The Gender Question: BC Securities Commission asks for comment on disclosure requirements with respect to board gender diversity

In late 2014, the Canadian Securities Administrators (CSA) published “comply or explain” rules regarding female representation in director and executive officer positions. The requirements were codified in National Instrument 58-101 (the Disclosure Requirements) and created a positive duty for issuers in participating jurisdictions to disclose the details of female representation, including issuers’ targets, policies, and mechanisms to address female representation in director and executive officer roles. Where issuers do not adopt such mechanisms or consider female representation, they are required to explain their reasons for not doing so. The Disclosure Requirements were adopted in all CSA jurisdictions except for BC and Prince Edward Island on December 31, 2014 (with the exception of Alberta, which did not adopt until December 31, 2016) (the Participating Jurisdictions).

Following the adoption of the Disclosure Requirements, the CSA conducted a review of the progress of female representation for women on boards and in executive officer positions. We reported on this review (CSA Staff Notice 58-309) in late 2017.

In January 2018, we posted that we expected further discussions surrounding board gender diversity in the lead up to the 2018 proxy season, with leading proxy advisory firms such as the Institutional Shareholder Services and Glass Lewis & Co. LCC adding a voting policy with respect to board gender diversity to their 2018 proxy voting guidelines for Canada.

As 2018 progresses, it is clear that discussions about gender diversity remain an ongoing area of focus for regulators. On February 26, 2018, the British Columbia Securities Commission (BCSC) published a notice and request for comments seeking input on the gender diversity Disclosure Requirements in NI 58-101 (the Consultation). Although BC has not adopted the Disclosure Requirements, BC-based TSX-listed and other non-venture issuers must comply with the Disclosure Requirements regardless, as they report in at least one of the Participating Jurisdictions.

The Consultation, which is running in tandem with consultations on the same issue by the Participating Jurisdictions, is meant to assist the BCSC in understanding the views of BC market participants as well as the benefits and challenges of diversity-related requirements. Comments are meant to discuss the Disclosure Requirements generally, and whether Canadian securities regulators should consider any further regulatory measures or actions in this area.

The Consultation is asking for some more specific inputs as well, such as:

  • the experience so far in providing information mandated by the disclosure requirements;
  • whether the disclosure requirements provide investors with the necessary information to inform their investment and voting decisions and how that information is incorporated;
  • whether corporate governance guidelines regarding gender diversity-related governance policies should be implemented and if existing guidelines are sufficient; and
  • whether issuers should be required to disclose if they have policies relating to diversity other than gender.

Based on the specific questions asked by the BCSC, it is clear that the Commission to be turning its mind to how the disclosure process can be improved and whether the tools already in existence, such as governance policies and prescribed format, are satisfactory.

The author would like to thank Justine Smith, articling student, for her assistance in preparing this legal update.

TSX Adds New Website Disclosure Requirements

In October 2017, the TSX published updates under section 473 of the TSX Company Manual placing additional disclosure obligation requirements on non-exempted TSX-listed issuers.

These updates became effective on April 1, 2018.

The TSX’s updates mandate that each TSX-listed issuer (other than Non-Corporate Issuers, Eligible Interlisted Issuers and Eligible International Interlisted Issuers (as such terms are defined in the TSX Company Manual)) will be required to maintain a publicly accessible website. These issuers are also required to post constating documents (i.e. articles of incorporation or amalgamation and by-laws) as well as the following documents, if adopted:

  • any majority voting policy;
  • any advance notice policy;
  • descriptions for the positions of chairman of the board and lead director (the previously proposed requirement to post job descriptions of key officers has been removed);
  • any board mandate; and
  • any board committee charters.

The webpages where documents are posted must be easily accessible from the issuer’s home page. If a document required to be posted is contained within a larger document, the requirements will be satisfied by the posting of the larger document.

These updates to the TSX Company Manual are intended to provide participants in the Canadian capital markets with ready access to key security holder documents. While reporting issuers are required to file certain material documents with Canadian securities regulators, which are publicly available on SEDAR, this new policy is intended to enhance the accessibility of such documents to the investing public. Further, this updated policy requires affected issuers to post documents that may otherwise not have been public or readily viewable.

The author would like to thank Peter Valente, articling student, for his assistance in preparing this legal update.

