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Securities law developments in 2015: Evolutionary not revolutionary

Author(s): Douglas Bryce, Rob Lando, Mary Abbott

Dec 9, 2015

This past year was marked by a few major developments in Canadian securities laws that could lead to significant changes in practice, such as the proposed reform of Canada’s take-over bid regime. For the most part, however, 2015 saw more evolutionary developments such as the introduction of several new prospectus exemptions and the imposition of stricter investor protections for individuals. Here is our list of the year’s most notable developments:

CCMRS – A March Towards a National Securities Regulator?

The push by a number of the provinces and the federal government to create a common securities regulatory regime (the Cooperative Capital Markets Regulatory System) continued to move forward in 2015. In particular, updated draft legislation for the uniform Capital Markets Act, draft initial regulations and related materials were published for comment on August 25, 2015, with the comment period remaining open until December 23, 2015. It remains to be seen how much political priority will be given to the initiative by the recently elected federal Liberal government, given that the initiative was previously backed by the prior Conservative government at the federal level.

New Take-over Bid Regime – Higher Hurdles for Bidders

Following years of debate among market participants regarding the role of defensive tactics and the use of shareholder rights plans in particular, in March 2015 the CSA published for comment significant proposed changes to the take-over bid regime in Canada. The changes will effectively give the target of a hostile bid 120 days to respond, as it will require the bid to remain open for at least 120 days unless the target’s board agrees to a shorter period (of not less than 35 days) or unless the target enters into an alternative transaction. The new rules will also require a mandatory 10-day extension of a bid following the satisfaction or waiver of all conditions, including the minimum tender requirement. All bids will be 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. The new take-over bid regime, if implemented as currently proposed, will likely result in the end of shareholder rights plan or “poison pill” hearings by regulators in most cases, since it is expected that securities regulators will cease trade rights plans after 120-day bids, absent unusual circumstances. Please refer to the article entitled “The swan song of poison pill hearings?” for more information.

Crowdfunding Comes to Canada

Given the rapid growth of crowdfunding as a means for early-stage companies to access capital, it was only a matter of time before securities regulators established a legal framework for the practice. The CSA has created a crowdfunding prospectus exemption that will come into force on January 25, 2016. Under this regime, issuers will be required to prepare an offering document containing all information that investors should know about their business; investors will be subject to an investment limit on each individual investment and overall annual limits that vary depending on the investor’s accreditation status; investors will be required to sign a prescribed risk acknowledgement form confirming they are aware of the risks of the investment; and issuers will be required to continue to make annual financial statements and certain other information available to investors on an ongoing basis, even if they are not subject to public company reporting obligations. The securities may only be sold through a registered “funding portal” meeting prescribed requirements, and there will be a prohibition on advertising and general solicitation of the securities.

Reforms to the Exempt Market System for Capital Raising

A number of other important revisions to the exempt market system in Canada will have a significant impact on the way in which prospectus-exempt financings are conducted across the country. Two of these initiatives reflect in part the constrained financing environment for certain smaller issuers. The first is the introduction of a new exemption aimed at allowing exempt issuances to be made to existing securityholders, and the second is a revised rights offering regime designed to streamline the rights offering process and facilitate the (relatively rare) usage of the exemption. Other developments in 2015 include a series of amendments in Ontario designed to harmonize exemptions relating to offering memorandums and family, friends and business associates with other jurisdictions. Finally, a number of amendments designed to enhance investor protections in the context of exempt offerings were introduced or published in draft form, including the introduction of a risk acknowledgement form for accredited investors that do not meet financial asset requirements and a new substantially expanded form of exempt trade report.

OSC Whistleblowers Initiative

The Ontario Securities Commission (OSC) has unveiled a proposed Whistleblower Program, which would be the first program of its kind in Canada. Though it is modelled on the SEC’s whistleblower program in the United States, the OSC’s proposal seeks to avoid some of the more egregious aspects of that program, which resulted in 120 whistleblower award claims in 2015 alone, and in one case resulted in a payment of over $30 million to a single individual. Further details regarding the OSC’s proposed Whistleblower Program are set out in the article entitled “Securities enforcement: Big win and broader tools for regulators.”

Proxy Voting Infrastructure – The Long and Winding Road Continues

The CSA has been engaged in a review of the Canadian voting infrastructure since August 2013, in the wake of various concerns expressed by market participants regarding the integrity and reliability of the network of organizations, systems, legal rules and market practices that support the solicitation, collection, submission and tabulation of proxy votes for shareholder meetings in the context of the Canadian beneficial share ownership system. CSA staff issued a report in January 2015 that discussed the progress made to date in their review and outlined next steps. The progress report confirmed that the CSA believes the current system to be fragmented and requiring modernization and improvement, and identified a number of specific improvements that must be made in the vote reconciliation process. We expect this review process to continue in 2016 and beyond. In the spring of 2015, the CSA also chose not to regulate proxy advisory firms such as ISS and Glass Lewis, opting instead to issue guidance on best practices that proxy advisory firms should follow.