Author(s):
James R. Brown, Douglas Bryce, Emmanuel Pressman, Donald Gilchrist
Dec 6, 2016
There were a number of significant developments in corporate and securities law in 2016, as a result of both regulatory amendments and proposals and several significant decisions from courts and securities regulatory tribunals. Take-over bids continued to occupy a prominent place in the national spotlight. The debates of prior years regarding the appropriate framework for take-over bids were concluded when the long-anticipated new takeover bid regime came into force – likely the single most important development of the year. The new bid regime significantly lengthens the timeframe for hostile take-over bids in Canada as well as introducing a mandatory majority tender condition that effectively eliminates “any and all” bids. The first hostile bid launched following the introduction of the new regime resulted in the high profile Dolly Varden decision of the Ontario and British Columbia Securities Commissions regarding the application of National Policy 62-202 – Defensive Tactics. Other significant developments included revisions to the early warning system, as well as the InterOil decision from the Yukon Court of Appeal, which has potentially significant implications for the conduct of friendly public company acquisitions in Canada.
Here is our list of the year’s most notable developments, grouped by: (1) changes in securities law and regulation, (2) changes in corporate law and stock exchange rules, and (3) court and securities regulatory decisions in the corporate and securities law areas.
Changes in securities law and regulation
1. New take-over bid and early warning rules finally come into force
On May 9, 2016, the new Canadian take-over bid regime came into force, representing the most significant change to take-over bid practice since 2001 and finally bringing uniformity to the take-over bid rules across all Canadian jurisdictions. Take-over bids must now remain open for 105 days unless the target’s board agrees to a shorter period (of not less than 35 days) or the target enters into an alternative transaction. All bids are now subject to a mandatory minimum tender requirement of more than 50% of the outstanding securities not already held by the bidder or its joint actors and a requirement for a mandatory 10-day extension if the bidder takes up securities under the bid.
The new bid rules are likely to narrow the use of shareholder rights plans (poison pills) to protecting against “creeping bids,” such as bids made through the normal course purchase and private agreement exemptions. While the new bid rules were anticipated to reduce the number of hostile bids, it is not yet clear whether they will have that effect. There have been four unsolicited bids launched in the seven months since the new bid rules came into effect, as compared to six unsolicited bids for all of 2015.
At the same time, the Canadian Securities Administrators also adopted revisions to the early warning system to require disclosure when a security holder’s ownership decreases by 2% or more or falls below the 10% reporting threshold and to make the alternative monthly reporting system unavailable to eligible institutional investors that solicit proxies in certain circumstances. Notably, the early warning reporting rules were not revised to adopt two earlier published proposals that had been the subject of considerable debate: a reduced 5% threshold (consistent with the U.S.) and required disclosure covering equity-equivalent derivatives.
For more information, please refer to our Osler Update entitled “Amendments to Canadian take-over bid and early warning regimes now in force”.
2. Enhanced trade reporting requirements for private placements
In 2016, the Canadian Securities Administrators adopted amendments to the exempt distribution trade reporting requirements to harmonize the trade reporting regime across Canada. Although harmonization has made the form easier to complete across multiple Canadian jurisdictions, the new reporting form does require significantly more information about the issuer and the purchasers, and in some respects significantly increases the compliance burden for certain kinds of offerings.
For more information, please refer to our Osler Update entitled “New Canadian reporting requirements for Canadian private placement sales”.
3. Advancing a regulatory framework for hedge fund offerings
In September 2016, the Canadian Securities Administrators released a proposed framework for offering retail investors access to “alternative funds” (commonly known as hedge funds). The proposal would permit hedge fund managers to offer alternative funds to the retail market through a long-form prospectus offering. The proposal, while focused on alternative funds, also includes provisions that will impact other types of mutual funds (namely conventional mutual funds and exchange-traded funds), as well as non-redeemable investment funds. These changes will be made through amendments to the restrictions relating to investments in physical commodities, other investment funds and illiquid assets.
For more information, please refer to our Osler Update entitled “Canadian Securities Administrators propose a regulatory framework for offering hedge funds to the public”.
4. Ontario proposes new approach to regulation of distributions outside Ontario
The Ontario Securities Commission has proposed a new rule that would provide Ontario issuers with more certainty about how to comply with Ontario securities laws when they sell securities to investors outside Canada. The new rule would replace a 33-year old Interpretation Note that became a source of confusion and uncertainty as market practices evolved. If the rule is adopted, Ontario issuers will be able to rely on a number of new exemptions that would eliminate the need for a Canadian prospectus in most common cross-border offering situations. However, Ontario issuers will need to file a new post-closing trade report in many cases, including when selling to U.S. investors under Rule 144A as part of a typical Canadian bought deal or marketed offering.
