Emerging market issuers face prospectus scrutiny

4 septembre 2014

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In preparing and filing the preliminary prospectus, we have recently noticed that regulators are commonly responding with requests for further disclosure from issuers with mining properties in emerging markets. Often, the information requested is of the nature that you would expect should be included an annual information form (AIF) except that the nature of the information sought is not actually covered by the scope of required AIF disclosure.

As we’ve discussed in previous posts, regulators have in recent years increased the scrutiny over emerging market issuers. Specifically, the OSC undertook a targeted review of issuers with significant business operations in emerging markets in 2011 and released a notice outlining areas of concern in March 2012. Meanwhile, in November 2012, the OSC released a guide to assist boards and management of emerging market issuers in addressing the risks of doing business in emerging markets and satisfying their governance and disclosure obligations. The TSX and TSX-V also issued a consultation paper in December 2012 intended to identify the potential risks with listing emerging market issuers and to provide guidance to issuers with respect to applicable listing considerations. 

In our experience, the disclosures recently requested by regulators in the context of their prospectus reviews have included information such as (i) the issuer’s ownership of property interests and assets; (ii) the impact of foreign laws on the issuer; (iii) the control of the board of directors over subsidiaries; (iv) how the board of directors of the issuer will be able to cause the emerging market subsidiary to transfer funds to the issuer to fund the issuer’s expenses, including the salary of the chief financial officer and other officers located in Canada, director fees, legal fees, audit fees or the costs of any investigation that the board or audit committee may need to undertake; (v) how the board will cause the removal of the officers and directors of the subsidiary; (vi) risks to the corporate structure and controls put in place to mitigate risks; (vii) whether the location of assets in emerging market jurisdictions has any implications to an investor’s ability to exercise statutory rights and remedies under Canadian securities law; (viii) information on which directors and executive officers have experience conducting business in the emerging market jurisdiction; and (ix) how any language barriers will be overcome. While arguably not topics that may be typically canvassed by Canadian reporting issuers in disclosure documents, these are also not unfamiliar, as many are drawn from the OSC guide.

As such, issuers, especially mining companies, outside of Canada, the U.S., Australia and Western Europe, that intend or are considering filing a prospectus in Canada, would be well advised to consider the OSC guide and other staff guidance and policies and review their disclosure accordingly in advance of undertaking a public offering of securities. This includes enhancing disclosure contained in their AIFs before filing a prospectus to include disclosure that is responsive to these types of questions. Such enhancements to the AIF should also help avoid delays in obtaining prospectus receipts and potential added costs and delays in assembling the required emerging markets disclosure, and coordinating with local counsel in the emerging markets jurisdictions under the tight time frame of a bought deal or other offering.

In addition, if an issuer does not have its emerging markets disclosure in place prior to undertaking a bought deal, it should ensure there is adequate time included in the timetable contained in the bought deal letter to prepare the disclosure and clear its preliminary prospectus with the regulators.

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