Double Trouble - Canadian Disclosure Requirements on Investments in Dual-Class Companies
Unfortunately for global investors trying to manage the regulation of investments in multiple jurisdictions, Canada has overlapping disclosure requirements when an investment in a public company exceeds the 10 per cent threshold. Ten per cent of what exactly is part of the challenge.
Canada has both an “Insider Reporting Requirement” where company insiders are required to report trades as well as a separate disclosure requirement that exists under Canadian take-over bid rules referred to as the “Early Warning Requirements”. These two disclosure requirements overlap substantially in terms of what information is disclosed but the test for whether or not each disclosure requirement is engaged is different.
The key difference is that the Insider Reporting Requirement is engaged with respect to “all the reporting issuer’s outstanding voting securities” and the Early Warning Requirement is engaged with respect to “voting or equity securities of any class of a reporting issuer”. In other words, and to answer many investors’ first question, one must aggregate all voting shares of a company together to determine whether the 10 per cent threshold for the Insider Reporting Requirement has been crossed but one must perform the analysis on a class-by-class basis to determine if the 10 per cent threshold for the Early Warning Requirement has been crossed. Simple enough perhaps unless the class of shares you thought you bought turns out not to be the class you end up holding.
Several Canadian companies, especially companies that carry on businesses that are regulated by foreign ownership restrictions, such as in the broadcasting or aviation industries, have more than one class of shares publicly traded. Public companies that are restricted from having foreign ownership exceeding a set threshold frequently set up a class of shares that is reserved for ownership by foreign investors and cap the voting power of that class as whole at a limit that does not exceed the legislated threshold. Typically, a foreign investor that buys the “domestic” class of shares is automatically, and often without notice, converted into the “foreign” class of shares and that’s where the issues can start.
If, for example, a foreign investor purchases 0.5 per cent of a public company’s “domestic” class of voting shares, those shares may be automatically converted into the same number of shares of the “foreign” class of shares. The voting power over the company as a whole typically does not change, still a nominal 0.5 per cent, and the equity position in the company overall does not change, still a nominal 0.5 per cent, but the voting position within the “foreign” class of shares on a class by class basis could change drastically potentially engaging disclosure requirements that would never have been anticipated with the intended investment position taken. The 0.5 per cent position could suddenly represent 15 per cent of the “foreign” class of shares or possibly even 25 per cent or 80 per cent etc. This drastic and unexpected change in voting power on a class by class basis could unexpectedly require the filing of an early warning report under Canada’s take-over bid regime.
To add another layer, and introduce the prospect of unintentionally making an illegal take-over bid, applicable Canadian securities laws also determine whether or not an investor has engaged the take-over bid rules by applying the requisite beneficial ownership threshold on a class-by-class basis. A take-over bid is made in Canada requiring compliance with a take-over bid regime when an offeror makes an offer to acquire outstanding voting securities or equity securities of a class made to one or more persons or companies, any of whom is in a jurisdiction in Canada or whose last address is shown on the books of the offeree issuer is in a jurisdiction in Canada, where the securities subject to the offer to acquire, together with the securities of the offeror (and its joint actors) which are beneficially owned, or over which control or direction is exercised, on the date of an offer to acquire, constitute in the aggregate 20 per cent or more of the outstanding securities of that class of securities at the date of the offer to acquire. Fortunately, good arguments can be made that a modest investment in the “domestic” class of shares that is automatically converted to a position in the “foreign” class of shares that ends up representing more than 20 per cent of that class of shares should not be regarded as a take-over bid for the “foreign” class of shares requiring compliance with the take-over bid rules.
Dual class companies can create investor disclosure requirement complications for Canadian investors as well if the voting power in the stock is not also considered on a class by class basis but foreign investors have the added challenge of tracking what happens when a relatively small investment is automatically converted into a potentially disclosable investment when examined on a class by class basis.
disclosure requirements dual class early warning insider reporting