Exemptions From Canadian Continuous Disclosure

By Robert H. Karp and Jennifer L. Friesen

Canadian securities regulators recently republished for comment proposed National Instrument 71-102 – Continuous Disclosure and Other Exemptions Relating to Foreign Issuers . This rule, first published in June 2002, will exempt many non-Canadian issuers from various continuous disclosure obligations set out in proposed National Instrument 51-102 – Continuous Disclosure Obligations (discussed in our client memo no. 2003-19T dated July 15, 2003), as well as certain other securities law requirements. Comments on the proposed rule must be submitted by August 19, 2003.

SEC Foreign Issuers¹ - including both U.S. domestic issuers and foreign private issuers subject to SEC rules—and Designated Foreign Issuers—those that are not subject to SEC rules but are subject to the securities rules of Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, The Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland or the United Kingdom—may be exempted from Canadian continuous disclosure obligations if certain conditions are met. It is also proposed that Eligible Foreign Reporting Issuers be permitted to file financial statements prepared under non-Canadian GAAP. This later proposal, contained in the original draft of NI71-102, is now found in Proposed National Instrument 52-107 – Acceptable Accounting Principles, Auditing Standards and Reporting Currency.

Non-Canadian issuers that are reporting issuers in Canada should review the proposed rules and their current Canadian continuous disclosure practices. In particular, non-Canadian issuers that operate under a specific exemption order previously granted to them by a Canadian securities regulator should seek advice to determine whether the exemption order will have to be updated or whether it will cease to be necessary if the proposed rule is adopted.

The exemptions discussed below are contingent on the issuer complying with the securities regulatory requirements in its home jurisdiction and the rules of the stock exchange(s) on which its securities are listed. The documents filed with the SEC or foreign securities regulators must also be filed in Canada and any documents required by home country law to be sent to securityholders must be sent to securityholders resident in Canada in the same manner as they are sent to non-Canadian securityholders. Documents filed in Canada must be written in either English or French and must be accompanied by a certificate of translation if the document was filed in the foreign jurisdiction in a language other than English or French.

In the case of Designated Foreign Issuers, at least annually in a document that is sent to securityholders, the issuer must disclose the fact that it is a Designated Foreign Issuer and subject to foreign regulatory requirements. The name of the foreign securities regulator must also be disclosed.

SEC Foreign Issuers and Designated Foreign Issuers are exempt from the Canadian continuous disclosure requirements to (a) file material change reports (although news releases must still be issued in Canada upon the occurrence of a material change); (b) prepare, deliver and file interim financial statements, annual financial statements and auditor’s report, annual reports, annual information forms (other than AIFs prepared to make an issuer eligible to file short form or shelf prospectuses), business acquisition reports, and MD&A; and (c) disclose outstanding share data, information about restricted shares, a change in year-end and a change in auditor.² In addition, these issuers are exempt from the minority shareholder approval requirements relating to restricted shares.

Insiders of SEC Foreign Issuers and Designated Foreign Issuers are exempt from filing insider reports, unless the issuer has taken steps to permit the electronic filing of insider reports under Canada’s System for Electronic Data on Insiders (SEDI).

The Multijurisdictional Disclosure System (MJDS), which permits certain U.S. issuers to satisfy specified Canadian continuous disclosure requirements by using disclosure prepared in accordance with SEC requirements, continues to apply. Where the exemptions in the MJDS differ from those in NI71- 102, issuers may rely on either exemption. For example, an insider of an SEC Foreign Issuer that is a SEDI issuer is not entitled to an exemption from the insider reporting obligations under NI71-102. However, insiders of U.S. issuers (as defined under the MJDS rule) will be exempt from filing insider reports. In addition, an SEC Foreign Issuer may rely on any exemption granted in NI51-102 to SEC Issuers (as defined in that rule).

Generally, Canadian early warning rules require that a news release be issued and that an early warning report be filed when a person acquires more than 10% of a reporting issuer’s securities. The proposed rule exempts from these early warning requirements the acquisition of securities of an SEC Foreign Issuer that has a class of shares registered under section 12 of the 1934 Act or a Designated Foreign Issuer if the comparable requirements of the SEC or the designated foreign jurisdiction are complied with, and if copies of the reports that are filed with the SEC or foreign securities regulators are also filed in Canada.

