Law Clerks' Review

“And Just Like That”: Mr. Big’s big mistake and other take aways

By: Fasken

This blog post has been written by YVONNE MAZURAK, Associate at Fasken LLP.

Like many others, I spent a good chunk of my time off over the holidays catching up on “And Just Like That”, aka the reboot of the decade long 90s hit show which followed the lives of Carrie Bradshaw—a 30-something columnist living in NYC—and her three best friends.

For those unfamiliar, the reboot continues following Carrie and her friends, now in their 50s, as they navigate new life events and challenges, one of which to the shock of long-time fans, is the death of Carrie’s husband, “Mr. Big” (I am hoping by now there’s no longer a need for spoiler alert disclaimers.)

While much has been written about the show in other respects, as an estate planning lawyer it naturally had me considering Carrie’s experiences following the loss of her husband.

Some of my thoughts:

1. Estate planning is not just about the deceased. One episode begins with Carrie sitting in a boardroom at a law firm attending a reading of Mr. Big’s Will, where she discovers that he had left a $1 million legacy to his ex-wife. As far as Carrie is aware, he had not spoken to his ex-wife in many years and, unsurprisingly, Carrie is left speechless. The lawyer reading the Will comments (rather insensitively, I might add): “When people have unfinished business, they tend to throw money at it.”

Much of this scene was of course created for dramatic effect, but nevertheless, to use the famous Carrie-ism: “I couldn’t help but wonder”, shouldn’t Mr. Big have known that estate planning is not just about the person doing the planning?

Estate planning is often also about the relationships between everyone involved. It is an opportunity to make decisions that will make an impact on one’s loved ones and proactively address foreseeable pressure points. As such, the relationship between beneficiaries can be a relevant consideration for a client when making a number of decisions including, for example, when determining:

• Who to appoint as Executor(s) – If multiple individuals are named (for example, all of the client’s adult children), is there any potential for tensions to develop between them? If so, how should they be directed to make decisions in their roles as executors (and with that, resolve disagreements in the event of a deadlock)?
• Whether to attach conditions to gifts for some (but not all) beneficiaries – There may be valid reasons for doing so, however, the beneficiaries might feel slighted by the decision (which could result in them challenging the validity of the Will), in which case, should the client consider alternative strategies for addressing that risk?
• How to pass down a family cottage – While many have good memories of time spent at their family cottage, conflict with respect to its use and ongoing maintenance is not unheard of. If these types of disagreements are foreseeable, should the beneficiaries be asked to enter into a co-ownership agreement before receiving an interest in the property?

2. One’s estate plan need not be kept a secret. Some degree of conflict between beneficiaries may be unavoidable, but transparency and open communication can be an effective strategy for dealing with the potential for hard feelings in the future and, in turn, reducing the likelihood of litigation. At the very least, had Mr. Big been open with Carrie about his intentions with respect to the gift for his ex-wife, he could have saved her (already overwhelmed by grief) from losing sleep over what the “unfinished business” may be.

3. Managing one’s estate should not be left to chance. Mr. Big’s death came as a shock to all of us. Hopefully, Carrie learned from this experience the importance of having a Will or re-visiting the one she already has in place. Carrie, who once famously stated in the original show, “I prefer my money where I can see it…in my closet”, might also be well advised to have her Will refer to a letter of wishes detailing how her fabulous designer clothes and accessories should be distributed after her death. That way, she would be able to revisit and revise such letter as often as she says goodbye to (and replaces) any pieces that fall out of style.

While flexibility should be worked into a Will to avoid the need to amend it nearly as often as Carrie switches up her wardrobe, it is important to revisit one’s estate planning on a fairly regular basis and certainly after major life events or developments, such births in the family, divorce, marriage and considerable changes to assets. In Mr. Big’s case, depending on when he last revisited his Will, it is possible that not only his family status had since changed (was he already married to Carrie at that point?), but also his financial situation (did he ever acquire real property outside of New York?) and his wishes (had he changed his mind about leaving the gift to his ex-wife and simply not gotten around to changing his Will?). I suppose we’ll never know.

Thanks for reading!

*Reprinted with permission.

Important Estate Planning Changes for Couples effective January 1

By: Margaret Rintoul from Blaney McMurtray

Effective January 1, 2022, important changes for estate planning come into effect.  Anyone who has separated from their spouse, is living in a common law relationship, or who intends to marry in 2022 needs to be aware of these changes to the laws of Ontario. 

Previously the Ontario law relating to wills and distribution of estates where there is no will, had four major elements:

1. Marriage revoked an existing will and left the individual without a valid will.
2. A separated but not divorced spouse remained entitled to share in an estate if he/she was named in a will or if there was no will (intestacy)
3. Divorce did not revoke an existing will, but created the situation where a divorced spouse named as an estate trustee or beneficiary was treated as having died before the maker of the will (the testator)
4. Common-law spouses (living together and not married) had no automatic rights to share in each other’s estates

As of January 1, 2022, two of these situations change significantly.  On January 1, 2022, the changes are:

1. Marriage occurring on or after January 1, 2022 does not revoke an existing will.
2. Spouses that have been separated but not divorced for at least 3 years before a death that occurs after December 31, 2021 or have a separation agreement, are treated the same as divorced spouses.  This means that a separated spouse who is named as an estate trustee or a beneficiary in a will, does not continue to be entitled to the benefits under the will.  If there is no will, there is no entitlement to share in the estate.     

A positive outcome from these changes is that couples who have been living together and decide to marry or couples who have otherwise made satisfactory estate planning arrangements do not have to change their wills as soon as they get married.  There will be no need for wills done just before marriage to say that they are done “in contemplation of marriage.” 

The change in the law is not retroactive, so anyone who married before January 1, 2022 is still caught under the previous rules and therefore does not have a will, unless they made a new one after marriage or before marriage and specifically in contemplation of marriage. 

For anyone who is getting married in 2022, and already has a will, that will remains in effect. If it does not already have provisions for the person who is now the spouse, there are no provision for the new spouse.

For separated spouses, the change to exclude a separated spouse from a benefit under a will or from a share of the estate where there is no will, could remove some of the pressure to do a new will after a separation.  If there is a reason why the separated spouse should continue to be the estate trustee or to receive benefits, the will must be specific about it.   The changes do not affect beneficiary designations on life insurance and registered plans like RRSP and RRIF accounts.  Those designations must still be changed if the separated spouse is to be excluded from receiving the benefits.  The person who separated but did not divorce and then entered into a common-law relationship still has to review their estate planning documents.  While the separated spouse will not share in the estate, the common-law spouse does not get any new rights.  None of the changes have the effect of validating what often seems to be a commonly held belief that if a couple lives together for three years, they are as good as married. 

The bottom line is that couples who are getting married, are separating, or who are in a long-term common-law relationship still need to get proper estate planning advice to be sure that they have made appropriate provisions for each other and other family members.

Article published by Blaney McMurtry on January 4, 2022.

*Reprinted with permission.

TSXV Modernizes Security Based Compensation Rules

By: Ben Schach and Brendan Kennedy from Stikeman Elliott LLP

The TSX Venture Exchange’s (TSXV) incentive stock option policy was amended in late 2021 to cover a variety of security based compensation commonly used as compensation tools, including deferred share units, performance share units, restricted share units and stock appreciation rights.

• Issuers with existing security based compensation plans that do not comply with the new policy will need to amend such plans the next time they are placed before shareholders for approval.
 
• New categories of security based compensation plans are now permitted by the TSXV, including a hybrid category where a portion of the plan maximum is fixed and a portion is rolling, and a fixed stock option plan that does not require shareholder approval.
 
