Securities Law Bulletin
January 2009

 

CSA ISSUES STAFF NOTICE 51-328 CONTINUOUS DISCLOSURE CONSIDERATIONS RELATED TO CURRENT ECONOMIC CONDITIONS

On January 8, 2009, the Canadian Securities Administrators ("CSA") issued Staff Notice 51-328 "Continuous Disclosure Considerations Related to Current Economic Conditions" (the "Staff Notice"). Its stated purpose is to help issuers highlight some specific areas for which disclosure will likely be important to help investors understand the risks and circumstances facing issuers. The CSA stated that "current economic conditions present more than normal challenges for many issuers in preparing their financial statements and Management's Discussion and Analysis ("MD&A")".

The Notice includes a letter to all reporting issuers. The Staff Notice can be found at http://www.bcsc.bc.ca/policy.aspx?id=7500&cat=5%20-%20Ongoing%20Requirements%20for%20Issuers%20and%20Insiders.

A detailed discussion of the specific areas for disclosure can be found in Appendix A of the Staff Notice which is in the form of an illustrative continuous disclosure letter to the issuer. As part of the CSA's continuous disclosure review program, they examine disclosure and financial reporting and provide specific comment letters for individual issuers selected for review (refer to CSA Staff Notice 51-312 Harmonized Continuous Disclosure Review Program).

Overview

The Staff Notice addresses the following topics:

Although the Staff Notice discusses topics likely to affect many issuers, it does not provide an exhaustive list of all requirements. Each reporting issuer should consider the accounting and disclosure issues specific to its circumstances in the current economic environment.

If you have questions about your continuous disclosure obligations, contact any member of Clark Wilson LLP's Corporate Finance / Securities Group.

 

SEC AMENDS CROSS-BORDER TRANSACTION RULES

The Securities and Exchange Commission ("SEC") recently adopted amendments to the rules governing certain cross-border business combination transactions and rights offerings. These "cross-border exemptions" apply where the target company in a business combination or an issuer conducting a rights offering is a "foreign private issuer", as defined in Exchange Act Rule 3b-4(c). These rule changes are effective as of December 8, 2008.

The rule amendments are intended to encourage issuers and offerors to include U.S. holders in business combinations and rights offerings on the same terms as all other target security holders. For purposes of the cross-border exemptions, a "U.S. holder" is any security holder resident in the United States. The amendments address practical problems that have limited the ability of offerors and issuers to rely on the cross-border exemptions. They also alleviate some of the burdens on issuers and offerors who must comply with more than one regulatory system in cross-border transactions.

Several of the rule amendments also apply to tender offers for U.S. companies. The SEC extended these rule revisions to U.S. tender offers on the basis that they provide increased flexibility for bidders in those offers, without compromising SEC investor protection goals.

The SEC also amended the beneficial ownership reporting rules for certain foreign institutions. The revisions allow them to file on the short-form Schedule 13G under the same circumstances as their U.S. counterparts. The changes to the beneficial ownership reporting rules permit these foreign institutions to file shorter form beneficial ownership reports when their domestic counterparts could do so under existing rules, so long as the foreign institutions can make certifications intended to ensure that more relaxed reporting rules are appropriate.

Revised Eligibility Test for Cross-Border Exemptions

To determine eligibility to rely on the cross-border exemptions, an issuer or offeror must determine the percentage of target securities held by U.S. persons. Under the required "look through" analysis, issuers and offerors must identify U.S. beneficial owners of the subject securities by looking through record owners in specified jurisdictions that hold in nominee form.

The revised rules provide greater flexibility with respect to the calculation of U.S. ownership. Offerors and issuers may calculate U.S. ownership as of a range of dates at an earlier period in the offer process, with the announcement of the transaction as the reference point. An issuer or offeror may calculate U.S. ownership as of a date no more than 60 days before and no more than 30 days after the public announcement of a business combination or after the record date for a rights offering. Where an acquiror is unable to accomplish the look through analysis within this date range, it may calculate U.S. ownership as of a date no more than 120 days before public announcement. The issuer or offeror no longer must exclude large block holders of the subject securities when determining U.S. ownership, a change which will likely make the cross-border exemptions more widely available.

In addition, the revisions expand the availability of an alternate test to determine U.S. ownership, based in part on a comparison of the average daily trading volumes of the securities in the United States and abroad. Offerors may use the alternate test for tender offers that are not made pursuant to an agreement with the target company. Issuers and offerors may also use the alternate test when they are unable to conduct the required look through analysis to determine U.S. beneficial ownership of the target securities.

