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CROSS
BORDER SECURITIES UPDATE
May 2004
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New National Instrument 51-102: Changes
to Disclosure Requirements and how they may affect you and your Company
The new National Instrument
51-102-Continuous Disclosure Requirements (the “Instrument”), its
companion policy and accompanied forms went into effect as of March 31,
2004. The Instrument has made changes regarding disclosure requirements
for Financial Statements, Management Discussion & Analysis (MD&A), Annual
Information Forms (AIFs), Material Change Reports and Information
Circulars.
This new policy has also created two new
disclosure requirements in the form of Business Acquisition Reports (BARs)
and Restricted Securities Disclosure. There are also minor changes to
other filing documents and exemptions against compliance with the
Instrument.
The Instrument applies to all reporting issuers, including venture
issuers, but it does not apply to investment funds. Additionally, the
Instrument distinguishes between venture issuers (“VIs”) and other issuers
(“Non-VIs”). As defined by the Instrument, VIs are those issuers that have
their securities listed on TSX Venture Exchange, the CNQ or the OTCBB, but
not
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those with securities listed on the TSX, NASDAQ, a
national exchange in the US or any national marketplace outside US or
Canada.
Financial Statements
Perhaps the most important change with respect to financial statements is
the change in filing deadlines. The British Columbia Securities Commission
(the “BCSC”) wishes to encourage issuers to file their financial
statements as soon as possible following the completion of their audits.
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Annual Financials |
Interim
Financials |
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VIs |
120 days |
60 days |
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Non-VIs |
90 days |
45 days |
Therefore, the BCSC has shortened the time for
filing of financial statements. Additionally the requirement to have the
board of directors’ approval before filing of financial statements can now
be delegated to the audit committee, subject to requirements of any
corporate legislation.
Regarding interim financial statements, if they
are not reviewed by an auditor, a statement must accompany them statingthe
reasons for the lack of auditor review and disclosing any reservations the
auditor may have had.
Another big change is that it is no longer mandatory for issuers to
deliver their annual and interim financial statements to all shareholders.
Instead, the concept of an Annual Request Form has been introduced, where
the issuer is allowed to send this form, as prescribed in NI
54-101-Communication with Beneficial Owners,
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to shareholders annually and upon receiving a
request for financial statements, the issuer must then deliver the
statements to the shareholder by the later of the filing deadline or 10
days after the request. Also, keep in mind that when your company is
delivering financial statements, a copy of the MD&A must also be
delivered. These requirements are effective
for financial years beginning after January 1, 2004.
Additional filing requirements regarding financial information effective
as of March 31, 2004, include:
- disclosure of any news release regarding
historical or prospective operational results;
- changes to the notice of change of auditor;
- changes to the notice of change of year end;
and
- changes to the notice of change in corporate
structure.
MD&A-Form 51-102F1
The Instrument extends the requirement for filing of MD&A to all reporting
issuers and is effective for all financial years beginning after January
1, 2004.
The MD&A must be filed at the same time as the
financial statements and no later. Therefore, the Instrument has shortened
the filing dates for the MD&A, as well as for filing of financial
statements.
continued... |
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VENTURE
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CROSS BORDER SECURITIES UPDATE: MAY 2004
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New National Instrument
51-102: Changes to Disclosure Requirements and how they may affect you and
your Company
(continued)As with financial
statements, delivery to all shareholders is no longer mandatory and there
is no need to send in a separate annual request form, as the MD&A request
is covered under the form sent out for financial statements. If either the
MD&A or the financial statements are requested, but not both, the issuer
must send both documents to the shareholder together.
