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Women on boards: Review and discussion of new “comply or explain” disclosure requirements

As noted in the September 1, 2015 posting below, recent rule changes have required senior Canadian public companies to disclose their policies and record on the appointment of women as directors and executive officers. Our recent Insight summarizes the initial results of and response to these new disclosure rules, and indicates what further changes may lie ahead. See our Dentons Insight.

Women on boards: Review and discussion of new “comply or explain” disclosure requirements

Securities Law Seminar for the Mining Sector

What does the new “Comply or Explain” diversity policy imposed by the Canadian Securities Administrators mean for the mining industry?

Since December 31, 2014, the Canadian securities administrators, other than those of British Columbia, Alberta and Prince Edward Island, require non-venture issuers to disclose their diversity policies as well as information on the representation of women on their boards and executive officer positions. When the non-venture issuers do not have a diversity policy or women representation, they will have to explain why. Carole Turcotte will examine the regulatory requirements as well as the advantages and disadvantages associated with diversity.

Carole Turcotte, Partner, Dentons Canada SENCRL


Registration information
On October 7 and 8, 2015, the Québec Mineral Exploration Association (QMEA) is hosting Xplor, a major event in Québec that brings together stakeholders in the mineral sector. This year, in addition to high-level presentations and workshops, the Association is introducing The Xplor Investors’ Rendez-vous, an exclusive activity between exploration companies and investors. To register for the event, please visit: AEMQ XPLOR 2015

We hope you will be able to attend.

October 7, 2015
Quebec Mining Exploration Convention
2:25 p.m. – 2:50 p.m. ET
Place Bonaventure, Montréal

Securities Law Seminar for the Mining Sector

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.


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

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

CSA Will Not Implement NI 51-103

On July 25, 2013, the Canadian Securities Administrators (“CSA”) announced that they would not pursue implementation of National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (“NI 51-103”), which would introduce a regulatory regime aimed at streamlining the disclosure requirements for venture issuers.

Despite having support from several market participants, after reviewing NI 51-103, the CSA has decided that it will not implement the instrument in its entirety, but rather, would consider implementing some of the proposals that it contains. As required, any proposed amendments that the CSA considers will be published for comment.

CSA Releases Three-Year Plan

On July 9, 2013, the Canadian Securities Administrators announced a proposed three-year plan to create a nation wide harmonized securities regulation system aimed to protect investors against unfair practices, foster fair and efficient capital markets and reduce risks while preserving regional flexibility.

The CSA plans to implement the following initiatives in the next three years:

  1. Enhanced Retail Investor Protection: CSA aims to improve disclosure to investors, develop an avenue for investors to file and resolve complaints, and create an investor education campaign;
  2. Capital Raising by Small/Medium-Sized Enterprises and Exempt Market Initiatives: CSA will review and propose amendments to current exemption and disclosure rules for complex securitized products;
  3. Shareholder Democracy and Protection: CSA will review the Canadian proxy infrastructure, including proxy advisory firms, and current take-over bid regimes;
  4. Market Regulation: CSA will undertake a review of the order protection rule and market data fees, aim to develop a ratings regime, and form an OTC derivatives regulatory framework;
  5. Enhancement of Enforcement Effectiveness: CSA will aim to develop measures to share information across jurisdictions, increase access to surveillance tools and explore the possibility of a consolidated case management system;
  6. Enhancement of Information Technology: CSA will explore the development of a new national filing system to replace the current systems (e.g. SEDAR and SEDI) and the implementation of aggregated data repositories; and,
  7. Other Initiatives: CSA will aim to improve internal processes, as well as initiatives to streamline legislative amendments across jurisdictions.
CSA Will Not Implement NI 51-103

OSC Staff Notice 43 705, Review of Technical Reports by Ontario Mining Issuers

On June 27, 2013, the OSC issued Staff Notice 43‑705 addressing OSC concerns with respect to disclosure in technical reports.

Out of the 50 reports reviewed, 40% had at least one major non‑compliance concern, 40% had some concerns, and only 20% were in compliance with the requirements of Form 43‑101F1.

59% of the issuers were at the mineral resources stage. 26% at the development or productions stage and 15% were at the exploration stage.

Most of the jurisdictions for the properties were in North America, South America, Africa, Russia or China and Australia and the principal mineral commodities were gold, copper and iron. 54% of the reports were prepared by regional firms and 20% from global firms.  Independent sole proprietor qualified persons (“QPs”) comprised 14% of the authors of technical reports and 12% were prepared by in‑house QPs.

