NIN 98/22 - Proposal for a National Escrow Regime Applicable to Initial Public Distributions [NIN - Rescinded]
| Published Date: | 1998-05-08 |
|---|---|
| Effective Date: | 1998-05-06 |
The CSA have not yet determined whether the regime ultimately adopted will take the form of a national instrument, to be adopted as a rule in certain jurisdictions, or a national policy. For purposes of this proposal, including this Notice, the regime will be referred to as the "National Instrument".
The National Instrument contains footnotes that are not part of the National Instrument but which have been included, where appropriate, to provide background or explanation.
This Notice provides background to, and summarizes the key terms of, the National Instrument.
Background
The securities legislation of most of the provinces and territories in Canada prohibits the regulator from issuing a receipt for an issuer's prospectus where an escrow agreement that the regulator considers necessary or advisable has not been entered into.
To date, there has been no uniform approach to escrow among the securities regulatory authorities of the different Canadian jurisdictions. Many securities regulatory authorities and certain exchanges have their own differing escrow policies that apply to IPOs in their own jurisdictions (and, in the case of certain exchange policies, reverse takeovers and similar transactions involving issuers whose securities are listed on their exchanges). The lack of uniformity of escrow requirements among the jurisdictions has been cumbersome for issuers and their advisers and confusing to investors.
The CSA believe that a simplified, uniform national approach to escrow will promote greater efficiency and place issuers, principals and public investors in different jurisdictions on a more level footing.
Purpose
The CSA recognize that a public investor's purchase of securities is, to a large extent, based on the investor's confidence in management's experience and abilities, and that an investor relies on management and other key principals to remain with the issuer for an appropriate period in order to carry out the plans described in the issuer's prospectus. This is particularly the case with 'emerging' issuers, as such issuers generally have only a limited history of operations on which an investor is able to base his or her investment decision.
The CSA have considered the objectives and role of escrow requirements in the context of IPOs. The fundamental objective of escrow requirements is to ensure that an issuer's management and other key principals retain an equity interest in the issuer for an appropriate period following the IPO. This continuing interest provides an incentive for the principals to remain with the issuer and devote their time and attention to the issuer's affairs, to the benefit of all shareholders.
Current Canadian escrow policies applicable to IPOs take varied approaches to assessing the past involvement of founding shareholders and other principals. Differing factors are considered, generally in an attempt to assess the financial risks borne by the founders, their potential financial reward from the IPO, and the nature and cost of the investment offered to public investors under the IPO. Terms of escrow and escrow release have been determined largely by reference to these assessments.
The CSA have determined that many of the factors and assessments underlying the current disparate escrow policies are more properly addressed, not by escrow, but by decisions as to IPO pricing and timing, which are primarily the responsibility of underwriters. The CSA expect underwriters to take their responsibilities seriously and to give these factors the attention they merit.
Application
The National Instrument will apply to IPOs. It will not apply to any subsequent distribution by prospectus or application for listing on an exchange by an issuer that has already completed an IPO in one or more other jurisdictions in respect of which it entered into an escrow agreement in accordance with the National Instrument.
Although the National Instrument will apply exclusively to IPOs, a regulatory authority may address the principles of the National Instrument and impose similar, additional or other terms of escrow for other types of transactions, including reverse takeovers, reorganizations, reactivations, major acquisitions or similar transactions, or applications for listing on an exchange by issuers whose equity securities have been previously listed on a foreign exchange.
The CSA intend that the definitive escrow regime adopted following the expiration of the comment period will replace the current escrow policies, including exchange escrow policies, applicable to IPOs in each jurisdiction.
The following is a summary of the key terms of the National Instrument.
Issuer Categories and Release Terms
Under the National Instrument an issuer will, at the time of its IPO, be categorized as an 'exempt', 'established', or 'emerging' issuer.
'Exempt' Issuers
An 'exempt' issuer is an issuer with average annual pre-tax earnings of at least $10 million over the last three financial years (with at least $10 million in the most recent year) or that will receive a minimum of $75 million in gross proceeds under its IPO. Securities held by principals of exempt issuers will not be subject to escrow under the National Instrument.
'Established' Issuers
An 'established' issuer is generally one that, at the time of its IPO, meets certain profitability (earnings or cash flow) or 'net tangible assets' tests, or other specified criteria applicable to research and development and natural resource issuers. Specific criteria to accommodate research and development and natural resource issuers have been included because such issuers generally must conduct extensive research and development or exploration and development before profits are generated. It was therefore considered inappropriate that such issuers be required to meet the same (e.g., profitability) tests as other issuers in order to be considered 'established' issuers.
Securities held by principals of established issuers will be subject to a three year time release escrow, with securities exempt or eligible for release from escrow as follows:
| Date | Cumulative equity securities free ofescrow |
| Date of final receipt for issuer's prospectus | 25% (exempt) |
| 1st anniversary (of final receipt) | 50% |
| 2nd anniversary | 75% |
| 3rd anniversary | 100% |
'Emerging' Issuers
An 'emerging' issuer is an issuer that does not meet the established issuer criteria. Securities held by principals of emerging issuers will, subject to 'graduation' (discussed below), be subject to a six year time release escrow, with securities exempt or eligible for release from escrow as follows:
| Date | Cumulative equity securities free ofescrow |
| Date of final receipt for issuer's prospectus | 15% (exempt) |
| 1st anniversary (of final receipt) | 30% |
| 2nd anniversary | 45% |
| 3rd anniversary | 60% |
| 4th anniversary | 75% |
| 5th anniversary | 90% |
| 6th anniversary | 100% |
Emerging Issuer Graduation (Early Release)
If, after its IPO, an issuer initially categorized as 'emerging' satisfies the established issuer criteria (as modified for this purpose), it may 'graduate' to the established issuer category so that the three year established issuer escrow release schedule will apply to its principals' escrowed securities. Upon 'graduation', the issuer and its principals are placed in the same position as they would have been had the issuer been categorized as an 'established' issuer at the time of its IPO, resulting in an immediate release of that number of securities that would already have been released had the issuer been on the established issuer escrow release schedule initially.
Securities subject to escrow
As noted above, a portion of each principal's securities will, in the case of both established and emerging issuers, be exempt from escrow. The remainder of each principal's securities will be held in escrow and released annually or, at the issuer's option, quarterly, over the applicable escrow period.
The securities subject to escrow under the National Instrument are generally equity securities and options (as defined in the National Instrument) beneficially owned by principals, or over which principals have control or direction. 'Principal' is defined broadly to include issuers' promoters, directors and senior officers, directors and senior officers of material operating subsidiaries, persons that beneficially own or have control or direction over securities holding more than 10% of the voting rights attached to issuers' outstanding securities (excluding 'passive investors', as defined in the National Instrument), associates of the foregoing and issuers 20% of the voting securities of which are beneficially owned by principals or over which they have control or direction.
Transfers within Escrow
Transfers to continuing or incoming directors and senior officers will be permitted with the approval of an issuer's board of directors. Transfers upon bankruptcy and to RRSPs and RRIFs are also permitted as set out in the National Instrument.
Self-Administering
The National Instrument is intended to be as self-administering as possible. The escrow agreement will outline the applicable release schedule (six year for emerging issuers, three year for established issuers, with quarterly releases at the issuer's option), and releases will be automatic, subject only to certain filing requirements. Filing and other procedural requirements upon the death of a principal or emerging issuer graduation are specified in the National Instrument.