Changes to the "Tier I" and "Tier II" Cross-border Exemptions

The cross-border exemptions are structured as a two-tiered system based on the percentage of target securities beneficially held by U.S. holders. The Tier I exemptions and Securities Act Rules 801and 802 are available where U.S. holders beneficially own no more than 10 percent of the target securities and where other eligibility criteria are met. Where U.S. holders own no more than 10 percent of the subject securities, the Tier I exemptions provide broad relief from U.S. tender offer and going private rules. Securities Act Rules 801 and 802 exempt an issuer in a rights offering or an offeror in a business combination transaction from the registration requirements of Section 5 of the Securities Act of 1933.

The changes to the Tier I exemptions expand the applicability of the exemption from Exchange Act Rule 13e-3, the “going private” rule. Under the revisions, the availability of this exemption no longer depends on the transaction structure. The revised exemption applies to a broader range of cross-border transactions, such as schemes of arrangements, cash mergers, or compulsory acquisitions for cash. In order to qualify for the expanded exemption from Rule 13e-3, a party must meet all the requirements for reliance on Rule 802 or Tier I.

The Tier II cross-border exemptions are exemptions from U.S. tender offer rules. They may be available when U.S. holders beneficially own no more than 40 percent of the target securities. These exemptions provide targeted relief to address recurring conflicts between U.S. and foreign regulatory requirements applicable in cross-border tender offers.

The revisions expand the scope of the Tier II exemptions by making them available to tender offers that are not subject to Regulation 14D or Exchange Act Rule 13e-4. In addition, the revisions broaden the relief provided in the Tier II exemptions in various ways.

Changes to Beneficial Ownership Reporting Rule for Certain Foreign Institutions

The revisions permit some foreign institutions to report beneficial ownership of securities acquired and held in the ordinary course of business on a short-form Schedule 13G instead of the longer Schedule 13D. These rule amendments codify the current practice of providing exemptive relief to permit these foreign institutions to file on Schedule 13G.

Only some foreign institutions may file on Schedule 13G under the revised rules. The foreign institution must be the foreign equivalent of the kinds of U.S. institutions listed in Exchange Act Rule 13d-1(b)(1)(ii). In addition, the foreign institution may file on Schedule 13G only under the same circumstances as its U.S. counterpart, such as when the securities it is reporting have been acquired in the ordinary course of its business. The foreign institution must include a certification with the Schedule 13G representing that it is subject to a substantially comparable regulatory scheme as its U.S. counterpart, and that it will provide the information that would have been required in a Schedule 13D filing to the SEC staff upon request.

If you have questions about a cross-border transaction, contact any one of Clark Wilson LLP's Corporate Finance / Securities Group.

 

SEC UPDATES FINANCIAL REPORTING MANUAL AVAILABLE ONLINE

The Securities and Exchange Commission ("SEC") has now posted on its website an updated version of the Accounting Disclosure Rules and Practices Manual, now renamed the Financial Reporting Manual. The Manual was last updated in 2000. The Manual is posted on the SEC's website, but it is theoretically "For Division of Corporation Finance Staff Use Only" and includes a disclaimer about its informal nature as guidance. However, SEC staff in review of issuer filings does refer to the Manual and following its guidance would give an issuer an excellent argument that it is in compliance with SEC accounting and financial disclosure rules.

The Financial Reporting Manual can be found online at http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml.

Topics covered include:

The Manual has always been a great resource for understanding SEC positions on filing and financial statement matters, and we encourage issuers to refer to it regularly regarding accounting and disclosure issues.

If you have questions about use of the updated Financial Reporting Manual, contact any member of Clark Wilson LLP's Corporate Finance / Securities Group.

 

Securities Law Bulletin to continue with Email Delivery only

At Clark Wilson LLP we are committed to keep our clients and others informed about changes affecting the securities industry, public company requirements and matters of interest to investors, dealers and issuers. For this reason, Clark Wilson's Securities Law Bulletin has been printed and mailed to our clients and others interested in or affected by the securities industries in Canada and the United States for over ten years. Over those years, the number of readers who received our Bulletin via the internet or by email has continued to grow, where it now far exceeds the number who receive the printed version.

To reflect our readership's changing preferences, and in keeping with our Green Policy (www.cwilson.com/green), Clark Wilson will cease to print and mail our Securities Law Bulletin but will send all our readers the email based version. If you do not currently receive the email of our Bulletin, we encourage you to sign up by providing your name and email address to webmaster@cwilson.com. All email addresses are dealt with in accordance with Clark Wilson's privacy policy.

ADD OR REMOVE FROM MAILING LIST

If you would like to be added or removed from this mailing service, please send requests to webmaster@cwilson.com.

© 2009, Clark Wilson LLP. All Rights Reserved.