In 58% of the cases, reports were filed pursuant to a disclosure trigger which arose from a material change in relation of the issuer or a change in the mineral resources in the most recently filed report. The areas of significant deficiencies in the technical reports included mineral resource estimates, environmental studies, permitting and social or community impact, capital and operating costs, economical analysis and interpretation and conclusions. Other frequent disclosure deficiencies included the summary, history and certificate of the QP. The significant areas of concern included the following:

1. Mineral Resource Estimate. Some 25% of the reports did not provide the required information in that the key assumptions parameters and methods used to estimate the resources are not provided and the requirement for “reasonable prospects for economical extraction” were not clearly disclosed.

2. Environmental Studies Permitting and Social or Community Impact. These were not addressed in some 32% of the reports and often remediation and reclamation matters were not discussed, particularly in relation to advanced properties.

3. Capital and Operating Costs. Some 26% of the reports did not adequately disclose information on these matters and that qualified persons are reminded to provide more context and justification for the capital and operating cost estimates for advanced properties.

4. Economic Analysis. Thirty seven percent of the reports on advanced properties did not sufficiently disclose the economic analysis including the impact of taxes on the projects where an economic analysis has been carried out. It is not acceptable to only include pre tax cash flows in economic outcomes.

5. Interpretations and Conclusions. The authors are reminding issuers that it is a new requirement to disclose significant risks and uncertainties and any related foreseeable impacts of risks and uncertainties on the project and some 36% of the reports did not disclose specific project risks on potential outcomes and mitigating factors.

In addition, QPs are reminded to briefly summarize the important information and key findings about the property including its description, ownership, data verification, site visits, resource and reserve estimates, if applicable, mining studies, economic analysis, if applicable, and the QPs conclusions and recommendations.

In some 28% of reports, the disclosure of the historical estimate did not state that it was not a current resource and was not being treated as a current resource.

In some 24% of the certificates, there were errors in the QPs certificate.

OSC Staff Notice 43 705, Review of Technical Reports by Ontario Mining Issuers

2012 Mining Report British Columbia Securities Commission

On January 24, 2013, the BC Securities Commission issued a report (the “2012 Mining Report”) with respect to disclosure and interpretive issues under National Instrument 43 101, which is referenced as “the Mining Rule” in the report. Any questions or comments on the 2012 Mining Report can be submitted to Robert Holland or Ian McCartney of the B.C.S.C.

The report identifies a number of weaknesses in the disclosure of mining companies and provides a useful checklist for compliance measures in Appendix “A” which you can download by clicking ”Download PDF”, and a summary of the mining technical reviews disclosing the common compliance elves on the different disclosures which is also attached to this memo.

The report identifies the following common deficiencies encountered in reviewing technical reports including:

  • Missing or altered statements in certificates and consents of the Qualified Persons;
  • Not dated, signed, or addressed to the company;
  • Non compliant disclaimers of responsibility or statements of reliance;
  • Does not provide a summary of all material technical and scientific information for the entire property;
  • Non compliant disclosure of historical estimates, exploration targets, or MRMR;
  • Does not provide adequate or sufficiently transparent information on the key assumptions, parameters, and methodologies used in mineral resource estimates.

In addition, the report also references the CIM December 15, 2009 publication “Additional Guidance – Reasonable Prospects for Economic Extraction”.

The CIM statement emphasizes that the use of the words “reasonable prospects for economic extraction” in addressing mineral resources are:

  • the responsibility of the Qualified Person;
  • judgment based on the Qualified Person’s experience; and
  • the methods used and assumptions made to determine if the project has “reasonable prospects” which must be presented explicitly in both public and technical reports.

Note that this clarification applies not only to measured and indicated resources, but also inferred reso 2012 Mining Report British Columbia Securities Commission urces and a copy is attached to this memo for reference.

To read Appendix A, click here.

2012 Mining Report British Columbia Securities Commission

BCSC releases 2012 Mining Report

Natasha Singh, articling student, assisted in the preparation of this article.

On January 24, 2013, the British Columbia Securities Commission (“BCSC”) released its 2012 Mining Report (the “Report”). The Report is the first of its kind for the BCSC and serves to strengthen the BCSC’s efforts to be Canada’s leading junior mining regulator. The Report provides an overview of the common pitfalls in mining disclosure and outlines areas where market participants could improve their disclosure.

