FOREWORD

Through our annual Securities Year in Review publication we seek to highlight key changes in the capital markets sector, particularly with respect to significant changes in securities laws.

In this respect, 2016 was a notable year for capital markets in Canada with important developments in several areas, including the take-over bid regime, prospectus exemptions, reporting and disclosure requirements and dividend reinvestment plan rules. Although most of the amendments were evolutionary rather than revolutionary, they are nonetheless significant for issuers and other stakeholders and hold promise for certain landmark changes in the future.

As we move into 2017, we continue to regularly monitor securities laws developments. Updates on issues relating to capital markets and corporate law are routinely published by McMillan lawyers on our website. In case you require information about specific issues please do not hesitate to get in touch with us.

Amandeep Sandhu Andjela Vukobrat

Cautionary Note: This publication only provides an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained. © McMillan LLP 2017

McMillan LLP Brookfield Place, 181 Bay Street, Suite 4400, Toronto, Ontario, Canada M5J 2T3 Vancouver Calgary Toronto Ottawa Montréal Hong Kong mcmillan.ca

EXECUTIVE SUMMARY

Notable Amendments in 2016

Some of the more significant amendments in 2016 that are discussed here include:

Reforms to the Take-over Bid Regime

Amendments to the take-over bid regime were made in an effort to assist the boards and shareholders of target companies.

New Prospectus Exemptions

A number of new prospectus exemptions were introduced. Some have been adopted across several Canadian jurisdictions, while others are limited to a single jurisdiction. These include the investment dealer exemption, start-up business exemption and offering memorandum exemption.

Amendments to Existing Exemptions

The amendments to the rights offering rule require issuers undertaking a rights offering to file certain rights offering documents with the TSX or TSXV and reduce the advance notification period, among other changes. The crowdfunding exemption amendments harmonized registration and prospectus exemptions for start-ups across various jurisdictions.

Changes to Reporting and Disclosure Requirements

In 2016, the CSA introduced a report of exempt distribution form, began to require that certain exempt market filings be made on SEDAR and provided guidance on the varying access levels for documents filed on SEDAR.

Other Important Amendments

Securities regulators made several other legislative amendments in 2016, including amending the Ontario Securities Act to broaden its insider trading restrictions, amending dividend reinvestment plans (DRIPs) to increase requirements for DRIPS and outlining exceptions.

Judicial Decisions

In 2016, there were several noteworthy decisions from the courts and securities regulators dealing with a number of significant issues relevant to regulation of the capital markets. The matters adjudicated include the scope of the public interest authority of securities regulators, the fairness of plans of arrangement and remedies available for secondary market misrepresentations. These notable developments should be of interest to capital markets participants.

Proposed Amendments

In 2016, securities regulators indicated that there would be various types of amendments pertaining to proxy voting infrastructure and protocols, issuer website disclosure, distributions outside of Canada and a new regulatory framework for alternative funds in the horizon.

McMillan LLP mcmillan.ca

Noteworthy CSA Guidance

In the past year regulatory authorities have provided guidance or updates on the following matters:

Non-GAAP Financial Measures

In early 2016, the CSA provided guidance on disclosure of non-GAAP financial measures to reflect the recent amendments to financial statement requirements.

Women on Boards – Results of Disclosure Requirements

A majority of the securities regulatory authorities across Canada jointly published a staff notice summarizing the key findings of a review of corporate governance disclosure relating to women on boards and in executive positions. This is the second review of this nature following corporate disclosure amendments.

Cybersecurity for Market Participants

The CSA published a staff notice proposing cybersecurity relation policy initiatives to help market participants reduce their exposure to cyber risk.

Results of Annual Continuous Disclosure Reviews

The CSA published a notice summarizing the results of their annual continuous disclosure review of reporting issuers. The notice highlights MD&A and other regulatory disclosure deficiencies and provides solutions for reporting issuers.

Regulation of Fixed Income Market

The CSA issued an update on its fixed income regulation plan through a staff notice. The notice highlights that the CSA intends to make the Investment Industry Regulatory Organization of Canada the information processor for corporate debt securities among other things.

Other Significant Developments

OSC Whistleblower Program

In 2016, the OSC launched a whistleblower program, the first of its kind in Canada. The program intents to encourage the reporting of suspected Ontario securities law violations and even provides for awards and protections for whistleblowers. The program and its key elements are discussed in more detail below.

