Prospectus Exemptions
The Ontario Securities Commission announced that it will be releasing proposals for new capital raising prospectus exemptions during the first quarter of 2014. The exemptions under consideration are the following: (i) crowdfunding exemption; (ii) a family, friend and business associates exemption; (iii) a streamlined rights offering exemption and a possible exemption for distributions to a reporting issuer’s existing security holders based on the issuer’s continuous disclosure obligations; and (iv) an offering memorandum exemption. The Ontario Securities Commission also stated that it supports the current proposal of the Canadian Securities Administrators for a prospectus exemption for distributions to existing TSXV issuer security holders and will consider comments in response to the CSA initiative in developing its proposed existing security holder exemption, with a goal of harmonizing the proposals.

TSX Considers Infrastructure as an Attribute for a Property of Merit
The Toronto Stock Exchange (the “TSX”) announced that infrastructure may be a factor in determining a property of merit for listing purposes. The TSX Company Manual (the “Manual”) requires that issuers applying to list under the mineral exploration and development-stage category have a property where continuity of mineralization is demonstrated in three dimensions at “economically interesting grades” (an “Advanced Property”) as detailed in a report (the “Technical Report”) prepared in accordance with National Instrument 43-101—Standards of Disclosure for Mineral Projects by an independent qualified person. If the project is unlikely to be economically viable taking into account the value of the mineral deposit, the costs associated with development, extraction and delivery of the resource to market, including the development of any necessary infrastructure, the TSX may determine that the project is not an Advanced Property and does not therefore meet TSX original listing requirements.

Infrastructure is not a material consideration for commodities that can be produced on-site in relatively small quantities, which have a high value relative to their weight and can be transported to market by air, even if the project is located in a remote area. Such commodities include gold and diamonds. Infrastructure is a key consideration for commodities shipped in bulk such as coal, iron ore, all base and precious metal concentrates, and industrial minerals, such as sand and gravel, limestone, commercial clay, and gypsum.

The TSX recommends that prospective applicants submit Technical Reports to obtain a preliminary opinion as to whether a particular project qualifies as an Advanced Property.

TSX Reviews Thresholds for Backdoor Listings
The Toronto Stock Exchange (the “TSX”) announced that it is reviewing the thresholds it applies for backdoor listings, otherwise known as “reverse take-overs” or “reverse mergers”. The TSX requires shareholder approval as a result of dilution exceeding 25% as a result of an acquisition. The TSX takes a backdoor listing further in that the unlisted entity must also meet original listing requirements.

The TSX Company Manual currently provides that the following two factors must both be present in order for a transaction to be considered a backdoor listing:

  1. The transaction will or could result in the existing security holders of the listed issuer holding less than 50% of the securities or voting power in the entity resulting from the transaction. That is, the transaction will or could result in more than 100% dilution, taking into account the securities issuable pursuant to the transaction and including securities issuable pursuant to a concurrent private placement.
  2. The transaction must result in a change in effective control of the listed issuer. TSX has generally applied the definition of “materially affect control” contained in the Company Manual in making this determination.

The TSX is considering amendments to the Company Manual to clarify where it might deem the transaction to be a backdoor listing and thereby require satisfaction of original listing requirements. Transactions in which either the existing security holders of the listed issuer hold more or less than 50% of the securities or voting power in the entity resulting from the transaction may or may not be characterized as backdoor listings. The distinguishing factors to be considered include the business of the listed issuer and of the unlisted entity, the relative sizes of the listed issuer and the unlisted entity, changes to management (including the board of directors), as well as changes in voting power, security ownership, name changes and capital structure, among other factors that may be relevant in the particular circumstances. The TSX notes that these factors do not constitute bright line tests and will be assessed both individually and collectively in determining whether a transaction results in a backdoor listing.

Listed issuers are always advised to make detailed submissions as to whether a transaction should be considered a backdoor listing and (if applicable) how the resulting entity will meet TSX original listing requirements.

Ontario Securities Commission Review of Forward Looking Information Disclosure
Forward Looking Information (“FLI”) is disclosure about possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action. FLI includes two subcategories dealing with financial information: (a) Future Oriented Financial Information (“FOFI”) and (b) financial outlook. Both FOFI and financial outlook are FLI about prospective financial performance, financial position or cash flows, based on assumptions about future economic conditions and courses of action. The difference between FOFI and financial outlook is the format in which the financial information is presented. In the case of FOFI, the information is presented in the format of a historical financial statement.

