72-701 - Guide for Use of the Multijurisdictional Disclosure System by Canadian Issuers in the U.S. Market (Previously NIN#91/22) [BCN]
The Guide, which is entitled “Use of the Multijurisdictional Disclosure System by Canadian Issuers in the U.S. Market”, provides an overall summary of the use of the U.S. multijurisdictional disclosure system by Canadian issuers and discusses the requirements of state securities laws.
May 30, 2001
Brent W. Aitken
NI 71-101 The Multijurisdictional Disclosure System
NI 44-101 Short Form Prospectus Distributions
NI 44-102 Shelf Distributions
NI 44-103 Post-Receipt Pricing
This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website atwww.bcsc.bc.cain the Commission Documents database or the Historical Documents database.
USE OF THE MULTIJURISDICTIONAL DISCLOSURE SYSTEM
BY CANADIAN ISSUERS IN THE U.S. MARKET
Table of Contents
|A.||Offerings of Investment Grade Debt and Preferred Shares (Form F-9)|
|B.||Offerings of Equity and Other Securities (Form F-10)|
|2.||U.S. GAAP Reconciliation|
|II.||RIGHTS OFFERINGS (FORM F-7)|
|B,||Terms of Rights|
|III.||TENDER OFFERS AND EXCHANGE OFFERS|
|A.||Tender Offers (Schedules 13E-4F, 14D-1F and 14D-9F)|
|2.||Eligible Target Securities|
|4.||Effect of Exemptions|
|B.||Exchange Offers (Forms F-8 and F-80)|
|2.||Eligible Target Securities|
|IV.||BUSINESS COMBINATIONS (FORMS F-8 AND F-80)|
|A.||Exchange Act Registration and Reporting Obligations|
|B.||Forms for Exchange Act Registration and Reporting|
|1.||Form 40-F and Form 6-K Eligibility Requirements|
|2.||Mechanics of Form 40-F and Form 6-K|
|A.||Shelf Filings and Post-Effective Pricing Procedures|
|B.||Auditor Reporting and Independence Requirements|
|C.||Trust Indenture Act|
|VII.||MARKET REGULATION RULES|
|A.||Applicable U.S. Rules|
|B.||Regulatory Relief for MJDS Offerings|
|VIII.||STATE SECURITIES REGULATION|
|A.||State Registration of Securities Offerings|
|B.||Registration by Coordination|
|C.||Exemptions from State Registration Requirements|
|1.||Primary Offering Exemptions|
|2.||Secondary Trading Exemptions|
|3.||Effect of Exemptions|
|D.||Actions Taken by NASAA and the States to Accommodate MJDS Offerings|
|E.||Application to MJDS Offerings|
|1.||Form F-7 (Rights Offerings)|
|2.||Forms F-8 and F-80 (Exchange Offers and Business Combinations)|
|3.||Form F-9 (Investment Grade Debt and Preferred Shares)|
|4.||Form F-10 (Equity and Other Securities)|
|IX.||MODIFICATIONS TO REGISTRATION AND REPORTING SYSTEM FOR ALL CANADIAN ISSUERS (WHETHER OR NOT MJDS ELIGIBLE)|
|A.||Securities Act Registration|
|B.||Exchange Act Registration and Reporting|
|C.||Proxy, Share Ownership and Short-Swing Profit Rules|
USE OF THE MULTIJURISDICTIONAL DISCLOSURE SYSTEM BY CANADIAN ISSUERS IN THE U.S. MARKET
The Securities and Exchange Commission of the United States (the "SEC") has adopted a multijurisdictional disclosure system (the "MJDS"), similar to National Instrument 71-101The Multijurisdictional Disclosure System("NI 71-101") and Companion Policy 71-101CP, to facilitate capital formation in the United States by eligible Canadian issuers and to encourage the extension of certain offerings and bids to U.S. holders of securities issued by Canadian registrants. The MJDS, which became effective July 1, 1991, permits securities offerings, rights offerings, cash and securities exchange take-over and issuer bids, business combinations and continuous reporting with respect to securities of eligible Canadian issuers to be made in the United States by providing disclosure documents prepared in accordance with the requirements of Canadian securities regulatory authorities. In conjunction with the MJDS, the SEC has revised its rules to place Canadian "foreign private issuers"1
1 The SEC's definition of "foreign private issuer" is substantively similar to the definition of "foreign issuer" in the Policy Statement. It includes any non-government issuer incorporated outside the United States unless: (i) more than 50 per cent of the issuer's voting stock is held of record by U.S. residents; and (ii) any of the following: (a) the majority of the issuer's executive officers or directors are U.S. citizens or residents, (b) more than 50 percent of the issuer's assets are in the United States or (c) the issuer's business is administered principally in the United States. Non-U.S. issuers that do not satisfy this definition are required by the SEC to use the same forms as U.S. domestic issuers.
on an equal footing with all other foreign private issuers by making available to all Canadian foreign private issuers the series of forms designed for registration and reporting by foreign companies. Further, the SEC has exempted such Canadian issuers from U.S. proxy rules, share ownership reporting requirements and short-swing profit recapture provisions and has granted relief from certain of its market regulation rules in connection with MJDS-eligible offerings by "substantial" Canadian issuers. Additionally, state securities regulators in the United States are amending their rules to accommodate transactions covered by the MJDS.
The MJDS forms are designed to wrap around the applicable Canadian disclosure document.2
2 The MJDS is not available, therefore, if no take-over bid circular or issuer bid circular (in the case of a take-over or issuer bid) or information circular (in the case of a business combination) or prospectus (in all other cases) is prepared pursuant to Canadian requirements.
The forms set forth eligibility requirements and other details of registration, including informational legends and exhibits to be contained in such registration. The entire MJDS wrap-around form, including the Canadian disclosure document, legends, additional required information, consent to service of process3
3 All MJDS forms filed with the SEC (except for rights offerings registered on Form F-7) must be accompanied by a Form F-X, which contains a consent to service of process or SEC administrative subpoena and an appointment of a U.S. person as agent for process. Form F-X also must be filed by any non-U.S. person acting as trustee with respect to securities registered on any MJDS form.
and exhibits must be filed with the SEC.4
4 The registration statement filed with the SEC for all MJDS offerings except rights offerings must contain information concerning indemnification of directors, officers and controlling persons of the issuer. Such information need not be contained in the prospectus or circular delivered to investors. Canadian issuers must file with the SEC as an exhibit to the MJDS form used all information incorporated by reference into the Canadian disclosure document and all other documents required to be filed or made publicly available in Canada in connection with the transaction. If information incorporated by reference is required to be delivered to Canadian security holders, it must also be delivered to U.S. security holders. Other exhibits must be provided to U.S. security holders on request. Consents of accountants and other experts must be filed with the SEC and must clearly indicate that the consent extends to all applicable documents filed with the SEC.
Only the Canadian prospectus or circular, however, with specified additional information,5
5 Issuers eligible to use the short form prospectus distribution system in Canada may provide to U.S. investors the short-form prospectus prepared in accordance with the requirements of National Instrument 44-101 Short Form ProspectusDistributions, and Companion Policy 44-101CP. All MJDS forms require that the Canadian prospectus or circular provided to U.S. investors be in English and contain additional legends concerning potential tax consequences, pursuance of remedies against persons or assets located outside the United States and preparation of financial statements in accordance with foreign accounting principles. The prospectus filed under cover of Form F-10 for offerings of equity securities or non-investment grade debt or preferred shares, and the related MJDS continuous reporting forms, must contain a reconciliation of financial statements to U.S. generally accepted accounting principles.
must be provided to U.S. investors.
Disclosure documents for MJDS offerings in the United States will be reviewed by Canadian securities regulators and generally will be given a "no review" status by the SEC unless the SEC staff has reason to believe that there is a problem with the filing or the offering. Registration statements (and amendments thereto) for MJDS offerings made contemporaneously in Canada and the United States will become effective in the United States upon filing with the SEC, unless they are designated as preliminary materials.6
6 In addition to registration with the SEC, MJDS offerings are subject to registration with, and review by, securities regulators in each state in which the securities are to be offered or sold. See Section VIII below.
MJDS offerings made only in the United States may become effective seven days after filing with the SEC.7
7 Such offerings may become effective in less than seven days if the SEC is sooner notified that the review jurisdiction has issued a receipt or notice of clearance. Prior to filing an MJDS registration statement with the SEC for a U.S.-only offering, the issuer is to select a province or territory of Canada as the review jurisdiction (as of the date of the Policy Statement, the securities regulators in each of New Brunswick, Prince Edward Island, Newfoundland, the Northwest Territories and Yukon Territory had indicated they would not serve as the review jurisdiction) and is to file the disclosure documents with such jurisdiction, together with a fee of Cdn. $2,500, no later than the time of filing with the SEC. The name of the review jurisdiction should be indicated on the cover page of Form F-9 or F-10 in the space provided.
By filing with the SEC an MJDS registration form containing a preliminary prospectus (other than Forms F-7, F-8 and F-80 for rights offerings, securities exchange take-over and issuer bids, and business combinations), the issuer would be entitled to begin making offers in the United States. MJDS offerings may be conducted as "bought deals" in Canada so long as no solicitations of interest are made in the United States prior to the filing of the registration statement with the SEC.