• Security based compensation can no longer be granted under a plan that has not received the requisite annual shareholder approval.
 
• Cashless and net exercise of security based awards are now permitted by the TSXV.

On November 24, 2021, the TSXV overhauled its policy concerning security based compensation plans. In addition to stock options, the new Policy 4.4 – Security Based Compensation (Policy 4.4), formerly entitled "Incentive Stock Options" (the Former Policy), now explicitly refers to additional forms of security based compensation, including deferred share units, performance share units, restricted share units and stock appreciation rights.

Plans and Calculation

The Former Policy permitted only two types of stock option plans:

• a "rolling" plan pursuant to which the maximum number of stock options issuable under the plan is limited to 10% of the listed (i.e. issued and outstanding, undiluted) shares of the issuer at the time of any stock option grant (a Rolling 10% Plan); or
 
• a "fixed" plan pursuant to which the maximum number of stock options issuable under the plan was a specified number of shares, but limited to a maximum 20% of the listed shares of the issuer as of the date of the implementation of such plan (a Fixed 20% Plan and together with the Rolling 10% Plan, the Previous Plans).

Under the Former Policy, the TSXV discouraged issuers from employing more than one plan.

Policy 4.4 now affords issuers the opportunity to utilize "security based compensation plans" fitting into one of four categories. In addition to the Previous Plans, issuers are now also permitted to employ:

• a hybrid plan with both a rolling and fixed component pursuant to which stock options equaling up to 10% of the listed shares of the issuer at the time of any stock option grant may be granted and grants of all other security based compensation, excluding stock options, is fixed at a specified number of shares but limited to a maximum of 10% of the listed shares of the issuer as of the date of the implementation of such plan (a Hybrid Plan); and/or
 
• a fixed plan pursuant to which only stock options may be granted and under which the maximum number of stock options issuable under the plan is limited to 10% of the listed shares of the issuer as of the date of the implementation of such plan (a Fixed 10% Stock Option Plan).

Rather than discouraging an issuer's use of multiple security based compensation plans, the TSXV now permits issuers to implement plans as they see fit. If the issuer complies with all the provisions of Policy 4.4, an issuer may now implement a stock option plan, a DSU plan, a PSU plan, an RSU plan, an SAR plan, a stock purchase plan and/or any other security based compensation plan that is acceptable to the Exchange and that, in the aggregate, fall within one of the four foregoing categories. However, capital pool companies and NEX issuers can still only grant stock options, and investor relations services providers can also only receive stock options with specified vesting requirements.

Provided that the requirements of Policy 4.4 are met (including the absence of a cashless exercise provision), the Fixed 10% Stock Option Plan is the only category for which shareholder approval may not be required for implementation (however, this may require disinterested shareholder approval in certain cases). Issuers are not permitted to increase the number of listed shares issuable under a Fixed 10% Stock Option Plan more than once in a 24-month period.

Any amendments to a security based compensation plan, including when the number of shares issuable under such plan is modified, require shareholder approval. Policy 4.4 also requires shareholder approval on an annual basis for a Rolling 10% Plan (much like the Former Policy) and for the rolling portion of a Hybrid Plan.

Policy 4.4 now also includes calculation guidance regarding the upper limits for each category of plan. Policy 4.4 states that where a plan provides for a payout multiplier, where the number of shares that may be issued on exercise of the security based compensation is increased based on performance measures, and/or where a plan provides for participants to receive additional security based compensation in lieu of dividends, then the maximum aggregate number of listed shares that might possibly be issued must be included in calculating the applicable plan limits.

Cashless Exercise or Net Exercise

While under the Former Policy, the exercise price of stock options was required to be paid to the issuer in cash, Policy 4.4 now permits stock options to be exercised by way of either a "net exercise" or "cash exercise".

The TSXV will permit a cashless exercise where an issuer has an arrangement with a brokerage firm pursuant to which the brokerage firm promises to advance funds to an optionholder enabling it to exercise its stock options. The brokerage firm then sells a sufficient number of shares that were subject to the option to repay the loan with the optionholder receiving either the balance of shares after the sale or cash proceeds from the balance of the shares.

For example, an optionholder holding stock options to purchase 100 listed shares exercisable at a price of $10 could be loaned $1000 to exercise such stock options. Assuming a market price of $15, and excluding the effect of commissions and taxes, the broker would receive 67 listed shares from the exercise and will sell the 67 shares in order to repay the loan made to the participant who then receives either 33 listed shares or $495 (33x$15).

A net exercise of stock options, where no cash payment is made to the issuer, is now permitted where on exercise of the stock options the optionholder receives only the number of underlying listed shares equal to the quotient of: (i) the product of the number of stock options being exercised multiplied by the difference between 5 trading day volume weighted average price (the VWAP) of the underlying listed shares and the exercise price of the stock options; divided by (ii) the VWAP of the underlying shares.

For example, an optionholder fully exercising stock options to purchase 100 shares exercisable at a price of $10 with a current VWAP of $15 would not pay the issuer any cash and instead of receiving 100 shares would receive only 33 shares.

Limits and Vesting

As in the Former Policy, the updated Policy 4.4 confirms that, absent disinterested shareholder approval in the case of individual limits, the maximum number of listed shares issuable pursuant to all grants and issuances of security based compensation to an individual or consultant in a 12-month period remains limited to 5% and 2% of the listed shares of an issuer, respectively, calculated as at the date such security based compensation is issued or granted. Persons providing investor relations activities are subject to the same 2% cap as consultants.

Where security based compensation is permitted by the TSXV to be granted or issued outside of a security based compensation plan, as discussed below, the grant or issuance of such security based compensation is not included in calculating the 5% and 2% upper limits for individuals and consultants, respectively.

Policy 4.4 now specifically sets out that, subject to certain exceptions and notwithstanding acceleration related to death or the grantee ceasing to be an "eligible participant", no security based compensation issued pursuant to a security based compensation plan may vest before the date that is one year following the date it is granted or issued.

Security Based Compensation Outside of a Plan

Under Policy 4.4, the TSXV may permit, on application by an issuer, grants or issuances of security based compensation outside of a security based compensation plan in certain enumerated circumstances (a Non-Plan Grant), including applications:

• to compensate a person providing ongoing services (excluding services for investor relations activities, promotional and market-making activities) to the issuer in listed shares and/or warrants, rather than cash;
 
• to issue listed shares in settlement of outstanding obligations (excluding reimbursement of out-of-pocket expenses, cash advances and obligations related to investor relations activities, promotional and market-making activities) owing to a person who is or has been a non-arm's length party to the issuer at any time within the immediately preceding 12 months;
 
• to grant or issue listed shares as an inducement for a person to enter into a contract of full-time employment with the issuer or in the context of a severance package or termination of employment; and
 
• from an issuer proposing to lend funds to a person for the purposes of acquiring securities.

Unless otherwise stated in Policy 4.4, each such Non-Plan Grant must be subject to disinterested shareholder approval. Shareholder approval required in connection with a Non-Plan Grant may be obtained either at a shareholders’ meeting or by obtaining the written consent of shareholders holding more than 50% of the listed shares of the issuer.

Reporting and Disclosure

The former Form 4G has been expanded to address the additional types of security based compensation that issuers may issue, and to include "snapshot" summaries of outstanding security based compensation plans and outstanding security-based compensation. It now also includes the former Form 4F (Certification and Undertaking Required from a Company Granted an Incentive Stock Option) as its Schedule "A". Further, the new Form 4G (Summary Form - Security Based Compensation) is now simply a reporting form and it will no longer be used to apply to the TSXV for acceptance of a proposed amendment to a grant of security based compensation (rather, a letter application will be required in relation to the latter).