FLI is a key area of interest for investors. Investors want transparent and clear disclosure about present and future corporate operations and performance. When prepared properly, FLI can be used to enhance transparency and provide opportunities to increase an investor’s understanding of a reporting issuer’s business and future prospects.

The disclosure of FLI is subject to securities requirements under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), irrespective of where FLI is located within a document or the nature of the document where FLI is disclosed. Therefore, the rules apply regardless of whether FLI is on a website, in a news release or in the MD&A. The requirements can be divided in two parts: (a) requirements relating to the initial disclosure of FLI, and (b) requirements relating to the ongoing obligations to update, compare to actual results and, if appropriate, withdraw previously disclosed FLI

In a recent review of disclosure practices by reporting the Ontario Securities Commission, the following observations were made:

  • Disclosure of FLI is not mandatory for reporting issuers. However, many reporting issuers provide FLI, generally, in news releases, management’s discussion and analysis (“MD&A”), annual information forms, marketing materials or on their website.
  • FLI is by definition likely to be less reliable than historical information because it is based on management’s best judgment and assumptions on how future trends will impact their business. As such, it is important that FLI be clearly identified so that readers understand the limitation of this information, are not confused and don’t treat FLI as historical information. Further, it is critical that readers understand the basis on which the FLI was determined. This basis must be reasonable. In addition, material risk factors and related assumptions used to develop the FLI must accompany the disclosure. In determining what constitutes a “reasonable basis” for FLI, a reporting issuer should consider the reasonableness of the assumptions underlying the FLI and the process followed in preparing and reviewing the FLI. Updates on FLI help investors understand how actual results are reasonably likely to differ materially from previously disclosed FLI and how the reporting issuer is progressing towards the achievement of its disclosed targets and objectives.
  • There are four common areas where improvement is needed:
    •  clear identification of FLI
    •  material factors and assumptions
    •  updating previously disclosed FLI
    •  comparison of actual results to previously disclosed FOFI or financial outlook

Proper use of FLI is also important for a defence from secondary market liability as no person is liable for a misrepresentation in FLI in any document (other than an initial public offering prospectus or financial statements) or in any public oral statement if that person is able to prove both that:

  • the document or statement contained, proximate to the forward-looking information, (i) reasonable cautionary language concerning such information and (ii) material assumptions applied in making a forecast or projection in such information; and
  • the person had a reasonable basis for making the forecasts or projections in the forward-looking information.

Ontario Securities Commission Proposes Rule Amendments Regarding Disclosure of Women on Boards and Senior Management
The Ontario Securities Commission (the “OSC”) has proposed that TSX listed issuers provide disclosure of women on boards and in senior management. The proposal does not impose any requirements for issuers to have a specified quota of women on boards and/or in senior management. The proposed disclosure requirements followed a “comply or explain” approach. For example, the proposals contemplate an issuer either:

  • confirms that it has a policy regarding the representation of women on the board or in senior management and providing details regarding the policy, or
  • if the issuer did not have such a policy, explaining why not and identifying any risks or opportunity costs associated with the decision not to have such a policy.

The proposed disclosure has a 90 day comment period ending on April 16, 2014 and provides for annual disclosure in the corporate governance section of information circulars on the following topics:

  • director term limits;
  • policies regarding the representation of women on the board;
  • the board’s or nominating committee’s consideration of the representation of women in the director identification and selection process;
  • the issuer’s consideration of the representation of women in executive officer positions when making executive officer appointments;
  • targets regarding the representation of women on the board and in executive officer positions; and
  • the number of women on the board and in executive officer positions.

The proposed disclosure is intended to encourage more effective boards and better corporate decision making by requiring greater transparency for investors and other stakeholders regarding the representation of women on boards and in senior management of TSX-listed issuers. This transparency is intended to assist investors when making investment and voting decisions.

NOTE: This publication is intended to provide information to clients on recent developments in provincial and national law. Articles in this newsletter are not legal opinions and readers should not act on the basis of these articles without first consulting a lawyer who will provide analysis and advice on a specific matter.