Written by Karen Keck, Kwang Lim, Tina Liu and Tessa E.J. Guenther
In recent years, emerging market issuers have faced greater scrutiny by Canadian regulators as a result of questions and concerns about issuers with significant business operations in emerging markets (emerging market issuers). In 2011, the Ontario Securities Commission (OSC) commenced a targeted review of certain emerging market issuers listed on Canadian exchanges and published OSC Staff Notice 51-719 Emerging Markets Issuer Review outlining the results of its review and recommendations on March 20, 2012. The OSC subsequently published OSC Staff Notice 51-720 Issuers Guide for Companies Operating in Emerging Markets on November 9, 2012, to assist emerging market issuers and their directors and officers with their governance and disclosure practises.
On July 13, 2015, the Toronto Stock Exchange (TSX) published a Staff Notice that identifies risks emerging market issuers may face and provides guidance on how these risks may be mitigated to satisfy the TSX original and continued listing requirements. A corporate finance bulletin outlining the same guidance principles with respect to listings on the TSX Venture Exchange was concurrently released. The notice was published after the publication of a consultation paper on emerging market issuers by the TSX and the TSX Venture Exchange on December 17, 2012. The notice also speaks to the publication of sponsorship information for all new listings.
The guidance contained in the notice is complex and should not be considered an exhaustive list of considerations for listing an emerging market issuer. Depending on the facts specific to each emerging market issuer, all, part or none of the guidance in the notice may be applicable. Emerging market issuers should seek legal advice to mitigate the risks identified by the TSX when considering a listing and, if already listed, to meet the TSX continued listing requirements.
Emerging Market Issuers
The presence of any of the following factors may lead to an issuer being considered an emerging market issuer: (i) residency of "mind and management"; (ii) jurisdiction of principal business operations and assets; (iii) jurisdiction of incorporation; (iv) nature of the business; and (v) corporate structure. The TSX assesses the jurisdiction of an issuer on a country-by-country basis, but generally will not consider issuers of Canada, the United States, the United Kingdom, Western Europe, Australia and New Zealand to be emerging market issuers. When assessing other jurisdictions, the TSX will take into account factors such as the prevalence of the rule of law, the rating in corruption perception and transparency indices, a civil or common law system similar to Canada, usage of International Financial Reporting Standards and International Standards on Auditing and membership in key commercial and economic international organizations.
Potential Risks Associated with Listing Emerging Market Issuers
The TSX identifies certain factors relevant to listings that, if applicable, may result in risks for emerging market issuers including:
- management's lack of experience and familiarity with Canadian securities law and TSX requirements and/or requirements of the jurisdiction where the issuer is principally carrying out its business activities;
- communication issues arising when management or the board of directors do not share fluency in a common language, or in the language in which the issuer conducts business, or are not within close geographic proximity;
- the issuer's Canadian auditor's lack of experience in the applicable jurisdiction and the CFO's or audit committee's lack of expertise and experience with applicable financial reporting and audit practises and procedures;
- inadequate internal controls over financial reporting matters relating to differences in banking systems and controls between jurisdictions, differences in business cultures and business practises between jurisdictions and rules or limitations on the flow of funds between jurisdictions;
- more complex corporate or capital structures encouraged or necessitated by tax or foreign ownership restrictions in certain jurisdictions; and
- difficulty of an issuer to demonstrate legitimacy and certainty of title to its principal operating assets and to satisfy of various requirements (e.g., permits or business licenses) to carry out business operations in the applicable jurisdictions.
Guidance for Original Listing of Emerging Market Issuers
The TSX provides guidance on how the above-noted risks may be mitigated in connection with an original listing application submitted by emerging market issuers, a summary of which is set out below.
The TSX strongly recommends that potential emerging market applicants arrange a pre-filing meeting with the TSX.
The TSX describes the key components that it takes into consideration when assessing whether emerging market applicants meet TSX requirements for management and the board including the following:
- The TSX considers public company experience of management and the board as a key component of assessing whether an applicant will be able to satisfy all of its reporting and public company obligations and expects that a sufficient number of directors and key officers will have public company experience in North America or other countries such as the United Kingdom and Australia.