Disclosure documents filed with the SEC under the MJDS must meet U.S. "materiality" standards. Additionally, issuers and their directors, underwriters, experts and other parties remain subject to U.S. civil liability standards in connection with transactions made in the United States under the MJDS. Rule 405 under the U.S. Securities Act of 1933 (the "Securities Act") provides that "[t]he term 'material,' when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered." Section 1 of the Securities Act (Ontario) states that "'material fact' where used in relation to securities issued or proposed to be issued means a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities." The Ontario courts and the Ontario Securities Commission (the "OSC") have both looked to U.S. case law to determine whether or not facts are material.8
8SeeSparling v. Royal Trustco Ltd. (1984), 45 O.R.2d 484 at 490; Re Standard Broadcasting Corp., 8 OSCB 3672 at 3677 (Sept. 13, 1985).
All of the MJDS forms contain certain minimum eligibility criteria, requiring that, at the time of filing with the SEC, the issuer: (i) be incorporated or organized under the laws of Canada or any province or territory of Canada; (ii) be a foreign private issuer (except that crown corporations are eligible to offer investment grade debt or preferred shares on Form F-9); (iii) not be an investment company registered or required to be registered under the U.S. Investment Company Act of 1940 (the "Investment Company Act");9
9 Therefore, mutual funds and other traditional pooled investment vehicles are ineligible for the MJDS, absent an exemption from the registration requirements of the Investment Company Act. The SEC has proposed amendments to Rule 6c-9 under the Investment Company Act, which would exempt from the registration requirements of the Investment Company Act all non-U.S. banks (including Canadian trust companies and loan companies) and non-U.S. insurance companies offering their debt and equity securities in the United States. See SEC Investment Company Act Release No. 17682 (Aug. 17, 1990).
and (iv) have been a reporting issuer in Canada for at least 36 months10
10 The MJDS forms enable a successor from a recent business combination to satisfy this 36-month test by "tacking" its reporting history to the reporting histories of its predecessor companies whose assets and gross revenues, respectively, in aggregate contributed at least 80% of its total assets and gross revenues from continuing operations, as measured based on proforma combination of each predecessor's most recently completed fiscal year prior to the business combination. If the successor's reporting history, when combined in turn with the reporting history of each such predecessor, in each case equals or exceeds 36 months, the successor satisfies the eligibility requirement for reporting history.
(12 months for crown corporations) and be in compliance with its reporting obligations. Additional issuer eligibility requirements are imposed with respect to various types of offerings, including issuer size tests for offerings of equity securities and convertible or non-investment grade debt or preferred shares, and a 12-month stock exchange listing history11
11 The MJDS forms enable a successor from a recent business combination to satisfy this 12-month listing test by "tacking" in the manner described in the preceding footnote.
for rights offerings, securities exchange take-over and issuer bids and business combinations.
I. PROSPECTUS OFFERINGS
A. Offerings of Investment Grade Debt and Preferred Shares (Form F-9)
Form F-9 permits MJDS registration of offerings by eligible Canadian foreign private issuers and crown corporations12
12 A "crown corporation" is defined as a corporation all of whose common shares or comparable equity is owned directly or indirectly by the Government of Canada or a province or territory of Canada.
of certain investment grade debt and investment grade preferred shares. Form F-9 does not require reconciliation of financial statements to U.S. generally accepted accounting principles ("U.S. GAAP"). In order to accommodate MJDS debt offerings, the SEC adopted exemptions to U.S. Trust Indenture Act requirements, as described in Section VI.C. below.
1. Eligible Securities. To be eligible for Form F-9, the securities to be offered must either be non-convertible or be convertible only after one year from the date of issuance. The securities may only be convertible into another class of securities of the issuer (unless they are guaranteed by the issuer's parent, as discussed below). The debt or preferred shares must be rated "investment grade" at the time the SEC declares the Form F-9 effective. The definition of "investment grade" parallels the definition of "Approved Rating" in the Policy Statement and generally covers securities rated in one of the four highest categories by a rating agency recognized by the SEC as a "nationally recognized statistical rating organization" ("NRSRO"). Currently, the two Canadian rating agencies, Dominion Bond Rating Service Limited and C.B.R.S. Inc., are not NRSROs. Canadian securities regulatory authorities require that all securities offered by a Canadian issuer on or before June 30, 1992 using Form F-9 must receive, prior to issuance, a provisional rating by either of the Canadian rating agencies in one of their respective top four categories.
2. Eligible Issuers. The issuer must have been subject to the continuous disclosure requirements of a Canadian securities regulatory authority for at least 36 months (12 months in the case of a crown corporation) immediately prior to filing the registration statement and must be in compliance with such reporting requirements at the time of the filing. If the securities contain no conversion rights, the issuer need not meet any size test to qualify to use Form F-9. If the securities are convertible after one year following the date of issuance, the equity shares13
13 The term "equity shares" is defined in the MJDS forms to include common shares, non-voting equity shares and subordinate or restricted voting equity shares, but does not include preferred shares.
of the issuer must have an aggregate market value of Cdn. $180 million, and the aggregate market value of such equity shares held by non-affiliates14
14 For the purpose of the MJDS forms, the SEC defines an "affiliate" of any person as anyone who beneficially owns, directly or indirectly, or exercises control or direction over, more than 10 percent of the outstanding equity shares of such person. The determination of a person's affiliates is made as of the end of such person's most recently completed fiscal year.
-- that is, the "public float" -- must be at least Cdn. $75 million. Market value, for purposes of all MJDS forms, generally is determined by using the price of an issuer's securities in the principal market as of any date within 60 days prior to the filing of the registration statement. A majority-owned Canadian subsidiary that does not satisfy the foregoing issuer eligibility requirements may nevertheless issue eligible securities using Form F-9 if the Canadian parent company (i) satisfies the issuer eligibility requirements of Form F-9 and (ii) fully and unconditionally guarantees the securities issued by the subsidiary.15
15 U.S. rules regard the guarantee as the offering of a separate security, which may be registered on the same Form F-9 registration statement as the subsidiary's securities.
Such securities may be convertible only into or exchangeable only for Form F-9 eligible securities of the parent.
B. Offerings of Equity and Other Securities (Form F-10)
Form F-10 is available for offerings of equity, debt (whether or not investment grade) and certain other securities16
16 Form F-10 and the other MJDS forms are not available, however, for the registration of derivative securities, except certain warrants, options and rights. Convertible securities may be registered on Form F-10 only if convertible into securities of the issuer, its parent or an affiliate of either.
by certain large Canadian foreign private issuers. However, because Form F-10 imposes a significantly larger "substantiality" test on issuers than does Form F-9, and because it requires reconciliation of financial statements to U.S. GAAP, it is expected to be used only for offerings that do not qualify for Form F-9.
1. Eligible Issuers. To qualify for use of Form F-10, an issuer must satisfy the requirement for a 36-month reporting history and must have equity shares with a market value of at least Cdn. $360 million and a public float of at least Cdn. $75 million.17
17 The mechanics of determining eligibility, such as the method of valuing equity shares and the definitions of the various terms, are the same as under Form F-9. See Section I.A.2 above.
As with Form F-9, Form F-10 is available for the issuance of debt or preferred shares by a majority-owned Canadian subsidiary that does not satisfy the foregoing eligibility requirements if the Canadian parent company (i) satisfies the issuer eligibility requirements of Form F-10 and (ii) fully and unconditionally guarantees the securities. Such guaranteed securities may be convertible only into or exchangeable only for securities of the parent.18
18 The same Form F-10 registration statement may be used to register the offerings of the subsidiary's securities, the parent's guarantee and, if the subsidiary's securities are convertible, the parent's securities into which they may be converted.
2. U.S. GAAP Reconciliation. As with Form F-9, Form F-10 wraps around the Canadian prospectus. However, unlike Form F-9, Form F-10 requires reconciliation to U.S. GAAP of all financial statements included in the Canadian prospectus.19
19 Reconciliation to U.S. GAAP is not required in any other MJDS form for securities offerings, but is required by MJDS Form 40-F in connection with certain continuous reporting and registration obligations under the U.S. Securities Exchange Act of 1934.
Reconciliation must be in the manner specified in Item 18 of SEC Form 20-F (the form available to foreign private issuers both to register securities under the U.S. Securities Exchange Act of 1934 (the "Exchange Act") and as an annual report). Item 18 requires full disclosure of all information required by SEC Regulation S-X (the regulation containing the general accounting disclosure rules) and U.S. GAAP, including segment information and supplemental oil and gas data. The reconciliation requirement applies only with respect to filings made prior to July 1, 1993, absent future action by the SEC to the contrary.
