Co-Author: Adria Leung (2009/10 Articling Student, Miller Thomson Toronto)
The Canadian Securities Administrators recently released Staff Notice 55-315, about the Insider Reporting Requirements and Exemptions contained in National Instrument 55-104 (“NI 55-104”). The notice summarizes a number of important issues relating to the new insider reporting regime. Compliance with this new regime and examples of how to report these arrangements and transactions are discussed.
When an Initial Report Must be Filed
Section 3.2 of NI 55-104 states that a reporting insider must file an insider report “within ten days of becoming a reporting insider”, disclosing prescribed information. This applies to all parties who fall under the new definition of “reporting insider” in NI 55-104.
However, a party who was already an “insider” (according to Canadian securities legislation) a month before April 30, 2010, does not have to file a new initial report within ten days of April 30, 2010, if that “insider” has already filed all required insider reports. The new definition of “reporting insider” simply applies to certain classes of insiders who have reporting obligations and does not intend to create new “reporting insiders” from existing “insiders”.
Insiders Who Previously Filed Reports but are Not Reporting Insiders Under NI 55-104
Insiders who have previously filed insiders’ reports, but who do not fall under the new definition of “reporting insider” under NI 55-104, do not need to amend their SEDI profiles or do anything to reflect the fact that they are not reporting insiders under NI 55-104. However, it is recommended that under the “Remarks” field in SEDI, those previous insiders indicate their change of status. Whether they do this in their next transaction to be filed on SEDI, or by amending their last transaction already filed on SEDI, this is a good practice for members of the public who wish to know why an insider ceased reporting.
Exemption for a Grant of Related Financial Instruments Under a Compensation Arrangement
Part 5 of NI 55-104 deals with exemptions for automatic securities purchase plans. However, a reporting insider cannot rely on this exemption for a grant of related financial instruments under a compensation arrangement. Section 5.3 specifically states that this exemption does not apply to an acquisition of options or similar securities granted to a director or officer. As well, subsection 5.1(2) specifically states that a reference to a security of a reporting issuer includes a related financial instrument involving a security of the reporting issuer.
However, Part 6 of NI 55-104 deals with exemptions for certain issuer grants. A reporting insider can rely on this exemption for a grant of related financial instruments under a compensation arrangement as long as that issuer files an issuer grant report. The requirements for this issuer grant report must be complied with.
It must also be noted that if a compensation arrangement provides for the automatic issuance of related financial instruments as dividend equivalents, this would not be considered an issuance for the purposes of section 5.3. This would fall under the definition of “automatic securities purchase plan” for the purposes of Part 5 of NI 55-104.
Reporting Grants of Related Financial Instruments
In a scenario where the issuer is a reporting insider according to NI 55-104, and receives Deferred Share Units (DSUs) both before and after April 30, 2010, the issue of whether either of these grants needs to be reported arises. For example, a CEO receives a grant of 100 DSUs on March 15, 2010, a date after he became an insider. At the time of this grant, the CEO confirmed that the DSUs did not constitute securities and therefore were not subject to the ordinary insider reporting requirements applicable to securities. As well, the issuer disclosed the existence and material terms of the DSU Plan in its circular, and therefore the exemption in s. 2.2(b) of Multilateral Instrument 55-103 – Insider Reporting for Certain Derivative Transactions (Equity Monetization) could be relied upon. Thus, an insider report for the grant of these 100 DSUs was not needed. The CEO further received another 100 DSUs on May 15, 2010, after NI 55-104 came into force.
In this scenario, as the March grant is covered under the exemption in Multilateral Instrument 55-103, an insider report is not required. A reporting of a grant of related financial instrument does not need to be filed within ten days of April 30, 2010. However, this grant does have to be reflected the next time there is a change to the CEO’s holdings. There are two methods of reporting a grant of related financial instruments made before April 30, 2010. The first method involves filing an opening balance that shows the prior grant. The second method involves the notional adjusting of the transaction.
Using the first method, the CEO should first reflect the March grant in the opening balance. If this method is used, the CEO should indicate this in the “General Remarks” section, or else the information filed may be misleading since ordinarily, the opening balance reflects the insider’s holdings as of the date the insider first became an insider. The CEO should report the number of DSUs awarded and the equivalent number of underlying common shares.