- The TSX considers the independent oversight of management by the board a key component in support of the business of the applicant being conducted with integrity as well as in the best interests of its security holders, especially where an applicant has a significant or controlling security holder who also holds a key position in management. Adequate independent oversight may be demonstrated by an independent director acting as chair, at least one independent director with relevant work experience in the jurisdiction (or similar jurisdiction) in which the applicant principally operates and at least two independent directors with North American public company experience, one of which is resident in Canada.
- The TSX considers it essential that there be at least one director with significant knowledge and experience regarding the jurisdiction where the applicant principally conducts its business. The remaining members of the board and particularly the audit committee members must have a thorough understanding of the business and operating environment of the applicant.
- Where management and the board are not fluent in a common language or present in similar time zones, the TSX may require a communication plan that is acceptable to the TSX.
- The TSX identifies various factors that lend support for an individual's suitability as CFO including a professional accounting designation, North American public company experience, site visits, International Financial Reporting Standards experience, a strong understanding of Canadian securities laws relating to financial reporting matters, a thorough understanding of the business environment, customs and practises of the applicant's local jurisdiction (or similar jurisdiction) and an ability to design and apply effective internal controls.
- The TSX lists various factors that support the appropriateness of audit committee members including Canadian financial reporting skills and familiarity with Canadian securities laws relating to continuous disclosure obligations, relevant work or board experience in the applicant's local jurisdiction (or similar jurisdiction), a thorough understanding of the local legal and political environment as well as cultural and business practises and experience supervising internal audit engagements for public companies.
The TSX lists various factors that support the appropriateness of an auditor including experience and expertise in the applicant's local jurisdiction, size and resources of the firm, adequate experience in auditing Canadian reporting issuers, effective oversight by Canadian regulatory authorities, being a "participating audit firm" in good standing with the Canadian Public Accountability Board, and an ability to communicate effectively and execute or supervise audit field work.
The TSX expects a comprehensive internal control system in place prior to an applicant's listing, and may require certain listing conditions, such as a CEO and CFO written confirmation regarding the applicant's financial controls, an evaluation of the applicant's internal control system by independent auditors (other than the applicant's current auditors) and/or an annual report or letter be provided to the TSX commenting on the adequacy of internal controls.
The TSX may require an applicant to obtain sponsorship from a TSX-approved sponsor in connection with such applicant's original listing application. If the TSX requires sponsorship, a site visit by the sponsor will be required, and sponsors may be asked to comment on local business practises which are not consistent with Canadian business practises, as well as any other areas of concern identified by the TSX.
Related Party Transactions
The TSX may require an applicant to have a policy with respect to related party transactions, particularly if the applicant has a controlling security holder.
Non-traditional Capital or Corporate Structure and Ownership of Principal Assets
Where a complex or non-traditional corporate structure is used, the applicant must provide the TSX with a satisfactory explanation as to why such structure is necessary, and TSX may require a legal opinion addressing any of its concerns with the structure. The TSX expects comprehensive disclosure in a core disclosure document regarding any non-traditional corporate structure and any associated risks. It may also require title or other opinions related to the ownership of principal assets, particularly in a jurisdiction with which the TSX is unfamiliar.
The TSX conducts local background searches on the key management, board members and significant security holders of all applicants. It may also conduct local corporate searches on such applicants, all at the expense of the applicant.
An applicant may be asked to adopt policies dealing with related party transactions, whistle blowing, anti-bribery, anti-corruption and ethical business conduct, local disbursements, governance and disclosure.
Ongoing Guidance and Continued Listing Requirements
The TSX may require supplemental ongoing requirements of emerging market issuers, which will generally be identified at the time of an applicant's original listing. After an emerging market issuer is listed, the TSX will continually assess compliance with the matters discussed in the Notice, and will contact them regarding any deficiencies. As such, currently listed emerging market issuers should also ensure compliance with the Notice.
Sponsorship – Publication of Sponsor, Exemptions and Waivers
The TSX will commence publishing the names of sponsors, or will note exemptions from the sponsor requirements for applicable issuers, in its original listing bulletins.