Corporate Governance in the Cannabis Sector

Since the introduction of Bill C-45 to legalize the production, distribution and sale of cannabis for recreational use, the cannabis sector (the Sector) has been thriving. Despite many unknowns and uncertainties surrounding the Sector, investors appear unfazed as share prices continue to surge.

Some key features of the Sector

Even though Bill C-45 has not yet passed and has been the subject of some controversy, investor reticence appears to be at a minimum. However, mirroring the volatility of the cannabis market itself, the nature of these investors has changed. Whereas in the nascent stages of the Sector investors could generally be categorized as retail, advisory firm Kingsdale Advisors (Kingsdale) observes that investors of larger cannabis companies are becoming increasingly institutional. Kingsdale attributes this shift to forthcoming legislation, companies’ need for capital and their increased market cap and indexing. As investors increasingly change from retail to institutional, they may place greater scrutiny on the companies for their governance practices and proxy advisory firms like Institutional Shareholder Services and Glass Lewis may begin to influence the operations and trajectories of these affected companies. Kingsdale also notes that the pool of potential acquirers of cannabis companies is ever-expanding.

Significance and relevance of corporate governance

Kingsdale advises that as the nature of the Sector changes, as described above, the significance of sound corporate governance practices rises. In particular, Kingsdale warns directors of cannabis companies to be on alert for hostile bidders and activist shareholders who may launch campaigns that could detrimentally transform the companies. Similarly recognizing the significance of corporate governance, Ernst & Young, in its report entitled “How do you define your future in an undefined market? Insights and perspectives from Canada’s cannabis industry leaders”, suggests that Canadian licensed cannabis producers “will need to quickly organize talent and apply the formality, rigour and a lens for governance that established organizations do”.

As the passing of Bill C-45 looms near, it may prove to be imperative for cannabis companies to monitor how the market value of the Sector reacts, how the nature of the investors changes, as well as any other consequences of the legislation in order to ensure their companies’ success.

The author would like to thank Samantha Sarkozi, articling student, for her assistance in preparing this legal update.

Best Practices for Board Oversight and Disclosure of Environmental and Social Issues

In a recent post, we discussed investors’ growing interest in environmental and social (E&S) governance. As a recent report published by the Canadian Coalition for Good Governance (CCGG) demonstrates, public company boards are no less attentive to growing shareholder interest in E&S issues. The Directors’ E&S Guidebook (Guidebook), which is the product of consultations with industry leaders in the management of E&S factors, provides practical insights and recommendations for effective board oversight and disclosure of E&S matters.

Companies have good cause to respond to investor interest in E&S matters. For some, past incidents provided the impetus for the implementation of effective management structures. However, the report emphasises that the value of E&S structures is not limited to a preventative function; E&S structures have the potential to significantly increase shareholder value. In fact, the Guidebook found that many companies credited E&S policies with talent attraction and retention. CCGG also predicts that this association will persist because Millennials are more likely to monitor and demand commitment to E&S matters from the companies they work for and invest in.

The Guidebook also suggests best practices for the management of E&S issues. It outlines a number of E&S governance recommendations under eight governance topics. For example, under the topic of board practices, the Guidebook recommends that boards ensure that E&S priorities are a regular discussion item in meetings and design an escalation mechanism so that E&S issues may be brought to the attention of the board in a timely manner.

The Guidebook also provides four key insights from companies with existing E&S structures. First, a company’s unique experiences and drivers will determine the E&S factors that are high priority. Second, a robust approach to managing E&S risks is developed incrementally. Companies should view their approach to E&S matters as a central element of their corporate culture, strategy and operations. Third, the tone set by management is crucial to institutionalizing new behaviours motivated by E&S factors. The board must communicate its commitment to E&S issues and elevate E&S management to a long-term corporate priority. Finally, a company should be transparent about how its E&S approach creates value for its stakeholders. This will create trust and goodwill.

With these recommendations and insights in hand, companies will have a strong starting point for the integration of E&S governance into core business practices and priorities. The full report can be found here.

The author would like to thank Samantha Black, summer law student, for her assistance in preparing this legal update.

Activist Shareholders Trading on the Blockchain: Is the Prized Secrecy Compromised?

