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This insight updates an earlier article posted on July 11, 2016 to clarify the requirements to file an early warning report.

In theory calculating when early warning reports are required to be filed under Canadian securities law sounds simple, but in practice it can be quite complicated. This article attempts to make that task a little less confusing.  In any event, if you are close to any reporting thresholds before buying or selling any further shares or convertible securities you should seek legal advice from a legal professional experienced in this area so that all relevant facts can be ascertained and proper legal advice provided.

General Requirements

Generally speaking, the early warning reporting system under Canadian securities laws is designed to inform the marketplace immediately of the following events:

(a)   10% Ownership:  If a reporting person acquires securities of a reporting issuer such that the reporting person then beneficially owns, directs or controls 10% or more of a reporting issuer’s now current outstanding voting or equity securities;

(b)  2% Increases or Decreases: If a reporting person that was required to file a report under (a) above, subsequent to the date that the reporting person’s last report was filed, increases or decreases that reporting person’s ownership, direction or control (through one or more acquisitions or dispositions) by 2% or more of a reporting issuer’s now current outstanding voting or equity securities; or

(c)   Decreases to Less than 10% Ownership:  If a reporting person that was required to file a report under (a) above, subsequent to the date that the reporting person’s last report was filed, decreases that reporting person’s ownership, direction and control to less than 10% of a reporting issuer’s now current outstanding voting or equity securities.

In each of these events, the reporting person must:

(a)    News Release: Issue (and file on SEDAR) a news release, with mandated disclosure, by the opening of trading the next day; and

(b)   Early Warning Report: File an early warning report, with mandated disclosure, on SEDAR within 2 days.

That sounds pretty simple but in reality there are a series of factors that make the calculations for each of the foregoing events much more complicated in many circumstances.

Calculating the 10% Threshold

Add Convertible Securities and Joint Actors

First, the inputs for determining the percentage of a class of voting or equity securities beneficially owned, controlled or directed by a reporting person include not only shares of that class held by the reporting person but also convertible securities held by the reporting person, plus shares and convertible securities held by persons acting jointly and in concert with the reporting person. Second, the inputs for the numerator and the denominator in this calculation are slightly different.   The table below sets for the inputs for determining when the 10% threshold has been reached for any class of shares.

Note that the number of shares that the reporting person can acquire at any time upon the exercise or conversion of any convertible securities is added to the numerator whereas only the number of shares that the reporting person can acquire within the next 60 days is added to the denominator.

Consider Issuer Actions

Now let’s make it a little more complicated.  What happens if the number of outstanding shares of the reporting issuer changes over time?

A person is exempt from the early warning requirements in connection with an increase in the percentage of outstanding shares held by the person that arises without any action being taken by the person and solely from a reduction in outstanding shares that occurs as a result of redemptions, retractions or other repurchases by the reporting issuer that affect or are offered to all shareholders of the relevant class.

Similarly, a person is exempt from the early warning requirements in connection with a decrease in the percentage of outstanding shares held that arises without any action being taken by the person and solely from an increase in outstanding shares that occurs as a result of treasury issuances of shares by the reporting issuer.

However, a person may rely upon the aforementioned exemptions only until the person undertakes any transaction (i.e. any acquisition or disposition of shares or convertible securities) that changes the shareholding percentage of the person.

The table below provides a short summary of the reporting requirements in a few different circumstances:

Calculating the 2% Threshold

Two Tests

The 2% threshold calculation is actually two separate calculations, as a reporting person who was previously required to file early warning disclosure upon exceeding the 10% threshold is required to make disclosure each time the reporting person, or any person acting jointly or in concert with the reporting person, acquires or disposes beneficial ownership of, or acquires or ceases to have control or direction over, either of the following:

(a)   Shares in an amount equal to 2% or more of the issuer’s outstanding shares; or

(b)  Shares convertible into 2% or more of the issuer’s outstanding shares.

Calculating the First Test

For the first test, as person needs to include both shares currently owned and shares that can be acquired within the next 60 days upon the exercise or conversion of any convertible securities (in the latter case these are included in both the numerator and the denominator). It should be noted however that, depending on the terms of the convertible securities, it is likely that the number of shares that the person can acquire upon the exercise or conversion of any convertible securities within the next 60 days will change over time and therefore a reporting requirement may be triggered upon the passage of time. The table below sets for the inputs for this first test.

*After calculating the percentage ownership based on this formula, the person will compare its percentage ownership to its percentage ownership when it initially filed its early warning report. If the change in ownership (increase or decrease) is greater than 2%, the person is required to issue a news release and file an early warning report.

*Note that if a reporting person commences acting jointly or in concert with another person after the date of the reporting person’s last report, all securities owned by the joint actor should be included in this calculation, not just those acquired since the date of the reporting person’s last report.

Calculating the Second Test

For the second test, a person includes in the numerator shares that can be acquired at any time, by either the reporting person or any joint actors, upon the exercise or conversion of any convertible securities whereas only the number of shares that can be acquired within the next 60 days, by either the reporting person or any joint actors, are added to the denominator. The table below sets forth the inputs for this second test.

*Again, note that if a reporting person commences acting jointly or in concert with another person after the date of the reporting person’s last report, all securities owned by the joint actor should be included in this calculation, not just those acquired since the date of the reporting person’s last report.

Consider Issuer Actions

Again, let’s make it a little more complicated by considering what happens if the number of outstanding shares of the reporting issuer changes over time. As stated earlier, a person is exempt from reporting changes arising solely by issuer actions until the person makes a further transaction that changes the person’s shareholding percentage.

The table below provides a short summary of the reporting requirements in a few different circumstances:

Reliance on Reported Outstanding Shares

In determining its percentage of a class of shares held for the purposes of the early warning requirements, a person may rely upon information most recently provided by the issuer of the shares in a material change report or in its MD&A, whichever contains the most recent relevant information.

Notwithstanding the foregoing, a person may not rely on that information filed by the issuer if the person has knowledge both (i) that the information filed is inaccurate or has changed and (ii) of the correct information.

Who is a Joint Actor?

For these purposes, it is always a question of fact as to whether a person is acting jointly or in concert with another person but, without limiting the generality of the foregoing:

(a)  Deemed Joint Actor: A person that, as a result of any agreement, commitment or understanding with the first person or with any other person acting jointly or in concert with the first person, acquires or offers to acquire securities of the same class as those subject to the acquisition or offer to acquire by the first person is deemed to be acting jointly or in concert with the first person; and

(b) Presumed Joint Actor: A person that, as a result of any agreement, commitment or understanding with the first person or with any other person acting jointly or in concert with the first person, intends to exercise jointly or in concert with the first person or with any person acting jointly or in concert with the first person any voting rights attaching to any securities of the issuer whose securities are the subject of the acquisition or the offer to acquire is presumed to be acting jointly or in concert with the first person.

Restrictions on Purchases

During the period commencing on the occurrence of an event in respect of which an early warning report is required and terminating on the expiry of one business day from the date that the early warning report is filed, neither the acquiror of the shares nor any joint actor of the acquiror shall acquire or offer to acquire beneficial ownership of any securities of the class in respect of which the early warning report was required to be filed or any securities convertible into securities of that class. This requirement does not apply to a person that has beneficial ownership of, or control or direction over, securities that, together with that person’s joint actors, comprise 20% of more of the outstanding securities of the class.

Sample Calculations:

As you can see, it can be quite complicated to determine when a person must comply with the early warning reporting requirements.  Hopefully the foregoing discussions and tables together with the sample calculations in Appendix “A” will make the rules a little easier to follow.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other securities law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Linmac LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.