The Report identifies and discusses the following common areas of deficiencies in mining issuers’ disclosure:

1. Technical Disclosure – The common downfalls in technical disclosure are (i) the failure to file current or fully compliant reports; (ii) the failure to include the required cautionary statements for preliminary economic assessments, historical estimates and exploration targets; (iii) disclosure of mineral resources and mineral reserves that do not fully comply with NI 43-101; (iv) misleading references to mining studies; and (v) the failure to name the qualified person.

2. Company Disclosure – In general, voluntary disclosure is less likely to comply with regulations when compared to required filings. For instance, an issuer’s website, investor relations materials and corporate presentations is less likely to comply with the BCSC’s rules and regulations when compared with required filings, such as technical reports and annual information form.

3. Technical Reports – The common problems in technical reports are (i) missing or altered statements in certificate or consents of qualified persons; (ii) prohibited disclaimers or statements of reliance on other experts; and (iii) non-compliant disclosure or mineral resources and mineral reserves, historical estimates, and exploration targets.

The BCSC is hoping that the Report will help issuers address the foregoing problems and in turn, avoid costly and time-consuming mining disclosure reviews. A copy of the Report can be found here.

BCSC releases 2012 Mining Report

Canadian Securities Regulators Adopt Amendments to Improve Issuer Communications with Investors

On November 29, 2012, the Canadian Securities Administrators (“CSA”) announced the adoption of regulatory changes and amendments (the “Notice”) to National Instrument 54-101 – Communication with Beneficial Owners of Securities of a Reporting Issuer and National Instrument 51-102 – Continuous Disclosure Obligations. The amendments intend to improve the communications process between reporting issuers and shareholders. Specifically, the process by which reporting issuers send proxy-related materials to, and solicit proxies and voting instructions from, registered holders and beneficial owners of their securities.

The most significant features of the amendments are as follows:

• Providing reporting issuers with a new notice-and-access mechanism to send proxy-related materials to registered holders and beneficial owners of securities;

• Simplifying the process by which the beneficial owners are appointed as proxy holders in order to attend and vote at shareholder meetings; and

• Requiring reporting issuers to provide enhanced disclosure regarding the beneficial owner voting process.

The amendments will take effect on February 11, 2013. Certain other provisions apply as of February 15, 2013, while the notice-and-access provisions can only be used in respect of meetings occurring on or after March 1, 2013.

For more information, please refer to the Notice, which can be found here.


Canadian Securities Regulators Adopt Amendments to Improve Issuer Communications with Investors

Definition of Preliminary Economic Assessments Clarified

The Canadian Securities Administrators (“CSA”) published Staff Notice 43-307 Mining Technical Reports – Preliminary Economic Assessments, which is intended to clarify the definition of “preliminary economic assessment” (“PEA”) in National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”). NI 43-101 defines a PEA as “a study, other than a pre-feasibility study or feasibility study, which includes an economic analysis of the potential viability of mineral resources”. The terms pre-feasibility study (“PFS”) and feasibility study (“FS”) have the meanings ascribed by the CIM Definition Standards for Mineral Resources and Mineral Reserves, as amended. The CSA notes that certain issues have been identified in monitoring PEA disclosure since June 2011 when this definition was included in NI 43-101.

The Notice emphasizes to issuers that a PEA is to be kept separate and distinct from both PFS and FS, which indicate more comprehensive studies, and provides further guidance to issuers on other aspects of PEA preparation and disclosure to address the issues that have arisen. The CSA notes that the definition of PEA has two elements that distinguish it from other studies, namely that, by definition it cannot be a PFS or FS and it can only demonstrate the potential viability of mineral resources, not the technical or economic viability of a project. The Notice provides guidance to issuers regarding how to properly identify and disclose a PEA and avoid the staff challenging the study or taking the position that the issuer is treating the PEA as a PFS.

Definition of Preliminary Economic Assessments Clarified

New Rules Requiring Companies Listed on U.S. Exchanges, to Disclose Payments Over $100,000 Made to Governments

Shaira Nanji, articling student, assisted in the preparation of this article.

On August 22, 2012, the United States Securities and Exchange Commission passed a new rule regarding section 1504 of the Dodd-Frank Wall Street Financial Reform Act (the “Act”) which focuses on transparency of natural resource payments. Canadian mining companies that are listed or traded on U.S. exchanges should be aware of the new regulation. The purpose of the regulation is to enhance corporate and government accountability.