Perhaps one of the most important changes to the MD&A are the change made
to the form of the document. These changes include:
- addition of disclosure of “trends”-this used
to be disclosed in the AIF but has been removed from the AIF and
included in the MD&A;
- disclosure of selected financial data-for the
3 most completed financial years; 8 most recently completed interim
periods and discussion of factor causing period-period variations;
- requirement for VIs with no significant
revenue for past 2 most completed years to disclose additional
information;
- discussion of off-balance sheet arrangements;
- analysis of contractual commitments in tabular
format;
- disclosure of changes made, or expected to be
made, to accounting policies;
- disclosure of outstanding share data;
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- update of forward looking statements; and
- dating the MD&A as of the date of preparation.
AIFs-Form 51-102F2
The Instrument obliges all Non-VIs to file AIFs within 90 days of their
year-end. VIs who have used a short-form prospectus or a short-form
offering under TSX-Venture policies are also required to file AIFs
annually. Unlike the MD&A, AIFs do not have to be filed at the same time
as the financial statements. Therefore, if the financial statements are
filed earlier, your company still has the full 90 days to file its AIF.
The AIF changes are effective for financial years beginning after January
1, 2004.
The form of AIFs is still similar to that before. It is important to note
that companies registered with the Securities and Exchange Commission (the
“SEC”), in the US, can file their annual form 10-KSB, 10-K or 20-Fs with
the BCSC instead of an AIF.
Changes made to the AIFs include:
- removal of the discussion of “trends” and
“significant dispositions” (significant acquisitions must still be
disclosed);
- requirement for increased disclosure regarding
historical information for asset backed securities- from 2 years to 3
years of historical data;
- requirement for disclosure of contracts the
company’s business is substantially dependant on;
- requirement for disclosure of fundamental
social or environmental policies;
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- disclosure of penalties and sanctions; in
particular for directors and officers-they must make this disclosure if
they were a director or officer of a company during the occurrence of an
event that caused the penalty or sanction to be placed; and
- addition of some prospectus disclosure items;
examples include: trading information, risk factors, capital structure,
escrowed shares, interest of management and material contracts entered
into other than in the ‘ordinary course of business’ after January 1,
2002.
Material Change Reports-Form 51-102F3
As of March 31, 2004, management of companies can choose to file
confidential material change reports when the management decides that to
disclose the change would be unduly detrimental to the company. This
decision must be made reasonably. However, should any trades be made as a
result of the undisclosed information, that information must then
immediately be publicly disclosed.
Information Circulars-Form 51-102F5
There have been some changes made to the form of information circulars.
Proxy solicitation rules remain substantially the same and the new form is
effective as of June 1, 2004.
Changes to the form of Information Circulars include:
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CROSS BORDER SECURITIES UPDATE: MAY 2004
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New National Instrument
51-102: Changes to Disclosure Requirements and how they may affect you and
your Company
(continued)
- addition of penalties and sanctions disclosure
for directors and officer nominees;
- disclosure of “Indebtedness of Directors and
Officers” changed so that only debts above C$50,000 need be mentioned;
- regarding reorganizations, mergers,
arrangements and restructurings-now required to provide prospectus-level
disclosure for both the issuer and the resulting entity; and
- definition of “Named Executive Officer” found
in “Statement of Executive Compensation”-Form 51-102F4-has been changed
to mean the CEO, CFO and 3 highest paid employees so long as total
compensation is above C$150,000 per annum (this term used to mean the
CEO and the 4 most highest paid officers with total compensation over
C$100,000 per year).
Business Acquisition Reports (BARs)-Form
51-102F4
This is a new disclosure form
required to be filed within 75 days of a significant acquisition by all
issuers and must be accompanied by the required financial statements of
the acquired business/ the company invested in. To determine what is a
significant acquisition, the Instrument provides three tests, which can be
used:
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the Asset Test
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the Investment Test; and
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the Income Test.
Non-VIs are obliged to make use of
all three test, but VIs need not use the Income Test.
These
tests are based on the most recent audited, annual financial statements. |
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However, the Instrument does allow the option of
recalculating significant acquisitions using the most recent interim
financial statements.
