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Case Bulletin: R v Karigar, 2014 ONSC 3093

For the first time in Canada, an individual has been sentenced to jail time for bribing a foreign public official. The three-year penitentiary sentence was handed down by the Ontario Court of Justice under the Corruption of Foreign Public Officials Act, SC 1998, c 34 (the “CFPOA”).

The imposition of a jail sentence constitutes a major milestone in Canada’s drive towards tackling bribery in international business ventures, and should serve as a stark reminder to all Canadian companies active internationally of the critical importance of having in place a strong anti-corruption compliance program.

In 2013, Nazir Karigar (“Mr. Karigar”) was convicted of breaching section 3(1) of the CFPO for conspiring with employees and associates of Cryptometrics Canada Limited to bribe officials of Air India, a state-owned Indian airline, and an Indian Cabinet Minister in order to secure a business contract. On May 23, 2014, Mr. Karigar was sentenced to a three-year term of imprisonment.

Following recent amendments to the CFPOA, the maximum sentence for the offence committed under the CFPOA is now 14 years. However, at the time Mr. Karigar committed the CFPOA offence, the maximum sentence was only five years. The sentence was therefore towards the higher end of the applicable range.

The Court found that the aggravating factors in sentencing included: (i) the sophisticated nature of the bribery scheme; (ii) attempts at concealment by the creation of a fake competitive bid to create an illusion of a competitive bidding process; (iii) Mr. Karigar’s “sense of entitlement” which led to him openly tell a Canadian trade commissioner of the bribes; and (iv) Mr. Karigar’s deep personal involvement in the scheme.

The mitigating factors included: (i) Mr. Karigar’s cooperation in the prosecution, which avoided a lengthy trial; (ii) his prior clean criminal record; and, perhaps most interestingly, (iii) that the bribery scheme was a “complete failure”. At first blush, the success or failure of a bribery scheme might seem an odd factor to take into account when fixing a sentence; however, the Court noted that because of the failure of the scheme, the harm caused was relatively limited.

The Court’s closing remarks left no room for doubt about the serious nature of CFPOA violations:

“[a]ny person who proposes to enter into a sophisticated scheme to bribe foreign public officials to promote the commercial or other interests of a Canadian business abroad must appreciate that they will face a significant sentence of incarceration in a federal penitentiary”.

Canadian Courts are clearly prepared to play their part in delivering the message that Canada is serious about the enforcement of its anti-corruption laws. For Canadian companies doing business abroad the warning is clear – they must take business ethics seriously and ensure they have clear policies and vigorous compliance programs in place.

Case Bulletin: R v Karigar, 2014 ONSC 3093

Current Permitting Processes and Challenges for New Mines and Re-opening Old Mines

Current Permitting Processes and Challenges for New Mines and Re-opening Old Mines

Avoiding Deal Killers – Understanding Technical Report Triggers Under NI 43-101

Avoiding Deal Killers – Understanding Technical Report Triggers Under NI 43-101

2nd Coaltrans Conference – West Coast

2nd Coaltrans West Coast, Four Seasons Hotel, Vancouver, Canada, 7-8 May 2014

Dentons is proud to be a Silver Sponsor in support of trade between North America’s coal producers and Asia’s buyers at the 2nd Coaltrans West Coast conference in Vancouver.

Coaltrans will harness its international network of contacts to bring together regional coal producers and service providers with existing and potential coal buyers and investors.

Please join us on Day 1 during Session 2 for a presentation by Leanne Krawchuk on Options for Balancing the Deal Risks in Your Coal Supply Agreements beginning at 10:50 am. Visit members of the Dentons Canada mining team, Leanne Krawchuk, Wei Shao and Carrie Schroeder at the Dentons booth during the exhibition.

We look forward to getting together with you for two days of business matching, knowledge sharing and deal-making!

2nd Coaltrans Conference – West Coast

Mining Seminar

Please join us on Thursday, May 15th as we discuss:

Dealing with First Nations – IBAs and other relationship building tools
Mai Rempel, Counsel

Avoiding Deal Killers – Understanding Technical Report Triggers Under NI 43-101
Alan Hutchison, Partner

Event Schedule

7:30 a.m. Registration and breakfast
8:00 a.m. Presentations
9:15 a.m. Conclusion

Location 

Terminal City Club
Metropolitan Room
837 West Hastings Street
Vancouver, B.C.

To RSVP

RSVP to Kelly Tsang, Specialist, Marketing and Events at kelly.tsang@dentons.com.

This session is complimentary but seating is limited. Please RSVP by May 9, 2014. 

Mining Seminar

BC Environmental Assessment Office Fees

The Province of British Columbia approved an Order in Council dated April 11, 2014 to establish environmental assessment fees in British Columbia for the review of environmental assessment applications, orders and enforcement fees.

The fee structure became effective on April 14, 2014.

There are three categories of fees: 1. pre-certificate fees; 2. transitional assessment fees; and 3. post-certificate fees.

Pre-certificate Fees

There is an exemption fee of $10,000 payable when a party seeks an exemption from the requirement for an environmental assessment certificate. The first installment for an assessment fee ranges from “simple” at $25,000 to “typical” at $75,000 and the assessment fee for the second installment ranges from $25,000 to $75,000.

Transitional Assessment Fees

Transitional assessment fees range from “simple” at $37,500 to “complex” at $112,500.

Post-certificate Fees

Post certificate fees for an extension range from $2,000 to $10,000 and an amendment fee ranges from $2,000 to $50,000. In addition, there are inspection fees imposed and the timelines for the payment of the fees are as set out in the regulations. There are a number of factors that are used to determine the fees and these are set out in the materials available on the government website at http://www.eao.gov.bc.ca/fees.html.

BC Environmental Assessment Office Fees

Mandatory reporting standards for payments by extractive industry companies

The Government of Canada recently issued a Consultation Paper regarding proposed mandatory reporting standards (the proposed standards) for payments by extractive industry companies to governments, both domestic and foreign, and including Aboriginal entities. [1] The proposed standards are Canada’s implementation of a commitment made at the 2013 G8 Summit [2] and reflect similar initiatives in several other countries, including the US through the Dodd Frank Act and the European Union (EU) through its Transparency and Accounting Directives. [3]

The proposed standards will apply to companies operating or headquartered in Canada that are involved in the commercial development of oil, natural gas, and minerals, whether in Canada or abroad. Companies involved in transportation within Canada are, apparently, not subject to the proposed standards, although the consultation paper is unclear as to how cross-border transportation undertakings are to be dealt with.

The proposed standards will apply not only to publicly listed companies, but also to medium and large private extractive companies operating in Canada. Medium and large private companies are determined as those which meet two of the three following criteria: (1) CA$20 million in assets; (2) CA$40 million in net turnover; and (3) 250 employees.

