On March 13, 2015, the U.S. Securities and Exchange Commission (SEC) announced charges against eight directors, officers and major stockholders for failing to make timely updates to their beneficial ownership reports on Schedule 13D – the U.S. counterpart to a Canadian early warning report – regarding steps taken in connection with potential going private transactions. These charges are a reminder to Canadian market participants active in the United States of the importance of updating Schedule 13D reports when their investment intentions change. In addition, these charges are a potential harbinger of increased Canadian enforcement action for failing to file updated early warning reports in comparable circumstances, particularly in light of proposed amendments (Proposed Amendments) by the Canadian Securities Administrators (the CSA) to the Canadian early warning reporting regime, which are due to be published in the second quarter of 2015 and that we discussed in a previous Osler Update.
In the United States, a report on Schedule 13D (commonly referred to as a “beneficial ownership report”) is required to be filed with the SEC within 10 days of the acquisition of direct or indirect beneficial ownership of more than 5% of a class of publicly traded equity securities. In many cases, institutional and passive investors are permitted to file an abbreviated report on Schedule 13G instead, so long as they did not acquire the securities with the purpose or effect of changing or influencing control of the issuer. In most cases there are no restrictions on further acquisitions by the acquiror during the period between when the requirement to file Schedule 13D or Schedule 13G is triggered and when the report is actually filed, which may be up to 10 days later. A report on Schedule 13D must disclose the holder’s purpose in acquiring the securities and its plans and proposals regarding the issuer, and the filer is further required to promptly amend its report on Schedule 13D when there are material changes in the information previously disclosed.
The Canadian counterpart to a report on Schedule 13D is the early warning report. When a purchaser acquires beneficial ownership of, or control or direction over, 10% or more of a class of voting or equity securities, the purchaser is required to promptly issue and file a press release and within two business days must file an early warning report with the securities regulators. Further press releases and reports are required upon the acquisition of each additional 2% or more of the outstanding securities or a change in a material fact contained in an earlier report. The disclosure required in the press releases and reports must cover, among other things: (i) the number and percentage of securities acquired; (ii) the purpose for which the securities are acquired; and (iii) any further intention to acquire additional securities. The purchaser is prohibited from acquiring any additional shares of the class until the end of the first business day after the initial press release or any further press release is issued. As is the case in the United States, there is also a simplified reporting system (called the Alternative Monthly Reporting System) available, and it may be used by certain eligible institutional investors.
The U.S. and Canadian obligations to update previous reports on Schedule 13D or early warning reports, as applicable, are similar in that both are trigged by material changes in information previously disclosed. As such, the U.S. enforcement actions underscore the importance of making any required amendment to an early warning report in a timely manner.
In laying these charges, the SEC has indicated that determining the form of a going private transaction, obtaining third party waivers, assisting with shareholder vote projections, informing management of their intentions, forming consortiums of participating shareholders or some combination thereof may constitute material changes, which helps inform the Canadian understanding of what might constitute a “change in any material fact” that triggers the requirement to file an updated early warning report. Certain of the filers charged by the SEC also failed to report their ownership of securities in the applicable company in a timely manner, which we would expect to be of concern to Canadian securities regulators as well and highlights the need for timely compliance with these disclosure requirements.
The Proposed Amendments will require additional disclosure in early warning reports regarding the purpose of the transaction and future intentions to acquire securities, and descriptions of any agreements with respect to securities and voting. These additional disclosure requirements are aimed in particular at requiring investors to provide more detailed and customized disclosure regarding the intentions of the person acquiring securities and the purpose of the acquisition. The CSA have noted that currently this disclosure often consists of boilerplate language that in their view provides little useful information for the market.
Generic disclosure of the purpose of the investment and future intentions in an already filed early warning report – for example, that the investor holds for investment purposes only, and may or may not purchase or sell securities in the future, depending on market conditions and other factors material to the investor’s investment decision – will generally be insufficient to shelter an investor from the obligation to provide updated disclosure where there has been a material change in the investor’s intentions. We expect that the Proposed Amendments will lead to increased scrutiny of early warning reports, which in turn will increase the tension between compliance with disclosure obligations and the potentially damaging consequences of premature public disclosure of changes in an investor’s intentions.
In the United States, litigation regarding untimely or deficient Schedule 13D filings is a very commonly used defensive tactic. Going forward, Canadian litigation and enforcement actions in this area may very well increase, particularly after the Proposed Amendments are implemented. Canadian market participants will need to pay even closer attention to the contents of their early warning reports and when they need to be updated.