CANADIAN CAPITAL MARKETS REPORT: LOOKING BACK, LOOKING FORWARD

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1 CANADIAN CAPITAL MARKETS REPORT: LOOKING BACK, LOOKING FORWARD

2 At Davies, we focus on the matters that are the most important to our clients, in Canada and around the world. The more complex the challenge, the better. Our strength is our people, who blend proven experience, deep legal expertise and business sensibility to generate the outcomes you need. We measure our achievements by one simple standard: Your success. TORONTO MONTRÉAL NEW YORK DAVIES WARD PHILLIPS & VINEBERG LLP 1 FIRST CANADIAN PLACE, 44 TH FLOOR TORONTO ON CANADA M5X 1B1 DAVIES WARD PHILLIPS & VINEBERG LLP 1501 MCGILL COLLEGE AVENUE, 26 TH FLOOR MONTRÉAL QC CANADA H3A 3N9 DAVIES WARD PHILLIPS & VINEBERG LLP 900 THIRD AVENUE, 24 TH FLOOR NEW YORK NY U.S.A TELEPHONE: FAX: TELEPHONE: FAX: TELEPHONE: FAX:

3 CONTENTS TABLE OF CONTENTS INTRODUCTION 1 IPO UPDATE: A NOVEL OFFERING BY THE ROYAL CANADIAN MINT 5 SUPREME COURT OF CANADA REJECTS PROPOSED LEGISLATION FOR NATIONAL SECURITIES REGULATOR 9 SELLING THE DEAL: PROPOSED CHANGES TO MARKETING RULES FOR PUBLIC OFFERINGS 13 NEW RULES ON COMPENSATION DISCLOSURE: TAKING AIM AT COMPENSATION COMMITTEES AND CONSULTANTS 19 WRAPPER RELIEF: THE END OF WRAPPERS? 23 WILL GO-SHOPS EMERGE IN CANADA? 27 CHINA, INDIA AND OTHER EMERGING MARKETS IN THE SPOTLIGHT 31 NO-CONTEST SETTLEMENTS 35 GOVERNANCE THEMES IN CANADA IN DEVELOPMENTS IN U.S. LAW AFFECTING CANADIAN ISSUERS 41

4 INTRODUCTION CAPITAL MARKETS OUTLOOK As we reflect on 2011 and try to predict what 2012 will hold for capital markets in Canada, we are faced with the undeniable fact that the only identifiable certainty for the near to medium term is continued uncertainty and a degree of volatility. Debt levels remain high across the OECD and sovereign debt continues to be a risk to GDP growth in the European Union and the United States. A slowing economy in China represents an additional risk to global growth. However, the general view is that Canada s fiscal situation remains comparatively strong in this environment. On a macro-economic level, inflation has been trending downward in most OECD and BRIC nations. Interest rates remain at historically low levels with indications being that they will remain so for several years. Equities on major exchanges have maintained relatively low valuations and the situation in Europe is expected to keep the Euro under extreme pressure with the future viability of the European economic union in doubt. What does all of this mean for Canadian capital markets in 2012? There is reason to believe that Canada could be a relative bright spot in terms of capital markets activity in 2012 as cash-rich companies will look to make strategic acquisitions creating increased deal flow. This overview includes a discussion of recent and expected developments in the Canadian capital markets. While it remains difficult to predict what may lie ahead in Canadian capital markets for 2012, we hope that this overview provides you with some useful information as you make your own assessment for the year to come. IPO UPDATE: A NOVEL OFFERING BY THE ROYAL CANADIAN MINT The initial public offering of exchange-traded receipts ( ETRs ) by the Royal Canadian Mint in 2011 was a prime example of an unconventional financing in an unconventional time. Davies acted for the Royal Canadian Mint in its offering of ETRs. The ETRs provide evidence of ownership of physical gold bullion held in the custody of the Mint at its facilities in Ottawa. The offering was made on a prospectus-exempt basis with the exchange-traded receipts being listed on the Toronto Stock Exchange. SUPREME COURT OF CANADA REJECTS PROPOSED LEGISLATION FOR NATIONAL SECURITIES REGULATOR In May 2010, the federal government initiated a reference to the Supreme Court of Canada. A single question was asked: Does the federal government of Canada have legislative authority to enact the proposed Canadian Securities Act (the Act )? The Act would have created a single national securities regulator ultimately overseeing a unified national securities regulation system for Canada. In December 2011, the Supreme Court of Canada issued a unanimous decision that legislation proposed by the federal government creating a single national securities regulator is unconstitutional. 1

5 SELLING THE DEAL: PROPOSED CHANGES TO MARKETING RULES FOR PUBLIC OFFERINGS In November 2011, the Canadian Securities Administrators proposed amendments to the rules for marketing activities in connection with public offerings of securities. The objective of the amendments is to increase the range of permissible marketing and pre-marketing activities in connection with prospectus offerings. While the proposals provide some degree of enhanced flexibility, the additional regulation that is being introduced by way of these amendments will have to be reconciled with current market practices. NEW RULES ON COMPENSATION DISCLOSURE: TAKING AIM AT COMPENSATION COMMITTEES AND CONSULTANTS Recent amendments to the compensation disclosure rules which take effect in the upcoming proxy season require disclosure about the risk assessments conducted with respect to an issuer s compensation practices, compensation governance including additional information about an issuer s compensation committee and whether executive officers and directors are permitted to enter into financial transactions to hedge equity-based compensation. WRAPPER RELIEF: THE END OF WRAPPERS? In 2011, Davies sought relief, on behalf of a group of investment dealers, from the requirements of Canadian securities laws which dictate, in connection with a private placement of foreign securities into Canada, that a foreign offering document provided to Canadian purchasers be wrapped by a disclosure document containing certain mandated Canadian disclosure. If granted, the relief requested would eliminate technical barriers to entry for private placements by foreign issuers into Canada and should improve access to such offerings by Canadian investors. WILL GO-SHOPS EMERGE IN CANADA? In recent years, it has become fairly common in the United States for buyers, particularly private equity buyers, to agree to include in public company acquisition agreements a go-shop clause which permits targets to solicit offers for a limited period of time in situations where the target company has not conducted an auction or market check. Although not commonly used in Canada, go-shops appeared in a few Canadian public deals in 2011, which raises the question of whether we can expect to see increased use of go-shops in CHINA, INDIA AND OTHER EMERGING MARKETS IN THE SPOTLIGHT Amid investor allegations of accounting impropriety and fraud, securities regulators in Canada and the United States have begun focusing their attention on emerging market issuers that have accessed North American markets to examine their disclosure records, the vehicles through which they have accessed the markets (primarily through reverse takeovers) and the roles played by the underwriters and auditors in bringing these issuers to market. Last summer, the Ontario Securities Commission announced a targeted review of Ontario reporting issuers listed on Canadian exchanges and having significant business operations in emerging markets. 2

6 NO-CONTEST SETTLEMENTS In October 2011, the Ontario Securities Commission announced initiatives aimed at resolving enforcement matters more quickly and effectively. The most notable of these was a proposal to allow enforcement actions to be settled without any admission of facts or wrong-doing by respondents in line with practice in the United States and under Canada's Competition Act. The proposal sparked an unanticipated controversy, resulting in an announcement by the Commission that it would be considered at public hearings. GOVERNANCE THEMES IN CANADA IN 2012 Shareholder democracy and the proxy voting system continue to be major themes in Canadian corporate governance in Specifically, shareholder democracy remains focused on initiatives that seek to give shareholders greater voice in certain corporate decisions, including say on pay, majority voting and shareholder proposals. The focus on the proxy voting system includes concerns with the role of the proxy advisory firms and the integrity of the proxy voting system itself. DEVELOPMENTS IN U.S. LAW AFFECTING CANADIAN ISSUERS In 2011, the U.S. Securities and Exchange Commission adopted a number of rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and issued proposals with respect to others. The piece included here provides an overview of several of the rules adopted in 2011 as well as one noteworthy rule scheduled to be adopted in