With respect to joint ownership or subsidiaries, extractive companies operating in Canada will be required to report if they have a controlling interest in any project in Canada or abroad. The proposed standards will adopt the International Financial Reporting Standards (IFRS) definitions of “control”, “joint venture”, and “joint operation”.

Affected companies would have to publish annual reports of payments of $100,000 and over, either cumulatively in one year or on a one-time basis. The reports would have to be made on a project-level basis, and include payments made to all levels of government, both domestically and abroad. Under the proposed standards, the following categories of payments would have to be reported:

  • Taxes levied on income, production or profits of companies, excluding consumption taxes;
  • Royalties;
  • Fees, including license fees, rental fees, entry fees and “other considerations for licenses and/or concessions”;
  • Production entitlements (including payments made in-kind);
  • Bonuses, such as signature, discovery and production bonuses;
  • Dividends paid in lieu of production entitlements or royalties (excluding dividends paid to governments as ordinary shareholders; and
  • Payments for infrastructure improvements (including roads, electricity, etc.).

Consistent with the U.S. and the EU, it is proposed that companies would not be required to report social payments such as for community centres, schools, hockey teams, arenas, capacity development, training and the like.

It is proposed that the disclosures would be posted on company websites, and would be available for free and unrestricted use by the public.

Payments to Aboriginal entities

The proposed standards would also extend to payments made to Canadian Aboriginal entities, including in relation to Impacts and Benefits Agreements. Payments to the following types of Aboriginal entities would be subject to mandatory reporting:

  • Aboriginal organizations or groups with law-making power and/or governance mechanisms related to the extractive sector;
  • provincially or federally incorporated Aboriginal organizations that undertake activities in the extractive sector on behalf of their beneficiaries; and,
  • Aboriginal organizations or groups that are empowered to negotiate legally binding agreements on behalf of their members (this would include Impacts and Benefits Agreements).

Third party verification

Under the proposed standards, reports would have to be assured or verified by a third party, according to recognised accounting standards.

Consultation Period

The Government of Canada has indicated its preference for these rules to be introduced via provincial securities regulators. However, if the provinces do not take the necessary steps in the near future, the Government of Canada has stated its commitment to introducing federal standards, and will begin work over the summer of 2014 to implement legislation by April 2015.

The Government of Canada is inviting feedback from interested parties prior to May 9, 2014. The consultation process builds on government dialogue with various groups that has occurred over the past year. The Resource Revenue Transparency Working Group (the Working Group), comprising the Mining Association of Canada, the Prospectors and Developers Association of Canada, Publish What You Pay – Canada, and the Revenue Watch Institute, issued recommendations in a paper published earlier this year.4 The Working Group’s recommendations include mandatory disclosure of the same information as contained in the proposed standards, but also includes transportation and terminal operations fees. The Working Group has also recommended that such disclosure be imposed through the provincial securities regulators.

Conclusion

In addition to placing an obligation on extractive sector companies to implement or adapt systems and processes to track and record relevant payments to governments, the proposed rules should be assessed in the context of business ethics and anti-corruption compliance policies and controls. Given the short lead-in time for introduction of the rules, companies operating in Canada should start the process of evaluating and implementing the steps they need to take, to avoid being unprepared for the changes to the Canadian regime. For companies with an international presence, compliance efforts in Canada will need to be addressed as part of wider efforts to comply with similar regimes to be introduced in the EU, and proposed for the US.

At Dentons Canada, we are working closely with our global colleagues to monitor developments and provide clients with practical solutions and market-leading compliance strategies.

 

[1] Natural Resources Canada, Establishing Mandatory Reporting Standards for the Extractive Sector – Consultation Paper: Spring 2014, online: Natural Resources Canada http://www.nrcan.gc.ca/publications/15753 [Consultation Paper].

[2] See item 5 of the G8 Lough Erne Declaration, online: http://www.g8.utoronto.ca/summit/2013lougherne/lough-erne-declaration.html.

[3] Consultation Paper, supra.

[4] The Resource Revenue Transparency Working Group, Recommendations on Mandatory Disclosure of Payments from Canadian Mining Companies to Governments, online: http://www.pdac.ca/pdf-viewer?doc=/docs/default-source/publications—papers-and-presentations/working-group-transparency-recommendations-(2014).pdf.

Mandatory reporting standards for payments by extractive industry companies

British Columbia Aboriginal Mentoring and Training Association (“BCAMTA”)

On February 7, 2014, BCAMTA opened its office in Terrace to guide and support aboriginal people towards gaining employment in the mining and exploration industry. There are a number of mines planned in the Terrace area and the need for employees, particularly those who have local connections would assist the mining sector for employing local people.

Additional information is available here.

British Columbia Aboriginal Mentoring and Training Association (“BCAMTA”)

2014 Federal Budget

The mineral exploration tax credit has been extended for a further one-year period.  This provides a 15% tax credit for flow-through share investors. Other items which would impact the mining industry include amendments to the Hazardous Products Act, an allotment of $40 million for the Norther Economic Development Program over a two-year period and a number of Human Resource initiatives, principally with respect to training.

The government has also proposed changes with respect to corporate transparency, particularly in the area of access to information and corporate beneficial ownership.

2014 Federal Budget

Government appoints new commissioner of the environment and sustainable development

Julie Gelfand has been appointed environment commissioner effective March 24, 2014. She was most recently the Chief Advisor and Rio Tinto Canada and Vice President of Environmental and Social Responsibility at the Rio Tinto Iron Ore Company of Canada. She was also formerly the vice-president of the sustainable development at the Mining Association of Canada.

The commissioner is responsible for determining whether federal government departments are meeting their sustainable development goals and for overseeing the environmental petitions process and reports to Parliament on behalf of the Auditor General.

Additional information is available here.

Government appoints new commissioner of the environment and sustainable development

Environment minister tasked with reviewing the Environmental Assessment Office for effectiveness and efficiency

In a speech to the Association for Mineral Exploration of British Columbia, Premier Christy Clark advised that the environment minister, Mary Polak, has been given the task of reviewing The Environmental Assessment Office to make it as effective and efficient as possible.

The Premier indicated that the current process has become less certain, less predictable and probably not efficient.  Premier Clark insisted that the process would remain rigorous, clear and that it would be timely.

It will be interesting to see the result of the review, particularly in light of the recent Pacific Booker decision in the British Columbia Supreme Court where the Court was ordered the Environmental Assessment Office to reconsider its earlier rejection of Pacific Booker’s application to develop the Morrison deposit in British Columbia.  The government has decided not to appeal that decision.