Section 1504 of the Act states that publicly traded issuers must annually disclose and report any payment or series of payments over $100,000 to governments related to the commercial development of oil, natural gas or minerals. Issuers must file a new form called Form SD, Specialized Disclosure, starting after September 30, 2013. The new regulation clarifies the types of taxes, fees, bonuses, and dividends that are required to be disclosed. The types of payments related to commercial development activities that need to be disclosed include:

• taxes;
• royalties;
• fees (including license fees);
• production entitlements;
• bonuses;
• dividends; and
• infrastructure improvements.

New Rules Requiring Companies Listed on U.S. Exchanges, to Disclose Payments Over $100,000 Made to Governments

CSA Releases Results of Continuous Disclosure Review Program For the Fiscal Year Ended March 31, 2012

On July 19, 2012, the Canadian Securities Administrators (the “CSA”) released CSA Staff Notice 51-337 – Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2012 (the “Notice “) which summarized the results of the CSA’s continuous disclosure review program (the “CDR Program”) for the fiscal year ended March 31, 2012. The Notice is intended to help issuers understand and comply with their obligations, summarize the results of the CDR Program for the fiscal year and provide examples of common deficiencies.

The CDR Program completed a total of 1,248 full or issue-oriented reviews. Issue-oriented reviews, which accounted for 64% of reviews conducted, involved a review of the financial statements and MD&As of select issuers. The issue-oriented review focused largely on whether issuers disclosed how the transition to International Financial Reporting Standards (“IFRS”) affected their financial position, financial performance and cash flow.

Select issuers were also subject to a full review which involves a review of many types of disclosure (e.g. the most recent annual financial statements and interim financial reports, technical disclosure, annual information forms and information circulars). The full review revealed a number of common deficiencies some of which included:

  • Financial statement deficiencies (e.g. requirements for first-time adoption of IFRS (IFRS 1))
  • MD&A deficiencies (e.g. use of boilerplate language under discussion of operations, liquidity and general provisions)
  • Deficiencies in disclosure required by National Instrument 43-101, Standards of Disclosure for Mineral Projects (e.g. incomplete or inadequate disclosure of preliminary economic assessments, mineral resources and mineral reserves, non-compliant certificates and consents from qualified persons for technical reports)
  • Deficiencies in disclosure required by Form 51-102F6, Statement of Executive Compensation (e.g. use of boilerplate language under item 2.1 (compensation discussion and analysis), failure to disclose the grant date fair value of share-based awards and option-based awards in the summary compensation table)

Overall, 56% of review outcomes required issuers to take action to improve disclosure (compared to 70% in 2011). The CDR Program will focus on the first annual IFRS Report for the fiscal year ended March 31, 2013.

In 2004, the CDR Program was established by the CSA for the purpose of identifying material disclosure deficiencies that affect the reliability and accuracy of an issuer’s disclosure record. The CSA will work with issuers to resolve issues that are identified as a result of the review process. For more information about the CDR Program, please see CSA Staff Notice 51-312 – Harmonized Continuous Disclosure Review Program.

CSA Releases Results of Continuous Disclosure Review Program For the Fiscal Year Ended March 31, 2012

BCSC Action Reinforces Lessons for Continuous Disclosure

This article was written by Alan J. Hutchison

A recent Notice of Hearing issued by the British Columbia Securities Commission (“BCSC”) may require mineral exploration companies to re‐visit their continuous disclosure practices. On April 24, 2012 the BCSC issued a Notice of Hearing against four current and former directors of Canaco Resources Inc. (“Canaco”) alleging that they breached applicable securities laws in connection with the disclosure of drill results from Canaco’s Magambazi gold exploration project in Tanzania, as well as in connection with certain stock option grants around the same time. While none of these allegations have as yet been proven, certain facts have emerged from both the BCSC’s allegations and Canaco’s public response that merit discussion of common continuous disclosure practices by mineral exploration companies.


In late November 2010 management of Canaco received assay results from eight holes from an ongoing drill program at Magambazi. The results were circulated to the directors and it appears that management and the board considered the assays to be good results. Canaco staged the announcement of the drill results over three news results over a two week period. The share price increased significantly following each news release, with one day increases of 10.9%,14.6% and 5.9%. The Company did not file a material change report following any of the news releases.

Between the time the management and board of Canaco became aware of the assay results and the date that the first news release was announced, the board of directors authorized the Company’s customary annual grant of stock options to directors, officers and consultants.

Following the increase in the share price following the release of the assay results, the TSX Venture Exchange required the Company to re‐price the stock options to the price of Canaco’s shares following the announcement of all of the assay results. It appears that Canaco and the option holders did this voluntarily and to the satisfaction of the TSXV, and the matter was resolved in March 2011.

