originally planned for June 2010, to September 10, 2011. The industry test, which was cancelled due to this summer's G20 meetings, will test the scenario of inaccessibility of downtown Toronto. While tests will be conducted voluntarily,

IIROC strongly urges all Dealer Members to participate in these tests as they represent a valuable opportunity for Dealer Members to supplement their respective mandatory annual tests which are required under IIROC regulation.

For more information, see IIROC Notice 10-0332.

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Currency exchange and funds transfer businesses not otherwise regulated would be covered.

On December 10th, the Quebec government adopted Bill 128, An Act to enact the Money-Services Businesses Act and to amend various legislative provisions. As a result, the Money-Services Businesses Act (the MSB Act) will come into force on the date to be set by the government. The MSB Act requires that persons operating a "money-services business" for compensation obtain a license from Quebec’s financial markets authority, the Autorité des marchés financiers (the AMF), and disclose information about their directors, officers, partners, shareholders, branch managers and employees working in Quebec and certain types of lenders they deal with. Please refer to our post of November 12 for more details with respect to the MSB Act.

As noted in our post of November 12, the initial draft of the MSB Act provided that all license applications, together with the payment of prescribed fees, would need to be filed on behalf of the money-services business by a director, officer or partner that is either domiciled in Quebec or that has a place of business or a place of work in Quebec. As adopted, the MSB Act clarifies that money-services businesses that are not incorporated under Québec law and that do not have their head office or an establishment in Quebec can appoint a Quebec respondent for these purposes. The respondent does not need to be a director, officer or partner of the money-services business but must be in a position to adequately exercise its functions as a respondent vis-a-vis the AMF, and the money-services business must provide the respondent with the necessary information and documentation. 

The detailed initial registration and ongoing compliance requirements applicable to "money services businesses", including the qualifications and responsibilities of persons who could serve as respondents for purposes of registration under the MSB Act, have yet to be spelled out by regulation.

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The Canadian Coalition for Good Governance yesterday released its 2010 Proxy Circular Disclosure Best Practices, a report that considers the specific matters that corporate disclosure should address and analyzes examples of actual company disclosure. While the report considers director-related disclosure, much of it focuses on executive compensation. On the latter topic, the CCGG states that compensation plans should be aligned with the Coalition's executive compensation principles, namely, that:

1. "pay for performance" should be a large component of executive compensation;
2. performance should be based on measurable, risk-adjusted criteria and evaluated over an appropriate time horizon, to ensure the criteria have been met;
3. compensation should be simplified to focus on key measures of corporate performance;
4. executives should build equity in the company, to align their interests with shareholders;
5. companies should put appropriate limits on pensions, benefits, severance and change of control entitlements;
6. effective succession planning helps to mitigate the need to pay for retention.

According to the CCGG, compensation plan disclosure should "clearly describe" how the plan is linked to the company's strategy, objectives and risk management, and describe (among other things) the board's role in designing and determining executive compensation and key factors considered by the board. Numerous examples of executive compensation disclosure are also provided.

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Sylvie Hébert

The new Quebec Business Corporations Act (QBCA), which was introduced following three years of extensive consultations, will come into force on February 14, 2011.

Major reform of Quebec corporate law

As discussed in our December 2009 bulletin, the QBCA makes major changes to the regime applicable to companies currently governed by the Quebec Companies Act (QCA). These changes will take effect as soon as the QBCA comes into force on February 14, 2011 as the Act will automatically apply to companies constituted, continued or resulting from an amalgamation under Part IA of the QCA without any action required on their part. They will become “business corporations” governed by the new statute, as will insurance companies within the meaning of the Act respecting insurance, to which Part IA of the QCA applies. Companies constituted, continued or resulting from an amalgamation under Part I of the QCA will, for their part, have five years to send articles of continuance to the enterprise registrar in accordance with the new statute, failing which they will be dissolved. The same transition period will apply to companies incorporated under the Mining Companies Act.¹

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Yesterday, the Canadian Securities Transition Office released an update on its activities for the last few months. Notably, the CSTO stated that it has now begun to develop regulations to accompany the proposed federal Securities Act released by the Department of Finance earlier this year. The CSTO intends to seek comments on proposed regulations as work progresses.

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The CSA announced today that a new version of the SEDAR Filer Manual (version 8.15) is now available, which provides updated and new guidance on such things as privacy, passport processes and filing processes. For more information, see CSA Staff Notice 13-317.

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As we discussed in an earlier post, the CSA published amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, its companion policy and related forms in October in furtherance of their project to implement point of sale disclosure for mutual funds. The Ontario Minister of Finance has now approved the amendments, with minor modifications, which will become effective on January 1, 2011.

The Minister also recently approved the IFRS-related amendments referred to in our post of October 1 (with minor modifications). Generally, the amendments affect continuous disclosure rules, prospectus rules, certification rules and registration materials and also come into force on January 1, 2011.

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On December 8, Ontario's Bill 135, the Helping Ontario Families and Managing Responsibility Act 2010, received Royal Asset. The Act amends the Ontario Securities Act and, among other things, (i) establishes a regulatory framework for trading in derivatives in Ontario; (ii) allows the Ontario Securities Commission to regulate credit rating organizations; (iii) provides the OSC authority to recognize and make decisions related to alternative trading systems and (iv) extends current prohibitions on insider trading and tipping to issuers that have a "real and substantial connection" to Ontario and whose securities are listed and posted on the TSX-V. Most of the amendments came into force on the day of Royal Assent, while certain provisions principally relating to the regulation of derivatives will not come into force until a date still to be proclaimed.