Environment minister tasked with reviewing the Environmental Assessment Office for effectiveness and efficiency

Funding increase from Yukon government for prospectors

The Yukon government has increased its Yukon mineral exploration program by $630,000 for the coming field season. Premier Darrell Pasloski said in Vancouver in late January at the Mineral Exploration Roundup of the Association for Mineral Exploration for B.C. annual meeting the program provides a portion of the exploration expenditures to assist mineral exploration in the territory and in 2013 some 55 Yukon exploration projects received funding through the program. The program is merit based and provides partial funding for those projects most likely to succeed.

Additional information is available here.

Funding increase from Yukon government for prospectors

Peel River watershed decision results in environment groups suing Yukon government

Nacho Nyak Dun, theTr’ondek Hwech’in (two First Nations), the Canadian Park sand Wilderness Society and the Yukon Conservation Society are suing the Yukon government over the land use plan for the Peel River watershed on the basis that it violates land claims agreements signed by the First Nations.  The government indicated that it would not ban mining in an area the size of the Peel River watershed and allows mining in about 70% of the region, subject to many restrictions on the exploration activities and allows existing mining properties to remain open for exploration and development, subject to the terms of the watershed development plan.

Additional information is available here.

 

Peel River watershed decision results in environment groups suing Yukon government

Lean times may call for lien measures – What you need to know about miners’ liens in Northern Canada

Given the present economic climate of falling metal prices and depressed equity markets for mining companies, many owners and operators of mines are experiencing cash flow and working capital shortages.  As a result, contractors and others who provide services or materials to mines, whether in the exploration, development, or production phases of such projects, are increasingly looking to miners lien legislation to help them increase their leverage when seeking payment of outstanding accounts.

Miners’ liens are unique legal and potentially powerful tools.  Therefore, those involved in working on or operating a mine, as well as lenders, should have some awareness of the impact of the filing of such liens on mineral tenures and on the interests of any secured creditors.

What is a lien?

In general terms, a lien is a charge against property, including mineral tenures, granted to a person who provides services or materials which improve that property as long as there has been compliance with the rules in the applicable lien legislation.  The property acts as security for the debt owing to the lien claimant.  Therefore strict compliance with the statute is required in order to get the benefits of the lien.

Lien legislation is different in each province and territory.  All Canadian jurisdictions have builders lien legislation that applies generally to improvements and services provided to property, but the northern territories have special miners lien legislation.  Where miners lien legislation exists, it is that legislation and not the builders lien legislation that applies to mining projects.

Miners Lien Acts north of 60 – who can lien for what?

In each of the Yukon, Northwest Territories and Nunavut, the applicable Miners Lien Act provides a statutory framework for claiming a miners lien.  There are currently two different lien legislation regimes: one in the Yukon and another in the Northwest Territories and Nunavut.

In the Yukon, a lien is provided to a contractor or subcontractor who provides services or materials to a mine “preparatory to, in connection with, or for an abandonment operation in connection with” the recovery of a mineral.  The lien is provided on “all the estates or interests in the mine or mineral concerned” as well as on the mineral itself “when severed and recovered from the land while it is in the hands of the owner”.  The lien is also on “the interest of the owner in the fixtures, machinery, tools, appliances and other property in or on the mines or mining claim”.  In addition, a person who rents equipment to an owner, contractor or subcontractor has a lien for the rent while the equipment is being used or reasonably required to be available for the purpose of the mine.

In the Northwest Territories and Nunavut, a person who performs any “work or service on or in respect of” or “places or furnishes any material to be used in the mining or working of a placer or quartz mine or mining claim” has a lien for the price of the work, service or material on “the minerals or ore produced from and the estate or interest of the owner in the mine or mining claim”.

How to claim a lien and time limits

Under the Miners Lien Acts, there are two initial steps required to claim a lien: first, file a claim of lien, and second, start an action.

Firstly, a lien claimant must file a claim of lien in the mining recorder’s office against the applicable mineral tenures within the prescribed time period.  This time period differs between the Yukon and the Northwest Territories/Nunavut.  The applicable time periods are summarized in the chart below.  The claim of lien must be supported by an affidavit which verifies the facts in the claim of lien, and the claim of lien must include:

  1. The name and residence of the claimant, owner of the property and of the person for whom the work, service or material was provided;
  2. A description of the work or service performed or material furnished and the time period within which it was performed or furnished;
  3. The amount claimed as due or to become due;
  4. The description of the property to be charged; and
  5. The date of the expiration of the period of credit agreed to by the lien holder for payment for the work, service or material of the lien holder where credit has been given.

Secondly, a lien claimant must start an action within the prescribed time period in the Supreme Court in the Yukon or the Northwest Territories or in the Nunavut Court of Justice in Nunavut. In addition, the lien claimant must file a certificate from the court in the mining recorder’s office against the liened mineral tenures. Again, this time period differs between the Yukon and the Northwest Territories/Nunavut, and the applicable time periods are summarized in the chart below. The certificate notifies anyone searching at the mining recorder’s office that the mineral tenure is subject to a legal proceeding.

Priority

Assuming there has been compliance with the legislation, a miners lien gives a lien claimant limited priority over mortgage and other encumbrance holders.  This priority can be important if the mineral tenures are subject to secured financing the amount of which is equal to or exceeds the value of the mineral tenures.  In such a scenario, the lien claimant may only be able to recover the amounts which have priority over the secured financing.  Therefore it is important for all the players to understand the scope of the priority.

The following chart summarizes the applicable steps and timelines to claim a miners lien in Yukon and in the Northwest Territories/Nunavut, and the priority granted by such liens.

 

  Yukon Northwest Territories and Nunavut
Time for filing a claim of lien Before the expiration of 45 days from the last day on which the work or service or material which is the subject matter of the claim, was performed. Before the expiration of six months from the last day on which the work or service or material, the subject-matter of the claim, was performed or placed or furnished or, where credit has been given, from the time fixed for payment.
Time for commencing an action and filing a certificate. 60 days after deposit of the claim of lien. 90 days after filing of the claim of lien.
Priority A lien takes priority over any mortgages or encumbrances to the extent the lien arises from work, services, or materials provided to the mine for a period of up to 60 days.The purpose of this limitation is to provide certainty to financiers of mines that any miners lien has a limited priority. The commencement of this 60 day period is not expressly stated in the Miner Lien Act. The Yukon Territory Supreme Court has indicated that this period should be calculated from the last day of the provision of work, services or materials, and that accordingly it may be different for each lien claimant. However, this case law is not binding, and therefore this legislation may be interpreted differently by a future court. A lien takes priority over all mortgages and encumbrances registered on or after March 23, 1937, as to 1/2 of the output from the applicable mine or mining claim.This priority typically extends to half of the minerals or ore when recovered from the mine, and, if so ordered by a court, may also extend to half of any net proceeds recovered from the sale of such minerals or ore.

