Spotlight On: Crossing the 10% Ownership Threshold
January 15, 2022
All about the key 10% threshold for stakebuilding investors, and what you need to know to cross it
Ever wonder why an investor might acquire 9.9% of the shares of a Canadian public company? The answer to most head-scratchers in corporate transactions is usually: “because of tax”.
In Canada, it might also be as a result of the onerous securities law requirements that are imposed on any investor that crosses the 10% ownership threshold in the voting or equity securities of a reporting issuer.
Ten percent beneficial ownership of, or control or direction over, voting or equity securities is the first ownership threshold where public disclosure and other requirements begin to apply to securityholders of reporting issuers under Canadian securities laws.
How to Determine Your Beneficial Ownership
There is no definition of the term “beneficial ownership” in Canadian securities laws, so beneficial ownership is determined in accordance with the ordinary principles of applicable property and trust law. Beneficial ownership is distinguishable from registered ownership and the beneficial owner of securities may be different from the registered owner, where for example securities are held in the name of a broker.
A person is deemed to have beneficial ownership on a given date of:
- any securities (such as common shares), if the person is the beneficial owner of securities (such as a convertible debenture or warrant) convertible into or exchangeable for the securities within 60 days following that date; and
- any securities if the investor has a right or obligation (such as under a share purchase agreement) permitting or requiring it, whether or not on conditions, to acquire beneficial ownership of the securities within 60 days by a single transaction or a series of linked transactions; and
- any securities that are beneficially owned by a company that is itself controlled by that person, or that are beneficially owned by an affiliate of such company.
How to Determine Your Control or Direction
The term “control or direction” is not defined in the securities laws of most Canadian jurisdictions. However, guidance provided by regulators indicates that a person generally will have control or direction over securities if the person, directly or indirectly, has or shares:
- voting power, which includes the power to vote or to direct the voting of such securities; and/or
- investment power, which includes the power to acquire or dispose or to direct the acquisition or disposition of such securities.
Control or direction over securities can be established through any contract, arrangement, understanding or relationship or otherwise.
Because control or direction can be established even in the absence of beneficial ownership, investors approaching beneficial ownership of 10% or more of a class of securities of a reporting issuer should be especially alert to any circumstances which could give them additional voting or investment power.
How to Calculate Your Securityholding Percentage
The determination of whether an investor has crossed the 10% ownership threshold in a class of securities of a reporting issuer is based on the investor’s “securityholding percentage” in securities of that class, which is calculated as follows:
- (a) First, add up all of the outstanding securities of the class actually beneficially owned or controlled or directed by the investor and any persons “acting jointly or in concert” with the investor (see “Joint Actors: Acting Jointly or in Concert” below).
- (b) Next, add up all of the securities of the class (including unissued securities) the investor is deemed to beneficially own, either as a result of beneficially owning securities convertible into the securities or otherwise having a right or obligation to acquire beneficial ownership of the securities within 60 days.
The sum of paragraphs (a) and (b) above is your numerator.
- (c) Check the issuer’s public disclosure for its most recently reported number of issued and outstanding securities of the class. If you have knowledge that the most recently reported number is inaccurate or has changed and knowledge of the correct number, use that one instead.
- (d) Add the number of securities from paragraph (b) above that are not included in the number of issued and outstanding securities in paragraph (c) above. (This represents the number of securities that the issuer would issue if the convertible securities held by the investor and its joint actors were in fact converted or exercised.)
The sum of paragraphs (c) and (d) is your denominator.
Divide the numerator by the denominator. If the result is 0.10 or greater, the investor has crossed the 10% ownership threshold.
The calculation is not impacted by whether or not any convertible securities are in the money or likely to be exercised, or by any conditions on the right or obligation to acquire beneficial ownership of the securities.
A person that is party to an equity swap or similar derivative arrangement may have deemed beneficial ownership of, or control or direction over, the underlying securities if, for example, the investor has the ability to obtain the securities or to direct the voting of the securities.
Securities lending arrangements that separate the economic interest in securities from ownership and voting also should be considered in determining a person’s securityholding percentage in a class of securities of an issuer.
Joint Actors: Acting Jointly or in Concert
Whether parties are acting jointly or in concert (and are therefore “joint actors”) will depend on the particular facts and circumstances of each case. Generally, there must be a clear understanding between the parties to bring about a specific result. Guidance provided by regulators indicates that, subject to certain exceptions:
- Parties are deemed to be joint actors with an investor if they acquire or offer to acquire securities with the investor or any other person acting jointly or in concert with the investor, or if they are an “affiliate” of the investor (that is, where they control, are controlled by, or are under common control with the investor).