Transition
An issuer that has obtained a receipt for a prospectus in connection with an IPO and is currently subject to an escrow agreement in accordance with LPS 3-07 will remain subject to the terms of the existing escrow agreement. When a definitive escrow regime is adopted following the CSA's consideration of comments received on the National Instrument during the comment period, the Commission will consider what, if any, provision will be made for application of the new regime to issuers subject to an escrow agreement in accordance with LPS 3-07.
An issuer that has filed a preliminary prospectus with the Commission in connection with an IPO and has entered, or proposes to enter, into an escrow agreement in accordance with LPS 3-07, may elect to instead enter into an escrow agreement in accordance with the National Instrument. An issuer that elects to enter into an escrow agreement in accordance with the National Instrument must amend its prospectus to reflect the revised terms of escrow, enter into an escrow agreement in the form of Schedule "A" of the National Instrument and, if applicable, terminate its prior form of escrow agreement. In addition, the issuer and its underwriter should consider whether any changes to the issuer's capital structure would be necessary to ensure that the securities offered under the IPO prospectus are appropriately and fairly priced, including the possible cancellation of any escrow shares issued in accordance with LPS 3-07.
Comments
Interested parties are invited to make written submissions with respect to the National Instrument. Submissions received by August 15, 1998 will be considered.
Submissions, in duplicate, should be addressed to all of the Canadian securities regulatory authorities listed below in care of the British Columbia Securities Commission
Alberta Securities Commission
British Columbia Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, Government of New Brunswick
Prince Edward Island Securities Commission
Nova Scotia Securities Commission
Department of Government Services and Lands, Newfoundland and Labrador
Registrar of Securities, Northwest Territories
Registrar of Securities, Government of the Yukon Territory
c/o Brenda J. Benham
Director, Policy & Legislation
British Columbia Securities Commission
200 - 865 Hornby Street
Vancouver, BC V6Z 2H4
Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:
Claude St Pierre,
Secretary
Commission des valeurs mobilières du Québec
Tour de la Bourse
C.P. 246, 17th Floor
Montréal, Québec H4Z 1G3
A diskette containing the submissions (preferably Microsoft Word, Windows format) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions received cannot be maintained.
Questions may be referred to any of:
Wayne Redwick
Director, Corporate Finance
B.C. Securities Commission
Phone: (604) 899-6699
Fax: (604) 899-6700
e-mail: wredwick@bcsc.bc.ca
Melody Schalm
Legal Counsel, Policy & Legislation
B.C. Securities Commission
Phone: (604) 899-6644
Fax: (604) 899-6700
e-mail: mschalm@bcsc.bc.ca
Stephen Murison
Legal Counsel
Alberta Securities Commission
Phone: (403) 297-4233
Fax: (403) 297-6156
e-mail: steve.murison@gov.ab.ca
Agnes Lau
Deputy Director, Securities Analysis
Alberta Securities Commission
Phone: (403) 422-2191
Fax: (403) 422-0397
e-mail: agnes.lau@gov.ab.ca
Ian McIntosh
Deputy Director, Corporate Finance
Saskatchewan Securities Commission
Phone: (306) 787-5867
Fax: (306) 787-5899
e-mail: ian.mcintosh.ssc@govmail.gov.sk.ca
Pierre Martin
Legal Counsel
Commission des valeurs mobilières du Québec
Phone: (514) 873-5009 Ext. 262
Fax: (514) 864-6381
Rick Whiler
Lead Accountant, Market Operations
Ontario Securities Commission
Phone: (416) 593-8127
Fax: (416) 593-8244
e-mail: rwhiler@osc.gov.on.ca
Ram Ramachandran
Associate Chief Accountant
Ontario Securities Commission
Phone: (416) 593-8253
Fax: (416) 593-8241
e-mail: rramachandran@osc.gov.on.ca
DATED at Vancouver, British Columbia, on May 6, 1998
Douglas M. Hyndman
Chair
References: Proposal for a National Escrow Regime
LPS 3-07
Proposal For A National Escrow Regime Applicable To Initial Public Distributions1
1 At this time, it has not yet been determined whether the proposed National Escrow Regime applicable to Initial Public Distributions will take the form of a rule or a policy. The proposal will, hereafter, be referred to as the "National Instrument".
PART 1 INTRODUCTION
The securities legislation of most of the provinces and territories in Canada prohibits the regulator2
2 The term "regulator" is defined in National Instrument 14-101 - Definitions ("NI 14-101") as the Director, Executive Director or equivalent, as applicable, of a securities regulatory authority. Pursuant to section 3.2, terms used in this National Instrument and defined in NI 14-101 have the meaning ascribed to them in NI 14-101.
from issuing a receipt for an issuer's prospectus where an escrow or pooling agreement that the regulator considers necessary or advisable has not been entered into.
The Canadian securities regulatory authorities recognize that a public investor's purchase of securities is, to a large extent, based on the investor's confidence in management's experience and abilities, and that an investor relies on management and other key principals to carry out the plans described in the issuer's prospectus. This is particularly the case with ‘emerging' issuers, as such issuers generally have only a limited history of operations on which an investor is able to base his or her investment decision.
The purpose of this National Instrument is to set out the terms of escrow that the regulators consider necessary at the time of an issuer's initial public distribution by way of prospectus. It seeks to ensure that issuers' management and other key principals retain an equity interest in the issuer for an appropriate period following the public distribution. This continuing interest provides an incentive for the principals to remain with, and devote their time and attention to the affairs of, the issuer, to the benefit of all shareholders.
PART 2 APPLICATION
2.1 Initial Public Distribution
This National Instrument applies to an initial public distribution of equity securities by an issuer pursuant to a prospectus filed with one or more of the Canadian securities regulatory authorities (an "IPO"). It does not apply to any subsequent distribution by prospectus or application for listing on an exchange by an issuer that has already completed an IPO in one or more jurisdictions3
3 The term "jurisdiction" is defined in NI 14-101 to mean a province or territory of Canada, except when used in the term foreign jurisdiction.
in respect of which it entered into an escrow agreement in accordance with this National Instrument.
2.2 Reverse Takeovers and Other Transaction
Although this National Instrument applies exclusively to IPOs, a regulatory authority may address the principles of this National Instrument in determining terms of escrow for other types of transactions, including reverse takeovers, reorganizations, reactivations, major acquisitions or similar transactions, or applications for listing on an exchange by issuers whose equity securities have been previously listed on a foreign exchange. An exchange or other regulatory authority may impose additional or other escrow requirements in these circumstances.
2.3 Additional Requirements
A securities regulatory authority may, where no underwriter is involved in an IPO or where an issuer's equity securities will not be listed on a Canadian exchange upon completion of its IPO, or in other exceptional circumstances, impose escrow requirements additional to those outlined in this National Instrument.