II. RIGHTS OFFERINGS (FORM F-7)
Eligible Canadian issuers can register a rights offering in the United States by using Form F-7 to wrap around a Canadian rights offering circular or prospectus. The securities registered on Form F-7 are those issuable upon the exercise of the rights. The rights themselves generally are not required to be registered in the United States, based on a "no-sale" theory. If the rights are required to be registered in the United States, the issuer may use Form F-7. There are no requirements in Form F-7 to provide any accounting reconciliation, disclosure concerning indemnification or consent to service of process by the issuer.20
20 However, a consent to service of process on Form F-X must be filed by any non-U.S. person acting as trustee with respect to securities registered on Form F-7. Although a consent to service of process is not required from the issuer, the cover page of Form F-7 provides that a U.S. agent for service should be designated.
Failure to disclose material information necessary to make the statements made, in light of the circumstances under which they are made, not misleading may give rise to statutory civil liability in the case of Form F-7, in contrast to the Canadian rights offering circular for which such failure does not form the basis of statutory civil liability.
A. Eligible Issuers
Canadian issuers may use Form F-7 to register rights offerings in the United States if they meet the 36-month reporting history requirement and have had a class of securities listed on The Toronto Stock Exchange (the "TSE"), The Montreal Exchange (the "ME") or the Canadian Venture Exchange (the "CDNX”") for the 12 months immediately preceding filing of Form F-7 with the SEC. The issuer also must be in compliance with the reporting and listing requirements at the time of filing. Form F-7 does not contain any financial eligibility criteria.
B. Terms of Rights
To prevent discrimination among security holders, Form F-7 requires that the terms and conditions of the rights granted to U.S. holders be not less favourable than those granted to any other holder of the same class of securities. To preclude a public offering being made indirectly to new investors by an issuer not eligible to make such an offering on the other MJDS forms, Form F-7 requires that the rights may not be transferable, except outside the United States in accordance with Regulation S under the Securities Act. Regulation S provides a safe harbour for resales in specified markets outside the United States, including the TSE, the ME and the CDNX. The securities acquired upon exercise of the rights may be transferable in the United States.
III. TENDER OFFERS AND EXCHANGE OFFERS
A. Tender Offers (Schedules 13E-4F, 14D-1F and 14D-9F)
The MJDS permits take-over bids and issuer bids for eligible target securities of Canadian issuers to be made to U.S. security holders in accordance with Canadian rules and regulations, constituting compliance with the U.S. Williams Act ("Williams Act").21
21 If, however, the transaction is exempt from any substantive provisions of Canadian take-over bid regulation, compliance with U.S. Williams Act rules in the United States may be required. See Section III.A.4 below.
If the consideration offered for the tendered securities is cash only, the transaction is referred to in the United States as a tender offer. If the consideration includes securities, the transaction is referred to as an exchange offer, and additional requirements apply.22
22See Section III.B below.
Tender offers must be extended to all holders of the securities for which the bid is made (the "target securities") in the United States and Canada on terms and conditions not less favourable than those offered to any other holder of the target securities. The SEC has adopted three new forms for MJDS tender offers, which are designed to wrap around the required Canadian disclosure documents. Issuers use Schedule 13E-4F for making issuer bids;23
23 A Canadian issuer making an offer for its own securities may also be subject to the SEC's "going private" regulations, which are not covered by the MJDS. Going private transactions include tender offers (i) by an issuer that is a reporting company under the Exchange Act (or an affiliate thereof) causing the issuer to have fewer than 300 holders of record and (ii) by an issuer having securities listed on a U.S. stock exchange or on the National Association of Securities Dealers Automated Quotation System (or an affiliate thereof) causing the issuer to lose such listing or quotation. While any issuer tender offer covered by the going private rules would be eligible for the MJDS forms if the other requirements are met, the issuer also would be required to file an SEC Schedule 13E-3 and comply with applicable U.S. requirements.
third-party bidders use Schedule 14D-1F for making bids; and issuers of target securities or their directors or officers use Schedule 14D-9F for responding to bids made on Schedule 14D-1F. The Canadian disclosure documents (including certain U.S. informational legends) are to be disseminated to U.S. resident holders of the target securities in accordance with Canadian requirements. Additionally, in order to permit bidders in MJDS tender offers to make limited purchases of the target securities in accordance with Canadian rules, the SEC has granted relief from certain Exchange Act rules, as described in Section VII below.
1. Eligible Bidders. The MJDS has no size test, reporting history, nationality requirement or other eligibility requirements for bidders making an all-cash tender offer. Thus the MJDS could be available for all-cash tender offers even if the bidder is incorporated in a U.S. jurisdiction or outside North America.
2. Eligible Target Securities. The issuer of the target securities must be a foreign private issuer incorporated in Canada and U.S. holders must hold less than 40 per cent of the target securities. The percentage of target securities held by U.S. holders is to be calculated without including any securities convertible into or exchangeable for the target securities. The calculation is to be made as of the end of the target issuer's most recent fiscal quarter (or, if such quarter ended within 60 days of filing, as of the end of the preceding quarter). However, in order to prevent unequal treatment of competing bids, if the offer is made during an ongoing MJDS-eligible offer for the target securities, the calculation is to be made as of the date used by the initial offeror.
3. Safe Harbour. The SEC has provided a safe harbour for bidders to determine that U.S. holders hold less than the threshold levels of target securities. The same safe harbour applies to the determination that the issuer of the target securities is a foreign private issuer. The issuer of the target securities will be conclusively presumed to be a foreign private issuer and U.S. holders will be conclusively presumed to hold less than 40 per cent of the target securities unless: (i) the aggregate published trading volume of the target securities during the preceding 12 months on U.S. securities exchanges and on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") exceeded such volume on Canadian securities exchanges and on the Canadian Dealing Network, Inc.; (ii) the target issuer's most recent annual report or annual information form indicates that U.S. holdings equal or exceed the threshold percentage;24
24The offeror is obligated to search such report or form filed or submitted by the target issuer with the SEC and with securities regulators in Alberta, British Columbia, Ontario and Quebec. If the target issuer is not a reporting issuer in any of the above provinces, the offeror must also search such report or form filed with any other securities regulator in Canada.
or (iii) the offeror has actual knowledge that U.S holdings equal or exceed the threshold percentage.
4. Effect of Exemptions. Tender offers that are exempt from any substantive provisions of Canadian take-over bid regulation are ineligible for the MJDS. For example, offers for non-convertible debt securities would not be eligible for the MJDS because they would not be regulated as take-over or issuer bids under Canadian legislation, take-over bids through the facility of a stock exchange would be also ineligible for the MJDS if they are exempt from Canadian statutory requirements. However, the use of a blanket exemption from take-over bid regulation in one or more Canadian jurisdictions will not disqualify an offer from the MJDS so long as the offer remains fully subject to the laws or regulations of Canada or any one of its provinces or territories governing take-over bids. If Canadian regulators grant limited exemptive relief, rather than a blanket exemption, from substantive take-over bid rules, the tender offer may be extended to U.S. security holders pursuant to the MJDS only with SEC approval.25
25 The SEC has stated that its staff will resolve requests for such approval on an expedited basis. If such approval is not granted, the offer to U.S. holders may nevertheless be made using the Canadian disclosure document, but would have to comply with all or certain of the provisions of the Williams Act (as specified by the SEC), even though exempted from comparable provisions in Canada.
The SEC has indicated, however, that its approval normally would not be necessary for an offer to be made in the United States under the MJDS if Canadian regulators granted relief only from Canadian take-over bid requirements that are not of the type required under U.S. rules. Such Canadian-only requirements without a U.S. counterpart include valuation and minority approval requirements for insider bids, integration of pre-bid and post-bid purchases into the offer, collateral benefit restrictions and French language requirements. Nevertheless, the SEC must be notified of requests to Canadian regulators for such relief so that the staff of the SEC may have an opportunity to determine whether it is necessary to require compliance with any Williams Act provisions before the offer can be made to U.S. holders.26
26 In the case of exemptions from such Canadian-only requirements, the obligation is on the SEC staff to notify the offeror and Canadian regulators that an application to the SEC for relief would be necessary before the offer could proceed in the United States pursuant to the MJDS.
B. Exchange Offers (Forms F-8 and F-80)
Forms F-8 and F-80 are available to register an exchange offer made for the target securities by an eligible Canadian issuer offering its own securities as part or all of the consideration for the target securities. The take-over bid or issuer bid circular prepared in accordance with Canadian requirements is to be filed with the SEC under cover of Form F-8 or F-80. Schedule 13E-4F or 14D-1F also must be filed with the SEC; the disclosure in these schedules can be integrated with that in Form F-8 or F-80 into one document.27
27See Section III. A. above. Schedule 13E-4F or 14D-1F can be used for an exchange offer even if the F-8 eligibility requirements are not met.
The Canadian circular (including certain U.S. informational legends) may then be distributed by mail to U.S. security holders.
1. Eligible Offerors. A Canadian foreign private issuer may make an exchange offer pursuant to the MJDS if it meets the 36-month reporting history requirement and has had a class of securities listed on the TSE, the ME or the CDNX for the 12 months prior to filing with the SEC. The bidder must be in compliance with the reporting and listing requirements at the time of filing. In addition, the bidder must have a public float for its equity shares of at least Cdn. $75 million, unless it is making an exchange offer for another class of its own securities.