- Parties are presumed to be joint actors with an investor if they intend to exercise voting rights attaching to securities with the investor or with any other person acting jointly or in concert with the investor, or if they are an “associate” of the investor (which includes 10% shareholders or certain relatives of the investor).
A joint actor relationship can be established by any agreement, commitment or understanding and can be formal or informal.
Initial Obligations on Crossing 10%
Voting or Equity Securities
The reporting and other requirements below generally only apply to acquisitions of voting or equity securities of a reporting issuer. The term “voting security” refers to any security other than a debt security of an issuer carrying a voting right either under all circumstances or under only certain circumstances that have occurred and are continuing. The term “equity security” refers to a security of an issuer that carries a residual right to participate in the earnings of the issuer and, on liquidation or winding up of the issuer, in its assets. Common shares typically will be voting or equity securities.
The Early Warning Reporting System
An investor whose “securityholding percentage” crosses the 10% threshold in voting or equity securities of a reporting issuer must:
- Promptly, and in any event no later than the opening of trading on the business day following the triggering event, issue and file on the issuer’s profile on the System for Electronic Document Analysis and Retrieval (SEDAR) a press release containing prescribed information regarding the triggering event, including the purposes of the transaction and any intention to acquire additional securities of the issuer; and
- Within two business days after the triggering event, file on the issuer’s profile on SEDAR an early warning report (EWR) in the prescribed form, including the information required to be included in the news release together with certain information permitted to be omitted from the news release. (See “Contents of EWRs and AMRs” below.)
From the time that the EWR requirement is triggered until the expiry of one business day following the date upon which the EWR is filed, the investor and its joint actors must not acquire or offer to acquire beneficial ownership of, or control or direction over, any securities of the applicable class of securities or securities convertible into securities of that class, unless the investor already holds 20% or more of the outstanding securities. This is sometimes referred to as the “one business day moratorium”.
The EWR requirements do not apply to joint actors of an investor in connection with the obligation to make a specific filing if the investor files a news release or EWR at the time the joint actor would be required to file, and the news release or EWR discloses the required information concerning the joint actor.
Alternative Monthly Reports
An investor which meets the definition of an “eligible institutional investor” and qualifies to do so may choose to file alternative monthly reports (AMRs) instead. An investor which files AMRs in the prescribed form on the issuer’s profile on SEDAR also may not be required to file insider reports on SEDI.
Both EWRs and AMRs are designed to provide notice to the market of an investor’s accumulation of 10% or more of the voting or equity securities of a reporting issuer. The AMR regime is designed to minimize compliance and other costs for institutional investors that do not intend to exercise control over a reporting issuer.
The AMR requirements do not apply to joint actors of an investor in connection with the obligation to make a specific filing if the investor files an AMR at the time the joint actor would be required to file and the AMR discloses the required information concerning the joint actor.
Benefits of the AMR System
The AMR regime is less onerous than the early warning system. For example:
- After the initial report filed on reaching 10% ownership, an AMR only needs to be filed if the investor’s beneficial ownership of, or control or direction over, the applicable class of securities crosses multiples of 2.5% (that is, at ownership thresholds of 12.5%, 15%, 17.5%, etc.) as of the end of the month in which the transaction occurs. EWRs, in contrast, are required at 2% intervals.
- An AMR must be filed within ten days of the end of any month in which the above threshold is crossed or a change in a material fact occurs, as opposed to within two days of the triggering event for EWRs.
- No one business day moratorium on further purchases applies for AMR filers.
- AMRs do not require disclosure of the consideration paid for the securities and do not need to be accompanied by a news release.
- An investor which files AMRs is exempt from filing SEDI insider reports provided they meet certain criteria, including that (i) the investor discloses in its AMR its interest in any related financial instrument involving a security of the issuer that is not otherwise reflected in its securityholding percentage, (ii) the investor does not have knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed, and does not receive such knowledge in the ordinary course of its business and investment activities, (iii) there are no directors or officers of the issuer who were, or could reasonably be seen to have been selected, nominated, or designated by the investor or any joint actor, and (iv) the investor, together with any joint actors, does not have effective control (deemed at more than 30%) of the issuer. An investor will become ineligible to rely on this exemption if, together with any joint actors, it purchased or sold in the previous month 50% or more of all the applicable securities that were reported sold on a stock exchange or over-the-counter.
