• Exchanges currently reviewing respective listing requirements applicable to issuers with a significant connection to an emerging market jurisdiction
  • Current guidance includes: pre-filing conferences, likelihood of a sponsorship requirement and possibility of supplemental ongoing requirements to mitigate risks
  • Comment period continues to February 28, 2013

On December 17, 2012, the Toronto Stock Exchange (the TSX) and TSX Venture Exchange (TSXV, and together with the TSX, the Exchanges) published a joint Consultation Paper on Emerging Market Issuers (the Consultation Paper). The Consultation Paper discusses the potential risks associated with listing issuers with a significant connection to an emerging market jurisdiction, “Emerging Market Issuers” (EMIs) identified by the Exchanges. The Consultation Paper also provides preliminary guidance to issuers and their advisers with respect to listing considerations applicable to EMIs and solicits comments from market participants on potential new guidance or requirements.

For the purposes of the Consultation Paper, the Exchanges consider an emerging market jurisdiction to be any jurisdiction outside of Canada, the United States, Western Europe, Australia and New Zealand.

Risks Associated with Listing Emerging Market Issuers

The Exchanges identified four principal areas of risk:

  • management and corporate governance
  • financial reporting
  • non-traditional corporate/capital structures
  • legal matters relating to title and ability to conduct operations.

Management and Corporate Governance of Emerging Market Issuers

The Exchanges identified certain risks related to management’s knowledge of Canadian regulatory requirements; communication between management; the board of directors and third parties; and management’s local business knowledge. Some of the risks the Exchanges identified related to management and corporate governance of EMIs include:

  • a potential increase in the likelihood of noncompliance with, or misunderstanding of, Canadian securities laws and the requirements of the Exchanges
  • inadequate oversight of senior management by the board of directors
  • the inability of advisers to adequately communicate with senior management and the board of directors
  • the inability of the CFO to properly carry out his or her duties
  • the inability of the audit committee to properly carry out its duties
  • the inability of senior management to adequately communicate with the Exchanges and applicable securities regulatory authorities
  • a potential increase in the likelihood of non-compliance with, or misunderstanding of, the legal and regulatory requirements applicable to operations.

Financial Reporting

With respect to financial reporting, the Exchanges identified risks relating to the qualification of auditors, the adequacy of internal controls and the qualifications of CFOs and audit committees of EMIs. Specifically, the Exchanges noted the following risks for EMIs with principal operations in an emerging market jurisdiction:

  • an increase in the likelihood of errors or oversights in the audit process, and correspondingly in the issuer’s financial statements and related disclosure
  • an increase in the likelihood of errors and misstatements in the issuer’s financial statements as a result of differences in banking systems and controls, business cultures and practices and rules or limitations on the flow of funds between jurisdictions.

Non-Traditional Corporate/Capital Structures

The Exchanges identified the following potential risks where non-traditional corporate or capital structures of EMIs are in place:

  • if the structure requires that legal ownership of the issuer’s operating assets be vested in a non-affiliated entity, title to and control over such assets by the issuer may be compromised
  • the structure may limit or otherwise inhibit the ability of the shareholders to have recourse against the assets of the issuer
  • inadequate public disclosure of the nature, material characteristics and risks associated with the structure.

Legal Matters Relating to Title and Ability to Conduct Operations

With respect to legal matters relating to title and the ability to conduct operations, the Exchanges identified the following risks relating to the validity of title to an EMI’s principal operating assets and the legal right of an EMI to conduct operations:

  • there may be an increase in title risk or difficulty demonstrating legitimacy and certainty of title to principal operating assets
  • specific permits or business licences may be required for an issuer to carry out its business operations, including specific requirements if the issuer is considered foreign in the jurisdiction of its business operations, which may impact its ability to carry out its business operations.

Questions for Public Consultation

The Exchanges are soliciting comments in order to assess whether to implement new guidance or requirements for listing EMIs, including with respect to:

  • potential risks associated with listing EMIs
  • factors that determine whether an issuer may be an EMI
  • management and corporate governance, including questions relating to requirements for independent directors
  • financial reporting issues and specifically the role of the CFO, the audit committee and auditors
  • internal controls, including, for the TSX, whether a report on internal controls should be submitted by an auditor at the time of original listing for EMIs
  • related party transactions and whether the Exchanges take an expanded view of “related party transactions” with regards to EMIs
  • non-traditional corporate/capital structures and whether these should be allowed for EMIs
  • sponsorship of EMIs, including whether sponsorship should always be required and whether sponsorship reports should be made public
  • ongoing requirements including whether the interim financial statements of EMIs should be reviewed by an auditor.

The Consultation Paper also includes the TSXV’s proposed policy document, Appendix 2B – Listing of Emerging Market Issuers, which sets forth specific guidance and requirements applicable to the listing of Emerging Market Issuers on TSXV.

The comment period will continue to February 28, 2013.

Guidance for Listing Emerging Market Issuers

Pre-Filing Conferences

The Exchanges have recommended that any issuer with significant connections to an emerging market jurisdiction that is contemplating a listing on either Exchange arrange a pre-filing meeting with the applicable Exchange.

Other Requirements

Sponsorship: The TSX notes that while, historically, sponsorship may have been waived for certain applicants completing an IPO or brokered financing, or graduating from the TSXV, in assessing EMIs, the TSX is unlikely to waive the sponsorship requirement.  

Ongoing Requirements: In connection with an original listing, the TSX notes that it may require supplemental ongoing requirements to mitigate risks, including a requirement to have the TSX pre-clear a change of auditors and pre-clear new board members or senior management. The TSX further notes that it could periodically re-consider these requirements as an issuer’s risk profile changes over time.