Canadian securities law issues raised for Canadian public companies by the COVID-19 pandemic
Last Updated: March 26, 2020
The global spread of COVID-19 continues to have a significant impact on Canadian businesses across a variety of sectors and industries, with its scope, scale and financial effects continuously evolving. These impacts raise specific considerations for Canadian reporting issuers, who must consider how the impact of the pandemic on their businesses affects their annual and/or quarterly disclosure obligations and other securities law obligations.
Below are some important issues for Canadian reporting issuers to consider as they navigate their continuous disclosure and other securities law obligations and assess COVID-19’s impact on their businesses:
Continuous disclosure obligations
- Reporting issuers should assess whether they will be able to file their annual or interim financial statements by the required filing deadline
In recognition of the impact of COVID-19 on reporting issuers and other market participants, the Canadian Securities Administrators (CSA) have issued temporary blanket relief from some continuous disclosure filings normally required to be made by reporting issuers on or before June 1, 2020. The blanket relief provides a 45-day extension for filing of financial statements, management’s discussion and analysis (MD&A), annual information forms (AIFs) and certain other filings. Reporting issuers choosing to rely on this exemption and that comply with the conditions of the relief will not need to file applications for management cease trade orders (MCTOs) as they will not be noted in default. The relief is being granted pursuant to local blanket orders issued in each jurisdiction, and its conditions are broadly consistent with those that would apply were the issuer to have applied for and obtained an MCTO with respect to restrictions on trading by reporting insiders and mandatory periodic updates on material developments in the business by way of press release. However, before relying on the relief, particularly in respect of the filing of financial statements and related MD&A, reporting issuers should consider carefully the implications of any such delay on their other obligations, including compliance with debt covenants or other similar requirements. See our update regarding the orders granting the temporary blanket relief here for further details.
- Relief from audited annual financial statement mailing deadlines
We note that the blanket orders discussed above impose the same conditions if an issuer wishes to rely on the orders in respect of relief from the reporting issuer’s obligation to mail its financial statements to securityholders within 10 days of the filing deadline for those financial statements or 140 days of the fiscal year end (as applicable to the reporting issuer). For an issuer that is otherwise in compliance with its filing obligations under applicable securities laws (including with respect to filing of its financial statements and related MD&A), these conditions would be onerous.
We have been communicating with staff at the Ontario Securities Commission about the mailing deadline for reporting issuers that filed their annual financial statements prior to the deadlines prescribed under National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102) as these are often sent together with the proxy materials. We believe that a reporting issuer that is otherwise in compliance with its filing obligations under applicable securities laws can issue a news release advising securityholders of its intention to deliver those financial statements and MD&A at such time as the reporting issuer mails its meeting materials and then delay the printing and mailing of its annual financial statements and MD&A until it is ready to send its proxy circular for its annual meeting.”
- Reporting issuers should be monitoring the impact of COVID-19 on any previously disclosed financial outlook
The nature of a pandemic means that circumstances surrounding the virus are changing rapidly. Despite COVID-19 being a global event that is beyond the control of any issuer, reporting issuers are responsible for disclosing any material effects of the virus/pandemic on their businesses. Reporting issuers should be cognizant of swift changes in the pandemic’s effects on their business and continuously monitor how these changes affect any previously disclosed financial outlook. Under NI 51-102, Canadian public companies are required to address events and circumstances that are reasonably likely to cause actual results to materially differ from previously disclosed material forward looking information, either in their MD&A or a press release issued prior to the filing of their MD&A. As a result, reporting issuers must decide if any developments as a result of the pandemic have affected any earnings guidance or other financial outlook they previously disclosed and if so, take the necessary steps to update or withdraw such financial outlook.
- Reporting issuers need to identify the specific risks and effects of the virus on their businesses
The risk factors and material effects of COVID-19 on an issuer differ depending on the nature of the issuer’s business. Canadian reporting issuers should address the specific risks and uncertainties applicable to them related to the pandemic in their MD&A and AIFs. It is important for an issuer to avoid ‘boilerplate’ language and give detailed disclosure of the risks and the anticipated significance and impact those risks may have on the issuer’s financial position, operations and cash flows. Some specific risks may include:
- Disruptions as a result of travel restrictions
- Disruptions to the issuer’s supply chain as a result of mass quarantines or lockdowns in the reporting issuer’s home jurisdiction or elsewhere
- Disruptions to operations resulting from quarantined employees and government-imposed closures
- Uncertainty around the pandemic’s impact on the cost of capital
- Reporting issuers need to be mindful of material changes and address them appropriately in the circumstances
The impacts of COVID-19 are rapidly evolving. It is essential for issuers to be conscious of changes in their businesses, operations or capital that would reasonably be expected to have a significant effect of the market price or value of their securities. Reporting issuers must continue to comply with the requirement in NI 51-102 to disclose any such material changes by immediately issuing a press release discussing the nature and substance of any material change and filing a material change report within 10 days following the material change.