The Form 4F certification and undertaking required from an issuer granting an incentive stock option has been repealed, as the revised Form 4G includes the substantive contents of Form 4F.

Policy 4.4 requires that every security based compensation plan and every agreement to grant or issue security based compensation to a director or officer of an issuer or to any investor relations service provider (or any amendments thereto) be disclosed to the public by way of a news release that describes, as applicable, the number of listed shares issuable under the plan, the terms of the security based compensation issued or granted and the shareholder and/or TSXV approvals that may be required in connection therewith.

Transition

All security based compensation plans filed with the TSXV prior to November 24, 2021 (each, an Existing Plan) and all security based compensation conditionally approved, granted, issued or amended prior to November 24, 2021 remain in force in accordance with their existing terms.

Any Existing Plan that is to be put before an issuer's shareholders for approval (including the annual approval of a Rolling 10% Plan or the approval of an amendment) must comply with the new Policy 4.4.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice. This article was first published on Stikeman Elliott LLP’s Knowledge Hub and originally appeared at www.stikeman.com. All rights reserved.

*Reprinted with permission.

Enforcement of Foreign Judgments in Canada: “Carry On” With Care

By: Harvey Morrison, QC, Andrew Kinley and Monika Berenyi from McInnes Cooper

On November 4, 2021, the Supreme Court of Canada clarified the law regarding when a judgment debtor “carries on business” for the purpose of the recognition and enforcement of foreign judgments in Canada. In H.M.B. Holdings Limited v. Antigua and Barbuda, the Court decided that a default judgment given in B.C. in an action to enforce a judgment originally issued in Antigua could not be registered in Ontario because the judgment debtor didn’t carry on business in B.C. at the time of the B.C. legal action.

As more businesses and entities globalize operations and (particularly in the wake of the COVID-19 Pandemic) grow their online presence, their exposure to foreign judgments will increase. Although the term “carry on business” is still broad and slightly uncertain, the Court’s decision makes it easier to discern when a business or entity is “carrying on business” in Canada for the purposes of enforcing a foreign judgment against it in Canada. The decision suggests that operating partially online in Canada likely isn’t enough to expose it to the enforcement of a foreign judgment in Canada. However, the maintenance of physical business premises is consistently regarded as a compelling factor in determining whether a party is “carrying on business” in a jurisdiction. Businesses and entities with even a moderate physical presence in Canada will be a target for foreign judgment enforcement. Such businesses and entities are wise to consider ways to structure their business operations to mitigate their exposure to foreign judgments.

Here’s a recap of how foreign judgments can be enforced in Canada and the Court’s decision in H.M.B. Holdings Limited v. Antigua and Barbuda.

The Enforcement of Foreign Judgments

A court can issue a monetary judgment against the unsuccessful party (the judgment debtor) at the end of legal proceedings. However, the issuance of a judgment doesn’t mean the successful party (the judgment creditor) automatically receives monies; it must still enforce the judgment against the judgment debtor’s assets. This is a more complex and difficult task when the judgment debtor’s assets are located in a foreign jurisdiction. In Canada, there are two main options to enforce a foreign judgment:

• Enforcement Action. The judgment creditor can commence an action for enforcement in the province in which the judgment debtor’s assets are located.

• Reciprocal Enforcement Legislation. The judgment creditor can use provincial or territorial reciprocal enforcement legislation, such as the Ontario Reciprocal Enforcement of Judgments Act (REJA), to register and enforce the judgment where the judgment debtor’s assets are located. There is similar legislation in all provinces and territories. This option is much easier, but not always available. Not all jurisdictions are reciprocating states, the reciprocating legislation varies by jurisdiction, and there are defences to registration – including that the judgment debtor doesn’t “carry on business” or reside in the jurisdiction.

The Case

Antigua, a Caribbean country, expropriated property owned by H.M.B. Holdings Limited, an Antigua corporation. H.M.B. sued Antigua in Antigua for compensation. The Antiguan Court ordered Antigua to compensate H.M.B. Subsequently, H.M.B. sued Antigua in British Columbia to enforce the Antiguan judgment, and obtained a default judgment against Antigua. A year later, H.M.B. applied to enforce that B.C. judgment in Ontario pursuant to Ontario’s REJA. Antigua opposed this application, arguing it didn’t carry on business in B.C. at the time of the B.C. legal action. Antigua didn’t have a physical presence in B.C.: there was no consulate, office, employees, or direct marketing within the province. However, Antigua did have contracts with representatives for a citizenship investment program (CIP). The Ontario Superior Court and the Ontario Court of Appeal sided with Antigua, and dismissed H.M.B.’s REJA application. At the Supreme Court of Canada the issue was whether Antigua “carried on business” in B.C. at the time of the B.C. legal action. The Supreme Court of Canada agreed it did not, and as a result H.M.B. couldn’t register the B.C. judgment under Ontario’s REJA:

The Presence Test. To determine if a judgment debtor is carrying on business in a jurisdiction, a court must assess whether the judgment debtor has some actual direct or indirect presence in the jurisdiction accompanied by a degree of activity that is sustained for a period.

• Physical Presence. A physical presence – like the maintenance of physical premises – is compelling evidence that the judgment debtor is carrying on business in the jurisdiction.

• Virtual Presence. However, a virtual presence that falls short of an actual presence is likely not carrying on business in the jurisdiction.

Application of the Test. The Court concluded Antigua was not “carrying on business” in B.C. during the B.C. legal action: it had no physical presence in B.C., it didn’t carry on any sustained business activity in B.C., and the CIP representatives weren’t agents of Antigua (they carried on their own business independent of Antigua), and the CIP had no particular focus on attracting investors from B.C.

Please contact your McInnes Cooper lawyer or any member of our Litigation Team @ McInnes Cooper to discuss how we can help you mitigate your exposure to foreign judgments in Canada.

McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

© McInnes Cooper, 2021. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at publications@mcinnescooper.com to request our consent.

*Reprinted with permission.

OSC Issues Order to Provide Exemption to Federal Financial Institutions from Non-GAAP Disclosure Requirements

By: Stikeman Elliott LLP

The Ontario Securities Commission (OSC) recently made an Order to exempt reporting issuers that fall under the definition of “federal financial institution” under the Bank Act from the application of National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (NI 52-112) under certain circumstances. Securities regulators in British Columbia, Alberta, Manitoba, Saskatchewan, Nova Scotia, Newfoundland & Labrador, Prince Edward Island and Yukon have also made similar orders.

As we discussed in a June post, NI 52-112, which was adopted earlier this year, requires certain reporting and non-reporting issuers that include non-GAAP and certain other financial measures in public disclosure to provide additional information to help investors understand the context of such measures. The requirements are intended to provide investors with transparency while reducing the uncertainty for issuers in regards to disclosure obligations.

Under the OSC’s Order, eligible issuers are exempt from NI 52-112 in respect of a disclosure of a specified financial measure pursuant to an OSFI Guideline where: (i) the OSFI Guideline specifies the composition of the measure and the measure was determined in compliance with that OSFI Guideline; and (ii) in proximity to the measure, the eligible issuer discloses the OSFI Guideline under which the measure is disclosed. “Eligible issuer” in the Order is defined to mean a reporting issuer that “is, or that has a subsidiary or an affiliate that is, a federal financial institution subject to OSFI Guidelines”. A “federal financial institution” is defined in reference to the Bank Act (Canada), and generally includes banks, cooperative credit associations, trust companies and insurance companies.

