The decline in oil prices and the consequences for Western Canada as well as the delayed federal budget have all dominated the domestic headlines for January. However, there are a number of other developments on the horizon that Canadian issuers should be thinking about in 2015. In no particular order, here are our "15 Hot Topics for 2015":
- New Securities Regulator
- Stock Exchange for Private Companies
- Easier Rights Offerings
- Restrictions on Private Placement Exemptions
- Offering Memorandum Exemption
- Foreign Offerings to Sophisticated Canadian Investors
- Takeover Bids and Poison Pills
- Early Warning Reporting Obligations
- Venture Issuer Streamlined Disclosure
- Oil and Gas Disclosure
- Enhanced Payment Disclosure Obligation
- Option Re-pricing / Executive Compensation / Employee Retention
- Gender Diversity on Boards
- Shareholder Activism
New Securities Regulator
In 2014, progress continued on the initiative to establish a cooperative capital markets regulatory system in Canada. In July 2014, the governments of New Brunswick and Saskatchewan signed onto the Agreement in Principle originally entered into by the governments of British Columbia, Ontario and Canada in September 2013. Then, on September 8, 2014, these participating jurisdictions released a Memorandum of Understanding (with the government of Prince Edward Island signing on shortly thereafter) and consultation drafts of the uniform provincial Capital Markets Act (PCMA) and the federal Capital Markets Stability Act(CMSA) for public comment. The period for submitting comments on these drafts expired on December 8, 2014, with over 60 comment letters published by the participating jurisdictions.
In the early spring of 2015, the participating provinces are expected to publish draft initial regulations under the PCMA for public comment. In order to maintain continuity and minimize disruption for market participants, it is expected that these regulations will be based on the existing rules of the participating provinces, including the existing national and multilateral instruments. It is also expected that changes will be made only as necessary to fit the rules under the PCMA and to eliminate differences in requirements in order to create a single set of regulations that will apply across the participating jurisdictions. This should simplify transition to the cooperative system and provide a strong basis for cooperation with provinces that have not yet chosen to participate in the cooperative system, such as Alberta and Québec. Also in 2015, the participating jurisdictions are expected to pursue enactment of the PCMA in the provincial legislatures and the CMSA in Parliament, with a view to the Capital Markets Regulatory Authority (CMRA) being operational later this year.
Stock Exchange for Private Companies
TSX Private Markets was launched in November 2014, and was designed to support efficient capital raising and secondary trading by accredited investors within Canada's exempt market through approved dealers. Private companies can access TSX Private Markets by first obtaining the sponsorship of an approved participant who is registered either as an IIROC member dealer or exempt market dealer in the applicable jurisdictions.
The evolution of an independent trading arena for private issuers is an interesting development that responds to the reality that many new issuers were choosing to stay private and raise capital through institutional investors and high net worth individuals. This development was most prevalent in Western Canada where a number of energy issuers elected to remain private despite having raised significant equity in the exempt market.
Also, in late 2014, the Ontario Securities Commission recognized each of Aequitas Innovations Inc. and Aequitas Neo Exchange Inc. as an exchange, effective March 1, 2015.
Crowdfunding may be gaining some traction in Canada (see our April 2014 MarketCaps "Growing momentum and clarity for equity crowdfunding in Canada"). Saskatchewan has adopted an order permitting limited equity crowdfunding for Saskatchewan-based start-up businesses, and several Canadian jurisdictions have proposed new prospectus exemptions relating to crowdfunding.
The proposals take two forms: one a start-up crowdfunding exemption aimed at providing an alternative source of capital to non-reporting issuers at a very early stage of development, and the other a more broadly applicable crowdfunding exemption which would permit both reporting issuers and non-reporting issuers (with some exceptions) to distribute securities through a registered crowdfunding portal.
Easier Rights Offerings
The Canadian Securities Administrators (CSA) have proposed amendments with respect to the rights offering regime in order to create a more streamlined process. For example, review by a regulator of the rights offering circular would no longer be required. The dilution limit on prospectus exempt rights offerings (using a circular) would be increased to 100% of the offered class of securities (up from 25%). A new short form notice of rights offering, and a new simplified form of rights offering circular in a question and answer format, would be introduced (see our December 2014 MarketCaps "Will Canadian rights offerings no longer be the financing method of last resort?").
Also, all Canadian jurisdictions except Ontario now permit issuers with a listed class of securities to make distributions by way of private placement to their existing securityholders and, as of February 2015, Ontario will as well. The prospectus exemption requires the offer to be made to all existing holders of the listed equity securities being offered (with some exceptions), and is subject to several conditions. For example, each investor's subscription cannot exceed $15,000 within a 12-month period (unless advice is obtained from a registered investment dealer), and the issuer must issue a news release containing certain prescribed information.
Restrictions on Private Placement Exemptions
The CSA have proposed amendments to, among other things, require persons relying on the accredited investor exemption to obtain a signed risk acknowledgement form from certain individual accredited investors who are not permitted clients and to restrict the minimum amount investment ($150,000) exemption to distributions to non-individual investors.