 

Impact of liens

Some of the key impacts of miners’ liens for participants in mining projects are summarized below:

Owners & Operators: Owners and operators should be aware of the impact miners liens can have on their debt covenants and should properly manage relationships with contractors, suppliers and lenders when experiencing cash flow and working capital shortages.

Contractors & Suppliers: Contractors and suppliers should be aware of lien legislation, and take timely action to perfect a lien because failure to comply with the strict requirements in lien legislation can have dire consequences.  Once perfected, a lien can provide leverage to a contractor or supplier in the settlement of outstanding accounts with an owner.

Lenders: Lenders need be aware that a portion of their security may be subordinated to lien claims. Lenders can ensure there are protective covenants in security documents which contemplate the lenders’ recourse in the event a claim of lien is filed.

Lean times may call for lien measures – What you need to know about miners’ liens in Northern Canada

Junior Mining: OSC Issues Guidance On MD&A Disclosure

On February 6, 2014, the Ontario Securities Commission (“OSC”) released OSC Staff Notice 51-722 Report on a Review of Mining Issuers’ Management’s Discussion and Analysis Guidance (the “Report”). The Report summarizes the results of a review conducted by the OSC of the annual and interim Management’s Discussion and Analysis (MD&A) filed by 100 mining companies with market capitalization of less than $100 million (the “Review”) and is designed to serve as a tool to assist small mining companies to navigate regulatory requirements.

The Review focused on: 

  • venture issuer disclosure;
  • discussion of operations;
  • liquidity and capital resources disclosure;
  • disclosure of transactions between related parties;
  • disclosure of risk factors and uncertainties; and
  • reporting on use of financing proceeds. 

It should be noted that at the time of the Report there were approximately 449 Ontario mining issuers for which the OSC was the principal regulator and approximately 374 of these issuers (approximately 83%) had a market capitalization of less than $100 million. Out of the 100 Ontario mining issuers surveyed, 54% had a market capitalization of less than $25 million and 28% had a market capitalization of less than $10 million. In terms of stage of development, the majority of the issuers, 53%, were at the mineral resource stage, 23% were at the exploration stage and 24% were at the development or production stage.

Given the limited funding available for junior mining companies at the exploration and development stage, coupled with fluctuating precious and base metal prices, it should come as no surprise that the Review found the following deficiencies among junior mining companies:

  • venture issuers without significant revenue from operations were found to not provide an adequate breakdown of exploration and evaluation assets or expenditures;
  • exploration stage companies do not adequately discuss or itemize their exploration expenditures;
  • issuers with working capital deficiencies provide only very general discussions or none at all about potential sources of financing and how they plan to continue operations; and
  • issuers do not appropriately disclose the identity of related parties involved in related party transactions.

The Report also included examples of boilerplate language which lacked certain specificities required under Part 5 of National Instrument 51-102 ­Continuous Disclosure Obligations. In many instances issuers simply repeated information previously disclosed in an earlier MD&A without updating the information for the current year. 

The reality on the ground is that many small mining issuers are quickly running out of cash and are trying valiantly to reduce their overhead by withholding salaries or hiring skeleton staff, such as part-time CFOs, just to keep the lights on. Perhaps this is the reason why junior mining companies were found to have cut corners when preparing MD&A disclosure. Nevertheless, tough market conditions should not be used as an excuse to justify disclosure deficiencies.  

As stated by the OSC, the MD&A is a summary written through the eyes of management which allows management to provide insights beyond the numbers found in the financial statements. Therefore, deficiencies in MD&A disclosure prevent investors from making informed investment decisions. While there are some who might grumble that the new disclosure guidance is burdensome and that junior mining issuers cannot be expected to adhere to these guidelines, one must recall that the OSC’s mandate is to not only administer and enforce securities law, but to provide protection to investors and foster fair and efficient capital markets. The guidelines provided by the Report fulfill this mandate.

 A copy of the Report is available on the OSC website at: OSC Staff Notice 51-722 Report on a Review of Mining Issuers’ Management’s Discussion and Analysis Guidance

Junior Mining: OSC Issues Guidance On MD&A Disclosure

ISS adopts updates to Canadian Corporate Governance Policy for 2014

Institutional Shareholder Services (“ISS”) has adopted updates to its Canadian Corporate Governance Policy (“CCGP”), which will take effect for shareholder meetings held on or after February 1, 2014. ISS is a leading and influential proxy advisory firm that provides voting recommendations, primarily to institutional shareholders.

Most changes to the existing policy apply to both TSX and TSX Venture-listed companies, while others apply only to TSX-listed companies.

The changes applicable to both TSX and TSX Venture-listed companies are as follows:

  • Voting on Directors for Egregious Actions.  The CCGP provides that in extraordinary circumstances ISS will recommend a “Withhold” vote for directors individually, committee members or the entire board, due to material failures of governance, stewardship, risk oversight or fiduciary responsibilities, failure to replace management as appropriate or egregious actions related to director(s)’ service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders.  The revised policy provides examples of risk oversight failures and specifically points out that companies must comply with applicable laws and regulations, including anti-bribery laws, and avoid actions that may result in companies being sanctioned or fined by regulators or a court.  Furthermore, the revised policy specifically provides that any amount of hedging the company’s stock by a director or executive officer will be considered a material risk oversight failure, because it severs the alignment of directors’ or executive officers’ interests with the interests of shareholders.
  • Board Responsiveness.  The revised policy makes it clear that ISS will recommend a “Withhold” vote for individual directors, committee members or the entire board of directors if at the previous board election, any director received more than 50% Withhold votes and the nominating committee has not required that the director leave the board after 90 days, or has not provided another form of acceptable response to the shareholder vote.  The revised policy also provides for such “Withhold” votes if the board of directors failed to act on a shareholder proposal that received the majority of votes cast in favour at the previous shareholders meeting.
  • Advance Notice Requirements.  The CCGP states that ISS will review proposals to adopt Advance Notice Policies on a case-by-case basis, supporting Policies that provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible.  Efforts to ensure full disclosure of a dissident shareholder’s economic and voting position in the company will be supported.  The revised policy requires the board of directors to have the authority to waive any provisions of the Advance Notice Policy that may provide nominating shareholders with legal recourse if denied access to the ballot.  Under the revised policy, ISS will recommend voting against an Advance Notice Policy if such Policy only permits the board to waive a portion of the advance notice provisions in its sole discretion or if the company requires any proposed nominee to deliver a written agreement that requires the proposed nominee to comply with all policies and guidelines of the company that are applicable to directors, which may impede the ability of such nominees, if elected, to effect positive change in respect of the board of directors and corporate governance of the company.
  • Re-pricing Stock Options and Extending Option Terms.  The CCGP states that ISS will generally recommend voting against proposals to re-price outstanding stock options.  The revised policy removes current exceptions to this general policy.  The revised policy also states that ISS will recommend voting against proposals to extend option terms.
  • Enhanced Shareholder Meeting Quorum for Contested Director Elections.  The revised policy states that ISS will generally recommend against new by-laws or amended by-laws that would establish two different quorum levels for electing directors, where a higher quorum level is required for shareholder meetings in which shareholders seek to replace the majority of the current board of directors.
  • Independence of Directors.  The definition of “independence” in respect of nominees for director has been clarified.  An “Inside Director” now specifically includes any current interim executive on the board of directors and any beneficial shareholder holding more than 50% of the outstanding voting rights, which may be aggregated to account for shares held by more than one member of a group, such as a family.  Changes to the definition of an “Affiliated Outside Director” now differentiate between a former or interim CEO, who would not be subject to a cooling off period, and other Non-CEO executives, who would be subject to a three year cooling off period under certain circumstances.  The revised definition of “Affiliated Outside Director” also clarifies that a former interim executive on the board of directors, other than a former interim CEO, may be deemed an “Affiliated Outside Director” in certain circumstances, and provides for additional criteria relating to participation or ownership of firms that provide professional services to the company and could therefore affect the independence of a director associated with such firms.

