Ontario’s Capital Markets Modernization Taskforce issues final recommendations

Ontario’s Capital Markets Modernization Taskforce (Taskforce) has published its final report (final report)¹. The 74 recommendations cover a wide range of topics, including corporate governance practices, reducing regulatory burdens, improving market access, investigative and enforcement matters, and major structural reforms.

Although the Taskforce dropped or reworked a few of its more controversial proposals and added some new recommendations, its final report is largely consistent with the consultation report (consultation report) that it released in July 2020². Some of the Taskforce’s recommendations, if adopted, would significantly affect some aspects of market participants’ commercial and governance practices.

For more on the Taskforce’s recommendations relating to corporate governance, mergers and acquisitions (M&A), capital-raising, and continuous disclosure, read our follow-up bulletin here.

What you need to know

• Some of the Taskforce’s recommendations could be adopted relatively quickly because they enjoy broad support and are already being considered by the Canadian Securities Administrators (CSA). For example, the CSA is pursuing projects relating to alternative models for capital-raising, permitting smaller issuers to file financial information semi-annually, consolidation and streamlining of continuous disclosure requirements, and implementation of SEDAR+.
• The Taskforce’s recommendations regarding the OSC’s structure and governance, as well as those touching upon the structure and oversight of Canada’s self-regulatory organizations (SROs) for investment dealers and mutual fund dealers, may be more challenging and time-consuming to implement because they require legislative amendments, the establishment or reorganization of entities, and/or the appointment, hiring and/or re-assignment of personnel.
• Some of the Taskforce’s recommendations have generated controversy and may not progress as proposed. For example, there are disagreements about whether further measures are needed to address relationships between capital markets participants and Canadian financial institutions, concerns about regulatory overreach in the expansion of the OSC’s mandate to include fostering competition and diverging views on the appropriateness of regulating corporate governance decisions such as mandating the adoption of diversity targets and board term limits.
• On February 12, CSA members other than the OSC published their response to the Taskforce’s final report, emphasizing the potential risks (such as inter-jurisdictional friction and regulatory burden) of implementing many of the recommendations outside the CSA framework and stressing the importance of subjecting policy work to a robust process that includes countrywide stakeholder consultations as well as appropriate research and cost-benefit analysis³. (The Taskforce did not systematically disclose the stakeholder feedback it received on its consultation report or how it addressed that feedback in finalizing its recommendations).
• What’s next: The OSC can and likely will pursue some of the Taskforce’s recommendations, such as those relating to initiatives that are already underway at the OSC or CSA levels. For those recommendations that have attracted mixed feedback, we expect the OSC to continue assessing stakeholder reaction to the final report and await further direction from the Ministry of Finance before proceeding. It is unclear where some of the Taskforce recommendations will lie on the priority list for Ontario’s recently appointed Minister of Finance. We will be watching to see if any of the recommendations, particularly those that require legislative amendments such as the structural reforms, appear in the Ontario Government’s 2021 budget scheduled for release on March 31. In addition, we expect that the market will be looking to the Ministry of Finance, OSC and CSA to conduct economic analyses and assess supplementary data as they consider whether and how to implement the Taskforce’s recommendations.
  • If market participants find any of the Taskforce’s recommendations problematic, now is the time to express these concerns.

Background

The Ontario Government established the Taskforce in February 2020 to advise the Minister of Finance on how to improve innovation and competitiveness in the province’s capital markets and help build Ontario’s economy. The Taskforce initially consulted 110 stakeholders about the challenges facing participants in Ontario’s capital markets before publishing the consultation report. The consultation report attracted 130 submissions containing a mixture of praise, pushback and additional issues for consideration.

