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20 April 2004
Accelerated Filing Deadlines
Delivery of Materials to Security Holders
Timing of Annual Meetings
Disclosure of Auditor Review of Interim Financial Statements
Management Discussion and Analysis
Annual Information Form
Certification by CEO/CFO
Business Acquisition Reports
Proxy (Meeting) Circulars
Restricted Share Disclosure
Additional Filing Requirements
Canadian securities regulators recently adopted National Instrument 51 102, Continuous Disclosure Obligations,(1) which changes some of the continuous
disclosure obligations of companies that are reporting issuers in Canada and
makes the continuous disclosure obligations uniform in all Canadian provinces
and territories. Compliance dates vary, but many important changes take effect
for interim filings for the first quarter of 2004. The major changes to the
continuous disclosure obligations of Canadian issuers are summarized below.
The new rule does not apply to investment funds, and most issuers of exchangeable
shares and guaranteed securities are exempt from the rule if they meet certain
conditions. Although the continuous disclosure obligations apply to non-Canadian
issuers that are reporting issuers in Canada, many non-Canadian issuers are
exempt from the requirements.
Venture issuers will be subject to less stringent requirements or be exempted
from some requirements altogether. A 'venture issuer' is a reporting issuer
that has no securities listed on the Toronto Stock Exchange (TSX), a US marketplace
or any marketplace outside Canada and the United States.
Highlights of the changes are as follows:
Reporting issuers that are not venture issuers must file their annual audited
financial statements, annual management discussion and analysis and annual information forms within 90 days of the end of their
financial year, and their interim financial statements and interim management discussion and analysis within 45 days of the end of the interim period. These shorter deadlines harmonize
Canadian filing deadlines with US Securities and Exchange Commission (SEC) filing deadlines for US domestic and foreign private issuers (although large US domestic issuers have even shorter deadlines).
The filing deadlines for venture issuers are 120 days for annual audited financial
statements and management discussion and analysis, and 60 days for interim financial statements and management discussion and analysis.
Venture issuers need not file an annual information form. An issuer that files any of these documents
in a foreign jurisdiction before these deadlines must concurrently file the
documents in Canada.
These accelerated filing deadlines apply to filings for financial years, and
interim periods within financial years, that begin on or after January 1 2004.
The filing deadlines lead to a somewhat unusual result in that the first interim
filing made under the new rule may be due before the due date for annual filings
for the previous year. For example, issuers with a calendar year-end must make
their annual filings by May 19 2004 (140 days after the end of the financial
year), but the filing for the first quarter will be due on May 14 2004 (the
44th day after the end of the quarter, as the 45th day falls on a Saturday and
filings can only be made on weekdays).
The other Canadian jurisdictions now join Ontario in permitting issuers to issue an earnings news release, publicly file their financial statements and management discussion and analysis on the System for Electronic Document Analysis and Retrieval (SEDAR), and post them on their company websites without triggering a requirement concurrently to send the documents to security holders.
Sending only to those who request them
The rule that requires issuers to send meeting and other materials to non-registered security holders (National Instrument 54-101) has long permitted non-registered security holders to decline to receive the proxy materials for routine annual meetings. (Proxy materials are the notice of meeting, the proxy circular, and the annual financial statements and management discussion and analysis that are typically included in the issuer's annual report to shareholders.) However, the rules for registered holders lagged behind these rules: registered shareholders could not decline to receive proxy materials for annual meetings, and issuers had to send them the materials whether the shareholders wanted them or not.
The new rule puts registered and non-registered shareholders on an equal footing - at
least with respect to annual financial statements and the annual management discussion and analysis. Issuers
with large numbers of registered shareholders may have an opportunity to reduce
the number of annual reports they send, should they wish to do this. Annual
financial statements and management discussion and analysis for financial years beginning on or after
January 1 2004 (and interim financial statements and management discussion and analysis for interim periods
in those financial years) need only be sent to those security holders (registered
or non-registered) who request them. Annually, the issuer must send each registered
and non-registered security holder, other than debt holders, a form for requesting
copies of these documents.
Once the request forms have been sent, the issuer need post these documents
only to (i) those beneficial owners who have returned their request form indicating
that they wish to receive the materials, and (ii) all registered owners who
have not declined to receive the materials (because corporate statutes generally
require the issuer to send the audited financial statements to all registered
shareholders other than those who have declined, in writing, to receive them).
If the financial statements are requested, the related management discussion and analysis must also be
sent at the same time, and both must be sent by the later of the financial statement
filing deadline or 10 days after receipt of the request.
