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 amendments make five key incremental changes to the early warning reporting system designed to provide greater transparency about holdings of reporting issuers’ securities by enhancing the quality and integrity of the early warning reporting regime. One such amendment is of particular interest to securities lenders and borrowers: in certain circumstances, lenders and borrowers of securities will be exempt from including the securities lent or borrowed for the purposes of determining whether an early warning reporting obligation is triggered.

The Early Warning Reporting System. Canadian securities laws include an early warning reporting system to provide transparency about investors’ holdings of reporting issuers’ securities. The system imposes “early warning” obligations on the purchaser of public company securities:

• When a purchaser acquires beneficial ownership or control of 10% or more of a reporting issuer’s voting securities, the purchaser must promptly issue and file a press release and an early warning report with the securities regulators.

• Upon the acquisition of each additional 2% (or more) of the reporting issuer’s outstanding securities or a change in a material fact contained in an early warning report the purchaser filed earlier, the purchaser must comply with further press release and reporting requirements.

• Eligible institutional investors, including financial institutions and pension funds, can use an alternative monthly reporting system (AMRS) unless they are otherwise disqualified from doing so.

Securities lending arrangements. A “securities lending arrangement” is an arrangement between a lender and a borrower in which the lender transfers or lends a security to the borrower in circumstances where it is expected that the borrower will transfer or return the security, or an identical security. Securities lending arrangements are generally included in determining whether the early warning threshold is met, triggering the requirement for an early warning report. The general rule is that lenders and borrowers must include securities lent (disposed) and borrowed (acquired) under securities lending arrangements when determining whether an early warning reporting obligation is triggered.

New exemptions for securities lenders and borrowers. One of the changes to the early warning reporting system is to exempt securities lenders and borrowers, in certain circumstances, from including the securities lent or borrowed for the purposes of determining whether an early warning reporting obligation is triggered. Here are the three key aspects of the new exemptions for lenders and borrowers:

• Lenders. Lenders will be exempt from the early warning trigger for securities lent or transferred pursuant to a “specified securities lending arrangement”. A specified securities lending arrangement requires, among other things, that there be a written agreement between the lender and borrower setting out the material terms of the securities lending arrangement that expressly provides either that: the lender has an unrestricted ability to recall the securities before a meeting of security holders; or the lender requires the borrower to vote the securities as instructed by the lender.

• Borrowers. Borrowers will be exempt from the early warning trigger for securities borrowed, disposed of or acquired in connection with a “securities lending arrangement” if: the borrowed securities are disposed of within 3 business days of the date the transfer or loan occurs; the borrower will later acquire those or identical securities and transfer or return those securities to the lender; and the borrower does not intend to and does not vote the securities during the lending arrangement.
• Disclosure nevertheless required. Notwithstanding these exemptions, if a reportable transaction occurs and the reporting party is a party to an existing securities lending arrangement involving a security of the class of securities in respect of which early warning disclosure is required, then the early warning reporting rules require disclosure of the material terms of such securities lending arrangement and whether it was exempt from the early warning reporting obligations.

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Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Corporate Finance & Securities Team to discuss this topic or any other legal issue.

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