The BCSC’s allegations are twofold: (1) that Canaco breached section 85 of the Securities Act (British Columbia) by failing to disclose all assay results immediately upon receipt, and (2) that the directors of Canaco acted inappropriately by granting stock options when in possession of material undisclosed information. The crux of Canaco’s defence is that the assay results were not material as the drill holes constituted infill drilling and simply confirmed the extent of mineralization previously demonstrated in earlier drilling. Canaco has sought expert opinions from third parties affirming this position, most notably from Micon International Ltd. Although not expressly stated in the BCSC’s Notice of Hearing, it is submitted that it is noteworthy that the Magambazi deposit did not have a resource estimate.

The intent of this article is not to question the facts or attempt to form a judgment on any of the matters set out in the BCSC’s Notice of Hearing. But even prior to a judgment being rendered, there are a number of lessons for exploration mining companies.

Timing of Announcements of Drilling Results

A frustrating reality for every mineral exploration company is that with the boom in mineral exploration over the past few years the turnaround time for assay results has lengthened considerably. What used to be a one or two week wait is now commonly eight weeks. Most companies prefer not to announce hole by hole results, as it can be more difficult to put results in proper context to properly disclose the geological ramifications for the project of the drill results. The result is that there is a considerable time lag between raising capital, expenditure on mineral exploration and announcement of results. The additional challenge for many companies is the reality that it is not easy to generate regular news flow necessary to keep shareholders engaged in the company’s story. Plus, the seemingly fickle attention span of the market compels companies to focus on key points and not to overwhelm the market with more information it can absorb. As a result, most companies do exactly what Canaco did in this situation – accumulate a cluster of assay results and then release them in stages over one or two weeks once the company can properly analyze the results and ensure that the company obtains the requisite internal and NI 43‐101 approvals for the news release. The BCSC’s allegations in this instance suggest that this practice is contrary to securities laws. It may be necessary for companies to announce the assay results immediately and then seek to provide analysis and context in a subsequent news release. Given the technical nature of the disclosure, presumably few companies would be interested in doing this voluntarily.

Hindsight is 20‐20

Continuous disclosure requirements imposed by Canadian securities laws and stock exchange rules require public companies to assess materiality for every change or development affecting the company. Usually materiality is assessed on a forward looking basis, namely as to whether the news or development would reasonably be likely to impact the value or market price of the company’s securities. This requires companies to assess not only the change or new development itself, but the asset or project to which it relates in the context of the company as a whole. What is material to one company is not necessarily material to another, so while general principles can be ascertained, management and directors must ultimately assess their companies on an individual basis.

It is apparent in the Canaco situation that the BCSC did not accept Canaco’s position that the assay results are not material. Certainly at first glance it appears that the market considered the assay results to be material, as all three news releases resulted in significant increases in Canaco’s share price. However, that does not preclude an argument that management, directors and consultants of Canaco considered the materiality of the assay results in good faith and determined prior to announcement that they were not material, even though the market reached a different conclusion.

Accepting Canaco’s defence at face value, the concerning aspect of this case is that in a regulatory proceeding materiality is often applied with the benefit of hindsight. As a result, public companies are reminded that it is better to err on the side of caution and adopt a conservative assessment of materiality. To draw on a couple of specific facts from the Canaco example, it is worth noting the following principles:

• Prior to the completion of a mineral resource estimate, which typically resets materiality for a mineral project, companies should consider that all drill results are material. Even if the geological knowledge of a project is not enhanced by a drill program, one should not consider such drill programs to be infill drilling per se until the stage of drilling to reduce spacing between drill holes to confirm or upgrade categories of mineral resources.

• Companies should avoid granting stock options or other share based compensation to insiders when in possession of undisclosed assay results. It is submitted that the grant of options prior to the dissemination of the news releases announcing the drill results was the principal factor that caused the BCSC to commence a proceeding in this case. Without that inciting factor it is doubtful that the Notice of Hearing would have proceeded. As Canaco notes in its defence, this may result in extremely narrow windows to grant stock options, and possibly several months after the customary timing for issuing options, but to do otherwise can result in regulatory problems.

Material Change Reports

Canadian securities laws require public companies to file material change reports within 10 days of the occurrence of a material change in its business or affairs. However, the material change report is probably the continuous disclosure requirement that is most inconsistently applied, especially by smaller issuers. It seems that companies either file material change reports for every news release in order to ensure compliance, or they hardly ever file material change reports at all. In almost every instance material change reports are given little attention or thought, but have become perfunctory compliance documents duplicating the company’s news release.