Offering Memorandum Exemption
The Ontario Securities Commission has proposed introducing an offering memorandum exemption in Ontario. An offering memorandum exemption already exists in all other Canadian jurisdictions, although some jurisdictions have proposed amending their exemptions. The proposed new Ontario exemption would provide exempt market dealers with more opportunities to be involved in financings for smaller and medium sized issuers.
Certain jurisdictions have issued blanket orders providing relief, on conditions, to the audit requirement and the requirement for financial statements in an offering memorandum to be prepared using IFRS.
Foreign Offerings to Sophisticated Canadian Investors
Canadian securities regulators are attempting to improve access by sophisticated Canadian investors to private placement offerings of foreign issuers by carving out exceptions to Canadian rules which act as a barrier in those offerings.
Rule changes have been proposed which would provide relief from certain offering document disclosure obligations (such as connected issuer disclosure) and restrictions (such as those relating to listing representations). In some Canadian jurisdictions, relief from these rules is already available, or certain of the disclosure rules do not apply.
In some Canadian jurisdictions, blanket relief has been put in place so that foreign issuers do not trigger Canadian reporting issuer obligations under Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets in connection with their offerings into Canada.
Takeover Bids and Poison Pills
The CSA intend to publish for comment proposed amendments to the existing takeover bid regime in the first quarter of 2015 (see our September 2014 MarketCaps "Proposed bid amendments"). The amendments will be designed to rebalance the current dynamics between hostile bidders and target boards by, for example, requiring a bid to remain open for at least 120 days (unless the target board agrees to waive the 120-day requirement) and imposing a minimum 50% tender condition. This is expected to have an impact on the poison pill landscape.
Early Warning Reporting Obligations
The CSA intend to publish final amendments to the early warning reporting obligations in the second quarter of 2015 (see our October 2014 MarketCaps "Significant changes to proposed early warning reporting amendments"). The amendments are expected to trigger a disclosure requirement for both increases and decreases in ownership of at least 2% and when a shareholder's ownership interest falls below the 10% threshold; to make the alternative monthly reporting system unavailable to eligible institutional investors who solicit, or intend to solicit, proxies from securityholders of a reporting issuer on certain matters; to enhance the content of the early warning disclosure to be filed; and to clarify the timeframe to file the early warning report and news release.
Venture Issuer Streamlined Disclosure
Amendments have been proposed to streamline disclosure obligations for venture issuers that are intended to improve the quality of disclosure while alleviating the burden of preparation for the issuer (see our June 2014 MarketCaps "A refreshed proposal to streamline disclosure requirements for venture issuers"). For example, the management's discussion and analysis for interim periods for issuers without significant revenues could be satisfied by a highly focused report on quarterly highlights, primarily consisting of a short discussion about its operations and liquidity. For executive compensation disclosure, disclosure would only be required for the CEO, the CFO and one additional highest paid executive officer. In addition, the number of years of disclosure would be reduced from three to two years and the disclosure requirements relating to stock options and other share-based awards would be amended.
Oil and Gas Disclosure
Amendments to National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities, to be implemented in July 2015, are intended to, among other things, promote improved disclosure of resources other than reserves, and provide increased flexibility for oil and gas issuers that operate and report in different jurisdictions or recover product types not previously recognized by NI 51-101. The amendments will align NI 51-101 with the amended Canadian Oil and Gas Evaluation Handbook (COGE Handbook).
Enhanced Payment Disclosure Obligation
The Canadian government introduced legislation (intended to be effective June 2015) to require mining and oil and gas issuers to publicly report payments made to governments for resource projects. The Canadian government's proposal would apply to both public and private issuers based or operating in Canada that exceed certain asset, revenue or employee thresholds. The reporting obligation would be triggered by any payment (including those made to First Nations) over $100,000.
Option Re-pricing / Executive Compensation / Employee Retention
With the decline in overall Canadian public markets in late 2014 and early 2015, particularly among issuers in the energy sector, we expect increased focus on employee compensation and retention programs that are linked to stock performance. During the last broad market downturn, a number of temporary measures were introduced to permit option cancellation and re-pricing with limited or no shareholder approval and we expect there will be calls for similar relief in 2015. This time however such discretionary relief would be against the backdrop of shareholder activists who are already often concerned about management compensation and remuneration.
Gender Diversity on Boards
TSX-listed issuers, as well as certain other non-venture issuers, will have to comply with new disclosure requirements for the 2015 proxy season relating to the representation of women on boards and in senior management (see our October 2014 MarketCaps "Where are the women? New disclosure for TSX-listed issuers"). The new rules require an issuer to disclose, among other things, whether the issuer has adopted a written policy relating to the identification and nomination of women directors (and if not, why not) and whether the issuer has adopted a target regarding women on the board and in executive officer positions (and if not, why not).
We expect to see shareholder activism continue to heighten and evolve in 2015, giving greater control to shareholders over director selection and removal as well as restructuring transactions. The introduction of U.S. style shareholder activism into the Canadian market place increased significantly in 2014 and we expect this trend to continue. As a structural response, many Canadian issuers have now adopted advance notice provisions in their bylaws for director elections and we expect continued debate in 2015 about the right regulatory balance between the interests of shareholders / activists and the ability of issuers to fend off unwanted proposals.