Corporate governance, proxy matters and M&A

• Require listed issuers to adopt diversity targets, director nomination policies and implementation timelines. All publicly listed issuers in Canada (not just TSX issuers) should be required to adopt board and executive management-level diversity targets, with implementation timelines, that address the representation of people who self-identify as women, Black, indigenous or people of colour (BIPOC), persons with disabilities, or LGBTQ+. The Taskforce recommends an aggregated target of 50% for women to be met within five years and an aggregated target of 30% for people who self-identify as BIPOC, LGBTQ+ or persons with disabilities to be met within seven years. Listed issuers should be required to disclose annual data on the representation of these groups on their board and in executive management and adopt a policy regarding the director nomination process that expressly addresses the identification of candidates who self-identify as women, BIPOC, LGBTQ+ or as persons with disabilities.
• Require listed issuers to adopt 12-year term limits for directors, subject to limited exceptions. For example, exceptions would apply to the chair of the board (who would be subject to a 15-year limit) and family-owned and controlled businesses (who could have some board members who are not subject to term limits). The Taskforce also recommends that issuers be required to implement these term limits within three years of the amendments taking effect.
• Reduce early warning reporting (EWR) threshold to 5% for non-passive investors. The Taskforce excluded passive investors from the scope of its final recommendation, which would require any investor who intended to make a take-over bid or propose a transaction that would result in the investor gaining control of the issuer, or who solicited proxies against any director nominees or corporate actions proposed by the issuer’s management, to start disclosing its holdings: 1) once it crossed the 5% threshold; or 2) became non-passive when owning 5% of more of the issuer’s shares. The investor, however, would not be subject to the EWR regime’s moratorium on share acquisitions unless and until it crossed the 10% threshold.
• Taskforce drops proposal to mandate quarterly reporting by institutional investors. The Taskforce dropped the proposal in its consultation report that institutional investors who own above a certain dollar threshold provide quarterly disclosure of their holdings in securities of certain Canadian reporting issuers.
• Allow reporting issuers to obtain the identities and holdings of all beneficial owners of their securities. The Taskforce recommends that the Ontario government establish a stakeholder group to develop a strategy to achieve this objective by September 1, 2022 and, in the interim, securities laws should be amended so that NOBO (non-objecting beneficial owner) status is the default for beneficial owners.
• Regulate proxy advisory firms (PAFs). Consistent with its consultation report, the Taskforce recommends that: 1) issuers be given a statutory right to rebut (at no cost) PAF reports; 2) PAFs be required to include issuer rebuttals in their reports; and 3) PAFs be restricted from providing consulting services to an issuer if they also provide voting recommendations regarding that issuer.
• Require universal proxy ballots for contested meetings. A universal proxy ballot is a single ballot that lists the director nominees of each side of a dispute and allows a shareholder to vote for a combination of nominees. The Taskforce recommends that universal proxy ballots be used in any contested meeting and that this recommendation be implemented by September 1, 2022.
• Require issuers to have independent board committees oversee all material conflict of interest transactions. The Taskforce also recommended that additional policy guidance on independent committee practices should be adopted.

The final report includes several new recommendations, including the following.

• Enhance and standardize securities grant and option exercise disclosures. The Taskforce recommends that the OSC and CSA conduct a consultation on whether issuers should be required to include in their annual compensation disclosure a look-back analysis on previously granted option and share-based compensation, including the value vested and realized under prior grants, using a standardized valuation methodology.
• Eliminate board slate voting and require annual director elections and majority voting. Virtually all public companies already hold annual elections for directors on an individual basis and majority voting is already required for all TSX-listed issuers, so these recommendations are unlikely to have a meaningful impact for most issuers.
• Raise the limit for the private issuer take-over bid exemption from 50 to 300 shareholders. The private issuer take-over bid exemption currently exempts an offeror from the formal bid requirements if it makes a take-over bid for a non-reporting issuer that has no public market for its securities and has 50 or fewer shareholders (excluding employees of the issuer or its affiliates). The Taskforce recommends that this limit be raised from 50 to 300 non-arm’s length shareholders.

Capital-raising

Consistent with its consultation report, the final report includes the following recommendations.

• Introduce an alternative public offering model. Issuers that have been reporting issuers for at least 12 months could raise capital based on their continuous disclosure record and a short offering document, instead of a prospectus (but with the same standard of liability as a prospectus). The annual maximum for offerings under this exemption would be set at 10% of market capitalization, while issuers with a market capitalization under $50 million could raise up to the lesser of $5 million and 100% of their market capitalization annually.
• Develop a well-known seasoned issuer (WKSI) model. Large issuers with a minimum public float of at least $500 million (known as WKSI) could raise capital under a shelf prospectus that would become automatically effective upon filing without any review by the OSC.
• Liberalize the testing-the-waters regime. Consistent with the recently liberalized testing-the-waters rules adopted in the U.S., Canadian reporting issuers could pre-market public offerings to institutional accredited investors at any time prior to filing a preliminary prospectus. (The existing testing-the-waters rules apply only to IPOs). To help regulators monitor potential insider trading activities, investment dealers would be required to keep and file with the Investment Industry Regulatory Organization of Canada (IIROC), and provide to the OSC upon request, a list of contacted investors. Premarketing materials would also have to be filed with IIROC.
• Prohibit short selling in advance of prospectus offerings and private placements. To combat aggressive short selling designed to depress share prices prior to pricing, market participants would be prohibited from acquiring securities in an offering if they have a short position arising from a short sale of a security of the same type as that being offered (or fungible with such securities, such as warrants). The prohibition would not apply to trading in exchange-traded funds (ETFs) and the Taskforce recommends that exemptions for market-making by registered dealers be considered.
• Phase out hold periods for securities of qualified issuers sold to accredited investors. The Taskforce recommends that hold periods for privately placed securities sold to accredited investors by issuers with a minimum 12-month reporting history be phased out. The existing four-month hold period would be reduced to 30 days and then eliminated after two years. Four-month hold periods would continue to apply to the securities of issuers who elect to file their disclosure semi-annually, as discussed below.
• Expand accredited investor definition based on proficiency. Allow issuers to privately place securities to a broader group of sophisticated investors by expanding the accredited investor definition to include individuals who have passed specified proficiency requirements that enable them to recommend investment products to other investors.
• Allow an increased role for exempt market dealers (EMDs) in prospectus offerings and reverse takeovers (RTOs), subject to certain conditions such as: 1) requiring an investment dealer to act as an underwriter and sign the underwriter certificate; and 2) limiting such arrangements to those where the EMD’s compensation does not exceed 50% of the compensation paid to the investment dealer that acts as underwriter.
• Restrict the bundling of capital markets and commercial lending services. Consistent with its consultation report, the Taskforce retained its controversial recommendations in this area. If its recommendations are adopted:
  • Registered dealers would be prohibited from providing capital markets or M&A advisory services to an issuer where an affiliated lender offered bundled services or economics under an exclusivity arrangement with the issuer.
  • Any issuer that had a commercial lending arrangement with an affiliate of a registered dealer would be classified as a “connected issuer”, so that at least one independent underwriter would be required in a syndicate. The independent underwriter would have to underwrite at least 20% of the offering or receive at least 20% of the total fees. The final report also goes further than the consultation report by recommending a ban on certain restrictive clauses in engagement letters (such as “right to act” and “right of first refusal” clauses) where a registrant of an affiliated lender provides capital markets services to an issuer.
  • Although the Taskforce states that these recommendations are intended to address concerns regarding coercive tied selling (which is already prohibited under existing laws), these recommendations go much further and are aimed at helping independent investment dealers gain a larger share of capital markets and M&A advisory mandates.
• Increase access to the shelf system for independent products. Bank-owned dealers would be required to include new products proposed for their shelf by their dealing representatives, unless there is a reasoned basis for exclusion. Dealers who sell proprietary products would have to provide the OSC with quarterly reports on proprietary versus independent products on their shelf and conduct limited market checks regarding their proprietary products every year.