The conditions for the exemption mirror the existing exception under section 4(1)(e) NI 52-112 in respect of disclosure of a specified financial measure that is required under law or by an SRO of which the issuer is a member. According to the OSC, the Order is intended to reduce the burden for eligible issuers subject to OSFI Guidelines “since sufficient disclosure exists surrounding these measures.”

The Order came into effect on December 2, 2021, and expires on the earlier of June 2, 2023 and the effective date of rules that include an exception to the application of NI 52-112 based on disclosure of a specified financial measure pursuant to an OSFI Guideline.

For more information, see Ontario Instrument 52-502 Exemption from National Instrument 52-112 Non-GAAP and Other Financial Measure Disclosure (Interim Class Order).

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice. This article was first published on Stikeman Elliott LLP’s Knowledge Hub and originally appeared at www.stikeman.com. All rights reserved.

*Reprinted with permission.

OSC Sets Out Interpretative Guidance in its Corporate Finance Branch Annual Report for 2021

By: Christi Devenyi and Laura Levine from Stikeman Elliott LLP

The OSC Corporate Finance Branch’s annual report provides an overview of its operational and policy work for fiscal 2021, providing timely guidance for market participants.

The Ontario Securities Commission (OSC) Corporate Finance Branch has published its annual report (Report) which sets out the OSC’s expectations and interpretation of regulatory requirements with respect to capital raising and continuous disclosure matters. The Report is based on the work conducted by the OSC during the fiscal year ended March 31, 2021, particularly with respect to the 1,100 reporting issuers overseen by the OSC, as principal regulator. Notably, in fiscal 2021, 574 prospectuses were filed in Ontario, which represents a nearly 50% increase compared to 2020, in part due to the increase in activity in the cannabis and psychedelics industries. Technology replaced real estate in the top three most active industries, joining cannabis and mining. Based on market capitalization, banking, mining and technology industries remain the largest industries, representing 50% of the reporting issuers under the OSC’s mandate.

Guidance for Issuers

As in previous years, the Report provides helpful guidance and reminders to market participants with respect to a number of topics:

Primary Business Financial Statements

As previously discussed,on August 12, 2021, the CSA proposed changes to Companion Policy 41-101CP to National Instrument 41-101 General Prospectus Requirements related to primary business requirements in an effort to harmonize the financial statement requirements for long form prospectuses where the issuer has made, or proposes to make, an acquisition. While the initial proposal did not include a timeline for adoption of the new guidance, the Report indicates that the proposed changes are expected to become effective in July 2022. The proposed changes are stated to be designed to provide additional guidance on the interpretation of primary business and predecessor entity, including when financial statements would be required. In addition, the proposal:

• clarifies when an issuer can use the optional tests to calculate the significance of an acquisition, and when an acquisition of mining assets would not be considered an acquisition of a business for securities legislation purposes; and
 
• provides some guidance in circumstances when additional information may be necessary for the prospectus to meet the requirement to contain full, true and plain disclosure.

Non-GAAP Financial Measures

National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (NI 52-112), came into force on August 25, 2021, replacing prior CSA guidance with respect to non-GAAP financial measures. As we discussed earlier this year, NI 52-112 addresses disclosure requirements with respect to non-GAAP financial measures, non-GAAP ratios, and other financial measures (e.g., capital management measures, supplementary financial measures, and total of segments measures, as defined in NI 52-112). While NI 52-112 introduces new disclosure requirements if non-GAAP financial measures are disclosed outside of financial statements, NI 52-112 has substantially incorporated the disclosure guidance from CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures.

As a reminder, the new disclosure requirements in NI 52-112 apply to issuers’ disclosures for financial years ending on or after October 15, 2021. Practically speaking, this means that for an issuer with a calendar year end (December 31), the first disclosure documents that will need to comply with NI 52-112 will most likely be the reporting issuer’s annual MD&A and earnings release (non-venture).

Distributions Out

As previously discussed, OSC Rule 72-503 Distributions Outside Canada (the Rule) was introduced in 2018 in order to facilitate cross-border offerings by removing the duplicative application of Ontario prospectus requirements where offerings to an investor outside Canada are made in material compliance with the securities laws of the foreign jurisdiction. The exemptions provided in the Rule are popular, with the OSC reporting 620 Reports of Distributions Outside Canada submitted in Fiscal 2021. While the Rule has proven useful to issuers, the OSC has observed certain distributions outside Canada that appear to undermine existing hold periods or provide an unfair advantage to foreign-based dealers. The OSC reminds issuers of the guidance in Companion Policy 72-503 Distributions Outside Canada, which provides that:

• issuers, selling security holders, underwriters and other participants distributions made in reliance on the Rule are expected to take sufficient measures to make it reasonable to conclude that the offered securities come to rest outside Canada (meaning that it should be unlikely that securities will be redistributed back into Canada by an original purchaser outside Canada that has acquired the securities with a view to distribution, rather than investment intent);
 
• the Rule’s exemptions are intended only for distributions being made in good faith outside Canada; and
 
• where the OSC becomes aware of conduct that may bring the reputation of Ontario’s capital markets into disrepute, it may assert its jurisdiction and exercise its powers against the above-mentioned participants in the distribution.

The OSC may exercise its discretionary authority to cease trade securities, make orders to prevent conduct contrary to the public interest, and make regulations to foster fairness, efficiency and confidence in capital markets irrespective of whether there is a “distribution” in Ontario in breach of the prospectus requirement in section 53 of the Securities Act (Ontario).

This guidance raises questions about the Rule’s proper interpretation and the types of practices that issuers should adopt to seek to ensure that offered securities come to rest outside Canada, particularly as the Rule’s companion policy explicitly provides that shares distributed pursuant to three of the four prospectus exemptions in the Rule are freely tradeable. Importantly, the Rule only reflects the OSC’s approach to distributions outside Canada which has historically been quite different from that taken by the other Canadian securities regulators.

Concurrent Filing of a Base Shelf Prospectus and Prospectus Supplement

In bought deal offerings, issuers typically file a short form prospectus or a prospectus supplement to an existing base shelf prospectus. However, in 2021, the OSC received several filings from issuers seeking to launch bought deal offerings by concurrently filing a preliminary base shelf prospectus and preliminary draft supplement to qualify the shares under the offering. According to the Report, issuers opted for a concurrent filing structure due to volatile market conditions caused by COVID-19 and to manage signalling risk. Further, as discussed in our blog post from June 2020 regarding the concurrent filing bought deal of WSP Global Inc., issuers may also prefer this structure in order to take advantage of the efficiency of preparing effectively one prospectus under National Instrument 44-102 Shelf Distributions while retaining maximum financing flexibility going forward with the base shelf prospectus in place.

The Report provides the following recommendations for issuers looking to take advantage of this offering structure:

• an issuer should confidentially pre-file both the base shelf prospectus and draft prospectus supplement (both are subject to review);
 
• an issuer must be cash flow positive; and
 
• the cover letter accompanying the pre-filed prospectus should include details of the expected deal timeline and submissions on how the issuer is or will be complying with the marketing requirements under both National Instrument 44-101 Short Form Prospectus Distributions and National Instrument 44-102 Shelf Distributions.

The three working-day comment review period (which has temporarily been extended to 5 working days) set out in National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions will be applied once both the preliminary base shelf and prospectus supplement have been filed.