PART 3 INTERPRETATION
3.1 Definitions
In this National Instrument, unless the context otherwise requires, the following terms have the following meanings:
(a) "associate" has the meaning ascribed to that term in the securities legislation of an issuer's principal jurisdiction;
(b) "control or direction" has the meaning set out in section 3.3;
(c) "emerging issuer" means an issuer that is not an established issuer;(d) "equity security" means any security of an issuer that carries a residual right to participate in the earnings of the issuer and, upon the liquidation or winding up of the issuer, in its assets;
(e) "escrow agent" means a trust company that is authorized to carry on business in a jurisdiction and that has agreed to hold securities in escrow and otherwise act as agent in respect of an escrow agreement pursuant to this National Instrument;
(f) "escrow securities" means all principal securities except(i) principal securities of an exempt issuer,
(ii) in the case of principal securities of an established issuer, 25% of each holder's equity securities and 25% of each holder's options, and
(iii) in the case of principal securities of an emerging issuer, 15% of each holder's equity securities and 15% of each holder's options;(g) "established issuer" means an issuer that, on the final receipt date, is
(i) an issuer with earnings of at least $200,000, before taxes, extraordinary items and discontinued operations, in its most recent financial year, as reported in its audited financial statements,
(ii) an issuer with cash flows from operating activities4
4 Cash flows from operating activities must be determined in accordance with the Handbook. "Handbook" is defined in NI 14-101 as the Handbook of the Canadian Institute of Chartered Accountants, as amended from time to time.
of at least $400,000 in its most recent financial year, as reported in its audited financial statements,
(iii) an issuer
(A) that will have net tangible assets of at least $5,000,000 upon completion of the minimum offering specified in its IPO prospectus,
(B) whose IPO prospectus contains or is accompanied by a financial forecast, prepared in accordance with National Instrument 48 or any successor Instrument or Policy, forecasting that the issuer will, in the following financial year, meet the earnings or cash flows levels set out in clauses (i) or (ii) above, and(C) whose equity securities will be listed on a Canadian exchange upon completion of its IPO,
(iv) a natural resource issuer
(A) with proven reserves of at least $2,000,000, based on a technical report, or
(B) that(I) holds an interest in a resource property on which it has spent at least $1,000,000 on exploration and development, as reported in its audited financial statements, and
(II) has allocated at least $1,000,000 of its IPO proceeds to the next phase of the exploration program on that property, as recommended in a technical report, or
(v) a research issuer that
(A) holds an interest in a material, device, product or process on which it has spent at least $1,000,000 on research and development, as reported in its audited financial statements, and
(B) has allocated at least $1,000,000 of its IPO proceeds to further research and development on that material, device, product or process;(h) "exempt issuer" means an issuer
(i) with average annual earnings of at least $10,000,000, before taxes, extraordinary items and discontinued operations, in its last three financial years, and earnings of at least $10,000,000 (determined on the same basis) in its most recent financial year, as reported in its audited financial statements, or
(ii) that will receive a minimum of $75,000,000 in gross proceeds (before the deduction of commissions and other amounts payable to agents) under its IPO;(i) "final receipt" means the final receipt for an issuer's IPO prospectus or amended prospectus issued by the regulator of the issuer's principal jurisdiction;
(j) "final receipt date" means the date on which an issuer's final receipt is issued;
(k) "graduation criteria" has the meaning set out in section 5.4.;
(l) "IPO" means the initial public distribution of equity securities by an issuer pursuant to a prospectus filed with one or more of the Canadian securities regulatory authorities;
(m) "net tangible assets" means an issuer's shareholders' equity, less the carrying value of its goodwill and intangible properties, as defined in the Handbook, based on the issuer's audited financial statements;(n) "option" means an option, warrant or other right (including a conversion right) to acquire an equity security of an issuer, but does not include a non-transferable incentive stock option exercisable solely for cash at a price per underlying equity security equal to or above the price at which the equity securities are offered to the public under the IPO prospectus;
(o) "passive investor" has the meaning set out in section 3.4;(p) "principal" means a person or company5
5 ‘Person or company' is defined in NI 14-101 to include individuals, corporations, partnerships, trusts, associations and other entities.
that, immediately prior to the issuance of the final receipt, is
(i) a promoter of the issuer,
(ii) a director or senior officer of the issuer or of a material operating subsidiary of the issuer,
(iii) a person or company, other than a passive investor, that(A) beneficially owns, directly or indirectly,
(B) has control or direction over, or
(C) has a combination of direct or indirect beneficial ownership of and of control or direction over securities of the issuer carrying more than 10% of the voting rights attached to all the issuer's outstanding voting securities6,6 In determining whether a particular person or company owns or has control or direction over (or a combination of both) securities carrying more than 10% of the voting rights, the voting rights attached to securities into which options (as defined in this National Instrument) are exercisable must, for that person or company, be included in the numerator and the denominator.
(iv) an issuer 20% or more of the voting securities of which are beneficially owned, directly or indirectly, by one or more of the persons or companies referred to in clauses (i) through (iii), or over which one or more of the persons or companies referred to in clauses (i) through (iii) has or have control or direction (or a combination of beneficial ownership and control or direction), or
(v) an associate of a person or company referred to in clauses (i) through (iii);(q) "principal jurisdiction" means
(i) the jurisdiction in which an issuer's IPO prospectus is filed, or
(ii) where an issuer's IPO prospectus is filed in more than one jurisdiction, the jurisdiction designated as the issuer's principal jurisdiction;(r) "principal securities" means all equity securities and options
(i) beneficially owned, directly or indirectly, by principals, or
(ii) over which principals have control or direction immediately prior to the issuance of the final receipt;(s) "promoter" means
(i) a person or company that, acting alone or in conjunction with one or more other persons or companies or a combination thereof, directly or indirectly takes the initiative in founding, organizing or substantially reorganizing the business of an issuer, or
(ii) a person or company that, in connection with the founding, organizing or substantial reorganizing of the business of the issuer, directly or indirectly receives, in consideration of services or property or both, 10% or more of a class of the issuer's own securities or 10% or more of the proceeds from the sale of a class of the issuer's own securities of a particular issue, but does not include a person or company that receives securities or proceeds solely as underwriting commissions or in consideration for property, if that person or company does not otherwise take part in founding, organizing or substantially reorganizing the business;
(t) "proven reserves" means the net present value of future cash flows, before taxes, from proven oil, natural gas or mineral reserves, prepared on a constant dollar basis and discounted at a rate of 15%;
(u) "research issuer" means an issuer(i) whose sole business is systematic investigation or research in a field of science or technology for the purpose of developing new, or improving existing, materials, devices, products or processes,
(ii) none of whose IPO proceeds are allocated to marketing, commercial production or commercial use of materials, devices, products or processes, and
(iii) that has no revenue from the sale of any materials, devices, products or processes, based on its audited financial statements;(v) "senior officer" means
(i) the chair or a vice-chair of the board of directors, the president, the chief executive officer, the chief financial officer, a vice-president, the secretary, the treasurer or the general manager of an issuer, or any individual who performs functions for an issuer similar to those normally performed by an individual occupying any such office, and
(ii) each of the five highest paid employees of an issuer, including any individual referred to in clause (i), excluding a commissioned salesperson who does not act in a managerial capacity; and
(w) "technical report" means a report prepared by an engineer or other person in accordance with National Instrument Statement No. 2-A or National Instrument Statement No. 2-B, as applicable, or any successor Instruments or Policies.
3.2 Terms Defined in National Definitions Instrumen
Terms used in this National Instrument that are defined in National Instrument 14-101 - Definitions - have the meanings ascribed to them in that National Instrument.
3.3 Control or Direction
A person or company with "control or direction" over securities includes a person or company that, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares
(a) voting power, including the power to vote, or to direct the voting of, such securities; or
(b) investment power, including the power to acquire or dispose, or to direct the acquisition or disposition of, such securities.
3.4 Passive Investor
3.4.1 Institutional Investo
In section 3.4, "institutional investor"7
7 The definition of ‘institutional investor' in this National Instrument is very similar to the ‘eligible institutional investor' definition presently contemplated for purposes of proposed National Instrument 62-103: The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.
means a person or company that is
(a) a Canadian financial institution8;
8 ‘Canadian financial institution' is defined in NI 14-101 to mean a bank, loan corporation, trust company, insurance company, treasury branch, credit union or caisse populaire that, in each case, is authorized to carry on business in Canada or a jurisdiction, or the Confédération des caisses populaires et d'économie Desjardins du Québec.
