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27 February 2007
The Canadian Securities Administrators (CSA) recently enacted numerous changes to the continuous disclosure requirements applicable to reporting issuers in Canada.
The definition of 'venture issuer' for the purpose of continuous disclosure requirements has been expanded to include issuers with securities listed on the Alternative Investment Market of the London Stock Exchange and the Off Exchange. The CSA created the 'venture issuer' designation in order to identify smaller reporting issuers, with a view to imposing a reduced continuous disclosure regulatory burden on those issuers. For example, venture issuers are exempt from filing an annual information form and have more time in which to file their financial statements.
Equity investee disclosure
For 2007 issuers must provide summarized information in their management discussion and analysis (MD&A) relating to significant equity investees (unless this information is included in the issuer's filed interim and annual financial statements). A 'significant equity investee' is a business in which the issuer has invested that is considered a significant acquisition using the financial statements of the equity investee and the issuer as at the issuer's financial year-end. Issuers are required to disclose summarized information as to:
The goal of this amendment is to require additional information from an issuer that has invested in a significant business and has accounted for it using the equity method.
Certification of internal controls
For 2007 MD&As must include certification from the chief executive officer or chief financial officer that he or she designed, or caused to be designed under his or her supervision, internal controls over financial reporting. The disclosure must include any weaknesses identified by the chief executive officer or chief financial officer in the design of the internal controls, any associated risks and plans to address weaknesses (or, if applicable, the reasons why no plans exist). Issuers must also disclose any changes to internal controls that occurred during the period covered by the MD&A. Exemptions from this requirement are available to issuers that comply with the US Federal Securities Law or other qualifying foreign issuers. In Canada, there is no requirement for an external audit of internal controls. By imposing a strong management reporting requirement, the CSA hopes to avoid the pitfalls of the external audit while creating a cost-effective method of improving the quality and reliability of financial statements.
Exemption for reverse takeovers
In 2007 the business acquisition report will no longer be required for reverse takeovers. Instead, issuers must provide disclosure on these transactions in their information circulars or material change reports.
The CSA has also streamlined the business acquisition report filing requirements. It now permits issuers to calculate the significance of an acquisition based on the issuer's audited financial statements for the financial year immediately preceding the issuer's most recently completed financial year if the issuer has not been required to file, and has not filed, audited financial statements for its most recently completed financial year. The CSA reduced the filing requirements of historical financial information in certain circumstances and eliminated the requirement that interim financial statements of an acquired business be reviewed (subject to incorporating them later by reference into a prospectus, at which time they would have to meet prospectus disclosure requirements).
Incorporation by reference
The business acquisition report may now incorporate other disclosure documents by reference. Furthermore, the business acquisition report need no longer be incorporated by reference into the issuer's annual information form.
Penalties and sanctions
For 2007 issuers must disclose in their information circulars securities law-related penalties imposed by a court or regulatory body on a proposed director. Issuers must also disclose any other penalty or sanction that would be considered important to a reasonable security holder in deciding whether to vote for a proposed director. These requirements are designed to mirror the disclosure requirements for annual information forms.
The CSA has limited the instances in which information circulars must include disclosure of executive compensation and other related information to only those information circulars that are disseminated for an annual general meeting or a meeting at which directors will be elected or where security holders will vote on matters relating to executive compensation. This limits executive compensation disclosure requirements to instances that are directly relevant to matters of executive compensation. However, the scope of the disclosure has been expanded to require disclosure relating to any person acting as an executive officer, including any external management company or any individual employed by an external management company to act as an executive officer for the issuer. This ensures that security holders are provided with full disclosure with respect to all individuals who are being compensated for acting as an executive officer, regardless of whether the issuer employs them directly.
The 2007 amendments clarify the level of disclosure required for certain significant acquisitions and corporate restructuring transactions. An issuer entering into a significant transaction must provide prospectus-level disclosure for the following entities:
These amendments ensure that security holders are provided with full disclosure relating to all entities in which they will hold an interest following a significant transaction.
For 2007 issuers conducting reverse takeovers should be aware that unless the reverse takeover acquirer has filed all relevant financial statements, the reporting issuer completing the reverse takeover must now file: (i) financial statements for all annual and interim periods ending before the date of the reverse takeover and after the date of the financial statements included in previous filings prepared in connection with the transaction; or (ii) financial statements before the date of the reverse takeover if no information circular or similar disclosure document was filed, or if any such disclosure document did not include financial statements for the reverse takeover acquirer that would be required to be included in a prospectus. The filing requirements relating to financial statements following a reverse takeover have been changed to ensure that there is no gap in the financial record after the reverse takeover is complete. Furthermore, issuers are not required to provide comparative financial information for the reverse takeover acquirer for periods ending before the date of the reverse takeover if it would be impractical to do so, provided that the information that is available is presented and the notes to the interim financial statements expressly state that prior-period information has not been prepared.
Issuers now have two choices when delivering financial information to security holders: (i) to deliver annual financial statements to all security holders within 140 days of their financial year-end; or (ii) to send a request form to their security holders to obtain instructions regarding the delivery of financial statements and MD&A and provide copies of the documents to those security holders that respond. This amendment clears up previous ambiguities, ensures that security holders receive financial information promptly and provides issuers with a clear choice when delivering financial information to security holders.
The CSA has established a program that allows issuers to file financial statements in eXtensible Business Reporting Language (XBRL) format. XBRL is a business reporting language that organizations can use to share financial information and investors can use to analyze data. XBRL is a relatively new format and is emerging as an international standard for communicating business and financial data. The XBRL format filing does not replace the official portable document format filing required by securities regulators, but handles additional information that is made available to the public through the System for Electronic Document Analysis and Retrieval website.
For further information on this topic please contact Paul Goldman or David Redford at Goodmans LLP by telephone (+1 604 682 7737) or by fax (+1 604 682 7131) or by email (firstname.lastname@example.org or email@example.com).
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Paul L Goldman