A new, harmonized insider reporting regime for Canada will become effective on April 30, 2010, in the form of National Instrument 55-104 - Insider Reporting Requirements and Exemptions (NI 55-104) and the related companion policy, which have been adopted by the Canadian Securities Administrators (the CSA).
Key Changes in the New Regime
The changes to insider reporting in Canada contained in NI 55-104 cover various aspects of the regime and will include:
- after a six-month transition period to end as of October 31, 2010, the filing deadline for insiders to report changes in their holdings is being tightened to five calendar days from the current filing deadline of ten calendar days;
- the number of individuals who will be required to file insider reports will be reduced to a smaller group of insiders who have significant power or influence over the issuer;
- making the reporting requirements more uniform for securities issued under share-based compensation arrangements; and
- insider reports will be required to be filed by significant shareholders based on that shareholder’s beneficial ownership of the issuer’s securities after deemed conversion of certain securities held by the shareholder.
The New Definition of “Reporting Insider”
NI 55-104 contains the new concept of “reporting insider”, which is a smaller group of insiders that will continue to be required to file insider reports. Accordingly, the number of insiders of a reporting issuer that is required to file insider reports will be reduced.
The definition of “reporting insider” includes the following insiders:
(i) those who have ordinary course access to material undisclosed information concerning the reporting issuer and who also directly or indirectly exercise, or have the ability to exercise, significant power or influence over the issuer;
(ii) a director of the reporting issuer, of a significant shareholder of the reporting issuer or of a “major subsidiary” of the reporting issuer (a subsidiary that accounts for 30% or more of the reporting issuer’s consolidated assets or revenues, based on its most recent financial statements);
(iii)the CEO, CFO and COO of a reporting issuer, of a significant shareholder of the reporting issuer or of a “major subsidiary” of the reporting issuer. The reporting issuer’s remaining officers and its subsidiaries’ other officers and directors will only have to file insider reports if they have significant power or influence over the reporting issuer; and
(iv) any other insider who is responsible for a principal business unit, division or function of the reporting issuer (for example, sales, finance or production). This will make the filing of insider reports easier for larger issuers or issuers with multiple subsidiaries, as the requirements for who is required to file the reports are being streamlined.
The threshold for insider reporting by a significant shareholder will remain at the same percentage level under NI 55-104. Therefore, a person or company with beneficial ownership of, or control or direction over, directly or indirectly, more than 10% of the voting rights attached to a reporting issuer’s outstanding securities, will continue to be required to file insider reports.
The additional concept introduced by NI 55- 104 will now include a significant shareholder who can acquire through “post-conversion beneficial ownership” additional voting securities within the next 60 days that would bring their holdings above the 10% threshold. This new concept will make the insider reporting requirements similar to Canada’s take-over bid regime, so that a shareholder has to include in the calculation of its holdings any securities that it can acquire within the next 60 days through, for example, converting securities or exercising warrants or options.
Exemption for Acquisitions of Securities Under Compensation Arrangements
NI 55-104 includes a new process for reporting transactions involving share-based compensation arrangements, so that a reporting issuer can file insider reports on a deferred basis. This new process is available provided that the reporting issuer has already included disclosure of the existence and material terms of the compensation arrangement in a management information circular or other public document filed on SEDAR, the reporting issuer has already filed an “issuer grant report,” within five days of the grant, containing the required disclosure of the material terms of that grant and the relevant insider complies with the applicable deferred reporting procedure.
Removal of Proposal to Require Disclosure of Late Insider Reports
The CSA decided that it would not proceed with its earlier proposal to require a reporting issuer to disclose any late insider report filings in its management information circular. The CSA has indicated that it may revisit this idea in the future as part of its goal of harmonizing various consequences of late insider reporting, including applicable late fees.
Suggestions for How to Prepare for the New Regime
Reporting issuers should review the new requirements in detail and take the following steps in preparation for the new regime that is to become effective on April 30, 2010:
- review its current list of insiders who are subject to the insider reporting requirements and amend (and likely reduce) the list based on the new group of reporting insiders;
- provide guidance to the revised list of the issuer’s reporting insiders regarding the new requirements, in particular the accelerated five-day reporting period that will become effective as of October 31, 2010; and
- review the issuer’s share compensation arrangements and determine whether to commence filing issuer grant reports.