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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

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

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 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

CSA Adopts Amendments to Form 51-106F6 – Statement of Executive Compensation

The Canadian Securities Administrators (CSA) have adopted amendments to Form 51-102F6 – Statement of Executive Compensation which will apply in respect of financial years ending on or after October 31, 2011. The amendments come largely as a result of CSA Staff’s targeted compliance review of executive compensation disclosure and recent international developments in the area of executive compensation. The amendments range from drafting changes to clarify existing disclosure requirements to new substantive requirements. The substantive amendments to Form 51-102F6 include:

  • requiring a company that relies on the exemption from disclosing performance goals or similar conditions in its Compensation Discussion and Analysis (CD&A) on the basis that disclosure would “seriously prejudice the interests of the company” to explicitly state that it is relying on the exemption and explain why disclosing the relevant performance goals or similar conditions would seriously prejudice the company’s interests;
  • requiring companies to disclose whether the board of directors has considered the implications of the risks associated with the company’s compensation policies and practices;
  • requiring companies to disclose whether any named executive officer (NEO) or director is permitted to purchase financial instruments that are designed to hedge or offset a decrease in the market value of equity securities granted as compensation or held, directly or indirectly, by the NEO or director;
  • requiring increased disclosure of information about compensation advisors retained by the company, including a description of the advisor’s mandate, any other work performed for the company and a breakdown of all fees paid to compensation advisors for each service provided; and
  • requiring companies to disclose the methodology used to calculate grant date fair value of all equity-based awards, including key assumptions and estimates used for each calculation and why the company chose that methodology, regardless of whether there are any differences with the accounting fair value.
CSA Adopts Amendments to Form 51-106F6 – Statement of Executive Compensation