On November 9, the Ontario Securities Commission released a guide intended to assist boards and management of emerging market issuers (Canadian public companies with significant business operations in emerging markets) in addressing the risks of doing business in emerging markets and satisfying their governance and disclosure obligations. The guide follows a regulatory review of EMIs announced in June 2011 and a subsequent report setting out the results of the OSC's review published in March of this year. OSC staff has indicated that it expects the guide to be useful to other issuers as well.
The guide highlights eight potential areas of risk which may warrant further scrutiny by emerging market issuers, sets out questions that directors and management should consider in addressing each specific area of risk and outlines expectations regarding compliance with disclosure obligations. The areas of risk identified by the guidance document relate to the need for boards and management of emerging market issuers to: (i) have a thorough understanding of the political, cultural, legal and business environments of the company; (ii) incorporate appropriate policies to overcome language and cultural barriers; (iii) design an appropriate corporate structure that takes into account the political, legal and cultural realities of emerging markets; (iv) effectively identify and monitor related party transactions to prevent abuse; (v) have a sufficient understanding of legal, regulatory, political and cultural risks impacting the company and evaluate these risks in the context of the specific emerging market; (vi) ensure the effectiveness of internal controls; (vii) evaluate the risks associated with the use of and reliance on experts in emerging markets; and (viii) ensure that external auditors have appropriate expertise and experience and that the audit committee can effectively oversee an external auditor's work.
The guide is not intended to be exhaustive (for example, there is no reference to reverse take-over transactions as a listing device) or to create new legal obligations (or modify existing ones).
According to the OSC, the unique challenges of operating in emerging markets require boards to "take extra measures to ensure investors' interests are protected." For more information, see OSC Staff Notice 51-720.