Publication
title
What You Need to Know about Changes to the Canadian Continuous Disclosure Regime
DATE
March 4, 2004
EXPERTISE
HIGHLIGHTS
- shortened filing deadlines for financial statements and new MD&A disclosure (applicable to interim periods and financial years beginning on or after January 1, 2004)
- new significant business acquisition reporting effective March 30, 2004
- new requirement to file material contracts and documents affecting securityholders
- all issuers (other than venture issuers) will need to file an AIF within 90 days of year-end for financial years beginning on or after January 1, 2004
- enhanced AIF and circular disclosure
- SEC and other designated foreign issuers exempt
- modification of rules for venture issuers
INTRODUCTION
The Canadian Securities Administrators (CSA) recently published National Instrument 51-102 Continuous Disclosure Obligations (the CD Instrument) which is expected to come into force on March 30, 2004. The CD Instrument is subject to transitional arrangements and certain provisions will not apply immediately. The CD Instrument harmonizes existing continuous disclosure obligations across the country for reporting issuers (other than investment funds) and imposes new obligations regarding financial statements, management's discussion and analysis (MD&A), annual information forms (AIFs), information circulars and the reporting of business acquisitions. While the CD Instrument enhances the current disclosure regime, it also simplifies continuous disclosure by consolidating local continuous disclosure requirements and prescribing the content of continuous disclosure forms in one instrument, establishing the basis for an integrated disclosure system. The prescribed forms instruct issuers to use plain language when drafting disclosure documents so that the disclosure can be understood by readers.
The CSA have also published National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, which is also expected to come into force on March 30, 2004. This instrument exempts SEC foreign issuers and other designated foreign issuers from the Canadian continuous disclosure regime, provided they comply with comparable US or other foreign requirements.
This information bulletin outlines the principal requirements of the CD Instrument and the exemptions available for foreign issuers.
FINANCIAL STATEMENTS
To ensure more timely disclosure and to align Canadian filing deadlines with those of other major capital markets, the deadline for filing financial statements has been shortened. For financial periods or years beginning on or after January 1, 2004, an issuer (other than a venture issuer) must file its interim statements within 45 days of the end of the quarter and its annual financial statements within 90 days of its year-end (or earlier if the issuer files such financial statements on an earlier date with a foreign jurisdiction). For December 31 year-end issuers, this means first quarter interim financial statements must be filed within 45 days of March 31, 2004. Such an issuer will still have 140 days from its year-end to file its December 31, 2003 annual financial statements, but will have to file its annual statements for the year ended December 31, 2004 within 90 days of that date. Issuers will also have to implement CEO/CFO certification of their financial statements for financial years or periods beginning on or after January 1, 2004. For details of these requirements, see our recent Information Bulletin The Canadian Securities Administrators Venture Further into the Corporate Governance Arena.
For financial years and periods beginning on or after January 1, 2004, interim and annual financial statements must be approved by the issuer's board of directors, although for interim statements the approval may be delegated by the board to the audit committee. The recently published Audit Committee Instrument also provides that the audit committee must review annual and interim earnings releases prior to public disclosure. Interim financial statements that have not been reviewed by an issuer's external auditors must be accompanied by a notice to that effect. Where a qualified review report has been given, the interim statements must be accompanied by a written review report of the auditor. If the auditor was unable to complete the review of the interim statements, a notice stating this and the reasons why the auditor could not complete the review must accompany the statements.
To complement the shorter filing deadlines, the CD Instrument has removed the requirement to deliver financial statements to all securityholders. Issuers will only be required to send financial statements (and MD&A) to securityholders who request them. The form to request delivery of such materials must be distributed annually by issuers to securityholders other than holders of debt.
MD&A
Issuers will be required to file interim or annual MD&A, as the case may be, when filing interim and annual financial statements. Such MD&A must be approved by the board of directors or, in the case of interim MD&A, by the audit committee if approval is delegated to the committee. MD&A must now include a discussion of the following items: off-balance sheet arrangements, transactions with related parties, trends in the issuer's business (which were previously required to be contained in the issuer's AIF), forward-looking information contained in prior MD&A (if such prior disclosure could now be misleading without such subsequent comment), liquidity and capital resources, outstanding share data (previously required in the AIF) and critical accounting estimates.
