Heightened Scrutiny of Emerging Market Issuers: New TSX Guidance

The high-profile collapse and de-listing of several issuers with operations primarily in emerging markets has resulted in emerging market issuers facing heightened scrutiny by Canadian securities regulators. Now, the Toronto Stock Exchange has published a Staff Notice to Emerging Market Issuers that describes the higher-risk profile that TSX associates with emerging market issuers and the mitigating steps they should take to demonstrate their suitability for listing. Issuers with significant connections to emerging market jurisdictions will have to satisfy TSX that they are prepared to adhere to Canadian standards of investor protection despite potential problems in their home jurisdictions relating to the rule of law, corruption, shareholder rights, risk management and adherence to recognized accounting standards. TSX notes that emerging markets issuers already listed on the exchange should also consider the guidance and proactively work to address any deficiencies.

Because the guidelines are detailed and complex, we encourage emerging market issuers to consult counsel and plan for a pre-filing meeting with TSX staff well in advance to help ensure a successful listing. We also encourage already-listed emerging market issuers to consider how they are addressing the special risks noted by TSX. The remainder of this bulletin highlights key information from the TSX notice.

Identifying Emerging Market Issuers

To classify an issuer as an emerging market issuer, TSX will consider the residency of its "mind and management;" the location of its principal business and assets; its jurisdiction of incorporation; and its corporate structure. TSX is focused on jurisdictions outside North America, the United Kingdom, western Europe, Australia and New Zealand and will take into account the prevalence of the rule of law in the relevant country; the rating in corruption perception and transparency indices; whether there is a civil or common law system similar to Canada’s; usage of International Financial Reporting Standards (IFRS) and International Standards on Auditing; and the country’s membership in key commercial and economic international organizations.

Special Risks Associated with Emerging Market Issuers

The following are some of the potential risks TSX associates with emerging market issuers:

• management’s lack of experience with Canadian securities laws and TSX rules;
• language and geographic barriers between management and the board of directors;
• lack of expertise of the auditor in the foreign jurisdiction;
• differences in banking systems, cultures or business practices, including uncertain foreign government permitting or licensing requirements;
• risks related to legal title to assets and the right to carry on the issuer’s operations; and
• the use of complex corporate or capital structures.

In reviewing emerging market issuers in the resource sector, TSX will place special importance on a technical report which evidences an independent expert’s review of the issuer’s principal assets, especially where the author of the technical report has reviewed title opinions for the issuer’s properties.

TSX Review of Emerging Market Issuers

Management Expertise and Board Oversight. Adequate management expertise and independent oversight by qualified and experienced directors are considered essential by TSX. This includes the CFO having North American public company expertise, a thorough understanding of the relevant foreign business environment, experience applying IFRS, and either a professional accounting designation or significant accounting and financial reporting expertise. The audit committee should have Canadian financial reporting expertise, experience in the issuer’s industry and jurisdiction, an understanding of the foreign legal, political and business environment, and experience supervising international audit engagements for public companies. TSX also emphasizes the need for site visits as well as robust director education programs and communication protocols to address language barriers and time-zone differences.

Internal Controls. TSX will review the internal control systems of emerging market issuers and may request that these controls be evaluated periodically by independent auditors other than the issuer's current auditors.

Related Party Transactions. Related party transactions and any other transactions that do not appear to have been negotiated at arm’s length will be subject to heightened scrutiny by TSX.

Corporate and Capital Structures. Corporate or capital structures that are non-traditional or complex by Canadian standards will be assessed by TSX in terms of securityholder protections. TSX may also request a supporting legal opinion.  

Internal Policies. TSX may require emerging market issuers to adopt policies dealing with related party transactions, whistle-blowing, anti-bribery, anti-corruption and ethical business conduct.

Sponsorship. TSX has indicated that emerging market issuers may require a sponsor. Before engaging a sponsor, the choice should be cleared with TSX. The exchange may ask the sponsor for information about the business environment and key risks in the foreign jurisdiction; request commentary on a site visit by the sponsor; and ask the sponsor to comment on management’s and the board’s public company experience, local business knowledge and related party transaction policy.

Ongoing Obligations. TSX may impose supplemental ongoing obligations on emerging market issuers, which may involve the exchange pre-clearing new senior management, board members or auditors; reviewing changes to directors’ and officers’ insurance for securityholder claims; or requesting information about the issuer’s financial reporting and internal controls.

Additional Guidance

For additional guidance in meeting Canadian regulatory standards, emerging market issuers may consult

• the OSC’s Issuer Guide for Companies Operating in Emerging Markets, which is discussed in Torys’ client bulletins "OSC Staff Provides Disclosure Guidance for Emerging Market Issuers" and "Emerging-Market Companies Face Increased Regulatory Scrutiny When Accessing Canadian Capital Markets;" and
• IIROC’s Guidance Respecting Underwriting Due Diligence.