On December 17, 2012, the Toronto Stock Exchange and the TSX Venture Exchange released a Consultation Paper on Emerging Market Issuers (the “Consultation Paper”). The main purposes of the Consultation Paper are to
- share the potential risks identified by the Exchanges that are associated with the listing of issuers with a significant connection to an emerging market jurisdiction (“Emerging Market Issuers”),
- provide preliminary guidance to issuers and their advisors regarding the listing of Emerging Market Issuers, and
- solicit comments from market participants.
The public is invited to review the Consultation Paper and provide comments by February 28, 2013. The Consultation Paper follows the publication on November 9, 2012 by the Ontario Securities Commission of OSC Staff Notice 51-720 Issuer Guide for Companies Operating in Emerging Markets. For further information on the OSC publication, please see our bulletin dated November 26, 2012.
Definition of Emerging Market Issuer
The following factors are being considered by the Exchanges in determining whether an applicant is an Emerging Market Issuer:
- residency of “mind and management”;
- jurisdiction of the principal business operations and assets;
- jurisdiction of incorporation;
- nature of the business; and
- corporate structure.
Jurisdictions that are comparable to Canada with respect to business practices, business culture, corporate law requirements, securities laws requirements and rule of law would be excluded from the “Emerging Market Issuer” definition. For the purposes of the Consultation Paper, an emerging market jurisdiction means any jurisdiction outside of the United States, Western Europe, Australia and New Zealand.
Potential Risks Associated With Listing Emerging Market Issuers
The Consultation Paper identifies and discusses the following four areas in which there may be greater risks associated with Emerging Market Issuers:
- Management and Corporate Governance
If management lacks knowledge of Canadian securities law and the requirements of the Exchanges, the chances of non-compliance or misunderstanding, inadequate disclosure (in particular with respect to related-party transactions) and inadequate corporate governance standards and practices are higher. Management’s lack of experience and familiarity with the laws of the jurisdiction where the issuer carries on business also increases the potential for non-compliance or misunderstanding of the local legal and regulatory requirements. In addition, if the board of directors or management are not physically close to the issuer or are not fluent in a common language or in the language in which the issuer does business, the likelihood of communication problems within the company and with the Exchanges increases.
- Non-Traditional Corporate / Financial Reporting
For issuers with principal operations in an emerging market, if the issuer does not have adequate internal controls over financial reporting matters (i.e. inadequacies due to differences in banking systems and business practices between jurisdictions), and if its CFO, audit committee or Canadian auditors lack sufficient experience and expertise in the issuer’s jurisdiction, the potential for errors, misstatements or oversights in the issuer’s financial statements and related disclosure may increase.
- Corporate Structures
The use of complex corporate structures to deal with tax or foreign ownership restrictions can create additional risks, such as limitations on title to and control over assets, limitations on shareholders’ ability to have a recourse against the assets of the issuer, and inadequate public disclosure of the corporate structure. The Exchanges are considering refusing listings of Emerging Market Issuers that have adopted non-conventional corporate structures, requiring comment from the sponsor on the necessity of a non-traditional corporate structure and/or a legal opinion to support the validity of the corporate structure.
- Legal Matters Relating to Title and Ability to Conduct Operations
Issuers must validly own the principal operating assets and be able to operate the business in order to be listed on the Exchanges. Issuers carrying on business in an emerging market jurisdiction may have difficulty to show legal title to assets and obtain the required operating permits or business licences in order to satisfy these key listing requirements.
The Exchanges are also considering additional sponsorship requirements, such as requiring sponsorship for all Emerging Market Issuers, special attributes for sponsors, sponsorship reports, review of a sponsor’s work, and site visits and commentary by the sponsor. Moreover, the Exchanges are conceiving supplemental ongoing requirements, including the pre-clearance of a change of auditors and of new board members or new senior management, in the presence of certain risk factors.
As a result of the potential risks described above, it is strongly recommended that Emerging Market Issuers that are considering listing on the Exchanges schedule a pre-filing meeting with the applicable Exchange. This meeting would be used as a forum to discuss the applicable listing requirements and identify potential issues and areas of concern with the listing.
For further reference, a copy of the Consultation Paper is available here.