The new disclosure requirements relating to MD&A apply to financial years and interim periods beginning on or after January 1, 2004. For a December 31 year-end issuer, this would mean its annual MD&A for the year ended December 31, 2003 would be prepared in the old form, but its interim MD&A for the period ended March 31, 2004 would be required to be in the new form. The prescribed form for interim MD&A provides that where the first MD&A filed under the CD Instrument is interim and not annual MD&A, that interim filing must disclose the prescribed information for annual MD&A disclosure, albeit in respect of the interim period. As an alternative, issuers have the option of filing their annual MD&A for financial years beginning before January 1, 2004 in the new form, in which case their first interim MD&A in the new form would simply update their annual MD&A disclosure. For December 31 year-end issuers, this would necessitate filing their MD&A in the new form for the year ended December 31, 2003 before or contemporaneously with their interim MD&A for the period ended March 31, 2004.
ANNUAL INFORMATION FORMS
The AIF is the cornerstone disclosure document of the CD Instrument. All issuers (other than venture issuers) will be required to file an AIF in respect of financial years beginning on or after January 1, 2004. An AIF must be filed within 90 days of an issuer's financial year-end (or in the case of an SEC issuer that files its AIF on Form 10-K, Form 10-KSB or Form 20-F, the date such form is filed with the SEC if earlier). The AIF form has been amended by adding certain prospectus disclosure obligations including trading prices and volumes, capital structure, prior sales of securities, legal proceedings and material contracts. New disclosure obligations have been introduced, including the obligation to disclose social and environmental policies that are fundamental to the issuer's business and any contracts upon which the issuer's business is dependent. In addition, more extensive disclosure is prescribed regarding the bankruptcy or insolvency of, and penalties and sanctions imposed upon a director, executive officer or material shareholder of the issuer or a company of which such director, officer or shareholder is or has been a director or executive officer. Cease trade orders relating to such companies must also be disclosed. Information required to be included in an AIF and contained in another document may be incorporated by reference into the AIF, provided that the other document has been or is filed.
Additional disclosure relating to the issuer's audit committee may also be required in an issuer's AIF (or incorporated by reference if the document referenced has already been filed). Issuers that are subject to recently published Multilateral Instrument 52-110 Audit Committees will have to include disclosure concerning the audit committee's charter, its members' independence, financial literacy, experience and education, and various other matters, such as fees paid to external auditors for audit and audit-related services, tax-related services and other services.
BUSINESS ACQUISITION REPORTS
The CD Instrument introduces a requirement to report on significant business acquisitions. An issuer that completes a significant acquisition (in respect of which a binding agreement is entered into on or after March 30, 2004) must file a business acquisition report (BAR) within 75 days of the date of acquisition. The BAR must describe the business acquired, the consideration paid and the effect of the acquisition on the financial position of the issuer and must include certain financial information, including financial statements of the acquired business and pro forma financial statements of the issuer giving effect to the acquisition.
An acquisition will be significant if (i) the issuer's consolidated investments in and advances to the acquired business exceed 20% of the issuer's consolidated assets before the acquisition; or (ii) the consolidated assets or income from continuing operations of the acquired business exceed(s) 20 % of the issuer's consolidated assets or income from continuing operations, based on the annual financial statements of the issuer and the acquired business for the most recently completed financial year before the acquisition. An exemption from the requirement to file a BAR is available where an information circular containing the necessary acquisition disclosure is dated within nine months of the acquisition and filed with the securities regulators.
MATERIAL FOR SHAREHOLDERS' MEETINGS
The CD Instrument introduces new requirements regarding required disclosure in information circulars, including disclosure regarding executive compensation. The requirements will not apply until June 1, 2004 and therefore issuers will not need to comply for the 2004 spring proxy season. The new requirements are not significantly different from the existing requirements. Issuers will now only be required to disclose routine indebtedness of a director or executive officer to the issuer of $50,000 or more (raised from $25,000) and the amount of any indebtedness forgiven in the last financial year. Also new is the requirement to disclose bankruptcies or insolvency proceedings of proposed directors and similar information (including cease trade orders) regarding any company of which a proposed director is or has been a director or executive officer. Enhanced equity compensation plan disclosure will also be required. Documents previously filed (or to be filed concurrently with an information circular) may now be incorporated by reference in the information circular.
