Canadian regulators propose lowering early warning threshold to 5% and expanding disclosure

The Canadian Securities Administrators today published for comment proposed changes to the early warning reporting requirements that propose to, among other things, decrease the reporting threshold from 10% to 5% and expand the basis for disclosure.

The CSA state in the notice that the amendments are being proposed to address the increasing prevalence of shareholder activism and the ability of 5% shareholders to requisition a shareholders' meeting. While the threshold for reporting further acquisitions would remain at 2%, a 2% decrease in ownership would also become reportable, as would a drop below the new 5% threshold.

Changes are also being proposed to expand the scope of the reporting framework in light of the increased use of derivatives by investors. Noting that, through the use of derivatives, a sophisticated investor may be able to accumulate a substantial economic interest in an issuer without public disclosure, the CSA also propose specific amendments intended to capture certain types of derivatives that affect an investor’s total economic interest in an issuer. These amendments are also aimed at concerns relating to “empty voting” or the ability of an investor to hold voting rights while not holding an equivalent economic stake.

The disclosure that issuers must provide in early warning reports would also be enhanced under the proposed amendments. According to the CSA, current disclosure is "often inadequate" and fails to sufficiently inform investors. As such, the changes would require more specific disclosure regarding the purpose of the transaction and the intentions of the person acquiring the securities in order for the market "to properly evaluate the particulars of the acquisition." Changes are also being proposed to the “alternative monthly reporting” regime, pursuant to which disclosure exemptions are available for certain passive institutional investors.

The request for comments, which specifically poses a number of questions regarding the thresholds and proposals, is open until June 12, 2013.

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