The thresholds for meeting significant acquisition tests is met if the
consolidated assets of/ consolidated investment in the acquired business
is greater than or within the following percentage ranges of the issuer’s
assets.
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VIs |
Required Financial Statements |
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40% or more |
1 year audited and subsequent interim financials |
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Non-VIs |
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20%-40% |
1 year audited and subsequent interim financials |
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40% or more |
2 years audited and subsequent interim financials |
It is important to note that if your company
files an information circular or a filing statement under TSX-V policies,
within 9 months of the acquisition, which includes financial statements of
the acquired business, and there have been no material changes regarding
the acquisition, you can be exempted from filing a BAR.
The new BAR requirements apply to all significant acquisitions entered
into via binding agreements dated after March 31, 2004.
Restricted Security Disclosure
This is another new disclosure
requirement imposed on issuers in BC by the adoption of the Instrument. In
effect, the BCSC is now requiring issuers to provide disclosure
regarding their restricted securities (all classesof shares, which have
less or more restricted voting
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rights than other classes) in
certain documents required to be filed or sent to shareholders.
Issuers must disclose the following:
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how voting rights are restricted;
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rights to participants in
take-over bids; and
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percentage of voting rights
represented by the restricted securities.
Issuers must provide this
information in all Information Circulars, all documents delivered to
shareholders by request and all AIFs. This type of disclosure is not
required in financial statements or the MD&A.
Other Filing Requirements
Effective immediately, the
Instrument has put into place other filing requirements. These include:
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reports of outcome of any
shareholder votes (this does not apply to VIs);
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report of change in status of
issuer (i.e. if cease to be a VI or become a VI);
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filing copies of news releases
regarding results of financial operations;
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filing copies of all documents
sent to shareholders or filed with the SEC in each province or territory
where the issuer is registered as a reporting issuer; and
continued...
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CROSS BORDER SECURITIES UPDATE: MAY 2004
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New National Instrument
51-102: Changes to Disclosure Requirements and how they may affect you and
your Company
(continued)
- filing of all "Material Documents"
entered into after January 1, 2002-these include constating documents
(notice of articles and by-laws/articles), and material contracts
(contracts that define or materially change shareholder rights or
contracts entered into not in ‘ordinary course of business’).
It is important to note that contracts causing a
material change in the business of the issuer must be filed with the
Material Change Report; all other contracts must be filed with the AIF or
if the company is not required to file an AIF, within 120 days after the
company’s financial year end.
Exemptions from complying with NI 51-102 and Insider Reporting
Requirements
These exemptions are available as outlined below:
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Issuer |
Exemption |
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Exchangeable Share Issuers |
Need only file copies of the parents’ documents (ex.
only copies of parents’ financials or AIFs or MD&A) |
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Credit Support Issuers |
Need only file copies of the
parents’ documents (ex. only copies of parents’ financials or AIFs or
MD&A)
Note:
this only applies if the parent company is eligible to use the
Multi-Jurisdictional Disclosure System and the subsidiary does not
have any independent operations |
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Issuer |
Exemption |
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BC Issuers |
exempt from the BAR,
Restricted Securities Disclosure and Filing of Certain Documents (Part
12 of NI 51-102).
Note:
if issuer has reporting status in more than one province (ex. listed
on the TSX Venture or the TSX), the exemption only applies in regards
to filings required in BC. |
Conclusion
The Instrument puts in place many important changes, most of which have
been summarized above. However, it is up to each individual issuer to
ensure that they are in full compliance with all of the Instrument’s
requirements. Should you have any questions regarding the new continuous
disclosure rules, do not hesitate to contact us.
