Canadian Securities Law Online

OTC derivatives oversight and Infrastructure initiatives announced

info@stikeman.com (Stikeman Elliott LLP) — Tue, 18 Nov 2008 14:30:16 -0500

On November 14, 2008, the President’s Working Group on Financial Markets (PWG) announced a number of initiatives intended to provide regulatory oversight and prudent management of the over-the-counter derivatives market. These initiatives include the implementation of central counterparty services for credit default swaps and the signing of a Memorandum of Understanding between the Federal Reserve, SEC and the Commodity Futures Trading Commission with respect to information sharing and consultation regarding CDS central counterparties issues. The PWG also announced a set of policy objectives to “guide efforts to address challenges associated with OTC derivatives.”

CSA announce delay in implementing registration reforms

info@stikeman.com (Stikeman Elliott LLP) — Fri, 14 Nov 2008 13:58:29 -0500

On November 14, 2008, the Canadian Securities Administrators (CSA) published CSA Staff Notice 31-309 to provide an update on the status of proposed National Instrument 31-103 Registration Requirements. NI 31-103 represents the CSA's proposal to reform the registration regime across the country by harmonizing and streamlining registration and related requirements. An earlier version of proposed NI 31-103 was published by the CSA in February 2007 and after industry comments were considered, the CSA introduced an amended version in early 2008. Both proposals were subject to a great deal of interest by various market participants, as demonstrated by the 300 comment letters generated from the most recent version of proposed NI 31-103.

As such, the CSA has stated that they will need more time to develop their final proposal as they are still in the process of reviewing the many comments submitted. The target date for implementation of NI 31-103 has, therefore, been delayed and will no longer occur on March 30, 2009. The CSA expect their work to be completed by April 2009, at which time they plan to provide a timetable for the implementation of the new regime.

For more information on registration reform, see our Registration Reform information page.

Terms of Canadian Lenders Assurance Facility released

info@stikeman.com (Stikeman Elliott LLP) — Thu, 13 Nov 2008 15:16:11 -0500

The Department of Finance has now released the terms of the Canadian Lenders Assurance Facility. For more information on the Facility, see our post of October 23, 2008.

Government of Canada announces additional support for credit markets

info@stikeman.com (Stikeman Elliott LLP) — Wed, 12 Nov 2008 15:34:08 -0500

Lewis Smith and Justin Parappally | PDF Version

The Government of Canada has introduced new measures to provide liquidity to Canadian financial institutions. Earlier measures are described in this post of October 23.

Today, the Ministry of Finance advised that the mortgage-backed securities purchase program announced previously will be increased from $25 billion to $75 billion. $12 billion in purchases have already been made from the first tranche of the purchase program, with an additional $7 billion expected to be purchased in an auction taking place today. The final purchases from the first tranche are expected to take place on November 21.

Today’s announcement also included a reduction in the base premium under the Canadian Lenders Assurance Facility (CLAF) of 25 basis points and a temporary waiver of the 25 basis point surcharge, which means that the lowest price for insurance under the facility will be 110 basis points rather than 160 basis points as previously announced on October 23. CLAF provides for government insurance for up to three years for certain borrowing by banks and other qualifying deposit-taking institutions. The reduction in pricing is an attempt to make the program more competitive with similar programs in other countries.

Consultations with Canadian financial institutions on the terms of the CLAF have been completed, and a term sheet for the program is expected to be released within a few days, which will include details of the commercial terms and application process. We understand that the Canadian program will be similar to the UK’s Credit Guarantee Scheme. However, unlike the UK scheme, which appears to give government authorities some discretion in determining which entities are eligible and the amount of support to be provided, CLAF coverage will be available to any institution meeting the prescribed eligibility criteria and the maximum amount of coverage for each institution will be determined by formula.

As well, yesterday the Office of the Superintendent of Financial Institutions (OSFI), announced changes to the regulatory capital requirements for banks and other federally-regulated deposit-taking institutions. Debt covered by the CLAF can now be assigned the same risk weighting for regulatory capital purposes as Government of Canada debt during the term of the CLAF guarantee even if that term is less than the term to maturity of the debt. Similarly, debt covered by similar foreign programs can now be assigned the same risk weighting as the guaranteeing sovereign for the term of the foreign sovereign guarantee even if that term is less than the term to maturity of the debt. In addition, OSFI has raised the limit on qualifying preferred shares and “innovative instruments” as a component of Tier 1 capital from 30 percent to 40 percent. Since the current 15 percent limit on “innovative instruments” has been left unchanged, the effect of the change is to increase the amount of qualifying preferred shares that can be included in Tier 1 capital.

