Summary of Oversight and Regulatory Activities: AMF’s 2020 Report on Quebec Capital Markets

The Corporate Finance division of the Autorité des marchés financiers (AMF) recently released its fourth annual Summary of Oversight and Regulatory Activities (Report). Along with an overview of Quebec’s capital markets, the Report provides guidance for Quebec issuers and outlines the AMF’s expectations regarding regulations applicable to reporting issuers in Quebec. We discuss some of the Report’s key highlights below.

QUEBEC CAPITAL MARKETS

• 673 issuers (out of a total of 1,916 reporting issuers in Quebec) had Quebec as their principal regulator in 2019, a decrease from 696 issuers (out of a total of 1,957 reporting issuers in Quebec) in 2018. Of those, 56 per cent were venture issuers, principally consisting of issuers listed on the TSX Venture Exchange (TSXV), and 44 per cent were other issuers.
• Total market capitalization of Quebec issuers increased from C$396-billion in 2018 to C$469-billion in 2019, but still accounted for 16 per cent of the aggregated market capitalization of issuers in Canada.
• The number of Quebec issuers listed on the Toronto Stock Exchange (TSX) and the TSXV decreased slightly from 184 in 2018 to 181 in 2019, in keeping with the downward trend of the past 10 years in both Quebec and Canada as a whole. At the same time, the Report notes that 12 Quebec issuers were listed on the Canadian Securities Exchange (CSE), down from 13 in 2018.
• Quebec issuers completed one initial public offering (IPO) on the TSX, one IPO on the NASDAQ, and one IPO on the TSXV as a capital pool company.
• In total, 395 prospectuses were filed in Canada in 2019, down from 452 prospectuses in 2018. Of the total number of prospectuses filed in Canada last year, 148 were filed in all Canadian provinces (37 per cent) and 81 were filed in all Canadian provinces except Quebec (23 per cent). The remaining 158 prospectuses were filed in only certain Canadian provinces (40 per cent), including Quebec in some cases.
• In 2019, Quebec issuers raised C$1.5-billion (C$3.6-billion in 2018) on the public market and C$9.1-billion (C$8.1-billion in 2018) on the exempt market, for a total of C$10.6-billion, down from C$11.8-billion in 2018.
• Of Quebec issuers listed on the TSX, 95 per cent have at least one woman on the board of directors and 36 per cent have at least three women sitting on the board. These figures have been steadily climbing over the past five years.

DISCLOSURE DEFICIENCIES

New Accounting Standards

The Report contains findings on the application of International Financial Reporting Standards (IFRS) that have recently come into effect, particularly with respect to revenue from contracts with customers (IFRS 15), financial instruments (IFRS 9) and leases (IFRS 16). The Report provides guidance on how to provide compliant disclosure under these standards, including with respect to the impact of such new standards on management’s discussion and analysis.

Capital Pool Companies (CPCs)

The Report notes certain disclosure deficiencies by CPCs when completing their qualifying transactions. Most notably, the AMF reminds issuers of the following:
 

1. Description of the business: The following should be presented to investors: an understanding of the business model; the stages of development of the primary products or services; the timing and stage of the various research and development programs; the material regulatory approvals necessary to achieve the stated business objectives; and the marketing and future development plans and strategies.
2. Conflicts of interest: The particulars of existing or potential material conflicts of interest must be disclosed, whether between the CPC, the target company and the directors, executive officers or any person who, directly or indirectly, does not deal at arm’s-length with the target company. Furthermore, related party transactions that clarify the business objectives of the target company and the resulting entity must likewise be disclosed. 
3. Material risk factors: Risk factors must be specific, comprehensive and disclosed in the order of gravity. Amongst the risk factors that were not adequately disclosed, the AMF highlights the following: negative cash flows from operating activities, going concern uncertainty, limited transaction history, nil or limited revenue, a history of net losses, a significant project or key product being in the early stages of development, limited capital resources and material transactions entered into between related parties.
4. Liquidity and capital resources: A CPC issuer must provide an analysis of its liquidity, which must include disclosure of its ability to generate sufficient amounts of cash and cash equivalents to maintain the company’s capacity to meet its projected growth or fund its development over the short and long term. Disclosure must also include an analysis of its existing uncommitted capital expenditures.
5. Forward-looking information: Forward-looking information requires a reasonable basis and must also be limited to a reasonable period of time which, according to the AMF, should generally not extend past the issuer’s next fiscal year.

Some of these deficiencies were raised more generally by the Canadian Securities Administrators (CSA) in CSA Staff Notice 51-361 – Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019 released on October 29, 2020 (CSA October 2020 Notice). Please see our November 2020 Blakes Bulletin: CSA Highlight Common Deficiencies in COVID-19 Disclosure.

Mineral Resource Estimates

On June 4, 2020, the CSA published CSA Staff Notice 43-311, which discusses the results of a disclosure review of mineral resource estimates presented in the technical reports of over 80 mining issuers. The following areas were identified to be inadequately disclosed, resulting in the regulators requiring the filing of amended technical reports in 10 cases:
 

1. Reasonable prospects for eventual economic extraction: Technical reports must provide adequate disclosure to determine the economic potential and viability of the estimated mineralized material.
2. Data verification: Data used to support a mineral resource estimate, including legacy data from former operators, needs to be adequately verified and determined suitable by a qualified person.
3. Risk factors: Failure to disclose meaningful known risks in relation to the mineral resource estimate may result in misleading disclosure.
4. Sensitivity to cut-off grade: To the extent that such an estimate meets the test of reasonable prospects, variations to the cut-off grade to indicate the relative robustness of the estimate can be useful information. 