Background: Registered Shareholders and Beneficial Shareholders

While a registered shareholder holds its shares directly with a company and can be contacted through its transfer agent, a beneficial shareholder does not have the shares registered in its name. Instead, a securities depository is the registered shareholder. There are two types of beneficial shareholders, a Non-Objecting Beneficial Owner (NOBO) and an Objecting Bene­ficial Owner (OBO). A NOBO has authorized a financial intermediary to disclose its identity and share position. An OBO has taken affirmative steps to object to such disclosure. Therefore, while a NOBO can be contacted directly, an OBO can only be contacted through the intermediary. Activist shareholders are generally OBOs until they are required to disclose their identity and share positions under securities regulations. We briefly explore the impact of blockchain technology on this secrecy, which is fundamental to the strategy of activist shareholders.

Increased Adoption of Blockchains for Securities Transactions

A blockchain is an alternative to classical financial ledgers by providing a new way to create, exchange, and track information pertaining to the ownership of financial assets. Transactions are automatically recorded publicly and in real time. Major stock exchanges and leading financial institutions are rapidly exploring and adopting the use of blockchains for securities issued by corporations in order to ensure more accurate, efficient, and economical recording of share ownership.

After two years of testing with a blockchain technology provider, the Australian Securities Exchange (ASX) announced in December 2017 that they be the world’s first securities exchange to use blockchain technology in corporate finance. However, unlike the public blockchain, the ASX would use a “permissioned” blockchain where participants are known, must obtain permission to have access, and must comply with continuous obligations enforced by regulators. Even more recently, in February 2018, the Canadian Securities Exchange (CSE) unveiled that they would be the first recognised exchange in Canada to introduce a fully developed blockchain platform for trading, clearing, and settling tokenised securities.

Digital Wallets and Identification

The blockchain ledger of share ownership often conceals the transacting parties’ identities because assets are held in anonymous “digital wallets” bearing complex serial codes. However, on the blockchain ledger, ascertaining the identity of a shareholder may often require little effort. For instance, if an officer of a corporation announces their intention to subscribe to a certain quantity of shares, this would immediately be recorded on the blockchain ledger, thereby inferentially divulging the officer’s ownership of the corresponding digital wallet.

Increased Risk of Identifying Activist Shareholders through Advances in Data Mining

If the distinction between OBOs and NOBOs persists in the new era of blockchain trading platforms, secrecy may not appear to be lost for activist shareholders. However, blockchain enables traders to exchange shares in a more rapid and cost-effective manner, resulting in immediacy of information and increased transparency. With significant advances in data mining and machine learning, the market could identify activist shareholders as the buyers of shares through pattern recognition, as well as de-anonymization and re-identification strategies offered by specialist research firms. This parallels current de-coding methods, such as analyzing patterns in the sequence, quantity, and timing of trades, used by market participants to infer the identity of the shareholder.

While fund managers and individual investors stand to benefit from this increased information, activist shareholders, who value and depend on secrecy when building hostile positions, are less likely to be as welcoming. Blockchains for securities transactions could compel activists, who would prefer to remain undisclosed, to adopt new strategies to maintain their secrecy, such as using many digital wallets, splitting large share acquisitions into smaller ones, or treating digital wallets as “disposable” or single-use.

The author would like to thank Shan Arora, articling student, for his assistance in preparing this legal update.

Canadian Securities Administrators are seeking comments on soliciting dealer arrangements

The Canadian Securities Administrators (the “CSA”) have issued CSA Staff Notice 61-303 and Request for Comment – Soliciting Dealer Arrangements (the “Notice”) on the use of soliciting dealer arrangements. “Soliciting dealer arrangements” generally refer to agreements entered into between issuers and investment dealers under which the issuer agrees to pay to the dealers a fee for each security successfully solicited to tender to a bid in the case of a take-over bid, or to vote in favour of a matter requiring securityholder approval. In many cases, the payment of any fee is contingent on “success” and/or only if votes are cast in a particular manner.

The recent use of soliciting dealer arrangements in the context of contested director elections has raised substantial controversy. For example, in a previous blog, we reported on the decision of the Alberta Securities Commission (the “ASC”) in PointNorth Capital Inc. where the ASC was called upon to consider the appropriateness of a soliciting dealer arrangement that had been entered into in the context of a proxy fight. Pursuant to this arrangement, the issuer agreed to pay the soliciting dealers a fee if the issuer’s slate of incumbent directors was elected. The ASC dismissed the application by the dissident shareholders and allowed the soliciting dealer arrangement to remain on the grounds that it was not “clearly abusive” of the capital markets in general.