Insured Mortgage Purchase Program gets additional government support

info@stikeman.com (Stikeman Elliott LLP) — Wed, 12 Nov 2008 10:27:39 -0500

This morning, the Department of Finance announced a plan to add up to $50 billion to its Insured Mortgage Purchase Program. The additional investment brings the maximum value of securities purchased through the CMHC to $75 billion. Meanwhile, the base commercial pricing of the recently-announced Canadian Lenders Assurance Facility will drop by 25 basis points and the 25 basis point surcharge for insurance will also be waived until further notice. The latter changes are intended to make the Facility “more competitive with similar programs offered in other countries.”

Alpha Trading System set to launch

info@stikeman.com (Stikeman Elliott LLP) — Thu, 06 Nov 2008 16:16:02 -0500

Following the completion of its recent testing phase, Alpha Trading Systems (Alpha), a Canadian alternative trading system (ATS) has announced that it will formally launch on November 7, 2008. Owned by nine major Canadian financial institutions, Alpha will operate as a visible continuous auction market and initially support trading of ten TSX-listed securities. Its stated objective, however, is to have all TSX and TSXV-listed securities available for trading on its platform by the end of the first quarter of 2009.

Alpha is the latest new marketplace to join the Canadian landscape, which also includes Pure Trading, Omega ATS, Chi-XCanada and Blockbook.

TSX issues notice of temporary relief relating to NCIB purchases and issues reminder of other TSX rules

info@stikeman.com (Stikeman Elliott LLP) — Mon, 03 Nov 2008 16:11:55 -0500

PDF Version

On November 3, 2008, the TSX issued Staff Notice 2008-0005 relating to the following provisions of the TSX Company Manual: Section 628, relating to normal course issuer bids (NCIBs), Section 707, relating to the Remedial Review Process, Part 1, relating to the definition of “market price” and Section 604, respecting securityholder approval requirements for issuers experiencing a financial hardship.

With respect to NCIBs, the Staff Notice grants temporary relief from the daily purchase restrictions to increase the amount that an issuer can purchase under an NCIB from 25% of the average daily trading volume to 50% of the average daily trading volume. Similar relief has also been granted to participating organizations from corresponding provisions of the TSX Trading Rules. The Staff Notice also provides temporary relief to issuers subject to a remedial review by extending the time period that an issuer has to remedy deficiencies that triggered a delisting review from 120 to 210 days. The temporary relief relating to NCIBs and remedial reviews will be effective from November 3, 2008 through to March 31, 2009.

The Staff Notice also clarifies that while the TSX Manual defines “market price” as the 5 day volume weighted average trading price of listed securities, it also provides that this 5 day period may be adjusted based on relevant factors if such price does not accurately reflect the current market price of securities. Given current market conditions, the Staff Notice clarifies that the TSX may be willing to use a shorter time period for making this calculation on a case-by-case basis for the purposes of pricing securities for private placements, including warrants.

Finally, the Staff Notice also reminds issuers that Section 604(e) of the TSX Manual provides an exemption from securityholder approval requirements for issuers experiencing serious financial hardship, which exemption may be more relevant to issuers under current market conditions.

IIROC publishes trade-through protection rules

info@stikeman.com (Stikeman Elliott LLP) — Tue, 28 Oct 2008 10:28:26 -0500

In response to the CSA's proposed amendments to NI 23-101 Trading Rules, released earlier this month, IIROC has now published for comment proposed amendments to the Universal Market Integrity Rules that would correspond to the changes to NI 23-101. IIROC's proposed amendments would include repealing the rule and policies respecting the "best price" obligation concurrent with the implementation of trade-through protection. With the publication of the proposed amendments, IIROC also withdrew from further consideration interim provisions on trade-through obligations, previously published by Market Regulation Services (a predecessor to IIROC). Until the amendments implementing trade-through protection are made to NI 23-101 and UMIR, however, Participants remain subject to the "best price" obligation under Rule 5.2 of UMIR.

CSA Notice 81-318 - Request for Comment - Framework 81-406 Point of sale disclosure for mutual funds and segregated funds

info@stikeman.com (Stikeman Elliott LLP) — Fri, 24 Oct 2008 14:19:07 -0500

The CSA and the Canadian Council of Insurance Regulators, comprising the Joint Forum of Financial Market Regulators, have released their proposed Framework 81-406 Point of sale disclosure for mutual funds and segregated funds. This framework set out concepts and principles reflecting the Joint Forum’s vision for more meaningful and effective disclosure.

Prior to publishing proposed changes to existing securities laws required to implement this framework, the CSA is seeking feedback on the proposal. Comments may be submitted by December 23, 2008.

Notice of Ministerial Approval of NI 52-109 and Consequential Amendment to NI 51-102

info@stikeman.com (Stikeman Elliott LLP) — Fri, 24 Oct 2008 13:50:47 -0500

The OSC has published notice of Ministerial Approval of the revised National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (previously published in the OSC Bulletin on August 15, 2008, click here for our previous post) and has confirmed that new rule, and related forms and companion policy, will come into force on December 15, 2008.

