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M&A REGULATION Additionally, the current Canadian early warning system (specifically, the reporting threshold) has a different reporting threshold than the reporting system in the United States. Reduction in Reporting Threshold The key proposal that garnered much of the immediate attention was to reduce the early warning reporting threshold from 10 percent to 5 percent. In the CSA's view, increasing shareholder activism and the ability under Canadian corporate statutes of holders of at least 5 percent of a corporation's shares to requisition a shareholders' meeting prompted the need for increased market transparency and a lowering of the reporting threshold to 5 percent. Calculation of the Threshold In its proposals the CSA expressed concern that hidden ownership strategies can significantly undermine the early warning regime since an investor may have access to securities held by a derivative counterparty without triggering a disclosure obligation. The proposals seek to improve disclosure by requiring an investor to include within the early warning calculation certain equity derivative positions (defined in the proposals as "equity equivalent derivatives") that are substantially equivalent in economic terms to conventional equity holdings. A derivative would substantially replicate the economic consequences of ownership of a specified number of reference securities if a dealer that took a short position on the derivative could substantially hedge its obligations under the derivative by holding 90 percent or more of the specified number of reference securities. Examples of equity equivalent derivatives include total return swaps, contracts for difference and other derivatives that provide the party with an economic interest that is substantially equivalent to the economic interest the party would have if it held the securities directly. Partial exposure instruments, such as an option and collar that provides only limited exposure to the reference securities, would not constitute "equity equivalent derivatives." Other Reporting Triggers The proposed amendments would also clarify, or fill gaps in, other reporting requirements. Under present rules investors who have made early warning disclosures are required to disclose increases in ownership of 2 percent or more of the issuer's securities, and changes in any material fact previously disclosed. Consequently, it is for the investors to determine whether a decrease in their ownership constitutes a material fact requiring disclosure. Under the proposed amendments, disclosure would be required for a decrease in ownership of 2 percent or more. Additionally, where under current rules it is not clear that a decrease in ownership below the reporting threshold (as proposed, 5 percent) would require disclosure, the CSA proposes that securityholders be required to issue a press release and file a report if their ownership decreases below the 5 percent threshold. Under the current rules, an investor required to make early warning disclosure is required to issue a press release promptly (and to file a report within two business days). Under the proposals the timing of the press release is more clearly specified; it would have to be issued before market open on the first trading day following the reportable event. tion or other change in a material fact in a previous report), including detailed disclosure of the investor's intentions. The CSA, expressing concern that under the current early warning regime unhelpful "boilerplate" language is overused, included in the proposals more detailed disclosure requirements relating to the investor's intentions, with a view to making the disclosure more specific and meaningful. It is not clear how transition to the more detailed disclosure would work if the proposals were adopted, specifically whether investors that had crossed the threshold before implementation of the new requirements would be required to provide updated disclosure. However, the CSA will have an opportunity to clarify these matters once it receives feedback from market participants. Reporting on Securities Lending Arrangements Through its proposals, the CSA seeks to provide greater transparency about, and ensure appropriate disclosure of, securities lending arrangements for the purposes of early warning disclosure requirements. Given the increasing use of securities lending arrangements, the CSA clarified in its proposals how the early warning requirements apply to such arrangements. The CSA proposals confirmed that securities lending arrangements are captured by early warning disclosure requirements (as acquisitions of interests for the borrower, and as dispositions of interests by the lender). An exemption is contemplated for certain lending arrangements where the lender has the ability to recall the loaned securities prior to any securityholder meeting. The views expressed by the CSA on securities lending arrangements are consistent with its perspective that greater detail and clarity must be provided to the market concerning complex transfers of interests in publicly traded securities. Changes to Alternative Monthly Reporting The early warning regime currently permits a party qualifying as an eligible institutional investor (an "EII"), having a passive intent with respect to its ownership or control of securities, to report changes on a more relaxed timetable. Under these rules (known as the alternative monthly reporting system (the "AMR")), an EII may defer reporting changes until 10 days after the end of the month in which the change occurred unless it (i) makes, or intends to make, a takeover bid or (ii) proposes, or intends to propose, a reorganization, amalgamation, arrangement or similar business combination. The policy underlying the AMR is that there is less market sensitivity to changes involving passive investors, and therefore less urgency for disclosure of those changes. Currently, an EII that solicits, or intends to solicit, proxies from the securityholders of a reporting issuer may use AMR even though its intent may be to actively engage with the securityholders of the reporting issuer. The CSA stated its belief that allowing an EII access to AMR in this circumstance would not be consistent with the policy intent of the AMR regime. As a result, the CSA proposes to exclude from AMR any EII which solicits, or intends to solicit, proxies from securityholders on matters relating to the election of directors or a reorganization, amalgamation, merger, arrangement or similar corporate action involving the securities of the reporting issuer. Enhanced Disclosure IMPLICATION OF THE PROPOSED AMENDMENTS The proposals require enhanced disclosure in early warning reports relating to the purpose of the reported event (acquisition, disposi- If implemented, the proposed amendments would bring Canada's early warning disclosure regime into closer conformity with the 46 | LEXPERT • June 2013 | www.lexpert.ca C-00-Firm.indd 46 13-05-17 10:06 AM