On July 29, 2017, the securities regulatory authorities in Ontario, Québec, Alberta, Manitoba and New Brunswick (the participating jurisdictions) published CSA Multilateral Staff Notice 61-302 Staff Review and Commentary on Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (the Notice”).
The notice outlines the approach used by the participating jurisdictions to review material conflict of interest transactions, including insider bids, issuer bids, business combinations and related party transactions that give rise to concerns regarding the protection of minority security holders. The notice also advises market participants of the participating jurisdictions’ views on special committees of independent directors and enhanced disclosure requirements.
The notice describes how staff review conflict of interest transactions to assess compliance with Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (“MI 61-101”), including the timing and scope of such reviews, the information-gathering process and potential remedies in the event of non-compliance.
The Notice also contains a discussion of staff’s views on special committees of independent directors and enhanced disclosure requirements based on the requirements of MI 61-101 and associated guidance, decisions of securities regulatory authorities, and issues identified in reviews of “material conflict of interest transactions”. The Notice addresses the role of boards of directors and/or special committees of independent directors in negotiating, reviewing, and approving or recommending material conflict of interest transactions, and disclosure obligations that enable security holders to make informed decisions to vote or tender in favour of proposed material conflict of interest transactions.
“Material conflict of interest transaction” refers to insider bids, issuer bids, business combinations and related party transactions, each as defined in MI 61-101 and generally does not include transactions that are captured incidentally within the scope of MI 61-101, such as transactions that are business combinations only as a result of employment-related collateral benefits. The term “minority security holder” refers to equity security holders of a reporting issuer that are not an “interested party” (as such term is defined in MI 61-101) in connection with the material conflict of interest transaction.
The Notice states that Staff will review material conflict of interest transactions on a real-time basis to assess compliance with the requirements of MI 61- 101 and to determine whether a transaction raises potential public interest concerns.
Staff will generally initiate a review of a material conflict of interest transaction upon the filing of a disclosure document for the transaction. Reviews focus on compliance with disclosure requirements, compliance with the conditions for exemptions in MI 61-101 from the formal valuation and minority approval requirements, and the substance and disclosure of the process conducted by an issuer’s board of directors or special committee in considering a material conflict of interest transaction plus any complaints received by Staff.
The Notice, consistent with the guidance found in ss. 6.1(6) of 61-101, states that a special committee is advisable for all material conflict of interest transactions. The Notice warns against special committees formed after a proposed transaction had been substantially negotiated or where the special committee is passive and fails to conduct a robust review of the circumstances leading to the transaction, alternatives to the transaction that were available in the circumstances, and the transaction itself. According to the Notice an effective special committee process in the context of a “material conflict of interest transaction” generally includes a robust mandate, the engagement by the committee of independent advisors, supervision over or direct conduct of negotiations, accurate record keeping, and non- coercive conduct on the part of interested parties. The Notice states that the special committee should be able to hire its own independent legal and financial advisors and that where the special committee has not been involved in preliminary negotiations, the board of directors and special committee should not be bound by any such negotiations.
The Notice also discusses the requirement of fairness opinions to be obtained by special committees and boards of directors from financial advisors in connection with material transactions. In addition to requirements under MI 61-101 to obtain a formal valuation, the Notice states that it is the responsibility of the board and special committee to determine whether a fairness opinion is necessary to assist in making a recommendation to security holders on a proposed transaction. Staff believe that it is generally the responsibility of the board of directors and the special committee to determine the terms and financial arrangements for the engagement of an advisor to provide a fairness opinion. disclosure concerning fairness opinions should provide security holders with a meaningful understanding of the fairness opinion and how it was considered by the board or special committee.
The Notice also discussing appropriate disclosure in the context of a material conflict of interest transaction”. The Notice states that the disclosure in the context of a material conflict of interest transaction requires a thorough discussion of the review and approval process; the reasoning and analysis of the board of directors and/or special committee, the views of the board of directors and/or special committee as to the desirability or fairness of the transaction, reasonably available alternatives to the transaction, including the status quo, and the pros and cons of the transaction.
Multilateral CSA Staff Notice 61-302 is available CSA Multilateral Staff Notice 61-302 Staff Review and Commentary on Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (the Notice”) the website of the Ontario Securities Commission.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
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