7 IPO UPDATE: A NOVEL OFFERING BY THE ROYAL CANADIAN MINT According to a January 2012 report by PwC LLP, Canadian IPOs in 2011 amounted to 61 issues for a total value of $2.0 billion, down from 73 issues with a total value of $5.5 billion in The drop was even more significant among new issues listed on the Toronto Stock Exchange, which had only 15 new issues for a value of $1.8 billion in 2011 compared to 25 IPOs worth a total of $5.2 billion in Despite this decrease in IPO activity, one of the most innovative and successful Canadian IPOs in recent years was completed in In late October, the Royal Canadian Mint (the Mint") launched an initial public offering of exchange-traded receipts ( ETRs ) under its Canadian Gold Reserves program. Retail and institutional investors responded with enthusiasm, and the IPO was completed in November with an issue size of $600 million. The strong reputation of the Mint and a uniquely designed gold investment product were an attractive combination to investors seeking to invest in gold bullion. Davies advised the Mint on the IPO. ROYAL CANADIAN MINT The Mint is a federal Crown agency that was founded in It is the largest commercial mint in the world, producing circulation, collectable and bullion coins for domestic and international markets. The core business of the Mint includes operating full-service gold and silver refineries and providing secure storage services. The Mint's obligations are backed by the full faith and credit of the Government of Canada. GOLD EXCHANGE-TRADED RECEIPTS Unique among gold investment products, ETRs provide investors with direct legal and beneficial ownership in physical gold. Other gold investment products require investors to acquire an equity interest in a fund or other intermediary that invests in gold. In contrast, each ETR is evidence of an investor's direct ownership in an equal undivided interest in physical gold bullion held in the custody of the Mint at its facilities in Ottawa. The ETRs trade on the TSX in both Canadian and U.S. dollars and are designed to track the price of gold. The net proceeds of the offering were applied on behalf of the ETR purchasers to purchase gold for their account and the ETRs were issued as "warehouse receipts" evidencing the holders' interest in gold in the Mint's facilities. The aggregate amount of gold underlying the ETRs is reduced daily by an amount representing the Mint's service fee of 0.35% per annum. 5

8 The ETRs are redeemable for gold or cash once per month. Subject to a minimum redemption amount, investors may redeem their ETRs in the form of one ounce of gold Maple Leaf coins, kilo bars or London Good Delivery bars, with a minimum purity of 99.99%. Each ETR also entitles the holder to purchase, on the first anniversary of the issue date, additional ETRs at the prevailing gold price on such date. REGULATORY RELIEF PROSPECTUS EXEMPTION The Mint's Canadian Gold Reserves program operates under exemptive relief from the prospectus requirement and most applicable continuous disclosure requirements. The Mint's application for relief was premised on the notion that ETRs are analogous to government debt securities for which an exemption is available under National Instrument Prospectus and Registration Exemptions. Securities regulators accepted this analogy because the ETRs represent an obligation backed by the full faith and credit of the Government of Canada. The relief was conditional upon the Mint: (i) continuing to be a Crown corporation under its governing statute; (ii) providing investors with an Information Statement containing certain prescribed disclosure relating to the ETRs and the offering; and (iii) maintaining a website containing additional ongoing information relevant to ETR holders. The Information Statement contained disclosure that included the Mint's business as it relates to the ETRs, use of proceeds, terms of the ETRs, plan of distribution, detailed risk factors, a description of the gold market generally and tax consequences to ETR holders. The ETR program website includes a daily calculation of the per-etr entitlement to gold and net asset value of the ETRs, the daily London pm gold Fix, details regarding any change to applicable fees, and any document delivered to ETR holders. CONTINUOUS DISCLOSURE EXEMPTION Upon completion of the IPO, the Mint became a reporting issuer across Canada. However, with the exception of certain material change reporting requirements, the Mint was exempted from the requirement to prepare and file ongoing disclosure materials, including financial statements and MD&A. The rationale for this relief was that the value of the ETRs is a function of the market price of gold and is not related to the ongoing business, operations and financial condition of the Mint. One innovative aspect of the relief order is that the Mint is permitted to file all of its ongoing public disclosure through its Canadian Gold Reserves website. Securities regulators may become increasingly comfortable with issuers providing disclosure materials through their websites as an alternative to SEDAR in appropriate circumstances. In our view this represents a forward-looking approach that acknowledges the growing role of issuer websites in disseminating disclosure and the acceptance of this approach by market participants. Stay tuned for further developments. 6

9 SUPREME COURT OF CANADA REJECTS PROPOSED LEGISLATION FOR NATIONAL SECURITIES REGULATOR In December 2011, the Supreme Court of Canada issued a unanimous decision that legislation proposed by the federal government creating a single national securities regulator is unconstitutional. Davies represented the Canadian Coalition for Good Governance, which represents institutional investors across Canada, in the proceedings before the Supreme Court. BACKGROUND In May 2010, the federal government initiated a reference to the Supreme Court of Canada. A single question was asked: Does the federal government of Canada have legislative authority to enact the proposed Canadian Securities Act ("the Act")? The Act would have created a single national securities regulator ultimately overseeing a unified national securities regulation system for Canada. The Canadian securities industry evolved provincially and has since remained regulated by the provinces. This is not to suggest the regime has been without controversy. Dating back to the 1935 Royal Commission on Price Spreads, many federally and provincially appointed commissions have called for consolidation under a national regulator. Most recently, both the 2002 Wise Persons' Committee and the 2009 Hockin Panel issued reports endorsing a single national regulator. The federal government responded by forming the Canadian Securities Transition Office, charged with establishing a Canadian securities regulator within three years. On April 13, 2011, arguments were heard at the Supreme Court concerning the proposed Act. Advocating in favour of a national regulator were the federal government, the government of Ontario and a group of industry organizations, including the Canadian Coalition for Good Governance, the Canadian Bankers Association and the Canadian Foundation for Advancement of Investor Rights. The principal argument in support of a national regulator was that the securities markets have undergone significant transformation in recent decades, evolving from local markets to markets that are now nationally and internationally defined resulting in systemic risks that can only be dealt with on the national level. The evolving national character of securities markets brings those markets within the general trade and commerce power granted to the federal government under the Constitution. Other provinces, including most notably Québec and Alberta, disputed that the operation of the securities markets has evolved to become a matter of national concern. They argued that Canadians are adequately served by the existing framework of provincial legislation. More importantly, however, these provinces perceive the nationalization of securities regulation as a threat to the balance of federalism. They believe it would allow the federal government to enact legislation that would unilaterally define the scope of its power, thereby usurping the provincial powers over matters of a local or private nature. 9

10 THE OPINION OF THE SUPREME COURT The Supreme Court held that the main thrust of the proposed Act is to regulate, on an exclusive basis, all aspects of securities trading in Canada. In doing so it would duplicate and displace the existing provincial and territorial securities regimes. While the Court agreed that the preservation of capital markets is a matter that goes beyond a specific industry and engages trade as a whole, it found that the proposed Act is chiefly concerned with the day to day regulation of all aspects of contracts for securities which falls within the provinces' authority over property and civil rights under the Constitution. The Court expressly noted that there were specific aspects of the Act aimed at addressing matters of genuine national importance going to trade as a whole. These included management of systemic risk and national data collection. With respect to these aspects of the Act, the provinces, acting alone or in concert, lack the constitutional capacity to sustain a viable national scheme and the federal government would have been justified in acting. However, the Court concluded that, viewed as a whole, the Act is not chiefly aimed at genuine federal concerns. It is principally directed at the day to day regulation of all aspects of securities. The Court concluded that the proposed Act overreaches genuine national concerns. While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry, which is the ultimate consequence of the proposed federal legislation. The Court noted that "the policy question of whether a single national securities scheme is preferable to multiple provincial regimes is not one for the Court to decide." THE WAY FORWARD Ultimately, the Court appears to have left it open to legislators to introduce narrower legislation which is specifically targeted at matters of national concern such as the regulation of systemic risk and national data collection. Alternatively the Court noted that the provinces and federal authorities could cooperate to design a regulatory scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns. Recent comments by Finance Minister Jim Flaherty suggest that the federal government intends to pursue the concept of a federal securities regulator within the areas of national concern identified by the Supreme Court by engaging the provinces in discussions on how this can be achieved. 10

11 SELLING THE DEAL: PROPOSED CHANGES TO MARKETING RULES FOR PUBLIC OFFERINGS On November 25, 2011, the Canadian Securities Administrators (the CSA ) released for comment proposed amendments to the rules and policies for pre-marketing and marketing activities in connection with a public offering of securities. The stated objective of the amendments is to increase the range of permissible marketing and premarketing activities in connection with prospectus offerings. While these proposals do provide some additional flexibility in marketing offerings, they also impose additional regulation, both during and following the waiting period. Some of the new requirements will be at odds with current market practices. A clear theme of the proposals is that all information used in marketing an offering must form part of the associated prospectus, ensuring a clearer avenue for investors to sue issuers and underwriters for deficient disclosure used in marketing activities. The proposals also seek to codify and clarify existing marketing practices although they will impose some further administrative burdens on market participants when conducting marketing activities. The following highlights some of the CSA's proposals. For more detail on the proposals, see our publication of November 30, 2011, "CSA Releases Proposed Changes to the Marketing Rules for Prospectus Offerings". Davies has also submitted a comment letter on the proposals that, among other things, identifies where they may conflict with practical realities of the capital markets. SELLING THE DEAL DURING THE WAITING PERIOD While current rules provide latitude for marketing activities in the "waiting period" between the preliminary and final prospectus, these permitted marketing activities are limited. In addition to providing prospective purchasers with the preliminary prospectus, market participants may distribute communications that alert prospective purchasers to the offering (and provide only basic information about the offering) and solicit expressions of interest from prospective purchasers who receive a copy of the prospectus. A NEW CATEGORY OF MARKETING MATERIAL: TERM SHEETS The proposals add an additional category of marketing material that can be used during the waiting period: term sheets. Although referred to as "term sheets", this category of material is defined to include any written communication regarding an offering (excluding green sheets whose distribution is limited to the registered representatives of the underwriters). The disclosure in a term sheet must be fair, true and plain (as opposed to the full, true and plain requirement for a prospectus) and must already be in the preliminary prospectus. The CSA will consider disclosure in a term sheet to be fair, true 13