The changes applicable only to TSX-listed companies are as follows: 

  • Persistent Problematic Audit Related Practices.  The revised policy codifies ISS’ analytical approach, which would require members of the Audit Committee (and potentially the full board) to vote on a case-by-case basis if adverse accounting practices are identified that raise to a level of serious concern, such as accounting fraud, misapplication of applicable accounting standards, or material weaknesses identified in the internal control process.
  • Director Attendance and Overboarding.  Under the CCGP, ISS will provide cautionary language in its voting recommendations if (a) the director is a CEO and sits on more than two outside public boards in addition to his or her own company, or (b) if the director is an outside professional director and sits on more than six public company boards in total.  Under the revised policy, ISS will recommend “Withhold” votes for individual directors who are “overboarded” and have attended less than 75% of their respective board and committee meetings held within the past year without a valid reason for these absences.  In addition, ISS will recommend “Withhold” votes for individual directors who have attended less than 75% of board and committee meetings held within the past year without a valid reason for those absences and the company has not adopted a majority voting policy.  If the company has adopted a majority voting policy, ISS will recommend “Withhold” votes for individual directors who have attended less than 75% of board and committee meetings held within the past year without a valid reason for those absences and the pattern of low attendance existed in the prior year.
  • Executive Pay Evaluation.  In the revised policy, ISS has revised its methodology for comparing compensation against the peer group to better reflect long-term pay for performance alignment.  The revised policy also provides that ISS will evaluate issues related to executive pay on a case-by-case basis by considering poor disclosure practices and the board’s responsiveness to investor input on compensation issues.
  • Equity Compensation Plans.  The CCGP provides that ISS will recommend voting against discretionary non-employee director participation in management equity compensation plans, and this position will not change under the revised policy.  Under the CCGP and the revised policy, ISS will not recommend voting against a stock option plan that provides for non-employee director participation, provided that the plan stipulates that the number of stock options that may be granted to non-employee directors in the aggregate does not exceed 0.25 percent (for larger companies) to 1 percent (for smaller companies) of outstanding shares of the company and option grants to non-employee directors does not exceed $100,000 per director per year.  Recognizing that the role of non-employee directors has expanded substantially as a result of regulatory updates and shareholder engagement activity, the revised policy provides for different maximum limits on option-based and share-based (non option) equity compensation award grants to non employee directors.  Although the above noted limit on stock options continues to apply, the revised policy includes a new maximum of $150,000 per year in shares in the case of an equity plan that does not grant stock options.  Shares taken in lieu of cash director’s fees and a one-time initial equity grant upon a director joining the board will not be included in the maximum award limit.
ISS adopts updates to Canadian Corporate Governance Policy for 2014

Adoption of Bill 70 Amending the Mining Act: Overview of Amendments

After several failed attempts at reforming the Mining Act, on December 10, 2013 the National Assembly finally adopted Bill 70, An Act to amend the Mining Act (“Bill 70”).

Bill 70 draws upon a number of the measures that were proposed in Bill 43 of May 29, 2013 (“Bill 43”) as well as in Bill 14 of May 12, 2011 tabled by the previous government, which was actually a modified version of defunct Bill 79. For more details about the measures proposed in Bill 43, please see our May 13 article “Focus on Mining” (available here).

However, unlike the previous bills, which put forth a complete reconsolidation of the Mining Act, Bill 70 introduces a series of amendments to the existing act. It is also worth noting that Bill 70 is the result of certain compromises made by the government further to various comments received including from the mining industry, municipalities, environmental groups and aboriginal groups.

Essentially, the provisions that are amended by Bill 70 focus on three main aspects: mining titles, environment and communities and MRCs.

Mining Titles

(a) Mining leases

Scoping and market study. As a precondition for the grant of a mining lease, Bill 70 requires, instead of a feasibility study on the processing of the ore in Quebec as proposed in Bill 43, a scoping and market study, which will be less stringent.

Economic spinoffs within Quebec. Bill 70 carries on one of the proposals contained in Bill 43 concerning the option for the Minister of Natural Resources (the “Minister”) to require, when granting a mining lease, that the economic spinoffs within Quebec from the mining of the mineral resources authorized under the lease be maximized. However, this requirement can now only be imposed on reasonable grounds.

Public consultation. Any metal mine project having a production capacity of less than 2,000 metric tons per day will be subject, before a mining lease is granted, to the holding of a public consultation. The conditions and form of the public consultation will be determined by regulation, so it is difficult for the time being to determine what the public consultation requirements will be. As for projects having a production capacity of 2,000 metric tons or more per day, they will also require a public consultation, but it will be held in the framework of the environmental assessment process described below.

The grant of a surface mineral substance operating lease for peat or a lease needed for an industrial activity or to engage in commercial export is also subject to a prior public consultation.

Reporting. Following in the footsteps of Bill 43, Bill 70 stipulates that holders of mineral rights have an obligation to provide information to the Minister on the quantity and value of the ore that is extracted, the duties paid under the Mining Tax Act and the overall contributions they have paid. In principle, this information is public, except for data appearing in the reports on exploration work involving amounts beyond the allowances claimable under the Mining Tax Act, which will remain confidential for a period of five years. This is an adjustment introduced in Bill 70. Similarly, the data contained in the agreements concluded with a community will not have to be made public and may only be used for statistical purposes.

