Canadian Securities Administrators adopt enhanced disclosure, retain 10% reporting threshold

Along with the announcement on February 25, 2016 of final amendments to Canada’s take-over bid regime (see our February 26, 2016 publication, Canada’s New Take-Over Bid Rules Seek to Level the Playing Field, relating to that announcement), the Canadian Securities Administrators (CSA) published the text of final amendments to Canada’s Early Warning Regime (EWR), which will take effect on May 9, 2016.1

Background

The release of the amendments (EWR Amendments) brings to an end a three-year engagement by the CSA with market participants that began in March 2013 with an initial set of EWR proposals (see our March 15, 2013 publication, Proposed Changes to Early Warning Reporting System Address Market Transparency and Shareholder Activism in Canada, relating to the initial EWR proposals) and the CSA’s subsequent update to those proposals on October 10, 2014 (see our October 15, 2014 publication, Early Warning Reporting Threshold Remains at 10% While Other Changes to Enhance Transparency Will Be Implemented, relating to the updated proposals).

Highlights of EWR Amendments

  • Reporting Threshold – As indicated in our October 15, 2014 publication, the CSA will not be proceeding with their initial proposal of reducing the early warning reporting threshold from 10% to 5%, which would have been consistent with the Rule 13D reporting threshold under the U.S. rules. The decision to retain the 10% threshold appears to have been based on concerns by some commentators about a hindrance of investors’ ability to rapidly accumulate or reduce a large position particularly in small capitalization issuers and the signaling of investment strategies to the market.
  • Additional Required Disclosure of Decreases in Ownership – Shareholders who have met the 10% reporting threshold will now be required to report both increases and decreases of 2% or more in ownership. In addition, shareholders will be required to report when their ownership interest has fallen below the 10% reporting threshold.
  • Enhanced Disclosure – The EWR Amendments raise the disclosure standard for filers by requiring more information about the future intentions of the acquiror (and any joint actors) as well as information about the purpose or purposes for the transaction. In particular, the EWR Amendments specify eleven corporate actions which would trigger such disclosure, including the acquisition or disposition of additional securities of the issuer and material changes in the issuer’s business or corporate structure. These enhanced disclosure requirements bring the Canadian early warning system more closely in line with the Schedule 13D reporting requirements in the United States and reflect a desire on the part of the regulators that changes to intention are disclosed more fully and on a timely basis.
  • Certification – The EWR Amendments require early warning reports to be certified and signed by the filer.
  • Press Releases – The EWR Amendments clarify that early warning news releases must be issued and filed no later than the opening of trading on the next business day.
  • Alternative Monthly Reporting System – Under the current EWR rules, eligible institutional investors are precluded from using the alternative monthly reporting system (AMRS) if they make or intend to make a formal take-over bid or certain other corporate transactions which would result in the eligible institutional investor assuming control of the issuer. The EWR Amendments extend the exclusions to activist investors in certain situations other than a change of control. In particular, the EWR Amendments provide that eligible institutional investors will now also be precluded from using the AMRS if they solicit proxies from securityholders in any of the following circumstances: (i) in support of one more director nominees other than persons proposed by management, (ii) in support of a reorganization, amalgamation or other similar corporate action not supported by management, or (iii) in opposition to a reorganization, amalgamation or other similar corporate action supported by management.
  • Derivatives – Contrary to the initial EWR proposals, certain equity derivative positions that are substantially equivalent in economic terms to conventional equity holdings will not count as part of the determination for whether a shareholder has crossed the 10% threshold.
  • Securities Lending Arrangements – Finally, the EWR Amendments provide for the exclusion of borrowed securities from the determination of the EWR threshold for specified securities lending arrangements, provided that the borrowed securities are disposed of within three business days and that the borrower does not vote or intend to vote the borrowed securities.