CSA decide not to reduce early warning threshold to 5%

October 10, 2014

The Canadian Securities Administrators today announced that they will not be moving forward with plans to reduce the early warning reporting threshold from 10% to 5% as previously proposed.

As we discussed in March 2013, the CSA last year proposed amendments to the reporting threshold, triggers and related disclosure requirements under Canada’s early warning reporting regime intended to “provide greater transparency about significant holdings of issuers’ securities”. While the most significant change under the 2013 proposal would have been to decrease the reporting threshold from 10% to 5%, the CSA also proposed a number of other significant reforms, including greater transparency through reporting of “equity equivalent derivatives” in order to address issues such as “hidden ownership” and “empty voting”.

In today's release, the CSA note that a majority of the over 70 comment letters received in response to the 2013 proposals expressed concern with the potential unintended consequences resulting from some of the proposed amendments to the early warning regime. In what is sure to be a welcome development for most market participants, the CSA have decided against moving forward with the proposed reduction of the reporting threshold to 5% or the proposed inclusion of equity equivalent derivatives in the determination of the early warning threshold. An equity equivalent derivative would have been defined as a derivative that was referenced to or derived from a voting or equity security of an issuer and that provided the holder, directly or indirectly, with an economic interest that was substantially equivalent to the economic interest associated with beneficial ownership of the security (the examples provided included cash-settled total return swaps and contracts for difference).

Today’s announcement is a status update only with the details to follow when final amendments are published, which is expected to be in Q2 2015.

According to today’s announcement, the final amendments will incorporate a number of other previously proposed reforms, including requiring disclosure of 2% decreases in ownership as well as when ownership falls below the reporting threshold (i.e. “exit” reports). Another significant aspect of the 2013 proposal included proposed amendments to address securities lending arrangements. These will also be dealt with in the final amendments by exempting lenders from disclosure requirements if they lend shares pursuant to a “specified securities lending arrangement” and exempting borrowers from disclosure requirements in certain circumstances. As set out in the 2013 proposal, a “specified securities lending arrangement” required, among other things, that the lender have an unrestricted ability to recall the securities before a meeting of securityholders and/or to instruct the borrower how to vote the securities.

Proposals to expand the circumstances under which eligible institutional investors (EIIs) will be disqualified from alternative monthly reporting (AMR) will also go forward. In the 2013 proposal, the CSA had proposed to make the AMR regime unavailable where an EII solicits, or intends to solicit, proxies from securityholders of a reporting issuer on matters relating to the election of directors of the reporting issuer or a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of the reporting issuer. In today’s announcement, the CSA have indicated that they will provide further clarification on the circumstances where such exclusion would apply.

The final amendments will also clarify the application of early warning requirements to certain derivatives as well as enhance disclosure requirements and clarify timeframes for filing.

For more information, see CSA Notice 62-307.

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