As a consequence of the implementation of the revised National Instrument 52-109, CEO and CFO certifications filed under the revised rule will be required to include, among other things, a certification that the CEO and CFO have evaluated the effectiveness of the issuer's internal control over financial reporting and have caused the issuer to disclose their conclusions about such effectiveness in the issuer's MD&A. The revised rule also contains new forms of certifications for venture issuers and for issuers completing an IPO or reverse-takeover.

As a consequence of these amendments, the MD&A form (Form 51-102F1) will also be amended, effective December 15, 2008, to include specific reference to the disclosure required to be included in the MD&A under the revised certification rule.

Ottawa announces creation of Canadian Lenders Assurance Facility

info@stikeman.com (Stikeman Elliott LLP) — Thu, 23 Oct 2008 09:50:02 -0500

In response to the recent turmoil in global markets, Canadian Minister of Finance Jim Flaherty announced this morning the creation of the Canadian Lenders Assurance Facility. The facility, to commence in November and run for six months, will offer insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. Insurance will be available on certain debt issues with a term to maturity of at least three months. The stated intention of the initiative is to ensure that Canadian financial institutions "are not put at a competitive disadvantage when raising funds in wholesale markets given similar actions recently announced by other countries."

Update:

Canada offers guarantee of bank debt

Lewis Smith

The Canadian government today announced a temporary program to guarantee mid to longer term debt issued by Canadian banks and other federally-regulated deposit-taking institutions. The Canadian Lenders Assurance Facility will insure certain categories of senior unsecured wholesale debt with a term to maturity of at least three months. This insurance will cover principal and interest payments on eligible debt instruments for up to three years from the date of issue. Debt denominated in Canadian dollars, US dollars, Euros, Sterling or Yen is eligible for the program.

The facility will charge a base annualized premium of 135 basis points, with surcharges depending on the credit rating of the issuing institution and an additional surcharge for debt that is not denominated in Canadian dollars. Insurance will be available beginning in early November and will be issued until April 30, 2009. There is a limit on the amount of insurance available to each institution, based on the amount of wholesale debt of the institution maturing in the next six months, and on the amount of deposits held by the institution.

The Canadian Lenders Assurance Facility is a response to the government guarantees of interbank lending that have been introduced in many foreign jurisdictions. There was concern that Canadian institutions, although fundamentally sound, would be at a disadvantage when competing for debt capital with foreign institutions who have the benefit of a government guarantee.

This is the second major Canadian initiative in implementing the G7 plan of action to stabilize global financial markets. The first, announced on October 10^th, was a program to provide additional liquidity to Canadian financial institutions through the purchase of up to $25 billion of mortgage-backed securities. Banks, trust companies, insurance companies, credit unions, loan companies and caisses populaires who issue mortgage-backed securities under the National Housing Act MBS program are eligible to participate. Since the underlying mortgages already carry guarantees backed by the Canadian government, there is no incremental risk to the government in the purchase of these securities. The purchases are being undertaken through a series of competitive auctions, with $5 billion purchased in the first auction on October 16^th, and up to $7 billion in additional purchases taking place today.

These programs are modest compared to those in some other countries. However, Canadian banks are well-capitalized by international standards, and have not suffered the domestic mortgage losses experienced by their counterparts in other jurisdictions. Public statements by the federal Minister of Finance suggest that no further assistance to Canadian financial institutions is contemplated at this time. For example, it appears that there are no plans to raise the deposit insurance limit above its current level of $100,000. If Canada’s banks continue to be the most sound in the world, as shown in the World Economic Forum’s Global Competitiveness Report released earlier this month, then the present initiatives may well be sufficient to see them through the current global liquidity squeeze.

For more, see the Department of Finance's Backgrounder on the Canadian Lenders Assurance Facility.

Recent Case: Deer Creek Energy v. Paulson

info@stikeman.com (Stikeman Elliott LLP) — Wed, 22 Oct 2008 10:31:47 -0500

Deer Creek Energy Ltd. v. Paulson & Co., Inc., June 13, 2008 | 2008 ABQB 326 (Court of Queen's Bench).

Alberta judge holds market valuation soundest basis for deciding fair value of dissenters’ shares; dissenters not permitted to take advantage of spike in market price after first stage of two-step transaction. Court also rejects dissenters’ claim for far higher valuation based on future possibilities, even though some of these had been touted by company in its marketing efforts.

In this long‑anticipated ruling, Madam Justice Romaine of Alberta’s Court of Queen’s Bench found that “market value” was the primary consideration in valuing the shares of dissenting shareholders of Deer Creek Energy Ltd., an ABCA corporation involved in an oil sands project near Fort McMurray, Alberta.

