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

• introducing a new concept of a “reporting insider”, which is a subset of those persons defined to be insiders. Generally, only reporting insiders will be required to file insider reports;
   
• expanding the insider reporting obligation to apply to persons who are not insiders as defined under securities legislation, but that are designated as insiders for the purposes of the Instrument;
   
• applying the insider reporting requirement beyond beneficial ownership or control or direction over securities to also include interests in, or rights or obligations associated with, related financial instruments and to agreements, arrangements or understandings that alter a reporting insider's economic exposure to the reporting issuer; and
   
• accelerating filing deadlines for subsequent insider reports, from 10 calendar days down to five, starting October 31, 2010 (initial reports will still be subject to a 10 day filing deadline).

Reporting issuers and insiders should review the new definitions and requirements carefully to determine how their reporting obligations are affected. Insiders who are not “reporting insiders” will be relieved from most of their reporting obligations, while those that fit within the definition will be required to report a broader range of interests. The new rules will also impact management companies by requiring reports by their directors, officers and shareholders and will replace the insider reporting-related undertakings that were required in respect of income trust issuers and their subsidiaries. Those who hold convertible or similar securities but are not otherwise insiders may be determined to be insiders for the purposes of the Instrument and subject to insider reporting obligations. Issuers may need to review their insider trading policies and procedures for any required modifications and determine whether they will file issuer grant reports to enable their insiders to rely on certain reporting exemptions in respect of compensation arrangements.

Determining who is a “reporting insider”

Generally, the scope of persons required to file insider reports will be reduced by requiring only insiders who are “reporting insiders” to be subject to a reporting requirement. A “reporting insider” includes:

• a 10% voting shareholder; being a significant shareholder of the reporting issuer or a significant shareholder based on post-conversion beneficial ownership of the reporting issuer’s securities (based on ownership or control or direction over securities carrying more than 10% of the voting rights);
   
• a member of senior management or the board;  being the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO) and every director of a reporting issuer, a significant shareholder, a significant shareholder based on post-conversion beneficial ownership or a major subsidiary (based on the threshold of 30% or more of the consolidated assets);
   
• key personnel; being a person or company responsible for a principal business unit, division or function of a reporting issuer;
   
• external managers: being a person or company established or contracted to provide significant management or administrative services to an issuer or a subsidiary of the issuer (a “management company”) and that provides significant management or administrative services to a reporting issuer or a major subsidiary of the reporting issuer, and every CEO, CFO, COO, director and significant shareholder of the management company;
   
• those performing similar functions; being an individual performing functions similar to the functions performed by any of the positions described above; or
   
• individuals with information and influence; being any other insider that (i) in the ordinary course receives or has access to undisclosed material information; and (ii) directly or indirectly, exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of a reporting issuer (referred to as the “basket criteria”).

New obligations relating to management companies, income trust issuers and those holding convertible securities 

While the Instrument generally reduces the breadth of persons who are subject to the insider reporting requirement, it will result in imposing insider reporting upon certain persons who may not have previously been required to report. These include significant shareholders based on post-conversion beneficial ownership and management companies that provide significant management or administration services to the issuer or a subsidiary of the issuer. With respect to management companies, their directors, officers and significant shareholders are also considered to be “insiders” for the purposes of the Instrument. 

Similarly, for issuers that are income trusts, every trustee, director, officer and significant shareholder of the principal operating entity of the income trust issuer is also considered to be an insider for the purposes of the Instrument. With respect to all of these individuals or entities that are considered insiders, those that are “reporting insiders” as set out above will now be required to file insider reports.

For the purposes of the Instrument, a person or company is a significant shareholder based on post-conversion beneficial ownership if it has direct or indirect beneficial ownership, control or direction over securities carrying more than 10% of the voting rights attached to all the issuer’s outstanding voting securities, based on the conversion of any convertible or similar securities.   As is the case for determining beneficial ownership with respect to take-over bids (and filing of early warning reports), a person is considered to have, as of a given date, post-conversion beneficial ownership of a security if the person or company is the beneficial owner of a security convertible into the security within 60 days following that date or has a right or obligation permitting or requiring the person or company, whether or not on conditions, to acquire beneficial ownership of the security within 60 days, by a single transaction or a series of linked transactions.

