Having abandoned the establishment of a separate venture issuer disclosure and governance regime, the Canadian Securities Administrators (CSA) has published for comment proposed amendments to current disclosure and governance obligations intended to streamline and tailor disclosure requirements and to enhance the substantive governance requirements for venture issuers. The proposed amendments for venture issuers include the following:
- for venture issuers without significant revenue, allowing the requirement for management's discussion and analysis (MD&A) for interim financial periods to be satisfied by a streamlined and focused report on quarterly highlights;
- implementing a new tailored form of executive compensation disclosure;
- reducing the instances in which a business acquisition report must be filed (changes to significance thresholds);
- requiring audit committees to have a majority of independent members; and
- amending the prospectus disclosure requirements to reduce the number of years of audited financial statements required for venture issuers to become reporting issuers, and to bring the disclosure requirements into line with the proposed amendments related to continuous disclosure.
The CSA indicates that the proposed amendments are designed to focus disclosure of venture issuers on information that reflects the needs and expectations of venture issuer investors, while eliminating disclosure obligations that may be less valuable.
In addition, the CSA proposes the following amendments applicable to all issuers:
- updating the annual information form disclosure for mining issuers to conform such disclosure to 2011 amendments made to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101); and
- establishing executive compensation disclosure filing deadlines.
The proposed amendments follow from the CSA's earlier proposal in 2011 and 2012 to implement a new regulatory regime for venture issuers, which would have included separate continuous disclosure and corporate governance obligations for venture issuers. While the CSA determined in 2013 not to pursue the implementation of a new venture issuer regime, the latest amendments retain some elements of the earlier proposal to be implemented by amending existing rules.
The CSA proposes to permit venture issuers without significant revenue to prepare and file a streamlined quarterly disclosure document, referred to as 'quarterly highlights', in place of a quarterly interim MD&A, for the first three quarters of the issuer's fiscal year.
Quarterly highlights would consist of a short discussion on the issuer's operations and liquidity, including:
- known trends;
- major operating statistics and changes thereto;
- commitments; and
- events – expected or unexpected – or uncertainties that have materially affected operations and liquidity in the quarter, or are reasonably likely to have a material effect moving forward.
When assessing whether an issuer has significant revenue in a financial year, a venture issuer must consider only the actual total revenue reported in its annual financial statements.
Business acquisition reports
Currently, all issuers are required to file a business acquisition report within 75 days of a significant acquisition, including audited financial statements of the acquired business for the most recent financial year and pro forma financial statements of the issuer.
The proposed amendments increase the significance threshold for venture issuers by raising each of the asset test and investment test thresholds from 40% of the consolidated assets of the venture issuer (calculated using the most recent interim or annual financial statements of the venture issuer) to 100%, thereby reducing the instances where business acquisition reports are required.
The CSA also proposes to eliminate the requirement that business acquisition reports filed by venture issuers include pro forma financial statements.
Executive compensation disclosure
The proposed amendments would allow venture issuers to comply with either the existing executive compensation disclosure requirements under Form 51-102F6 – Statement of Executive Compensation or a new proposed executive compensation form specific to venture issuers (proposed Form 51- 102F6V) that would streamline disclosure to a certain extent by:
- introducing a venture issuer-specific definition of 'named executive officer' that would include:
- the chief executive officer and chief financial officer during any part of the most recently completed financial year; and
- only one other executive officer whose total compensation was more than $150,000 (reduced from three other executive officers under the current requirements) at the end of the most recently completed financial year;
- reducing the disclosure period from three years to two; and
- eliminating disclosure of the fair market value of stock (options) and other share-based awards, and replacing it with detailed disclosure of the issuance and exercise of such securities.
Audit committee composition
Previously, venture issuers were exempt from composition requirements for their audit committees. The proposed amendments would require venture issuers to have an audit committee consisting of a minimum of three members, the majority of whom are independent (ie, members other than executive officers, employees or control persons of the venture issuer or of an affiliate of the venture issuer). This would be generally consistent with existing requirements under the TSX Venture Exchange.
The proposed continuous disclosure amendments would be conformed within the prospectus requirements for venture issuers as follows:
- permitting the use of quarterly highlights instead of an existing interim MD&A;
- permitting compliance with executive compensation disclosure requirements using the Proposed Form 51 102F6V in a prospectus; and
- requiring business acquisition report-level disclosure in a prospectus only where the acquisition is significant at the 100% level.
For issuers conducting an initial public offering (IPO) which will be a venture issuer upon completion of the IPO, two years (instead of three years) of audited financial statements will be required in the IPO prospectus.
The proposed amendments would also reduce the requirement to describe a venture issuer's business and its history from three to two years.
Executive Compensation disclosure deadline
The proposed amendments also establish a fixed deadline for filing an executive compensation disclosure, set at 140 days from the most recently completed financial year end for non-venture issuers and either 140 or 180 days from the most recently completed financial year end for venture issuers. The CSA is requesting comments specifically on the appropriate venture issuer deadline.
For those issuers whose applicable corporate law and constating documents permit their annual meeting of shareholders to be held later than such deadline, the issuer may have to file its executive compensation disclosure twice: once in stand-alone form to meet the foregoing deadline and again within its management information circular filed in connection with its annual shareholders' meeting.
The proposals include revisions to annual information form disclosure to conform to changes made to NI 43-101 in 2011.
The proposed amendments are in draft form and are subject to comment from interested parties. In addition, there are specific questions that the CSA has set out in the notice.
For further information on this topic please contact Jonathan Poirier at Borden Ladner Gervais LLP's Calgary office (+1 403 232 9500), fax (+1 403 266 1395) or email (firstname.lastname@example.org). Alternatively, contact Stephen P Robertson at Borden Ladner Gervais LLP's Vancouver office by telephone (+1 416 367 6000), fax (+1 416 367 6749) or email (email@example.com). The Borden Ladner Gervais website can be accessed at www.blg.com.