Background

While promising, Deer Creek’s project was still in its early stages when, on August 2, 2005, Total E&P Canada Ltd. announced a bid for the company’s outstanding shares at $25 per share, a 39% premium over the trading price. The $25 bid was subsequently hiked to $31 when Total exercised its right of first refusal with respect to a competing offer in that amount by Shell Canada Ltd. All of this occurred after Total and Deer Creek had spent the first half of 2005 discussing the possibility of a joint venture or asset sale.

After extending its offer, Total took up and paid for the 82.4% of outstanding Deer Creek shares that had been tendered. The Deer Creek board, now made up of Total nominees, scheduled a special shareholder meeting for December 12, 2005 to approve a going-private transaction. At that meeting the majority of the minority voted to approve the transaction. Those that remained exercised their dissent and appraisal right under the ABCA rather than accept the $31 that had been offered, arguing that the shares were worth much more – at least $110 and perhaps as much as $200. Their argument was based on the company’s future prospects (which had been touted to some extent by the company itself in marketing presentations).

Thus, the court was required to determine the fair value of their shares at the close of business on December 9, 2005. After a trial, a two-year wait, and 132 pages of detailed reasons, the answer turned out to be $31.

The board’s process

Several significant process concerns were addressed in the reasons in response to the dissenters’ complaint that the process adopted by the Deer Creek board was inadequate. Romaine J. accepted the testimony of a number of witnesses that negotiations between Deer Creek and Total had been vigorous. She also agreed that the Deer Creek board was within its rights to decide that no independent committee was needed: the CEO held a sufficient equity position to ensure that he would not be conflicted by his management role and the board had reasonably satisfied itself that two nominee directors representing the minority interest of a private equity firm were not under any pressure to accept a bid as a means of cashing out the firm’s investment.

Romaine J. concluded that “Deer Creek engaged in a deliberate and organized process of considering alternatives for the future development of the [project]” and that its attempts to test the market were “more than adequate”. That the board was not outmanoeuvred in negotiations was shown by the fact that it negotiated a soft lock-up with fiduciary out (allowing for a post-market check) and a reasonable 3% break fee. It also got Total to cut its 90% tender requirement to 66 2/3%. In addition, the $31 price represented a premium of 72% on Deer Creek’s prior trading price.

Business judgment in appraisal situations

Deer Creek argued that, in the absence of fraud, bad faith and self-dealing, the board’s decisions about process and valuation should be deferred to under the “business judgment rule”. Romaine J. noted the difficulty inherent in allowing a company to take recourse to the “rule” in a dissent situation. In her view, the rule should not be applied in such situations so as to add to the dissenter’s burden of proof. In this case, however, the board’s decision was the right one, even in hindsight, so the application of the business judgment rule was unnecessary.

Investor presentations

High on the list of the dissenters’ complaints were presentations made by Deer Creek to potential investors and industry groups prior to the take-over bid. The presentations had suggested high potential values for the project, with minimal discounting of execution, financing or other forms of risk. The high valuations put forward by the dissenters were allegedly based on dividing the potential values discussed at these seminars by the number of shares outstanding.

Romaine J. rejected as “unrealistic and self-serving” the argument that the dissenters, who were highly sophisticated investors and arbitrageurs, had been misled by what in her view were industry-standard presentations relating to the potential of an early-stage development. She found that the presentations did not breach TSX disclosure rules and that the two fairness opinions supporting the $31 offer should have dispelled any doubt the shareholders had about the presentations’ completeness. She also found as a matter of fact that at least some of the dissenters had clearly not relied on the valuation information communicated in the presentations.

Market valuation preferred

Under the ABCA, the court was required to come up with a “fair value” for the shares. The meaning of “fair” in this context is often disputed, of course. Here, Deer Creek preferred the market value method and the dissenters the discounted cash flow method. As Romaine J. noted, the duty of the court is to take everything that is relevant into account, so a combination of these methods (and possibly of other considerations) is another alternative.

That having been said, the court strongly preferred the market value approach in the circumstances. Three factors were considered: (i) whether there was an open and unrestricted market for Deer Creek shares, (ii) whether the board and management acted in a prudent and informed manner, and (iii) whether the fact that this was a two-step going-private transaction affected the validity of the market valuation approach.

Does it matter that this was a two-stage transaction?

The first two questions were quickly answered in the affirmative, while the third required more consideration. The argument was essentially that, during the period in which Total was a majority shareholder, Deer Creek’s value increased (i.e. because it had a deep pockets backer with access to financing, top-flight management, etc., eliminating the “execution risk” that existed when the company was simply an unproven junior player).

Romaine J. held that where, as here, the intention to carry out a two-stage transaction is clear, dissenters cannot capitalize on a spike in value in the interim period between the two stages. While she could find no Canadian authority on the point, she referred to Delaware law which has treated the issue inconsistently. In Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (Del. 1986), it was held that post-merger (but pre-squeeze-out) developments should be factored into the valuation. However, Romaine J. noted that cases such as Grimes v. Vitalink Communications Corp., [1997] WL 538676 (Del. Ch.) have distinguished Technicolor and in any event Delaware law must (in Romaine J.’s opinion) be applied with caution because dissent rights in that state’s corporations statute do not apply as broadly as those of the ABCA and other similar Canadian statutes.

