csa adopts amendments to early warning system

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Canadian Securities Administrators Adopt Amendments to Early Warning System

On February 25, 2016, the Canadian Securities Administrators, the umbrella organization of securities regulators in Canada, published the text of anticipated amendments to the early warning system. According to the CSA, the amendments are intended to provide greater transparency about significant holdings of issuers’ securities and to enhance the quality and integrity of the early warning system.

In Ontario, the amendments will come into force on the later of May 9, 2016 and the date that certain provisions of the Budget Measures Act, 2015 come into force.

Investors with outstanding early warning reports should take note of these amendments once they come into force, as they will have implications for their ongoing reporting obligations.

Summary of Amendments

As set out in the CSA notice, the amendments will:

• require disclosure of decreases in ownership, control or direction of 2% or more;

• require disclosure when a securityholder’s ownership, control or direction falls below the early warning reporting threshold;

• exempt borrowers and lenders of securities in certain circumstances;

• make the Alternative Monthly Reporting System unavailable to eligible institutional investors who solicit proxies from securityholders in certain circumstances;

• require disclosure in the early warning report of an interest in a related financial instrument, a securities lending arrangement and other agreements, arrangements or understandings involving an issuer’s securities;

• enhance the disclosure in the early warning report by requiring more detailed information regarding the intentions of the acquiror and the purpose of the transaction;

• require the early warning report to be certified and signed;

• clarify the timeframe to issue and file the news release and early warning report; and

• further streamline the information required in the news release.

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Certain of the amendments were initially proposed in March 2013, when the CSA published for comment proposed amendments to the early warning system. The CSA has adopted some but not all of the initial proposed amendments. While the CSA previously considered reducing the reporting threshold from 10% to 5%, in response to comments received, it has concluded that the reporting threshold should remain at 10%.

Additional Disclosure Requirements

The early warning system currently requires additional disclosure once a securityholder has acquired an additional 2% or more of an issuer’s outstanding securities. The amendments also will now require additional disclosure of decreases in ownership of 2% or more as well as when the securityholder’s ownership decreases below 10%. The current requirement to provide additional disclosure if there is a change in a material fact contained in a previously filed early warning report will continue to apply.

Enhanced Disclosure

The amendments require detailed disclosure about the class of securities and the material terms of related financial instruments, any securities lending arrangements and other agreements, arrangements or understandings involving an issuer’s securities. According to the CSA, these amendments are intended to result in more comprehensive disclosure about an acquiror’s economic or voting interests in the securities and to address the transparency concerns associated with these types of agreements, arrangements and understandings.

The amendments also require additional disclosure regarding the purpose of the transaction and the acquiror’s plans or future intentions with respect to the issuer.

AMRS Disqualification

The AMRS allows certain eligible institutional investors, including financial institutions, pension funds, mutual funds, and certain investment managers, to file reports on a monthly basis, when their securities ownership increases to 10% or more, and thereafter when their securities ownership increases or decreases past thresholds of 2.5% or decreases below 10%. Currently, eligible institutional investors who make or intend to make a formal take-over bid or who propose or intend to propose a reorganization, amalgamation, merger, arrangement or similar business combination with an issuer that would give them effective control over the issuer or its successor are disqualified from relying on the AMRS.

Once the amendments come into force, an eligible institutional investor who solicits proxies from securityholders in support of a director nominee other than the individuals proposed by management or in support of a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of an issuer not supported by management, or in opposition to a similar corporate action proposed by management, also will be disqualified from relying on the AMRS. An eligible institutional investor who is relying on the AMRS, upon engaging in any solicitation activities, would be required to immediately issue and file a news release and within two business days file an early warning report disclosing its intentions. For a period of 10 days after the news release is filed, the eligible institutional investor would be

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restricted from acquiring any additional securities.

The term “solicit” is broadly defined and includes any communication under circumstances that to a reasonable person will likely result in the giving, withholding or revocation of a proxy. While the CSA previously considered extending the disqualification criteria to include an intention to solicit proxies, it concluded to remove this concept to avoid uncertainty.

Timing Requirements

The amendments have clarified that the news release must be issued and filed no later than the opening of trading on the next business day following the acquisition. The early warning report will continue to be due within two business days of the acquisition.

Derivatives and Securities Lending or Borrowing

The amendments have added new guidance to National Policy 62-203 regarding the circumstances under which an investor may have to include in the early warning threshold calculation an equity swap or similar derivative arrangement. The amendments also provide an exemption for lenders from the early warning requirements for securities transferred or lent pursuant to certain specified securities lending arrangements, as well as an exemption for borrowers, subject to certain conditions.