Securities Law Update (August 2003) Southbound Multijurisdictional Disclosure System: The Basics Introduction The multijurisdictional disclosure system (the "MJDS") was adopted in 1991 by the United States Securities and Exchange Commission (the "SEC") and the Canadian provincial securities regulators in an effort to reduce the barriers to cross-border financings between Canada and the United States. The MJDS permits eligible Canadian issuers to publicly offer securities in the United States by using a prospectus which is prepared in accordance with Canadian disclosure requirements and is reviewed by provincial securities regulators 1. While the prospectus is filed with the SEC under the cover of an MJDS form, the SEC does not review the filing. The MJDS offers eligible Canadian issuers the following principal benefits: since prospectus disclosure is governed by Canadian requirements, the costs and other burdens of complying with two disclosure regimes are lessened; because the prospectus is not reviewed by the SEC, the clearance process is very fast (review by provincial securities regulators can be effected in as little as three to four business days); financial statements need not be reconciled to U.S. GAAP for non-convertible investment grade debt or preferred securities; trust indentures need not comply with the substantive requirements of the U.S. Trust Indenture Act of 1939 in most cases; and since U.S. continuous reporting obligations may be satisfied by using Canadian continuous disclosure documents, the costs and other burdens of complying with two reporting regimes are reduced. 1 There is also a reciprocal "Northbound MJDS" regime which permits eligible U.S. issuers to offer securities into Canada without Canadian regulatory review. It is however relatively little used and is not discussed in this memorandum.
2 Eligible Canadian Issuers A Canadian issuer is eligible to effect a public offering of securities in the United States under MJDS if: it is a "foreign private issuer" 2 incorporated or organized under Canadian law; it has been subject to the continuous disclosure requirements of any provincial securities regulator in Canada for at least 12 calendar months; and the aggregate market value of the equity shares of the issuer is at least US$75 million (not required if the securities being offered are non-convertible investment grade debt or preferred securities). A Canadian issuer is not eligible to use the MJDS if it is an investment company under the U.S. Investment Company Act of 1940. Preparation and Filing of Documents An eligible Canadian issuer wishing to conduct a public offering in the United States under the MJDS would commence by preparing a preliminary prospectus for filing with the securities regulators in the provinces and territories where the securities will be offered. In the case of an offering only in the United States, the filing would be with a provincial securities regulator that has agreed to act as a reviewing authority or, in certain circumstances, that requires the prospectus to be filed with it because the issuer is located in its province. The disclosure in the prospectus is governed by applicable Canadian disclosure requirements which permit senior issuers to file a short form (or "POP") prospectus which incorporates by reference much of the issuer's current continuous disclosure record. The issuer would also prepare an MJDS registration statement for filing with the SEC under the appropriate MJDS form (discussed in greater detail below) which would consist of the Canadian prospectus and certain other information and exhibits filed with the SEC but not delivered to offerees or purchasers. The MJDS prospectus would include prescribed legends and information but could omit disclosure relevant only to Canadian investors (e.g. the 2 A "foreign private issuer" is any foreign issuer other than a foreign government, except that if more than 50% of the outstanding voting securities of the issuer are held of record either directly or through voting trust certificates or depository receipts by residents of the United States, the issuer will not qualify as a "foreign private issuer" if any one of the following is true: (i) the majority of the executive officers or directors are United States citizens or residents, (ii) more than 50% of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States.