- If the investor is exempt from filing SEDI insider reports, then any director or senior officer of the investor who is a reporting insider of the issuer solely as a result of being a director or senior officer of the investor also is exempt from filing SEDI insider reports.
AMR Disqualification Criteria
An investor will be disqualified from filing AMRs and must immediately issue and file a news release and EWR if, among other things, the investor or any of its joint actors:
- makes or intends to make a formal take-over bid;
- proposes or intends to propose a reorganization, amalgamation, merger, arrangement or similar business combination that if completed would reasonably be expected to result in the investor, either alone or together with any joint actors, possessing effective control over the issuer; or
- solicits proxies against the recommendations of management with regard to any transaction or in support of any director candidates other than management’s nominees.
An investor which has become disqualified from filing AMRs and which owns 10% or more of the securities must not acquire additional securities until 10 days after the news release is filed.
Contents of EWRs and AMRs
Both EWRs and AMRs must follow forms set out in National Instrument 62-103. Both forms require the investor to disclose (i) the securities of the reporting issuer held by the investor and any of its joint actors; (ii) the details of any related financial instruments involving the same class of securities, securities lending arrangements or agreements, arrangements or understandings altering their economic exposure to the same class of securities; (iii) the details of any agreements, arrangements, commitments or understandings between the investor, its joint actors and any other person with respect to the issuer’s securities; and (iv) the details of any plans and future intentions of the investor and its joint actors if they would result in, among other things:
- the acquisition or disposition of additional securities of the issuer;
- a corporate transaction involving the issuer or any of its subsidiaries;
- a sale or transfer of a material amount of the assets of the issuer;
- a change in the board of directors or management of the issuer;
- a material change in the issuer’s business or corporate structure;
- a class of securities of the issuer being delisted from a marketplace or the issuer ceasing to be a reporting issuer in any jurisdiction of Canada; or
- a solicitation of proxies from securityholders.
Similarities to and Differences from US Filings
The EWR regime is similar to Schedule 13D filing requirements in the US, AMRs are similar to Schedule 13G filings, and SEDI insider filings are similar to US Form 4 filings. There are however some important differences:
- The reporting threshold for both EWRs and AMRs is 10%, as opposed to 5% in the US.
- An EWR must be filed within two business days of the triggering event, whereas a Schedule 13D report must be filed within ten days of the acquisition.
- A moratorium on further purchases applies from the time of the triggering event to the expiry of one business day after an EWR is filed, whereas in the US no such restrictions apply. As noted above, the one business day moratorium does not apply to eligible institutional investors relying on the AMR reporting system.
Insider Reporting Requirements
If an investor has beneficial ownership of, or control or direction over, whether direct or indirect, securities of a reporting issuer carrying more than 10% of the voting rights attached to all of the issuer’s outstanding voting or equity securities the following requirements will generally apply to the investor:
- The investor is a “significant shareholder” and a “reporting insider” of the issuer for purposes of insider reporting requirements.
- Unless an exemption is available, the investor must within 10 calendar days of becoming a reporting insider file an initial insider report on the issuer’s profile on the System for Electronic Disclosure by Insiders (SEDI) disclosing the investor’s:
- beneficial ownership of, or control or direction over, whether director or indirect, securities of the issuer, and
- interest in, or right or obligation associated with, a related financial instrument involving a security of the issuer.
- If the investor, at the time it becomes a reporting insider of the issuer, is party to an agreement, arrangement or understanding that
- has the effect of altering, directly or indirectly, the investor’s economic exposure to the issuer; or
- involves, directly or indirectly, a security of the issuer or a related financial instrument involving a security of the issuer,
that remains in effect, the investor must within 10 calendar days of becoming a reporting insider file an insider report in the issuer’s SEDI profile disclosing the existence and material terms of the agreement, arrangement or understanding.
- Senior officers and directors of the investor and each individual performing functions similar to those roles, among others, may also be reporting insiders and subject to the same insider reporting requirements, unless an exemption is available.
Ongoing Obligations After Crossing 10%
Ongoing Reporting Obligations
Investors over the 10% ownership threshold of a class of voting or equity securities of a reporting issuer must keep a sharp eye out, as the following additional ongoing reporting obligations apply to any change to their holdings, interests or intentions, or those of their joint actors, in each case unless an exemption applies:
- Another news release and EWR is required every time the investor, together with any joint actors, crosses each subsequent threshold of 2% beneficial ownership of, or control or direction over, the applicable class of securities (or securities convertible into 2% or more of the applicable class of securities).