(b) a bank or insurance company referred to in clauses (B) or (C) of Rule 13d-1(b)(1)(ii) under the 1934 Act9;
9 ‘1934 Act' is defined in NI 14-101 as the Securities Exchange Act of 1934 of the United States of America.
(c) an entity engaged in financial services activities that is supervised and regulated under the banking, insurance, trust or similar laws of the United Kingdom of Great Britain and Northern Ireland;
(d) a pension fund that is regulated by the Office of the Superintendent of Financial Institutions (Canada), by a pension commission of a jurisdiction or by a similar regulatory authority;
(e) a mutual fund, excluding a private mutual fund that is operated as an investment club;
(f) a person or company registered or licensed to provide investment counseling, portfolio management or similar advisory services in respect of securities, or is exempt from the requirement to be so registered or licensed, under the securities laws of a jurisdiction, the Investment Advisers Act of 1940 of the United States of America, as amended, or the Financial Services Act, 1986, of the United Kingdom of Great Britain and Northern Ireland, as amended, provided the person or company(i) provides such services for valuable consideration under a contractual arrangement, and
(ii) exercises full discretionary authority over securities, subject to good faith and general investment policies, guidelines, objectives or restrictions and to legal requirements; or(g) a person or company referred to in clauses (D) or (F) of Rule 13d-1(b)(1)(ii) under the 1934 Act.10
10 This includes U.S. registered investment companies and certain U.S. pension funds.
3.4.2 Institutional Investor deemed Passive Investor
An institutional investor is, under this National Instrument, deemed a passive investor in respect of a particular issuer, provided that
(a) no director or senior officer of the issuer was selected, nominated or designated by the institutional investor or any person or company acting in concert with the institutional investor in connection with the issuer's securities; and
(b) the institutional investor, either alone or together with any person or company acting in concert with the institutional investor, does not possess control in fact (effective control) of the issuer through the votes attached to securities of the issuer beneficially owned, or over which control or direction is held, otherwise than by way of security only.
3.4.3 Other Passive Investors
A person or company that is not an institutional investor referred to in subsection 3.4.2 and that, on the final receipt date, beneficially owns, or has control or direction over (or a combination of both), securities of an issuer carrying more than 10% of the voting rights attached to all its outstanding voting securities will, in absence of evidence to the contrary, be deemed not to be a passive investor.
A person or company whose investment in an issuer is strictly ‘passive' may apply to the regulator of the issuer's principal jurisdiction to be considered a passive investor in respect of that issuer. The following factors would generally indicate that a person or company is a passive investor:
(a) the person or company's sole business is investing in other issuers;
(b) the person or company is not in a position to exercise control over the issuer's board of directors;
(c) the person or company is not involved in management of the issuer;
(d) the person or company does not have any significant existing or prior relationship to any principals of the issuer;
(e) the person or company will not, upon completion of the IPO, beneficially own, or have control or direction over (or a combination of both), securities of the issuer carrying more than 10% of the voting rights attached to all its outstanding voting securities; and
(f) the person or company, either alone or in concert with any other person or company, does not possess control in fact (effective control) of the issuer through the voting rights attached to securities of the issuer beneficially owned, or over which control or direction is held (or a combination of beneficial ownership and control or direction), otherwise than by way of security only.
A person or company may apply to a regulator to be considered a passive investor prior to the person or company's acquisition of securities of the issuer or at any other time prior to the issuer's IPO. Provided that the relevant circumstances do not change, if the regulator determines that the person or company is a passive investor prior to the IPO, the person or company will be considered a passive investor at the final receipt date.
PART 4 ESCROW REQUIREMENT
4.1 Securities subject to Escrow
All escrow securities are subject to escrow.
4.2 Requirement for Escrow Agreement
Each holder of escrowed securities must enter into a written agreement with the issuer and an escrow agent, in the form of Appendix "A" to this National Instrument.
PART 5 RELEASE FROM ESCROW
5.1 Release of Escrow Securities - Established Issuer
Subject to sections 5.3, 5.5 and 5.6, escrow securities of established issuers will be released from escrow as follows:
25% of each holder's principal securities that are equity securities and 25% of each holder's principal securities that are options will be released on or after each of the first, second and third anniversaries of the final receipt date.
The number of each holder's equity securities and options, for purposes of the above calculations, is the number of equity securities and options, respectively, held by each holder immediately prior to the issuance of the final receipt.
5.2 Release of Escrow Securities - Emerging Issuers
Subject to sections 5.3, 5.4, 5.5 and 5.6, escrow securities of emerging issuers will be released from escrow as follows:
(a) 15% of each holder's principal securities that are equity securities and 15% of each holder's principal securities that are options will be released on or after each of the first, second, third, fourth and fifth anniversaries of the final receipt date; and
(b) 10% of each holder's principal securities that are equity securities and 10% of each holder's principal securities that are options will be released on or after the sixth anniversary of the final receipt date.
The number of each holder's equity securities and options for purposes of the above calculations is the number of equity securities and options, respectively, held by each holder immediately prior to the issuance of the final receipt.
5.3 Optional Quarterly Releases
5.3.1Definition
In this section 5.3:
(a) "specified release date" means each date on or after which equity securities and options are releasable from escrow pursuant to section 5.1 or 5.2, as applicable; and
(b) "releasable escrow securities" means the number of equity securities and options of a holder releasable from escrow on a particular specified release date.
5.3.2 Quarterly Releases
Notwithstanding sections 5.1 and 5.2 and subject to sections 5.4, 5.5 and 5.6, escrow securities will, if provided in the escrow agreement, be released from escrow quarterly, in advance of each specified release date, as follows:
(a) 25% of the releasable escrow securities will be released on or after the day that is 270 days prior to that specified release date;
(b) 25% of the releasable escrow securities will be released on or after the day that is 180 days prior to that specified release date;
(c) 25% of the releasable escrow securities will be released on or after the day that is 90 days prior to that specified release date; and
(d) the remainder of the releasable escrow securities will be released on or after that specified release date.
5.4 Early Release - Emerging Issuer Graduatio
For purposes of this National Instrument, "graduation criteria" means the established issuer criteria set out in subsection 3.1(g), modified as follows:
(a) by replacing the phrase "on the final receipt date" with "subsequent to the final receipt date";
(b) by deleting clause 3.1(g)(iii); and
(c) by replacing the phrase "its IPO proceeds" in clauses 3.1(g)(iv) and (v) with "its unencumbered cash or cash equivalents currently available".
Notwithstanding section 5.2, if, after its final receipt date but prior to the third anniversary of its final receipt date, an emerging issuer meets any of the graduation criteria, that number of equity securities and options that would, to that date, have been eligible for release from escrow if the issuer had been an established issuer on the final receipt date will, subject to the procedural requirements of section 6.3, be immediately released from escrow.
If an emerging issuer meets any of the graduation criteria after the third anniversary of its final receipt date, all its escrow securities will, subject to the procedural requirements of section 6.3, be immediately released from escrow.
5.5 Release upon Deat
Notwithstanding sections 5.1 and 5.2, upon the death of any principal who is an individual, the deceased principal's escrow securities will, subject to the procedural requirements of section 6.2, be immediately released from escrow.
