Securities Law Bulletin Important Changes to Canadian Insider Trading Disclosure Regime By Jennifer A. Wainwright The Canadian securities regulatory authorities in each of the provinces of Canada have enacted a new, uniform insider trading disclosure regime which will come into force on April 30, 2010. The new regime contains a number of important changes to the current insider trading disclosure rules in Canada. Canadian securities legislation requires insiders of reporting issuers: to file an initial insider report, disclosing their beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer, and their interest in, or right or obligation associated with, a related financial instrument (defined below) involving a security of the reporting issuer; to file insider reports disclosing changes in their beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer, or interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer; and upon the exercise of an option, warrant or other convertible or exchangeable security, to file separate insider reports disclosing the resulting change in their beneficial ownership of, or control or direction over, whether direct or indirect, each of the options, warrants or other convertible or exchangeable securities, and the common shares or other underlying securities. Canadian insider reporting requirements are intended to deter improper insider trading based on material undisclosed information and increase market efficiency by providing investors with information concerning the trading activities of insiders and, by inference, the insiders views of their issuer s prospects. Insider reporting also helps prevent illegal or otherwise improper activities involving stock options and similar equity-based instruments, including stock option backdating, option repricing and the opportunistic timing of option grants (spring-loading or bullet-dodging). Insiders are expected to interpret Canadian insider reporting requirements with these policy rationales in mind and comply with the requirements in a manner that gives priority to substance over form. Deadline to Report Shortened The reporting deadline for insider reports after an initial report has decreased from 10 days to five calendar days after the trade for most transactions following a six-month transition period. Initial reports continue to be required to be filed within 10 days of becoming a reporting insider (defined below). PAGE 1
Categories of Persons Required to Report Reduced The categories of persons required to report trades has been reduced to a core group that have the greatest access to material undisclosed information and the greatest influence over reporting issuers. Persons required to report, now called reporting insiders, are: a) the CEO, CFO or COO and directors of the reporting issuer; b) the CEO, CFO or COO and directors of a major subsidiary of the reporting issuer. A major subsidiary is a subsidiary (i) whose assets, as included in the issuer s most recent annual audited or interim balance sheet (or statement of financial position), are 30% or more of the consolidated assets of the issuer or (ii) whose revenue, as included in the issuer s most recent annual audited or interim income statement (or statement of comprehensive income), is 30% or more of the consolidated revenue of the issuer; c) a significant shareholder of the reporting issuer. A significant shareholder is a person or company that has beneficial ownership of, or control or direction over, whether direct or indirect, or a combination of beneficial ownership of and control or direction over, whether direct or indirect, securities of an issuer carrying more than 10% of the voting rights attached to all of an issuer s outstanding voting securities (excluding any securities held by the person or company as underwriter in the course of a distribution); d) the CEO, CFO or COO and directors of a significant shareholder of the reporting issuer; e) a significant shareholder based on post-conversion beneficial ownership of the reporting issuer s securities. A person or company is a significant shareholder based on post-conversion beneficial ownership if the person or company has beneficial ownership of, post-conversion beneficial ownership of, control or direction over, whether direct or indirect, or any combination of beneficial ownership of, post-conversion beneficial ownership of or control or direction over, whether direct or indirect, securities of an issuer carrying more than 10% of the voting rights attached to all of an issuer s outstanding voting securities. Post-conversion beneficial ownership of a security, including an unissued security, occurs if the person or company is the beneficial owner of a security convertible into the security within 60 days following that date or has a right or obligation permitting or requiring the person or company, whether or not on conditions, to acquire beneficial ownership of the security within 60 days, by a single transaction or a series of linked transactions; f) the CEO, CFO or COO and directors of a significant shareholder based on post-conversion beneficial ownership of the reporting issuer s securities; g) a person or company responsible for a principal business unit, division or function of the reporting issuer; h) a management company that provides significant management or administrative services to the reporting issuer or a major subsidiary of the reporting issuer; i) the CEO, CFO or COO and directors of such a management company; j) the significant shareholder of such a management company; k) an individual performing functions similar to