After reviewing reporting by 100 randomly selected Ontario-based issuers across all industries comprising both venture and non-venture issuers, the Ontario Securities Commission (“OSC“) published Staff Notice 51-723 – Report on Staff’s Review of Related Party Transaction Disclosure and Guidance on Best Practices on January 29, 2015 (the “Report“). The Report concluded that although issuer reporting met most of the key disclosure requirements, such disclosure was overly generic and lacked specific detail to the issuer and the related party transaction (“RPT“) being disclosed. Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions, defines an RPT as a transaction between the issuer and a related party of the issuer at the time the transaction is agreed to as a consequence of which the issuer, directly or indirectly, enters into specified transactions. Such specified transactions include, but are not limited to, a purchase or sale of assets, borrowing or lending money, forgiving debts or liabilities, issuing securities and subscribing for securities. Related parties of an issuer include, but are not limited to, directors, senior officers and each of their affiliates and security holders holding more than 10% of the voting securities.
The OSC recognized that although RPTs can be beneficial and are a normal feature of business, they have the potential to be unfair or abusive to the issuer or its security holders due to the inherent conflicts of interest. This is the reason why there are disclosure requirements relating to RPTs: to ensure the fair treatment of all security holders. Full and adequate disclosure allows investors to better understand their business purpose and value and to better assess the merits of the transaction, especially when the transaction is material or not in the normal course.
Almost all of the issuers reviewed had some form of RPT disclosed in their financial statements or their management’s discussion and analysis (“MD&A“). Over half of those issuers received comments from OSC staff requesting future changes to the MD&A in order to improve transparency, as the disclosure lacked detail and was too generic and not specific to the issuer. The OSC found that although the issuer disclosed the existence of an RPT, it generally failed to provide further description of the nature and terms of the transaction. The OSC found this lack of specificity to be more of a concern for smaller issuers with market capitalizations under $100 million.
In addition to the deficiencies noted in their review of financial filings, the OSC found that while many issuers made reference to having a code of conduct, 20% had not filed their code of conduct on SEDAR, thereby making it unavailable to investors. As such, the OSC staff requested that these issuers file their codes of conduct on SEDAR.
Furthermore, when it reviewed material change reports required to be filed in relation to RPTs of the issuers, the OSC found that very few issuers were required to file a material change report for an RPT, and all of them relied on an exemption from having to provide a formal valuation or obtain minority approval. In a few of these material change reports, issuers failed to disclose information about insider participation in a private placement where the private placement was a material change for the issuer.
The Report also provides guidance into areas where issuers should focus to improve their related party disclosure and offers various examples. “Investors are entitled to clear and meaningful disclosure of RPTs to help inform their investment decisions,” said Huston Loke, Director of Corporate Finance of the OSC in a news release issued by the OSC on January 29, 2015. “The disclosure should highlight the purpose of the RPT, the parties involved and the corporate governance practices surrounding the approval of RPTs.” As part of a good governance regime, issuers, their board and their advisers are encouraged to refer to the OSC guidance and recommendations as they prepare their annual and interim filings and continuous disclosure reporting. It was also recommended that boards consider the OSC guidance in developing policies for the identification and review of RPTs and ensuring that sufficient detail of the RPT is included in the issuers’ public filings.
A copy of the Report is available on the OSC’s website at the following link: http://www.osc.gov.on.ca/documents/en/Securities-Category5/sn_20150129_51-723_transaction-disclosure.pdf