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20 April 2004
Exemptions from Continuous Disclosure Requirements
Proxy Solicitation and Shareholder Communications
Business Combinations and Related-Party Transaction Rules
Accounting Principles and Auditing Standards
Sunset on Exemptions for Foreign Transition Issuers
Canadian securities regulators have adopted a new uniform continuous disclosure regime. National Instrument 71 102, Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, will exempt many non-Canadian issuers from various obligations provided that certain conditions are met.
Two categories of non-Canadian issuers are eligible for relief: (i) US Securities and Exchange Commission (SEC) foreign
issuers(1) (including both US domestic issuers and foreign private issuers subject
to the rules of the SEC) and (ii) designated
foreign issuers, namely those that are subject not to SEC rules but to the securities
laws of Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands,
New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland or the United
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 in light of the new exemptions in National Instrument 71 102.
The exemptions discussed below are contingent on the issuer's compliance with
the securities regulatory requirements of 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 that the home country requires to be sent to security holders
must be sent to those resident in Canada at the same time (or
as soon as practicable thereafter) and in the same manner as they are sent to
non-Canadians. 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.
Designated foreign issuers must disclose at least annually (in a document sent
to security holders) that they are designated foreign issuers and are subject to foreign
regulatory requirements. The name of the foreign securities regulator must also
SEC foreign issuers and designated foreign issuers are exempt from the Canadian
requirements relating to:
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). Paper copies of the insider reports filed in the United States or in a designated foreign jurisdiction are not required to be filed in Canada.
The Multi-jurisdictional Disclosure System (MJDS) continues to apply. The MJDS
permits certain US issuers to satisfy specified Canadian continuous disclosure
requirements by using disclosure prepared in accordance with SEC requirements.
Where the exemptions in the MJDS differ from those in National Instrument 71 102, 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 National Instrument 71 102. However, insiders of US 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 that is available to SEC issuers under
National Instrument 51-102, Continuous Disclosure Obligations.
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 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 US Securities Exchange
Act 1934 or a designated foreign issuer, 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.
SEC foreign issuers and designated foreign issuers will satisfy their obligations under Canadian securities laws with respect to proxy 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 that solicit proxies from security holders 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 to communicate with, deliver security holder materials
to and confer voting rights on the non-registered security holders. The exemption
is available only if the issuer complies with the comparable requirements of
the SEC or designated foreign jurisdiction and pays any required fees to Canadian
depositories or intermediaries under National Instrument 54-101, Communication
with Beneficial Owners of Securities of a Reporting Issuer (this is the rule that requires Canadian public companies to follow specified procedures
to ensure that non-registered, beneficial owners of securities receive proxy
and other meeting materials and are able to vote the securities they own).
SEC foreign issuers and designated foreign issuers are exempt 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 foreign issuers will be permitted to prepare their annual, interim and pro forma financial statements using generally accepted accounting principles (GAAP) other than 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 be otherwise filed in Canada. All foreign issuers may use International Financial Reporting Standards, without reconciliation to Canadian GAAP, or any foreign accounting principles that cover substantially the same core subject matter as Canadian GAAP, but a reconciliation to Canadian GAAP would then be required.
In addition, SEC foreign issuers will be permitted to file financial statements prepared under US GAAP, with no reconciliation to Canadian GAAP. 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 SEC's requirements for foreign private issuers (including any reconciliation to US GAAP that is required by SEC rules). Designated foreign issuers can file statements prepared using the accounting principles of their home jurisdiction, without reconciliation to Canadian GAAP.
Financial statements may be audited in accordance with US generally accepted auditing standards or International Standards on Auditing. If international standards 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 from an auditor's report prepared in accordance with Canadian generally accepted auditing standards. Designated foreign issuers may also have their financial statements audited under home country auditing standards.
Foreign transition issuers ('Category E reporting issuers' under the Ontario Securities Commission's Policy Statement 7.1) are permitted to prepare and file annual financial statements and auditor's reports and interim financial statements in compliance with the laws of their home country. These financial statements must be filed within 140 days of the end of the financial year (or 60 days after the end of the interim period) or the date when they are filed in the home country, whichever is earlier. These issuers are also exempt from Canadian requirements to prepare and file management discussion and analysis, annual information forms and business acquisition reports. These exemptions will end automatically on January 1 2005.(2)
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.
'Foreign reporting issuer' is a reporting issuer, other than an investment fund, that is incorporated or organized under the laws of a foreign jurisdiction, unless (i) outstanding voting securities carrying more than 50% of the votes for the election of directors are owned, directly or indirectly, by residents of Canada; and (ii) any one or more of the following is true:
'Foreign transition issuer' is an issuer:
'SEC foreign issuer' is a foreign reporting issuer that (i) has a class of securities registered under Section 12 of the 1934 act or is required to file reports under section 15(d) of the 1934 act; and (ii) is not registered or required to be registered as an investment company under the US Investment Company Act 1940.
(2) A copy of National Instrument 71-102, Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, and the companion policy, can be obtained on the Ontario Securities Commission website at
A copy of National Instrument 52-107, Acceptable Accounting Principles, Auditing Standards and Reporting Currency, and the companion policy, can be obtained on the Ontario Securities Commission website at www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/rule_20040116_52-107_ni.htm.
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