Recently, the CSA (Canadian Securities Administrators) released revised guidelines regarding the disclosure of non-GAAP (generally accepted accounting principles) financial measures and the TSX (Toronto Stock Exchange) published responses to issuer FAQs (frequently asked questions) regarding NCIBs (normal course issuer bids). This bulletin addresses each of these regulatory updates and the enhanced guidance that they provide to participants in Canadian capital markets.
ISSUER DISCLOSURE OF NON-GAAP FINANCIAL MEASURES
A non-GAAP financial measure is a numerical measure of an issuer's historical or future financial performance, financial position or cash flow that:
- Is not specified, defined or determined under the issuer’s GAAP (e.g., IFRS (International Financial Reporting Standards))
- Is not presented in an issuer’s financial statements, and
- Either (a) excludes an amount that is included in the most directly comparable measure calculated and presented in accordance with the issuer's GAAP or (b) includes an amount that is excluded from the most directly comparable measure calculated and presented in accordance with the issuer's GAAP
On January 14, 2016, as a consequence of IASB (International Accounting Standards Board) amendments to IAS 1 (International Accounting Standard 1) that came into effect on January 1, 2016, the CSA revised Staff Notice 52-306 – Non-GAAP Financial Measures (Staff Notice 52-306). The key changes are summarized below.
The CSA have clarified in Staff Notice 52-306 that performance measures that are calculated without using financial measures (e.g., number of subscribers, square footage) and performance measures that are calculated using financial information presented in an issuer’s financial statements (e.g., sales per square foot, where the sales figure is extracted directly from the financial statements) are not considered to be non-GAAP financial measures. However, if a non-GAAP financial measure is used to calculate a performance measure (e.g., “adjusted sales” is used to calculate sales per square foot), then such performance measure will be a non-GAAP financial measure.
Naming Non-GAAP Financial Measures
Consistent with past comment letters provided to issuers in the context of continuous disclosure and prospectus reviews, the revised Staff Notice 52-306 now notes that the CSA expect issuers to name non-GAAP financial measure in a way that distinguishes the measure from disclosure items specified, defined or determined under an issuer’s GAAP and in a way that is not misleading. For example, in presenting EBITDA (earnings before interest, taxes, depreciation and amortization) as a non-GAAP financial measure, it would be misleading to exclude amounts for items other than interest, taxes, depreciation and amortization. Further, when presenting sales per square foot based on an “adjusted sales” figure, it could be misleading not to qualify the name of the performance metric (e.g., as “adjusted sales per square foot”).
Disclosing Additional Subtotals Before Filing Financial Statements
In certain circumstances, an issuer’s GAAP may require the presentation of additional subtotals in the financial statements. Where an issuer presents these additional subtotals in a press release or some other location outside of an issuer’s financial statements before filing its financial statements on SEDAR (System for Electronic Document Analysis and Retrieval), the CSA advise that, in such earlier release, management explain the composition of these subtotals so as to avoid confusion by: (i) including a copy of the financial statement that contains these additional subtotals; or (ii) reconciling these additional subtotals to the most directly comparable line item specified or defined by IFRS that will be presented in financial statements.
TSX ADMINISTRATIVE PRACTICE IN RESPECT OF NCIBs
On January 15, 2016, TSX staff issued a notice (TSX Staff Notice) that provides answers to FAQs in respect of NCIBs. The TSX Staff Notice is significant in that it publishes previously undisclosed TSX administrative practices concerning the undertaking of NCIBs by listed issuers.
Timing and Documents Required to Commence an NCIB
The TSX Staff Notice provides that issuers must file with the TSX, at least seven business days prior to the commencement date of an NCIB:
- A draft copy of TSX Form 12 – Notice of Intention to Make a Normal Course Issuer Bid (TSX Form 12)
- A draft copy of the press release announcing the NCIB
- A draft copy of the ASPP (automatic security purchase plan), if applicable
- A detailed calculation of the ADTV (average daily trading volume), for issuers that are not investment funds
- A detailed calculation of the public float, for issuers intending to purchase a number of securities based on their public float
TSX staff typically review and provide comments on these documents within three business days and issuers must file the documents in final executed form at least three business days prior to the commencement date of the NCIB. Finally, the NCIB press release must be issued prior to market open at least two business days prior to the start of the NCIB.
Issued and Outstanding Public Float Calculation
The TSX Staff Notice clarifies that an issuer proposing to undertake an NCIB can only include the issued and outstanding securities of the class subject to the NCIB in the public float calculation (i.e., an NCIB for common shares cannot include warrants or convertible debentures that are convertible or exchangeable into common shares). The TSX provides that it will make an exception, however, if an issuer has two classes of listed securities that are automatically inter-convertible, without any action on the part of the issuer or security holder (e.g., securities that are inter-convertible based on the residency of the security holder).
ATSs (Alternative Trading Systems)
The TSX does not object to an issuer engaged in an NCIB on the TSX also buying securities on a Canadian ATS, provided that any such purchases are disclosed in the TSX Form 12, as well as the press release, and the issuer and its buying broker satisfy themselves that they are properly relying on an issuer bid exemption under applicable securities laws and are in compliance with those requirements, in purchasing securities on the ATS. Where an issuer states that its NCIB will only be made through the facilities of the TSX, the TSX Staff Notice reminds issuers to ensure their buying broker is aware of this limitation as the broker may otherwise use a smart order router to direct purchases to all marketplaces in Canada, including ATSs.
TSX rules permit an issuer to make one block purchase in a calendar week that is in addition to the applicable daily limit (for issuers that are not an investment fund, this limit is the greater of 25 per cent of the ADTV or 1,000 securities). Once that block purchase has occurred, the issuer may not make any further purchases for the remainder of the trading day. The TSX Staff Notice clarifies that any such block purchase can only be made using the broker assigned to conduct the purchases under the NCIB and that an issuer can make a block purchase even after it has used up its daily limit.
Odd Lot/Small Shareholder Program
According to the TSX Staff Notice, while an odd lot purchase and selling arrangement can run concurrently with an NCIB, the TSX will not allow an issuer to use its odd lot purchase and selling arrangement to purchase securities for cancellation under its NCIB. The TSX’s view is that the purpose of an odd lot program is to buy the odd lots in the market and aggregate them for sale in the board lot market, not to cancel the securities.
The TSX Staff Notice also addresses, among other things: off-exchange block purchases of securities under an NCIB, at a discount to the prevailing market price, pursuant to an exemptive relief order from a CSA member; implementation of ASPPs; calculation of ADTV; interlisted issuers conducting security purchases on a marketplace outside Canada; trading rules applicable to NCIBs; and amendments or terminations of NCIBs.
For further information, please contact:
Matthew Merkley 416-863-3328
Hugh Goodday 416-863-3333
or any member of our Capital Markets group.