2. Eligible Target Securities. The issuer of the target securities, like the bidder, must be a foreign private issuer incorporated in Canada and may not be an investment company registered or required to be registered under the Investment Company Act. Forms F-8 and F-80 limit the number of U.S. holders28
28 The MJDS forms define "U.S. holder" as any person with a U.S. address on the records of the issuer, any voting trustee, any depositary, any share transfer agent or any person acting in a similar capacity.
of the target securities. Form F-8 is available if U.S. holders have less than 25 per cent, and Form F-80 is available if U.S. holders have less than 40 per cent, of the target securities.29
29 If U.S. ownership exceeds these thresholds, or if other Form F-8 or F-80 eligibility requirements cannot be satisfied, the exchange offer may nevertheless be eligible for MJDS registration on Form F-9 or F-10 if the applicable requirements of those forms are satisfied. Form F-9 would be available only if the offered securities are investment grade debt or investment grade preferred shares. The use of Form F-10 would require reconciliation of financial statements to U.S. GAAP. No such reconciliation is required if Form F-8 or F-80 is used.
The two forms are identical except for the U.S. ownership ceilings.30
30 Some state securities regulators have enacted rules to expedite their review of MJDS exchange offers and business combinations when U.S. holdings are less than 25 per cent. Therefore, the SEC has provided Form F-8 in order to facilitate the clearance of such transactions by state regulators, and Form F-80 for other eligible MJDS exchange offers and business combinations, which may be subject to lengthier review by the states. See Section VIII below.
The percentage calculation is made in the same manner as for Schedules 13E-4F and 14D-1F.31
31See Section III. A.2.
IV. BUSINESS COMBINATIONS (FORMS F-8 AND F-80)
Forms F-8 and F-80 may also be used to register securities issued in conjunction with "business combinations," defined to include statutory amalgamations, mergers, arrangements and other reorganizations requiring the vote of shareholders of the participating companies. Whereas Canadian law generally exempts such securities from prospectus requirements in view of the disclosure provided in the information circular,32
32 The Ontario Securities Commission recently has clarified that the level of disclosure required in these offering circulars is prospectus-level disclosure. See OSC Policy Statement 5.1, paragraph 24, 14 OSCB 2956, 2961-62 (1991).
U.S. law provides that the distribution of securities as part of a business combination generally must be conducted by prospectus and registered with the SEC.33
33 One significant exception to the registration requirement for securities issued in a business combination is Section 3(a)(10) of the Securities Act. That section exempts from registration securities issued in a reorganization approved by a court or authorized governmental authority, which the SEC has interpreted to include Canadian courts and authorities in some instances.
The information circular and other disclosure documents used to solicit votes in connection with a business combination in Canada are to be filed with the SEC under cover of Form F-8 or F-80 and delivered to security holders in the United States (along with certain U.S. informational legends). As with exchange offers, the securities to be issued in connection with a business combination must be offered to U.S. holders on terms and conditions not less favourable than those offered to any other holder of the same class of securities. If the business combination involves a "going private" effect, Canadian issuers must file an SEC Schedule 13E-3 and comply with applicable U.S. requirements.
A. Eligible Participants
The eligibility requirements for using Form F-8 or F-80 for business combinations are similar to the requirements for exchange offers. Each company participating in the business combination must be a foreign private issuer incorporated in Canada. Each participant, except certain small participants, must also satisfy the following requirements: (i) 36-month reporting history; (ii) 12-month listing history on the TSE, the ME or the CDNX; (iii) current compliance with reporting and listing requirements; and (iv) public float for equity shares of at least Cdn. $75 million. In order not to preclude use of the MJDS when a smaller company is participating in a business combination, the foregoing requirements need not be satisfied by participants that, in the aggregate, would contribute less than 20 per cent of the assets and revenues of the combined ongoing entity.34
34 Forms F-8 and F-80 provide that the reporting, listing and public float requirements are not imposed on any participating company if such requirements are satisfied by other participants whose assets and gross revenues from continuing operations, respectively, would contribute at least 80% of the successor registrant's total assets and gross revenues from continuing operations, as measured based on proforma combination of each participant's most recently completed fiscal year.
The MJDS forms provide an accommodation with respect to the public float test for a participant in a business combination occurring within 12 months after the termination of an MJDS-eligible tender offer or exchange offer for the participant's equity shares. Such a participant will be deemed to satisfy the public float test for the business combination if such test would have been satisfied immediately prior to the exchange offer or cash tender offer. Thus, the reduction in the participant's public float resulting from the exchange or tender offer will not preclude use of the MJDS for a second-step business combination.
B. Successor Registrant
The successor entity subsisting after the business combination must be a foreign private issuer incorporated in Canada. In addition, Forms F-8 and F-80 impose limitations on the U.S. shareholdings of the securities to be distributed by the successor registrant. Form F-8 is available if U.S. holders will hold less than 25 per cent, and Form F-80 is available if U.S. holders will hold less than 40 per cent, of such securities upon completion of the business combination.35
35 If U.S. ownership will exceed those thresholds, or if other Form F-8 or F-80 eligibility requirements cannot be satisfied, the business combination (including a second-step business combination) may nevertheless be eligible for registration on Form F-10 if the applicable requirements are satisfied. Like Forms F-8 and F-80, Form F-10 exempts certain small participants from some of the eligibility requirements for business combinations. The use of Form F-10 would, however, require reconciliation of both historical and proforma financial statements to U.S. GAAP. Forms F-8 and F-80 have no such reconciliation requirement.
The two forms have identical eligibility requirements except for the U.S. ownership ceilings. The calculation of U.S. holders is to be made as of the end of each participant's most recent fiscal quarter (or if such quarter ended within 60 days of filing, as of the end of the preceding quarter).36
36 If, however, the Form F-8 or F-80 registration statement is filed during an ongoing MJDS-eligible tender offer or exchange offer for a class of securities involved in the business combination, the calculation of U.S. holders is to be made as of the date used by the initial offeror.
V. CONTINUOUS REPORTING
A Canadian issuer could become subject to Exchange Act obligations to file or furnish periodic reports in the United States if it: (i) makes a registered offering of securities in the United States (Section 15(d) of the Exchange Act); (ii) has a class of securities listed on a U.S. national securities exchange (Section 12(b) of the Exchange Act) or quoted on NASDAQ (Section 12(g) of the Exchange Act); or (iii) has a specified number of U.S. shareholders and a specified amount of assets (Section 12(g) of the Exchange Act). In addition, a Canadian issuer that falls within clause (ii) or (iii) above must, unless subject to the Rule 12g3-2(b) exemption described below, register such class of securities with the SEC under the Exchange Act.37
37 Whereas in Ontario, a company automatically becomes a reporting issuer upon listing a class of securities on the TSE or upon offering securities in Ontario by prospectus or take-over bid circular, in the United States a company must file a registration statement under the Exchange Act in order to be listed or quoted. This registration obligation is separate from and in addition to any registration that the issuer may have made pursuant to the Securities Act in connection with a public offering of securities in the United States.
The MJDS eases the Exchange Act registration and reporting obligations for eligible Canadian issuers by allowing such issuers to satisfy such obligations by filing Canadian disclosure documents.
A. Exchange Act Registration and Reporting Obligations
Any class of securities, whether debt or equity, that is listed on a U.S. national stock exchange or quoted on NASDAQ must be registered pursuant to Section 12(b) or 12(g) of the Exchange Act, respectively. Equity securities that are not exchange-listed must be registered by Canadian foreign private issuers under Section 12(g) of the Exchange Act if there are 500 or more record holders of the class, of which 300 or more reside in the United States, and the issuer has total assets worldwide exceeding U.S. $5 million.38
38 The registration of a public offering in the United States pursuant to the Securities Act does not, by itself, trigger an obligation to register under the Exchange Act, although it does trigger an obligation to file periodic reports pursuant to Section 15(d) (absent an exemption). The obligation to register arises if the offered securities are listed on a stock exchange or if the shareholder and asset thresholds are exceeded following the offering.
An exemption from the registration requirements of Section 12(g) and the related continuous reporting obligations is available for foreign private issuers that furnish to the SEC, pursuant to the so-called "information-supplying exemption" of Exchange Act Rule 12g3-2(b), the continuous disclosure documents that it is either required to, or actually does; (i) make public in its home country, (ii) file with home country regulators, (iii) make public through a stock exchange or (iv) distribute to security holders. The Rule 12g3-2(b) exemption is not available, however, if the equity securities are quoted on NASDAQ or the issuer has registered a public offering of securities in the United States, other than on MJDS Form F-7, F-8, F-9, F-10 or F-80. Without this carve-out for MJDS offerings, Canadian issuers that have relied on the information-supplying exemption for a class of equity securities would lose the exemption if they were to conduct an MJDS offering. Therefore, the SEC has amended Rule 12g3-2(b) to avoid disruption of a Canadian issuer's reliance on the exemption following an MJDS offering.