The CSA’s concerns with respect to mineral project disclosure were raised once again in the CSA October 2020 Notice.

MINI TENDERS OVERSIGHT

The AMF Report provides guidance regarding the rules applicable to mini tenders, being offers to acquire less than 20 per cent of voting securities or equity securities of a class of an issuer, and thus not subject to the take-over bid rules.

The AMF remarks that despite the absence of a specific regulatory framework applicable to mini tenders, it will review such transactions to ensure that they do not undermine market efficiency and that investors are protected from unfair, improper or fraudulent practices. Some of these concerns are further highlighted in CSA Staff Notice 61-301 issued in 1999.

The AMF states that in its review of mini tenders, it will particularly pay attention to situations where:
 

• Investors are provided a very short time to make an informed decision (entailing a heavier burden of transparent and unequivocal disclosure)
• Security holders’ voting rights are a concern, including their dissent rights (such as when a proxy in favour of the offeror is attached to the mini tender).

Although not addressed in the Report, these very situations were considered in a 2019 decision of the Quebec financial markets administrative tribunal (TAMF), which cease traded the mini tender offer of Mach Group Inc. (Mach Group) to acquire 19.5 per cent of the outstanding class B voting shares of Transat A.T. Inc. (Transat), in circumstances where Transat had agreed to be purchased by Air Canada by way of plan of arrangement.

In that decision, the majority found that the tender period of 11 calendar days (seven business days) was insufficient, therefore making the offer coercive. The majority also noted that Mach Group’s mini tender was complex insofar as it had multiple aspects involving not only a tender of shares, but also a proxy solicitation, an assignment of dissent rights and a level of interaction with the plan of arrangement, reinforcing the need for adequate time to make an informed decision. On the other hand, the minority’s opinion considered the tender period sufficient, stressing that shareholders’ acceptance or rejection of the offer was not mandatory and that a short timeline was in fact playing against Mach Group’s interest. Such a divergence of opinion illustrates that the time provided to investors to make an informed decision is fact-specific and subject to interpretation.

The TAMF’s decision confirmed that securities regulators will use their public interest power to block mini tender offers where they are found to be abusive of investors. For more information on the TAMF decision, please see our September 2019 Blakes Bulletin: Mach Group “Mini Tender” Offer to Buy Montreal-Based Airline Won’t Fly: Quebec Financial Markets Tribunal.

USE OF FINANCIAL HARDSHIP EXEMPTION

During 2019-2020, the Report notes an increased use by Quebec issuers of the financial hardship exemption, affording relief from the formal valuation requirement and the minority approval requirement contained in Regulation 61-101 respecting protection of minority security holders in special transactions (Financial Hardship Exemption), particularly in transactions involving an asset acquisition of a related party.

The AMF reminds issuers that, amongst the conditions provided for in the Financial Hardship Exemption, they must clearly demonstrate that:
 

• The transaction is designed to improve the issuer’s financial position
• The terms of such transaction are reasonable in the issuer’s circumstances, as determined by the board of directors and at least 2/3 of the independent directors.

The AMF further notes it will closely examine continuous disclosure documents filed by issuers that rely on the Financial Hardship Exemption, especially when the issuer is paying cash consideration to a related party.

AT-THE-MARKET (ATM) DISTRIBUTIONS

Effective August 31, 2020, the CSA amended Regulation 44-102 respecting Shelf Distributions and Policy Statement to Regulation 44-102 to ease certain requirements and restrictions pertaining to ATM distributions (New ATM Rules), in particular the requirement for the prospectus qualifying the distribution to be delivered to purchasers. For more information on the New ATM Rules, please see our June 2020 Blakes Bulletin: No Relief Required: New and Improved Canadian Rules for “At-The-Market” Equity Offerings.

Whereas typically it is within the issuer’s purview to determine the jurisdictions in which it wishes to conduct an offering, an ATM distribution on a Canadian exchange cannot exclude prospective purchasers in a particular Canadian jurisdiction who are purchasing through such exchange. As a result, the issuer conducting an ATM offering on a Canadian exchange cannot avoid being considered to be making a distribution in Quebec and must file the shelf prospectus and ATM prospectus supplement in Quebec. Although neither the Report nor the New ATM Rules address Quebec’s French translation requirement, which is triggered by the ATM distribution being extended into Quebec, we note that the AMF has typically granted relief from such requirement in relation to the shelf prospectus and the ATM prospectus supplement, particularly for non-Quebec issuers. In this respect, the AMF appears sympathetic to the fact that the issuer does not have a choice over whether to include or exclude Quebec as an offering jurisdiction in such context. Consistent with this approach, the ATM French language relief will cease to apply in the event of a non-ATM offering which includes Quebec, meaning that such non-ATM supplement, along with the shelf prospectus (including the documents incorporated by reference therein), will need to be translated and filed in French, as in the ordinary case of any public offering made to Quebec investors.

Outside the ATM context, it remains possible for a non-Quebec issuer to file a shelf prospectus in certain jurisdictions excluding Quebec. However, to the extent that the shelf prospectus contemplates the possibility of an ATM distribution, it will be necessary for the issuer to file an undertaking with the AMF pursuant to which the issuer undertakes to file an amendment to the prospectus to add Quebec as a jurisdiction should the issuer determine to proceed with an ATM distribution.

For further information, please contact:

Howard Levine                          514-982-4005

or any other member of our Capital Markets group.