NIN 96/25 - Proposed Relief for Eligible Institutional Investors from Early Warning, Insider Reporting, Take-over Bid and Control Person Distribution Requirements [NIN - Rescinded]
| Published Date: | 1996-08-02 |
|---|---|
| Effective Date: | 1996-08-01 |
Background
The Ontario Securities Commission ("OSC") has been working for several years on a proposal to relax insider reporting and early warning reporting requirements for institutional investors, in response to representations that it is extremely costly and difficult for such persons to comply with the current requirements of the legislation, that the costs imposed on institutional investors in complying exceed the benefits of disclosure, and that the SEC has substantially relaxed the equivalent U.S. requirements for institutional investors. B.C.'s legislation is substantially the same as Ontario's in this regard.
The OSC published proposals in the OSC Bulletins of September 10, 1993 and September 16, 1994, and a proposed OSC rule setting out proposed relief from early warning, insider reporting, take-over bid and control person distribution requirements was published for comment in the OSC Bulletin of October 20, 1995. In October 1995 the Canadian Securities Administrators' Take-Over Bid Committee was asked to work on development and finalization of the proposed rule as a national instrument. In June 1996 the Committee reached agreement in principle on the forms of relief that would be included in the proposed rule and in June and July 1996 the securities commissions of B.C., Alberta, Manitoba, Ontario and Quebec approved in principle the forms of relief to be granted, subject to a different approach proposed to be taken by the B.C. Securities Commission in connection with relief from insider reporting and early warning reporting requirements.
In the OSC Bulletin of August 2, 1996 the OSC will publish a Staff Notice, "Status Report on Proposed Changes to the Early Warning System and Related Insider Reporting, Take-Over Bid and Control Person Distribution Issues" that summarizes the comments received on the proposed OSC rule and, like this Notice, discusses the current stage of development of the rule and indicates the next steps that are expected to be taken.
Purpose of Early Warning System
The early warning system is designed to ensure that the market is advised of accumulations of significant blocks of securities that may influence control of a reporting issuer because they can be voted or sold or indicate that a control transaction in respect of that issuer is imminent. Accumulations may be material information to the market even when not made for the purpose or with the effect of changing or influencing control of the issuer, as they may affect an investor's decision to invest for a number of reasons, including as a result of their potential impact upon the public float (which could affect liquidity and market price), the effect of future increases or decreases in the acquirer's position, the ability to relocate votes (which can affect other control transactions), the constitution of the issuer's board of directors, the approval of significant proposals or transactions and the issuer's performance. In addition, the mere identity of the institutional shareholder and its presence may be material in certain cases.
Persons to Whom Relief will be Granted
Other than aggregation relief (discussed below), which would be available only to financial institutions, the rest of the proposed relief would be available to "eligible institutional investors". "Eligible institutional investors" would be defined as: banks, trust companies, loan companies, insurance companies, credit unions, caisses populaires, pension funds, portfolio managers having full discretionary authority, and mutual funds in Canada; U.S. banks and insurance companies; and entities engaged in financial services activities that are regulated under the laws of the United Kingdom of Great Britain and Northern Ireland.
The proposed definition of "financial institution" is substantially the same as the definition of "eligible institutional investor", except "financial institution" does not include a mutual fund, pension fund or portfolio manager with full discretionary authority.
Relief would be limited to "eligible institutional investors" in order to reduce the opportunity for abuse, and in light of the fact that institutional investors have been the only persons expressing inordinate difficulties with the existing regimes.
Nature of Relief
Aggregation Relief
Relief would be available only to financial institutions. For purposes of the early warning system, insider reporting, take-over bid rules and control person distribution rules, a financial institution would be exempt from the requirement to aggregate securities holdings of independent business units if decisions regarding buying and selling securities are made independently in each business unit. (For example, a bank group that is eligible for relief would not have to aggregate holdings of its various subsidiaries to determine whether it held 10 percent of an issuer's securities.)
Early Warning and Insider Reporting Relief - B.C. Approach
Under the B.C. approach to early warning and insider reporting relief, relief would be available to an eligible institutional investor that does not have access to material undisclosed information regarding the issuer, has no nominee that is a director or officer of the issuer, does not possess effective control over the issuer, and has no intention to make a formal bid or propose an amalgamation or other transaction that would result in the investor, either alone or with joint actors, having effective control over the issuer. A rebuttable presumption of "effective control" would apply at 30% of outstanding votes. Such investors would be exempt from the early warning and insider reporting requirements of the Securities Act provided they file an alternative monthly disclosure document for each month in which the month-end balance is 10% or more.
The alternative monthly disclosure document would be required to disclose the following information: month-end balance of holdings, with a breakdown separating the number of securities beneficially owned from the number over which there is no beneficial ownership, but over which there is power to exercise control and direction; a statement that the filer meets the relief criteria and is eligible for the relief; and the name(s) of the filer's joint actor(s), if any.
