Volume 1, Number 3 - July 15, 2013
Investors in a Canadian public company need to be aware of the consequences of becoming a holder of 10% or more of any class of its voting or equity securities. Canada’s requirements are in some ways very similar to the Schedule 13D, Schedule 13G and insider reporting requirements in the United States, but in some ways are very different. All investors in securities of Canadian public companies, whether in Canada, the United States or other countries, must comply with Canadian ownership reporting requirements.
What Must I Do if I Become a 10% or Greater Shareholder?
What you have to do when you become a 10% or greater shareholder depends on whether or not you are an eligible institutional investor. If you are, then unless you are disqualified,you are eligible to use Canada’s alternative monthly reporting system (AMR). You will have to file your initial AMR report with the Canadian securities regulators within 10 days of becoming a 10% shareholder. After that, you will only need to file another AMR report within 10 days of the end of any month in which your ownership position, measured at month end, has increased or decreased by more than 2.5% from the last reported position or decreased below 10%. As an eligible institutional investor, you will also be exempt from Canada’s insider reporting requirements unless you are disqualified from the insider reporting exemption.
What Happens if I Become a 20% or Greater Shareholder?
Do not become a 20% or greater shareholder without first speaking with Canadian legal counsel. Canadian securities laws prohibit acquisitions of outstanding securities of an issuer that result in an investor holding 20% or more of a class of voting or equity securities of a Canadian public company without making a formal takeover bid (that is, a public tender offer). There are a few exceptions to this requirement, including purchases through private agreements and limited public market purchases, but it is important to get specific legal advice about them before increasing your ownership level to 20% or more.
What Is an Eligible Institutional Investor?
You are an eligible institutional investor if you are an investment manager acting on behalf of investors on a fully discretionary basis. You are also an eligible institutional investor if you are a financial institution, a pension fund, a mutual fund that is not public in Canada, an investment company registered under the Investment Company Act of 1940, a U.S. registered investment adviser or an ERISA plan.
How Can an Eligible Institutional Investor Become Disqualified from the AMR?
Eligible institutional investors are disqualified from using the AMR if they make, or intend to make, a formal takeover bid (tender offer) for the issuer’s securities or if they propose, or intend to propose, a merger or similar transaction that would result in acquiring effective control over the issuer. Unlike the test of eligibility to use Schedule 13G in the United States, there is no disqualification based on investing with the purpose or effect of changing or influencing the control of the issuer.
Eligible institutional investors can be disqualified from the insider reporting exemption in a broader range of circumstances than the AMR disqualification. Disqualification from the AMR will also result in a disqualification from the insider reporting exemption. However, eligible institutional investors must make filings under Canada’s insider reporting system, whether or not they are eligible to use the AMR, if they have access to material non-public information about the issuer, if they participate or previously participated in the selection of any director or officer of the issuer or if they possess effective control over the issuer.
What if I Am Not Eligible for the AMR?
If you are not an eligible institutional investor or if you are disqualified from the AMR, you will have to follow the rules under Canada’s conventional early warning system.
After crossing the 10% ownership level, you must immediately stop making any further purchases of securities of the issuer. Next, you must promptly issue and file a press release stating that you have become a 10% shareholder and disclosing other required information. Finally, you must file a report with the Canadian securities regulators within two business days of becoming a 10% shareholder. You may only continue making purchases of the issuer’s securities at the end of one business day after the report has been filed.
After each further increase of 2% or more from your last reported position, you must once again stop making any additional purchases, issue another press release and file another report. Again, additional purchases may only be resumed at the end of one business day after that next report has been filed. However, under the conventional early warning system there is no requirement to report decreases in ownership.
In addition to filing the reports required under the conventional early warning system, you will also be required to make Canadian insider report filings.
What About Companies Subject to Formal Bids?
A special rule requires you to issue and file a press release before the opening of trading on the next business day if you acquire 5% or more of the outstanding securities of a class that is the subject of a formal takeover bid (tender offer) or issuer bid (self-tender). An additional press release must be issued, again before the opening of trading on the next business day, each time you acquire an additional 2% or more of the securities of the class.
What Are the Requirements for Insider Reports in Canada?
A 10% shareholder is considered an insider of the issuer. Unless you use the AMR and also meet all of the additional requirements for the exemption from insider reporting, you must use Canada’s System for Electronic Disclosure by Insiders (SEDI) to report your ownership position once you become an insider. You must file your initial report on SEDI within 10 days of becoming an insider. Further filings must be made within five calendar days of every transaction involving any security of the issuer while you remain an insider.
How Are Equity Derivatives or Other Economic Equivalents Treated?
Equity derivatives and other economic equivalents to actual share ownership are not currently taken into account when calculating your ownership position to determine whether you are a 10% shareholder or have triggered a subsequent reporting obligation. However, these economic equivalents must be reported together with your actual share ownership on the insider reports that you file on SEDI. If you are an eligible institutional investor and meet the other requirements for a SEDI filing exemption, the AMR reports that you file must disclose these economic equivalents.
What Changes Are Expected?
The Canadian Securities Administrators have proposed some major changes. One is to lower the reporting threshold from 10% to 5% under both the conventional early warning system and the AMR. Another is to require filers using the conventional early warning system to report decreases of 2% and falling below the 5% reporting threshold. They also plan to add a new disqualification from the AMR for eligible institutional investors that engage in proxy solicitations.
One of the most significant proposed changes is to require equity derivatives and other instruments that are economically substantially equivalent to conventional equity holdings to be included together with actual share ownership for the purposes of calculating whether the 5% reporting threshold, or any other reporting threshold, has been crossed, without allowing for the netting of long positions against short positions. If these changes are adopted as proposed, investors in Canadian public companies are likely to find it challenging to determine whether, and when, the relevant reporting thresholds have been crossed.
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 email@example.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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