5.6 Release upon Take-Over Bid
5.6.1 Release of Escrow Securities
Notwithstanding sections 5.1 and 5.2, escrow securities may be tendered to an arm's length person or company (in this section 5.6, the "offeror") pursuant to a bona fide formal take-over bid, plan of arrangement, amalgamation, merger or similar transaction and, where the terms and conditions of the take-over bid or other transaction have been satisfied, released from escrow to the offeror.
5.6.2 Exchange of Securitie
Notwithstanding subsection 5.6.1, where all or part of the consideration paid by the offeror for the escrow securities consists of equity securities of the offeror or another issuer (the ‘new securities'), the new securities will be held in escrow in substitution for the escrow securities for which they were exchanged.
PART 6 RELEASE OF ESCROW SECURITIES - PROCEDURE
6.1 Automatic Release
Subject to sections 6.2 and 6.3 below, escrow securities will be automatically released in accordance with the terms of the escrow agreement and no other regulatory or other filings or procedures are, under this National Instrument, necessary.
6.2 Release upon Death
Upon the death of a principal who is an individual, the deceased principal's escrow securities may be released provided that the issuer complies with the requirements of the escrow agreement relating to release on death and, at least 10 days prior to the date of the release, issues and files with the securities regulatory authorities of the jurisdictions in which it is a reporting issuer and the Canadian exchanges on which its equity securities are listed, a news release disclosing details of the impending release of escrow securities.
6.3 Release upon Emerging Issuer Graduation
6.3.1 Initial Regulatory Filings upon Graduation
In order for escrowed securities of an emerging issuer that has met one of the graduation criteria to become eligible for accelerated release from escrow pursuant to section 5.4 an issuer must, at least 20 days prior to the date of the initial release of escrow securities pursuant to section 5.4, file with the securities regulatory authorities of the jurisdictions in which it is a reporting issuer and the Canadian exchanges on which its equity securities are listed:
(a) a certificate signed by a director or officer of the issuer stating that the issuer has met one of the graduation criteria (which criterion must be specified), the basis upon which that graduation criterion was met, and that the holders of the escrow securities are entitled under this National Instrument to an initial release of the numbers of equity securities and options specified, and
(b) where the issuer has met one of the graduation criteria by meeting(i) the earnings or cash flows criteria set out in clauses 3.1(g)(i) and (ii) (as modified under section 5.4), a copy of the relevant audited financial statements,
(ii) the criterion set out in sub-clause 3.1(g)(iv)(A) (as modified under section 5.4), a copy of the relevant technical report,
(iii) the criteria set out in subclause 3.1(g)(iv)(B) (as modified under section 5.4),(A) a copy of the relevant technical report,
(B) a copy of the relevant audited financial statements (unless already filed),(C) a certificate signed by the issuer's auditor confirming that the exploration and development expenditure criteria have been met and that the issuer has the required unencumbered cash or cash equivalents available to proceed with the next phase of exploration, and
(D) a certificate signed by a director or officer of the issuer stating that the issuer intends to proceed with the next phase of exploration (unless this information is included in the certificate referred to in subsection (a)), or(iv) the criteria set out in clause 3.1(g)(v) (as modified under section 5.4)
(A) a certificate signed by the scientist or other qualified person responsible for the research and development program describing the nature of the program and the estimated costs to carry it out,
(B) a copy of the relevant audited financial statements (unless already filed),
(C) a certificate signed by the issuer's auditor confirming that the research and development expenditure criteria have been met and that the issuer has the required unencumbered cash or cash equivalents available for further research and development, and
(D) a certificate signed by a director or officer of the issuer stating that the issuer intends to use the funds on further research and development in accordance with this National Instrument (unless this information is included in the certificate referred to in subsection (a)).
6.3.2News Release Requirement
An emerging issuer that has met one of the graduation criteria and wishes to become eligible for accelerated escrow release pursuant to section 5.4 must, in addition to complying with the requirements of subsection 6.3.1, the requirements under securities legislation applicable to a material change in an issuer's affairs and any requirements of the escrow agreement relating to early release, at least 10 days prior to the date of the initial release pursuant to section 5.4, issue and file, with the securities regulatory authorities of the jurisdictions in which it is a reporting issuer and the Canadian exchanges on which its equity securities are listed, a news release disclosing details of the impending release of escrow securities and the change in the release schedule that will be applicable to its escrow securities.
6.3.3 Filing of Amended Escrow Agreement
Where section 5.4 applies, the issuer must, within 10 days after the date of the initial release of escrow securities on the new release schedule, file with the securities regulatory authorities of the jurisdictions in which it is a reporting issuer and the Canadian exchanges on which its equity securities are listed a copy of the amended escrow agreement.
6.3.4 Regulatory Actio
Where a regulator determines that an issuer did not meet any of the graduation criteria, the regulator may, in addition to any other action the regulator deems necessary or advisable, direct the issuer and the holders of escrow securities to refrain from taking any action to obtain a release of escrow securities pursuant to section 5.4 or, if escrow securities have already been released by reason of the purported application of section 5.4, require that the escrow agreement be amended to reinstate the original escrow release schedule under section 5.2 and that the relevant securities be returned to escrow.
PART 7 TRANSFERS WITHIN ESCROW
7.1 Transfers to Directors and Senior Officers
7.1.1 Transfers
Subject to any legal or other restrictions on transferability and to the approval of the issuer's board of directors, escrow securities may be transferred to continuing or, upon their appointment, incoming directors or senior officers of an issuer or of a material operating subsidiary of the issuer.
7.1.2 Filing Requirement
In addition to the requirements under securities legislation concerning disclosure and filings where a material change has occurred in an issuer's affairs, where escrow securities are transferred to other directors or senior officers in accordance with section 7.1 an issuer must, at least 10 days prior to the date of the transfer, file with the securities regulatory authorities of the jurisdictions in which it is a reporting issuer and the Canadian exchanges on which its equity securities are listed:
(a) a copy of the amended escrow agreement (with amendments indicated) or an Acknowledgment in the form attached as Schedule "C" to the escrow agreement;
(b) a copy of the directors' resolution approving the transfer; and
(c) a certificate signed by a director or officer of the issuer stating that the transfer is to a director or senior officer of the issuer or of a material operating subsidiary of the issuer in accordance with the terms of this National Instrument.
7.2 Transfers upon Bankruptcy or to Certain Plans
7.2.1Transfers upon Bankruptcy
Subject to any legal or other restrictions on transferability, upon the bankruptcy of a holder of escrow securities, escrow securities may be transferred to the trustee in bankruptcy or other person or company legally entitled to the escrow securities, provided that the escrow securities remain in escrow, subject to the same terms of escrow as were applicable prior to the bankruptcy.
7.2.2 Transfers to Certain Plans
Subject to any legal or other restrictions on transferability, escrow securities may be transferred by a holder of escrow securities to a registered retirement savings plan ("RRSP") or registered retirement income fund ("RRIF"), or subsequently between such RRSPs or from an RRSP to an RRIF, provided that the holder of the escrow securities is the sole beneficiary of the RRSP and RRIF, as applicable, and the escrow securities remain in escrow on the same terms as applied prior to the transfer.
7.2.3 Filing Requirement
Where escrow securities are transferred in accordance with subsections 7.2.1 or 7.2.2, the transferee must, within 10 days after the date of the transfer, file a copy of the amended escrow agreement (with amendments indicated) or an Acknowledgment in the form attached as Schedule "C" to the escrow agreement with the securities regulatory authorities of the jurisdictions in which it is a reporting issuer and the Canadian exchanges on which its equity securities are listed.