- If the investor is an eligible institutional investor filing AMRs, a new AMR is required upon the investor, together with any joint actors, crossing each subsequent threshold of 2.5% beneficial ownership of, or control or direction over, the applicable class of securities.
- Another news release and EWR or AMR, as applicable, is required upon any change in a material fact in the most recently filed AMR, including changes to the investor’s intentions.
- SEDI insider filings must be made within five calendar days of
- any change to the investor’s holdings or interest in, or right or obligation associated with, a related financial instrument, no matter how small and regardless of the nature of the change, or
- the investor entering into, materially amending or terminating any agreement, arrangement or understanding that
- has the effect of altering, directly or indirectly, the investor’s economic exposure to the issuer; or
- involves, directly or indirectly, a security of the issuer or a related financial instrument involving a security of the issuer.
- If the investor is an eligible institutional investor and becomes disqualified from filing AMRs (see “AMR Disqualification Criteria” above), it must immediately issue and file a news release and within two business days file an EWR.
- A final news release and EWR or AMR and SEDI filing, as applicable, is required if the investor drops below the 10% ownership threshold. No further reports are then required unless the investor crosses the 10% ownership threshold again.
Where a joint actor is involved, the investor must be doubly careful as the actions and intentions of the joint actor may affect an investor’s reporting obligations.
An issuer action alone, such as the issuance of additional securities or the repurchase of securities by the issuer, does not trigger a new EWR or AMR until the investor undertakes a transaction that changes its securityholding percentage in the class of securities.
Similarly, an issuer event alone, such as a stock dividend, stock split, consolidation, amalgamation, reorganization, merger or other similar event that affects all holders of a class of securities in the same manner does not trigger the requirement to file a SEDI insider report until the investor undertakes a transaction that changes its beneficial of, or control or direction over, securities of the issuer.
Insider Trading Rules
In addition to the above ongoing reporting obligations, an investor which has beneficial ownership of, or control or direction over, securities of a reporting issuer carrying more than 10% of the voting rights attached to all of the outstanding securities of the reporting issuer is an “insider” of the issuer and “person or company in a special relationship with an issuer”.
Among other things, such investor will be subject to insider trading rules which prohibit trading in securities of the issuer while in possession of material non-public information, unless an exemption applies.
Related Party Transactions and MI 61-101
If the investor is a “related party” of the issuer under Multilateral Instrument 61-101 (“MI 61-101”), any transaction between the issuer and the investor, whether or not there also are other parties involved, may be a “related party transaction”.
MI 61-101 imposes additional requirements on related party transactions, including:
- a formal valuation by an independent and qualified valuator, unless an exemption is available;
- approval of the related party transaction by the “majority of the minority” of shareholders, excluding shares beneficially owned, or over which control or direction is exercised, by the issuer, an interested party and any of its joint actors, and certain related parties of an interested party and any of the related party’s joint actors, unless an exemption is available; and
- enhanced disclosure by the issuer in its press release and its material change report, if one is required to be filed.
When building a stake in a Canadian public company:
- Keep an eye on your holdings as a percentage of the outstanding class of securities. Set up alerts for the reporting issuer to receive relevant information about the issuer and its securities and be mindful of share buy-backs, consolidations (reverse stock splits) and other issuer actions or events which could reduce the number of shares outstanding and increase your relative holdings.
- Consider whether you have voting or investment control over any additional securities, even if you don’t beneficially own them.
- Once your holdings approach 10% of the outstanding class of securities, check with your legal and tax advisors before making any additional trades.
- If you are responsible for trades on behalf of an organization, ensure you have a clear understanding of the intentions of your organization (as the investor). Intent, even if not yet acted upon, can influence the type and frequency of reporting required.
- Be aware of relationships with other investors, especially where a common objective develops. If the facts support a joint actor relationship, their holdings, actions, and intentions could be imputed to you, potentially pushing you over reporting thresholds and exposing you to unintended reporting requirements or in some cases breaches of securities laws.
- If you inadvertently cross a key threshold or your investment intentions change, act quickly: obligations can be immediate and fines and penalties can apply to late filings or misrepresentations in existing filings.
- Ensure that your actions reflect your intentions, and keep a close eye on public and private communications (including on social media). For example, “soliciting proxies” can encompass a broad variety of actions, and even an intent to solicit proxies for certain objectives can have consequences, such as disqualifying you from filing AMRs and prompting immediate early warning reporting and other obligations.
- Regularly review the public disclosure in any of your prior filings to ensure it remains accurate. Changes in material facts in previous reports will trigger requirements to file new reports.
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