the functions performed by any of the insiders described above; l) the reporting issuer itself, if it has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security; and m) any other insider that (i) in the ordinary course receives or has access to information as to material facts or material changes concerning the reporting issuer before the material facts or material changes are generally disclosed; and (ii) directly or indirectly exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer. Reporting Requirements for Derivative Transactions The new regime consolidates insider reporting requirements for derivative transactions in one location with the primary insider reporting requirements. Reporting insiders continue to be required to file an initial insider report disclosing their interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer and, thereafter, insider reports PAGE 2
disclosing any change in the reporting insider s interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer. Reporting insiders of a reporting issuer must file an insider report within five days if they enter into, materially amend or terminate an agreement, arrangement or understanding that has the effect of altering, directly or indirectly, the reporting insider s economic exposure to the reporting issuer and involves, directly or indirectly, a security of the reporting issuer or a related financial instrument involving a security of the reporting issuer. A related financial instrument means an agreement, arrangement or understanding to which an insider of a reporting issuer is a party, the effect of which is to alter, directly or indirectly, the insider s (a) economic interest (meaning a right to receive or the opportunity to participate in a reward, benefit or return from a security or an exposure to a loss or a risk of loss in respect of a security) in a security of the reporting issuer, or (b) economic exposure to the reporting issuer. Related financial instruments include forward contracts, futures contracts, stock purchase contracts or similar contracts involving securities of the reporting issuer, options issued by an issuer other than the reporting issuer, stock-based compensation instruments, including phantom stock units, deferred share units (DSUs), restricted share awards (RSAs), performance share units (PSUs), stock appreciation rights (SARs) and similar instruments and debt instruments or evidences of deposit issued by a bank or other financial institution for which part or all of the amount payable is determined by reference to the price, value or level of a security of the reporting issuer (a linked note). Economic exposure in relation to a reporting issuer means the extent to which the economic or financial interests of a person or company are aligned with the trading price of securities of the reporting issuer or the economic or financial interests of the reporting issuer. Extended Deadline for Reporting Transactions under Automatic Securities Purchase Plans The new regime sets out a deferred reporting option for acquisitions and certain dispositions by directors and officers of securities under an automatic securities purchase plan, which is a dividend or interest reinvestment plan, a stock dividend plan or any other plan established by an issuer or by a subsidiary of an issuer to facilitate the acquisition of securities of the issuer, if the timing of acquisitions of securities, the number of securities which may be acquired under the plan by a director or officer of the issuer or of the subsidiary of the issuer, and the price payable for the securities are established in advance by written formula or criteria set out in a plan document and not subject to a subsequent exercise of discretion. This deferred reporting option also applies to a related financial instrument involving securities of reporting issuers. It does not apply to options and similar securities. A director or officer of a reporting issuer or a subsidiary may file an insider report disclosing, on a transaction-bytransaction basis or in acceptable summary form, each acquisition (other than an acquisition under a lump sum provision) and each specified disposition of a security under an automatic securities purchase plan in a calendar year, that has not previously been disclosed, by March 31 of the following year. A disposition or transfer of securities acquired under an automatic securities purchase plan is a specified disposition if (a) the disposition or transfer is incidental to the operation of the plan and does not involve a discrete investment decision or (b) the disposition or transfer is made to satisfy a tax withholding obligation arising from the distribution of securities under the plan and certain other requirements are met. Alternative Reporting Regime for Compensation Arrangements A director or officer may comply with an alternative reporting regime for the acquisition or specified disposition of a security of the reporting issuer under a compensation arrangement established by the reporting issuer or by a subsidiary of the reporting issuer if the reporting issuer has previously disclosed the existence and material terms of the compensation arrangement in an information circular or other publicly filed document and has filed an issuer grant report, setting out details of the grant of securities under the compensation arrangement. This alternative reporting option also applies to a related financial instrument involving securities of reporting issuers. A compensation arrangement includes, but is not limited to, an arrangement, whether or not set out in any formal document and whether or not applicable to only one individual, under which cash, securities or related financial instruments, including options, stock appreciation rights, phantom shares, restricted shares or restricted share units, deferred share units, performance units or performance shares, stock, stock dividends, warrants, convertible securities or similar instruments, may be received or purchased as compensation for services rendered or otherwise in connection with holding an office or employment with a reporting issuer or a subsidiary of a reporting issuer. PAGE 3