Each issuer that has registered a class of securities pursuant to the Exchange Act, or has made a registered offering of securities in the United States pursuant to the Securities Act is thereafter required, absent an exemption, to file periodic reports with the SEC. As discussed above, an exemption for reporting obligations which arise under Section 12(g) of the Exchange Act is available to Canadian and other non-U.S. issuers pursuant to Rule 12g3-2(b) for securities that are not exchange-listed or NASDAQ-quoted and have not been publicly offered in the United States other than on MJDS Form F-7, F-8, F-9, F-10 or F-80. This exemption allows a non-U.S. issuer to fulfil U.S. periodic reporting obligations which arise under Section 12(g) of the Exchange Act by furnishing39
39 Because home country documents are merely "furnished" to the SEC, rather than "filed," they are not subject to liability for misstatements under Section 18 of the Exchange Act. They may be subject to liability, however, under other provisions of the Exchange Act or the Securities Act.
its home country disclosure documents to the SEC. Canadian issuers eligible for the Rule 12g3-2(b) exemption also have available an exemption from the periodic reporting requirement that would normally arise from making a registered offering in the United States under Section 15(d) of the Exchange Act40
40 This periodic reporting requirement is imposed by Section 15(d) of the Exchange Act and applies for the remainder of the issuer's fiscal year in which the registered offering is made and any subsequent year in which there are at least 300 record holders of the class of securities offered. The requirement to file reports pursuant to Section 15(d) is suspended so long as the issuer is subject to the comparable reporting requirements imposed by Section 13(a) on all issuers of securities registered under Section 12(b) or 12(g) of the Exchange Act.\
if the offering is a rights offer, exchange offer or business combination using MJDS Form F-7, F-8 or F-80 and the issuer is furnishing its home country disclosure documents to the SEC in accordance with Rule 12g3-2(b).41
41 This exemption is available pursuant to new Exchange Act Rule 12h-4.
Canadian issuers that make offerings on the other MJDS forms (i.e., Form F-9 or F-10) or make offerings on Form F-7, F-8 or F-80 but do not satisfy the conditions of Rule 12g3-2(b), may fulfil the resulting Exchange Act registration and reporting obligations by filing certain Canadian disclosure documents under cover of SEC wrap-around Forms 40-F and 6-K, as described below.
B. Forms for Exchange Act Registration and Reporting
Canadian issuers that have conducted an MJDS offering (as well as certain other eligible issuers) and are not eligible for the Rule 12g3-2(b) may satisfy resulting Exchange Act annual reporting obligations by filing home country documents under cover of new MJDS Form 40-F and material change reporting obligations by furnishing home country documents under cover of Form 6-K.
1. Form 40-F and Form 6-K Eligibility Requirements. A substantial Canadian issuer that meets the eligibility requirements for Form F-10 can use new Form 40-F to register any class of securities under the Exchange Act and to fulfil annual reporting obligations, even if the registration or reporting obligations did not arise from an offering on MJDS forms. Any Canadian issuer that meets the applicable eligibility requirements of Form F-9 can use Form 40-F to fulfil Exchange Act registration and annual report obligations relating to a class of securities eligible for registration on Form F-9. Form 40-F is also available for Canadian issuers to satisfy Exchange Act reporting obligations arising from a rights offering, exchange offering or business combination on Form F-7, F-8 or F-80.42
42 New Rule 12h-4 exempts such offerings from the reporting requirements of Exchange Act Section 15(d) if the issuer is furnishing its home country disclosure documents to the SEC pursuant to the Rule 12g3-2(b) exemption.
If the securities issued in such a transaction are to be listed on a U.S. stock exchange or quoted on NASDAQ, however, Form 40-F is not available (unless the issuer satisfies Form F-9 or F-10 eligibility requirements, as noted above) and such securities must be registered and annual reports filed on Form 20-F. An issuer that is eligible to file Form 40-F at the end of a fiscal year will be presumed to be eligible to use Form 6-K for furnishing material change reports until the end of its next fiscal year.
2. Mechanics of Form 40-F and Form 6-K. Both Form 40-F and Form 6-K are to be used as wrap-around forms for the filing of home country information that is material to an investment decision, which the issuer has made public, filed with a securities exchange or distributed to security holders. A Canadian issuer registering a class of securities pursuant to the Exchange Act must file under cover of Form 40-F all such information (in English) made public, filed or distributed pursuant to Canadian law since the beginning of its last full fiscal year. There also must be filed that portion of Canadian reports, forms or stock exchange listing applications describing the securities being registered. A Canadian issuer using Form 40-F to satisfy its annual reporting obligations must file with the SEC its Canadian Annual Information Form, audited financial statements and accompanying management's discussion and analysis on the same day such information is due to be filed with any Canadian securities regulator. All other information material to an investment decision that the issuer makes public, files or distributes, such as interim financial statements and material change reports, must be "furnished" to the SEC under cover of Form 6-K promptly after such information is made public, filed or distributed.43
43 Information "furnished" to the SEC under cover Form 6-K is not subject to liability for misstatements under Section 18 of the Exchange Act. Such information may, however, be subject to liability under other provisions of the Exchange Act or the Securities Act. Information "filed" with the SEC on Form 40-F is subject to liability under Section 18, which allows a person who purchased or sold a security in reliance on a false or misleading statement with respect to a material fact in the filed document to recover damages unless the person sued proves that he acted in good faith and had no knowledge that the statement was false or misleading. If documents furnished on Form 6-K are in a language other than English, an English version or summary need only be provided for press releases and for documents distributed directly to security holders.
The Canadian disclosure documents filed or furnished under cover of Form 40-F or 6-K to satisfy Exchange Act reporting obligations of a Canadian issuer may also be used to satisfy the information-supplying requirements of Rule 12g3-2(b) with respect to a class of equity securities of the issuer. The forms provide a space on the cover page to indicate that the information is being filed or furnished to satisfy both obligations. Any annual financial statements included in a registration statement or annual report on Form 40-F filed prior to July 1, 1993 must be reconciled to U.S. GAAP as required by Item 17 of Form 20-F,44
44 Item 17 requires quantitative reconciliation of net income and material balance sheet items, but other disclosures required by U.S. GAAP and SEC Regulation S-X are not required. Issuers expecting to conduct an offering of equity or other securities on Form F-10 should consider, however, preparing a full U.S. GAAP reconciliation pursuant to Item 18 of Form 20-F in order to be in compliance with the reconciliation requirements of Form F-10. No reconciliation will be required in MJDS filings made on or after July 1, 1993, absent future action by the SEC to the contrary.
unless the registration statement or report is solely with respect to (i) Form F-9-eligible securities, even if the registration or reporting obligation did not arise from an offering on Form F-9, or (ii) a reporting obligation that arose from a rights offering, exchange offering, business combination or offering of investment grade debt or preferred shares on Form F-7, F-8, F-9 or F-80.
VI. MISCELLANEOUS PROVISIONS
A. Shelf Filings and Post-Effective Pricing Procedures
Canadian issuers may use the MJDS to make continuous or "shelf" offerings by following the procedures contained in National Instrument 44-102 Shelf Distributions (“NI 44-102”) andCompanion Policy 44-102CP in conjunction with the MJDS forms. A single Canada-U.S. shelf could be established, based on Canadian requirements, enabling eligible issuers to sell off the shelf in either country as market conditions warrant. Canadian issuers also may use the Post-Receipt Pricing ("PREP") rules included in National Instrument 44-103 Post-Receipt Pricing (“NI 44-103”) and Companion Policy 44-103CP to price MJDS offerings after they have become effective with the SEC. Canadian issuers cannot use SEC shelf offering and post-effective pricing procedures under the MJDS. MJDS offerings under NI 44-102 and NI 44-103 are conducted just as any other MJDS offerings. Specifically, the Canadian documentation and review procedures apply to these offerings and issuers should use the appropriate MJDS form to wrap around the Canadian prospectus. An MJDS registration statement used in connection with the PREP rules will become effective with the SEC prior to pricing to the same extent it does in Canada. Issuers must file supplements to Canadian shelf disclosure documents and the supplemented PREP registration statements with the SEC within one day after being filed in Canada, but these filings are not deemed to be "amendments" to the underlying SEC registration statement, and thus are not subject to the post-effective amendment approval procedures.
B. Auditor Reporting and Independence Requirements
Financial statements included in MJDS disclosure documents may be audited in accordance with generally accepted auditing standards in Canada. If additional comments for U.S. readers are appropriate pursuant to Canadian auditing guidelines on the Canada-U.S. reporting conflict with respect to contingencies and going concern considerations,45
45See Canadian Institute of Chartered Accountants Auditing Guideline, "Canada-United States reporting conflict with respect to contingencies and going concern considerations" (December 1988).
such comments must be added as a legend on the cover page of the prospectus delivered to U.S. investors, unless the comments have been included in the prospectus itself.
The SEC has long-standing rules governing the independence of external auditors. Among other things, these rules restrict the types of services that auditors may perform for clients in addition to the auditing of financial statements, as well as the types of financial interests an accounting firm may have in a client's business. These SEC rules generally are more specific than the corresponding Canadian guidelines. Under the MJDS, the SEC requires that a Canadian auditor comply with the SEC auditor independence rules only commencing with its report on financial statements for the most recent fiscal year included in the initial registration statement filed on an MJDS form.46
46See Section 600 of the SEC's Codification of Financial Reporting Policies.
