Written by Will Osler, Christopher Doucet and Matthew Cunningham
In February 2020, the Ontario Government established the Capital Markets Modernization Taskforce to review and modernize Ontario's capital markets. Given the events that have transpired since the last review in 2003, including the Great Recession and the ongoing COVID-19 pandemic, this is a much-needed undertaking. The taskforce issued its initial consultation report on July 7, discussing 47 of the most pressing policy issues raised by stakeholders during the consultation process.
There are two overall themes of these policy issues. First, to supplement the Ontario Securities Commission's (OSC) policing function. Second, to grow Ontario's capital markets. The report proposes some significant changes, and a number of them are discussed in more depth below. A number of the proposals would impact policy across multiple provinces, and implementation would require cooperation on a harmonized approach.
1. Streamline Disclosure Timing
Currently, Canadian public companies are required to provide quarterly disclosure of their interim financial results and accompanying management discussion & analysis (MD&A). Stakeholders consulted by the taskforce noted that this can be an onerous process, particularly for smaller issuers. To alleviate this, the report recommends moving from quarterly disclosure to semi-annual disclosure at the discretion of the issuer. This would reduce issuer expenditure and should present a better value proposition for those issuers whose finances do not change significantly between quarters.
2. Introduce an Alternative Offering Model for Reporting Issuers
The taskforce is proposing an alternative offering model that would rely on an issuer's continuous disclosure record in lieu of a prospectus. Under this model, issuers in compliance with continuous disclosure requirements and fulfilling certain other conditions would be able to offer securities listed on an exchange to the public up to a certain maximum dollar amount. The issuer would also have to file a short disclosure document in conjunction with the offering.
3. Building an "Access Equals Delivery" Model of Information Dissemination
This proposal would permit companies to disclose documents to investors and stakeholders in electronic format, including by posting them on websites, instead of having to provide hard copy versions. This would dovetail with the Canadian Securities Administrators' SEDAR+ project and help provide investors and regulators with more timely disclosure. Further, this should alleviate the effort and cost issuers currently expend on disclosure as well as impacts on the environment. Documents affected by this proposal would include annual and interim financial statements, MD&A and management reports of fund performance, with the potential to extend to other types of disclosure.
4. Allow Exempt Market Dealers to Participate in Prospectus Offerings and Reverse Takeovers
Exempt market dealers (EMDs) provide support for start-ups and smaller issuers seeking to raise capital prior to engaging in an initial public offering. However, EMDs are often unable to continue supporting these entities when they subsequently undertake prospectus offerings. The report proposes to allow EMDs to participate in prospectus offerings as selling group members, which would allow them to maintain relationships with issuers and open up additional financing channels. Further, the report recommends that EMDs be allowed to act as sponsors in reverse-takeover transactions.
5. Consolidating Reporting and Regulatory Requirements
The report recommends streamlining reporting and regulatory requirements, including combining form requirements for MD&A, annual information forms and financial statements. The proposal also contemplates the removal of some reporting requirements where the information is available via other disclosure.
6. Removal of Four-Month Hold Period on Exempt Securities
The taskforce is proposing to remove the four-month hold period currently in place on securities issued by an exempt issuer under the accredited investor exemption. The proposal would allow secondary trades immediately where the issuer has been a reporting issuer for four months before the trade. However, issuers and any dealers would be required to take steps to ensure that the accredited investor is purchasing securities for its own account and not to distribute, in order to avoid indirect underwritings to non-accredited investors. This may require expanded representations and warranties in subscription agreements, should this proposal be adopted.
7. Developing a Well-Known Seasoned Issuer Model
The Well-Known Seasoned Issuer (WKSI) model, currently employed in the United States, permits issuers to undertake a less burdensome shelf registration process. WKSI requirements under the U.S. model include that the issuer maintains a certain public float or that it has issued a certain number of debt securities in a specified time period while maintaining an appropriate disclosure record. The taskforce is recommending an amendment to the Securities Act (Ontario) to allow the development of a WKSI model in Canada. This would allow large issuers to raise capital in a more cost-effective manner and minimize regulatory burdens.
8. Prohibit Short Selling in Connection with Prospectus Offerings and Private Placements
Stakeholders consulted by the taskforce noted that short selling in connection with prospectus offerings is a growing problem with the current system, particularly with respect to bought deals. Among other issues, short selling hinders pricing and execution of offerings. The report proposes that the OSC adopt a rule prohibiting market participants that have previously short sold securities of the same type being offered under a prospectus from acquiring securities under such prospectus or private placement.
9. Introduce Additional Accredited Categories
The accredited investor exemption applies to individuals meeting certain income and asset thresholds, among other requirements. The taskforce proposes to expand this exemption to include individuals with relevant proficiencies, such as those who have completed the CFA Charter.