SEC Foreign Issuers and Designated Foreign Issuers will satisfy their obligations under Canadian securities laws with respect to information circulars, proxies and proxy solicitation by complying with the comparable requirements of the SEC or the securities regulatory authority in the relevant designated foreign jurisdiction. Third parties who solicit proxies from securityholders of SEC Foreign Issuers and Designated Foreign Issuers are also exempt from the Canadian requirements provided that the comparable SEC or foreign requirements are met.

SEC Foreign Issuers and Designated Foreign Issuers are also exempt from the Canadian requirements of communication with, delivery of securityholder materials to, and conferral of voting rights on the non-registered securityholders. The exemption is available only if the issuer complies with the comparable requirements of the SEC or designated foreign jurisdiction and pays any fees required to be paid to Canadian depositories or intermediaries under National Instrument 54-101 – Communication With Beneficial Owners of Securities of a Reporting Issuer . (NI54-101 is the rule that requires Canadian public companies to follow procedures to ensure that non-registered, beneficial owners of securities receive proxy and other meeting material and are able to vote the securities they own.)

The proposed rule will exempt SEC Foreign Issuers and Designated Foreign Issuers from the Canadian securities law requirements for business combinations and related party transactions (including the Ontario and Quebec requirements for a valuation and minority approval). In the case of SEC Foreign Issuers, the exemption applies only if less than 20% of their equity securities are held in Canada.

All Eligible Foreign Reporting Issuers will be permitted to prepare their annual, interim and pro forma financial statements under non-Canadian GAAP. Non-Canadian GAAP financial statements may be used to satisfy continuous disclosure obligations, be included in prospectuses filed with the Canadian securities regulatory authorities or otherwise filed in Canada.

SEC Foreign Issuers will be permitted to file financial statements prepared under U.S. GAAP, with no reconciliation to Canadian GAAP required. SEC Foreign Issuers that are "foreign private issuers" under SEC rules, and that have less than 10% of their equity securities held by Canadian residents, may file financial statements prepared in accordance with the accounting principles that meet the disclosure requirements for SEC filings by foreign private issuers if they include a reconciliation to U.S. GAAP as is required by SEC rules. Designated Foreign Issuers may file statements prepared using the accounting principles of their home jurisdiction, without reconciliation to Canadian GAAP. All Eligible Foreign Reporting Issuers (including SEC Foreign Issuers and Designated Foreign Issuers) may use International Accounting Standards, without reconciliation to Canadian GAAP. Alternatively, they may use foreign accounting principles (including U.S. GAAP) that cover substantially the same core subject matter as Canadian GAAP, but a reconciliation to Canadian GAAP would then be required.

Financial statements may be audited in accordance with U.S. GAAS or International Standards on Auditing. If International Standards on Auditing are used, the auditor’s report must be accompanied by a statement that describes any material differences in the form and content of the auditor’s report as compared to an auditor’s report prepared in accordance with Canadian GAAS. Designated Foreign Issuers may also have their financial statements audited under home country auditing standards.

"Foreign Transition Issuer" is the term the proposed rule uses to describe a "Category E reporting issuer" under the Ontario Securities Commission’s Policy Statement No. 7.1, one of the instruments that will be rescinded when the proposed rule is adopted. A Foreign Transition Issuer is an issuer that is incorporated outside of Canada, is neither an SEC Foreign Issuer nor a Designated Foreign Issuer, and became a reporting issuer only because the issuer listed its securities on the Toronto Stock Exchange (TSX) (and not, for example, because the issuer offered securities in Canada by prospectus), and has few shareholders in Canada. The proposed rule permits annual and interim financial statements to be prepared in compliance with the laws of the foreign jurisdiction. Foreign Transition Issuers are, however, required to file the financial statements that are filed in their home jurisdiction. The proposed rule also exempts Foreign Transition Issuers from Canadian requirements to prepare and file business acquisition reports, AIFs and annual and interim MD&A. All these exemptions will end automatically on January 1, 2005.

This article is a general discussion of certain legal and related developments and should not be relied upon as legal advice.