EXECUTIVE COMPENSATION DISCLOSURE
Changes have also been made to the statement of executive compensation that is required in an information circular. As with the revised information circular requirements, these changes are not effective until June 1, 2004. An issuer will be required to disclose the compensation of any person who performs the function of chief financial officer, regardless of the amount of the compensation. This requirement mirrors the existing disclosure requirement for CEOs. In light of the inclusion of the CFO regardless of compensation, an issuer will now only be required to disclose the compensation of the three most highly compensated executive officers (previously, disclosure was required in respect of the four most highly compensated executive officers and the CEO). The threshold for disclosure has increased from total salary and bonuses in excess of $100,000 to total salary and bonuses in excess of $150,000.
FILING OF MATERIAL DOCUMENTS
The CD Instrument introduces a requirement to file (i) documents that can reasonably be regarded as materially affecting the rights or obligations of securityholders, and (ii) material contracts entered into within the last financial year (or before if the contract is still in effect) and which are outside the ordinary course of business of the issuer. Documents that must be filed in the first category include constating documents such as articles of incorporation, amalgamation or continuance, unless the document is a statutory or regulatory instrument (e.g., the charter of a Schedule I or Schedule II bank under the Bank Act (Canada)), by-laws, any securityholder or voting trust agreement that the reporting issuer has access to and can reasonably be regarded as material to an investor in its securities and any securityholders' rights plans. The Companion Policy to the CD Instrument indicates that material contracts that are required to be filed will generally be those that the issuer has disclosed as material contracts in its AIF.
Material contracts must be filed no later than the time the issuer files a material change report (if the making of the document constitutes a material change for the issuer) or the time the issuer files its AIF under the CD Instrument, if the document was made or adopted before the date of the AIF. The first date that such documents will be required to be filed (if not previously filed with a material change report) will therefore depend upon when the issuer's first AIF is due under the CD Instrument. December 31 year-end issuers will be required to file documents affecting the rights of securityholders and material contracts with their AIF for the year ended December 31, 2004 within 90 days of that year-end. The material contracts filed will be those that have been entered into since January 1, 2004 or any others that are still in effect.
Material contracts entered into before January 1, 2002 do not have to be filed. The CD Instrument allows an issuer to omit or black out clauses in material contracts that would seriously prejudice the issuer's interests or violate confidentiality provisions. Filings will be made on SEDAR, but documents affecting the rights of securityholders may be filed in paper format if dated before March 30, 2004 and not available in electronic form.
ADDITIONAL FILING REQUIREMENTS
The CD Instrument proposes some additional filing requirements which will be effective March 30, 2004. These include the requirement for a reporting issuer, following a meeting of securityholders at which a matter was submitted to a vote, to promptly file a report disclosing the outcome of the vote and, if the vote was conducted by a ballot, the percentage of votes cast for or against or withheld from voting. Any press release issued by a reporting issuer containing information regarding its historical or prospective results of operations or financial conditions for a financial year or interim period must also be filed.
WHICH PROVISIONS ARE APPLICABLE TO VENTURE ISSUERS?
Venture issuers are not subject to all the provisions of the CD Instrument. A venture issuer is an issuer without securities listed on the TSX, certain senior exchanges in the United States or any marketplace outside the US or Canada. Issuers listed on the TSX Venture Exchange are venture issuers.
Such issuers will have longer periods during which to file their financial statements with securities regulators: interim statements must be filed within 60 days and annual statements within 120 days. Venture issuers will also not be required to file an AIF or voting result reports. Venture issuers will be required to file material contracts either with their material change reports or within 120 days of their year-end. Venture issuers without significant revenue will be required to make additional disclosure regarding their research and development costs. The threshold for determining whether an acquisition is significant for venture issuers and require the filing of a BAR will be 40%, not 20%.
WHO IS EXEMPT FROM THE INSTRUMENT?
The CD Instrument applies to all reporting issuers other than investment funds and those specifically exempted from its application. Issuers of exchangeable securities and credit support securities will be exempt from the Instrument if they meet certain conditions. "SEC foreign issuers" and "designated foreign issuers" are generally exempt provided they comply with the continuous disclosure requirements of the SEC or the applicable foreign jurisdiction. An SEC foreign issuer is an eligible foreign reporting issuer (generally an issuer incorporated outside Canada whose voting control and management is outside Canada) which has a class of securities registered under US federal securities laws or which reports under such laws. A designated foreign issuer is an eligible foreign reporting issuer which is not an SEC foreign issuer and is subject to foreign disclosure requirements and no more than 10% of whose outstanding voting securities are owned by Canadian residents. Issuers may also seek discretionary exemptions from the Instrument.
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.
©OGILVY RENAULT 2004 - All Rights Reserved
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