Issuers should contact their registrar and transfer agent to discuss this new
Documents are permitted to be sent to security holders electronically if consent is obtained. Therefore, issuers should ensure that the request form asks for email addresses and consent to electronic delivery of security holder materials to reduce printing and mailing costs. The consent to electronic delivery that security holders give to their dealers and other intermediaries under National Instrument 54-101 cannot be relied on by issuers that wish to communicate directly with their security holders.
Although the TSX rules (and some corporate statutes, such as the Canada Business
Corporations Act) require that issuers hold their annual meeting of shareholders
within six months of the year-end (June 30 for issuers with a December 31 year-end),
most issuers hold their annual meeting much earlier, often in April or May.
Under the new financial statement filing deadline, the meeting needs to be held
earlier than the six-month outside limit if the annual report (containing the
annual financial statements and annual management discussion and analysis) is to be mailed in the same
envelope as the proxy material for the annual meeting.
The reason for this is as follows. Issuers incorporated under Ontario's Business
Corporations Act can send their proxy material up to 50 days before the meeting.
When added to the requirement that an issuer send the annual financial statements
and MD&A within 90 days of the end of the financial year, the meeting would
have to be held not later than the 140th day after the year-end (ie, May 20
2005 for a company with a December 31 year-end). Companies incorporated under
the Canada Business Corporations Act can send their proxy material up to 60
days before a meeting. Accordingly, the meeting would have to be held no later
than the 150th day after the year-end (ie, May 30 2005 for a company with a
December 31 year-end).
There continues to be no requirement for the auditor to review the interim
financial statements. However, if the auditor was not engaged to review the
interim financial statements, or was engaged to review them but was unable to
complete the review, the interim financial statements must be accompanied by
a notice indicating this fact. If the auditor performed a review and expressed
a reservation in its interim review report, that report must accompany the interim
This disclosure requirement is effective with respect to interim periods in financial years beginning on or after January 1 2004.
The requirement that the audit committee review, and the board approve, the
annual financial statements has been expanded to require the audit committee
to review, and the board to approve, the interim financial statements and both
the annual and the interim management discussion and analysis before they are filed. The board may delegate
the approval function with respect to the interim financial statements and interim
MD&A to the audit committee.
The new approval requirements are effective with respect to financial years,
and interim periods within financial years, beginning on or after January 1
2004. The requirement that the audit committee review the interim financial
statements and interim and annual management discussion and analysis is contained in Multilateral Instrument
52-110, Audit Committees, and will apply on (i) the date of the first annual
meeting of shareholders after July 1 2004, or (ii) July 1 2005, whichever is
The annual management discussion and analysis form has been revised to include additional information that will permit a more informed analysis of the issuer's true financial picture. Enhanced disclosure will be required regarding:
Issuers other than venture issuers must give more detailed disclosure of critical accounting estimates. Issuers will be required to discuss and analyze any changes in accounting policies, both those adopted during the year and those expected to be adopted in the future. Venture issuers that have had no significant revenue from operations in the previous two financial years will be required to disclose a breakdown of the material components of their expenditures.
Outstanding share data must now be disclosed in the management discussion and analysis instead of the annual information form. When the transitional periods in Multilateral Instrument 52 109, Certification of Disclosure in Issuers' Annual and Interim Filings, have expired, two additional
items of disclosure will be required. The CEO's and CFO's conclusions regarding
the effectiveness of the issuer's disclosure controls and procedures must be
disclosed, as must any material changes in internal control over financial reporting.
Issuers have also been instructed to draft the management discussion and analysis in plain language.
The transitional periods in the certification rule begin to expire on March
The interim management discussion and analysis must update the annual management discussion and analysis and include:
Again, when the transitional periods in the certification rule expire, issuers will be required to disclose in the interim management discussion and analysis any material changes in internal control over financial reporting.
The new form of management discussion and analysis must be used for the management discussion and analysis for financial years, and interim periods in those financial years, beginning on or after January 1 2004.
The first management discussion and analysis prepared using the new form - which will be an interim management discussion and analysis - must contain all the information required to be disclosed in an annual management discussion and analysis, for the relevant period. Issuers have, however, been given the option of adopting the new form of annual management discussion and analysis early (ie, for a financial year-end that began before 2004). If this option is chosen, the first interim management discussion and analysis using the new form can simply be an update of the annual management discussion and analysis. Therefore, an issuer with a December 31 year-end has the option of either (i) preparing the 2003 annual management discussion and analysis using the existing form, and preparing a longer-than-usual first quarter 2004 interim management discussion and analysis using the new form for annual management discussion and analysis, but only in respect of the interim period, or (ii) preparing the 2003 annual management discussion and analysis using the new form, and preparing a typical first quarter 2004 interim management discussion and analysis using the new form but that merely updates the 2003 annual management discussion and analysis. The latter option appears to be the prevalent choice among Canadian public companies.
