Changes to Canadian shelf prospectus distribution rules
Many senior Canadian issuers access the Canadian capital markets through the shelf prospectus system, which allows an issuer which meets certain criteria to issue securities over a two-year period. A shelf prospectus is filed qualifying the total amount of securities which the issuer expects to issue over a two-year period and the issuer then issues securities in tranches depending on market conditions and its needs.
Foreign issuers often access the Canadian capital markets by establishing a medium term note program through a single purpose financing subsidiary. The medium term notes are typically issued under a base shelf prospectus and guaranteed by the foreign parent. For example, DaimlerChrysler Canada Finance qualified C$5 billion ($3.2 billion) of notes last year and immediately issued C$750 million (representing the largest single Canadian medium term note offering to date). These notes are guaranteed by the ultimate German parent corporation of the issuer, DaimlerChrysler.
Set out below are the principal differences between the procedures relating to shelf distributions under the new National Instrument 44-102 – Shelf Distributions (NI 44-102) and its predecessor, National Policy No. 44 (NP44). NI 44-102 came into force on December 31 2000. These changes apply not only to base shelf prospectuses relating to medium term notes but also to base shelf prospectuses generally.
NI 44-102 involves three new provisions not contained in the shelf provisions in NP44:
- first, NI 44-102 expands access to the shelf procedures to permit distributions of cash settled derivatives and asset-back securities;
- second, NI 44-102 permits shelf prospectuses that contemplate both equity and debt offerings without specific allocation between them (subject to an obligation to issue a press release where discussions occur with an underwriter concerning the distribution of a tranche of equity securities under an unallocated shelf prospectus); and
- third, NI 44-102 provides that an existing shelf prospectus cannot be used to distribute securities if the issuer, at the time of proposed distribution, no longer meets the (general) prompt offering system eligibility criteria.
This International Briefing is a repeat of the article which first appeared in the April issue of IFLR. Due to a printing error, the last few words were unfortunately missing in the previous version. IFLR apologises for any inconvenience or confusion caused.
IDA disclosure standards for valuations
To protect minority shareholders, the Ontario Securities Commission regulates insider and issuer bids, and going private and related party transactions through Rule 61-501. Unless otherwise exempt, such a bid or transaction requires: (a) the approval of a majority of an issuer's minority shareholders; and (b) the delivery to shareholders of either a formal valuation or fairness opinion (professional opinions) prepared by an independent valuer.
The Investment Dealer's Association of Canada (the IDA) – the self-regulatory organization governing investment dealers – has developed disclosure standards for professional opinions that all members must comply with when preparing such opinions under Rule 61-501.
The IDA standards provide that professional opinions prepared under Rule 61-501 must contain disclosure sufficient to enable directors and security holders of an issuer to understand the principal judgments and underlying reasoning of the valuer, so as to form a reasonable view of the valuation conclusion or opinion as to fairness expressed therein.
Formal valuations must disclose, among other things:
- the identity and credentials of the valuer, including relevant experience, the financial terms of its retainer and its relationships with interested parties;
- the scope of the review conducted;
- a description of:
- the subject matter of the valuation; and
- the reasons for the valuation approach and the methodologies adopted, and a comparison thereof;
- any distinctive material value that might accrue to interested parties;
- discussion of prior offers or valuations, or other material expert reports considered; and
- annual and interim financial information and a discussion of material changes therein.
Additionally, disclosure for fairness opinions requires discussion of factors that the valuer considered important in its analysis and the reasons for its opinion as to the transaction's fairness.
The IDA standards also provide a mechanism whereby concern over commercially sensitive information contained in professional opinions can be resolved by a special committee of the issuer's independent directors.
With these disclosure standards, professional opinions will come under greater scrutiny in the future.