This is a good reminder that material change reports should not be overlooked as a continuous disclosure obligation. Applicable securities laws require public companies to assess the materiality of a particular occurrence or development to determine whether a material change report is required to be filed.

Multiple Layers of Securities Regulation

It is also worth noting that Canadian public companies have to deal with multiple layers of securities regulation. The provincial securities commissions, stock exchanges and self regulatory organizations (i.e. IIROC) all have a regulatory function that aims to preserve the integrity of the Canadian capital markets. While most of the time these organizations work together in an attempt to harmonize their rules and enforcement practices, that is not always the case. Over the past couple of years we have seen some noteworthy differences of opinion between securities commissions and the TSX. The facts here suggest that the TSXV questioned Canaco about the grant of stock options almost immediately following the announcement of the assay results. It appears that there was a significant dialogue between the TSXV and Canaco, which culminated in the re‐pricing of the stock options. There is no indication that the TSXV challenged the conduct of the directors of Canaco to the extent that the BCSC is doing now. This is a good reminder that securities regulators can take different perspectives on an investigation and can reach different views on what constitutes an appropriate resolution.

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For further information, please contact a member of our National Mining Group.

BCSC Action Reinforces Lessons for Continuous Disclosure

CSA adopts disclosure rules for Over-the-Counter issuers

On May 10, 2010, the Canadian Securities Administrators (except Ontario) (the “CSA”) announced the adoption of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets (the “OTC Rule”). The OTC Rule establishes certain disclosure obligations for issuers with securities quoted on the U.S. OTC market if those issuers are found to have a significant connection to Canada. According to the CSA, the rule discourages the manufacture and sale in a Canadian jurisdiction of U.S. OTC quoted shell companies that can be used for abusive purposes.

Under the OTC Rule, certain Canadian continuous disclosure requirements would apply to OTC issuers if the issuer falls into one or more of the following categories: (i) the issuer’s business has been directed or administered in or from Canada; (ii) promotional activities have been carried on in or form Canada; or (iii) the issuer distributed a security to a person resident in Canada before obtaining a ticker symbol, and that security becomes an OTC-quoted security.

An OTC issuer subject to this rule would be required to comply with the continuous disclosure obligations applicable to venture issuers. In addition, OTC issuers subject to the rule will be required to file annual information forms.

The OTC Rule will come into effect on July 31, 2012.

CSA adopts disclosure rules for Over-the-Counter issuers

TSX Supportive of OSC Review of Emerging Market Issuers

On March 20, 2012, TMX Group announced its support for, and cooperation with, OSC’s review of emerging market (“EM”) issuers. In addition, the Toronto Stock Exchange and TSX Venture Exchange initiated parallel consultations with various market participants, issuers and other market stakeholders over the last number of months. Based on this review and consultation, TMX Group prepared and is expected to provide additional guidance to EM issuers, to complement existing rules and working practices. Such guidance may be subject to further regulatory consultation and review by securities commissions.

Kevan Cowan, President, TSX Markets and Group Head of Equities, TMX, said:

“While provincial securities regulators are the primary authority overseeing reporting issuers, TMX Group takes its responsibility and public interest mandate very seriously. With the growth of emerging market economies, issuers and investors from these markets are expected to increasingly seek opportunity in Canada and other developed economies around the world. The work currently being conducted by TMX Group is part of our ongoing efforts to enhance the quality and integrity of Canada’s capital markets, a key competitive advantage both for us and for Canada.”

TSX Supportive of OSC Review of Emerging Market Issuers

OSC Publishes Results of Review of Emerging Market Issuers

On March 20, 2012 the Ontario Securities Commission (“OSC” or the “Commission”) released a staff notice summarizing the findings of the Commission’s review of emerging market (“EM”) issuers. With the growing importance of EM issuers to the Ontario economy, OSC’s review was prompted by recent concerns involving certain high profile EM issuers. In summary, the review articulated four main areas of concern:

(1) Concerns regarding issuer governance and related disclosure: OSC’s review yielded recommendations for improved corporate governance practices and better disclosure regarding corporate structure and risk factors. The OSC also recommended that EM issuers maintain appropriate books and records in Canada, and consider both minimum local language competency and Canadian director residency;

(2) Concerns regarding the audit function for an EM issuer’s annual financial statements: The Commission’s recommendations included, among others, facilitating access to audit working papers of Ontario reporting issuers, and examining whether suitability standards for auditors should be developed;

(3) Concerns regarding adequacy of the due diligence process conducted by underwriters in offerings of securities by EM issuers: OSC review recommended that a transparent set of requirements and best practices for the conduct of due diligence by underwriters be established; and

(4) Concerns regarding the exchange listing process. The Commission’s review recommended that exchanges review their current listing and approval requirements with a view to determine whether more stringent listing requirements would be appropriate for EM issuers.

