The Canadian Securities Administrators (CSA) have published for comment proposed amendments to the reporting threshold, triggers and related disclosure requirements under Canada’s early warning reporting (EWR) regime intended to “provide greater transparency about significant holdings of issuers’ securities”.
Currently, under the EWR regime, prescribed disclosure is required by any investor that acquires beneficial ownership of or the power to exercise control or direction over 10% or more of any class of a public company’s voting or equity securities. Additional reporting is required on each incremental acquisition of 2% as well as a change in a material fact contained in an earlier report. Certain eligible institutional investors (EIIs) can take advantage of relaxed timing requirements for early warning reporting under the alternative monthly reporting (AMR) regime.
As discussed in an earlier post, the key changes under the proposals include:
- decreasing the reporting threshold from 10% to 5%;
- clarifying that the reporting trigger applies to a 2% decrease in ownership and a decrease below the new 5% threshold;
- expanding the reporting trigger to capture certain types of derivatives that affect an investor’s total economic return in an issuer;
- expanding the scope of required disclosure to include a broader range of interests and require more specific disclosure; and
- making the AMR regime unavailable to investors who actively engage with shareholders on certain corporate matters.
Reporting Threshold and Timing
The proposals provide for a decrease in the EWR threshold from the current 10% to 5% under both the EWR and AMR regimes. Under the “moratorium” provisions of the EWR regime, which prohibit further purchases until one full business day after a report is filed, the cooling-off period would apply at the new 5% threshold.
Under the amendments, the required news release (which is currently required to be filed “promptly”) would have to be filed promptly but no later than the opening of trading one business day following a reportable transaction, and the timing for filing the report would not change. Timing for reporting under the AMR regime would also not change.
The CSA’s stated objectives for lowering the EWR threshold to 5% include addressing the increased prevalence of shareholder activism and the ability of 5% shareholders to influence control of an issuer, requisition a shareholders’ meeting or affect the outcome of significant transactions or the constitution of the issuer’s board of directors, as well as harmonizing Canada’s standard with that of several major foreign jurisdictions. In this regard, a 5% threshold would be consistent with jurisdictions including the United States, the United Kingdom and Australia.
Hidden Ownership and Empty Voting
The CSA are concerned that the current EWR requirements may not capture investors using “hidden ownership” strategies whereby derivatives are used to accumulate substantial economic positions in public companies on an undisclosed basis, and this interest is then potentially converted into voting securities in time to exercise a vote. They have similar concerns with “empty voting” strategies whereby investors may utilize derivatives or securities lending arrangements to hold voting rights in respect of an issuer and possibly influence the outcome of a shareholder vote without having an equivalent economic stake in the issuer.
To broaden the scope of the EWR and AMR regimes to include such interests, the proposals would provide that for purposes of the reporting trigger, a person would be deemed to have acquired beneficial ownership or the power to exercise control or direction where they acquire beneficial ownership, control or direction over an “equity equivalent derivative.” This term is proposed to be defined as a derivative which is referenced to or derived from a voting or equity security of an issuer and which provides the holder, directly or indirectly, with an economic interest that is substantially equivalent to the economic interest associated with beneficial ownership of the security. The CSA note that an equity equivalent derivative would generally include only cash-settled equity total return swaps, contracts for difference or substantially similar derivatives, but not partial-exposure derivatives such as options and collars that provide the investor with only limited exposure to the reference securities.
Securities Lending Arrangements
Under securities lending arrangements, the lender disposes of its securities and the borrower acquires the securities, generally along with the right to vote the securities for the duration of the loan. The CSA state that the current regime requires the lender and borrower to consider the securities disposed of and acquired, respectively, in determining whether the reporting requirement has been triggered, notwithstanding the duration of the loan.
In light of the proposed requirement to report 2% decreases in ownership, the reporting requirement would specifically apply to lenders under securities lending arrangements, absent available exemptions. However, the proposals would exempt the lender (but not the borrower) from reporting securities lent out as a disposition under a “specified securities lending arrangement” that provides an unrestricted ability for the lender to recall the securities (or identical securities) before a meeting of securityholders and/or requires the borrower to vote the securities in accordance with the lender’s instructions. Further, in order to provide the market increased transparency about the use of these arrangements, it is also proposed that securities lending arrangements in effect at the time of a reportable transaction be disclosed, even if such transaction did not involve the securities lending arrangement.
Changes to Scope of Alternative Monthly Reporting
Under the current regime, an investor that qualifies as an EII is entitled to utilize the AMR regime, which only requires them to report an increase in ownership of 2.5% or more within 10 days of the end of the month in which the threshold is crossed and does not require a press release or a trading moratorium. The EII can generally remain in the regime unless and until it makes or proposes or intends to make or propose a transaction in which the EII would obtain a controlling interest in the reporting issuer. Upon this happening, they are required to issue a press release and immediately begin reporting in the EWR regime. However, unlike in some other jurisdictions, a decision to become “active” does not give rise to the same result. In other words, an investor is currently able to accumulate a substantial interest in an issuer’s shares even after deciding to become “active” and is only required to disclose the share purchases 10 days after the end of the month in which they occur. The CSA are concerned that this is inconsistent with the policy rationale underlying the relaxed timing requirements of the AMR regime, being the availability of the regime only to an EII with a passive intent.