The 2001 Delaware ruling in Allenson v. Midway Airlines Corp., 789 A.2d 572 (Del. Ch. 2001) stated that the rule for the interim period is that there must have been, in Romaine J.’s words, “actual implementation of a new plan or activity” before the fair value would be affected by it. Here, Deer Creek had followed the same business plan before and after Total became the majority shareholder.

Finally, Romaine J. noted that under Canadian law (and probably under U.S. law as well), it is a general principle that “a dissenting shareholder cannot benefit from an increase in underlying share value created by a corporate transaction from which that shareholder dissented.” This is particularly true in the case of a two-step transaction, a form of transaction that is widely recognized, in law and in the business community, as a “single complete change of control transaction.”

Thus the fact that it was a two-stage transaction did not affect the validity of the market valuation approach. On the Allenson test described above, the second stage did not constitute the “actual implementation of a new plan” because it was clear from the beginning (and certainly should have been plain to investors as sophisticated as the dissenters) that Total was interested in a two-stage transaction.

Valuation methods

Romaine J. held that in general the discounted cash flow method of valuation tends to be less appropriate for early stage companies (and that it is less common in Canada than under Delaware law). She further held that the fact that virtually 100% of the long-term shareholder base of the company (as opposed to the dissenting arbitrageurs) tendered to the $31 offer constituted significant evidence that the shareholders received fair value. She also found that the net asset value approach, another alternative valuation method, supported the $31 figure.

No “expropriation premium”

One group of dissenting shareholders, who argued for a $200 share value, claimed that the court should include an “expropriation” or “forcible taking” premium. They relied on Domglas Inc. v. Jarislowski, Fraser & Co. (1980), 13 B.L.R. 135 (Que. S.C.), aff’d (1982), 22 B.L.R. 121 (Que. C.A.) for the proposition that such premiums are available, but Romaine J. held that Domglas has been rejected in numerous subsequent cases, notably LoCicero v. B.A.C.M. Industries Ltd., [1988] 1 S.C.R. 399 and Ford Motor Co. of Canada v. OMERS (2006), 12 B.L.R. (4^th) 198 (Ont. C.A.).

Conclusion

In light of the board’s diligent efforts to ensure shareholder value and the liquidity of the stock, and in light of the inappropriateness of discounted cash flow as a valuation method for an early-stage resource company, it was clear that the market price accepted by the vast majority of the shareholders under conditions in which there was ample information about the company was determinative of “fair value” for the purposes of the ABCA dissent provisions. That value was accordingly set at $31.

Proposed new executive compensation disclosure requirements: What you need to know to prepare for upcoming proxy disclosure

info@stikeman.com (Stikeman Elliott LLP) — Tue, 21 Oct 2008 10:19:27 -0500

Simon Romano, Ramandeep Grewal and Daniella Laise | PDF Version

On September 18, 2008, the CSA published their final rule regarding the repeal and substitution of the current executive compensation disclosure form, also known as Form 51-102F6 (the Current Form). Under this rule, a revised Form 51-102F6 (the New Form) will be implemented, significantly changing current requirements with respect to disclosure of executive compensation and related matters.

The CSA published their initial proposals for the overhaul of executive compensation disclosure on March 29, 2007 (the 2007 Proposal) and the Current Form is a result of the subsequent comment and review process. The 2007 Proposal was based to a significant extent on changes adopted by the U.S. Securities and Exchange Commission (the SEC) in August 2006. Following receipt of substantial comments on the 2007 Proposal, the CSA republished a revised proposal on February 22, 2008, which was further revised and published as a final rule on September 18, 2008. The New Form introduces significant changes to the executive and director compensation disclosure requirements from those set out in the Current Form. As currently stated by the CSA, they expect this disclosure to apply in respect of financial years ending on or after December 31, 2008.

Overview

The New Form has been organized into a number of new sections, as discussed in detail below. While a number of requirements found in the Current Form are carried forward, the New Form contains many new disclosure requirements. The New Form introduces, among other things, a requirement for a narrative discussion in the form of a "compensation discussion and analysis" and a revised format for the summary compensation table, which includes a column that sets out the dollar value of total compensation as a single number. A new disclosure section for compensation paid to directors is also included. Disclosure of compensation paid under incentive plans has also been consolidated into one section, which contains significantly revised requirements for the format of the various tables and explanatory disclosure. This includes the requirement to disclose equity-based compensation based on grant date fair value of the grant or award. Other significant changes include expanded pension disclosure and more detailed disclosure on termination or change of control payments. The instructions contained in the New Form state that the objective of the disclosure is to "communicate the compensation the board of directors intended the company to pay, make payable, award, grant, give or otherwise provide to each named executive officer (NEO) and director for the financial year" and that a company's disclosure under the form must satisfy this objective.