Sufficiency of Proceeds and Financial Condition of an Issuer

OSC staff remind issuers that proceeds being raised under a prospectus, together with the issuer’s other resources, must be sufficient in order to accomplish the purpose of the offering as stated in the prospectus. As we discussed earlier this year, clear disclosure must be included in a prospectus describing the use of proceeds and the issuer’s financial condition, including any liquidity concerns. Where financial concerns are present, the OSC may request additional disclosure, such as:

• details about negative cash flows from operating activities;
 
• working capital deficiencies;
 
• net losses; and
 
• significant going concern risks.

When increased disclosure is not sufficient to address financial concerns, the issuer may be required to change the structure of an offering (by finding additional sources of financing or setting a minimum subscription, for example). The OSC may find the structure of a base shelf prospectus inappropriate where an issuer does not appear to have sufficient cash resources to continue operations or to meet developmental milestones in the next 12 months. In these circumstances, the OSC may request:

• the withdrawal of the base shelf and filing of a short form prospectus with a minimum subscription amount or fully underwritten commitment; or
 
• the arrangement of additional sources of financing.

In addition, the OSC may question a base shelf offering where the size of the offering is significantly higher than the issuer’s current market capitalization, as this might indicate a potential significant acquisition or change of business. Additional information and guidance is set out in CSA Staff Notice 41-307 (Revised) Concerns regarding an issuer’s financial condition and the sufficiency of proceeds from a prospectus offering as well as section 5.4 of National Instrument 44-102 Shelf Distributions.

Post-Receipt Pricing Prospectuses

The Report notes that there has been an increase in post-receipt pricing (PREP) prospectuses filed under National Instrument 44-103 Post-Receipt Pricing, which allows issuers to omit pricing and other related information. In order assist OSC staff with their review of PREP prospectuses, it is recommended that issuers provide the estimated amount or range of proceeds that is expected to be raised under the offering, especially for issuers that have financial concerns. When PREP prospectuses are filed with bulleted information, OSC staff will also typically request the estimated amounts for any bulleted figures.

If the OSC has financial concerns, additional requests may be made, such as including the proceeds raised in the final base PREP filed, or imposing a minimum offering amount. They may also consider the ability of the issuer to decrease the size of the distribution by 20% in determining the minimum proceeds required to address financial concerns.

Confidential Filing of Prospectuses

As previously discussed here and here, the OSC began accepting confidentially pre-filed prospectuses for review in March, 2020, and issued a press release on January 28, 2021 providing best practice guidance for confidential pre-file prospectuses. Since then, OSC staff have reviewed 88 prospectuses on a confidential basis. The Report outlines helpful guidance with respect to the confidential pre-file process:

• Issuers are reminded to carefully consider whether the draft preliminary prospectus is at an appropriate state for a confidential pre-file. A draft may not be ready for review where:
  • the disclosure falls short of the standard required for a preliminary prospectus;
   
  • there is no significant prospect of a transaction occurring in the foreseeable future; or
   
  • the terms and conditions of the offering (and any related transaction) have yet to be settled.
 
• A deal timeline should be included in the cover letter to assist OSC staff with their review.
 
• The OSC will generally not review pre-files of non-offering prospectuses (other than for SPAC qualifying transactions, which it has accepted) or prospectuses solely qualifying the issuance of securities on conversion of convertible securities.

Forward-Looking Information in a Prospectus

The Report reviewed common shortfalls and recommendations surrounding the use of forward-looking information (FLI) in a prospectus. Issuers are reminded of the following guidance:

• When disclosing FLI that spans over multiple years: Reasonable and sufficient quantitative and qualitative assumptions to support such information must be provided. The Report explains that FLI must be limited to a time period that can be reasonably estimated, which will generally be considered the end of the issuer’s next fiscal year. Where FLI is presented for multiple years updates should be provided at least annually. Issuers may be asked to disclose policies and processes in the event previously disclosed FLI is withdrawn.
 
• Where FLI is presented without sufficient support: Issuers may be asked to limit the disclosure to a shorter supportable period. OSC staff may also flag assumptions that are not supported in an issuer’s track record, such as projected aggressive growth targets without the benefit of historical experience, or the absence of detailed explanations for expected changes to financial items.
 
• Use of non-compliant disclaimers: OSC staff have specifically noted that an offering document should not include disclaimer language stating that the issuer’s auditors have not performed any procedures with respect to FLI and that the auditors disclaim any associations with FLI, as this does not meet the requirements under section 10.1 of National Instrument 41-101 General Prospectus Requirements.

Continuous Disclosure Review Program

The Report discusses the outcomes of the OSC’s continuous disclosure review program, which includes the review of an issuer’s filed documents, website and social media. Where the OSC conducted a full continuous disclosure review of an issuer, in the vast majority of cases, prospective disclosure enhancements were required as opposed to immediate action. As compared to 2020, instances where immediate action was required doubled from 13% to 30%, while instances where no action was required more than tripled from 4% to 15%.

Areas highlighted for improvement include discussion of operations in MD&A and COVID-19 disclosure. In addition, while issuers generally provide disclosure addressing the diversity requirements in National Instrument 58-101 Disclosure of Corporate Governance Practices, the format and content of the disclosure varies between issuers. Issuers should consider presenting data related to the disclosure requirements in a common format. OSC staff remind issuers that CSA Multilateral Staff Notice 58-313 Report on Seventh Staff Review of Disclosure regarding Women on Boards and in Executive Officer Positions (7th Annual Report) sets out suggested tables in order to improve the consistency and comparability of diversity disclosure. For an in-depth discussion of the 7th Annual Report, please see here.

Psychedelics

There has been an increase in the past year in the presence of issuers involved in psychedelic drugs, both for medicinal and recreational purposes. Due to the illegality of psychedelics in Canada and various countries issuers should include clear disclosure in a prospectus regarding the regulatory, licensing and legal frameworks applicable to the issuer. OSC staff want to see that risks are clearly identified, understood and managed by the board of directors. Depending on the issuer’s business, the Report explains that it may be appropriate to provide similar disclosures to the expectations set out in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities. The OSC is continuing to monitor industry developments and will be reviewing filings on a case-by-case basis to determine if any novel business models give rise to public interest concerns not appropriately addressed by disclosure. In these situations, issuers are encouraged to consult with OSC staff on a pre-file basis to discuss the appropriate level of disclosure, potential risks and other novel considerations.

General

Additional interpretive guidance provided in the Report based on trends that emerged in 2020 include:

Audit Committees

• OSC staff have noted that some issuers have inappropriately relied on exemptions in National Instrument 52-110 Audit Committees (NI 52-110) to appoint less than three members to an audit committee. NI 52-110 requires audit committees of non-venture and venture issuers to be composed of a minimum of three members. While NI 52-110 provides certain exemptions regarding independence and financial literacy, OSC staff remind issuers that there are no exemptions regarding the minimum number of audit committee members.
 
• OSC staff have also identified instances of inadequate descriptions of audit committee members’ biographies or work experience. Disclosure should clearly explain whether an audit committee member has the ability to read and understand a comparable set of financial statements in accordance with section 1.6 of NI 52-110.

Prospectus Disclosure Improvements

• Prospectus Review Outcomes: The most common outcome during a prospectus review continues to be requesting enhanced disclosure requiring material changes to the disclosure in a prospectus.
 
• Overly Promotional Statements: The Report explains that a common mistake observed is the inclusion of overly promotional statements in prospectuses about an issuer’s business without the provision of sufficient support for such statements, such as growth of certain markets or the business’s size and opportunities.
 
• Inappropriate Information in Marketing Materials: Issuers are inappropriately including information in marketing materials that is not directly derived from the prospectus.
 