12 and plain if it is honest, impartial, balanced and not misleading, does not give undue prominence to a particular fact or statement in the prospectus and does not contain promotional language. A copy of the preliminary prospectus must be delivered with the term sheet and the term sheet must be filed prior to its use. As all information used in the term sheet must be included in the prospectus, both issuers and underwriters will have statutory liability if this information contains a misrepresentation. SETTING THE GROUND RULES FOR ROAD SHOWS More significant are the proposals that will specifically regulate the use of road shows, whether they are conducted in person, by conference call or over the Internet or by other electronic means. The new rules will require that all information used in the road show be contained in the preliminary prospectus, except "comparables" information that is provided exclusively to permitted institutional investors. Again, because the information used in the road show must be included in the prospectus, both issuers and underwriters will have statutory liability if this information contains a misrepresentation. These rules will further stipulate that road show disclosures be fair, true and plain and that any written materials provided to road show participants (other than the prospectus) satisfy the other requirements for a term sheet as discussed above, including the filing requirement. Depending on how the final rules are drafted, this may require issuers and their underwriters to revisit their approach to their internal review and use of information in road shows. The proposals distinguish between investors generally and "permitted institutional investors", which include Canadian and foreign financial institutions and pension funds and Canadian investment funds managed by a registered investment fund manager or advised by a person authorized to act as adviser. Road shows whose audience is limited to permitted institutional investors may include information comparing the issuer and the securities to other issuers and/or securities without the need to include such comparables in the prospectus; however, each participating investor must agree in writing to keep any such comparables information confidential. A road show made available to retail investors may only include comparables if they are included in the preliminary prospectus. REGULATING MARKETING IN THE "POST-RECEIPT" PERIOD FOR THE FIRST TIME The proposals also regulate marketing activities in the period following the waiting period, where a receipt has already been issued for a final prospectus. This is new territory for the CSA. In effect, the proposals stipulate that the rules governing the use of term sheets and road shows during the waiting period apply equally in the post-receipt period. Accordingly, market participants will have to conduct their marketing during this period as they would in the waiting period, and will have statutory liability for any misrepresentation in term sheets and road show information used in this period. These proposals may have significant practical implications. For example, in order to use a term sheet to market a take-down off a shelf prospectus, a preliminary prospectus supplement (and the term sheet) would need to be filed in advance. This is at odds with current practice for Canadian shelf offerings, where only a final prospectus supplement is typically filed. 14

13 PRE-MARKETING IN THE QUIET PERIOD The basic rule under Canadian securities legislation is that an issuer or underwriter may not solicit expressions of interest in respect of a potential public offering until a receipt has been issued for a preliminary prospectus. "Bought deals" are the exception, although pre-marketing activities for a bought deal are limited. The proposals expand the range of permissible pre-marketing activities through a new "testing-of-the-waters" exemption for IPOs and the delivery of term sheets to permitted institutional investors in connection with bought deals. However, the majority of the pre-marketingrelated proposals simply codify existing practice for upsizing bought deals and provide clarity as to the CSA's views on when pre-marketing limitations apply. EXPANDING PRE-MARKETING The proposals introduce a new testing-of-the-waters exemption that would allow a dealer to determine interest in a potential initial public offering on behalf of a non-reporting issuer through limited confidential communication with permitted institutional investors. The proposals would also permit the use of a term sheet prior to filing the preliminary prospectus in connection with a bought deal on substantially the same terms as a term sheet used during the waiting period; however, this term sheet could only be delivered to permitted institutional investors and any information in the term sheet must be from the news release announcing the bought deal or the issuer's continuous disclosure record. UPSIZING BOUGHT DEALS The proposals also provide additional rules and guidance on the use of the bought deal exemption from the general prohibition on pre-marketing of public offerings. Most of this simply codifies existing practice in respect of upsizing bought deals. However, the proposals go a step further by seeking an absolute limit on any increase in size of a bought deal to a percentage of the original deal size. The CSA has asked for feedback as to what is an appropriate level, suggesting it could be anywhere from 15% to 50%. The new rules will also stipulate that a bought deal agreement cannot have a market-out clause, again in line with current market practice. WHEN DOES THE "QUIET PERIOD" BEGIN? With its proposals, the CSA included additional guidance as to when a distribution of securities under a bought deal begins and ends. This timing is important as a dealer may not engage in discussions with prospective investors regarding a possible issuance of securities from an issuer while in distribution, except in accordance with the prospectus requirements and limited exceptions for pre-marketing and marketing discussed above. As discussed in Davies capital markets report, the CSA considers a distribution to have commenced at the time when distribution discussions have "sufficient specificity" that it is reasonable to expect that the dealer will propose to the issuer or selling security holder an underwriting of those securities. While this standard remains somewhat opaque under the amended guidance, CSA staff does identify circumstances that meet the "sufficient-specificity" threshold but rejects the notion that an engagement letter or indicative terms for the proposed offering must be provided to an issuer before the threshold is reached. 15

14 Further, CSA staff does not think the mere rejection of a proposal by an issuer terminates the related distribution and indicates that it is not appropriate for the dealer to resume communications with potential investors until after a "cooling-off period". No guidance is provided, however, as to the length of an appropriate cooling-off period. NON-DEAL ROAD SHOWS CSA staff also takes the opportunity to expand its position that activities that form part of a plan or series of activities undertaken in anticipation or in furtherance of a distribution would usually trigger the prospectus requirement, even if they would be permissible in isolation. In its new guidance, CSA staff specifically identifies non-deal road shows as potentially offending this view even if they do not indicate that an offering is contemplated, non-deal road shows held in anticipation of prospectus offerings would be prohibited by virtue of the prospectus requirement. 16

15 NEW RULES ON COMPENSATION DISCLOSURE: TAKING AIM AT COMPENSATION COMMITTEES AND CONSULTANTS On August 15, 2011, Ontario's Minister of Finance approved amendments to the Form F6 Statement of Executive Compensation which will impact compensation disclosure by issuers starting in the upcoming proxy season. The amendments, which apply to reporting issuers commencing with the first fiscal year ending on or after October 31, 2011, require the inclusion in the issuer's management information circular of supplemental disclosure about (i) compensation policy risk assessment, (ii) governance practices related to compensation, (iii) executive hedging arrangements, and (iv) compensation consultants engaged by the issuer. In addition, changes were made to clarify the circumstances in which a reporting issuer can rely on the exemption from the requirement to disclose performance goals that are relevant to the compensation of the company's named executive officers on the basis that such disclosure would be seriously prejudicial to the issuer's interest. Each of these proposed changes is summarized below. RISK ASSESSMENT DISCLOSURE A company is now required to disclose whether or not its Board (or Compensation Committee) considered the implications of the risks associated with the company's compensation policies and practices. If the implications were considered, the company must disclose the extent and nature of the Board/Committee's role in the risk oversight of the company's compensation policies and practices; any practices the company uses to identify and mitigate the compensation policies and practices that could encourage an executive to take inappropriate or excessive risks; and any identified risks arising from the company's compensation policies and practices that are reasonably likely to have a material adverse effect on the company. COMPENSATION GOVERNANCE Companies are now required to describe any policies and practices adopted by the Board to determine the compensation for the company's directors and executive officers. Where a company has established a Compensation Committee, it will also have to include disclosure identifying each member and stating whether or not the member is independent or not as well as disclose the competence of members of the Compensation Committee (e.g., whether members have any direct experience which is relevant to their responsibilities as members of the Compensation Committee) and the skills and experience that enable the Compensation Committee to make decisions as to the suitability of the company's compensation policies and practices. 19