    (b) Mining Claims

Notice to the municipality and the landowner. Claim holders must notify the municipality and the landowner concerned within 60 days after registering a claim of the fact that they have obtained the claim, and must inform the municipality at least 30 days before performing any work.

Annual work report. Claim holders have an obligation to submit an annual report on the work that is performed. The requirement to submit an annual work plan to the Minister contained in Bill 43 was excluded from Bill 70.

Work credit. The radius within which the work credits accumulated for a claim could be used to renew other claims was reduced from 4.5 to 3.5 km in Bill 43. Bill 70 did not carry on such a measure, and the applicable radius therefore remains at 4.5 km. The 12-year limit on the lifespan of the work credits, as proposed in Bill 43, does remain however, along with an increase in the amount to be paid to double the cost of the work that should have been performed for purposes of renewing the claim.

Dropped measure: public auction. Bill 70 drops the measure proposed in Bill 43 which gave the Minister the option to auction off certain claims.

Environment

Environmental assessment. Bill 70 also provides for the amendment of the Regulation respecting environmental impact assessment and review, such that mineral processing plant construction and operation projects and mine opening and operation projects with a production capacity of 2,000 metric tons or more per day, as well as all projects involving the processing of rare earth (regardless of the processing or production capacity) will, going forward, be subject to the environmental assessment process stipulated in the Environment Quality Act. Note that Bill 43 provided instead that all of the aforesaid projects would be subject to such an assessment, regardless of their production capacity.

Mine site rehabilitation and restoration plan. Like Bill 43, Bill 70 stipulates that the grant of a mining lease is subject to approval of the mine site rehabilitation and restoration plan in accordance with the Mining Act and issuance of the certificate of authorization required for that purpose under the Environment Quality Act. However, where the time frame for obtaining the certificate of authorization is unreasonable, the Minister may still grant the lease.

Communities and MRCs

(a) Native communities

Bill 70 adds a new section to the Mining Act concerning the obligation to consult Native communities. This section draws on some of the provisions already contained in the previous bills. For more details on the new Bill 70 measures concerning Native communities, we invite you to read the bulletin published on that subject by our Aboriginal Law group (available here).

(b) Local communities

Monitoring committee. Bill 70 stipulates that all holders of mining leases must establish and maintain a project monitoring committee to foster local community involvement in the project as whole. The committee must comprise at least one representative of the municipal sector, one representative of the economic sector, one member of the public and, where applicable, one representative of a Native community consulted by the Government with respect to the project.

(c) Regional County Municipalities (MRCs)

Bill 70 also amends the Act respecting land use planning and development to allow the MRCs to delimit any mining-incompatible territory in their land use and development plan. However, it is in the Mining Act that particulars regarding what constitutes such territories will be found, as well as regarding the exclusion of the mineral substances found thereon from mining activities. Bill 70 did not keep the concept of a “territory compatible on certain conditions,” which was originally proposed in Bill 43. The power of the Minister of Natural Resources to review the delimitation of any mining-incompatible territory and to request changes to the land use plan to permit the conduct of mining activities (often referred to as a veto right) was also dropped in Bill 70.

Other Measures

Bill 70 also introduces a series of other amendments to the Mining Act, many of which were proposed in Bill 43.

  • Obligation to provide financial guarantees covering the full costs set out in the rehabilitation and restoration plan;
  • Obligation to disclose any uranium discovery;
  • Limitation of the power of expropriation to the holders of mining rights that want to proceed to the mining stage;
  • Power of the Minister to refuse, on public interest grounds, an application for a lease to exploit sand and gravel; and
  • Updating of the penal sanctions system.

For any questions about Bill 70, please contact a member of our Mining Law group.

Adoption of Bill 70 Amending the Mining Act: Overview of Amendments

Adoption of Bill 70, an Act to amend the Mining Act: Amendments relating to Native communities and reactions of those communities

On last December 10th, the National Assembly of Québec adopted Bill 70, An Act to amend the Mining Act (“Bill 70”). The adoption of Bill 70 came in the wake of three aborted attempts to modify Quebec’s mining regime in recent years, most recently the government’s failure, last October, to pass Bill 43, which would have enacted a new mining act (“Bill 43”).

Bill 70 was part of an effort to harmonize the interests of the various mining stakeholders, such as the mining industry itself, the municipal sector, environmental advocacy groups, and aboriginal communities, which all submitted their observations and comments on Bill 43 during the Special consultations and public hearings on Bill 43 (the “Consultations”).

This newsletter will address the specific provisions of Bill 70 that relate to Native communities, and the reactions of those communities to Bill 70’s adoption. For an overview of the changes brought in by Bill 70, we invite you to read the bulletin on that topic published by our Mining Law group.

Changes to the mining regime relating to Native communities.

  • Consultation of Native communities

Like the earlier Bill 14, Bill 43 proposed an amendment to the Mining Act designed to reaffirm the minister’s obligation to consult Native communities separately. During the Consultations, the Native communities argued that this amendment was not specific enough in terms of the government’s consultation obligations and, moreover, that it only reiterated the government’s duty to consult the First Nations.

In response to those representations, Bill 70 introduces a new chapter (Chapter I.1) in the Mining Act, which reiterates that the government must consult the Native communities separately if the circumstances so warrant (new section 2.1). New section 2.2 states that taking into account the rights and interests of Native communities is an integral part of reconciling mining activities with other possible uses of the territory. At this stage however, it is difficult to determine how that taking into account will be translated into action. Bill 70 also stipulates that the Minister of Natural Resources (the “Minister”) must draw up, make public and keep up to date a Native community consultation policy specific to the mining sector (new section 2.3).

  • Disclosure of agreements with Native communities

Bill 43 contained an obligation for lessees and grantees to send the agreements entered into with any community, whether municipal or Native, to the Minister. Thus, under Bill 43, those agreements were made public.

The amendments proposed in Bill 43 were vociferously criticized during the Consultations, not only by the Native communities but also by certain members of the industry, and Bill 70 tones them down. Bill 70 now provides that the information contained in an agreement between the holder of a mining lease or a mining concession and a community sent to the government in accordance with the Act will not be made public. The data can only be used for statistical purposes. The whole is subject to the Act respecting Access to documents held by public bodies and the Protection of personal information (new section 215).

  • Expropriation

Like Bill 43, Bill 70 prohibits holders of mining rights and owners of surface mineral substances from expropriating Native cemeteries (new section 235).

  • Monitoring committee

Bill 70 stipulates that all holders of state mining leases must establish a project monitoring committee to foster local community involvement in the project as whole. Although the lessee chooses the committee members, they must include at least one representative of the municipal sector, one representative of the economic sector, one member of the public and, where applicable, one representative of a Native community consulted by the Government with respect to the project (new section 101.0.3).

