Staff of the Ontario Securities Commission has released Staff Notice 51-720 – Issuer Guide for Companies Operating in Emerging Markets. The Guide is the result of staff’s review of Ontario reporting issuers whose management is principally based outside Canada or whose principal operations are located in emerging markets, many of which are resource-sector issuers. The Guide provides guidance on corporate governance and disclosure matters that are particularly significant to those issuers, including examples of the level of detail recommended to satisfy the disclosure standard described in the Guide. While focused on emerging market issuers, the Guide is relevant to underwriters and other advisers working with those issuers and has general application for all Ontario reporting issuers. Issuers and their advisers can expect that the Guide, and the standards it describes, will inform staff’s consideration of disclosure when conducting continuous disclosure reviews, prospectus reviews and enforcement investigations and proceedings.
In the Guide, staff identifies four broad areas of concern relating to emerging market issuers:
- Corporate governance. OSC staff is concerned that boards and audit committees may sometimes be deficient in their level of engagement in overseeing management and in their sense of responsibility for the stewardship of emerging market issuers. Issuers can only make meaningful disclosure when management and the board thoroughly understand the business environment in which the issuer is operating. This will require, for example, that they have appropriate language skills and understand the political, legal and regulatory framework in which they conduct business. Disclosure relating to these matters should be detailed and specific, not general. In particular, non-Canadian directors must take steps to inform themselves about Canadian regulatory requirements and priorities.
- Corporate structures. Emerging market issuers may employ complex corporate structures, for example, to comply with foreign ownership restrictions. If issuers use special purpose entities or structures with multiple layers, risks associated with the separation of the board and management may be exacerbated. Issuers’ disclosure should explain corporate structures in detail and why complex structures are necessary to facilitate operations; it should also describe the risks associated with them and the steps taken to monitor and control those risks.
- Related party transactions. Related party transactions pose particular risks for emerging market issuers because of differences between Ontario’s and foreign business practices and rules. Disclosure regarding a related party transaction should identify with specificity the parties and their relationships to the issuer, and should clearly describe the business purpose of the transaction, the financial impact of the transaction and the nature of ongoing obligations.
- Risk management and internal controls. The final area of concern encompasses four matters: identifying and disclosing risks, the sufficiency of internal controls, working with experts, and oversight of the external auditor. OSC staff is concerned that various risks relevant for emerging market issuers are not always appropriately identified, understood or managed by the board. The Guide states that issuers must disclose the risks specific to their foreign operations and the controls applicable to them, including political factors, risk of corruption or nationalization and expropriation, and any legal restrictions affecting ownership or access to assets. Experts can be used to address these particular risks, provided that they have the necessary local expertise and that appropriate disclosure is made. With respect to auditors, the concern expressed by staff in the Guide relates to the expertise of the auditor in respect of the foreign market – language capabilities, a presence in that market and sufficient knowledge of the accounting and tax rules.
For each of these areas, the Guide sets out a series of questions that a board of directors should consider in determining whether they have appropriately assessed and disclosed any related risks.
The Guide indicates that the OSC is working with the Canadian Public Accounting Board on areas of mutual concern affecting emerging market issuers. The OSC is also involved in the Investment Industry Regulatory Organization of Canada’s ongoing review of underwriting due diligence standards – a review driven by emerging market issuer considerations. In addition, the Guide notes that in November the TSX and TSX-V will be publishing additional guidance relating to listings for emerging market issuers.
Staff indicates that the risk factors identified in the Guide are already informing the process by which issuers are selected for continuous disclosure reviews, and these factors will be incorporated in the prospectus review process. Staff states in the Guide that the guidance provided is not intended to create new legal obligations or modify existing ones but is, rather, a statement of existing requirements. Whether or not the Guide sets out disclosure standards that exceed current ones, market participants should now expect that disclosure for emerging market issuers will be measured against this standard. Emerging market issuers should also expect that staff will use the standards set out in the Guide when considering disclosure in the context of future enforcement investigations and proceedings.
Although the Guide focuses on emerging market issuers, other market participants should also consider the standards set out in the Guide when assessing the disclosure practices of issuers with which they are involved.
The guide is available here.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2019 by Torys LLP.
All rights reserved.