This would apply to the balance sheet at year-end and the statements of operations and cash flows for that year. Compliance with SEC auditor independence rules is not required, however, with respect to any rights offerings on Form F-7. Of course, SEC independence rules will apply to all MJDS filings in subsequent years.
C. Trust Indenture Act
The U.S. Trust Indenture Act of 1939 (the "TIA") governs the terms of indentures for debt securities offered and sold in the United States. In connection with the MJDS, the SEC adopted two exemptions to TIA requirements in order to accommodate MJDS debt offerings. Rule 10a-5 provides an exemption from the requirement that at least one trustee under the indenture be a U.S. trustee, so as to enable an eligible Canadian institutional trustee (i.e., a trust company subject to federal supervision or examination under the Trust Companies Act (Canada) or the Canada Deposit Insurance Corporation Act) to act a sole trustee in connection with an MJDS offering, without the need to appoint a U.S. co-trustee. Rule 4d-9 exempts, from virtually all of the substantive requirements of the TIA, trust indentures used for MJDS offerings if the indenture is subject to the requirements of the Canada Business Corporations Act, the Business Corporations Act, 1982 (Ontario), or the Bank Act.47
47 Rule 4d-9 does not provide an exemption from the trustee eligibility requirements in Sections 310(a)(1), (2) and (5) of the TIA concerning authority to exercise corporate trust power, capital and surplus and prohibited conflicts of interest, but a trustee authorized under Rule 10a-5 would meet those requirements. Section 316(b) of the TIA also continues to apply and as a result, each security holder would have a statutory right to receive payments of principal and interest when due and to bring an action therefore.
The foregoing exemptions currently are not available for offerings involving a trustee incorporated and regulated under British Columbia law or an issuer incorporated in British Columbia, because British Columbia law does not provide reciprocal exemptions for U.S. trustees and U.S. indentures.48
48 Legislation to provide such reciprocal relief is contemplated in British Columbia. If enacted, the SEC can be expected to make the TIA exemptions available to British Columbia trustees and issuers as well.
VII. MARKET REGULATION RULES
A. Applicable U.S. Rules
Three SEC market regulation rules are of particular relevance to MJDS offerings. Exchange Act Rule 10b-6 is intended to prevent participants in a distribution of securities (i.e., issuers, selling security holders, underwriters and members of the selling group) from conditioning the market for the securities in order to facilitate the distribution. Generally, it prohibits distribution participants from bidding for, purchasing or otherwise inducing the purchase of the securities in distribution or any related securities (such as warrants or rights to purchase the securities in distribution)49
49 During an exchange offer, Rule 10b-6 would prohibit the purchase of the target securities, as well as the offeror's securities being distributed, because the target securities are considered "rights to purchase" the securities being distributed.
until they have completed their participation in the distribution. Rule 10b-6 contains certain exceptions to its general prohibitions so as to permit an orderly distribution and limit disruption of market activity. Rule 10b-7 allows limited market stabilization of the price of a security during a distribution. Under that rule, stabilization is limited to a single price set in relation to both the offering price and the price in the primary U.S. market. The third rule, Rule 10b-8, governs the sale of an underlying security during a rights offer, as well as the bidding for and purchasing of the rights. This rule allows purchases and sales of rights only to the extent necessary to reduce the risk of positions held. It does not generally permit the liquidation of positions acquired.
All three of these rules regulate the activities of "affiliates" of, and persons acting in concert with, distribution participants as well as the participants themselves. The SEC applies these rules to all U.S. and non-U.S. distribution participants and their affiliates when a "distribution," as defined in paragraph (c)(5) of Rule 10b-6, is being made in the United States, even if the prohibited activity takes place in markets outside the United States. Thus, absent an exemption, Rule 10b-6 would prohibit a Canadian bank, which is affiliated with a Canadian dealer participating in the selling group for an MJDS offering, from purchasing the distributed security for a customer's trust account managed by the bank. Absent relief, Rules 10b-6 and 10b-7 could disrupt market activities on Canadian stock exchanges by restricting the market making activities of employees of Canadian dealers participating in, or affiliated with participants in, MJDS offerings.
A fourth rule, Exchange Act Rule 10b-13, is applicable to exchange offers and cash tender offers for equity securities. It prohibits the bidder from purchasing the target security (or related convertible or exchangeable securities) outside of the offer from the time of announcement of the offer until its expiration. The rule is designed to protect shareholders of the target securities from the effects of "side deals" for purchases on terms different from the offer. In an MJDS tender or exchange offer, Rule 10b-13 would be in conflict with Canadian provisions that allow purchases outside the offer of up to five per cent of the outstanding target securities, if certain disclosures are made and other conditions are met.
B. Regulatory Relief for MJDS Offerings
In connection with tender offers and exchange offers made pursuant to MJDS rules, the SEC has granted blanket exemptions from Exchange Act Rules 10b-6 and 10b-13 to permit securities purchases that are allowed under Canadian rules and that are not made for the purpose of creating actual or apparent trading activity in, or raising the price of, such securities.50
50See SEC Exchange Act Release No. 29355 (June 21, 1991).
The exemptions are available only to offerors that: (i) disclose in the MJDS offering documents the intent to make (or the possibility of) such purchases as permitted by Canadian rules; (ii) disclose in the United States information regarding such purchases on the same basis as it is required to be disclosed (or otherwise is disclosed) in Canada; (iii) bids for or purchases of the target's securities are not effected in the United States otherwise than pursuant to the offer; and (iv) bids or purchases of the offeror's securities are not effected in the United States.
The SEC has granted certain exemptions and other relief from Rules 10b-6 and 10b-7 in connection with distributions in Canada and the United States, or solely in the United States, by substantial Canadian issuers eligible to use Form F-10.51
51See Letter regarding Distributions of Certain Canadian Securities (Aug. 22, 1991). Canadian foreign private issuers are eligible to use Form F-10 if they have at least a 36-month reporting history in Canada and equity shares with a market value of at least Cdn. $360 million and a public float of at least Cdn. $75 million. See Section I.B above for a discussion of Form F-10 eligibility requirements.
The relief is available for all offerings by such issuers, regardless of whether MJDS forms are used. Issuers, selling security holders and non-dealer affiliates of participants in such distributions are exempt from Rules 10b-6 and 10b-7, provided that their bids for or purchases of the securities being distributed (or certain related securities) are made outside the United States and in compliance with applicable Canadian requirements. In connection with such relief from the SEC, the Ontario Securities Commission has implemented restrictions on trading during a prospectus distribution of TSE-listed securities by distribution participants, their affiliates and persons acting in concert with any of them.52
52See OSC Policy Statement 5.1, Paragraph 26.
Similar restrictions with respect to ME-listed securities have been implemented in Quebec.53
53See QSC Policy Statment No. Q-26.
A member of the selling group in an offering of Form F-10-eligible securities also is exempt from Rules 10b-6 and 10b-7, provided that such member sells no more than two per cent of the securities being distributed in Canada and that all selling group members, in the aggregate, sell no more than 15 per cent of such securities. Selling group members also are required to make all bids or purchases outside the United States and in compliance with applicable Canadian requirements, including TSE and ME rules.
Underwriters, banking group members and other dealers (except selling group members exempted as described above) participating in, or affiliated with participants in, a distribution of Form F-10-eligible securities in the United States generally are subject to Rules 10b-6 and 10b-7, but have received certain limited relief from the SEC. Those dealers that are TSE or ME members may engage in specified "passive market making" and "options passive market making" activities pursuant to stock exchange rules54
54See TSE General By-Law, Section 11.11(8); ME Rule 6462(8).
during a distribution of Form F-10-eligible securities, so long as such activities are not intended to raise the price of the securities being distributed. "Passive market making" allows responsible registered traders on the TSE or specialists on the ME: (i) to facilitate the opening of trading; (ii) to maintain quotation spreads in accordance with exchange requirements; (iii) to provide guaranteed executions in exchange small order execution systems; (iv) to match prices and quotations on competing exchanges; (v) to maintain price relationships between related securities; and (vi) to liquidate positions accumulated while performing these functions. Other conditions also apply. The SEC also has granted blanket exemptions to permit TSE and ME members to stabilize in Canada based on Canadian market prices when the Canadian market is the principal market for the Form F-10-eligible security being distributed, and to observe a two business day "cooling off" period with respect to permitted bids and purchases of Form F-10-eligible securities under Rule 10b-6.
In connection with rights offers, the SEC has granted exemptions from Rules 10b-6, 10b-7 and 10b-8 to permit members of the TSE or ME to engage in "passive market making" activities in compliance with applicable Canadian requirements with respect to: (i) Form F-10-eligible securities and rights to purchase such securities; and (ii) securities of an issuer having at least a three year operating history and voting stock with a market value of at least U.S. $150 million held worldwide by "non-affiliates," and rights to purchase such securities.
VIII. STATE SECURITIES REGULATION
Issuers conducting securities offerings in the United States are subject to the securities laws of the states in which offers and sales are made (often referred to as "blue sky" laws)55
55 Each of the 50 states, the District of Columbia and Puerto Rico has laws governing the offer and sale of securities in its jurisdiction.
as well as the federal securities laws administered by the SEC. State laws generally require the registration of securities offered and sold in the state.56
56 U.S. state take-over statutes will not affect tender offers made under the MJDS because they apply only if the target company is organized under the laws of the state or has its principal office and substantial assets in the state. However, any securities offered in an exchange offer as consideration for the target securities might be subject to state registration.