OSC Publishes Results of Review of Emerging Market Issuers

CSA issues prospectus disclosure guidance for issuers with short-term liquidity concerns or raising insufficient proceeds

CSA issues prospectus disclosure guidance for issuers with short-term liquidity concerns or raising insufficient proceeds

On March 2, 2012, the Canadian Securities Administrators (CSA) issued a notice setting out the CSA’s approach regarding disclosure of the financial condition of an issuer and the sufficiency of proceeds in the context of a prospectus offering.

The notice is intended for issuers that have filed a prospectus and either (i) it appears that the prospectus inadequately discloses the issuer’s financial condition and going concern risk or (ii) there is adequate disclosure about the issuer’s financial condition, but it appears that the proceeds from the proposed offering may be insufficient to accomplish the stated purpose of the offering. In these circumstances, a receipt for a prospectus may not be issued.

The CSA identified five areas in which the staff may raise comments where it identifies concerns in respect to an issuer’s financial condition and/or sufficiency of proceeds: (i) missing information regarding offering amount and pricing, (ii) offering structure, (iii) use of proceeds disclosure, (iv) risk factors disclosure and (v) representations to support ability to continue operations. For each of these areas, the notice identifies disclosure that will likely be required before the issuer receives a receipt for a final prospectus. However, for issuers with real short-term liquidity concerns, it is possible that a receipt may not be issued, regardless of disclosure.

The notice does not set out a specific test to determine under what circumstances the proceeds will be considered insufficient or when an issuer will be deemed to not have sufficient funds to continue as a going concern. As a practical matter, it would appear that the determination as to the sufficiency of proceeds to achieve the purposes identified in the prospectus will often be clear. In respect of issuer with liquidity concerns, the notice provides general guidance based on the type of issuer in question:

  • Exploration stage issuer:  Sufficient to reach completion of next phase of a project
  • Development stage issuer:  Sufficient to achieve the issuer’s next significant milestone
  • Research & Development issuer:  Sufficient to achieve progress on the development of a key product
  • Issuer with active operations:  Ability to continue operations for the short term

A copy of the notice is available here.

CSA issues prospectus disclosure guidance for issuers with short-term liquidity concerns or raising insufficient proceeds

SEC adopts new mine safety disclosure rules

Effective January 27, 2012, the United States Securities and Exchange Commission (“SEC”) has adopted new rules outlining how publicly traded mining companies must disclose in their quarterly and annual reports the mine safety information required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The new rule is applicable to foreign private issuers and to Canadian issuers reporting under the US-Canadian multijurisdictional disclosure system. The disclosure, however, only applies in respect of mines located in the United States.

The information required by the new SEC rules, which is required to be disclosed on a mine-by-mine basis, includes:

• Significant and substantial violations of mandatory health or safety standards under the Federal Mine Safety and Health Act of 1977 (“Mine Act”) for which the operator received a citation from the Mine Safety and Health Administration (“MSHA”).
• Information regarding citations and orders for unwarrantable failure of the mine operator to comply with the Mine Act.
• Imminent danger orders issued under the Mine Act.
• The dollar value of proposed assessments from the MSHA.
• Notices from the MSHA of a pattern of violations or potential to have a pattern of violations under the Mine Act.
• Pending legal actions before the Federal Mine Safety and Health Review Commission.
• Mining-related fatalities.

Additional information can be found here. For a copy of the new SEC rule please visit http://www.sec.gov/rules/final/2011/33-9286.pdf

SEC adopts new mine safety disclosure rules

TSX Provides Guidance to Issuers regarding News Release Obligations

In its November 2011 Issuer Update Newsletter (the “Newsletter”), the Toronto Stock Exchange (the “Exchange”) provides guidance to issuers regarding the news release process and approvals for material and non-material news releases, as outlined in the timely disclosure policy found in sections 406 to 423.4 of the TSX Company Manual.

Specifically, the Exchange clarifies that issuers must send a copy of all news releases to the Investment Industry Regulatory Organization of Canada – Market Surveillance (“IIROC”) via SecureFile or by fax, regardless of whether the news release contains material information or non-material information. However, the need to obtain pre-approval of the issuer’s news release from IIROC depends on both whether the news release contains material information and on the intended time of dissemination of the news release. The following chart, reproduced from the Newsletter, sets out the various disclosure requirements:

The Exchange will provide guidance regarding the slightly different disclosure requirements applicable to TSX Venture Exchange issuers in its next Issuer Update.

