The CSA Proceeds with Amendments to the Early Warning Reporting Regime but Abandons Two Key Proposed Changes

Written By J. Paul D. Barbeau and Eric Chernin

On October 10, 2014, the Canadian Securities Administrators (CSA) published CSA Staff Notice 62-307, which sets out changes to previously announced proposed amendments to Canada's early warning reporting regime.

The CSA previously announced a proposal to reduce the ownership level at which an issuer must disclose its ownership to five percent from the current 10 percent and to include "equity equivalent derivative" positions (derivatives that substantially replicate the economic consequences of ownership) in determining whether a shareholder triggered the early disclosure threshold. The CSA also proposed a series of additional reforms to require the reporting of reductions in share positions and holdings of derivatives and to limit access to the alternative monthly reporting (AMR) system for security holders who actively solicit proxies.

The Final Amendments

Following an 18-month consultation period, the CSA announced that it is abandoning its proposal to reduce the ownership reporting threshold to five percent from 10 percent and to require disclosure of derivative securities for the purposes of determining whether the early disclosure threshold has been triggered.

A majority of the more than 70 comment letters received by the CSA from industry participants and other concerned parties expressed concerns about the potential consequences of certain proposed changes in light of the unique characteristics of Canada's public markets. The CSA specifically cited concerns about the limited liquidity of Canadian capital markets, higher administrative costs and a reduction in an investor's ability to change its equity position in a timely manner as reasons for abandoning certain of its proposed changes.

However, the CSA is proceeding with the following remaining proposed changes.

1. Disclosure of Decreases in Ownership – While the threshold for reporting incremental acquisitions above the 10-percent reporting threshold will remain at two percent, each two-percent incremental decrease in ownership would also become reportable. An investor will also be required to disclose when its ownership falls below the 10-percent reporting threshold (i.e., "exit" reports).
2. Enhanced Disclosure About Investors' Intentions – Investors will be required to provide more detailed and fulsome information about their intentions with respect to their shareholdings. The prevalent practice of providing boilerplate disclosure in early warning reports will no longer be sufficient.
3. Securities Lending Arrangements – The terms of securities lending arrangements will no longer be exempt from disclosure requirements. Lenders will be exempt from disclosure requirements only if they lend shares pursuant to "specified securities lending arrangements" and borrowers will only be exempt, in certain circumstances, from disclosure requirements if they borrow shares under a securities lending arrangement.
4. Disqualification of Eligible Institutional Investors from Alternative Monthly Reporting – The AMR regime permits simplified monthly disclosure for certain institutional investors. The proposed changes will expand the circumstances under which eligible institutional investors will be disqualified from utilizing the AMR. In particular, the AMR regime will be unavailable where an eligible institutional investor solicits, or intends to solicit, proxies on matters relating to the election of directors or corporate actions involving an issuer's securities. The CSA noted that additional clarification will be provided on the circumstances where eligible institutional investors will be precluded from using the AMR regime.
5. Ancillary Matters – The final amendments will also clarify the application of early warning requirements to certain derivatives, require disclosure of derivatives in early warning reports and clarify timeframes for filing early warning reports and the associated news release.

The CSA expects that the final amendments, "while not as extensive as the Draft Amendments, will enhance the quality and integrity of the early warning reporting regime in a manner that is appropriate for the Canadian public capital markets".

Implications

The CSA's decision not to proceed with its proposals to reduce the early warning threshold to five percent and to include derivative securities in the securityholding calculation is a welcome development for many market participants, particularly activist investors. Investors will continue to be able to accumulate a meaningful toehold position without public disclosure. Consequently, Canadian issuers will remain prime targets for activist investors and issuers should correspondingly continue to proactively assess their vulnerabilities and consider instituting structural defenses.

However, investors will also be subject to enhanced disclosure in early warning reports and will be required to be more precise in relation to their future intentions. This is likely to give rise to a greater volume of early warning reports filed on a more frequent basis to address material changes in previously filed early warning reports, including changes with regards to an investor's intentions.

Next Steps

The CSA intends to publish the final amendments in the second quarter of 2015.