• COVID-19: As previously discussed here and here, issuers are reminded that prospectuses should contain up to date and timely disclosure of COVID-19 risk factors and impacts, whether directly or, in the case of short-form prospectuses. by reference.

Cease Trade Order – Content Deficiency

• Issuers are reminded of the guidance set out in CSA Notice 51-322 ReportingIssuer Defaults (CSA Notice 51-322) which lists continuous disclosure deficiencies that will generally result in an issuer being noted in default. These deficiencies include:
  • the failure to file certain continuous disclosure documents; and
   
  • content deficiencies in the issuer’s continuous disclosure.
 
• Cease trade orders may be issued where a required filing is deficient in terms of content. Examples of content deficiencies are provided in section 2 of CSA Notice 51-322.

Special Purposes Acquisition Corporations

• Special purpose acquisition corporations (SPACs) received significant media attention due to a large increase in SPAC activity in the United States, which led to heightened regulatory scrutiny by the Securities and Exchange Commission. The SEC has, among other things, issued guidance on disclosure considerations for SPAC IPOs and qualifying transactions, and highlighted specific concerns relating to the role of the sponsor/founder.
 
• In Canada, SPACs are governed by Toronto Stock Exchange and NEO Exchange rules. Further to these rules, a prospectus must be filed with the relevant securities commission or authority at the time of an IPO, and a non-offering prospectus must be filed at the time of a qualifying transaction.
 
• The OSC is continuing to monitor SPAC developments in the U.S. and internationally, and will consider whether any policy changes to the SPAC program are necessary.
 
• For more information on the benefits and features of SPACs, see our blog post from earlier this year.

For further information, please see OSC Staff Notice 51-732 Corporate Finance Branch 2021 Annual Report.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice. This article was first published on Stikeman Elliott LLP’s Knowledge Hub and originally appeared at www.stikeman.com. All rights reserved.

*Reprinted with permission.

Brave new (Meta) world—Nike files virtual trademarks: implications for Canadian trademark law

On the heels of Mark Zuckerberg announcing the rebranding of Facebook to "Meta", along with his plans for creating a virtual reality metaverse, Nike garnered significant media attention when it was reported that it filed seven trademark applications for use on "virtual goods"¹. These filings include the notable Nike "swoosh" logo and the words "Nike", "Just Do It", "Jordan", and "Air Jordan"².

In the trademark application details, Nike described the trademark registrations as intending to cover the categories of "downloadable virtual goods, namely, computer programs featuring footwear, clothing, headwear, eyewear, bags, sports bags, backpacks, sports equipment, art, toys and accessories for use online and in online virtual worlds"³. This has led to speculation that these applications are Nike's latest efforts in exploring the metaverse, cryptocurrencies, and non-fungible token (NFT) worlds⁴.

As Canadian companies bring more and more of their business online, the management and protection of their intellectual property, including trademarks, will meet the complex and global dynamics of a rapidly changing virtual marketplace. In this article, we explore the evolving brave new (meta)world of virtual trademarks and their potential impact on trademark law in Canada.

The notion of "virtual trademarks" is nascent in Canadian law. The idea of protecting the use of a trademark that exists in a virtual world, supported by a virtual economy and its virtual currency, raises a host of complex issues regarding the scope of trademark protection. For example, consider online games where there may be active in-game markets for various forms of virtual property (e.g., tokens, prizes, and awards), and where the exchange of virtual currency creates a marketplace of virtual goods. There, the association of goods and services with a particular symbol or trademark may be likened to the real world. If commerce, in the real world, can generate brand association and goodwill, then why not in the virtual world? This raises many questions revolving around a central theme: to what extent can, and should, trademark law function to permit virtual indicators of source and the policing of virtual (non-national) borders? Which jurisdiction's trademark law applies?

In the world of video gaming, trademark law has traditionally been applied when marks are used in the promotion and sale of video games. Brand recognition and quality assurance are the hallmarks of this protection. However, in recent years, trademark owners in the gaming space have started paying closer attention to the symbols presented within the games. They have even started to bring lawsuits, for example, when marks were being expressively misappropriated⁵. Nike's recent trademark filings indicate that more traditional brands are changing their strategy as well, with a new focus on the virtual worlds. Fashion brands like Louis Vuitton have partnered with League of Legends on a capsule collection and in-game skins; Gucci and The North Face have collaborated with Pokemon Go!; and Gucci and Vans have entered (boldly, where no brand has gone before) the Roblox world⁶.

This is potentially going to get complicated, especially as the dollar values double. Consider, for example, a situation where a player in the metaverse sells a virtual pair of branded sneakers to another player. What constitutes quality with regard to virtual sneakers? Can a pair of virtual sneakers have material qualities that are only revealed after purchase? If not, do we really need to provide incentives for the brand to protect the quality of its virtual footwear⁷? Does the brand serve as an indicator of source, allowing the consuming gamer to make purchase choices among options? Nike's recent filings suggest that there are implications to selling virtual branded products by virtual players and risk of damage if its brand is not protected in the virtual world.

Virtual trademark lawsuits, based on trademarks allegedly used in commerce within virtual economies, could conceivably occur in three distinct situations⁸:

One issue to consider is what will constitute "use" of a trademark in the virtual world, because "use" is a central component of trademark laws when it comes to whether the registration is valid and in the context of trademark litigation. Assuming Canada's laws apply, a trademark owner would need to demonstrate use of the mark "in the normal course of trade", pursuant to section 4(1) of the Trademarks Act⁹. Activities can be considered "in the normal course of trade" where there are commercial dimensions to the activities¹⁰. Whether "use" of a mark in a given virtual world environment would constitute use "in the normal course of trade" will likely depend on the exact wording used in the trademark application itself (since there is a different standard for "use" for a "product" than a "service") and the virtual world model. In a metaversal world, where the activities of users participating in the user-generated world typically involve the exchange of virtual assets, it is very conceivable that a court could find "use" of a mark to be "in the normal course of trade".

However, even if the trademark owner is able to establish ownership rights over a mark in a video game, a question would still remain as to the limits of the trademark protection. Are the virtual trademark rights enforceable only against users within the game? Trademark rights have always been territorially defined based on use of the mark and the statutory regime where the use occurs. Under the Trademarks Act, the rights to a registered mark may be enforced across Canada, even if the actual use of the mark is confined to a limited geographical area¹¹. Under Scenario 2, above, the situation considers whether a player would be able to enforce their unregistered trademark rights against a real world retailer in any location in the country. This raises the question as to the "geography" covered by the Internet and whether trademark law should recognize "virtual" geographical limitations.

Even if any given "use" of a mark is used "in the normal course of trade", a registered trademark owner would still need to demonstrate that the infringing trademark causes a likelihood of "confusion" with the registered mark. The test in Canada is "a matter of first impression in the mind of a casual consumer somewhat in a hurry who sees the name...at a time when he or she has no more than an imperfect recollection of the [trademark], and does not pause to give the matter any detailed consideration or scrutiny, nor to examine closely the similarities and differences between the marks"¹².

Section 6(5) of the Trademarks Act sets out the following non-exhaustive factors for courts to consider in determining whether trademarks are confusing: (a) the inherent distinctiveness of the trademarks or trade names and the extent to which they have become known; (b) the length of time the trademarks or trade names have been in use; (c) the nature of the goods, services, or business; (d) the nature of the trade; and (e) the degree of resemblance between the trademarks or trade names, including in appearance or sound or in the ideas suggested by them¹³.