In light of the issues raised by soliciting dealer arrangements, the staff of the CSA has published the Notice and is requesting comments to better understand these arrangements to aid the CSA in assessing whether additional guidance or rules in respect of these arrangements would be appropriate. To aid its assessment in this regard, the CSA has also posed a series of questions for market participants .

Comments must be submitted to the CSA by June 11, 2018.

Stay connected with Special Situations Law and subscribe to the blog today.

Aurora/CanniMed: Canadian securities regulators provide guidance on takeover bids in Canada – Expect to see more hard lock-ups and fewer tactical poison pills

The Ontario and Saskatchewan securities regulators (the Commissions) have released their reasons in connection with the unsolicited bid of Aurora for CanniMed (the Reasons). Below, members of our Special Situations team set out some of the key lessons of the decision.

Key Takeaways

  • expect to see an increased use of hard lock-ups (that is, lock-ups in which a shareholder agrees to tender shares even if a superior bid comes along), which will provide bidders with reduced risk during the new 105-day bid period
  • well-structured hard lock-ups do not necessarily result in target shareholders being joint actors with the bidder
  • tactical shareholder rights plans or poison pills will likely have limited uses going forward
  • ultimately, regulators expect the new takeover bid regime to emphasize target shareholder choice
  • regulators will insist on strict compliance with the new takeover bid regime

Quick Background

  • Aurora Cannabis Inc. launches unsolicited bid for CanniMed Therapeutics Inc. and signs hard lock-up agreements with four target shareholders representing approximately 38% of CanniMed’s shares
  • Three days later, CanniMed announces it has entered into a plan of arrangement with Newstrike Resources Ltd.
  • CanniMed announces that its board has adopted a tactical poison pill in response to Aurora’s bid

Key Lessons

Lesson 1: Lock-ups are good for bidders and do not necessarily make shareholders joint actors

Due to the 105-day deposit period provided for in the 2016 take-over bid regime, bidders are exposed to greater risk. The response of bidders has been to attempt to secure hard lock-ups from target shareholders as early as possible. We expect this trend to continue following the Aurora/CanniMed decision. Hard, well-structured lock-up agreements will be a critical tool for bidders.

In the Reasons, the Commissions noted that while lock-up agreements or the context in which they are used can raise public interest issues, lock-ups are a “lawful and established feature” of the M&A process and are of increased importance since the adoption of the new regime. By upholding relatively restrictive lock-ups, the Reasons indicate that generally the Commissions will accept target shareholders’ ability to execute lock-ups in furtherance of their own interests.

The Reasons held that entering into hard lock-up agreements did not automatically result in Aurora and the locked-up shareholders acting jointly or in concert. The Commissions noted that Canadian securities legislation provides that an agreement or understanding to tender securities to a bid does not, in and of itself, lead to a determination of acting jointly or in concert. The legislation does not distinguish between hard and soft lock-ups.

Notably, the provision in the agreements requiring the locked-up shareholders to vote against the Newstrike transaction and for the Aurora transaction if it were reformulated into a corporate transaction (such as an arrangement) did not make Aurora and the locked-up shareholders joint actors – the Commissions found that such voting provisions were consistent with the otherwise permissible commitments to tender to a bid. In the Commissions’ view, the lock-ups were consistent with the shareholders seeking enhanced liquidity and a higher price.

Lesson 2: Despite creative defensive tactics, regulators expect shareholders to have the ultimate say

The Reasons emphasize that despite creative defensive tactics targets may employ, the uses of tactical poison pills will likely be limited under the new regime. The Reasons suggest that it will be a rare case where poison pills will be allowed to interfere with established features of the new bid regime—including by preventing creeping 5% acquisitions or hard lock-ups.

In this case, CanniMed’s pill had a number of unusual features, including changing the mandatory extension period to 10 business days rather than the 10 calendar days provided for under the bid regime, and deeming all securities subject to lock-up agreements to be beneficially owned by Aurora.

