Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities, July 2011

Highlights

  • 16% of reporting issuers reviewed were required to file missing material contracts
  • 3% of reporting issuers reviewed were required to revise redacted provisions
  • Reporting issuers must continually assess whether or not a given contract is material

The Canadian Securities Administrators (CSA) recently released CSA Staff Notice 51-334 – Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2011 (the CSA Staff Notice).

The CSA Staff Notice summarizes the results of CSA reviews of compliance by reporting issuers with certain continuous disclosure provisions of securities legislation during the year ended March 31, 2011. In particular, the CSA Staff Notice discloses that the CSA completed reviews of approximately 60 reporting issuers to assess compliance with the material contract filing requirements under Part 12 of National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102).

Background

Securities legislation mandates that, subject to available exceptions, reporting issuers file on SEDAR any contracts that the issuer or any of its subsidiaries is a party to and that are material to the issuer, in connection with certain events, including: (i) the filing of the issuer's annual information form (or, if the issuer is not required to file an annual information form, within 120 days after the end of its financial year); (ii) the filing of a material change report; and (iii) the filing of a prospectus.

Effective March 17, 2008, amendments to the continuous disclosure and prospectus requirements and policies under Canadian securities laws came into force, which amendments modified the requirements for the disclosure and filing of material contracts (the 2008 Amendments). As noted in our February 2008 Blakes Bulletin: Changes to Requirements for the Disclosure and Filing of Material Contracts, changes resulting from the 2008 Amendments included:

  • the deeming of certain categories of material contracts not to be in the ordinary course and, therefore, not excepted from the disclosure and filing requirements;
  • restrictions on the extent to which a reporting issuer may redact or omit provisions from the filed copy of a material contract; and
  • notice of the policy of the CSA that, generally, a material contract includes a schedule, side letter or exhibit referred to in such a contract.

Identified Areas of Concern

The CSA Staff Notice reminds reporting issuers to carefully consider the material contract filing rules in NI 51-102, as well as the related companion policy guidance, and notes three areas of concern identified in the CSA review.

Availability of the Ordinary Course of Business Exception

If a material contract was entered into in the ordinary course of business, it is typically excepted from the material contract filing requirements in NI 51-102. However, as a consequence of the 2008 Amendments, reporting issuers are unable to avail themselves of the ordinary course exception in certain circumstances. The CSA Staff Notice states that the ordinary course exception will be unavailable generally where it is determined that the contract is important to understanding the reporting issuer's business. In 2011, the CSA required 16% of the reporting issuers it reviewed to file missing material contracts to comply with the applicable requirements.

Redaction or Omission of Contract Provisions

Ordinarily, an issuer is permitted to redact or omit certain provisions of a material contract if an executive officer of the reporting issuer reasonably believes that disclosure of such provisions would be seriously prejudicial to the interests of the reporting issuer or would violate confidentiality provisions. However, the 2008 Amendments placed limits on the ability of an issuer to redact terms and conditions of material contracts, including if such terms and conditions are necessary for understanding the impact of the material contract on the business of the reporting issuer. In 2011, the CSA required 3% of the reporting issuers it reviewed to revise redacted provisions of previously filed material contracts to comply with the applicable requirements.

Continual Assessment

Further, the CSA Staff Notice cautions that reporting issuers must continually assess whether or not a given contract is material since a contract that was not previously material to an issuer may become material if, due to changes in the issuer's business or other contracts, the issuer becomes substantially dependent on that contract.

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