Native community reaction to the adoption of Bill 70.

In a press release issued last December 10th, the Assembly of First Nations of Quebec and Labrador (“AFNQL”) promptly publicized its objections to the content of the Mining Act amendments contained in Bill 70, as adopted (1).

The AFNQL’s objections focus on two issues:

  • Consultation of Native communities

First, the AFNQL argues that the consultation measures introduced in new Chapter I.1 of the Mining Actwill be meaningless, because Quebec will still have no control whatsoever over the exploration work with this legislation.”

The AFNQL finds the amendments brought by Bill 70 insufficient , as there is no specific requirement for consultation at the exploration work stage, and it argues that the government, based on the “free mining” principles enshrined in the Act, has in practice taken the position of neither consulting nor accommodating the First Nations at the exploration work stage. The reason for the AFNQL’s position is that the Mining Act does not require claim holders to obtain a permit before carrying out that type of work (2).

To Native communities, such an approach is inconsistent with the mining sector law reforms initiated by the provinces of Newfoundland, Ontario, Alberta and British Columbia and, moreover, breaches the Crown’s constitutional obligations at the exploration work stage, based on the Court of Appeal of Yukon’s decision in Yukon Ross River Dena Council v. Government of Yukon (3).

  • Disclosure of agreements with Native communities

Although the data contained in an agreement will not be made public, the AFNQL still objects to the disclosure of that information to the government. The Grand Council of the Crees has also voiced concerns about that point. The AFNQL’s press release contains the following statement: “Worse still, the new Mining Act even constitutes a major setback in respecting First Nation self-governance, in relation to the status quo of the previous Mining Act. Minister Ouellet insists, in sections 59 and 79, in spite of fierce protests of First Nations in Quebec, on forcing the mining companies to disclose the information contained in the confidential commercial agreements they signed with the First Nations.”

For any others questions about Bill 70, please contact a member of our Mining Law group or our Aboriginal Law group.

1. The Grand Council of the Crees and the Algonquins, among others, have also made their reactions known.

2. See the memorandum filed by the Great Innu Nation in the course of the Consultations.

3. 2012 YKCA 14; leave for permission to appeal denied by the Supreme Court of Canada on September 19, 2013.

Adoption of Bill 70, an Act to amend the Mining Act: Amendments relating to Native communities and reactions of those communities

TSX Staff Notice guidance impacts IPO plans

On November 7, 2013, the Toronto Stock Exchange (“TSX”) issued a Staff Notice to Applicants, Listed Issuers, Securities Lawyers and Participating Organizations (“Staff Notice”) that provides guidance for companies considering a listing on the TSX.  In particular, the Staff Notice addresses listing requirements for mineral exploration and development stage companies as well as clarifies the position of the TSX on financial statement disclosure required for listing and stock options granted prior to an initial public offering.

Qualification of an Advanced Property for Mineral Exploration Companies

The TSX requires that companies applying to list under the mineral exploration and development-stage category hold or have a right to earn and maintain at least a 50% interest in an advanced mineral property (“Advanced Property”).  The TSX will generally consider a mineral property to be an Advanced Property if continuity of mineralization is demonstrated in three dimensions at “economically interesting grades” as detailed in a technical report prepared by a qualified person in accordance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”).

From a practical standpoint, typically mineral exploration companies had to have at least a current resource estimate for a project to be accepted by the TSX as an Advanced Property.  However, the Staff Notice provides that infrastructure may now be an important consideration in the determination of “economically interesting grades”.  Infrastructure is a particularly important consideration for a project that is located in a remote or isolated area that is not readily accessible, either by road, railway or port, or for bulk commodities such as coal, iron ore, all base and precious metal concentrates, and industrial minerals, such as sand and gravel, limestone, commercial clay and gypsum (“Bulk Commodities”) which require adequate infrastructure for the delivery of large amounts of materials to the market.  Industrial mineral projects located in remote areas far away from their targeted markets may not be economical given their low intrinsic value.  Infrastructure will not be a material consideration for the TSX for commodities that can be produced on-site in relatively small quantities, which have a high value relative to their weight and can be transported to market by air, such as gold and diamonds.

Applicants with Bulk Commodity projects in remote areas with poor infrastructure should have a reasonable plan to develop or obtain access to the required infrastructure together with a cost estimate, which should ideally be outlined in a technical report and supported by a preliminary economic assessment, pre-feasibility study or feasibility study.  To assess the reasonableness of the plan, the TSX will consider (a) whether infrastructure has been built over similar terrain and circumstances in the past and the cost associated with building such infrastructure, (b) whether the infrastructure will be unconventional (e.g. using a pipeline for concentrate transportation), and (c) the assumptions in respect of the funding of the infrastructure, specifically whether the applicant will fund the infrastructure or rely on third parties to fund or develop the infrastructure.

The TSX Staff Notice provides that in order to satisfy the requirement of having “economically interesting grades” for projects in remote or isolated locations, the assumptions, plans and cost estimates for infrastructure should ideally be outlined in a NI 43-101 technical report under items 18 (project infrastructure) and 21 (capital and operating costs) of Form 43-101F1 – Technical Report and supported by a preliminary economic assessment, pre-feasibility study or feasibility study. 

The TSX provides that a project with either a mineral reserve or mineral resource will qualify as an Advanced Property but for those projects located in a remote or isolated area, where infrastructure will be an important aspect of that determination.  However, especially when one considers the fact that most mineral deposit discoveries are in remote areas and will invariably require some new infrastructure as part of their development, it is not entirely clear how the TSX will assess mineral resource stage projects in the future.  Moreover, it may be necessary to complete a more advanced study like a preliminary economic assessment, pre-feasibility study or feasibility study to demonstrate that the lack of infrastructure or a remote location does not impede the viability of the project.

As a result, although the Staff Notice does not expressly raise the bar for mineral projects to support a listing in the TSX, the practical ramifications of the TSX’s guidance may make it more difficult for mineral exploration companies to list on the TSX prior to completing at least a preliminary economic assessment.  For Bulk Commodity projects where there is no public market to set market prices, this will definitely limit earlier stage projects from supporting a TSX listing.  For such projects a company will typically not be able to assess the economic value of its deposit before it engages in offtake discussions with potential purchasers of the Bulk Commodity, and these discussions will not take place prior to the company demonstrating the extent and continuity of mineralization to support a potentially economic project.  This creates a catch-22 situation at the best of times, but especially so with limited access to a public market to facilitate raising additional capital.  The takeaway for all mineral exploration companies interested in listing on the TSX is that they should carefully review suitability for a TSX listing and engage in a pre-filing discussion with the TSX, especially where their mineral project is not yet at a preliminary economic assessment stage. 