The Commissions cease traded CanniMed’s pill, as in their view, its principal function was not to give CanniMed’s board extra time for higher bids to emerge, but rather to prohibit further lock-ups being entered into and to support the Newstrike transaction in the face of Aurora’s bid, which was conditional on the Newstrike transaction being abandoned. As such, the pill interfered with legitimate and established elements of the bid regime such as lock-up agreements, which are of increased importance under the new take-over bid regime.

Lesson 3: Regulators will insist on strict compliance with the new regime

The Reasons indicate that given the “careful rebalancing” of the takeover bid regime in 2016, the Commissions will be reluctant to waive prescribed bid requirements, favouring a predictable regime instead.

Aurora argued that the policy rationale for the “alternative transaction” exception to the 105-day bid period applied in this case. As a result, the minimum deposit period for Aurora’s bid should be reduced from 105 to 35 days to coordinate the timing of the Newstrike acquisition and the Aurora bid and allow shareholders to consider both at once.

The Commissions disagreed, and stated that the Newstrike transaction was not an alternative transaction to Aurora’s bid, noting that Aurora itself had made its offer conditional on the Newstrike transaction not being completed. The Commissions noted that Aurora was free to solicit proxies against the Newstrike transaction if it so chose and could also seek to persuade shareholders to wait it out until its bid expired. The Commissions stated that abbreviating the 105-day period was not necessary in the circumstances to facilitate a choice by CanniMed shareholders between both transactions. In addition, in their view, the Newstrike acquisition did not preclude competing bids during the bid deposit period.

The Commissions also found that Aurora could avail itself of the 5% exemption to the prohibition against it purchasing target shares outside of the bid, noting that Aurora did not own any shares and that allowing a purchase of up to 5% would not put Aurora in a blocking position to preclude any superior offers.


The Aurora/CanniMed reasons provide the clearest guidance to date on the state of hard lock-ups and defensive tactics under the new regime. Overall, the message is clear: the expectation is that target shareholders should have the ultimate say. We will continue monitoring future developments.

Preparing for activism in 2018: the activist investing annual review

Activist Insight recently published the fifth annual edition of The Activist Investing Annual Review (the Review). The Review analyzes global activist investing trends over the past few years, with an emphasis on 2017, forecasts developments expected in 2018, and breaks out key statistics by jurisdiction.

The 2018 Forecast

The Review identifies four big trends expected to make their mark on 2018 activism:

  • Return to large-cap targets. With more institutional investors recognizing the benefits of an activist approach, such investors have become more and more willing to support activist campaigns. This support allows activists to challenge larger and larger companies, a trend showing no signs of slowing down in the coming year.
  • Resurgence of the proxy contest. With declining settlements and bolder defence tactics, many companies facing activist campaigns have become less willing to settle.
  • Backlash against dual class shares. In 2017, dual class share structures came under scrutiny from S&P Dow Jones, FTSE Russell, and MSCI, with backlash causing companies to rethink plans to offer non-voting shares in forthcoming IPOs.
  • Activism outside the United States. Shareholder activism is gaining traction in Europe and Asia, from shareholder rights directives adopted in the European Union to corporate governance reform in Japan. Continuing the trend from past years, global activism is expected to continue its upward trajectory.

Focus on Canada

In Canada, 2017 saw 47 targets face public demands from activist investors. This represents a decline from 2016 and 2015, in which 53 and 60 companies were publicly subjected to activist demands, respectively. Nonetheless, outside of the United States, Canada ranked second highest in number of activist targets by location of company headquarters, topped only by Australia with 53 targets in 2017. In addition, these numbers do not reflect activist activity that occurs behind the scene without public campaigning.

Breaking down the statistics by target characteristics, activism in Canada in 2017 aligns with Canadian market characteristics generally. Accordingly, approximately half of the target companies headquartered in Canada that faced activist challenges had a market cap of $250 million or less, with another 30% between a market cap of $2 billion and $250 million. Similarly, the breakdown of activism in Canada by sector reflects the two-thirds share of Canadian stock listings in the energy and financial sectors. The recent cyclical downturn in the energy sector correlates to the reduction in activist activity in Canada over the past year. However, as the cycle swings upward again, watch for increased activity in this sector.