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The Alberta Securities Commission recently released its Corporate Finance Disclosure Report for 2010, which reviews the findings from the ASC's review of reporting issuers' continuous disclosure. While the ASC stated that it was "generally satisfied" with the results of its review, the report identifies disclosure deficiencies and provides guidance to assist issuers in meeting requirements.

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On December 3, the Investment Industry Regulatory Organization of Canada published amendments to its Dealer Member Rules that "make it explicit which option values are to be used in calculating minimum capital and margin requirements for all of the Conversion and Reconversion offset strategies." The amendments take effect on January 4, 2011. For more information, see IIROC Notice 10-0322.

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MFDA members approved a number of amendments to MFDA Rules at the Annual General and Special Meeting of Members on December 1. Rule amendments include those with respect to transaction fees, proficiency requirements and the Client Relationship Model project. For more information, see MFDA Bulletin #0458-P. While some of the amendments are already in effect, those respecting the Client Relationship Model are subject to transition periods. For example, the requirements for relationship disclosure under Rule 2.2.5 will not be effective until September 28, 2011 for new clients and December 3, 2013 for existing clients. A summary of the various transition periods for the amended rules is provided in MFDA Bulletin #0459-P.

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Our colleague Jason Kroft has published an article on our structured finance law blog regarding the recent SEC extension for nationally recognized statistical rating organizations from conflict of interest requirements in Rule 17g-5(a)(3) of the Securities Exchange Act of 1934. The post can be found here.

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As we discussed in a post of April 30, IIROC proposed a new dealer regulation fee model earlier this year that would incorporate a "rate by revenue tier" approach to dealer regulation. IIROC has now developed such a market regulation fee model, which it published for comment on November 30. The proposed model would see each marketplace charged a fee based on the marketplace's share of the total number of messages processed by IIROC's surveillance system (in order to recover the IT costs of surveillance), as well as a fee based on the marketplace's share of the total number of trades (in order to recover all other regulation costs). IIROC would continue to collect the market regulation fee from dealer members (the minimum monthly fee would be $4,800 per member), but marketplace-specific costs would be recovered directly from the marketplace that incurred such costs. IIROC is accepting comments on the proposed new fee model until January 29, 2011. For more information, see IIROC Notice 10-0316.

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The Canadian Securities Administrators yesterday released the results of its compliance review of corporate governance disclosure, which ultimately characterized the level of non-compliance with National Instrument 58-101 Disclosure of Corporate Governance Practices as "unacceptable". 

The CSA, which selected 72 reporting issuers for review, required 55% of issuers to make prospective enhancements to corporate governance disclosure, compared to 36% in the 2007 review. Specifically, the CSA found "significant and frequent disclosure deficiencies" with respect to such matters as issuers failing to: (i) specify the basis for determining that a director was not independent; (ii) disclose whether the board had an independent lead director; (iii) describe the measures taken by boards to orient new directors; and (iv) describe the process for identifying board candidates. For each of the identified deficiencies, the CSA provided guidance to assist reporting issuers in meeting disclosure requirements.

For more information, see CSA Staff Notice 58-306 - 2010 Corporate Governance Disclosure Compliance Review.

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On November 30, the Investment Industry Regulatory Organization of Canada proposed draft guidance regarding the management of order flows with respect to best execution obligations under UMIR. The guidance, released in the context of "a more complex trading environment", sets out a list of frequently asked questions relating to order types in the context of achieving best execution. Namely, the guidance considers issues such as: (i) order routing decisions; (ii) how to manage orders when not all marketplaces are open; (iii) considerations for deciding where to "book" an order; and (iv) obligations when using a third-party vendor for order routing.

Meanwhile, guidance was also proposed regarding the use of certain order types. According to IIROC, "a particular order type may function as designed but the execution outcome may result in an unanticipated price." IIROC stated that it has particular concern with order types without specific execution price limits. Guidance on the subject was also structured as an FAQ, and considered such issues as (i) whether market orders or limit orders should be used "in today's more complex markets"; (ii) whether "stop loss" orders prevent losses in fast moving markets; and (iii) whether "All or None" orders can be used to guarantee a fill of an order at a specific price in volatile markets.

IIROC is accepting comments on the proposed guidance until January 31, 2011. For more information, see IIROC Notice 10-0317.

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Earlier today, the CSA announced the extension of the registration exemption for mortgage investment entities from the investment fund manager registration requirement and the adviser registration requirement until March 31, 2011. In British Columbia, the extension will run until June 30, 2011 in order to allow the BCSC time to conduct further analysis on the regulation of mortgage investment entities operating in the province. As we discussed in an earlier post, CSA members issued the initial parallel orders on August 20, which were to remain in effect until December 31, 2010 and which imposed certain prescribed conditions on the use of the exemption. Meanwhile, in Ontario, the additional condition that limits the exemption only to those licensed under the Mortgage Brokerages, Lenders and Administrators Act, 2006 has also been carried forward under the extension order.

According to the CSA, "[w]hile significant analysis has been completed to date", the extension is necessary to allow CSA members "to complete their analysis and communicate the applicable requirements to the public with sufficient notice to allow mortgage investment entities to take the necessary steps to comply with those requirements."

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The TMX Group yesterday published its new TSX Listing Fee Schedule effective as of January 1, 2011. While original listing and sustaining fees remain unchanged, the minimum base fee for additional listings for corporate issuers is increasing by $3,000 across all capitalization levels. By way of example, this increase raises the minimum base fee for additional listings from $2,000 to $5,000.

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