If a reporting issuer has complied with the reporting requirements described above, a director or officer of the reporting issuer or a subsidiary may file an insider report disclosing, on a transaction-by-transaction basis or in acceptable summary form, each acquisition and each specified disposition of a security under a compensation arrangement in a calendar year, that has not previously been disclosed, by March 31 of the following year. Penalties It is an offence to fail to file an insider report in accordance with the filing deadlines or to submit information in an insider report that, in a material respect and at the time and in the light of the circumstances in which it is submitted, is misleading or untrue. A failure to file an insider report in a timely manner or the filing of an insider report that contains information that is materially misleading may result in one or more of: the imposition of a late filing fee; the reporting insider being identified as a late filer on a public database of late filers maintained by certain securities regulators; the issuance of a cease trade order that prohibits the reporting insider from directly or indirectly trading in or acquiring securities or related financial instruments of the applicable reporting issuer or any reporting issuer until the failure to file is corrected or a specified period of time has elapsed; and in appropriate circumstances, enforcement proceedings. Canadian securities administrators have indicated that they may also consider information relating to wilful or repeated non-compliance by directors and executive officers of a reporting issuer with their insider reporting obligations in the context of a prospectus review or continuous disclosure review, since this may raise questions relating to the integrity of the insiders and the adequacy of the issuer s policies and procedures relating to insider reporting and insider trading. The Canadian securities administrators recommend that issuers adopt written disclosure policies to assist directors, officers, employees and other representatives in discharging timely disclosure obligations. Written disclosure policies should also provide guidance on how to maintain the confidentiality of corporate information and prevent improper trading based on inside information. National Policy 51-201 Disclosure Standards outlines detailed best practices for issuers for disclosure and information containment and provides interpretative guidance of insider trading laws. Adopting these best practices may assist issuers to ensure that they take all reasonable steps to contain inside information. Reporting issuers may also wish to consider preparing and periodically updating a list of the persons working for them or their affiliates who have access to material facts or material changes concerning the reporting issuer before those facts or changes are generally disclosed. This type of list may allow reporting issuers to control the flow of undisclosed information. The Canadian securities administrators may request additional information from time to time, including asking the reporting issuer to prepare and provide a list of insiders and reporting insiders in the context of an insider reporting review. If you have any questions with respect to the foregoing or its application to you, please contact Jennifer Wainwright at jwainwright@airdberlis.com or any member of s Corporate Finance Group. PAGE 4
Lawyers: If you have questions regarding this article, please contact the author or any member of the Corporate Finance Group: Sherri Altshuler 416.865.3081 saltshuler@airdberlis.com Daniel N. Bloch 416.865.4739 dbloch@airdberlis.com Michael Bluestein 416.865.4741 mbluestein@airdberlis.com Thomas A. Fenton 416.865.4631 tfenton@airdberlis.com Tony Gioia 416.865.3403 tgioia@airdberlis.com Rebecca Kacaba 416.865.7707 rkacaba@airdberlis.com Steven Kelman 416.865.3446 skelman@airdberlis.com Richard M. Kimel 416.865.3961 rkimel@airdberlis.com Martin E. Kovnats 416.865.3419 mkovnats@airdberlis.com Brookfield Place 181 Bay Street, Suite 1800 Toronto, Ontario, Canada M5J 2T9 T 416.863.1500 F 416.863.1515 www.airdberlis.com Andrew Magnus 416.865.4744 amagnus@airdberlis.com Anne Markle 416.865.7717 amarkle@airdberlis.com James G. Matthews 416.865.7748 jmatthews@airdberlis.com Jeffrey K. Merk 416.865.7768 jmerk@airdberlis.com Any of the articles or papers written by our professionals can be viewed at: www.airdberlis.com Margaret T. Nelligan 416.865.7710 mnelligan@airdberlis.com Susan Pak 416.865.3430 spak@airdberlis.com Morli Shemesh 416.865.3406 mshemesh@airdberlis.com Jennifer A. Wainwright 416.865.4632 jwainwright@airdberlis.com Andrew J. Wilder 416.865.3969 awilder@airdberlis.com This bulletin offers general comments on legal developments of concern to business organizations and individuals and is not intended to provide legal opinions. Readers should seek professional legal advice on the particular issues that concern them. 2010. This bulletin may be reproduced with acknowledgment. PAGE 5