16 EXECUTIVE HEDGING ARRANGEMENTS The amendments to Form F6 impose a positive obligation on the issuer to disclose whether executive officers and directors are permitted to enter into financial transactions to hedge their equitybased compensation awards or the value of securities they hold. COMPENSATION CONSULTANTS The recent amendments impose upon companies the requirement to provide additional information with respect to compensation consultants. Notably, they will have to disclose the name of any compensation consultant hired by the company and a summary of the consultant's mandate; the date on which the consultant was originally retained; whether the consultant performed any other services for the company in addition to the compensation services provided; and the aggregate fees paid to the compensation consultant for the two most recent years (separated between consulting services and other services). DISCLOSURE OF PERFORMANCE GOALS Form F6 requires that, where applicable, companies disclose performance goals or similar conditions that are relevant to the compensation of the company's named executive officers. There is, however, an exemption from this requirement where "a reasonable person would consider that disclosing them would seriously prejudice the company s interests". The amendments to Form F6 now provide additional detail as to the circumstances in which a company can rely on the exemption. Notably, the form now specifies that for purposes of the exemption, a company's interest will not be considered to be seriously prejudiced solely by disclosing performance goals or similar conditions if those goals or conditions are based on broad corporate-level financial performance metrics such as earnings per share, EBITDA or revenue growth. Similarly, the exemption is not available if the company has publicly disclosed the performance goals or targets. Finally, if the company is relying on the exemption to avoid disclosing its performance goals or targets, it is now required to clearly state the fact that it is relying on the exemption and explain why disclosing the performance goals or targets would seriously prejudice the company s interests. 20

17 WRAPPER RELIEF: THE END OF WRAPPERS? In 2011, Davies, along with Blakes and Osler, initiated a process involving a large group of investment dealers to try to bring an end to the need to "wrap" offering documents to enable foreign securities to be sold to accredited investors in Canada on a private placement basis. In May 2011, an application was made on behalf of several investment dealers for exemptive relief from the requirements of Canadian securities laws which dictate, in connection with a private placement of foreign securities into Canada, that a foreign offering document provided to Canadian purchasers be wrapped by a disclosure document containing certain mandated Canadian disclosure. The granting of the requested relief will significantly lower the technical barriers to entry for private placements by foreign issuers into Canada and improve access to foreign securities for the benefit of certain Canadian accredited investors and, indirectly, the many Canadian retail investors whose money they manage. BACKGROUND TO THE RELIEF The relief is being sought by a number of well-known global investment banks. In addition, prominent Canadian institutional investors have signed on in support of the application on the basis that the requirement to provide Canadian wrappers in connection with foreign offerings seriously reduces the number of such offerings made into Canada and inhibits the ability of such investors to diversify or add to their portfolios in a cost-effective manner. SCOPE OF THE RELIEF The requested relief will, if granted, allow investment dealers to offer foreign securities to international investors using a prospectus prepared for use in another jurisdiction, without any Canada-specific disclosure. In particular, the requested relief would include relief from: (i) the requirement to include in a Canadian offering memorandum a summary of statutory rights of action under relevant Canadian law; (ii) the requirement to include certain disclosure relating to the relationships between the underwriters and issuer in an offering ("connected issuer disclosure"); (iii) the requirement to provide notification of the indirect collection of personal information for Canadian purchasers; and (iv) relief from the prohibition against the inclusion in an offering document distributed in Canada of a statement to the effect that a security will be listed or that an application has or will be made to list the security on an exchange. LIMITATIONS OF THE REQUESTED RELIEF Relief for Named Firms Only The relief, if granted, will only be available to the registrant firms named in the application and their affiliates. The OSC was not amenable to an application on behalf of unnamed registrants. This means 23

18 that registrant firms not named in the application for the requested relief will be required to make copycat applications based on the relief granted in order to avail themselves of the exemption. Connected Issuer Disclosure Relief Restricted to Specified Foreign Securities The exemption from the requirement to provide "connected issuer" disclosure in respect of relationships between the issuer and the underwriters in the offering will only be available where the offering is subject to securities laws which require similar disclosure. As such, the jurisdictions in which an offering is regulated at the time of the Canadian private placement will affect whether a wrapper will be required in connection with such private placement. It is anticipated that the relief would be available for U.S. registered offerings or 144A offerings. For offerings not regulated by the securities laws of jurisdictions covered by the requested relief, relief has also been requested from the current requirement to include the required connected issuer disclosure on the cover page of the offering document delivered in Canada. If granted, the relief from cover-page disclosure would allow the required Canadian disclosure to be embedded in the main body of the offering documents used in other jurisdictions, which may also obviate the need to prepare a separate Canadian wrapper. Sales Only to a Subset of Permitted Clients The exemption would be available only for sales to a subset of permitted clients, which does not include individuals ("Institutional Permitted Clients"). While this may limit the usefulness of the requested relief somewhat, in our experience, most purchasers in private placements of foreign securities into Canada are large institutional investors who will qualify as Institutional Permitted Clients. Notice to Clients In connection with granting the requested relief, the OSC may require that investment dealers provide certain of the disclosures currently provided in Canadian wrappers in a notice which would likely be required to be provided prior to the first sale of foreign securities to such client. Exempt Sales Reports Investment dealers or issuers making sales of securities into Canada via private placement using only a foreign offering document will still be required to file an exempt trade report and pay the requisite filing fee in the jurisdiction in which such sale is made. POTENTIAL LEGISLATIVE SOLUTION The dialogue with the OSC relating to the requested relief has led to a discussion among Canadian market participants of the impact of existing securities legislation on private placements of foreign securities into Canada generally. The involvement of both investment dealers and Canadian institutional investors in the application and dialogue relating to the requested relief has highlighted for regulators the obstructive and often detrimental impact that the existing private placement securities law regime can have on the ability of Canadian institutional investors to participate in the market for foreign securities. We are hopeful that the relief will be granted in a form which will significantly reduce the number of offerings for which the applicant would be required to provide a separate Canadian offering document to their clients. It is possible that if granted, the requested relief will lead to the enactment of legislative changes to enshrine such relief, though we would expect it to take months or years before such changes would come into force. In any event, the continued dialogue with securities regulators on the topic of the requested relief will be an important issue in the Canadian securities market in

19 WILL GO-SHOPS EMERGE IN CANADA? It has become customary in both Canada and the United States for definitive agreements for the sale of a public company to include a "no-shop" clause which precludes the target company from soliciting offers after the agreement is signed. In order for the boards of directors to satisfy their fiduciary duties, public companies generally would conduct an auction or, often in Canada, some more limited form of market check or canvass prior to entering into a definitive agreement. However, in the past few years, particularly in the United States, the "go-shop" clause has emerged in some definitive agreements. A "go-shop" clause permits a target company to solicit offers for a limited period of time (usually in the range of days) after signing a definitive agreement. At the end of the go-shop period, the traditional no-shop provision will then apply. Effectively, the go-shop enables that target to enter into a definitive agreement and conduct its auction or market check after signing. The go-shop clause emerged in the United States during the M&A boom in , particularly in acquisitions of public companies by private equity firms. The go-shop enabled public company boards to feel comfortable that they had satisfied their "Revlon" duties to maximize price without having conducted a formal auction before signing a deal. Go-shops have remained fairly popular in the United States, especially in the context of private equity take-privates, since the end of the M&A boom in While Canadian boards are not faced with Revlon duties and often are comfortable proceeding with a change of control transaction without having conducted an auction, many feel that some form of market check or canvass, even if limited, is appropriate or necessary to satisfy their fiduciary duties. In 2007 and 2008, it appeared as though the U.S. trend towards go-shops was starting to emerge in a limited fashion in Canada as there were 12 announced deals in those two years with go-shops. However, this was followed with only one deal with a go-shop announced in 2009 and none in While go-shops remained rare in 2011, there were three Canadian deals announced in 2011 that included a go-shop 1, and Davies was involved in another deal in 2011 where a go-shop was agreed to, but ultimately the deal was not announced. This limited use of go-shops in 2011 raises the question of whether we can expect to see a continued increase in go-shops in EFFECTIVENESS OF GO-SHOPS Some commentators have criticized go-shops, saying they are not much more than window dressing and rarely result in topping bids. These critics point out that any potential bidder starts at an inherent disadvantage since they must conduct due diligence and secure financing within a short period of time, and must not only top the existing bid, but do so knowing that the initial bidder will usually have matching rights and a right to a break fee if it does not match the topping bid. 1 The targets in the three deals were Prime Restaurants Inc., Afexa Life Sciences Inc. and TimberWest Forest Corp. 27

