Author(s):
Rob Lando
Volume 1, Number 1 - June 17, 2013
Allowing Canadian investors to participate in a global rights offering is easier than you think. There are two relatively simple approaches.
What Is a Rights Offering?
In many countries of the world, it is common for companies to raise capital from their existing shareholders through rights offerings and, in recent years, rights offerings have also become significantly more popular in the United States. There are typically three components to a rights offering. First, the company distributes rights to its existing shareholders – the rights distribution. Second, the shareholders who receive the rights are given an opportunity to exercise them to subscribe for additional shares – the rights exercise. Finally, unless all of the rights are exercised, there will be leftover shares that the company will sell through the securities dealers, leading the rights offering – leftover share sales.
How Is Canada Involved?
Every company worldwide that has any beneficial shareholders in Canada should be aware of the way Canada regulates rights offerings. If a company makes a rights distribution to its shareholders, and any of them are in Canada, it may be violating Canadian securities laws unless it has taken the necessary steps to comply with the applicable Canadian requirements. Unlike many other countries, Canada regulates rights offering at the time of the rights distribution rather than the rights exercise. There are no special Canadian requirements that apply to the exercise of rights by an investor in Canada.
Canada may also be involved if the securities dealers plan to make leftover share sales to investors in Canada, whether or not they are already shareholders of the company.
How Can the Canadian Requirements for a Rights Distribution Be Satisfied?
Two different approaches can be taken so that the rights distribution will comply with Canadian requirements. The first is to use the rights offering exemption. The second is to prevent any beneficial shareholder in Canada from receiving any rights unless it is an accredited investor under the Canadian definition.
The Canadian Rights Offering Exemption
In most cases, it is very simple for a non-Canadian company to comply with the Canadian requirements for a rights offering so that it can allow all of its beneficial shareholders in Canada to receive the rights, whether or not they are accredited investors. A written noticemust be sentto the Canadian securities regulators at least 10 days before the rights distribution. In addition, the company must provide a certificateconfirming that it has minimal connections to Canada, including having less than 10% of its shareholders in Canada and less than 10% of its outstanding shares held in Canada.
The Accredited Investor Exemption
There may be cases in which there isn’t enough time to provide the required notice, or the company is not able to confirm that it meets the minimal-connections-to-Canada test. For example, the company may not have access to enough information about its current beneficial shareholders to be able to determine whether or not it meets the tests in time. In those cases, the rights distribution in Canada can still be made, but only to accredited investors. Typically, this will require adding disclosure to the rights offering circular or prospectus stating that the rights will not be distributed to any shareholder in Canada except in limited circumstances – which is sometimes called the “stop at the border” approach. In order to claim the rights that were initially stopped from reaching them, Canadian shareholders must provide a certification that they are accredited investors, so that they can receive the rights under the accredited investor exemption (rather than the rights offering exemption). The distribution of the rights to them would be considered a private placement that must be reported to the Canadian securities regulators within the following 10 days, while any exercise of the rights by a Canadian shareholder would not trigger any further reporting or other Canadian compliance obligations.
Leftover Share Sales
The dealers involved in the company’s rights offering can make leftover share sales using a conventional Canadian wrapper (if necessary) and following all of the other usual requirements for Canadian private placement sales. No special requirements arise from the fact that the shares being sold were initially offered to existing investors under a rights offering.
Canada and the United States have a lot in common, including the general principles behind their securities laws. But there are some differences you might find surprising. This newsletter will provide answers to some of the most commonly asked questions about Canada’s securities laws. While we hope you find it interesting, we also hope you understand that it is intended only to provide general information and should not be considered legal advice.
Rob Lando is a leading expert on Canadian securities laws and their application in Canada/U.S. cross-border corporate finance and M&A transactions. Rob is a partner in the New York office of Osler, Hoskin & Harcourt LLP and can be reached at (212) 991.2504 or by email at rlando@osler.com.
Osler, Hoskin & Harcourt LLP is a leading business law firm practising nationally and internationally from offices across Canada and in New York, and is consistently ranked as one of Canada’s top firms.
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