The increase over the past few years in the number of listings in Canada of foreign issuers, or domestic issuers with significant foreign operations, raises unique regulatory issues requiring greater attentiveness to corporate policies and procedures.

The Ontario Securities Commission has published OSC Staff Notice 51–720 “Guide for Issuers Operating in Emerging Markets”. The new staff notice provides a guide for emerging market issuers and their directors and management with regard to regulatory, governance and disclosure practices.The staff notice was published following the OSC’s emerging market issuer review, in which OSC staff selected a number of emerging market issuers for in-depth reviews of their public disclosure record and examination of the functions of each issuer’s board and audit committee.  

The staff notice provides guidance in eight broad areas for issuers operating in emerging markets, and sets forth a series of questions for boards (and audit committees) and management to consider, as well as relevant recommendations for enhanced disclosure required in continuous disclosure documents. We have set forth below a brief summary of the issues discussed in the notice.


The notice emphasizes the need for boards and management to have a thorough understanding of the political, cultural, legal and business environments in which the company operates. This means that Canadian directors, who may have limited knowledge and experience regarding the company’s operating environment, must exercise additional diligence to address any knowledge gaps that may exist. Likewise, the company must ensure that its foreign directors and management who are unfamiliar with Canadian regulatory requirements and practices must also address any knowledge gaps.


Where the language and culture of the emerging market in which an issuer operates differ significantly from those in Canadian markets, the staff notice recommends that emerging market issuers should consider the inclusion of board members with appropriate levels of knowledge and expertise in the language and cultural practices of the emerging market, and facilitating board access to independent translators.


In certain circumstances, emerging market issuers implement unique and complex corporate structures to address the political, legal and cultural realities of the foreign market. The staff notice raises the concern that complex structures may be difficult to understand, may present challenges to effective Board and management decision-making and obscure the misappropriation of assets or other fraudulent activities, or convey a false impression of financial performance or condition through distorted financial statements. The staff notice goes on to discuss 2 types of structures commonly used by companies operating in emerging markets: (1) those that have multiple layers of entities and numerous subsidiaries incorporated in various jurisdictions; and (2) those that encompass “special-purpose entities” such as variable interest entities.


The Staff Notice explains that transactions between the issuer and entities within the same group or with parties linked to its shareholders, directors or management, or other related party transactions, may present a heightened risk for emerging market issuers due to differences in local business practices, cultural norms and legal requirements compared to North American standards. In order to identify and monitor related party transactions by management and the board so as to prevent potential abuse, appropriate policies, procedures and scrutiny for the independent identification, evaluation and approval of RPT’s should be implemented.


The staff notice encourages greater board sensitivity to the risks associated with operations in emerging markets recognizing that risk analysis and mitigation techniques appropriate in the Canadian or North American business context may be less effective in emerging markets. Specific risks of operating in emerging markets may include risks related to political factors, legal and regulatory framework of the foreign jurisdiction, currency conversion restrictions, corruption, bribery, civil unrest and economic uncertainty, expropriation, and factors that may affect the company’s title to its assets.


Canadian resident board members of emerging markets issuers face the challenge of implementing stronger internal controls required due to differences in time zones, languages and culture. These factors complicate communications and may hinder accuracy and timeliness of financial reporting. Appropriate internal controls serve as essential checks and balances on foreign operations and reduce the risks of inaccurate financial reporting.


Issuers need to evaluate the credentials and specialized knowledge of any experts which they may rely upon in an emerging market, in order to assess whether they are similar to what would be expected in a Canadian context. An issuer operating in an emerging market may need to hire an industry professional or expert with specialized knowledge to assist with complex matters arising in the foreign jurisdiction. These professionals may include tax professionals, legal professionals and valuation professionals. Where industry thresholds in the emerging market may not be subject to equivalent Canadian rules and standards of professional conduct, boards need to critically assess the quality of the advice being provided by emerging market professionals.


Investors rely on the external auditor as an important gatekeeper to ensure fair presentation of the issuer’s financial statements. The audit committee is required under NI 52–110 to directly oversee the work of the external auditor including the resolution of any disagreements between management and the external auditor regarding financial reporting. The staff notice recommends that the audit committee of an emerging market issuer consider factors relating to the competence, experience and qualifications of the external auditor (including any foreign component auditor) in the foreign market when it recommends that the board of directors retain particular external audit firm.  


From the OSC’s staff notice and its emerging market issuer review, it is clear that the OSC considers regulatory compliance and corporate governance critical issues leading to increased responsibilities for boards, management, audit committees and gatekeepers such as investment bankers and auditors involved with emerging market issuers. To be sure, legal counsel will need to assist their clients in fulfilling their heightened obligations where foreign companies or operations are concerned.