Canadian Securities Regulators Adopt Amendments to Early Warning System
Updated: Jan 24, 2020
The Canadian Securities Administrators (the “CSA”) recently announced the publication of final amendments (see here) that are designed to provide greater transparency regarding holdings of reporting issuers’ securities under the early warning system.
Those familiar with the early warning system and compliant to date should pay attention to these changes as they will, no doubt, affect future reporting. Those unfamiliar with the early warning system should familiarize themselves with the rules and determine current compliance and put into place procedures to ensure future compliance and reporting.
The early warning system (sometimes referred to as the “early warning regime”) forms part of the Take-Over Bid and Insider Reporting regulation of publicly traded issuers in Canada. The early warning system was designed to provide timely disclosure to the marketplace:
when a person or company acquires beneficial ownership of, or control or direction over, 10% or more of the voting or equity securities of a reporting issuer (which includes any securities convertible into such voting or equity securities and includes securities held by “any person acting jointly or in concert” with the acquiror);
when there is any increase of 2% or more in a previously reported position by such person or company; and
when there is any change of material fact in the prescribed disclosure previously reported by such person or company.
The intent was to provide the market with immediate notice that a particular person or company is accumulating a significant block of shares in a reporting issuer in order that they assess the person’s or company’s intentions with respect to ownership and control of the reporting issuer (in part to avoid what was commonly referred to as “creeping” takeovers).
Upon triggering any of the applicable disclosure requirements above the person or company was required to:
promptly (now clarified mean no later than the opening of trading on the next business day following the acquisition) issue and file a news release containing certain prescribed disclosure regarding the acquiror and those acting jointly or in concert with the acquiror, the subject securities, the circumstances of the acquisition and the future intentions of the acquiror; and
within 2 business days from the day of the acquisition, file a report containing substantially similar prescribed information on SEDAR. Until one business day after the date that such a report is filed, the person or company (or any person acting jointly or in concert with the person or company) was not permitted to acquire or offer to acquire beneficial ownership of any of the subject securities or any securities convertible into the subject securities (however, this restriction does not apply to holdings of 20% or more as such person or company must then comply with applicable securities law and regulation associated with “take-over bids”).
For certain types of entities who qualify as an “eligible institutional investor” there is an alternative monthly reporting regime (“AMR”) that provides a less onerous reporting regime for institutional investors who have no current intention of acquiring control of the reporting issuer. For example, such investors are permitted to report their holdings in reporting issuers at regular intervals, rather than on a trigger described above under the early warning system.
The recently announced 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 of 10%;
exempt lenders from including securities lent or transferred for the purposes of determining the early warning reporting threshold trigger if they lend securities pursuant to a specified securities lending arrangement;
exempt borrowers under securities lending arrangements from including securities borrowed for the purposes of determining the early warning reporting threshold trigger in certain circumstances;
make the AMR 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 agreement, arrangement or understanding in respect of a security of the class of securities for which disclosure is required;
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 a news release and an early warning report; and
further streamline the information required in a news release filed in connection with the early warning reporting requirements.
The Amendments will also clarify the current application of early warning reporting requirements to certain derivative arrangements and to securities lending arrangements.
The CSA had originally proposed to also reduce the early warning reporting threshold from 10% to 5%. However in response to concerns raised by this proposal, the CSA concluded that the proposed reduction in the threshold was not appropriate at this time.
The amendments will mean changes to all of Multilateral Instrument 62-104 - Take-Over Bids and Issuer Bids, National Instrument 62-103 - The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, and National Policy 62-203 - Take-Over Bids and Issuer Bids (or, with respect to Ontario, substantially similar provisions contained in Part XX of the Securities Act (Ontario) and Ontario Securities Commission Rule 62-504 - Take-Over Bids and Issuer Bids, as applicable). Adoption of the final amendments is anticipated to take effect in early May, 2016.
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