The states have varying requirements for registration, but typically will accept the registration statement filed with the SEC along with certain additional information, such as corporate documents and a consent to service of process in the state. As with the SEC, the states review offering documents for adequacy of disclosure. In addition, many states conduct a substantive (also known as "merit”) review . Several exemptions are available from state registration requirements, most notably for securities listed on specified U.S. stock exchanges and for securities sold to existing security holders. The states generally do not have continuous disclosure requirements and instead require a current filing for secondary trading unless an exemption is available. Thus, an exemption is required to allow continued secondary trading in a state after one year. As described below, the North American Securities Administrators Association ("NASAA")57
57 NASAA is an association that represents all U.S. state securities regulators, Canadian provincial securities regulators and Mexican securities regulators. NASAA proposes uniform guidelines and procedures which are frequently adopted by many of its members.
has endorsed, and many states have adopted, model rules to accommodate MJDS offerings and related secondary trading.
For particular questions about any state’s securities law, you should consult the directory of state securities regulators at nasaa.org.
A. State Registration of Securities Offerings
Four methods of registration exist under U.S. state laws when a security is offered and sold in a state and an exemption from registration is not available: (i) registration by qualification requires the filing of comprehensive information and prior review by the state; (ii) registration by notification is generally available to issuers meeting certain earnings tests and requires the filing of certain forms and documents and allows the securities to be sold, absent objection, after a specified review period;58
58 This method of registration is rarely used.
(iii) registration by coordination is available when a registration statement is filed with the SEC under the Securities Act, and requires the filing of certain forms and documents and allows the securities to be sold, absent objection after a certain review period; and (iv) "automatic" registration is available in some states which have simplified filing requirements with no review.59
59 Although Illinois is an automatic registration state, additional requirements and review procedures apply to real estate syndications, which could include distributions by issuers that own or operate real estate, depending upon the substantiality of the real estate assets and other factors.
For many offerings made under the MJDS, an exemption will be available. Where an exemption is not available, registration by coordination ordinarily will be available because all offerings of securities under the MJDS require the filing of a registration statement with the SEC. Certain states list the forms of registration statements for which registration by coordination is available, in which case it will be necessary to ensure that the MJDS forms have been included in the list. For many MJDS offerings, registration by notification will be available and could be considered as an alternative to registration by coordination. The procedures for registration by coordination are described in Section VIII.B below.
B. Registration by Coordination
Registration by coordination streamlines the contents of the registration statement and the related procedures, but does not affect the substantive standards for review. Once the required review period has passed, the registration statement would become effective upon effectiveness of the registration statement with the SEC. The following requirements generally apply to registration by coordination:
i) Filing packages - The filing package required by the states includes a Uniform Application to Register Securities form and certain accompanying documents. Although some of these documents would not be part of Canadian filing packages, almost all relevant states have indicated a willingness to modify their standard form for offerings made under the MJDS to conform to Canadian practice. NASAA has not yet endorsed a modified form.
ii) U.S. GAAP - Although state statutes and regulations might be unclear in this respect, financial information contained in registration statements filed with the states could be required to be reconciled to U.S. GAAP even if no such reconciliation is required by the SEC's MJDS rules (but see Section VIII.D.ii below).
iii) Payment of fee - A filing fee will be payable.
iv) Appointment of agent for service - The filing package must generally include a form authorizing the appointment of the state securities administrator as agent for service of process in the state and a corporate resolution authorizing the appointment.
v) Review period - Generally a registration statement must be on file with a state at least 10 calendar days prior to effectiveness (but see Section VIII.D.i below). The administrators in many states have the power to accelerate this review period by order if requested to do so.
vi) Merit review - In certain states the review procedure includes merit review in addition to a review of the adequacy of disclosure. Merit review could result in denial of registration if certain guidelines are not met.
C. Exemptions from State Registration Requirements
1. Primary Offering Exemptions. Exemptions that might be available for primary offerings (i.e. distributions) of securities under the MJDS include the following:
i) Exchange listed securities - All securities listed on the following exchanges and any securities senior in rank to the listed securities are exempt from state registration: The New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, Chicago Board Options Exchange, Tier 1 of the Philadelphia Stock Exchange and Tier 1 of the Pacific Stock Exchange. No filing with state regulators is required and no fee is payable to the states.
ii) Offerings to existing security holders - Virtually all states have a transactional exemption for sales of securities to existing security holders (limited in a few states to holders of equity securities). This exemption might not be available if a dealer-manager receives compensation in connection with the offering, even if the dealer-manager does not solicit security holders in the state.
2. Secondary Trading Exemptions. In addition to the exemptions listed above, certain non-issuer exemptions might be available for trades made in the secondary market of securities previously offered under the MJDS. Non issuer transactions in securities of issuers subject to the reporting requirements of the Exchange Act60
60See Section V above for a description of Exchange Act registration and reporting requirements.
are exempt from state registration requriements. Some states may require a notice filing. The first exemption is premised on the availability of information on an ongoing basis. Non-issuer exemptions include the following:
i) Manual exemption - This exemption is available if the issuer publishes certain continuous disclosure information on an ongoing basis in a recognized manual, for which the issuer pays a fee. The recognized manuals vary among the 36 states that have this exemption, the most commonly recognized being the various manuals published by Standard & Poor's and Merchant.
ii) Isolated sales - This exemption has been interpreted to be limited to as few as one or two transactions in the state in a year.
iii) Debt securities not in default - Many states have a non-issuer exemption for debt securities where there has been no default for a certain period of time. The no default requirement could be no default during the current fiscal year, no default during the three preceding fiscal years or no default during the existence of the issuer or any predecessor.
iv) Non-issuer transactions - A few states exempt all non-issuer transactions not for the benefit of an affiliate of the issuer.
v) Sales to institutional investors - Generally an exemption is available for issuer and non-issuer transactions with institutional investors.
3. Effect of Exemptions. If an exemption from registration is available, there is no review and generally no requirement to comply with the substantive standards of state law. While most state do not require a filing, some states do. A state administrator may by order deny or revoke an exemption with respect to an exempt transaction. The exemptions apply only to securities registration requirements and do not exempt an offering from broker-dealer registration requirements or from the anti-fraud or other liability provisions of state law.
D. Actions Taken by NASAA and the States to Accommodate MJDS Offerings
In August 1990, the NASAA membership approved the following model rules to the Uniform Securities Act (1956) (on which most state securities laws are based) to accommodate offerings by Canadian issuers under the MJDS, and recommended their adoption by individual states as needed:
i) Shortened review period - The first rule would reduce the review period for registration statements filed under the MJDS to not more than seven calendar days, the time typically required for the clearance of a short form prospectus of POP issuers in Canada under National Policy 43-201 Mutual Reliance Review System for Prospectuses and Annual Information Forms.
ii) Use of Canadian GAAP - The second rule would allow financial information to be prepared in accordance with Canadian GAAP without reconciliation to U.S. GAAP when reconciliation is not required by the SEC. In the NASAA survey several states indicated an unwillingness to permit Canadian GAAP to satisfy its financial disclosure requirements.
iii) Form for rights offers - Many states require a particular form to be filed to claim the exemption for offerings made to existing security holders. The third rule would allow the SEC registration statement for rightings offers made under the MJDS (Form F-7) to be filed in lieu of any such state form.
iv) Secondary trading exemption - The fourth rule would provide a secondary trading exemption for all classes of securities of an issuer which has filed any of the SEC MJDS forms (other than Form F-7 for rights offerings). This exemption would be available whether or not the issuer has ever done a primary offering of securities in the state.
E. Application to MJDS Offerings
1. Form F-7 (Rights Offerings). A transactional exemption for rights offerings is available in virtually all states, but the exemption is more complex than other exemptions and varies from state to state. The transactional exemption would not be available in some states if a dealer receives a fee to act as a dealer-manager even if it does not solicit security holders in the state. A filing is required in certain states to claim the exemption, although in many states this requirement applies only if a commission is paid to a soliciting dealer-manager. Under the third uniform rule, a copy of the SEC's Form F-7 could be filed in lieu of the usual state form. A fee is payable in many states. A few states require the issuer making a rights offering to register as a broker-dealer or issuer agent, although some states might be willing to waive this requirement. Other states would require a Canadian dealer-manager to register as a broker-dealer or issuer agent in the state for purposes of the rights offer even if there were only a small number of security holders in the state. Notwithstanding the availability in almost all states of an exemption for offerings made to existing security holders, the issuer should consider whether it might be easier to register rights offerings under registration by coordination if other exemptions are not available. If there are security holders in certain states, preparation of filing packages for registration by coordination could be required in any event. Because rights offerings have been in the past relatively uncommon in the United States, U.S. counsel also may be less familiar with the issues arising from the use of this exemption for rights offers than is the case with other exemptions.