Continuous Disclosure and other
Exemptions relating to Foreign Issuers: NI 71-102
The British Columbia Securities Commission
recently adopted NI 71-102, Continuous Disclosure and Other Exemptions
Relating to Foreign Issuers. This new national instruments provides broad
relief from some of the disclosure requirements of NI 51-102, Continuous
Disclosure, for two sub-categories of foreign reporting issuers; namely US
foreign issuers registered with the Securities and Exchange Commission
(the “SEC”) and other designated foreign issuers. This instrument does not
apply to investment funds and does not provide exemptions for mineral
projects or oil and gas companies. Mining companies and oil and gas
companies must still comply with requirements of NI 43-101 and NI 51-101,
respectively. |
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Foreign reporting issuers are those
which are incorporated under the laws of a foreign jurisdiction. As
defined by NI 71-102, these issuers are not:
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those whose outstanding securities
that carry more than 50% of the votes for the election of directors are
owned by Canadian residents;
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whose majority of officers and
directors are resident in Canada;
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or issuers that have more than 50%
of their consolidated assets within Canada; or
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have their business administered
principally in Canada.
SEC foreign issuers are those who
have a class of securities registered with under the 1934 Act or are
required to file reports under the same Act. SEC foreign issuer definition
excludes those issuers who are registered or re-registered under the
Investment Company Act of 1940.
Designated foreign issuers are those
that are not SEC foreign issuers; do not have more than 10% of their
equity securities owned, directly or indirectly, by Canadian residents and
are subject to foreign disclosure requirements of designated foreign
jurisdictions.
The 15 designated foreign
jurisdictions are as follows: Australia, France, Germany, Hong Kong,
Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa,
Spain, Sweden, Switzerland and the United Kingdom and Northern Ireland.
To qualify under NI 71-102 for the
exemptions from certain continuous disclosure requirements of NI 51-102, a
SEC foreign issuer or a designated foreign issuer must:
- be in compliance with SEC requirements or the
disclosure requirements of the designated foreign jurisdiction;
- file copies of all documents filed with the
SEC or the designated foreign jurisdiction in Canada; and
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CROSS BORDER SECURITIES UPDATE:
MAY 2004
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Continuous Disclosure and
other Exemptions relating to Foreign Issuers: NI 71-102
(continued)
- send copies of documents sent to foreign
jurisdiction security holders to its Canadian security holders.
Should the SEC foreign issuer or
the designated foreign issuer comply with the above requirements, then NI
71-102 provides relief from the requirements of NI 51-102 in the following
areas of continuous disclosure rules:
- material change reporting;
- financial statement requirements;
- Annual Information Forms;
- Management Discussion & Analysis;
- Business Acquisition Reports;
- information circulars;
- proxies and proxy solicitations;
- filing of certain news releases and documents;
- disclosure of voting results;
- insider reporting requirements for insiders of
SEC foreign issuers or designated foreign issuers if the issuer is not a
SEDI filer;
- notice of change of auditor; and
- restricted securities disclosure.
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It must be noted, however, that the
rules respecting the following requirements under NI 51-102 are not
exempted and must be followed by all SEC foreign issuers and designated
foreign issuers,:
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disclosures relating to change in
corporate structure filings;
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disclosures relating to change in
status filings; specifically when a venture issuer becomes a non-venture
issuer;
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the requirements to file copies of
documents sent to designated foreign security holders or the SEC;
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portions of NI 52-108-Audit
Oversight; and
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NI 51-107-Accounting Principles,
Auditing Standards and Reporting Currency.
Additionally, if your company is
filing financial statements under the exemptions provided by NI 71-102,
you must still comply with NI 51-107 requirements of accounting
principles, auditing standards and the reporting currency used.
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The information in
this newsletter is of a general nature only about recent developments of
interest to our clients. You are encouraged to contact legal counsel
before acting on any information provided.
 Author
Alixe Cormick has assisted small and micro cap companies through each
stage of their growth from inception to graduation to junior and more
senior trading forums.
VENTURE
LAW
CORPORATION
618 - 688 West Hastings
Street
Vancouver, British Columbia, V6B 1P1
Phone: 604-659-9188
Fax: 604-659-9178
Web:
www.venturelawcorp.com
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PDF: May 2004 - Cross-Border
Securities Update
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