With respect to the “information and influence basket criteria,” the CSA advise that, to determine whether an insider satisfies the significant influence criterion, “the insider should consider whether the insider exercises, or has the ability to exercise, significant influence over the business, operations, capital or development of the issuer that is reasonably comparable to that exercised by one or more of the enumerated positions in the definition.”

Reports by certain designated insiders for certain historical transactions

If an issuer becomes an insider of reporting issuer, the CEO, CFO, COO and every director of the first issuer is designated or determined to be an insider of the reporting issuer and is required to file insider reports for transactions that occurred in the previous six months or relevant shorter period. Similar reporting obligations also apply where a reporting issuer becomes an insider of another issuer, as the CEO, CFO, COO and directors of the other issuer are determined or designated to be insiders of the reporting issuer for the purposes of the Instrument.

Nature of interests giving rise to a reporting obligation

Pursuant to the Instrument, reporting insiders will be required to file insider reports disclosing the reporting insider's direct or indirect beneficial ownership, control or direction over securities of the reporting issuer, and interest in or right or obligation associated with a related financial instrument involving a security of the reporting issuer.

According to the CSA, the concept of an “economic interest” in a security is a core component of the definition of “related financial instrument” and is intended to have broad application that refers to economic attributes ordinarily associated in common law with beneficial ownership of a security. The CSA have also attempted to address any uncertainty related to derivatives by including derivative instruments in the definition of “related financial instrument” and have identified a broad range of instruments that they consider to be related financial instruments even if they do not, as a matter of law, constitute securities. These include: (i) forwards, futures, stock purchase or similar contracts involving securities of the reporting issuer; (ii) options issued by an issuer other than the insider’s reporting issuer;  and (iii) stock-based compensation instruments, including phantom stock units, deferred share units (DSUs), restricted share awards (RSAs), performance share units (PSUs), stock appreciation rights (SARs) and similar instruments.

The Instrument also contains a supplemental insider reporting requirement intended to capture the reporting obligations currently covered by Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization) relating to certain agreements, arrangements or understandings that have the effect of altering the reporting insider's economic exposure to the reporting issuer, involve, directly or indirectly, a security of the reporting issuer or a related financial instrument involving a security of the reporting issuer and do not otherwise trigger the obligation to file an insider report. Upon becoming a reporting insider, the reporting insider must file an insider report to disclose any such agreement or arrangement that was entered into prior to the date the person became a reporting insider and that is still in effect. According to the CSA, the term “economic exposure” generally refers to the link between a person’s economic or financial interests and the economic or financial interests of the reporting issuer of which the person is an insider.

Acceleration of Filing Deadlines

NI 55-104 accelerates the filing deadline for filing insider reports in respect of changes in a disclosable interest from 10 calendar days to five calendar days. However, initial insider reports, required to be filed upon becoming a reporting insider, are still subject to a 10 calendar day filing deadline. Under the transition provisions of the Instrument, the accelerated five day deadline comes into force after October 31, 2010.

Filing Exemptions for ASPPs, Compensation Arrangements and NCIBs

The Instrument carries forward certain existing exemptions that allow insider reports to be filed on an annual basis. These include acquisitions of securities and specified dispositions under automatic securities purchase plans (ASPPs) and under compensation arrangements established by the reporting issuer or by a subsidiary of the reporting issuer. For these types of transactions reports may be filed by March 31 of each year. To rely on the reporting exemption in respect of compensation arrangements, the reporting issuer is required to have previously disclosed the existence and material terms of the compensation arrangement in an information circular or other public document filed on SEDAR. For acquisitions of securities under a compensation arrangement, the issuer is required to have previously filed an issuer grant report on SEDI in respect of the acquisition. An issuer grant report must disclose: (i) the date the option or other security was issued or granted; (ii) the number of options or other securities issued or granted to each director or officer; (iii) the price at which the option or other security was issued or granted and the exercise price; (iv) the number and type of securities issuable on the exercise of the option or other security; and (v) any other material terms that have not been previously disclosed or filed in a public filing on SEDAR.  With respect to automatic securities disposition plans (ASDPs), the CSA note they may raise different considerations than ASPPs in that ASPPs are typically established and administered by the issuer while ASDPs are often private arrangements between the reporting insider and their broker. While not providing a reporting exemption in the Instrument in respect of ASDPs, the CSA state they will consider applications for exemptive relief on a case-by-case basis.