20 Other commentators, however, are of the view that go-shops can be an effective method of maximizing shareholder value if structured properly. These commentators note that a go-shop enables a target to secure a bid and then actively seek higher bids. In addition, the presence of a go-shop can pressure the initial bidder into making a high bid. One recent example of a go-shop that resulted in a topping bid is the Prime Restaurants transaction. On October 17, 2011, Prime and Cara Operations Ltd. entered into a definitive agreement pursuant to which Cara would acquire Prime. The definitive agreement included a go-shop provision that would remain in effect until Cara could waive its financing condition. On November 21, 2011, Prime announced that it had received a superior proposal from Fairfax Financial Holdings which offer was solicited during the permitted go-shop period. Cara did not match the Fairfax offer and the transaction with Fairfax closed on January 10, KEY PROVISIONS IN GO-SHOPS When negotiating go-shops, the following are key points that bidders and targets often consider in light of their particular needs. LENGTH OF THE GO-SHOP PERIOD Go-shop periods in Canada are typically between days though we have seen go shops as short as 22 days and as long as 60 days, including the April 2011 go-shop in the TimberWest Forest Corp. and British Columbia Investment Management Corporation transaction. In order for a go-shop to be meaningful, it must be long enough for a target to solicit potential bidders and for bidders to have a reasonable amount of time to conduct diligence and secure financing, if needed. The amount of time that is needed will depend on a number of factors, including the size and complexity of the target, the number of bidders it wants to solicit, and whether any market check or canvass has already been done. The length of the go-shop period is somewhat extended where the go-shop provision allows for continued negotiating with "excluded persons" after the end of the go-shop period. The extension of the go-shop period as it relates to the excluded person may be for a limited period of time or until the definitive agreement terminates. EXCLUDED PERSONS A little more than half of the Canadian go-shop deals announced between included the concept of an excluded person. While there are variations in how an excluded person is defined, generally a bidder that has submitted an acquisition proposal during the go-shop period that the target board has determined is or is reasonably likely to lead to a superior proposal will be considered an excluded person. The two key benefits to having an excluded-person clause is that the target company can continue to negotiate with this person after the go-shop expires and, if the target and the excluded person enter into an agreement, typically the lower break fee (discussed below) is payable. MATCHING RIGHTS Virtually all definitive agreements provide for matching rights that give a bidder the right to match a superior proposal during a no-shop period. Some targets contend, however, that a matching right should 28

21 not be granted during the go-shop period as the match right weakens the effectiveness of the go-shop. As a result, in a few of the deals announced between 2007 and 2011, including the TimberWest deal, the bidder was not given a right to match any superior proposal during the go-shop period. When there is a market check in the go-shop period, the length of the match period is usually between three and five business days. BREAK-FEES Most go-shop provisions provide for a lower break-fee if the agreement is terminated for a competing bid during the go-shop period or with an excluded person (even if after the go-shop period) and a traditional break-fee if the target terminates for a competing bidder after the go-shop period ends. Generally, the lower break-fee is about 40-60% of the traditional break-fee. For example, in the TimberWest deal, TimberWest agreed to pay a break-fee of $18.2 million (approximately 1.8% of deal) during the go-shop period and $31.8 million (approximately 3.1% of deal) after the go-shop period. INFORMATION SHARING Go-shop provisions generally require targets to immediately provide the current bidder with any material non-public information that they provide to new bidders during the go-shop period and to provide the current bidder with information regarding new bidders and their related proposals. However, the amount of information shared regarding the new bidders and their bids, and the time at which such information is shared, varies among deals. The current bidder will want as much information as possible so that it is well informed as to the goshop process. Targets, however, may find information sharing that is too detailed to be onerous and potentially divert management attention during the go-shop period. In more buyer-friendly deals, targets are required to immediately provide the name of any new bidder making an acquisition proposal during the go-shop period, the details of such proposal (including relevant documentation) and any new bidder that the target determines is an excluded person. At the other end of the spectrum, the target s obligations are limited to providing the names of those bidders that are excluded persons and limited information regarding their acquisition proposals, and only after the expiry of the go-shop period. 29

22 CHINA, INDIA AND OTHER EMERGING MARKETS IN THE SPOTLIGHT EMERGING MARKETS REVIEW Amid investor allegations of accounting impropriety and fraud, securities regulators in Canada and the United States have begun focusing their attention on emerging market issuers that have accessed North American markets. Regulators are examining the disclosure record of these issuers, the vehicles through which they have accessed the markets (primarily through reverse takeovers) and the roles played by the underwriters and auditors in bringing these issuers to market. Last summer, the Ontario Securities Commission ("OSC") announced a targeted review of Ontario reporting issuers listed on Canadian exchanges and having significant business operations in emerging markets. THE ROLE OF THE GATEKEEPERS As part of its review, the OSC is trying to determine whether emerging market issuers, as well as those involved in bringing them to market and auditing their financial statements, provided the required disclosure to investors and conducted the required due diligence at the time they went public. The OSC views the underwriters and auditors involved in the going-public process as important "gatekeepers" with significant responsibilities to investors. As a result, the OSC believes that it is critical for these gatekeepers to have adequate knowledge of the emerging market issuer, its business practices and the risks of operating in a foreign market. This includes an understanding of the cultural norms and relationships that are needed for the issuer to operate in its market. The OSC has suggested that due diligence procedures that would normally be considered appropriate in a North American environment may not address the business and cultural practices in an emerging market context. To that end, in the OSC's view, underwriters, auditors and boards of emerging market issuers may have to step up and carry out their duties with a greater degree of vigilance and oversight. THE NEED FOR INTER-JURISDICTIONAL COOPERATION The preliminary findings of the OSC have identified certain governance, cultural and logistical challenges associated with Canadian listed issuers that have management and primary operations in foreign markets. These challenges include audit procedures that may be affected by business practices in overseas industries and the impact of local business practices on internal controls and risks. The OSC has also identified as a significant challenge the inability of Canadian regulators to access audit working papers of foreign auditors. This is a challenge that the SEC is currently grappling with in connection with its investigation of Longtop Financial Technologies Limited, a Chinese company recently delisted from the NYSE. On May 22, 2011, Deloitte Touche Tohmatsu (China) resigned as auditor of Longtop after 31

23 discovering during an audit numerous improprieties, including inconsistencies within the company's banking documents. In September 2011, the SEC asked the U.S. District Court for the District of Columbia to enforce a subpoena it had sent to Deloitte seeking information about its audits of Longtop. Deloitte had refused to comply with the SEC subpoena alleging that, as a matter of national sovereignty, local Chinese laws precluded it from producing the requested documents to a foreign regulator without approval from the China Securities Regulatory Commission, which approval apparently was not forthcoming. The U.S. District Court ordered that Deloitte will have to "show cause" for not producing the Longtop working papers at a hearing to be held in February The friction between the SEC and Deloitte highlights the potential inter-jurisdictional issues that can arise when advisors located in foreign jurisdictions are subject to what may be competing regulatory regimes. THE CANADIAN EXPERIENCE To date, at least 24 unnamed issuers are the subject of the OSC review. The emerging market review was announced on the heals of Muddy Waters Research's allegations in June 2011 that, since its inception, Sino-Forest Corporation, a TSX-listed issuer with management and operations in China, had fraudulently inflated its assets and earnings. In August 2011, the OSC announced that the activities and business of Sino-Forest, including its management, were the subject of an OSC investigation. Another emerging market issuer that is caught in the OSC's sights is Zungui Haixi Corporation, a clothing and footwear company listed on the TSX Venture Exchange with management and operations in China. In August 2011, Zungui announced that its auditors had suspended their annual audit pending further action from Zungui. The auditors had noted inconsistencies in the company s bank documents and were unable to obtain access to acceptable Chinese bank confirmations. In September 2011, the OSC launched its investigation into the business and affairs of Zungui, and the auditors, chief financial officer and independent directors of Zungui resigned. WHAT WILL HAPPEN NEXT? So far, the OSC has taken action against both Sino-Forest and Zungui, having issued temporary ceasetrade orders in respect of the shares of each of the companies and trading generally by certain officers of the companies. To date, the OSC staff has not brought enforcement hearings against Sino-Forest. In the Zungui matter, a panel of commissioners of the OSC has found that Zungui has breached Ontario securities laws and that each of the chief executive officer and chairman of Zungui, both residents of China, have engaged in conduct contrary to the public interest by failing to, among other things, cooperate with the company's auditors and special committee and by obstructing the committee's independent investigation of the former auditors' concerns. It is unclear at this juncture what regulatory action will ensue from the OSC's emerging market review. The SEC's emerging market review has resulted in several enforcement hearings against issuers and auditors, trading suspensions and delistings of emerging market issuers, increased scrutiny of continuous disclosure filings of these issuers and changes in the regulation of reverse takeovers, a tool that has been used by many emerging-market issuers in both Canada and the United States. Time will tell whether the OSC will take similar action. The OSC has already suggested that some form of regulatory action will be taken to ensure that the responsibilities owed to investors by underwriters and auditors in the going-public process are being met. 32