TSX Provides Guidance to Issuers regarding News Release Obligations

Electronic Delivery as a Standard (Not Yet)

Should Canada do better to become a leader of innovation in electronic communication with security holders, including the delivery of documents, given the apparent Canadian propensity to spend our time online?

According to a March 2011 Globe & Mail report, Canadians spend more time online than the residents of any other country.  It seems Canadians don’t just spend more time, Canadians spend almost double the average. 

Earlier this month, the Canadian Securities Administrators announced changes to National Policy 11-201, Delivery of Documents by Electronic Means.  The comment period yielded only eight submissions, suggesting, perhaps, that there is no great urgency to making electronic delivery the standard.

The changes to NP 11-201 are meant to alert market participants to e-commerce legislation and other laws that may affect the electronic delivery of documents, to simply the guidance regarding security holder consents, and to reduce technology-related references.  NP 11-201 applies to “prospectuses, financial statements, trade confirmations, account statements and proxy-related materials that are delivered by securities industry participants or those acting on their behalf, such as transfer agents.” 

NP 11-201 continues to provide that (subject to any other laws), electronic delivery will satisfy delivery requirements in securities legislation if each of the following are met:

 1. The recipient of the document receives notice that the document has been, or will be, delivered electronically.

 2. The recipient of the document has easy access to the document.

 3. The document that is received by the recipient is the same as the document delivered by the deliverer (that is, the document is reasonably secure from being tampered with during delivery).

 4. The deliverer of the document has evidence that the document has been delivered.

NP 11-201 cautions that if any one of these components is absent, the effectiveness of the delivery may be uncertain.

NP 11-201 also cautions that electronic commerce legislation may require the consent of a recipient to electronic delivery.  NP 11-201 also states that without express consent, it may be more difficult to demonstrate that the intended recipient had notice of, and access to, the document, and that the intended recipient actually received the document.  However, in simplifying guidance on consent requirements, the sample express consent form has been eliminated from NP 11-201.  This consent form had been identified by the Securities Transfer Association of Canada (STAC) as a barrier to increasing demand for electronic delivery.   

Given the consequences of a finding that documents required to be delivered under securities laws and regulations were not properly delivered, it is unlikely that we will see a great rush to electronic delivery with these changes to NP 11-201.  In addition, any concerted effort to move to electronic delivery must comply with Canada’s Anti-Spam Legislation (CASL), which is likely to come into force next year.

Five years has passed since the Task Force to Modernize Securities Legislation in Canada published commissioned research study by Professor Dimity Kingsford Smith regarding Importing the e-World into Canadian Securities Regulation.  Canada has not progressed very far in terms of developing electronic delivery as a standard method of delivery.  The question is why?

As STAC points out, the complexities of obtaining consent is part of the explanation.  This has been partially remedied by NP 11-201 .  The issue of establishing delivery is also part of the explanation.  The revision to NP 11-201 has clarified the issuer’s responsibilities to have internal processes showing that delivery was attempted.  However, NP 11-201 also requires that the issuer must attempt other delivery methods (presumably mail) if the issuer receives a delivery failure notification, notwithstanding consent to delivery by electronic means. 

Another issue might simply be that demand is not there for electronic documents delivered in currently available formats.  We must be cautious of drawing inferences but broad statistical evidence from Statistics Canada surveys suggests that the percentage of at-home internet users who report conducting investment research online has remained relatively stagnant from 2005 to 2009 with less than 1/3 reporting that they engaged in that activity.  Online bill paying, by contrast, grew throughout that period. 

The current inflexibility with respect to the form of the electronic version of documents might contribute to low take up of electronic delivery.  NP 11-201 permits flexibility in technical format.  However, electronic documents must essentially follow the prescribed forms for paper documents.  One of the great advantages of electronic documents is the ability to layer information so that the user can review information on a graduated basis.  If participants are limited essentially to an electronic version of a massive printed document, this curbs innovation as well as ease of use.

Of course, any move to electronic delivery as a standard must ensure that investors have access (and timely access) to equivalent information.  There are, after all, significant regional differences in home internet usage rates.  Home internet usage by residents of British Columbia was reported to be 16 percentage points higher than in New Brunswick according to an October 2011 Financial Post article.

Electronic Delivery as a Standard (Not Yet)