PART 8 DEALING WITH ESCROW SECURITIES
8.1 Encumbrances Prohibited
Except as expressly permitted in this National Instrument, a principal or other holder of escrow securities may not, directly or indirectly, sell, assign, transfer, redeem, surrender for consideration, effect or permit a change in control or direction over, mortgage, hypothecate, charge, pledge, or otherwise encumber escrow securities or any interest in, or certificate evidencing, escrow securities.
8.2 Exercise of Option
A holder of an escrow security that is an option may exercise the option within escrow, provided that any equity securities acquired upon the exercise of the option remain in escrow, on the same terms as applied to the options. Thereafter, section 5.1, 5.2 or 5.3 of this National Instrument, as applicable, will apply to the equity securities acquired upon exercise of the option as though such securities had been held on the final receipt date.
PART 9 INCOMPLETE IPO
If an issuer does not, in any jurisdiction, complete its IPO, and the issuer has become a reporting issuer in one or more jurisdictions as a result of filing and obtaining a receipt for its IPO prospectus, the issuer's escrow agreement must remain in effect and be applied until the applicable securities regulatory authorities order that the issuer is deemed to have ceased to be a reporting issuer.
PART 10 WAIVERS FROM NATIONAL INSTRUMEN
A regulator or securities regulatory authority may waive any requirement of this National Instrument, subject to such conditions or restrictions as the regulator or securities regulatory authority may impose.
The regulators and securities regulatory authorities will consider granting a waiver of a requirement of this National Instrument only in very compelling circumstances. For this purpose, a principal's departure from the issuer will not generally be considered a compelling circumstance.
PART 11 SECURITIES LEGISLATION RESALE RESTRICTIONS
The release of escrow securities from escrow or a transfer of escrow securities within escrow in accordance with this National Instrument will not affect or remove any restriction imposed by the securities legislation of a jurisdiction on a trade in such securities by the holder.
PART12 TRANSITIONAL
The securities regulatory authority of each jurisdiction will determine what, if any, provision will be made for application of this National Instrument to principals and securities of an issuer that has completed an IPO in that jurisdiction and complied with a policy governing escrow requirements that was in force prior to the adoption of this National Instrument in that jurisdiction. Such issuers will not, at that time or subsequently, be subject to the National Instrument in any jurisdiction unless the issuer so elects in accordance with a transitional provision applicable to this National Instrument.
THIS AGREEMENT is made as of the ______ day of ______________, ______.
AMONG
(the "Issuer");
AND:
(the "Escrow Agent");
AND:
THE UNDERSIGNED SECURITY HOLDERS OF THE ISSUER
(collectively, the "Parties")
WHEREAS the Security Holders wish to deposit in escrow with the Escrow Agent certain securities of the Issuer, to be held in accordance with the proposed National Escrow Regime applicable to Initial Public Distributions of the Canadian securities regulatory authorities;
AND WHEREAS the Escrow Agent has agreed to hold such securities in accordance with the terms of this Agreement;
NOW THEREFORE in consideration of the covenants contained in this agreement and other good and valuable consideration (the receipt and sufficiency of which is acknowledged), the Parties agree as follows:
1.Interpretation
In this Agreement:
(a) "Acknowledgment" means an acknowledgment and agreement to be bound, in the form of Schedule "C" to this Agreement;
(b) "Additional Securities" means securities, acquired by a Security Holder subsequent to the date on which the Security Holder executes this Agreement or an Acknowledgement, that are(i) securities of the Issuer acquired by the Security Holder as a dividend or other distribution on Securities, upon the exercise by the Security Holder of a right of purchase, conversion or exchange attaching to Securities, or upon a subdivision or compulsory conversion or exchange of Securities, or
(ii) securities of an issuer acquired by the Security Holder in exchange, substitution or consideration for Securities tendered by the Security Holder pursuant to a bona fide formal take-over bid, plan of arrangement, amalgamation, merger or similar transaction;
(c) "Issuer's Certificate" means a certificate signed by a director or officer of the Issuer duly authorized to sign, as evidenced by a certified copy of a resolution of the board of directors of the Issuer attached to the certificate;
(d) "National Instrument" means the Proposal for a National Escrow Regime applicable to Initial Public Distributions published by the Canadian securities regulatory authorities in May, 1998;
(e) "Securities" means, in relation to a Security Holder, the securities of the Security Holder described in Schedule "A" to this Agreement, together with all Additional Securities of the Security Holder, at any time prior to their release from escrow in accordance with this Agreement; and
(f) "Security Holder" means a holder of securities of the Issuer who executes this Agreement or an Acknowledgment.
2.Deposit of Securities in Escrow
Each Security Holder hereby deposits with the Escrow Agent, to be held in escrow under this Agreement, the Securities of the Security Holder described in Schedule "A", and agrees to deliver forthwith to the Escrow Agent any certificates evidencing such Securities. Each Security Holder agrees to deposit in escrow with the Escrow Agent all Additional Securities and to deliver to the Escrow Agent forthwith on receipt thereof any certificates evidencing Additional Securities, and any replacement certificates which may at any time be issued for any Securities held in escrow.
3.Direction to Escrow Agent
The Issuer and each Security Holder hereby direct the Escrow Agent to retain the Securities in escrow until the Securities are released from escrow pursuant to the terms of this Agreement.
4.Restrictions on Dealing with Securities
4.l Dealings with Securities in Escrow
No Securities, and no interest in, control or direction over or certificate evidencing Securities, may, directly or indirectly, be sold, assigned, transferred, redeemed, surrendered for consideration, mortgaged, hypothecated, charged, pledged, encumbered or otherwise dealt with in any manner except as provided in this Agreement.
4.2 Indirect Dealings with Securities in Escrow
No Security Holder that is not an individual will issue securities of its own issue or effect or permit a transfer of ownership of securities of its own issue that would have the effect of changing the beneficial ownership of, or control or direction over, Securities.
5.Voting of Securities in Escrow
Escrow of Securities will not impair any right of a Security Holder to exercise voting rights attaching to Securities.
6.Dividends on Securities in Escrow
Escrow of Securities will not impair any right of a Security Holder to receive a dividend or other distribution on Securities or to elect the form or manner in which a dividend or other distribution on Securities will be paid. If, during the period in which any of the Securities are retained in escrow pursuant to this Agreement, any dividend or other distribution, other than one paid in securities of the Issuer, is received by the Escrow Agent in respect of Securities, such dividend or other distribution will be paid or transferred forthwith to the respective Security Holders entitled thereto. Additional Securities distributed on Securities will, if received by the Escrow Agent, be retained in escrow and, if received by the Security Holder, be deposited in escrow in accordance with section 2, to be held in and released from escrow on the same terms and conditions as apply to the Securities on which the distribution was paid.
7.Exercise of Other Rights Attaching to Securities In Escrow
Subject to section 2, escrow of Securities will not impair any right of a Security Holder to exercise a right attaching to a Security that entitles the Security Holder to purchase or otherwise acquire another security or to exchange or convert a Security for or into another security.
8.Permitted Transfers Within Escrow
8.l Transfer to Directors and Senior Officers
Securities may be transferred within escrow by a Security Holder to an individual who is a director or senior officer of the Issuer or of a material operating subsidiary of the Issuer, provided that the Escrow Agent first receives:
(a) a certified copy of the resolution of the board of directors of the Issuer approving the transfer;
(b) an Issuer's Certificate stating that the transfer is to a director or senior officer of the Issuer or of a material operating subsidiary of the Issuer in accordance with the terms of the National Instrument;
(c) a transfer power of attorney, duly executed by the transferor; and
(d) an Acknowledgment signed by the transferee or an amended Agreement reflecting the transfer.