24 NO - CONTEST SETTLEMENTS In October 2011, staff of the Ontario Securities Commission ("OSC") announced initiatives aimed at resolving enforcement matters more quickly and effectively. The most notable of these was a proposal to allow enforcement actions to be settled without any admission of facts or wrong-doing by respondents. The existence of concurrent civil litigation and enforcement proceedings has adversely affected the prospect of settlement of enforcement proceedings on a timely basis because of serious concerns by respondents that admissions in enforcement proceedings will be used against them in related civil proceedings. OSC staff believes that removing the requirement that respondents make admissions as part of the settlement process will eliminate the most significant obstacle to settlement in many cases. Earlier settlement of cases would free up staff to deal with more matters. OSC staff's proposal would permit "no-contest" settlements of proceedings before the OSC in circumstances where a respondent has cooperated with staff and has not been the subject of any prior securities regulatory action. Nocontest settlements have been widely used in the United States and have been the basis for many settlements in proceedings under Canada's Competition Act. Many market participants and leading securities practitioners have signalled strong support for the initiative. However, a number of opponents have surfaced. These include investor rights groups and law firms which regularly act for plaintiffs in securities class actions. They argue that public admissions of misconduct are powerful deterrents without which sanctions agreed upon in the context of a nocontest settlement will simply be seen by wrong-doers as the cost of doing business. Not surprisingly there is an element of self-interest to their opposition: plaintiff class action firms stand to lose a prolific source of admissions which, in the past, have formed the basis for various class actions. Opponents argue that the no-contest settlement program is not therefore in the public interest as it will make it harder for investors to recover losses. This may be true but it has never been the mandate of the OSC to actively assist investors in obtaining compensation from wrong-doers. That is the job of the civil courts. The OSC has responded by extending the timeframe for commenting on the proposed no-contest regime and has announced that it will hold public hearings into the matter. At present, the future of this proposal is uncertain. 35

25 GOVERNANCE THEMES IN CANADA IN 2012 Shareholder democracy and the proxy voting system continue to be major themes in Canadian corporate governance in Shareholder democracy refers generally to initiatives that seek to give shareholders a greater voice in certain corporate decisions, including say on pay, majority voting and shareholder proposals. The focus on the proxy voting system includes concerns with the role of the proxy advisory firms and the integrity of the proxy voting system itself. SHAREHOLDER DEMOCRACY Institutional shareholders in Canada are well-organized, knowledgeable and will look critically at an issuer's governance as one of the factors that can affect the value of their investment. The Canadian Coalition for Good Governance (the "Coalition") represents almost 50 institutional investor who manage nearly $2 trillion in assets. It develops policies and best-practice guidelines that reflect the views of its members. The Coalition also engages with independent directors of public companies on behalf of its members in order to promote discussion between directors and the Coalition's members. While institutional investors often share common views, they make their voting decisions independently of one another and may vote differently on any given issue. SAY ON PAY "Say on pay" is an advisory vote by shareholders on the compensation philosophy and practices of the issuer in the previous financial year. Say on pay came to Canada relatively late compared with other jurisdictions (including the United Kingdom and Australia). In fact, the initial position taken by Canadian institutional investors (through the Coalition) was that say on pay was not necessary. However, today, most Canadian institutional investors consider say on pay to be an important indication of an issuer's willingness to engage with its shareholders. Notably, the Ontario Teachers' Pension Plan has maintained its position against say on pay. In a letter released in March 2010, it advised that it would generally not support shareholder proposals for say-on-pay advisory votes, noting (among other things) that compensation is a board responsibility. In the 2011 proxy season, more than half (53%) of TSX 60 issuers put say-on-pay resolutions before their shareholders. That is likely to increase to at least two-thirds in the 2012 proxy season. The remainder of the S&P/TSX Composite Index has been much slower to embrace say on pay, with only 14% of the remaining Composite Index issuers (those outside of TSX 60 issuers) putting a say-on-pay vote forward in 2011 and another 1% having committed to do so in The issue has barely hit the radar screen of smaller issuers. Only 7% of issuers on the S&P/TSX SmallCap Index have adopted say on pay and none have disclosed in their circulars that they intend to do so in the 2012 proxy season. 37

26 MAJORITY VOTING Majority voting gives investors a meaningful voice in the election of individual directors to the boards of the issuers in which they have invested. Three elements are necessary for effective majority voting. The first is the abolition of slate voting in favour of votes for individual directors. Slate voting has almost been completely eliminated among TSX 60 issuers. Among Composite Index issuers more generally, the vast majority (87%) have also moved to individual voting for directors. The trend is also strong among SmallCap Index issuers, with 80% having eliminated slate voting in favour of allowing their shareholders to vote for each director individually. The second element is the reporting of the results of the votes for each director (i.e. the percentage cast for and against). In 2011, 88% of TSX 60 issuers reported the percentage results for their director elections. This practice was lower among the rest of the Composite Index issuers; only 59% of issuers on the Composite Index (those other than TSX 60 issuers) reported percentage results. Almost half the of issuers on the SmallCap Index (48%) followed this practice. The importance of the disclosure of voting results was illustrated when several institutional investors commenced a court action to force an issuer to disclose those results. The action was abandoned when the issuer disclosed the results voluntarily. The third element is some consequence for a director from whom a majority of votes has been withheld ultimately leading to resignation. Almost all TSX 60 issuers disclose that they have a policy dealing with the resignation of a director if he or she receives a majority of withhold votes. This is the case for a little more than half of the Composite Index and about a third of the SmallCap Index. In Canada, there were only two reported examples in 2011 of a director on the Composite Index or SmallCap Index receiving more "withhold" votes than "for" votes, although there may have been others that are not apparent because the issuer reports only whether the director has been elected (and a director will still be elected even if he or she receives a majority withhold vote). In 2011, of the 212 issuers who reported their voting results for individual director elections, the average percentage of votes withheld from an individual was 5.6% of votes cast. Forty issuers had at least one director that received 20% or more votes withheld with respect to his or her nomination. Twenty issuers had at least one director that received 25% or more votes withheld with respect to his or her nomination. SHAREHOLDER PROPOSALS Canadian corporate law permits shareholders to propose certain business to be put on the agenda of a meeting of shareholders. The timing and substance of the proposal must satisfy certain statutory requirements. Under most statutes, a proposal must be submitted by a registered shareholder, but under the federal and Ontario corporate statutes, proposals may also be submitted by beneficial holders of the issuer's shares. Proposals can be either advisory or binding, depending on the subject matter of the proposal. In some cases, the issuer reaches agreement with the party making the proposal and the proposal is withdrawn. During the 2011 proxy season in Canada, 72 proposals were made to 25 issuers. Of these, 20 were withdrawn. Only two of the proposals that were put to a vote at shareholder meetings succeeded. One was the proposal put forward by bcimc requiring European Goldfields Limited to adopt majority voting. The other was a proposal put before the shareholders of one of Canada's major banks to give 38

27 shareholders the right to show that they are abstaining from a particular vote (rather than restricting their options to voting for or against a management proposal or not voting at all). PROXY VOTING ISSUES PROXY PLUMBING ISSUES The proxy voting system in Canada is sufficiently flawed in its design and operation to raise legitimate questions about the quality of the shareholder vote in Canadian public companies. The proxy voting system has come under significant criticism in the last year or so. In October 2010, Davies released a discussion paper describing the issues with reliability of the proxy voting system in Canada. We are delighted that this paper has supported broader discussion among stakeholders and participants in the proxy voting system, including several roundtables and conferences, including one sponsored by RBC Dexia and one sponsored by the Canadian Society of Corporate Secretaries. The Ontario Securities Commission solicited comments on whether action needs to be taken with respect to the proxy voting system in its OSC Staff Notice The vast majority of the comments submitted in response to this staff notice support a review of, or significant changes to, the proxy voting system in Canada. PROXY ADVISORY FIRMS From an issuer perspective, one of the major issues of current concern is with proxy advisory firms. With this influence (actual or perceived) comes the fact that certain institutional investors provide proxy advisory firms with standard voting instructions. To the extent that institutional investors adopt the recommendations of a proxy advisory firm (in whole or in part), the concern arises that the proxy advisory firms have become setters of corporate governance standards. In addition, issuers are concerned that proxy advisory firms do not always analyze their public disclosure accurately or do not take into account the nuances or particular circumstances that apply to a particular issue. The result can be, from the issuer's perspective, that votes are being influenced by analysis that is inaccurate or otherwise deficient. Institutional investors typically respond to these concerns with assurances that they do not rely blindly on the recommendations of proxy advisory firms, but instead make their own voting decisions, which may or may not align with the recommendations of the proxy advisory firms. The Canadian Securities Administrators have been studying this issue and are expected to release a comment or proposal sometime in