Using the second method, the CEO should first file an opening balance of “0”. Next, the CEO should file a report to reflect a notional acquisition of the 100 DSUs in March, prior to filing an insider report to reflect the grant in May. The date of the notional acquisition should be the date of filing, not the actual date of acquisition (March 15, 2010). In the “General Remarks” section, the CEO should explain that this method is used, or the information filed may be misleading as it may suggest that there was an actual acquisition of 100 DSUs on the date of filing (in addition to the May grant). As well, if the DSU exercise price is based on the price of the actual date of the grant (March 15, 2010), but the filing date is used as the transaction date, this may suggest that the DSUs were not granted in accordance with the DSU Plan.
Even though the DSUs were not considered securities, they would likely still be considered “related financial instruments” and thus, an insider report for the May grant would likely still have to be filed within ten days of the grant. However, before filing a report about the May grant, the March grant must be reflected in the CEO’s holdings, using either of the two methods described above.
It must finally be noted that it is necessary to a) confirm that the issuer has created a security designation for the type of financial instrument it received, and b) record an Opening Balance on Initial Report for the DSUs before filing an insider report about a grant of securities or related financial instruments.
Reporting Additional Deferred Share Units Received as Dividends
If the CEO in the previous scenario had a Dividend Reinvestment Plan that allowed him to choose to receive additional common shares in lieu of cash dividends, such that he would receive one additional common share for each 10 common shares held, he would receive an additional 20 DSUs as a dividend on the 200 DSUs that he currently holds. The issue arises as to whether the CEO needs to file an insider report for the additional 20 DSUs that he received within ten days of the acquisition.
Section 6.2 of NI 55-104 outlines an exemption for the issuance of the additional DSUs as dividend equivalents. However, when the CEO files the issuer grant report for the May grant of DSUs, he must make sure to indicate that each time the issuer issues common shares as dividends on its common shares, holders of the DSUs will automatically receive corresponding DSUs as dividends. An alternative report would need to be filed by March 31, 2011 though, showing all DSUs received as dividend equivalents.
Alternatively, the CEO could rely on the “automatic securities purchase plan” exemption in Part 5 of NI 55-104 for acquisitions of securities and related financial instruments under an automatic plan. Providing the CEO cannot exercise any discretion over the issuance of additional DSUs as dividend equivalents under the DSU Plan, that aspect of the plan meets the definition of an “automatic securities purchase plan” under NI 55-104. Again, an alternative report would need to be filed by March 31, 2011, showing all DSUs received as dividend equivalents.
Information Required in an Issuer Grant Report
Section 6.3 of NI 55-104 outlines the information that must be included in an issuer grant report.
A report should be filed in the following format:
“On [date], [corporation name] granted a total of X [type of stocks/options, etc.] to directors, officers, employees and consultants of [corporation name]. Details of [type of stocks/options, etc.] granted to reporting insiders are:
Name Number of Options
[Name of Recipient 1] A
[Name of Recipient 2] B
[Name of Recipient 3] C
These [type of stocks/options, etc.] have an exercise price of $Y, and expire on [expiry date]. The [type of stocks/options, etc.] were granted under the [type of stocks/options, etc.] plan described in the [corporation name] Information Circular dated [date of Information Circular].”
Note that if it is not possible to fully describe a transaction or include all necessary material terms, a reference to a schedule filed in paper format to SEDI or a public document (such as a news release issued by the issuer) may be included.
Late Fee Waivers Where an Insider Reports Late but the Issuer has Filed an Issuer Grant Report Within the Normal Filing Period
The normal filing period for an issuer to file an issuer grant report is ten days in the case of grants before November 1, 2010, or five days in the case of grants on or after November 1, 2010. Based on the information received from issuers and reporting insiders, late fees may be levied if the issuer grant report is not filed on time. If a late fee is imposed on an insider who files an insider report outside the normal filing period, but that insider advises the CSA that the issuer has already filed an issuer grant report within the normal filing period, the CSA will likely waive that late fee as the insider has an exemption available.