8.2 Transfer upon Bankruptcy
In the event of the bankruptcy of a Security Holder, the Securities of the Security Holder may be transferred within escrow to the trustee in bankruptcy or other person [or company] legally entitled to such Securities, provided that the Escrow Agent first receives:
(a) a certified copy of either
(i) the assignment in bankruptcy of the Security Holder filed with the Superintendent of Bankruptcy; or
(ii) the Receiving Order adjudging the Security Holder bankrupt;(b) a certified copy of a certificate of appointment of the trustee in bankruptcy;
(c) a transfer power of attorney, duly executed by the transferor; and
(d) an Acknowledgment signed by the trustee in bankruptcy or other person [or company] legally entitled to the Securities or an amended Agreement reflecting the transfer.
8.3 Transfer to Certain Plans
Securities may be transferred within escrow by a Security Holder to a registered retirement savings plan ("RRSP") or registered retirement income fund ("RRIF"), or subsequently between RRSPs or from an RRSP to an RRIF, provided that the Escrow Agent first receives:
(a) evidence from the trustee of the RRSP or RRIF, as applicable, stating that, to the best of the trustee's knowledge, the Security Holder is, during the Security Holder's lifetime, the sole beneficiary of the RRSP or RRIF;
(b) a transfer power of attorney, duly executed by the transferor; and
(c) an Acknowledgment signed by the trustee of the RRSP or RRIF, as applicable, or an amended Agreement reflecting the transfer.
8.4 Effect of Transfer Within Escrow
Upon completion of a transfer of Securities pursuant to this section 8, the transferee will be a Security Holder and the Securities transferred will remain in escrow, to be held in and released from escrow on the same terms and conditions as were applicable prior to the transfer.
9.Release of Securities
9.1 Release Schedule
Subject to sections 10, 11 and 12, Securities will be released from escrow under this Agreement as set out in Schedule "B".
9.2 Delivery of Certificates to Security Holder
If a Security Holder wishes to receive a certificate evidencing Securities released or to be released from escrow on a release date set out in Schedule "B", the Security Holder will provide written notice to the Escrow Agent to that effect. If the Escrow Agent receives notice from a Security Holder that the Security Holder wishes to receive certificates for released Securities, the Escrow Agent will, as soon as reasonably practicable after the applicable release date or after receipt by the Escrow Agent of the notice from the Security Holder, whichever is later, deliver, to or at the direction of the Security Holder, certificates evidencing the Securities released from escrow on the applicable release date.
9.3 Replacement Certificates
Where a Security Holder has, in accordance with section 9.2, provided notice to the Escrow Agent that the Security Holder wishes to receive a certificate evidencing Securities released or to be released from escrow, and where the relevant certificate held by the Escrow Agent evidences a combination of Securities released from escrow on the applicable release date and Securities that are to remain in escrow, the Escrow Agent will, as soon as reasonably practicable after the applicable release date or after receipt by the Escrow Agent of the notice from the Security Holder, whichever is later, deliver such certificates to the Issuer or its transfer agent, together with a request that separate replacement certificates be prepared and delivered to the Escrow Agent. Where certificates evidencing Securities are delivered to the Issuer in accordance with the foregoing, the Issuer will, as soon as reasonably practicable, cause separate replacement certificates to be prepared and delivered to the Escrow Agent. As soon as reasonably practicable after the receipt by the Escrow Agent of the replacement certificates, the Escrow Agent will deliver, to or at the direction of the Security Holder, all replacement certificates evidencing Securities released from escrow on the applicable release date.
10.Release upon Death
Upon the death of a Security Holder, the Securities of that Security Holder will be released from escrow and the Escrow Agent will deliver all certificates evidencing such Securities to the legal representative of the deceased Security Holder, provided that the Escrow Agent first receives:
(a) an Issuer's Certificate stating that the Issuer has, at least 10 days prior to the date of the Issuer's Certificate, issued a news release disclosing details of the impending release of Securities;
(b) a certified copy of the death certificate; and
(c) such evidence of the legal representative's status that the Escrow Agent may reasonably require.
11.Take-Over Bid or Other Transaction
11.1 Deliveries to Escrow Agent
A Security Holder who wishes to tender certain Securities of the Security Holder (the "Tendered Securities") to a bona fide formal take-over bid, plan of arrangement, amalgamation, merger or similar transaction (a "Transaction") will deliver to the Escrow Agent:
(a) a written direction signed by the Security Holder (a "Direction") that directs the Escrow Agent to deliver to a specified person [or company] (the "Depositary") either:
(i) certificates evidencing the Tendered Securities, or(ii) where the Security Holder has provided the Escrow Agent with a notice of guaranteed delivery or similar notice of the Security Holder's intent to tender the Tendered Securities to the Transaction, that notice, together with a letter of transmittal or similar document and, where required, transfer power of attorney duly executed for transfer, and any other documentation specified or provided by the Security Holder and required to be delivered to the Depositary under the terms of the Transaction; and
(b) such other information concerning or evidence of the Transaction as the Escrow Agent may reasonably require.
11.2 Deliveries to Depositary
Forthwith after its receipt of the information and documentation specified in subsection 11.1, the Escrow Agent will deliver to the Depositary, in accordance with the Direction, the documentation specified or provided under clause 11.1(a), together with a letter addressed to the Depositary that:
(a) identifies the Tendered Securities;
(b) states that the Tendered Securities are held in escrow;
(c) states that the Tendered Securities are delivered only for the purposes of the Transaction and that the Tendered Securities will be released from escrow only upon receipt by the Escrow Agent of the information described in subsection 11.3;
(d) where certificates for Securities have been delivered to the Depositary, requires the Depositary to return to the Escrow Agent, as soon as practicable, the certificates evidencing Securities that are not releasable from escrow as described in clause (c) above; and
(e) where applicable, requires the Depositary to deliver or cause to be delivered to the Escrow Agent, as soon as practicable, certificates representing Additional Securities acquired by the Security Holder under the Transaction.
11.3 Release of Securities
Tendered Securities will be released from escrow upon receipt by the Escrow Agent of a declaration signed by the Depositary or, if the Direction identifies the Depositary as acting on behalf of another person [or company] in respect of the Transaction, by that other person [or company], that:
(a) the terms and conditions of the Transaction have been met; and
(b) the Tendered Securities have either been taken up and paid for or are subject to an unconditional obligation to be taken up and paid for under the Transaction.
11.4 Exchange of Securities
The Escrow Agent will hold any Additional Securities acquired by a Security Holder under a Transaction in escrow on the same terms and conditions, including release dates, as applied to the Securities for which they were exchanged, substituted or constituted consideration.
12.Early Release
12.1Issuer Certificate
Upon receipt by the Escrow Agent of an Issuer's Certificate:
(a) stating that the Issuer has met one of the graduation criteria specified in section 5.4 of the National Instrument;
(b) stating that the Security Holders are, pursuant to section 5.4 of the National Instrument, entitled to early release of Securities held in escrow;
(c) stating that the Issuer has issued a news release in accordance with the National Instrument and specifying the date such news release was issued; and
(d) specifying the new release schedule, in accordance with section 5.4 of the National Instrument, applicable to the Securities held in escrow;
Schedule "B" to this Agreement will be deemed to be amended to reflect the new release schedule referred to in clause (c) above.
