Written by Paul Barbeau, Harinder Basra, John Lawless, and Kwang Lim
On February 25, 2016, the Canadian Securities Administrators (CSA) published final amendments to the early warning regime (the Amendments). The Amendments are consistent with the revised proposals released by the CSA on October 10, 2014. We discussed these proposals in our October 14, 2014 client update: The CSA Proceeds with Amendments to the Early Warning Reporting Regime but Abandons Two Key Proposed Changes. The Amendments are anticipated to take effect on May 9, 2016.
Disclosure of Decreases in Ownership
The threshold for reporting incremental increases in ownership above the 10-percent threshold will remain at 2 percent, but each 2 percent incremental decrease in ownership will also now be reportable. An investor will also be required to disclose when its ownership falls below the 10-percent threshold (i.e., "exit" reports).
Investors will be required to provide disclosure on the following matters in early warning reports:
- their plans and future intentions regarding the issuer, including disclosing any plans or future intentions which relate to or would result in a change to the board of directors or management of the issuer, a material change in the capitalization or dividend policy of the issuer or the solicitation of proxies from securityholders of the issuer;
- the material terms of any related financial instruments and their effect on the investor's securityholdings;
- any agreement, arrangement or understanding that has the effect of altering the investor's economic exposure to the securities and the material terms of such agreement, arrangement or understanding; and
- whether the transaction giving rise to the reporting obligation involved a securities lending arrangement.
Disqualification of Eligible Institutional Investors from Alternative Monthly Reporting
The alternative monthly reporting regime (AMR) provides a less onerous reporting regime for eligible institutional investors who have no current intention of acquiring control of an issuer. Such investors are permitted to report their holdings at regular intervals rather than on an immediate basis.
The AMR will no longer be available to an eligible institutional investor who solicits proxies from securityholders in order to contest director elections or in connection with a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of a reporting issuer. The CSA has clarified that the AMR will only become unavailable if the eligible institutional investor solicits proxies in support of a nominee other than a nominee proposed by management, in support of a corporate action not supported by management or in opposition to a corporate action supported by management.
Securities Lending Arrangements
Securities lending arrangements must generally be disclosed in early warning reports. However, the Amendments create an exemption to disclosure for lenders and borrowers in certain securities lending arrangements.
Lenders will be exempt from early warning disclosure only if they lend securities pursuant to a "specified securities lending arrangement." Among other things, a "specified securities lending arrangement" requires that (i) the lender has an unrestricted right to recall all of the securities that it transferred to the borrower before the record date of a meeting of securityholders at which the securities may be voted or (ii) the lender can require the borrower to vote the securities in accordance with the lender's instructions.
Borrowers of securities will be exempt from early warning disclosure if all of the following criteria are satisfied:
- the borrowed securities are disposed of by the borrower no later than three business days from the date of the loan;
- the borrower will subsequently acquire identical securities and transfer those securities to the lender; and
- the borrower does not intend to vote and does not vote the securities during the term of the loan.
The CSA abandoned its initial proposal to include "equity equivalent derivatives" as part of the early warning regime but provided new guidance regarding certain derivative arrangements that may require disclosure under the early warning regime. The CSA states that an investor that is party to an equity swap or similar derivative arrangement may be deemed to have beneficial ownership, or control or direction, over voting or equity securities in certain circumstances. For example, this could occur when the investor has the ability, formally or informally, to obtain voting or equity securities or to direct the voting of securities held by any counterparties to a transaction.
The Amendments will result in more accurate publicly available information regarding the holdings of significant shareholders by requiring such shareholders to report decreases in ownership. In addition, the Amendments will lead to a greater volume of early warning reports in light of such requirement. The enhanced disclosure requirements concerning an investor's future plans and intentions should provide greater advanced warning to target boards about potential hostile take-over bids or attempts by activist investors or other shareholders to engage in proxy contests or otherwise influence the governance of the issuer. Investors will need to carefully consider whether securities lending arrangements or derivatives trigger a disclosure obligation under the early warning regime. The Amendments should provide greater market transparency but will impose additional compliance costs on investors filing early warning reports.