In December 2012, the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) (collectively, the Exchanges) jointly released the Consultation Paper on Emerging Market Issuers (Consultation Paper), as part of their ongoing review of emerging market issuers (EM Issuers). The Consultation Paper follows the release of the Ontario Securities Commission Staff Notice 51-720 Issuer Guide for Companies Operating in Emerging Markets, published in November 2012, which offers assistance and clarification to EM Issuers and their directors and management, on governance and disclosure practices by highlighting eight areas for consideration, together with disclosure tips to assist companies and their boards in assessing risks and complying with applicable Canadian securities law. The purposes of the Consultation Paper are to (i) identify the potential risks associated with listing EM Issuers that have been identified by the Exchanges, (ii) provide preliminary guidance with respect to listing considerations applicable to EM Issuers, and (iii) solicit feedback from market participants on matters related to listing EM Issuers and possible new guidance or requirements that the Exchanges may implement.
Key Risks Identified by the Exchanges
The Consultation Paper identifies four risk categories associated with EM Issuers:
Management and Corporate Governance Issues
- Management may lack a knowledge and understanding of Canadian regulatory requirements;
- Communication issues may exist if the directors and officers are not fluent in the language in which the EM Issuer conducts its business; and
- Management may lack experience and familiarity with local laws and business practices of the jurisdiction in which the EM Issuer conducts its business.
Financial Reporting Issues
- Canadian auditors may lack sufficient expertise and experience in the jurisdiction in which the EM Issuer conducts its business;
- There may be inadequate internal controls over financial reporting; and
- The CFO or the audit committee may lack sufficient expertise and experience related to applicable audit procedures, in particular as they pertain to international audit engagements for public companies.
Non-Traditional Corporate/Capital Structures Issues
While the Exchanges acknowledge that tax or foreign ownership restrictions encourage or necessitate more complex corporate or capital structures, there may be potential risks associated with such structures, including:
- Where the structure requires that legal ownership of the EM Issuer’s operating assets be vested in non-affiliated entity, the title to, and control over, such assets by the EM Issuer may be compromised;
- The structures may limit, or otherwise inhibit, the ability of shareholders to have recourse against the assets of the EM Issuer; and
- Inadequate public disclosure of the nature, material characteristics and risks associated with such structures.
Legal Matters Relating to Title and Ability to Conduct Operations
- Legitimacy and certainty of title to the principal operating assets of the EM Issuer are key and fundamental listing requirements of an EM Issuer; and
- An EM Issuer must have the specific permits and licenses to carry out its business operations.
As a practical matter, the Exchanges strongly recommend that issuers with “significant connections” to an emerging market arrange a pre-filing meeting with Exchanges’ representatives, and inter alios, senior management, key directors and the sponsor of the applicant, to facilitate the identification and resolution of concerns with the proposed listing. In particular, the pre-filing meeting will (i) introduce the Exchange to the EM Issuer, its business and key individuals; (ii) provide a forum for questions from issuers and their advisors relating to the listing process; (iii) identify the requirements and procedures that the Exchanges will apply to the EM Issuer’s application; and (iv) identify potential issues and areas of concern that the Exchanges may have with the proposed listing.
The Consultation Paper also includes a proposed TSXV policy document Appendix 2B - Listing of Emerging Market Issuers which sets out specific guidance and requirements applicable to listing Emerging Market Issuers on the TSXV.
The feedback period ended on February 28, 2013. The Exchanges are in the process of reviewing comments from stakeholders and assessing whether to implement new guidance or requirements for listing EM Issuers. It is likely that the feedback will result in new guidelines or requirements for listing EM Issuers.