The Instrument also continues filing exemptions relating to normal course issuer bids (NCIBs) by permitting an issuer which acquires securities of its own issue under an NCIB to file a report within 10 days of the end of the month in which the acquisition occurred.  Also provided is a new general exemption for an issuer from having to report in connection with a transaction, other than an NCIB, involving a security of its own issue if the existence and material terms of the transaction have been generally disclosed in a public filing on SEDAR.

In addition, the notice clarifies that adjustments to the number of securities due to stock splits and consolidations must be proportionate and adjustments to the exercise or conversion price of securities to compensate security holders for the loss of value where there is a rights offering or special distribution are generally acceptable, but anti-dilution provisions for dividends or distributions in the ordinary course of business are not. According to the notice, participation of convertible security holders in regular distributions to shareholders is subject to the TSX's prior consent, and amendments to conversation or exercise prices under  “basket” clauses (which permit the board to amend the exercise or conversion price at its discretion in the event of a dilutive event not specifically contemplated in the anti-dilution provisions) are subject to the prior consent of the TSX. The notice also states that instruments governing the terms of convertible securities should provide that any amendments shall be subject to the prior consent of the TSX. The notice also clarifies that not all of the guidance provided in respect of convertible securities will apply to exchangeable securities.

Addition of a cashless exercise feature to security compensation arrangements

Currently, security holder approval is required to add a cashless exercise feature to a fixed maximum plan where there is not a corresponding full deduction of the underlying securities. The notice clarifies that the TSX considers such an amendment "to be equivalent to an increase in the maximum number of securities issuable" under the arrangement. As such, security holder approval is required according to section 613(i)(iv) of the Manual, even where the compensation arrangement contains detailed amendment provisions.

NCIBs

Section 629(l)(1) of the Manual prohibits listed issuers making an NICB from purchasing its securities at a price higher than the last independent trade of a board lot (the “uptick prohibition”) in order to prevent it from "abnormally influenc[ing] the market price of its security." The TSX, however, has recognized the difficulty in complying with this prohibition and states in the notice that it will not consider trades to be a violation of the uptick prohibition where:

1. the independent trade occured no more than one second before the NCIB purchase that created the uptick;
    
2. the independent trade is a down tick to the previous trade and the NCIB purchase would not have created an uptick to the trade prior to the last independent trade; and
    
3. the price difference between the independent trade and the NCIB purchase was not more than $0.02.

Issuers will be expected to provide evidence that the above conditions were met where trades appear to violate the prohibition.

• new and/or amended provisions contained in Part XX of the OSA (OSA Amendments); 
• OSC Rule 62-504 Take-Over Bids and Issuer Bids (OSC Rule); and
• National Policy 62-203 Take-Over Bids and Issuer Bids (National Policy).

• Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids (Multilateral Instrument); and
• the National Policy.

The main focus of the new rules was to harmonize and consolidate bid regimes across the country; however, their introduction will also result in the following key changes to the previous bid rules:

• The new rules contain express exemptions from restrictions against collateral agreements for certain enumerated employment-related arrangements.
• The current exemptions for bids carried out in accordance with the laws of a foreign jurisdiction have been broadened.
• While all holders of the same class of securities must still be offered identical consideration if a formal bid is made, the new rules specifically allow for the offer of an identical choice of consideration.