Other securities law obligations
- Executive officers, directors and other insiders should understand and observe their obligations under securities laws regarding trading of securities and comply with the trading and black out policies of the reporting issuers they serve
Caution should be exercised in times of turmoil when insiders engage in trading activities. External volatility is often commensurate with dynamic ‘on the ground’ business changes that may not appear to be material within the securities law context in the heat of the moment. However, such changes can be seen by regulators and investors as having been material when looked at in hindsight. Trading by insiders in unpredictable times can be fraught with risk of reputational damage. It may raise red flags for regulators, who may pursue time consuming and costly inquiries and investigations even if the trading was done in compliance with applicable policies and laws. In a statement, the SEC highlighted that in the current circumstances, insiders are regularly learning new material non-public information that may hold an even greater value than under normal circumstances, and that a greater number of people may have access to material non-public information than usual. The SEC reminded directors, officers, employees, consultants and professional advisors of the prohibition on trading based on inside information and reminded public issuers of the importance of compliance with their disclosure controls and procedures, insider trading policies and other policies and procedures to protect against the improper dissemination and use of material non-public information. Public companies should consider imposing blackout periods as appropriate to reduce the risk of challenge or of improper actions by those in a 'special relationship’ with the reporting issuer.
- Reporting issuers need to consider applicable corporate statutes when changing the date, time or location of an annual shareholder meeting
The Toronto Stock Exchange (TSX) has issued blanket relief from TSX listing requirements to permit TSX-listed issuers to delay holding their 2020 annual meeting up to December 31, 2020. However, there are requirements under corporate law statutes that issuers will need to consider in determining the time by which they must hold their annual meetings (including whether any exemptive relief is required or available). See our update on the TSX relief here, which discusses these issues in further detail.
In addition, the CSA has provided guidance regarding the conduct of annual meetings and related proxy materials in light of COVID-19. This is further to the CSA’s previous guidance, that the CSA is supportive of measures issuers are taking to mitigate the risk of transmission and that issuers can contact their principal regulators to discuss any COVID-19 related issues in delivering proxy materials.
The CSA has stated that in light of the difficulties arising from COVID-19, a reporting issuer that has already mailed and filed its definitive proxy materials can notify securityholders of a change in the date, time or location of its annual meeting (including switching the meeting to be a “virtual” meeting) by way of press release without mailing soliciting materials or amending its proxy materials, provided that it takes all reasonable steps necessary to inform intermediaries, transfer agents, proxy service providers and other parties involved in the proxy voting infrastructure of the change. The CSA was careful to note that issuers must continue to comply with their constating documents and applicable corporate law (or obtain any necessary exemptions). The CSA guidance also sets out expectations relating to virtual meeting disclosure, including clear directions on how securityholders can access, participate in and vote at the virtual meeting. The CSA’s guidance in this regard is consistent with the previously issued guidance of the U.S. Securities and Exchange Commission.
We have previously provided an update regarding the ability of issuers in Canada to hold such virtual shareholder meetings, which can be found here. Issuers will have to consider a mix of corporate and securities law ishould they wish to change their meeting and/or record dates or the location of their meetings. The specific considerations will depend on the applicable issuer’s circumstances.
As the pandemic progresses, so will the effects on Canadian businesses. It is important to remember that disclosure requirements will differ from issuer to issuer. Canadian public companies should continually assess the impact of the pandemic on their business, and whether their public disclosure should be updated or revised.
Canadian regulators are regularly revising their expressed expectations of market participants, including in the area of public company disclosure. We have written about this in a recent post, and have made available a chart of regulatory pronouncements that we have been keeping up to date, which can be found here. We invite you to visit this material often to help you stay up to date.
The authors appreciate the invaluable assistance of Sotiri Varlokostas on this article.