For more information, please refer to our Osler Update entitled “Proposed OSC Rule 72-503 to modernize framework for distributions of securities outside of Ontario”.
5. Ontario adopts whistleblower protection
In connection with the July 2016 establishment of the Ontario Securities Commission’s new Whistleblower Program, which includes monetary incentives for whistleblowers in Ontario, the Ontario government has approved amendments to the Securities Act (Ontario)[1] to provide additional protection to persons who report a potential violation of Ontario securities law or a by-law or other instrument of a self-regulatory organization.
For more information, please refer to our Osler Update entitled “A review of new whistleblower protections under Ontario’s Securities Act”.
6. The slow creep towards a national securities regulator continues
In November 2016, Kevan Cowan, former President of TSX Markets and the TSX Venture Exchange, was selected by the Board of the Capital Markets Authority Implementation Organization to be the initial Chief Regulator of the future Capital Markets Regulatory Authority (CMRA) as well as the Chief Executive Officer of the Regulatory Division of the CMRA. The appointment of Mr. Cowan represents a further step towards the implementation of the Cooperative Capital Markets Regulatory System. The Capital Markets Authority Implementation Organization also disclosed in 2016 its intention for the CCMRS to be operational in 2018.
For more information about the CCMR, please refer to our earlier Osler Updates entitled “Debate continues regarding proposed Cooperative Capital Markets Regulatory System” and “Securities law developments in 2015: Evolutionary not revolutionary” on osler.com.
7. Amendments to Canada Business Corporations Act
In September 2016, the Canadian federal government introduced legislation to amend the Canada Business Corporations Act – the first such amendment in 15 years – following consultations initiated in 2013. The stated objectives of the proposed amendments are, among other things, to: 1) reform the process for electing directors of certain corporations; 2) modernize communications between corporations and their shareholders; and 3) require disclosure of information respecting diversity among directors and senior management.
For more information, please refer to our Osler Update entitled “Significant corporate governance changes in proposed amendments to the Canada Business Corporations Act”.
8. TSX proposes mandatory website disclosure
The Toronto Stock Exchange (TSX) published proposed amendments to its Company Manual that would introduce mandatory website disclosure requirements for TSX-listed issuers and revise the disclosure requirements for security based compensation arrangements. If implemented, the new rules and related revisions to proxy circular disclosure requirements will necessitate substantial changes to disclosure practices of all issuers listed on the TSX.
For more information, please refer to our Osler Update entitled “TSX’s proposed website disclosure rules will expand corporate governance and security based compensation disclosure”.
9. TSX addresses acquisition financing transactions
The Toronto Stock Exchange (TSX) published a Staff Notice regarding prospectus offerings, private placements and concurrent acquisitions, which provides guidance as to when the TSX will allow a concurrent equity financing by an issuer to be priced prior to the time at which the issuer publicly discloses a material transaction. In order to price an equity financing on such basis, the issuer and its advisors need to be satisfied that the issuer would not have agreed to the acquisition or other transaction without having a firm commitment for the equity financing at a specific price and offering size, and be prepared to provide an officer’s certificate to that effect.
For more information, please refer to our Osler Update “TSX provides guidance regarding the pricing of acquisition financing transactions”
Court and securities regulatory decisions
10. InterOil decision – Implications for fairness opinions, disclosure and corporate governance in sale transactions
In a decision with potentially significant implications for current market practice with respect to fairness opinions, disclosure and corporate governance in public company sale transactions, the Yukon Court of Appeal blocked Exxon Mobil’s proposed US$2.3 billion acquisition of InterOil Corporation. Despite the fact that the proposed plan of arrangement transaction was a topping bid approved by over 80% of the votes cast by InterOil’s shareholders and that the InterOil board of directors received a market standard form of fairness opinion from a leading global investment bank, the Court found that the arrangement was not fair and reasonable on the basis of deficient corporate governance and inadequate disclosure. The decision has implications on market practice for fairness opinions, compensation of financial advisors and disclosure in public acquisition transactions.
For more information, please refer to our Osler Update entitled “InterOil Decision – Implications for Fairness Opinions, Disclosure and Corporate Governance in Sale Transactions”.
11. Private placements as a hostile bid defensive tactic: The Dolly Vardendecision
The British Columbia and Ontario Securities Commissions upheld a contested private placement by the target of an unsolicited take-over bid, concluding that there was a legitimate need for the financing and that the private placement had not been implemented as a defensive tactic in response to the bid. The securities commissions provided important guidance on the regulatory analysis and treatment of contested private placements in light of the traditional limitations on defensive tactics set forth in National Policy 62-202. The decision also acknowledges the importance of the fiduciary responsibilities and business judgment of boards of directors in this context and arguably exhibits a degree of deference to that judgment which has not often been seen on the part of Canadian securities regulators.