• The new rules generally consolidate the bid regimes in Ontario and in the Other Jurisdictions by implementing a common set of exemptions and harmonized guidance in the form of the National Policy.
• The National Policy provides guidance on matters such as the impact of varying the terms of a bid, determination of independence, interpretation of the prohibition against collateral agreements (including determination of value for certain exceptions to this prohibition), and on redacting or omitting information in agreements required to be filed.
• Pre-bid integration rules, including those previously found in OSC Rule 62-501 Prohibited Stock Market Purchases of the Offeree's Securities by the Offeror During a Take-Over Bid, have been consolidated into the OSC Rule and the Multilateral Instrument.
• Any person or company who acquires or offers to acquire securities subject to a bid as a result of an agreement, commitment or understanding with the offeror or any joint actor of the offer and any affiliate of the offeror will be deemed to be acting jointly or in concert with the offeror.  This amendment alters the burden of proof, as previously such persons or companies would have been subject to a rebuttable presumption only.  Contrary to what was earlier proposed, associates and those agreeing to vote shares with the offeror are still subject to a rebuttable presumption only. 
• The new rules prescribe new harmonized forms for take-over bid, issuer bid and directors' circulars, as well as a new form for a notice of change or variation.
• The definitions of "take-over bid" and "issuer bid" have been amended to specifically exclude purchases that are a step in certain types of transactions that require the approval of security-holders. The definition of "issuer bid" has also been amended to exclude purchases where no valuable consideration is paid for the securities.

• Codifying existing exemptive relief allowing for employment arrangements that have a legitimate business purpose and that provide mutual exchange of value, the new rules now specifically include several exceptions from the prohibition against collateral agreements, including exceptions for severance arrangements or other employee benefit arrangements that provide:
  • an enhancement of employee benefits resulting from participation in a group plan where such benefits are generally provided to other similarly-situated employees of the successor to the business of the target; or 
  • a benefit received solely in connection with the security-holder's services as an employee, director or consultant, provided that;
    • at the time of the announcement of the bid, the security-holder and its associates own less than 1% of the class of target securities; or
    • an independent committee of the offeree issuer, acting in good faith, determines that (i) the net value of the benefit received is less than 5% of the consideration paid to such security-holder under the bid, or (ii) the security-holder is providing at least equivalent value for the benefit.

In order to rely on this "equivalent value" exception, certain prescribed conditions must be satisfied, which include providing specified disclosure.

• Also codifying common exemptive relief, two new exceptions are now available from the requirement to take-up and pay for securities proportionately under an issuer bid. The first exception allows formal issuer bids to be conducted pursuant to a modified "Dutch auction" process. The second exception allows an offeror to purchase "odd lots" held by security-holders of the offeree issuer.

• The new rules also implement new filing requirements.  Specifically, agreements between the offeror and a security-holder of the offeree relating to a bid, any agreements between an offeror and offeree issuer or the directors or officers of the offeree issuer relating to the bid, and any other agreements that could affect control of the offeree issuer must now be filed at the time that the relevant take-over bid circular or directors' circular is filed.
• These new filing requirements permit agreements to be redacted or for provisions to be omitted, however, in order to do so (i) the issuer must have reasonable grounds to believe that the disclosure would be seriously prejudicial or would violate confidentiality restrictions, and (ii) the provisions in question must not be necessary for understanding the document.  In addition, the document as filed must include a brief description of the information that has been omitted or redacted.

In response to comments received on earlier proposals, certain important changes were made to the final bid rules.  These include removing proposed restrictions on bid variations (in favour of guidance in the National Policy on when the regulators may rely on their public interest jurisdiction to investigate any apparent abuse through a variation); abandoning the requirement for an independent valuation opinion for employment arrangements excluded from the prohibition against collateral benefits (in favour of a "value for value" exception); and abandoning additional requirements applicable to the 5 person / 115% so called "private agreement" exemption.

In conjunction with the implementation of these new bid rules, the Ontario Securities Commission and the Autorité des marchés financiers are also implementing their joint rule MI 61-101 Protection of Minority Shareholders in Special Transactions.  MI 61-101 is the result of a combination of OSC Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions and Quebec's Regulation Q- 27 and is also intended to be effective as of February 1, 2008.

