On March 13, 2013, the Canadian Securities Administrators (CSA) published a notice and request for comments relating to proposed amendments to Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids, National Policy 62-203 Take-Over Bids and Issuer Bids and National Instrument 62-103 Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103) (the Proposed Amendments). The Proposed Amendments, if implemented, will amend the early warning reporting regime currently in effect. The CSA anticipates that corresponding amendments will be made to the Securities Act (Ontario) and to Ontario Securities Commission Rule 62-504 Take-Over Bids and Issuer Bids to give full effect to the Proposed Amendments in Ontario.

Objective and overview of proposed amendments

The stated objective of the Proposed Amendments is to provide greater transparency about significant holdings of a reporting issuer’s securities in order to allow market participants to review and assess the potential impact of changes in the ownership of, or control or direction over, an issuer’s voting or equity securities. To accomplish this objective, the following key changes to early warning reporting are proposed:

  • reducing the current early warning disclosure threshold from 10% to 5%;
  • requiring disclosure of both increases and decreases in ownership of 2% or more of securities;
  • enhancing the content and timing of the disclosure in the early warning news releases and reports required to be filed;
  • disqualifying eligible institutional investors (EIIs) who are soliciting or intending to solicit proxies from using the alternative monthly reporting system (AMR); and
  • requiring disclosure of certain “hidden ownership” and “empty voting” arrangements.

Reporting threshold

The Proposed Amendments, if enacted, would decrease the early warning reporting threshold from the acquisition of 10% of any class of equity or voting securities of an issuer to 5%. The CSA states that a 5% threshold is consistent with several other major foreign jurisdictions and represents a significant level of ownership, which can enable a shareholder to possibly influence control of an issuer and requisition a shareholders’ meeting.

Once the threshold is met, further disclosure is required if there is a 2% increase or decrease in ownership or if there is a change in a material fact contained in an earlier report. Currently, the regime does not explicitly require disclosure of decreases unless such decreases represent a change to a material fact in a previous filing.

A news release must be issued and a report must be filed if the ownership percentage decreases to less than 5%. The CSA believes that this proposed change provides valuable information to the market, particularly in situations where an investor’s ownership fluctuates above and below the 5% threshold. As the Proposed Amendments reduce the reporting threshold, the rules specifically applicable to reporting during a take-over bid will not be maintained.

Timing of reporting

Under the Proposed Amendments, a news release must be issued and filed promptly, but in any event no later than the opening of trading on the next business day. This amendment provides a definitive deadline for filing the news release as opposed to the current regime, which only requires that a news release be filed promptly.

Enhanced disclosure in early warning reports

The current early warning report form will be replaced with a new form. It will require new and more detailed disclosure of the intentions of the person acquiring securities and the purpose of the acquisition or disposition will be required. Conforming amendments will also be made to the disclosure required for EIIs.

Alternative monthly reporting system available for passive investors only

The Proposed Amendments provide that the AMR set out in NI 62-103 will exclude any person from using this reporting system who solicits, or intends to solicit, proxies from the securityholders of a reporting issuer on matters relating to the election of directors of the reporting issuer or to a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of the reporting issuer. AMR will be available for passive Ells only.

Hidden ownership and empty voting

Under the Proposed Amendments, in determining whether the 5% reporting threshold has been reached, an investor must include equity derivative positions that are substantially equivalent in economic terms to conventional equity holdings, and securities lending arrangements. The “equity equivalent derivative” concept captures derivatives that substantially replicate the economic consequences of ownership and is not intended to encompass partial-exposure instruments such as options and collars that provide the investor with only limited exposure to the reference securities. Rather, it intends to capture instruments such as total return swaps or contracts for difference and other derivatives that provide investors with a notional “long” position with an economic interest that is substantially equivalent to the economic interest investors would have if they held the securities directly.

Any voting securities borrowed pursuant to securities lending arrangements that permit borrowers to vote the shares at their discretion will be required to be disclosed under the early warning regime, if such borrowed securities, together with securities currently owned by a securityholder, exceed the 5% threshold. Early warning requirements will also apply to lenders. However, the CSA is considering providing an exemption for lenders where the borrowed securities are borrowed under an agreement that falls within the definition of “specified securities lending arrangements” (which inter alia provide the lender with an unrestricted ability to recall the securities before a meeting of securityholders).

CSA request for comments

The CSA invites public comment on the Proposed Amendments and will accept comments until June 12, 2013. A full copy of the Proposed Amendments can be accessed here.