10. Corporate Board Diversity; Director Term Limits
TSX-listed companies have been required to disclose their approaches to improving gender diversity since 2014. However, in the taskforce's view, development of diversity has been slow. This may be attributable to the current "comply or explain" model whereby companies are not necessarily obligated to follow rules designed to improve diversity. The report is proposing that securities legislation move away from this model in favour of setting targets and requiring issuers to provide data in relation to diversity representation on boards and in executive officer positions. Additional amendments would also impose a 10-year maximum term on directors with some exceptions, in order to increase board renewal. Further, the taskforce recommends that the OSC impose similar targets on itself to ensure representation similar to the companies it regulates.
11. Introduce a Regulatory Framework for Proxy Advisory Firms
The taskforce proposes that the OSC begin regulating proxy advisory firms (PAFs). This would include requiring that PAFs' institutional clients be provided with the issuer's perspective along with the PAF's report, introducing a statutory right for an issuer to rebut PAF reports and implementing a conflict of interest framework to ensure that PAFs are not simultaneously providing consulting services to issuers and voting recommendations to clients in respect of those same issuers. It is worth noting that the US Securities and Exchange Commission (SEC) has recently adopted new rules on proxy voting advice. The SEC's new rules include requiring that PAFs provide conflict of interest disclosure and give companies that are the subject of proxy voting advice access to such advice before or when the PAF provides the advice to its clients.
12. Decrease the Early Warning Threshold from 10% to 5%
Currently, shareholders are required to provide early warning disclosure regarding their control or direction over, or beneficial ownership of, securities of an issuer when they exert such control or direction over 10 percent of the voting or equity securities of an issuer. However, shareholders can often requisition a shareholder meeting while only holding 5 percent of such securities. With the rise of investor activism, the taskforce proposes decreasing the early warning disclosure requirement to 5 percent. This would better reflect the rules of other jurisdictions, such as the United States and United Kingdom, as well as harmonize with the ability to call shareholder meetings.
13. Require Annual Shareholder Say on Pay Vote
The taskforce is proposing to require TSX-listed issuers to undertake a periodic mandatory shareholder vote on their own approach to executive compensation. This would provide boards with useful input and encourage shareholder engagement. Further, this would align with developments in Canada and other jurisdictions, such as recent amendments to the Canada Business Corporations Act that require advisory say-on-pay votes. However, the report refrains from recommending that such votes be binding, in order to preserve boards' decision-making processes.
14. Require Enhanced Disclosure of Environmental, Social and Governance (ESG) Information
To reflect increased investor interest in ESG information, the taskforce is recommending the adoption of a standardized framework through which to disclose this information. There are currently two prevalent frameworks, the Sustainability Accounting Standards Board and the Taskforce on Climate-Related Financial Disclosures. The report recommends adopting one of the frameworks and using it to phase in mandated disclosure of ESG information over time.
15. Require Additional Requirements and Guidance for Independent Directors in Conflicts of Interest
As drafted, Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) does not fully cover the role of committees of independent directors in considering and advising on conflict of interest transactions. The taskforce recommends the codification of best practices for such committees, currently split between Multilateral Staff Notice 61-302 Staff Review and Commentary on MI 61-101 and OSC decisions, into a single document. This would improve access to such best practices and increase minority shareholder confidence in the event an issuer engages in transactions regulated by MI 61-101.
16. Provide the OSC with More Remedies Regarding M&A Matters
The taskforce notes that while the OSC is responsible for regulating many aspects of M&A matters, the remedies currently available to it in this regard are inadequate. Following the footsteps of the BC Securities Commission, the report proposes granting the OSC additional remedies, including the power to rescind transactions and to require persons to dispose of securities acquired in connection with an M&A transaction.
17. Eliminate Non-Objecting Beneficial Owner and Objecting Beneficial Owner Categories
In Canada, issuers generally correspond with beneficial owners of their securities via an intermediary. This means that the intermediary, not the issuer, has a clear view on who owns the issuer's securities. Further, these intermediaries are responsible for determining whether such an owner wishes to be a non-objecting beneficial owner (NOBO) or an objecting beneficial owner (OBO). The taskforce recommends removing the NOBO and OBO categories and giving issuers direct access to the list of all beneficial owners of their securities. The removal of the categories will allow issuers to contact all beneficial owners of their securities and, with the elimination of the NOBO and OBO categories, allow the solicitation of voting instructions directly from such owners.
The balance of the proposals contained in the report cover a wide range of areas, including the mandate of the OSC, a governance and oversight framework for self-regulatory organizations, capital raising activities for reporting issuers and access to capital for start-ups and entrepreneurs. Taken together, if implemented the proposals would represent significant change for public companies in Canada.
The taskforce is seeking further submissions on these proposals. Submissions must be received by September 7, 2020. If you have further questions regarding the above proposals or any of the others in the report, please contact one of the authors.