Investor Organizations Oppose Tightening of Canadian Disclosure Regime

The following post comes to us from Alex Moore, partner at Davies, Ward, Phillips & Vineberg LLP, and discusses an MFA and AIMA joint comment letter submitted with the Canadian Securities Administrators. The comment letter is available here.

The Managed Funds Association (“MFA”) and the Alternative Investment Management Association (“AIMA”) and have jointly submitted a comment letter with the Canadian Securities Administrators with respect to proposed changes to Canada’s block shareholder reporting regimes known in Canada as the Early Warning Reporting (“EWR”) system and the Alternative Monthly Reporting (“AMR”) system. The EWR and AMR systems are the Canadian equivalents to Schedule 13(d) and 13(g) disclosure in the United States.

The comment letter provides an extensive discussion of the importance of shareholder engagement and activist investing and the consequential benefits from such activity that accrue to all shareholders, as well as to target companies and the economy more generally. The letter submits that the CSA’s proposed tightening of Canada’s block shareholder reporting rules will stifle shareholder engagement and democracy and insulate incumbent managers from owners. The full text of the MFA and AIMA comment letter is available here:

The changes to the EWR and AMRS regimes proposed by the CSA include:

  • 1. Lowering the current disclosure threshold of 10% voting or equity ownership to 5%.
  • 2. Requiring immediate disclosure upon crossing the 5% ownership threshold and imposing a one day moratorium on further purchases following disclosure. These are features of the current EWR regime, but currently only apply at the 10% threshold.
  • 3. Disqualification of investors from the use of the AMRS regime if they intend to solicit proxies. The AMRS is available to eligible institutional investors and allows them to report changes in block ownership on a monthly basis rather than immediately and exempts investors from the purchasing moratorium.
  • 4. Requiring enhanced disclosure under both the EWR regime and AMRS regime with respect the investor’s intentions with respect to the issuer.
  • 5. Requiring an investor to include “equity equivalent derivatives” in calculating its share ownership for the purpose of determining whether the 5% ownership threshold has been crossed. Equity equivalent derivatives would capture derivatives (even cash-settled derivatives) that substantially replicate the economic consequences of ownership regardless of a lack of control over the reference securities.

The comment letter argues that the proposed changes will have a chilling effect on shareholder engagement and activist investing to the detriment of shareholders generally and the Canadian capital markets. The letter makes the case that engaged shareholders and activist investors serve as a check on management, contain agency costs, improve corporate governance and have been shown in a number of empirical studies to have a positive impact both on firm value and operating performance of target companies.

The CSA’s proposal fails to consider the negative impacts that increased disclosure burdens will have on the beneficial role that engaged shareholders and activist investors play. The letter also submits that evolutions in the capital markets in recent decades, particularly the declining proportion of shares held directly by retail investors and the increasing role of sophisticated institutional investors, means that the ability of a 5% or even 10% shareholder to have a disproportionate impact on company control has in fact diminished, suggesting that there is no basis for a lowering of the disclosure threshold.

The letter also compares the CSA’s proposed amendment to the shareholder reporting regimes in other jurisdictions, including the S.E.C.’s Rule 13d and concludes that the CSA’s proposed amendments would adopt some of the most burdensome elements of foreign regimes while retaining the existing strict requirements of the EWR that currently only apply at 10%.

The proposed changes have generated a large amount of interest, with 68 comment letters having been submitted. The full text of the CSA’s proposed amendments is available at:

Copies of other comment letters submitted in response to the proposal are available at:

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