As of March 17, 2008, amendments to Canadian securities law regulation National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) and its related Companion Policy changed the disclosure and public filing requirements related to material contracts entered into by reporting issuers.

The amendments limit the use of the "ordinary course of business" filing exemption and restrict the permitted redactions that can be made to a material contract before it is publicly filed on the System for Electronic Document Analysis and Retrieval. The changes apply not only to all new material contracts, but also to material contracts entered into after January 1, 2002, which are still in effect but which were not previously filed.

Key Changes to the Filing Requirements

Prior to March 17, 2008, reporting issuers were not required to file a material contract that was entered into in the “ordinary course of business.” Now, under NI 51-102, the following six types of material contracts do not qualify for the “ordinary course of business” filing exemption and, accordingly, must be disclosed:

  • A contract to which directors, officers or promoters are parties, other than a contract of employment;
  • A continuing contract to sell the majority of the reporting issuer’s products or services or to purchase the majority of the reporting issuer’s requirements of goods, services or raw materials;
  • A franchise or licence or other agreement to use a patent, formula, trade secret, process or trade name;
  • A financing or credit agreement with terms that have a direct correlation with anticipated cash distributions;
  • An external management or external administration agreement (includes contracts with a third party, the reporting issuer’s parent, or an affiliate of the reporting issuer, under which management or other administrative services are being provided to the reporting issuer); and
  • A contract on which the reporting issuer’s business is “substantially dependent.” A reporting issuer is “substantially dependent” on a contract if its business depends on the continuance of that contract. For example, a financing or credit agreement providing a majority of the reporting issuer’s capital requirements for which alternative financing is not readily available at comparable terms, qualifies as a substantially dependent contract.

The omission of copyright contracts from item #3 noted above suggests that copyright contracts entered into in the “ordinary course of business” may not have to be publicly filed.

Before the amendments, if disclosure of a provision in a material contract would be seriously prejudicial to the interests of a reporting issuer or would violate confidentiality provisions, the reporting issuer could redact such provision. Now, NI 51-102 provides a list of items in material contracts that cannot be redacted even if their disclosure would be seriously prejudicial to the reporting issuer or would violate confidentiality provisions, such as debt covenants and ratios in financing or credit agreements, or terms relating to the termination of the material contract. In addition, a reporting issuer will have to disclose other terms necessary for understanding the impact of a contract on its business, including, for example, the duration and nature of a patent, trademark, licence, franchise, concession or similar agreement.

NI 51-102 now requires that, where a redaction is made, the issuer provide a brief one-line description as to the type of information being redacted and now specifically stipulates that schedules, side letters, exhibits or amendments to a material contract must also be filed.

Practical Considerations

A contract must be filed on SEDAR if it:

  • is considered to be material to the reporting issuer;
  • has not previously been disclosed, was entered into within the most recently completed financial year or, if still in effect, on or after January 1, 2002; and
  • does not fall under the “ordinary course of business” filing exemption.

If the above filing requirements are triggered, the deadline for filing a material contract on SEDAR will be the earlier of: (a) the date a material change report must be filed, if entering into the contract constitutes a material change; or (b) the date of the reporting issuer’s Annual Information Form (“AIF”) or, in the case of a TSX-V issuer, 120 days after its financial year-end.

Reporting issuers must be alert to the new material contract filing obligations for new contracts and should conduct a review of all material contracts entered into after January 1, 2002, which are still in effect and were not previously filed, to ensure they still qualify for the now limited “ordinary course of business” filing exemption. Contracts that were filed on SEDAR prior to March 17, 2008 do not require review or reassessment by the reporting issuer.

When filing an AIF, a reporting issuer should consider whether any additional or amended disclosure in the AIF concerning the particulars of a material contract is required, even if the contract has been previously filed. Reporting issuers must also adjust their redaction practices to conform to the amended NI 51-102. In addition, reporting issuers should be cognizant of these new rules when negotiating contracts and avoid unnecessarily including sensitive information.