Summary compensation table

The New Form introduces a revised format and additional content for the summary compensation table (the SCT) for the Company's NEOs.

Under the New Form, identifying the three most highly compensated executive officers is not just based on salary and bonus, but on total compensation (excluding pension value and certain incremental payments as well as some other prescribed exclusions). This effectively means that, in order to make this determination, the company will need to calculate the value of total compensation under the last column of the SCT for its highest paid executives, including the value of equity and non-equity incentive plan awards.

Another significant change in the New Form is the overhaul of the SCT. Under the New Form, the SCT requires disclosure of each NEO's salary, share-based awards, option-based awards, non-equity incentive plan compensation (separated between annual and long-term plans), pension value (as discussed below), all other compensation and total compensation for the three most recently completed financial years (recognizing, that a three year history in compliance with the new requirements cannot be presented until 2010). Some of these columns are not only new, but also represent significant changes to what is, or is not, to be included.

For example, the salary column requires the disclosure of the dollar value of cash and non-cash based salary that was earned by an NEO during the relevant financial year. As well, for both share-based awards and option-based awards, the value disclosed must be the grant date fair value. If the grant date fair value is different from the accounting fair value as determined in accordance with section 3870 of the CICA Handbook, footnote disclosure is required disclosing the amount, and an explanation, of the difference. The non-equity incentive plan compensation column requires disclosure of all amounts earned for services performed during the relevant year that are related to awards under non-equity incentive plans and all earnings on any such outstanding awards. This column is to include any discretionary cash awards, earnings, payments, or payables that were not based on pre-determined performance goals as well as performance-based plan awards. This category is divided into two subcategories, (i) annual incentive plans (AIPs) and (ii) long-term incentive plans (LTIPs).

The Pension Value column requires disclosure of all compensation relating to defined benefit or defined contribution plans, including disclosure relating to service costs and other compensatory items.

Under the column entitled "All Other Compensation", disclosure is required of all other compensation that is not reported in any other column in the SCT. This includes, but is not limited to, perks, such as property or other personal benefits that are provided to an NEO and that are not generally available to all employees, as well as amounts relating, to among others, incremental payments relating to termination or change of control benefits that occur before the end of the relevant financial year and the dollar value of insurance premiums paid or payable by, or on behalf of, the company for personal insurance for an NEO (if the estate of the NEO is the beneficiary). The threshold for requiring disclosure of perks is an aggregate amount that is equal to or greater than the lesser of $50,000 or 10% of an NEO's total salary for the financial year. The commentary to this column also clarifies that, generally, an item will not be a perk if it is necessary for a person to do his or her job, even if it provides some personal benefit. If an item is not necessary for a person to do his or her job and provides some direct or indirect personal benefit, it is a perk, regardless of the reason that it is provided, unless it is also available on a non-discriminatory basis to all employees.

The last column of the SCT is a new column and requires disclosure of the aggregate dollar value of all of the other columns on the SCT for each NEO, representing another change from the current table, which does not require disclosure in dollar amounts for certain categories.

Following the SCT, the company is required to provide a narrative discussion explaining any significant factors necessary to understand information contained in the SCT. These include the significant terms of an NEO's employment agreement or arrangement, any repricing or other significant changes to the terms of any share-based or option-based award programs, and the significant terms of any award reported in the SCT, including a description of the formula or criteria to be applied in determining the amounts payable and the vesting schedule.

Compensation discussion and analysis

The New Form also requires a new narrative form of discussion and analysis of the executive compensation provided to NEOs, referred to as compensation discussion and analysis (CD&A). Under the CD&A, the company is required to provide a description and explanation of all significant elements of compensation awarded to, earned by, paid to, or payable to NEOs during the most recently completed financial year. Specifically, the CD&A is to include a discussion of the following:

the objectives of the compensation program;
what the compensation program is designed to reward;
each element of compensation;
why the issuer chooses to pay each element;
how the issuer determines the amount and formula for each element; and
how each element of compensation and the issuer's decisions about that element fit into the issuer's overall compensation objectives and affect decisions about other elements.

In addition to the disclosure set out above, the CD&A also requires the issuer to include disclosure of the following items, to the extent they are applicable: (i) any new actions, decisions or policies that were made after year-end that could affect an understanding of an NEO's compensation for the most recently completed financial year; (ii) a statement of the benchmark used for compensation purposes and an explanation of its components, including companies included in the benchmark group and the selection criteria; and (iii) any performance goals or similar conditions based on objective, identifiable measures, such as share price or earnings per share, unless a reasonable person would consider that disclosure of the specific quantitative or qualitative factors would be seriously prejudicial to the company's interest. If the company discloses performance goals or similar conditions that are non-GAAP financial measures, it must also explain how the company calculates these goals from its financial statements.