12.2Initial Release pursuant to revised Schedule
If Schedule "B" to this Agreement is amended pursuant to subsection 12.1, the Escrow Agent will effect the initial release of Securities in accordance with the amended Schedule "B" on, or as soon as reasonably practicable after, the later of the initial release date set forth in the amended Schedule "B" and the date that is 10 days after the date of the news release specified in the Issuer's Certificate provided under subsection 12.1. If the Escrow Agent has received notice from a Security Holder that the Security Holder wishes to receive certificates evidencing released Securities, the Escrow Agent will deliver such certificates in accordance with the procedure set out in subsection 9.2.
13.Escrow Agent has no Responsibility after Release
The Escrow Agent will have no further responsibility for Securities after it has delivered Securities to or at the direction of the Security Holder in accordance with the terms of this Agreement.
14.Remuneration of Escrow Agent
The Issuer will pay the Escrow Agent reasonable remuneration for, and reimburse the Escrow Agent for its disbursements in connection with, its services under this Agreement.
15.Indemnification of Escrow Agent
The Security Holders jointly and severally release, indemnify and save harmless the Escrow Agent from all costs, charges, claims, demands, damages, losses and expenses resulting from the Escrow Agent's performance, in good faith and without negligence, of its duties under this Agreement.
16.Responsibility for Furnishing Information
The Escrow Agent will bear no responsibility for seeking, obtaining, compiling, preparing or determining the accuracy of any information or document, the Escrow Agent's receipt of which is a condition to a release from escrow or a transfer within escrow under this Agreement.
17.Resignation of Escrow Agent
If the Escrow Agent wishes to resign as escrow agent, the Escrow Agent will give written notice to the Issuer. If the Issuer wishes the Escrow Agent to resign as escrow agent, the Issuer will give written notice to the Escrow Agent. The resignation of the Escrow Agent will be effective and the Escrow Agent will cease to be bound by this Agreement on the date that is 60 days after the date of receipt of the notices referred to above by the Escrow Agent or Issuer, as applicable, or on such other date as the Escrow Agent and the Issuer may agree upon (the "resignation date"), provided that the resignation date will not be a date that is less than 10 business days before a release date set forth in Schedule "B" and the Issuer will, before the resignation date, have appointed another escrow agent who has accepted such appointment, which appointment will be binding on the Issuer and the Security Holders.
18.Notices
18.1 Notice to Escrow Agent
Documents will be considered to have been delivered to the Escrow Agent on the next business day following the date of transmission, if delivered by telecopier, the date of physical delivery, if delivered by hand or by prepaid courier, or five business days after the date of mailing, if delivered by mail, to the following:
[Name, address, contact person, telecopier number]
18.2 Notice to Issuer
Documents will be considered to have been delivered to the Issuer on the next business day following the date of transmission, if delivered by telecopier, the date of physical delivery, if delivered by hand or by prepaid courier, or five business days after the date of mailing, if delivered by mail, to the following:
[Name, address, contact person, telecopier number].
18.3 Deliveries to Security Holders
Subject to subsection 18.4, documents will be considered to have been delivered to a Security Holder on the next business day following the date of transmission, if delivered by telecopier, the date of physical delivery, if delivered by hand or by prepaid courier, or five business days after the date of mailing, if delivered by mail, to the address noted in Schedule "A". The Escrow Agent will, unless a Security Holder directs the Escrow Agent in writing otherwise, deliver all certificates representing Securities of the Security Holder that have been released from escrow to the address of the Security Holder noted in Schedule "A".
18.4 Change of Address
A change in an address for delivery of the Escrow Agent or the Issuer under this section 18 will be effective upon delivery to each other Party of written notice of such change. A change in an address for delivery of a Security Holder under this section 18 will be effective upon delivery to the Escrow Agent and the Issuer. For the purpose of subsection 18.3, Schedule "A" will be deemed to be amended accordingly.
18.5 Postal Interruption
A Party will not effect a delivery by mail if the Party is aware of an actual or impending disruption of postal service.
19.Further Assurances
The Parties will execute and deliver any further documents and perform any further acts necessary to carry out the intent of this Agreement.
20.Time
Time is of the essence of this Agreement.
21.Governing Laws
This Agreement will be construed in accordance with and governed by the laws of {insert applicable jurisdiction} and the laws of Canada applicable in {insert applicable jurisdiction}.
22.Counterparts
This Agreement may be executed by facsimile and in two or more counterparts, each of which will be deemed to be an original and all of which will constitute one agreement.
23.Language
Wherever a singular expression is used in this agreement, that expression is deemed to include the plural or the body corporate where required by the context.
24.Enurement
This Agreement will enure to the benefit of and be binding on the Parties and their heirs, executors, administrators, successors and permitted assigns.
The Parties have executed and delivered this Agreement as of the date set out above.
The Corporate/Common Seal of )
[Escrow Agent] was affixed )
in the presence of )
)
__________________________________________ ) c/s
Authorized signatory )
)
__________________________________________ )
Authorized signatory )
The Corporate/Common Seal of)
[Issuer] was affixed)
in the presence of:)
)
__________________________________________) c/s
Authorized signatory )
)
__________________________________________)
Authorized signatory)
Where the Security Holder is an individual:
Signed, sealed and delivered by )
[Security Holder] in the presence of:)
)
__________________________________________)
Name)
)
__________________________________________)________________________
Address) [Security Holder]
)
__________________________________________)
)
)
_________________________________________ )
Occupation )
Where the Security Holder is a corporation:
The Corporate/Common Seal of )
[Security Holder] was affixed)
in the presence of:)
)
__________________________________________) c/s
Authorized signatory )
)
)
__________________________________________)
Authorized signatory )
Schedule "A" to Escrow Agreement
Security Holder
Name:
Signature:
Address for Deliveries:
| Securities: |  | |
| Class or description | Number | Certificate(s) (if applicable) |
| | |
| | |
| | |
Security Holder
Name:
Signature:
Address for Deliveries:
| Securities: | | |
| Class or description | Number | Certificate(s) (if applicable) |
| | |
| | |
| | |
| Security Holder: | | |
| Escrow Release Dates | Class or description of Securities | Number of Securities to be Released |
| e.g., January 2, 1999 | Class "A" common shares | 250 |
| | |
| | |
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| Escrow Release Dates | Class or description of Securities | Number of Securities to be Released |
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| Security Holder: | | |
| Escrow Release Dates | Class or description of Securities | Number of Securities to be Released |
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Acknowledgment and Agreement to be Bound
The undersigned hereby acknowledges that the securities listed in the attached Schedule "A" (the "Securities") have been or will be transferred to the undersigned and that such securities are subject to an Escrow Agreement dated __________________________ (the "Escrow Agreement").
In consideration of $1.00 and other good and valuable consideration (the receipt and sufficiency of which is acknowledged), the undersigned agrees to be bound by the Escrow Agreement in respect of the Securities, as if the undersigned was an original signatory to the Escrow Agreement.
Dated at ____________________ on ______________.
Where the Security Holder is an individual:
Signed, sealed and delivered by )
[transferee] in the presence of:)
)
__________________________________________)
Name)
)
__________________________________________)___________________________
Address) [transferee]
)
__________________________________________)
)
)
__________________________________________)
Occupation )
Where the transferee is a corporation:
The Corporate/Common Seal of )
[transferee] was affixed)
in the presence of:)
)
_________________________________________ ) c/s
Authorized signatory )
)
)
_________________________________________ )
Authorized signatory )