On Aug. 25, 2015, the participating provinces and territory in the Cooperative Capital Markets Regulatory System achieved an important milestone towards implementation of the system by publishing a revised consultation draft of the uniform provincial and territorial capital markets act (now known as the Capital Markets Act), along with the drafts of the initial regulations proposed for adoption by the participating provinces and territory under the draft uniform act. These materials have been published for a 120-day public comment period.
This article is part of Gowlings' Guide to the Proposed Initial Regulations and related materials. In this segment of our guide, we discuss the proposed initial regulations relating to the distribution of restricted shares. You can view other sections of the guide here.
The participating provinces and territories are proposing to impose a majority of the minority shareholder approval requirement for prospectus exempt distributions of restricted shares (which are "equity shares" that are not common shares or equity shares determined by the new chief regulator to be restricted shares). This is set out in section 8 of CMRA Regulation 41-501 Prospectus Requirement and Exemptions and is based on Part 3 of OSC Rule 56-501 Restricted Shares. The adoption of the majority of the minority shareholder approval requirement will represent a change in British Columbia.
Section 8 of CMRA Regulation 41-501 provides that the prospectus exemptions under capital markets law are not available for a "stock distribution" of restricted shares of a reporting issuer, or an issuer if the issuer will become a reporting issuer as a result of the stock distribution, unless:
- the stock distribution received "minority approval"; or
- (i) each "reorganization" carried out by the issuer related to the restricted shares that are the subject of the stock distribution received minority approval;
(ii) at the time of each reorganization referred to in clause (i), the issuer was a reporting issuer in any jurisdiction; and
(iii) if any proposed uses for the restricted shares were described in the information circular sent to shareholders in connection with the shareholders' meeting held to approve a reorganization referred to in clause (i), the reason for the stock distribution is not inconsistent with those uses.
For the definitions of "equity shares", "stock distribution", "minority approval" and "reorganization", see note (1) below.
The information circular prepared in connection with the shareholders' meeting held to obtain minority approval for the stock distribution or reorganization must contain prescribed information (including, for example, the name of each control person of the issuer and the number of securities beneficially owned by the control person).
An exemption from the majority of the minority shareholder approval requirement in section 8 of CMRA Regulation 41-501 is available for a stock distribution that is (i) of securities of an issuer that was a private company immediately before the completion of the stock distribution, or (ii) a subsequent distribution by such an issuer of securities of the same class as offered under the initial stock distribution.
Rationale behind Part 3 of OSC Rule 56-501
Dual class share structures, which exist where a company issues a class of shares carrying a disproportionate vote per share relative to other classes of shares, have been a popular financing device in Canada. The issuance of these shares, including restricted shares, allows the financing needs of an issuer to be met without the controlling shareholder having to subscribe for such shares to avoid dilution in its voting control. The Ontario Securities Commission adopted OSC Rule 56-501 as a result of its past experience with dual class share structures.
Despite the protections already afforded for minority shareholder interests under Canadian corporate law (such as shareholder oppression remedies), the majority of the minority shareholder approval requirement in section 8 of CMRA Regulation 41-501 is intended to heighten regulation in the area of restricted shares and provide further investor protection.
How does section 8 of CMRA Regulation 41-501 differ from OSC Rule 56-501?
Section 8 of CMRA Regulation 41-501 adopts Part 3 of OSC Rule 56-501, largely, in its current form as of March 2, 2015. There are no noteworthy changes that have been proposed against Part 3 (or against section 4.1 of OSC Rule 56-501, which is also being adopted to allow the new chief regulator to make determinations that equity shares are restricted shares).
However, in view of the disclosure obligations imposed on issuers with restricted shares under Part 10 of National Instrument 51-102 Continuous Disclosure Obligations, the participating provinces and territories have not proposed to carry forward the mandatory disclosure requirements related to restricted shares currently imposed under Part 2 of OSC Rule 56-501. This includes an obligation to provide disclosure about the restricted nature of the offered securities in a rights offering circular or offering memorandum for a stock distribution.
If you would like to discuss these regulations and how they will apply to your business, or if you wish to be added to our email distribution list for related publications, please contact Tal Cyngiser* or any of the following lawyers:
*Tal Cyngiser, an Associate in our Toronto office, was seconded to the Canadian Securities Transition Office (CSTO) for over a year, working extensively with the participating provinces and their securities commissions on the drafts of the initial regulations.
To view our full guide, click here.
(1) "equity shares" means shares of an issuer that carry a residual right to participate in the earnings of the issuer and, upon the liquidation or winding up of the issuer, in its assets.
"stock distribution" means a distribution of restricted shares, other than (i) a distribution of previously unissued restricted shares by way of a stock dividend in the ordinary course to shareholders instead of a cash dividend if at the time of the distribution there is a published market for the restricted shares, or (ii) a stock split that takes the form of a distribution of previously unissued restricted shares by way of stock dividend to holders of the same class of restricted shares if at the time of the distribution there is a published market for the restricted shares and the distribution is part of a concurrent distribution by way of stock dividend to holders of all equity shares under which all outstanding equity shares of the issuer are increased in the same proportion.
"minority approval" is defined as the approval of a proposed reorganization or stock distribution given at a meeting of shareholders called to consider the reorganization or stock distribution by a majority of votes cast by holders of voting shares, other than the votes attaching at the time to securities held by affiliates of the issuer and securities held by control persons of the issuer.
"reorganization" is defined to mean (i) the creation of a class of shares that are restricted shares, or (ii) an amendment to an issuer's constating documents, if the issuer has one or more classes of restricted shares outstanding, to increase (a) the per share voting rights attached to an issuer's common shares without at the same time making a proportionate increase in the per share voting rights attached to an existing class of restricted shares of the issuer, or (b) the number of common shares authorized.