The final report includes several new recommendations relating to capital-raising, including the following.

• Give the OSC additional designation powers. To provide greater regulatory certainty regarding novel products including crypto assets and derivatives, the OSC would be given powers to designate crypto assets and other instruments as securities and/or derivatives (and conversely, to designate certain assets or instruments not to be securities or derivatives).
• Reduce red tape for Canadian institutional investors seeking to participate in international offerings. An exemption from certain conflicts of interest disclosure requirements, which currently may be acting as a barrier to Canadian institutional investors’ participation in international offerings, should be adopted.
• Amend IIROC’s rules to harmonize with U.S. rules for cross-border bought deals. IIROC’s UMIR 6.4 should be amended to exempt certain large cross-border bought deal transactions from the requirement to execute on a marketplace, provided that there is appropriate transparency such as a press release, and the OSC and IIROC should study whether further harmonization with U.S. rules is warranted.

Continuous disclosure

• Adopt an access equals delivery model for disclosure documents within six months. An access equals delivery model should be the default approach for all issuers’ disclosure documents including prospectuses, financial statements and MD&A and an electronic delivery model should be adopted for all other documents that investors receive, such as meeting-related materials. The Taskforce recommends that Ontario adopt the access equals delivery model within six months and urges other CSA members to adopt a similar model.
• Require enhanced climate-related disclosure. All non-investment fund reporting issuers should be required to provide: 1) the disclosures recommended by the Taskforce on Climate-Related Financial Disclosures (TCFD) relating to governance, strategy and risk management (subject to materiality); and 2) disclosure about greenhouse gas emissions according to the TCFD framework on a comply-or-explain basis. Issuers would have between two and five years to implement the requirements, depending on their market capitalization.
• Consolidate and reduce reporting requirements for issuers. If the Taskforce’s recommendations are adopted, all issuers could opt to: 1) combine their financial statements with their annual information form (AIF) and Management’s Discussion and Analysis (MD&A) as one package; and 2) satisfy material change filing requirements by filing a new release containing the information required for a material change report (instead of filing both a news release and a separate material change report). In addition, Personal Information Form (PIF) requirements for all issuers would be streamlined, certain reporting and disclosure requirements for investment fund issuers would be streamlined and/or eliminated, and mutual fund simplified prospectuses and AIFs would be combined into a single document and updated.
• Semi-annual reporting option for smaller issuers. The Taskforce recommends that the OSC work with the CSA to permit smaller issuers (with annual revenue of less than $10 million) and a post-IPO or RTO continuous disclosure record of at least 12 months to file their financial statements semi-annually instead of quarterly, provided that disinterested shareholders pre-approve this election and approve it every three years thereafter. Issuers electing to file semi-annual financial statements would not be able to take advantage of the alternative public offering model described above.

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¹ A link to the final report is available here.

² Read our bulletin on the consultation report here and Torys submission to the Taskforce here.

³ A link to the CSA’s response is included here.