While MI 61-101 is substantially the same as OSC Rule 61-501, the regulators have made some changes as part of the harmonization process. These include amending the independence provisions of the instrument to explicitly prohibit a member of an independent committee from receiving any payment or benefit that is contingent upon completion of the transaction.  The changes also clarify that the valuation exemption for unlisted issuers is available to those listed on the AIM or PLUS markets, and make the valuation exemption for "amalgamations or equivalent transactions with no adverse effect" available for both related party transactions and business combinations.  The companion policy to MI 61-101 has also been revised and includes guidance on, among other things, circumstances in which the regulators may consider a related party to be a joint actor of an offeror in the context of a bid.

While all of these changes advance national harmony there will still be some differences among the various Canadian jurisdictions which may require discretionary relief (such as the definition of "reporting issuer"), but these differences are also slowly being reduced.

In essence, rules relating to take-over bids and issuer bids in Ontario will be consolidated in the OSA Amendments, and will be supplemented by the exemptions and additional details contained in the OSC Rule (which will include relevant exemptions as well as forms). Rules relating to take-over bids and issuer bids in all other jurisdictions will be consolidated into the Multilateral Instrument (which will also contain relevant exemptions and forms). While the two regimes are separate from one another and may have a different structure, they are intended to achieve harmonization and, in most substantive aspects, result in similar requirements across the country. While all CSA members were not able to settle on one single national rule to govern take-over bids and issuer bids, they will be implementing harmonized guidance on how both bid regimes are to be interpreted and applied in the form of the National Policy.

In conjunction with the implementation of the new bid regimes, the OSC and the Autorité des marchés financiers will also be implementing their joint rule MI 61-101 Protection of Minority Shareholders in Special Transactions. MI 61-101 is the result of a combination of OSC Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions and Regulation Q- 27 in Quebec and will also come into force on February 1, 2008 in Ontario and Quebec.

Summary of new NCIB Provisions

 The following is a summary of key points of the new provisions:

• The rolling 2% restriction on the repurchase of shares within any 30 day period has been eliminated for issuers that are not investment funds. The new limit is now the greater of 25% of the average daily trading volume (ADTV) and 1000 securities per trading day. This limit will only apply to purchases made through the TSX. The rolling 2% limit for investment funds remains.
   
• The ADTV is defined as the trading volume on the TSX for the most recently completed six calendar months preceding the date of acceptance of the notice of NCIB by the TSX, divided by the number of trading days for the relevant six months. The calculation excludes any purchases made by the listed issuer through the TSX under its NCIB during these preceding six months, and also excludes purchases made through the facilities of another exchange.
   
• The 12-month limit remains the same, and issuers are still entitled to repurchase the greater of 10% of the public float on the date of acceptance of the NCIB by the TSX or 5% of the class of securities issued and outstanding on the date of acceptance of the NCIB by the TSX, excluding securities held by or on behalf of the listed on the issuer on such date.
   
• The definition of “public float” now also excludes securities that are pooled, escrowed or non-transferable, in addition to those that are owned or over which control or direction is exercised by the issuer, a senior officer or director or a principal security holder of the issuer.
   
• A listed issuer may make one block purchase per calendar week that exceeds the daily repurchase restrictions, subject to the maximum annual aggregate limits. A “block” is defined as a quantity of securities that either (1) has a purchase price of $200,000 or more; (2) consists of at least 5,000 securities and has a purchase price of at least $50,000; or (3) consists of at least 20 board lots of the security and totals 150% or more of the ADTV for that security; and are not owned, directly or indirectly, by an insider of the listed issuer. Once the block purchase exception has been relied upon, the listed issuer may not make any further purchases under the NCIB for the remainder of that calendar day. 

Implementation and transition

The amendments were effective as of June 1, 2007. As of the effective date, all new notices of intention to make an NCIB or DSIB are required to follow the new rules and any issuer bids whose commencement date was prior to June 1, 2007, or for which TSX had accepted notice in writing prior to June 1, 2007 but had not yet commenced, were permitted to comply with either the old rules or the new rules.