28 DEVELOPMENTS IN U.S. LAW AFFECTING CANADIAN ISSUERS Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") in July 2010, public companies and other market participants have focused their attention on the U.S.Securities and Exchange Commission ("SEC") rules implementing Dodd-Frank. A number of SEC rules implementing Dodd-Frank are already effective; however, as of January 15, 2012 many proposed rules have not been finalized, and still other rules, such as the executive compensation clawback rules, have not yet been proposed. Described below are several rules adopted in the later part of 2011 that we believe to be significant, and one noteworthy pending rule that will be finalized in DISQUALIFYING FELONS AND OTHER BAD ACTORS FROM SECURITIES OFFERINGS UNDER RULE 506 On May 25, 2011, the SEC issued a proposed rule, mandated by section 926 of Dodd-Frank, that would disqualify issuers from relying on the private placement safe harbour provided by Rule 506 of Regulation D in any offering in which "covered persons" (as described below) include felons or other "bad actors". Rule 506, by far the most important (and frequently used) of the three categories of exempt offerings under the Regulation D safe harbour, allows issuers to raise unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited investors without having to register the offering with the SEC. The proposed rule identifies certain "disqualifying events" with respect to issuers and other "covered persons" that extend beyond the disqualifying events specified in section 926 of Dodd-Frank. The rule proposed by the SEC generated many comments from market participants and practitioners. A few of the more controversial aspects of the proposed rule are described below. RETROACTIVE APPLICATION WITH RESPECT TO PRIOR DISQUALIFYING EVENTS As proposed, the new rule would only apply to sales of securities occurring after the rule's effectivedate, but would apply retroactively to all disqualifying events that occurred during the relevant lookback period, regardless of whether the events occurred before Dodd-Frank's enactment. In a departure from the SEC's administration of similar disqualification provisions in the past, and despite a deeply rooted presumption in U.S. jurisprudence against retroactive legislation absent a clear statutory provision or statement of congressional intent, the SEC stated in its proposing release that the use of the past tense in the look-back provisions of section 926 of Dodd Frank required the retroactive application of the disqualification provisions. This approach surprised many issuers, securities industry professionals, and practitioners, and triggered a wave of comment letters urging the SEC to limit the proposed disqualification provisions to disqualifying events occurring after the rule becomes effective. If disqualifying events occurring before the effective date of the rule are not "grandfathered", many 41

29 issuers, corporate insiders, and other market participants that entered into regulatory settlements relating to prior events are likely to apply for waivers from the new rule with regard to those prior events. This could result in a substantial number of waiver requests and could ultimately be burdensome for the SEC and its staff, as well as creating uncertainty in the capital raising process. COVERED PERSONS Persons covered by the proposed rule include the issuer; directors, officers, general partners and managing members of the issuer; 10% beneficial owners of the issuer; any promoters connected with the issuer at the time of sale; and persons compensated for soliciting investors (e.g., placement agents), as well as the general partners, directors, officers and managing members of any compensated solicitor. The term "officer" is very broadly defined and includes, for example, vice presidents of an organization. As noted by the SEC in its proposing release, many financial institutions and broker-dealers that act as placement agents in Rule 506 offerings have a large number of vice presidents and other employees that would be considered "officers". Most of these individuals have no policy-making functions at the institution and may have no involvement in a specific Rule 506 offering. Moreover, issuers and other organizations have widely varying practices with respect to "officer" titles. This broad category of covered persons may result in numerous disqualifications for reasons having nothing to do with the offering activities of issuers or their placement agents. Casting the net so widely would also adversely affect an issuer's ability to comply with the "reasonable inquiry" standard discussed below. Commentators have suggested that the SEC modify the proposed rules to substitute the term "executive officer" as defined in SEC Rule 405 (and in Rule 501(f) of Regulation D) for the term "officer", which would have the effect of limiting this category of covered persons to officers who are in charge of a principal business unit, division or function or who perform another senior policy-making function. 1 The proposed 10% beneficial ownership threshold was also criticized as potentially covering owners who in fact do not control the issuer or other persons participating in the offering. While the SEC was applauded for adopting a bright line test (as compared to an actual "control" test), a few commentators proposed that the threshold be raised to 20% or even 25%. Additionally, some commentators noted that the term "promoter" is unclear and should be clearly defined to capture only persons who are actively involved in the offering and have a material financial interest in the offering. Others suggested that the rules should make clear that investment advisers (who are not included as covered persons) to funds are not "promoters" for this purpose. FACTUAL INQUIRY The proposed rule provides an exception from disqualification if an issuer can show that "it did not know, and in the exercise of reasonable care could not have known, that a disqualification existed". According to the proposal, an issuer must conduct "a factual inquiry into whether any disqualifications exist" and "the nature and scope of the requisite inquiry will vary based on the circumstances of the issuer and the other offering participants". While the SEC was applauded for including the "reasonable care" exception, it provided no guidance as to how issuers may satisfy this "reasonable care" standard. For example, the proposed rule is silent as to when the existence of a bad actor should be determined. This implies that an ongoing, continuous due diligence effort is required whenever securities are sold under Rule 506. This is unlikely to be workable, especially for issuers engaging in offerings on a 1 An alternative approach, as suggested by the SEC in its proposing release, would be to impose bad actor disqualifications on "officers" at a compensated solicitor who are "actually involved" in the Rule 506 offering, although the SEC would need to clarify what "actual involvement" means. 42

30 continuous or delayed basis. Commentators suggested that a cut-off date that is within a reasonable period of time before commencement of the offering be established (for example, 15 days prior to the offering date) 2, and that periodic inquiries would be a more practicable approach for issuers engaged in ongoing or continuous offerings. Another issue is whether issuers and other offering participants may rely on periodic written representations from covered persons. 3 An issuer involved in a Rule 506 offering may not be able to gather the information necessary to determine which persons should be the subject of inquiry or to actually make the necessary inquiries in a timely manner. There is real merit to permitting issuers to rely on certifications in determining whether third parties are bad actors, absent actual knowledge of the issuer to the contrary. The SEC was urged by commentators to adopt clear and workable non-exclusive guidelines for satisfying the factual inquiry standard. THE CONSEQUENCES OF RULE 506 DISQUALIFICATION It is important to note that disqualification under Rule 506 would not preclude an issuer from conducting private placements in reliance on section 4(2) of the U.S. Securities Act of 1933 ( the 1933 Act"). There is, however, one important distinction. Under Section 18 of the 1933 Act, securities sold in offerings made in compliance with Rule 506 of Regulation D are "covered securities" and, as such, are not subject to registration or qualification under state securities laws. In contrast, state securities laws are not preempted with regard to offerings made solely in reliance on section 4(2) unless the issuer has securities listed on a U.S. national securities exchange, and state exemptions for private placements, particularly if made to noninstitutional investors, are sometimes not available. Therefore, for Canadian companies that are not listed on a U.S. national securities exchange, disqualification under Rule 506 may result in their private placements in the United States being subject to registration or qualification requirements of the securities laws of various states. Currently, there are no U.S. federal or state-level bad actor disqualification rules applicable to Rule 506 offerings. Although Dodd-Frank requires adoption of Rule 506 disqualification rules, it is important that the final rules adopted by the SEC avoid significantly increasing costs of conducting Rule 506 offerings. For many issuers, particularly small public and private companies and middle-market issuers, Rule 506 is an integral tool for their private capital-raising efforts. Given the importance of the Rule 506 safe harbour to issuers that rely heavily on raising capital through private placements, the SEC was urged to reconsider its approach. It remains to be seen how the SEC will react to these comments in the final rule. NON-PUBLIC SUBMISSIONS FROM THE FOREIGN PRIVATE ISSUERS In December 2011, the SEC released a statement describing a change in the policy of the Division of Corporation Finance (the Division") with respect to non-public submissions of registration statements by foreign private issuers ("FPIs") and foreign governments. Under its existing policy, the Division permitted first-time non-u.s. registrants to file their registration statements (typically for a proposed public offering under the 1933 Act but also for registration of a class of securities under the Securities Exchange Act of 1934 in connection with listing on a U.S. exchange) on a non-public, or confidential, basis. By making a non-public submission, an FPI could privately resolve 2 The SEC has adopted cut-off dates in other contexts. For example, in the Rule 144A offering, the officer certification confirming qualified institutional buyer status can be dated as of a date on or after the close of the purchaser's most recent fiscal year. 3 The SEC has adopted certification standards in other contexts. For example, in ascertaining whether a prospective purchaser is a qualified institutional buyer for purposes of a Rule 144A offering, sellers can rely on, among other things, a written certification from an executive officer of the prospective purchaser as to the amount of securities owned or invested by that purchaser. 43