The CD&A also includes a requirement to set out a performance graph showing the company's cumulative total shareholder return over the five most recently completed financial years. A new requirement has been added to discuss, under the graph, how the trend shown by the graph compares to the trend in the company's compensation to executive officers reporting under the form over the same period.

Also under the CD&A, the company is required to describe the process used to grant option-based awards to executive officers, including a description of the role of the compensation committee and executive officers in setting or amending any equity incentive plan under which an option-based award is granted.

Incentive plan awards

Item 4 of the New Form requires disclosure of outstanding share-based and option-based awards in the form of two separate tables. The first table requires disclosure of all outstanding awards at year-end and the second table requires disclosure of the value vested or earned on each option-based, share-based and non-equity-based incentive plan during the most recently completed financial year. These tables are to be followed by a narrative discussion that describes and explains the significant terms of all plan-based awards, including non-equity incentive plan awards, but only in respect of awards that were issued, vested or were exercised during the year, or that were outstanding at year-end.

Deferred compensation plans and defined benefit and defined contribution pension plans

Item 5 requires disclosure in tabular form for all defined benefit plans and defined contribution plans. Following the tabular disclosure, the company is required to include a narrative discussion of any significant factors necessary to understand the information disclosed in the tables. Also required is a description of the significant terms of any deferred compensation plan, including the types of compensation that can be deferred, the significant terms of payouts, withdrawals and other distributions, and measures for calculating interest or other earnings, how and when such measures can be changed and at whose election. These measures must also be quantified where possible.

Termination and change of control benefits

The New Form abandons the $100,000 benchmark for disclosure of change of control or termination benefits for an NEO, requiring disclosure of all amounts, and more detailed disclosure of the compensatory arrangements with NEOs relating to retirement, resignation, termination and change of control. The New Form requires that for each contract, agreement, plan or arrangement that provides for payments to an NEO at, following, or in connection with any termination, resignation, retirement, a change in control of the company or a change in an NEO's responsibilities, the company is required to describe and explain, and where possible quantify, the following:

circumstances that trigger payments or provision of other benefits;
the estimated incremental payments that are triggered, including timing, duration and who they are provided by;
how the payment and benefit levels are determined;
any significant conditions or obligations that apply to receipt of payments, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality agreements (including the terms of these agreements and any provisions contained therein regarding waiver or breach); and
any other significant factors for each written contract, agreement, plan or arrangement.

Director compensation

The New Form also includes a new table that requires disclosure of director compensation, which is similar in form to the SCT for NEOs. This table requires tabular disclosure for each director of the fees earned, share-based awards, option-based awards, non-equity incentive plan compensation, pension value, all other compensation and total compensation provided for the relevant year. Following the table, the New Form also requires the company to include a narrative discussion of any factors necessary to understand director compensation. Tabular and narrative disclosure relating to share-based, option-based and non-equity incentive plan compensation is also required for directors similar to that required for NEOs under Item 4 of the New Form.

Companies reporting in the United States

The New Form carries forward the existing exemption for SEC issuers who provide information required by Item 402 of Regulation S-K under the Securities Exchange Act of 1934. As is the case under the Current Form, this exemption does not apply to a foreign private issuer that satisfies Item 402 by providing information required by Items 6.B and 6.E.2 of Form 20-F under the Securities Exchange Act of 1934. This effectively means that issuers that fully comply with SEC requirements will be exempt from complying with the New Form, however, those that rely on exemptions available to foreign private issuers will not.

Mandatory annual disclosure for certain issuers

Together with the revisions to Form 51-102F6, the final proposal also adds a new section under Part 11 of National Instrument 51-102 Continuous Disclosure Obligations. This new section requires reporting issuers that do not send an information circular to securityholders that includes executive compensation disclosure as required by Item 8 of Form 51-102F5, or an annual information form that includes information required by Item 18 of Form 51-102F2 (such as debt-only reporting issuers), to provide the disclosure required by the New Form within 140 days of their year-end. Item 8 of Form 51-102F5 (which is the form of information circular) requires executive compensation disclosure to be provided if an information circular is sent in connection with an annual general meeting or a meeting at which a company's directors are to be elected or where the securityholders will be asked to vote on a matter relating to executive compensation. This new requirement effectively means that if an issuer does not have such a meeting in any particular year, and does not file an annual information form, it will have to now comply with these new executive compensation disclosure requirements on an annual basis. These new provisions do not apply to certain foreign issuers, however, that comply with information circular and proxy requirements under National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers.