Whether or not infringement would be found in each of the three scenarios discussed above would depend largely upon the circumstances of the allegedly infringing use, with due consideration being given to the unique game environment. Courts will typically first look at the marks themselves before considering whether any of the above factors reduce the likelihood of confusion and will also consider all of the surrounding circumstances. As such, it is conceivable that a court could and would find a likelihood of confusion in the right circumstances under all three scenarios.

As Nike blazes into Mark Zuckerberg's new era of the metaverse, we must ask whether trademark law—and the law generally—is prepared to face this brave new metaworld. If we accept that trademark laws were developed to protect fair competition, and if we accept that in the metaverse, there is competition for the consumer's dollar, then we must expect that trademark laws—to use a card-gaming analogy—will follow suit.

Footnotes

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

*Reprinted with permission.

Cineplex awarded $1.24 billion judgment in takeover fight

By: Graham Splawski from Borden Ladner Gervais LLP

Cineplex v. Cineworld, 2021 ONSC 8016 (CanLII)

In Cineplex v. Cineworld, the Ontario Superior Court awarded Cineplex $1.24 billion in damages after the U.K. company Cineworld walked away from an agreement to purchase Cineplex valued at over $2 billion. The case concerns the most significant deal to fail since the start of the pandemic, and adds to the recent case law on the interpretation of material adverse effect (MAE) clauses in Canada.

What you need to know

• Cineplex v. Cineworld concerns a transaction where the U.K. purchaser, Cineworld, refused to close a public M&A transaction involving a Canadian target in the context of the pandemic.
• The Court found that, once the pandemic hit, Cineworld wanted a way out of the transaction even though it had none. Notably, Cineworld had not negotiated for a break fee. It hoped that the seller, Cineplex, would default on its covenants. When it appeared Cineplex was not going to default on its covenants, Cineworld withdrew its application for regulatory approval and alleged defaults. However, the Court found that Cineplex did not default, that Cineworld repudiated the agreement and therefore owed damages.
• This case illustrates the importance of negotiations around MAE and break free provisions in agreements, and that courts will look at the evidence holistically when considering failed transactions, including all of the deal teams' correspondence.
• The Court followed the interpretation of MAE clauses that it adopted in Fairstone Financial Holdings Inc. v. Duo Bank of Canada (Fairstone). The interpretation of an MAE as being an unknown threat to the overall earnings potential of the business, of durational significance, is consistent with the Delaware Court of Chancery’s decision in AB Stable VIII LLC v. MAPS Hotels and Reports One LLC.
• The Court interpreted the requirement that Cineplex operate its business in the “ordinary course” between signing the deal (pre-pandemic) and closing (during the pandemic), allowing Cineplex to respond to the pandemic so long as it did not take any steps to materially alter its business in doing so. This was consistent with the overall risk allocation in the arrangement agreement, which allocated systemic risk to Cineworld.
• The Court awarded Cineplex damages in the amount of the synergies that Cineplex could have anticipated to have received from the deal.

Background

Cineplex, Canada’s largest movie theatre operator, and Cineworld, the U.K.-based second-largest movie theatre operator in the world, entered into an Arrangement Agreement in December 2019 that would see Cineworld acquire all the shares of Cineplex for $34/share. This represented a premium of 42 per cent on the trading price of Cineplex shares at the time. The transaction was valued at approximately $2.8 billion (all values in CAD).

The Arrangement Agreement contemplated that the transaction would proceed by way of a statutory plan of arrangement, and would close no later than June 30, 2020. Prior to closing, the parties were required to obtain a number of approvals, including pursuant to the Investment Canada Act (ICA). The ICA process requires foreign investors seeking to acquire control of a Canadian business to seek a discretionary determination of “net benefit” from the Minister of Industry, Science and Economic Development where certain thresholds are exceeded. The process is notable because only the foreign buyer (Cineworld) had legal standing and control over its application for approval under the ICA.

As the COVID-19 pandemic began to intensify in March 2020, Cineworld had doubts about the transaction and considered other options. On June 12, 2020, Cineworld notified Cineplex that it was terminating the Arrangement Agreement because Cineplex had breached its covenants in the Arrangement Agreement, and that Cineworld was withdrawing its application for ICA approval.

Cineplex sued for breach of contract. The trial was heard from September through November 2021, and the Court issued its decision on December 14, 2021.

The contractual provisions

As in the Fairstone case, the Court considered two significant provisions in the Arrangement Agreement:

1. The “Operating Covenant”, which required Cineplex to operate its business in the “Ordinary Course and in accordance with Laws” between signing the Arrangement Agreement and closing, and to “use commercially reasonable efforts to maintain and preserve its and its Subsidiaries business organization, assets, properties, employees, goodwill and business relationships with customers, suppliers, partners and other Persons with which the Company or any of its Subsidiaries has material business relations”.
2. The MAE clause, which provided that Cineworld could refuse to close if a MAE occurred, except if the MAE was caused by “any earthquake, floor or other natural disaster or outbreaks of illness or other acts of God”.

The Court focused its analysis on the Operating Covenant, since Cineworld argued that it had not breached the Arrangement Agreement by terminating it, because Cineplex had breached the Operating Covenant.

Cineplex operated in the ordinary course

The Court found that Cineplex had not breached the Operating Covenant by taking steps responding to the pandemic, and rejected Cineworld’s argument that the Operating Covenant required Cineplex to operate its business exactly as it had prior to the pandemic. The Court based this finding on two principles of contractual interpretation:

1. The words of the Operating Covenant should be interpreted as a whole, specifically that the requirement to operate in the “ordinary course” in accordance with the law had to be interpreted with the requirement to use efforts to maintain the business. Cineplex did not breach the first requirement when it closed its theatres in response to government orders. The second requirement gave Cineplex flexibility to respond to this, and required Cineplex to manage its cash flow and negotiate with its suppliers and landlords. The Court found that none of the actions Cineplex took to respond to the pandemic to be so drastic, or to alter its business in such a material way, that they were beyond the ordinary course.
2. The words of the Operating Covenant should be interpreted consistently with the rest of the Arrangement Agreement, and consistent with its commercial context. Since the MAE clause clearly allocated systemic risks to Cineworld, it would be inconsistent with the MAE clause to interpret the Operating Covenant as precluding Cineplex from responding to systemic risks.

Cineplex’s damages were the lost synergies

The Court found that the appropriate measure of damages was the standard contractual measure of damages – to put the non-breaching party in the position it would have been had the contract been carried out. In this case, the Court found this was the value of the synergies that Cineplex would have gained from the transaction had it closed. Though the ultimate benefit would have accrued to Cineworld had the transaction closed (because Cineworld would be the sole shareholder of Cineplex), Cineplex would have remained the operating company and the synergies would have accrued to it. On Cineplex’s expert’s evidence, based on a report Cineworld commissioned prior to entering into the deal, this amounted to $1.24 billion (including interest).

The Court rejected Cineplex’s claim that the damages should be the amount Cineplex’s shareholders would have received from the transaction, which its expert calculated at $1.32 billion. The Court held that the shareholders were not a party to the Arrangement Agreement or the action, and Cineplex was not their agent. The relevant damages were those Cineplex suffered.

The Court rejected three of Cineworld’s arguments to reduce damages. First, the Court rejected a deduction for any debt that Cineworld might have assigned to Cineplex after closing. The Court found that Cineworld’s evidence on this point was unclear and insufficient to lead to a discount.

Second, the Court rejected any discount to reflect the uncertainty of Cineworld obtaining ICA approval, though it had withdrawn its application for that approval. The Court found that by June 2020, Cineworld was “very close” to obtaining approval and the government was working closely and cooperatively with Cineworld, including in respect of undertakings that would reflect the economic and operational uncertainties the pandemic caused.