31 any difficult disclosure or other issues with the SEC and maintain the confidentiality of the proposed offering until the SEC was ready to clear the filing. An issuer could thus abandon a proposed offering or listing if, for example, the SEC required disclosure of information the company desired to keep confidential, and could avoid any negative publicity in its home jurisdiction attendant to a failed offering or listing. According to the SEC, historically a majority of FPIs registering securities in the United States also had, or planned to have, their securities traded on a foreign exchange. More recently, however, the vast majority of FPIs have not had, and were not contemplating, a non-u.s. listing. As a result, the Division determined to limit its policy and permit non-public filings only where the registrant is: a foreign government registering its debt securities; an FPI that is listed or is concurrently listing its securities on a non-u.s. securities exchange; an FPI that is being privatized by a foreign government; or an FPI that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction. Companies most affected by the change will be those seeking to effect IPOs in the United States and not list their securities on a home country exchange. Additionally, shell companies, blank-check companies and companies with no or substantially no business operations will not be permitted to use the non-public submission procedure. The Division cautioned that even an issuer that satisfies one of the above criteria may be required to publicly file its registration statement if, for example, there has been publicity about the proposed offering or listing or there is a competing bid in an acquisition transaction. NET WORTH STANDARD FOR ACCREDITED INVESTORS In December 2011, the SEC adopted amendments to the accredited investor standard in its rules under the 1933 Act to implement the requirements of section 413(a) of Dodd-Frank. Specifically, Dodd-Frank requires that the definition of "accredited investor" in the SEC's rules exclude the value of a person's primary residence for determining whether the person qualifies as an accredited investor on the basis of having a net worth in excess of $1 million. Previously, the SEC's rules had permitted including the value of the primary residence in the calculation of net worth. Because the Dodd-Frank accredited investor provision was effective upon enactment of the law in July 2010, the SEC previously issued guidance with respect to calculation of the net worth standard. The new rules are consistent with that guidance with one exception. Under the amended rules, the value of an investor's primary residence may not be included as an asset, and any debt secured by the residence, up to the estimated fair market value of the residence, is not included as a liability, in the calculation of the investor's net worth. Any debt secured by the primary residence in excess of the estimated fair market value of the residence, is not included as a liability, in the calculation of the investor's net worth. Any debt secured by the primary residence in excess of the estimated fair market value of the residence 44

32 (i.e., an "underwater" situation) must be included as a liability. Furthermore, to disqualify investors who might attempt to artificially inflate their net worth by converting their home equity into cash or some other asset, any increase in debt secured by the primary residence in the 60 days preceding the sale of a security to the investor, unless incurred in acquiring the primary residence, must also be included as a liability for purposes of determining the investor's qualification as an accredited investor under the net worth standard. This latter provision was not included in the rules as originally proposed. In response to a number of comments, the SEC included a "grandfather" provision in the amended rules under which the former net worth test will apply to purchases of securities pursuant to a right (e.g., a warrant), provided that (i) the right was held by the person on July 20, 2010 (the day before the enactment of Dodd-Frank), (ii) the person qualified as an accredited investor on the basis of the former net worth test when the right was acquired, and (iii) the person held securities of the same issuer other than the right (e.g., common shares acquired concurrently with a warrant) on July 20, MINE SAFETY DISCLOSURE RULES Approximately one year after first proposing the rules in December 2010, the SEC adopted final rules implementing the mine safety disclosure requirements mandated by Dodd-Frank. As adopted, the final rules are substantially similar to the proposals. Although the mine safety disclosure rules have been in effect since Dodd-Frank's enactment in July 2010, the SEC's rules codify the statutory requirements and specify their scope and application. The rules apply to all SEC-reporting issuers, including non-u.s. issuers, and require specified disclosure (described below) in current and quarterly reports (U.S. issuers) and annual reports (all issuers) filed with the SEC. Affected companies will be required to note in the body of the report that they have mine safety violations or other reportable events, and that the information is provided in an exhibit to the report. The disclosure must provide information for the time period (i.e., quarter or year) covered by the report. The rules require disclosure by any issuer that is, or that has a subsidiary that is, an "operator" (as defined in the U.S. Federal Mine Safety and Health Act of 1977, the Mine Act") of a coal or other mine located in the United States. Although the new rules do not require disclosure with respect to mines located outside the United States, non-u.s. mine safety issues, if material, may be required to be disclosed pursuant to other SEC disclosure items (e.g., risk factors or MD&A). The disclosure must be made on a mine-by-mine basis rather than by groupings of mines. Issuers will not be responsible, however, for reporting orders or citations issued to any independent contractors working at their mine sites. The required disclosure items include: The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of mine safety or health hazard under section 104 of the Mine Act for which the operator received a citation from the U.S. Labor Department's Mine Safety and Health Administration ("MSHA"). The total dollar value of proposed assessments from MSHA under the Mine Act. 45

33 The total number of mining-related fatalities. Any pending legal action before the U.S. Federal Mine Safety and Health Review Commission involving such coal or other mine. A brief description of each category of violations, orders and citations. The total number of orders issued under section 104(b) of the Mine Act. The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health and safety standards under section 104(d) of the Mine Act. The total number of flagrant violations under section 110(b)(2) of the Mine Act. The total number of imminent danger orders issued under section 107(a) of the Mine Act. A list of mines for which the issuer or a subsidiary received written notice from the MSHA of a pattern of violations of mandatory health or safety standards that are of such a nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health and safety hazards under section 104(e) of the Mine Act. A list of mines for which the issuer or a subsidiary received written notice from MSHA of the potential to have such a pattern. The SEC has suggested, but the rules do not require, that companies provide the required disclosure in tabular format, with additional detail provided in footnotes, accompanying narrative disclosure or additional tables. Accordingly, companies may provide the required disclosure in any manner they believe is appropriate SEC REPORT ON DODD-FRANK WHISTLEBLOWER PROGRAM In May 2011, the SEC adopted final rules, effective in August 2011, implementing the whistleblower incentive and protection provisions of Dodd-Frank. The Dodd-Frank whistleblower provisions directed the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement action resulting in the imposition of monetary sanctions in excess of $1 million. Among other things, the SEC's rules define certain terms used in the operation of the whistleblower program; establish procedures for submitting tips and applying for awards; describe the criteria the SEC will consider in making awards; and implement Dodd-Frank's prohibition against retaliation for whistleblowing. Dodd-Frank also requires the SEC's Office of the Whistleblower (created by Dodd-Frank) to report annually to Congress, not later than October 31 st of each year, with respect to its operation of the whistleblower program. In November 2011, the Office issued its first annual report, which included data on the tips received by the Office over the seven weeks following the effective date of the new rules. Because of the short period covered by the report, the data may be of limited use, but are interesting nevertheless. 46

34 The report provides that three types of activities alleged market manipulation (16.2%), alleged offering fraud (15.6%), and corporate disclosures and financial statements (15.3%) accounted for almost half of the 334 tips received. Other unspecified activities accounted for almost 24% of the tips, with the remaining tips relating to insider trading, unregistered offerings, Foreign Corrupt Practices Act violations (surprisingly low at 3.9%), trading and pricing of securities, market events, and municipal securities and public pensions. Whistleblower submissions were received from individuals in 37 states (with, not surprisingly, California, New York, Florida and Texas being the leaders) and in foreign countries (with China (31.3%) and the United Kingdom (28.1%) representing almost 60% of the non-u.s. tippers). 47

35 Davies focus on capital markets work has propelled it to its TOP-TIER status. - IFLR 1000 If you are interested in receiving more information on Davies Ward Phillips & Vineberg LLP, please contact us or visit our website at The information in this guide should not be relied upon as legal advice. We encourage you to contact us directly with any specific questions. For additional information with respect to the foregoing or assistance in any transaction, please contact us directly: Richard Fridman rfridman@dwpv.com Mindy Gilbert mgilbert@dwpv.com Carol Hansell chansell@dwpv.com Neil Kravitz nkravitz@dwpv.com Robert S. Murphy rmurphy@dwpv.com Jeffrey Nadler jnadler@dwpv.com Patricia L. Olasker polasker@dwpv.com James R. Reid jreid@dwpv.com Jason M. Saltzman jsaltzman@dwpv.com Luis Sarabia lsarabia@dwpv.com Scott M. Tayne stayne@dwpv.com Robin Upshall rupshall@dwpv.com Natasha vandenhoven nvandenhoven@dwpv.com David Wilson dwilson@dwpv.com