3 Canadian tax discussion and the description of the Canadian underwriting). In practice, MJDS prospectuses of lesser known issuers tend to also include additional disclosure usually required by U.S. underwriters in order to facilitate the marketing of the offering in the United States. This disclosure would typically include a description of the business, a capitalization table, a description of management and selected financial and operating data. Certain information usually incorporated by reference into the prospectus is also often appended to the prospectus (e.g. the issuer's annual information form, management's discussion and analysis and annual and quarterly financial information) to assist with marketing efforts. Although the U.S. prospectus need not comply with U.S. form requirements, it is still subject to the civil liability and antifraud provisions of the U.S. securities laws. As a result, additional disclosure (e.g., enhanced risk factor disclosure) may be necessary to meet U.S. liability concerns. All these additions have resulted in what has become known as a "long-form short-form" prospectus but have not resulted in longer review periods by Canadian regulators. Following the filing of the preliminary Canadian prospectus and MJDS registration statement, the issuer would respond to and settle any comments of the Canadian securities regulators with the goal of being cleared to file a final prospectus with the Canadian regulators and go effective with the SEC (in many cases, this can be accomplished in as few as three to four business days). Review by the SEC and Provincial Securities Regulators The SEC does not review an MJDS registration statement (although the SEC reserves the right to review if it has reason to believe that there is a problem with the filing or the offering). The prospectus is reviewed only by applicable provincial securities regulators. In the case of a concurrent offering in Canada and the United States, the MJDS registration statement will become effective upon filing with the SEC of the related final prospectus. In the case of an offering being made only in the United States, the MJDS registration statement will be declared effective upon receipt by the SEC of a notification of clearance issued by the relevant provincial securities regulator. Equity and High Yield Debt Securities A Canadian issuer with the required 12-month Canadian reporting history and a public float of equity shares of at least US$75 million may offer to the public in the United States equity securities, non-investment grade debt securities or convertible securities by registering such securities on Form F-10. However, unlike a registration of investment grade debt or preferred
4 securities on Form F-9 (discussed below), registration of securities on Form F-10 requires reconciliation of financial statements to U.S. GAAP in accordance with Item 18 of Form 20-F 3. Investment Grade Debt and Preferred Securities A Canadian issuer of any size with the required 12-month Canadian reporting history may offer non-convertible investment grade debt 4 and preferred securities to the public in the United States by registering such securities with the SEC on Form F-9. Registration on Form F-9 requires no reconciliation of financial statements to U.S. GAAP. Form F-9 can also be used to register convertible securities meeting these requirements, but only if the securities are not convertible for at least one year. Trust Indenture and Trustee If debt securities are being registered on an MJDS form, the related trust indenture is exempt from the substantive requirements of the U.S. Trust Indenture Act of 1939 if the trust indenture is subject to the Canada Business Corporations Act, the Bank Act (Canada), the Business Corporations Act (Ontario) or the Company Act (British Columbia). In addition, a Canadian trust company may act as the sole trustee for the registered debt securities, provided that it is subject to the Trust Companies Act (Canada) (now the Trust and Loan Companies Act (Canada)) or the Canada Deposit Insurance Corporation Act and has the capability to discharge the duties of a trustee in the U.S. What happens in practice however is that, although the Canadian issuer will take advantage of the exemption from the substantive requirements of the U.S. Trust Indenture Act of 1939, it will appoint a U.S. trustee and seek relief under applicable Canadian trust indenture legislation from the requirement to have a Canadian trustee. Guaranteed Debt Securities A Canadian majority-owned subsidiary of an MJDS eligible parent can use the MJDS to offer debt securities to the public in the United States so long as the parent company fully and unconditionally guarantees the securities. The debt securities may be convertible into equity securities of the parent. The parent guarantee, the debt securities and, if applicable, the underlying securities of the parent may all be registered on the appropriate MJDS form. 3 4 Reconciliation under Item 18 of Form 20-F requires a discussion of material variations in the accounting principles used and reconciliation of certain income statement and balance sheet items. It also requires presentation of all other information required by U.S. GAAP and SEC rules, including segment information. Reconciliation under Item 17 of Form 20-F does not require presentation of this additional information. For example, an investment grade rating in respect of debt from DBRS would be AAA, AA, A or BBB and from Moody's would be Aaa, Aa, A or Baa.