The TSX recommends in the Staff Notice that mining companies seeking listing pre-file their technical report prior to the submission of a listing application to obtain a preliminary opinion as to whether a particular project qualifies as an Advanced Property.  As a result, mining companies considering a listing on the TSX should ensure that they complete a technical report as early as possible in the initial public offering (“IPO”) process, and that they allow in their timeline, time for the TSX to review the technical report and provide guidance as to whether or not the company’s mineral project will constitute an Advanced Property.  Once the IPO process is underway it may be disruptive and costly (in time and costs) to consider a listing on another stock exchange should the TSX not accept a project as an Advanced Property.

Financial Statements in Support of an Original Listing Application

The Staff Notice also provides guidance with respect to the use of audited forecast financial statements, pro forma financial statements and acceptable accounting standards in an application for listing. 

Companies applying to list on the TSX under the forecasting profitability category will generally require sponsorship if the audited forecast is not published in a prospectus or other disclosure document and is not subject to the requirements of future-oriented financial information provided in National Instrument 51-102 – Continuous Disclosure Obligations.  The sponsor must review and comment on the audited forecast and any other future-oriented financial information presented in the application.

In addition, upon review of an applicant’s pro forma financial statements, the TSX may make some adjustments to the pro forma financial statements.  Where the TSX relies on pro forma financial statements not publicly available, the TSX may require the sponsor or auditor to comment or provide comfort on the adjustments.

The TSX will accept financial statements prepared in accordance with International Financial Reporting Standards or Generally Accepted Accounting Principles (“GAAP”) in the United States for SEC issuers.  The TSX may accept financial statements prepared in accordance with GAAP of other jurisdictions depending on a variety of factors including whether the applicant is from a “designated foreign jurisdiction” or an “SEC foreign issuer” as defined in National Instrument 71-102 – Continuous Disclosure and Other Exemptions Relating to Foreign Issuers.

Pricing of Stock Options Granted Prior to an IPO

The Staff Notice also provides guidance that stock options granted within the three months immediately prior to the filing of a preliminary prospectus for an IPO are generally expected to be priced at or above the offering price.  Stock options granted within three months immediately prior to the filing of a preliminary prospectus which are priced below the offering price will likely be required to be cancelled, forfeited or re-priced to the offering price as a condition of listing.  The TSX may consider accepting options with an exercise price that is not lower than the price at which the relevant securities have been issued pursuant to a recent material financing to arm’s length parties, notwithstanding that such price may be lower than the offering price.

Companies planning to complete an IPO and TSX listing should ensure that the terms of any stock options contain a price adjustment mechanism to ensure that all stock options will be compliant with TSX requirements.

TSX Staff Notice guidance impacts IPO plans

Proposed new prospectus exemption for distributions to existing security holders of TSX-V issuers

On November 21, 2013, the securities regulatory authorities in all Canadian jurisdictions, with the exception of Ontario and Newfoundland and Labrador (the “Participating Jurisdictions”), published for comment Multilateral CSA Notice 45-312 (the “Notice”). The Notice sets out a new proposed prospectus exemption that would allow issuers listed on the TSX Venture Exchange (“TSX-V”) to raise capital through the distribution of securities to their existing security holders.

Background

Under Canadian securities rules, issuers may only issue securities by filing and obtaining a receipt for a prospectus or pursuant to an available prospectus exemption. The most commonly used exemption for TSX-V issuers is the “accredited investor” exemption, which permits the issuance of securities to investors that meet certain specified financial thresholds. Under the current rules, if a TSX-V issuer wishes to raise capital through the distribution of securities to investors who are not accredited investors, it generally must use either a prospectus or a prospectus exemption that requires a disclosure document, such as an offering memorandum, short form offering document or a rights offering circular.  

Data compiled by the Canadian Securities Association, the umbrella organization that represents all provincial securities commissions (the “CSA”), indicates that TSX-V issuers generally do not use the prospectus exemptions that require the preparation of an additional disclosure document and, following their initial public offering, generally do not conduct prospectus offerings. It is acknowledged that this is likely due to the time and cost involved in preparing the required offering document, especially if a financing fails and the costs are payable regardless. Based on this data and following discussions with market participants, including local advisory committees, the CSA has acknowledged and recognized that the proposed prospectus exemption would likely improve access to funding for junior issuers.

The CSA also acknowledges in the Notice that under the current rules retail investors (i.e. non-accredited investors) are not able to acquire the warrant “sweeteners” that are typically issued with shares in private placements to accredited investors, must buy securities of TSX-V issuers on the secondary market with no discount and must pay brokerage commissions in connection with any secondary market purchases. There is also recognition in the Notice that, as a result, TSX-V issuers do not have access to a potential source of capital.

The proposed exemption

Under the new exemption proposed by the regulatory authorities in the Participating Jurisdictions, TSX-V issuers would be permitted to distribute securities to existing security holders, relying on their existing continuous disclosure record, and would not be required to prepare an additional offering document. Some of the key conditions to the use of the proposed exemption are:

  • The issuer must have a class of equity securities listed on the TSX-V.
  • The issuer must have filed all continuous disclosure documents that it is required to have filed under applicable securities laws.
  • The offering can consist only of the class of equity securities listed on the TSX-V or units consisting of the listed security and a warrant to acquire the listed security.
  • The issuer must issue a press release disclosing the proposed offering and provide details of the intended use of proceeds.
  • The existing security holder will be required to confirm in writing that he/she was a security holder of the issuer as of the record date for the offering. The record date will be a date prior to the announcement of the offering. The CSA is still considering what would be an appropriate record date.
  • The aggregate amount that can be invested by an investor over a 12 month period is limited to $15,000, unless the investor has received suitability advice for the investment from a registered investment dealer. Under the proposed rules, if the investor receives suitably advice there is no limit to the amount that can be invested. However, in their request for comments the CSA have specifically asked if such a limit would be appropriate.
  • The investor must be provided with rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record.
  • Although an offering document is not required under the proposed exemption, if one is voluntarily provided by the issuer, an investor will have certain rights of action in the event of a misrepresentation in it.
  • The proposal includes resale restrictions which would require that any securities issued in reliance on the proposed exemption be subject to a four month restricted period.
  • The proposed exemption is only an exemption from the prospectus requirement. There is no corresponding exemption from the dealer registration requirement. Registration will typically not be required if the issuer is not in the business of dealing in or advising with respect to securities.

CSA request for comments

The CSA welcomes comments on all aspects of the proposed prospectus exemption and has requested feedback in respect of nine specific questions. The full text of the Notice, including the questions posed by the CSA and the proposed blanket order and rule, can be found here. The comment period ends on January 20, 2014.

Proposed new prospectus exemption for distributions to existing security holders of TSX-V issuers