Requirement to update forward-looking information
A requirement has been added to update forward-looking information that was presented in a previous management discussion and analysis if intervening events make that previous disclosure misleading.
The new annual information form requires disclosure of the following matters that are currently
required in a prospectus:
The annual information form must also be written in plain language.
Other enhanced disclosure requirements are to:
The new annual information form must be used for financial years beginning on or after January
1 2004. Disclosure about the audit committee will be required in any annual information form filed
on or after the earlier of (i) the date of the first annual meeting of shareholders
after July 1 2004, and (ii) July 1 2005.
The CEO and CFO of every reporting issuer must certify the filings (the financial statements, management discussion and analysis and, in the case of the annual filings, the annual information form) for each annual or interim period beginning on or after January 1 2004. During a transitional period, bare certificates dealing only with misrepresentations and fair presentation are required.
Material change reports
The disclosure requirements relating to material change reports are identical to the current Ontario rules. However, there is a new form for the material change report, which must be used for reports filed on or after March 30 2004.
A new business acquisition report must be filed within 75 days of the completion
of a significant acquisition (unless a proxy circular concerning the acquisition
has been filed or the issuer is listed on the TSX Venture Exchange and has provided
similar information in a filing statement). The business acquisition report
will include a description of the business acquired, one or two years' historical
financial statements of the business acquired and pro forma financial information.
An acquisition is significant if (i) the assets or income from the continuing
operations of the acquired business (or related businesses) exceed 20% of the
issuer's assets or income from continuing operations, or (ii) the investment
in and advances to the acquired business (or related businesses) exceed 20%
of the assets of the issuer. For venture issuers, the 20% threshold is raised
to 40% and the income test is not applied.
Business acquisition reports are required for all significant acquisitions
made on or after March 30 2004 unless the first legally binding agreement for
the acquisition was entered into before March 30 2004.
Proxy circulars sent on or after June 1 2004 must contain new content and must be written in plain language.
The proxy circular must now include disclosure regarding:
Additional changes have also been made with respect to disclosure of indebtedness
of individual directors, executive officers and senior officers. The threshold
for routine indebtedness has been raised to C$50,000 from C$25,000, and any
indebtedness forgiven during the year must now be disclosed.
The proxy circular must also contain a cross-reference to the sections of the
annual information form that contain the disclosures required by the audit committee rule.
The statement of executive compensation included in the proxy circular has
also changed. The most significant change is in the definition of 'named executive
officer', with the CFO now a named executive officer regardless
of his or her level of compensation. Consequently, disclosure is required in
relation to the CEO and CFO and the three most highly compensated executive
officers (other than the CEO and CFO) earning more than C$150,000 (this is an
increase from the C$100,000 amount in the old form).
The disclosure requirements that have existed under Ontario law for restricted
shares have been adopted nationally. If an issuer has outstanding equity securities
that carry a lesser vote per security than another class of securities, standardized
language must be used to describe the securities. These securities must be referred
to in disclosure documents as non-voting, subordinate voting or restricted voting
securities. Any restrictions on the voting rights and the rights of restricted
shares to participate in any takeover bid made for securities with superior
voting rights must also be described.
In addition, all documents sent to the holders of one class of equity securities
must also be sent to the holders of restricted shares.
For financial years beginning on or after January 1 2004, reporting issuers
are required to file other documents or reports with the securities regulators.
These include the following:
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. NI71 102, Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, exempts from these early warning requirements the acquisition of securities of many non-Canadian companies that are subject to the requirements of the SEC or 15 other designated foreign jurisdictions, if (i) the comparable requirements of the SEC or the designated foreign jurisdiction are complied with, and (ii) copies of the reports that are filed with the SEC or foreign securities regulators are also filed in Canada.
This exemption will be available to Canadian issuers that acquire securities
of these foreign issuers on or after March 30 2004.
For further information on this topic please contact Jennifer L Friesen at Torys LLP by telephone (+1 416 865 0040) or by fax (+1 416 865 7380) or by email (firstname.lastname@example.org). The Torys website can be accessed at www.torys.com.
(1) National Instrument 51-102, Continuous Disclosure Obligations, and copies of the new forms for management discussion and analysis, annual information forms, material change reports, business acquisition reports, proxy circulars and the statement of executive compensation are available on the Ontario Securities Commission's website at www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/rule_20031219_51-102_con-dis.htm.
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