5 Hybrid Filings A non-canadian subsidiary of an MJDS eligible parent company cannot use the MJDS to offer debt securities in the United States even if the securities are fully and unconditionally guaranteed by the parent. In such a case, a hybrid filing may be the solution. In a hybrid filing, the MJDS eligible Canadian parent company registers the parent guarantee on an MJDS form and the offered debt securities of the non-canadian subsidiary are registered on an SEC foreign issuer or domestic registration form. 5 Universal Shelf Prospectuses An unallocated, or universal, shelf prospectus is one that registers or qualifies more than one type of security without specific allocation of offering amounts among the classes of securities. Under National Instrument 44-102 Shelf Distributions, which came into effect on December 31, 2000, Canadian issuers may now file an unallocated shelf prospectus in Canada (this was not the case prior to the coming into effect of the National Instrument). Now that universal shelf prospectuses are permitted in Canada, eligible Canadian issuers can use the MJDS to set up an unallocated shelf in the United States or cross-border. State Securities Laws MJDS offerings of securities by Canadian issuers in the United States are subject to state securities and "blue sky" laws in the states where offers and sales are made. Such laws provide for registration with state securities regulators and review by such regulators. Model rules which accommodate MJDS forms and harmonize state review periods with Canadian review periods have been adopted by many states. However, the rules do not eliminate state review and, accordingly, coordination of any required state clearance with clearance by Canadian regulators may be required in connection with an MJDS offering. Exemptions may be available in certain circumstances (e.g. Canadian issuers whose securities are listed or are to be listed on a U.S. stock exchange or Nasdaq). NASD Review Most MJDS offerings are exempt from review by the National Association of Securities Dealers, Inc. (the "NASD"). Public offerings exempt from NASD review include: 5 For example, the shelf prospectus of Barrick Gold Corporation and its U.S. financing subsidiary Barrick Gold Finance Inc. dated April 8, 1997 relating to the issuance of up to $1,000,000,000 aggregate principal amount of debt securities of the parent and guaranteed debt securities of the subsidiary consisted of a combined registration statement on Forms F-9 and F-3 as the parent was MJDS eligible but the subsidiary was not.
6 offerings of securities of a Canadian issuer registered on a Form F-10 shelf registration statement and offered under Canadian shelf prospectus offering procedures; offerings of non-convertible debt, or non-convertible preferred securities, rated investment grade; and offerings of any securities by a corporate, foreign government or foreign government agency issuer that is unsecured non-convertible debt with a term of issue of at least four years, or unsecured non-convertible preferred securities, rated investment grade, except for initial public offerings of equity. Continuous Reporting Obligations General A Canadian issuer, regardless of size, that is eligible to use MJDS or whose continuous reporting obligations arise solely as a result of a public offering in the United States registered on an MJDS form may satisfy its U.S. reporting obligations by filing its Canadian disclosure documents under cover of the MJDS reporting forms, namely Form 40-F and Form 6-K. A Canadian issuer will nonetheless be subject to many of the requirements under the U.S. Sarbanes-Oxley Act of 2002, including certifications by the issuer's CEO and CFO of the contents of its annual report; enhanced annual MD&A disclosure of off-balance sheet transactions and the inclusion in the issuer's annual report of a new table of long-term debt and lease obligations showing future obligations; disclosure in the issuer's annual report on whether it has adopted a code of ethics for its CEO, CFO and senior accounting personnel and, if not, why not, and disclosure of any waivers of the code; and prohibitions on the issuer from making personal loans to directors or executive officers of the issuer. Annual Filings A Canadian issuer that is eligible to use MJDS reporting forms may satisfy annual continuous reporting obligations by filing its Canadian annual information form, audited annual financial statements and accompanying management's discussion and analysis with the SEC under Form 40-F concurrently with the filing of such information in Canada. Annual audited financial statements included in the Form 40-F must be reconciled to U.S. GAAP in accordance with the less onerous requirements of Item 17 of Form 20-F 6, unless: (i) the continuous reporting obligation arises solely as result of a public offering registered under an MJDS form other than 6 See footnote 3.
7 Form F-10; or (ii) the continuous reporting obligation relates to securities which, at the time of filing, could be publicly offered using Form F-9, in which case no reconciliation is required. Interim Filings A Canadian issuer that is eligible to use MJDS reporting forms to meet its continuous reporting obligations in the United States is required, during the remainder of the year, to promptly furnish to the SEC under Form 6-K all other information material to an investment decision that it: (i) makes public pursuant to the law of its home jurisdiction (e.g. interim financial statements and material change reports); (ii) files with any stock exchange on which its securities are traded; or (iii) distributes to its securityholders. If you have any questions regarding the foregoing or would like assistance in any transaction, please contact Patricia L. Olasker, Patrick E. Moyer and R. Brian Calalang in our Toronto office at (416) 863-0900, or Guy P. Lander or Jennifer Toone in our New York office at (212) 308-8866. The information and comments contained herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances. For particular applications of the law to specific situations, the reader should seek professional advice. www.dwpv.com