2. Forms F-8 and F-8061(Exchange Offers and Business Combinations).
61 State laws generally make some accommodation for exchange offers and business combinations only if they are registered on MJDS Form F-8, not Form F-80. The only difference between the two forms is the limitation on U.S. ownership. See Sections III.B.2 and IV.B above.
An exemption could be available for an exchange offer made under the MJDS. In the case of issuer bids, the exemption for offerings made to existing security holders might be used (see Section VIII.E.1 above), although in some states the issuer could be required to file a separate state form and use of this exemption might entail a waiting period. Similarly, an exemption could be available for securities offered in connection with an amalgamation or other business combination. However, for many exchange offers and business combinations there might be no exemption available. In the case of amalgamations, consideration should be given to the possible effect on certain exemptions of the issuer being a newly amalgamated corporation. If no exemption is available and registration by coordination is used, attention must be paid to the relative timing of certain events, as follows:
i) In several states, the offer may not be made to security holders until the registration statement is effective in the state.
ii) The offer may not be made to security holders in a state until the registration statement has been filed in the state. An exemption available in most states allows the offer to be made before effectiveness of the registration statement in the state, although the offer could not be accepted until after effectiveness. Thus, if the offer is made before effectiveness, steps would have to be taken to ensure that the offer could not be accepted until after effectiveness, such as by making effectiveness in the state a condition to acceptance of the offer.
iii) The use of registration by coordination may require that the filing with the state be made before the SEC declares the registration statement effective. This requirement is of particular concern in the case of exchange offers and business combinations because Form F-8 becomes effective with the SEC upon filing with the SEC.
3. Form F-9 (Investment Grade Debt and Preferred Shares). As noted in VII.C.1 above, stock exchange listing or quotation on the NASDAQ/NMS in the United States would exempt issuers from state registration both for the listed securities and for securities that are senior in rank to the listed securities. This exemption is particularly useful for MJDS offerings made under the shelf prospectus system under NI 44-102 because the large majority of states require renewal after one year of a registration for a continuous offering. For some states, the listing of one class of debt securities would provide an exemption for other classes of debt securities. Some states have established policies for the treatment of shelf offerings and the filer should check to see if these policies apply to MJDS shelf offerings made under NI 44-102 in lieu of SEC Rule 415.
4. Form F-10 (Equity and Other Securities). As noted in VII.C1. above, the listing or quotation on a U.S. market of securities offered into the United States would in most cases exempt issuers from state registration. Restricted shares may not be offered by an issuer into certain states under registration by coordination.
IX. MODIFICATIONS TO REGISTRATION AND REPORTING SYSTEM FOR ALL CANADIAN ISSUERS (WHETHER OR NOT MJDS ELIGIBLE)
In addition to the actions taken by the SEC to implement the MJDS and facilitate its use, the SEC has also modified its registration and reporting requirements to facilitate offerings and reporting by all Canadian foreign private issuers whether or not eligible to access the MJDS. Historically, most Canadian issuers have not been eligible to use the special SEC registration and reporting system available to other foreign private issuers. Most Canadian issuers were required to use the same forms as U.S. domestic companies to register securities offerings under the Securities Act and to fulfil registration and continuous reporting obligations under the Exchange Act. U.S. domestic registration and reporting forms generally contain disclosure and filing requirements more stringent than those contained in forms available to non-Canadian foreign private issuers.62
62See Section V for a general overview of registration and continuous reporting requirements under the Exchange Act.
Additionally, SEC proxy rules, insider share ownership reporting rules and short-swing profit recapture rules have applied to Canadian foreign private issuers that had conducted a registered offering in the United States or had listed securities on a U.S. stock exchange whereas other foreign private issuers are exempt from these rules. In connection with the MJDS, the SEC has revised its rules so that all Canadian foreign private issuers, whether or not they satisfy MJDS eligibility requirements, have available the same registration and reporting system and the same exemptions as all other foreign private issuers.
A. Securities Act Registration
All Canadian foreign private issuers now have available for registering public offerings in the United States the foreign integrated disclosure system Forms F-1, F-2, F-3 and F-4, which are available to all foreign private issuers and require disclosure that is less extensive in some respects than the disclosure required of U.S. domestic issuers, in addition to63
63 These forms do not require, for example, disclosure of compensation paid to individual executive officers (unless otherwise disclosed by the issuer), detailed information concerning stock options (unless otherwise disclosed by the issuer) or disclosure of shareholdings of individual officers and directors.
Forms S-1, S-2, S-3 and S-4, which comprise the integrated disclosure system for U.S. domestic issuers (but may be used by non-U.S. issuers). It is expected that some Canadian issuers, which were previously permitted to use only the domestic integrated disclosure forms for U.S. offerings, may elect to continue to use such forms for future offerings.64
64 Canadian issuers that intend to continue using short-form registration statements on Form S-2 or Form S-3 should bear in mind that such forms are available to foreign issuers only if they file the same Exchange Act reports as are required of U.S. domestic issuers. This condition would effectively preclude Canadian issuers planning to use Form S-2 or Form S-3 from using Forms 40-F, 20-F and 6-K to satisfy reporting obligations under the Exchange Act. Short-form registration statements on Form F-2 and Form F-3, however, do permit incorporation by reference from Forms 40-F, 20-F and 6-K.
B. Exchange Act Registration and Reporting
Historically, Canadian issuers that registered a public offering in the United States or had a class of securities listed on a U.S. stock exchange were required to prepare and file with the SEC the same continuous reporting forms as U.S. domestic issuers: Form 10-K for annual reports; Form 10-Q for quarterly reports; and Form 8-K for material change reports. In effect, many Canadian issuers historically have been treated the same as U.S. domestic issuers for SEC continuous reporting purposes. Non-Canadian foreign private issuers have historically used Form 20-F both to register a class of securities under Section 12(b) or 12(g) of the Exchange Act and to satisfy annual reporting obligations. The disclosure requirements of Form 20-F are less stringent than those of Form 10-K in areas such as accounting requirements, disclosure of management remuneration and related party transactions. In addition, Form 20-F need only be filed within six months after year end, whereas Form 10-K must be filed within 90 days. Canadian issuers have been able to use Form 20-F only in limited circumstances, for registration and annual reporting obligations arising under Section 12(g) with respect to securities traded in the over-the-counter market, provided that the issuer had no class of securities listed on a U.S. stock exchange and had never conducted a public offering in the United States. This limited group of Canadian issuers and all non-Canadian foreign private issuers were able to fulfil current reporting requirements concerning significant developments during the year by furnishing to the SEC home country documents under cover of Form 6-K. In connection with the MJDS, the SEC revised its rules so that all Canadian foreign private issuers are now treated like other foreign private issuers and are able to satisfy Exchange Act registration and annual report requirements by using Form 20-F and satisfy material change reporting requirements throughout the year by furnishing Canadian continuous disclosure documents to the SEC under cover of Form 6-K.65
65 Canadian issuers can still use Form 10-K, but will be unable to incorporate information by reference from their proxy statement if they intend to rely on the exemption from U.S. proxy rules now available to all Canadian foreign private issuers. See Section IX C. below.
Those Canadian issuers that have been filing annual reports on Form 10-K may switch to using Form 20-F or Form 40-F (if eligible) for any fiscal year ended on or after July 1, 1991 (or for any year ended prior to such date if the Form 10-K would not have been due prior to such date). Similarly, Form 10-K filers switching to the Form 20-F or 40-F system of reporting need not file any reports on Form 10-Q that would have been due on or after July 1, 1991. An exemption from Exchange Act registration and reporting requirements is still available under Rule 12g3-2(b) for a Canadian issuer that has not conducted a public offering in the United States (other than on MJDS forms) and does not have a class of securities listed on a U.S. securities exchange or quoted on NASDAQ, provided that such issuer furnishes to the SEC whatever information (i) it has made or is required to make public pursuant to Canadian requirements, (ii) it has filed or is required to file with a stock exchange, and which was made public by the exchange, and (iii) it has distributed or is required to distribute to its security holders.
C. Proxy, Share Ownership and Short-Swing Profit Rules
SEC rules impose comprehensive requirements with respect to proxy solicitations and the filing of reports of share purchases and sales by corporate officers, directors and 10% shareholders. SEC rules further require such corporate "insiders" to disgorge profits realized from the purchase and sale of any of the company's equity securities within a six-month period. Historically, non-Canadian foreign private issuers have been exempt from these rules. In connection with the MJDS, the SEC has amended its regulations so that, as of July 1, 1991, all Canadian foreign private issuers are exempt from the proxy, share ownership and short-swing profit rules.66
66See Exchange Act Rule 3a12-3, as amended.
Thus, Canadian issuers may choose to conduct all future proxy solicitations of their U.S. security holders in accordance with Canadian requirements rather than pursuant to U.S. rules. Furthermore, "insiders" of Canadian issuers are no longer required to file with the SEC statements of beneficial ownership on Form 3, 4 or 5.67
67 "Insiders" are expected, however, to have filed no later than July 10, 1991 a Form 4 disclosing all reportable transactions prior to July 1, 1991, which had not been previously reported. Persons making such filing should check the box on the top of Form 4 indicating that they are no longer subject to Section 16 of the Exchange Act.