For more information, please refer to our Osler Updates entitled “Contested private placements under the new take-over bid regime: the Dolly Varden decision” and “Contested private placements under new take-over bid regime: Securities regulators reject Hecla challenge of Dolly Varden private placement”.
12. Spring loading in insider trading – The AMF weighs in
In August 2016, the Tribunal Administratif des Marchés Financiers (TAMF) rendered a decision in which it concluded, among other things, that “spring loading” is an offence under the Québec Securities Act. In their decision, the TAMF describes spring loading as the issuance of options to management of a reporting issuer while management is in possession of “privileged” information, knowing that the price of the shares will potentially increase considerably when the privileged information is, in the relatively near future, disclosed to the public.
For more information, please refer to our Osler Update entitled “Insider trading: a first spring loading case in Québec”.
13. OSC narrows private party standing for public interest application hearings
In a March 2016 decision, the Ontario Securities Commission (OSC) determined not to grant standing to The Catalyst Capital Group Inc. (Catalyst) to bring an application before the OSC under its public interest jurisdiction. Catalyst was seeking to oppose the proposed acquisition of Shaw Media Inc. by Corus Entertainment Inc. and sought an order requiring Corus to provide additional disclosure to its shareholders (which would thereby effectively force Corus to delay its special meeting). The decision was the first time that the OSC has formally denied standing to a party in connection with a public interest application and represents a significant narrowing of the scope of private party standing in Ontario.
For more information, please refer to our Osler Update entitled “Ontario Securities Commission narrows private party standing for public interest applications in contested transactions: The Corus Entertainment decision”.
14. Bankruptcy and Insolvency Act trumps provincial legislation for oil well abandonment: The Redwater Energy decision
In a 2016 decision, the Alberta Court of Queen’s Bench determined that provisions of the Bankruptcy and Insolvency Act were paramount to obligations under the Alberta Oil and Gas Conservation Act and the Pipeline Act. The decision therefore allowed a Trustee in Bankruptcy to renounce assets (oil wells) it deemed uneconomic, contrary to provincial regulation requiring the receiver and trustee to abandon, reclaim and remediate a debtor’s licensed assets. The decision has far-reaching implications for an industry that has been hammered by low commodity prices, devastating wildfires, and now the prospect of increased levies to fund the efforts of the Orphan Well Association to assume the obligations of bankrupt participants.
For more information, please refer to our Osler Update entitled “Implications of the Redwater decision – Where does the buck stop?”.
15. The supreme court revisits oppression under the CBCA
In the November 2016 decision in Mennillo v. Intramodal inc., the Supreme Court of Canada revisited the oppression remedy under the Canada Business Corporations Act. A majority of the Court found that a failure to observe legal formalities under the CBCA did not in itself constitute oppression.
Mennillo, a shareholder, director and officer of Intermodal, brought a claim for oppression against Intramodal in relation to a dispute regarding the ownership of his shares. Menillo resigned as a director and officer. Taking the position that Menillo had also resigned as shareholder, the lawyer for the corporation filed a declaration to remove Mennillo both as a director and as a shareholder and transferred his shares to the other shareholder of the corporation. However, the corporation failed to observe certain formalities regarding the transfer of the shares.
Mennillo claimed that the corporation had wrongfully stripped him of his shares and that the failure to observe the required formalities meant that the shares were still owned by him. At trial, the judge found that Mennillo had expressly indicated that he did not intend to remain a shareholder and therefore, regardless of the failure to respect the required formalities for the transfer, Mennillo had transferred his shares.
The Supreme Court found there was no basis on which to override the trial judge’s factual findings that Mennillo had no reasonable expectation of owning the shares and that the corporation had transferred the shares, albeit imperfectly, in accordance with his intentions. The Court confirmed that a claim for oppression under the CBCA requires the claimant establish two elements: 1) that the claimant’s reasonable expectations were violated, and 2) that the conduct complained of was “oppressive, unfairly prejudicial to or unfairly disregarding” of the claimant’s interests. A mere failure to comply with the formal requirements under the CBCA cannot, in itself, satisfy the these two elements in the absence of evidence that the corporation acted contrary to or frustrated the complainant’s reasonable expectations in a manner that is oppressive or unfair.
[1] The full text of these changes is set out in section 3 of Schedule 26 of Bill 173, Jobs for Today and Tomorrow Act (Budget Measures), 2016.