Finally, the Court rejected Cineworld’s argument that Cineplex should not be awarded damages because it could have sought specific performance (i.e. to force Cineworld to close the transaction). The Court found that because Cineworld withdrew its ICA application, it was impossible to force it to close the transaction.

*Reprinted with permission.

Shorter offering timelines and reduced deal risk: CSA introduce new blanket orders

By: Graeme Martindale, Kent Kufeldt, Salvador Pimentel, Connor MacLeod from Borden Ladner Gervais LLP

On December 6, 2021, the Canadian Securities Administrators (CSA) published temporary exemptions from certain base shelf prospectus requirements for qualifying well-known seasoned issuers (WKSIs). The CSA has implemented the relief through local blanket orders that are substantively harmonized across the country and are set to come into effect on January 4, 2022 (collectively, the Blanket Orders).

The Blanket Orders were implemented by the CSA in response to feedback that certain prospectus requirements in the base shelf context create unnecessary regulatory burden for large, established reporting issuers that have a strong market following and up-to-date disclosure records. The feedback recommended enhancing the current prospectus system by amending the base shelf prospectus regime to implement a Canadian WKSI regime, as base shelf prospectuses filed by these types of issuers are less likely to result in a significant number of substantive deficiency comments.

The Blanket Orders will be issued on a trial basis, and the CSA will consider how best to adopt the procedures set out in the Blanket Orders through future rule amendments. The Blanket Orders are intended to remain in place for up to 18 months. The CSA will use this time to determine if these procedures should be adopted through rule amendments and how best to adopt these procedures. During this time there will be an opportunity to identify appropriate eligibility criteria, public interest and operational concerns.

The exemptions

The Blanket Orders will substantially reduce the length of time to complete shelf offerings by permitting issuers that satisfy the conditions of the Blanket Orders to file a final base shelf prospectus as the first step in a shelf offering instead of requiring a preliminary shelf base prospectus to be filed. Importantly, this will allow qualifying WKSIs who have not already obtained a final receipt for a base shelf prospectus to forgo the comment process all together.

In addition to eliminating the need to file, obtain a receipt and undergo the comment process for a preliminary base shelf prospectus, the Blanket Orders also simplify the form of the base shelf prospectus itself. The Blanket Orders exempt an issuer that meets the WKSI qualifications and certain other conditions from the requirements to:

• state the aggregate dollar amount of securities that may be raised under the base shelf prospectus;
• include the number of securities qualified for distribution;
• include a plan of distribution;
• describe the securities being distributed, other than as necessary to identify the types of securities qualified for distribution under the base shelf prospectus; and
• describe any selling security holders.

Exemption qualifications

In order to qualify as a WKSI for the purposes of the Blanket Orders an issuer must either have:

1. outstanding listed equity securities that have a public float of $500 million; or
2. at least an aggregate of  $1 billion of non-convertible securities, other than equity securities, distributed under a prospectus in primary offerings for cash, not exchange, in the last three years.

In addition, the issuer:

1. must also have qualified as a WKSI as of a date within 60 days preceding the date the issuer files the base shelf prospectus;
2. is, and has been, a reporting issuer in at least one Canadian jurisdiction for at least 12 months; and
3. is eligible to file a short form prospectus under National Instrument 44-101 Short Form Prospectus Distributions.

Moreover, the issuer cannot be an “ineligible issuer”. An issuer will be an ineligible issuer if any of the following apply:

• the issuer has not filed with the securities regulator or securities regulatory authority in each jurisdiction in which it is a reporting issuer all periodic and timely disclosure documents that it is required to have filed in that jurisdiction;
• the issuer is or, in the past three years the issuer or any of its predecessors was,
  • an issuer whose operations have ceased; or
  • an issuer whose principal asset is cash, cash equivalents, or its exchange listing, including a capital pool company, a special purpose acquisition company, or a growth acquisition corporation or any similar entity.
• an issuer that has in the past three years become bankrupt, made a proposal under any bankruptcy or insolvency legislation or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets;
• an issuer that was, or any entity that at the time was a subsidiary of the issuer that was, the subject of any penalties or sanctions, including restrictions on the use by the issuer of any type of prospectus, or exemption, imposed by a court relating to securities legislation or by a securities regulatory authority within the past three years;
• an issuer that has been the subject of any cease trade order in any Canadian jurisdiction or any suspension of trading under section 12(k) of the Securities Exchange Act of 1934 within the past three years;
• the issuer is an investment fund; or
• the issuer has outstanding asset-backed securities.

Issuers with “mining operations” must satisfy additional financial tests. Such issuers must have gross revenue derived from mining operations of at least $55 million for the most recently completed financial year and gross revenue derived from mining operations of at least $165 million in the aggregate for the three most recently completed financial years. The issuer must also file any technical reports required under National Instrument 43-101 – Standards for Disclosure for Mineral Projects. While the Blanket Orders use the term “mining operations,” no additional guidance has been provided at this time with respect to the scope of these requirements and what types of issuers in the mining sector may or may not be included. 

Finally, an issuer must make certain disclosures in the prospectus as to its status as a WKSI and that it is relying on the exemption. A letter of an executive officer or director of the issuer must also accompany the filing of the base shelf prospectus and be dated the same date as the base shelf prospectus. The letter must confirm the issuer’s reliance on the exemption, specify the qualification criteria that the issuer is relying upon and confirm that such criteria has been met by the issuer. 

Shorter offering timelines and reduced deal risk

Ultimately, the Blanket Orders will allow qualifying WKSIs to conduct shelf prospectus offerings on an expedited basis effectively leading to a reduction in potential deal risk for these types of issuers. For current shelf offerings all issuers are required to file a preliminary base shelf prospectus to their principal regulator for comment prior to being able to file and obtain a receipt for a final base shelf prospectus. While the comment period is typically limited to a three business day period, the scope of any potential comments can be unpredictable and lead to delays in prospectus filings. 

The Blanket Orders will significantly increase the speed at which shelf offerings are able to be conducted by qualifying WKSIs by allowing these issuers to avoid the comment process altogether. The Blanket Orders will, in most cases, allow qualifying WKSIs to file a final base shelf prospectus and obtain a receipt on the same business day. Once a receipt for the base shelf prospectus is obtained, issuers can then draw down from the base shelf by filing a prospectus supplement, which contains the variable terms of the securities that are not known and cannot be ascertained at the time of filing of the base shelf prospectus. Since prospectus supplements are not generally subject to regulatory review, the Blanket Orders will allow draw downs to be completed without having to undergo a comment period which will significantly minimize related potential deal risks for both qualifying WKSI’s and underwriters alike.

Additional considerations

Given that the Blanket Orders have the potential to significantly reduce the time between the filing of a base shelf prospectus and the closing of a shelf draw down, it is important that issuers intending to rely on the Blanket Orders work with their advisors, as well as any agents or underwriters, well in advance of any offering to formulate a plan to take advantage of the accelerated timelines. For example, the reduced timelines will necessitate the need to formulate a plan to deal with standard deliverables that typically take some time to complete, such as due diligence, underwriting or agency agreements, comfort letters and any required legal opinions.

Issuers looking to avail themselves of the exemptions contained in the Blanket Orders should also ensure that they are short form eligible and meet the general requirements for shelf distributions as set out in National Instrument 44-102 – Shelf Distributions.

Our Capital Markets team will work with issuers, agents and underwriters contemplating conducting a shelf offering using the exemptions set out in the Blanket Orders. For further information on how the Blanket Orders may affect your business, contact any of the authors or key contacts listed below.

*Reprinted with permission.