Preparing for compliance

To prepare for compliance, issuers may need to make substantial changes to the manner in which they gather and disclose executive compensation. A few suggestions to prepare for compliance include:

tracking each component of compensation of a larger group of executives to determine which are the most highly compensated under the New Form;
analysing all equity-based compensation arrangements to determine appropriate valuation methodologies and comparing valuations with accounting fair value under Section 3870 of the CICA Handbook;
tracking the information necessary to categorize and calculate the aggregate incremental costs of perks;
tracking data necessary to comply with the new pension disclosure requirements;
reviewing the New Form with the compensation committee to determine whether changes to executive compensation practices are required in light of the new disclosure requirements and to prepare for CD&A disclosure (in respect of which disclosure made by issuers under U.S. CD&A requirements may be a helpful reference); and
preparing executive compensation disclosure sufficiently in advance of the 2009 proxy season.

CSA publish instruments regarding marketplace operation and trading

info@stikeman.com (Stikeman Elliott LLP) — Fri, 17 Oct 2008 16:36:18 -0500

The CSA have published proposed amendments to National Instrument 21-101 Marketplace Operation (NI 21-101) and National Instrument 23-101 Trading Rules (NI 23-101) (the ATS Rules) (and their related companion policies) for comment and review. The proposed amendments include proposals for a framework to implement trade-through protection that will require all visible, immediately accessible, better-priced limit orders to be filled before other limit orders at inferior prices, regardless of the marketplace where the order is entered. Other amendments relate to clock synchronization, technology requirements for marketplaces, information processor requirements, and best execution reporting requirements.These proposed amendments on trade-trough protection have been developed further to the discussion paper published by the CSA on July 22, 2005, entitled CSA Discussion Paper 23-403 Market Structure Developments and Trade-through Obligations and the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces published by the CSA in conjunction with RS (now IIROC) on April 20, 2007. Comments on these proposed amendments will be accepted until January 15, 2009.

IIROC requests comments on best practices for product due diligence

info@stikeman.com (Stikeman Elliott LLP) — Fri, 17 Oct 2008 11:58:59 -0500

In addition to its ABCP study, IIROC has also published for comment a draft guidance note entitled "Best practices for product due diligence". Specifically, IIROC is requesting comment on the relevant criteria in determining whether a product should be subject to a due diligence review, factors to be considered in conducting product due diligence and the structures and procedures necessary for an effective review.

IIROC publishes study on manufacture and distribution of third-party ABCP

info@stikeman.com (Stikeman Elliott LLP) — Fri, 17 Oct 2008 11:38:01 -0500

On October 17, the Investment Industry Regulatory Organization of Canada (IIROC) announced the publication of a study concerning the manufacture and distribution of third-party asset-backed commercial paper in Canada. The study reviews the events leading up to the "liquidity crisis" of August 2007 in the ABCP market and includes recommendations concerning product due diligence, product transparency, conflicts of interest and credit ratings.

BCSC amendments to OTC investment dealers in BC

info@stikeman.com (Stikeman Elliott LLP) — Thu, 16 Oct 2008 12:44:18 -0500

In June, the BCSC imposed Conditions of Registration for B.C. investment dealers that trade in securities of over-the-counter (OTC) issuers through a B.C. office. Investment dealers that trade in American OTC markets must complete and file Form B, which records the information required under the conditions, within 30 days of the end of each calendar quarter.

The conditions expire on December 31, 2011.

IIROC publishes notice regarding short sales and failed trades

info@stikeman.com (Stikeman Elliott LLP) — Thu, 16 Oct 2008 11:18:41 -0500

On October 15, 2008, IIROC published a notice regarding the approval of amendments to the Universal Market Integrity Rules respecting short sales and failed trades. The amendments are based on an earlier notice, published in September 2007, and are intended to address potential abusive short selling and failed trade activity. These amendments will require reporting of failed trades after 10 trading days, limit the ability to cancel or vary executed trades, and allow IIROC to designate certain securities as ineligible for short sales entirely. They are also expected to involve the imposition of hard “pre-borrow” requirements in the case of persons who have executed failed trades, which will be subject to a request for comments. IIROC also announced that it is deferring adopting the removal of current short sale price restrictions and the removal of current requirements to file bi-monthly aggregate short position reports.

Natural Gas Exchange granted ASC recognition

info@stikeman.com (Stikeman Elliott LLP) — Thu, 16 Oct 2008 10:59:05 -0500

On October 9, 2008, the Alberta Securities Commission announced that it was granting recognition to the Natural Gas Exchange (NGX) to operate as an Exchange and Clearing Agency. Wholly owned by TMX Group, the NGX is based in Calgary and operates an energy exchange and a physical clearning and settlement facility for natural gas and electricity contracts.

IIROC provides short selling guidance

info@stikeman.com (Stikeman Elliott LLP) — Tue, 07 Oct 2008 10:18:40 -0500

In response to last week's OSC Extension Order with regards to the prohibition on the short sale of certain TSX-listed financial companies, IIROC has published guidance on the handling of short sales.