M&A activism increased in Canada by 0.9 percentage points from 2016 to 2017, a more modest increase than observed in Europe and Asia, but contrary to the trend set by Australia and especially the United States. In 2017, M&A activists were increasingly likely to advocate for an M&A transaction, up to 65% from 56% in the year prior. Despite the lull in 2017, overall M&A activism has shot up over the last five years, with activists pushing for more comprehensive changes through deal-making, another important trend to watch for this year.

The complete Review may be obtained from Activist Insight here.

Stay connected with Special Situations Law and subscribe to the blog today.

The author would like to thank Kassandra Shortt, articling student, for her assistance in preparing this legal update.

Trends in Environmental Social Governance

Corporations are facing increasing pressure to offer more transparency and disclosure with respect to their governance practices that promote environmental and social sustainability. This year’s trends in Environment Social Governance (ESG) in the context of Canadian corporate governance indicate that more and more corporations are including ESG as part of their core mandates and that investors are looking and asking for more ESG-related disclosures in making investment decisions.

What is ESG?

ESG is a general term used in the capital markets referring to non-financial performance indicators including sustainability, ethics and corporate governance factors, which measure the sustainability and ethical impact of an investment. ESG factors focus on activities that have actual or potential impact on the environment, human health, and, more broadly, society. Empirical data shows that the integration of ESG considerations generate positive impacts on financial performance, cost of capital, and society.[1]

ESG has become increasingly important for Canadian investors and corporations

According to a study by Laurel Hill Advisory Group (Laurel Hill), an independent cross-border advisory firm, Canadian investors are increasingly aware of and interested in how ESG issues are related to a company’s strategy, risk management, and operations. Similarly, according to the CFA Institute, almost 75% of investment professionals took a company’s ESG into consideration when making an investment decision.  More specifically, a 2016 study by RR Donnelly makes the following key findings relating to investors’ views vis-à-vis ESG information:

  • 65% of Canadian institutional participants said that they often or always consider environmental and social issues, and 95% of them often or always consider governance issues for all investments.
  • ESG information is mostly used by portfolio management teams: 70% of portfolio management teams review environmental issues, 65% review social issues and 80% review governance matters for every investment.
  • Only 30% of the investors find the ESG information provided by companies sufficient to help them assess the ESG’s materiality to the company’s business. 75% of the respondents said they prefer getting ESG information from third parties.
  • Investors are interested in specific information linking ESG issues to the corporate strategy, risk management and operation.

The Laurel Hill report shows that Canadian investors want more information about ESG. However, there is a gap between the ESG information that companies are disseminating and the information that investors are interested in.

Regulators are contemplating additional disclosures

The increased interests in ESG  has drawn regulatory attention. On March 21 2017, the Canadian Securities Administrators (CSA) announced a climate change disclosure review project. The project sought to review the disclosure practices of public companies in relation to climate-related risks and financial impacts. One of the key components of the project is to review international disclosure requirements and voluntary frameworks. In doing so, the CSA Staff will “review climate-related disclosure requirements in the securities laws of certain international jurisdictions, such as Australia, the United Kingdom and the United States, as well as recommendations contained in recently proposed voluntary disclosure frameworks with respect to climate-related disclosure.”

At the provincial level, the Ontario Securities Commission (OSC) noted in its 2018 Statement of Priorities “the growing financial relevance to investors of [ESG] factors and the need for ESG disclosure by companies.” The OSC stated that it would continue to monitor developments in respect of ESG practices “to assess whether additional or new forms of disclosure are required”.

Given investors’ surging interests in ESG, coupled with regulatory initiatives to collect and review information on international ESG standards, it may be only a matter of time before further ESG disclosures are required – especially in light of the regulators’ heralded openness to further disclosure obligations.

[1] Gunnar Friede, et al., “ESG and financial performance: aggregated evidence from more than 2000 empirical studies” (2015), Journal of Sustainable Finance & Investment, Vol. 5, No. 4, 210–233.

Stay connected with Special Situations Law and subscribe to the blog today.

 The author would like to thank Saam Pousht-Mashhad, articling student, for his assistance in preparing this legal update.

Governance Oversight – Is Your Board An Active One?

In a recent interview with Christopher P. Skroupa on, Walied Soliman (Chair of Norton Rose Fulbright Canada, LLP and Co-Chair of Norton Rose Fulbright’s Canadian special situations team) weighs in on what it means to be an active director. The interview can be viewed here.

Stay connected with Special Situations Law and subscribe to the blog today.