The Canadian Securities Administrators (CSA) recently published their annual review of Canadian public companies' continuous disclosure filings in CSA Staff Notice 51-344 - Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2015 (the CSA Notice). The CSA conducted more than a thousand continuous disclosure reviews of Canadian issuers over the past year and identified a number of deficiencies. These include the failure to file material change reports and news releases on a timely basis (if at all), selective disclosure of material non-public information, flaws in certifications over financial reporting controls, and various financial statement deficiencies.

While issuers should pay closer attention to these areas going forward, this bulletin focuses on two other key takeaways from the review: the failure to file material contracts on SEDAR, and the ongoing focus on deficient technical disclosure in the resource sector, particularly mining disclosure.

Failure to File Material Contracts: In the Future, Ignorance May Not Be Bliss

The legal requirement for Canadian public companies ("reporting issuers", in securities law parlance) to file material contracts on SEDAR is found in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102). If the material contract constitutes a material change for the issuer, it must be filed on SEDAR when the material change report is filed (within 10 days of the material change). Otherwise, the contract is to be filed no later than the date of the issuer's next Annual Information Form (AIF), or if the issuer is not an AIF filer, within 120 days after the end of the issuer's most recently completed financial year. There is an "ordinary course of business" exception to this requirement, but NI 51-102 specifies that certain contracts are required to be filed even if entered into in the ordinary course of business (the CSA Notice specifically identified certain credit agreements and contracts on which the issuer's business is substantially dependent as examples of contracts which must be filed). Issuers are permitted to redact certain information in the material contracts they file when it might be prejudicial or violate confidentiality provisions.

Despite these requirements, the CSA noted that a number of issuers are still not filing these contracts. It's reasonable to infer that in certain cases, issuers are either unaware of the requirement or at least not turning their minds to it. A partial explanation for this may lie in the fact that historically, Canadian securities laws did not require reporting issuers to publicly file copies of material contracts. This changed in 2004, when NI 51-102 was adopted. This new requirement brought Canada's continuous disclosure regime closer into line with requirements in the United States, where public companies had been obligated to publicly file material contracts for some time.

Given that background, it stands to reason that the more senior Canadian issuers, who are often "dual listed" on Canadian and US stock exchanges, would be more familiar with this requirement and thus more likely to be compliant. Conversely, awareness and compliance would likely be lowest among the more junior issuers who:

  1. would have had no experience with the prior US requirement;
  2. do not typically have access to in-house legal counsel; and
  3. often, for reasons of cost, do not consult with external legal counsel on what may be considered "routine" continuous disclosure matters.

Some issuers are going to understandably be resistant to publicly filing their material contracts. They may see it as a gratuitous revelation of information which they feel ought to remain private and proprietary (notwithstanding the fact that, as noted above, there are provisions for redaction of sensitive and confidential information). Certain issuers are not going to file these contracts unless they are convinced that they absolutely have to. The very fact that the CSA have flagged this issue this time around indicates that this is now on our regulators' radar. To date, there haven't been many cases where Canadian issuers have faced significant enforcement action (e.g., being cease-traded, sanctioned or fined) for failure to comply with this requirement. However, this may soon change. We often see the CSA initially express concern about an issue, followed up by stepped-up enforcement.

Mining Disclosure Reviews: Still in the Limelight

Of the over 1,000 continuous disclosure reviews which are summarized in the CSA Notice, 778 were "issuer oriented reviews" (IORs) which focus on a specific accounting, legal or regulatory issue. Of these IORs, 28% related to "Mining Technical & Oil and Gas Disclosure", and 10% related to "Mining Investor Presentations". This means that nearly 40% of the CSA's IORs related to resource issuer technical disclosure issues of one kind or another. Similarly, for the 2014 fiscal year, 34% of the CSA's IORs related to mining and oil & gas technical disclosure and another 13% focused on mining Management Discussion and Analysis. This shows a clear trend of regulators continuing to focus on the mining sector's disclosure in their compliance reviews.

Critical scrutiny of technical disclosure in mining issuers' websites continues to be a major focus of the CSA. This was also emphasized recently in CSA Notice 43-309 - Review of Website Investor Presentations by Mining Issuers, which was released this past April. In terms of uncovering mining disclosure deficiencies, these website reviews seem to turn up relatively "easy pickings" for regulators. One reason for this is that a number of issuers do not have a "qualified person" review or approve their website technical disclosure. There also appears to be a lack of awareness in some circles that the definition of "disclosure" is quite broad under National Instrument 43-101- Standards of Disclosure for Mineral Projects (NI 43-101) and thus encompasses an issuer's website disclosure. Awareness of this is increasing among mining issuers, but we continue to see problems arise from websites and investor presentations that are not treated with the same rigor as statutorily required securities disclosure documents.

Another one of the leading causes of deficiencies - and issuers being noted in default - arises from what we call the "deemed PEA" problem. This was first highlighted in CSA Notice 43-307 - Mining Technical Reports - Preliminary Economic Assessments, which was published on August 16, 2012. In a nutshell, certain mining issuers are disclosing information such as economic analysis, cash flow and life-of-mine estimates which would typically be based on an advanced mining study such as a preliminary economic assessment (PEA) or feasibility study. However, these issuers have not carried out a PEA or other advanced mining study and their disclosure does not contain cautionary language alerting readers to that fact.

One of the most common examples of this problem that we are currently seeing is when a company has previously published a resource estimate, and then goes further in subsequent press releases, website disclosure and/or investor presentations and discloses economic analysis based on that resource estimate. Recently we even came across an example of a company which had disclosed economic analysis and had not even done a NI 43-101 resource estimate.

The specific reason why this is problematic from a legal perspective is that, once a mining issuer crosses this line into economic analysis, our securities regulators may view this as "disclosing results of potential economic outcomes" for a material mineral property without those results being supported by a technical report. This can trigger the requirement under NI 43-101 to prepare and file a supporting technical report. While we cannot be certain of this, perhaps this phenomenon is partly a product of - or at least exacerbated by - the current depressed mining finance environment, particularly for junior and mid-tier issuers. Such companies may understandably be reluctant to spend their limited funds on advanced mining studies such as PEAs (which do not come cheap), yet they would naturally want to demonstrate the viability and progress of their projects. But it can be challenging to do this without tripping over NI 43-101 requirements.

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