Under the proposals, the AMR regime would not be available for an EII that solicits, or intends to solicit, proxies from securityholders of a reporting issuer on matters relating to the election of directors of the reporting issuer or a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of the reporting issuer. In practice, the proposals would mean that upon initiating or intending to initiate such activist activity and thus becoming disqualified from accessing the AMR regime, activist investors would be required to immediately file a news release and within two business days file an early warning report containing the proposed enhanced level of disclosure, thereby making their intentions known to the market significantly earlier than under the AMR regime.
Enhanced Early Warning Report Disclosure
To address the CSA’s concerns with respect to the use of boilerplate language and inadequate disclosure regarding the purpose of reportable transactions, the proposals include new EWR forms under both the EWR and AMR regimes with more detailed disclosure requirements as well as instructions on the type of disclosure expected by the CSA. Key additions include disclosure of:
- “deemed” control (triggered by the ownership of, or control or direction over, an equity equivalent derivative) of the relevant securities by the reporting investor, either alone or together with a joint actor;
- the material terms of any existing “related financial instrument”1 (including an equity equivalent derivative) involving the class of security subject to the early warning report, as well as the number of underlying securities if the reportable transaction involved an equity equivalent derivative;
- the material terms of any existing securities lending arrangement (including duration and recall provisions), as well as whether the reportable transaction involved such arrangement. In the case of a reporting investor that is a lender under any existing specified securities lending arrangement, the material terms thereof;
- whether the consideration paid or received represents a premium to the market price, and a description of method of acquisition or disposition if other than by purchase or sale;
- any plans of the reporting investor or a joint actor which relate to a list of specified actions, including an extraordinary corporate transaction involving the issuer, changes in the issuer’s board or management, material changes in the issuer’s business or corporate structure and any intention to solicit proxies from the issuer’s securityholders; and
- specified information in respect of any agreements or understandings between the reporting investor and a joint actor and any other person with respect to any securities of the issuer, whether or not such agreement relates to the reportable transaction.
Implications of the Proposed Changes
- Reducing the reporting threshold from 10% to 5% could benefit potential offerors by identifying more broadly (and earlier in the process) securityholders that hold 5% of the target securities (including for purposes of securing lock-up agreements), and allow issuers more time to defend against a potential offeror or activist shareholder. On the other hand, pre-bid accumulation transactions may be hindered, and potential acquirors would need to consider, in some cases, the earlier disclosure to the market of their intentions.
- Narrowing the scope of the AMR regime would, in certain cases, eliminate the cover offered to activist EIIs under the AMR regime and make their intentions known to issuers they are targeting substantially earlier.
- The proposed changes may result in increased compliance costs, largely to investment managers, mutual funds and other institutional investors, and we would expect the volume of reporting under the EWR regime to increase significantly, particularly among public mutual funds which are subject to a higher portfolio concentration limit of 10% and are not eligible to report under the AMR regime.
- Investors who use derivatives and securities lending as a risk management tool in connection with short and/or long positions in an issuer’s stock and who may not have previously been caught may have to publicly disclose holdings, and at the lower 5% threshold.
- Investors would need to plan early in connection with stock accumulations, consider carefully whether a particular proposed transaction is caught by the EWR regime, and generally assess possible implications in connection with reportable transactions such as the potential dissemination of investment strategies.
The CSA’s proposals would amend the early warning reporting requirements currently found in Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids, National Policy 62-203 Take-Over Bids and Issuer Bids and National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues. As MI 62-104 applies in all provinces and territories except Ontario, the CSA also expect that amendments to the Securities Act (Ontario) and Ontario Securities Commission Rule 62-504 Take-Over Bids and Issuer Bids will be proposed to give effect to the CSA’s proposals in Ontario.
The CSA’s request for comments, which specifically poses a number of questions regarding the thresholds and proposals, is open until June 12, 2013.
We remind readers that June 12, 2013 is also the deadline for submission of comments to the CSA in connection with their proposed new rule to regulate poison pills and to the Autorité des marchés financiers in Québec in connection with its consultation paper advocating a broader overhaul of the take-over bid regime, as discussed in our earlier post.
1"related financial instrument” has the meaning given to that term in National Instrument 55-104 Insider Reporting Requirements and Exemptions and generally refers to an agreement or understanding that affects, directly or indirectly, the relevant person or company’s economic interest in a security of the reporting issuer or economic exposure to the reporting issuer.