5 Key Changes to Early Warning Reporting System Effective May 9, 2016
Published:
May 2, 2016
Author(s):
Amendments changing the early warning reporting system take effect on May 9, 2016, provided all necessary approvals are obtained (except in Ontario, where some of the changes will take effect on the later of May 9 and the day on which certain sections of Schedules 18 of the Budget Measures Act, 2015 (Ontario) are proclaimed in force). Announced by the Canadian Securities Administrators (CSA) on February 25, 2016, the final changes are not as expansive as those earlier proposed and seem to strike a fair balance between increasing transparency and unduly burdening investors and issuers with cumbersome reporting requirements. The amendments also clarify several previously unclear aspects of the early warning reporting system.
No Threshold Change. Notably, the CSA did not implement the reduction to the early warning threshold from 10% to 5% as originally proposed. Institutional investors that commented that a lower reporting threshold would reduce access to capital for smaller issuers and hinder investors’ ability to rapidly accumulate or reduce large ownership positions in the normal course of their investment activities welcomed the CSA’s decision.
5 Key Changes. The amendments make incremental changes designed to provide greater transparency about holdings of reporting issuers’ securities by enhancing the quality and integrity of the early warning reporting regime. Here’s a summary of the five key final changes:
- Disclosure for decreases. Disclosure is now required where the ownership, control or direction over securities owned by the security holder decreases by 2% or more or falls below the 10% reporting threshold.
- Alternative monthly reporting. Alternative monthly reporting will no longer be available to eligible institutional investors (EIIs) that solicit proxies from security holders: to support the election of a director nominee not proposed by management; or in relation to a reorganization, amalgamation, merger, arrangement or similar corporate actions involving the reporting issuer’s securities. The alternative monthly reporting system (AMRS) is designed for passive investors, not investors who are actively engaged with the issuer. This change helps address concerns that EIIs could use the AMRS to delay reporting share purchases by reporting monthly under the AMRS rather than filing a report within two business days of a triggering event under the conventional early warning system, and could also avoid the moratorium provisions prohibiting further purchases until the expiry of one business day after the filing of each early warning report under the early warning system).
- Exemption for lenders and borrowers. Lenders will now be exempt from including securities lent or transferred pursuant to “specified securities lending arrangements” in determining an early warning threshold. Borrowers will similarly be exempted from the early warning threshold trigger in connection with securities borrowed in the ordinary course of short selling activities if certain prescribed conditions are met.
- Enhanced disclosure in the early warning report. The early warning report must now contain more detailed disclosure obligations (such as the material terms of any related financial instruments, securities lending arrangements and other agreements involving the securities) and more detailed disclosure about the investor’s intentions in acquiring securities and the purpose of the transaction.
- Certification requirement. Early warning reports must be certified and signed.
Clarification. The amendments also clarify several previously vague aspects of the early warning reporting system, making them clearer and lending greater certainty to the navigation of the early warning reporting rules:
- Timeframes for issuing news release and early warning report. It’s now clear that the investor must file an early warning news release not just “promptly” (the extent of the earlier rule), but no later than the opening of trading on the business day following the acquisition of the securities, and must file the early warning report no later than two business days following the acquisition.
- Application to derivative arrangements. The amendments also clarify the application of the early warning reporting requirements to certain derivative arrangements. Investors with the ability to formally or informally obtain voting or equity securities or direct voting of voting securities held by a counterparty to a transaction may be deemed to have beneficial ownership, control or direction over those securities and be required to include them in their early warning threshold calculations.
Concurrent Amendments. The CSA adopted the amendments to the early warning system concurrently with amendments to the regime governing the conduct of take-over bids, and involve amendments to these instruments and policies:
- Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids.
- National Instrument 62-103 The Early Warning Systems and Related Take-Over Bid and Insider Reporting Issues.
- National Policy 62-203 Take-Over Bids and Issuer Bids.
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