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CSA Provides Update on Proposed Changes to Early Warning Regime – Reporting Threshold Stays at 10%

Author(s): Jeremy Fraiberg, Douglas Bryce, Emmanuel Pressman, Douglas Marshall, Andrew MacDougall

Oct 10, 2014

The Canadian Securities Administrators (CSA) have provided an update on their proposed changes to the early warning reporting regime (the Draft Amendments), which were originally published for comment in March 2013 and summarized in a previous Osler Update

Most noteworthy is the CSA’s decision not to proceed at this time with their original proposal to reduce the early warning reporting threshold from 10% to 5%, which would have put Canada in line with the reporting threshold in the United States and most other countries.  Activist investors and hostile bidders will continue to be able to accumulate toeholds of up to 9.9% without having to make public disclosure, maintaining an advantage these investors and bidders have in respect of their activities in Canada as compared to the United States. 

The CSA are also not proceeding with their original proposal to include “equity equivalent derivatives” – equity derivative positions that are substantially equivalent in economic terms to conventional equity holdings – for the purposes of determining whether the early warning reporting threshold has been exceeded.  The CSA’s original proposal sought to provide greater transparency as to potential “hidden ownership” positions accumulated by sophisticated investors through the use of derivatives to achieve economic exposure to public companies while avoiding public disclosure.

The CSA based their decision on comments received from over 70 market participants, the majority of which raised various concerns about potential unintended consequences of the Draft Amendments.  Most of the commenters were investors and advisors, with relatively few issuers having submitted comments.  Among the views expressed and considered by the CSA were:

  • the unique features of the Canadian market, compared to the United States and other markets, including the large number of smaller issuers and the limited liquidity of these smaller issuers and of our market;
  • the potential detrimental or inadvertent impact of certain Draft Amendments, such as hindering an investor’s ability to rapidly accumulate or reduce a large position and the signalling of investment strategies to the market;
  • the complexity and difficulty of applying a new early warning reporting trigger in respect of “equity equivalent derivatives”; and
  • the significant administrative and compliance burden associated with implementing additional reporting obligations.

The CSA intends to publish final amendments to the early warning regime in the second quarter of 2015 that will address certain key issues identified in the Draft Amendments.  Some of the changes proposed in the Draft Amendments that the CSA intends to implement include requiring disclosure of 2% decreases in ownership, requiring disclosure when a shareholder’s ownership interest falls below 10%, and making the alternative monthly reporting system unavailable to eligible institutional investors that intend to engage in certain kinds of proxy solicitation.  This last change will move the Canadian regime more in line with the United States.

Additional changes expected in the final amendments include:

  • exempting lenders from disclosure requirements if they lend shares pursuant to a specified securities lending arrangement;
  • exempting borrowers, in certain circumstances, from disclosure requirements if they borrow shares under a securities lending arrangement;
  • providing guidance clarifying the current application of early warning reporting requirements to certain derivatives and requiring disclosure of derivatives in the early warning report;
  • enhancing and improving the disclosure requirements in the early warning report; and
  • clarifying the timeframe to file the early warning report and news release.


By Jeremy Fraiberg, Douglas Marshall, Emmanuel Pressman, Douglas Bryce, Andrew MacDougall