Insider reporting relief would continue to be available to any eligible institutional investor that chose to comply with the current early warning system rather than choosing to take advantage of the early warning relief.
Early Warning Relief - Non-B.C. Approach
Under the approach proposed in provinces other than B.C., relief from early warning requirements would be available to eligible institutional investors who have no intention to make a formal bid or propose an amalgamation or other transaction that would result in the investor, either alone or with joint actors, having effective control over the issuer.
A person would be exempt from the early warning system if the person filed an alternative monthly reporting document. This document would initially be filed upon the institution attaining a month-end balance of 10% or more of a reporting issuer's securities. Follow-up reports would be required only when month-end holdings increase or decrease from the reported position by 5 or more percentage points. (Filers could, at their option, choose instead to file follow-up reports at fixed intervals of 5% multiples; i.e. 15%, 20%, 25%, etc.)
The alternative monthly disclosure document would be required to disclose the following information: the information required by the B.C. alternative monthly disclosure document (see above); the purpose of the filer in making the acquisition or disposition of securities that gave rise to the filing requirement; the material terms of any agreement, other than bona fide lending arrangements, respecting any of the securities, including agreements respecting the acquisition, holding, disposition or voting of any of the securities; and any change in a material fact set out in a previous report.
Insider Reporting Relief - Non-B.C. Approach
Under the approach proposed in provinces other than B.C., relief from insider reporting requirements would be available to an eligible institutional investor that does not have effective control of the issuer; that does not, in the ordinary course, have access to undisclosed material information about the issuer; that has no nominees who are directors or officers of the issuer; and that has filed any required early warning reports (or alternative monthly reports, as described above under "Early Warning - Non-B.C. Approach"). Relief would consist of an outright exemption from insider reporting requirements.
U.S. Disclosure Requirements
Both the B.C. and the non-B.C. approaches differ somewhat from the requirements in the United States. In the U.S., while institutional securityholders are exempt from filing insider reports, certain institutional security holders are required to file a Schedule 13G disclosure document upon first exceeding a month-end balance of 5%, and thereafter upon any increase or decrease of 5%, calculated as at month-end. In addition, large institutional investment managers in the U.S. (those holding securities having a month-end value of at least $100,000,000) are required to file a Form 13F disclosure document quarterly, which discloses the quarter-end balance of securities held.
Take-Over Bid Relief
Relief is proposed for eligible institutional investors that do not have effective control of the issuer prior to the bid. Such investors would be exempt from the take-over bid requirements of the Securities Act with respect to a take-over bid that was done inadvertently, provided the bidder notifies the Executive Director within 10 days of becoming aware of the inadvertent bid, the bidder disposes of the same number or principal amount of securities as were acquired within 45 days of notifying the Executive Director, and the bidder has implemented procedures to ensure that no inadvertent bids will be made in the future. Disposal of securities may not be made to a person with effective control.
The bid must be an isolated incident, and the exemption is unavailable to a person who acquires effective control of the issuer as a result of the bid.
Control Person Distribution Prospectus Relief
Relief would be available for eligible institutional investors who meet the criteria for insider reporting relief (see above). Relief consists of an exemption from prospectus requirements provided the following conditions are met: no unusual effort is made to prepare the market, no extraordinary commission is paid, a letter disclosing the particulars of the distribution is filed within 10 days, and any applicable hold periods or seasoning periods have been satisfied (i.e. hold periods that would apply if the person was not a control person).
The proposed relief would not be applicable in Quebec as the laws of Quebec do not restrict unsolicited control block dispositions (although Policy Q-12 does restrict solicited secondary distributions to unsophisticated investors).
Other Relief
The proposed rule also grants ancillary relief in various areas, including early warning relief for pledgees, underwriters in the course of a distribution, participants in special warrant transactions and persons who may be caught by the early warning requirements solely as a result of actions taken by an issuer.
Next Steps
The proposed rule setting out the various forms of relief described above is in the process of being reformulated as a series of national instruments, which will set out the rules in all jurisdictions, including the B.C. approach to relief from insider reporting and early warning. The proposed national instruments are expected to be published later this year together with a request for comments.
Request for Comments
Interested persons are encouraged to direct written comments by October 15, 1996 to:
Brenda J. Benham
Director
Policy and Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, British Columbia
V6Z 2H4
Comment letters submitted in response to Requests for Comment are placed in the public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed on the public file, freedom of information legislation may require the Commission to make comment letters available. Persons submitting comment letters should therefore be aware that the press and members of the public may be able to obtain access to any comment letter.
DATED at Vancouver, British Columbia on August 1, 1996
Douglas M. Hyndman
Chair