Normal Course Issuer Bids

The TSX issued a staff notice to provide guidance on the application of particular sections of the TSX Company Manual to normal course issuer bids, as well as the timing and filing requirements for normal course issuer bids.

McMillan LLP mcmillan.ca

CONTENTS

A. NOTABLE AMENDMENTS IN 2016 ................................................................................................... 1 I. REFORMS TO THE TAKE-OVER BID REGIME ......................................................................................... 1 II. NEW PROSPECTUS EXEMPTIONS ...................................................................................................... 1

Investment Dealer Exemption .................................................................................................. 1 Start-Up Business Exemption .................................................................................................... 2 Offering Memorandum Exemption .......................................................................................... 2

III. AMENDMENTS TO EXISTING EXEMPTIONS........................................................................................... 3 Rights Offering Amendments ................................................................................................... 3 Amendments to the Crowdfunding Exemptions....................................................................... 4

IV. CHANGES TO REPORTING AND DISCLOSURE REQUIREMENTS .................................................................. 4 Exempt Market Filings to be made on SEDAR ........................................................................... 4 Report of Exempt Distribution .................................................................................................. 5 Early Warning Amendments .................................................................................................... 5

V. OTHER NOTABLE AMENDMENTS...................................................................................................... 6 Insider Trading Restrictions Extended ....................................................................................... 6 Dividend Reinvestment Plan Rules ............................................................................................ 6

B. JUDICIAL DECISIONS ........................................................................................................................ 7 I. RE HECLA MINING ....................................................................................................................... 7 II. INTEROIL CORPORATION V. MULACEK .............................................................................................. 7 III. SMOOTHWATER CAPITAL CORPORATION V. MARQUEE ENERGY LTD. ....................................................... 8 IV. ROONEY V. ARCELORMITTAL S.A. .................................................................................................... 9 V. LBP HOLDINGS V. ALLIED NEVADA GOLD CORP. ............................................................................... 9

C. PROPOSED AMENDMENTS ............................................................................................................. 10 I. PROXY VOTING INFRASTRUCTURE AND PROPOSED VOTING PROTOCOLS ................................................. 10 II. AMENDMENTS TO TSX COMPANY MANUAL RELATING TO DISCLOSURE REQUIREMENTS FOR ISSUER WEBSITES AND SECURITY BASED COMPENSATION ARRANGEMENTS ............................................................................. 11

Part IV Amendments – Publicly Accessible Website Disclosure ................................................ 11 Part VI Amendments- Security Based Compensation Arrangements ........................................ 11

III. IOSC PROPOSES NEW RULE REGARDING DISTRIBUTIONS OUTSIDE OF CANADA ....................................... 11 Restrictions on Resale ............................................................................................................. 12 Registration Requirements ..................................................................................................... 12 Report of Distributions Outside Canada ................................................................................. 12

IV. LIQUID ALTERNATIVES: GAME CHANGER FOR CANADIAN HEDGE FUNDS................................................ 12 D. NOTEWORTHY CSA GUIDANCE...................................................................................................... 13

I. UPDATES TO GUIDANCE ON DISCLOSURE OF NON-GAAP FINANCIAL MEASURES ..................................... 13 II. WOMEN ON BOARDS: RESULTS OF “COMPLY OR EXPLAIN” DISCLOSURE REQUIREMENTS ............................ 14 III. UPDATE ON CYBERSECURITY FOR MARKET PARTICIPANTS ..................................................................... 15 IV. RESULTS OF ANNUAL CONTINUOUS DISCLOSURE REVIEWS .................................................................. 16

MD&A Deficiencies ................................................................................................................. 16 Other Regulatory Disclosure Deficiencies ............................................................................... 17

V. CSA UPDATE ON REGULATION OF FIXED INCOME MARKET ................................................................. 18 E. OTHER SIGNIFICANT DEVELOPMENTS ........................................................................................... 18

I. OSC WHISTLEBLOWER PROGRAM INTRODUCED ................................................................................ 18 II. TSX PROVIDES GUIDANCE ON NORMAL COURSE ISSUER BIDS .............................................................. 19

TSX and ATS Purchases........................................................................................................... 19 Automatic Purchases under NCIB ........................................................................................... 19 Calculations ........................................................................................................................... 20

CONCLUSION ........................................................................................................................................ 20

AUTHORS .............................................................................................................................................. 21 ABOUT MCMILLAN LLP .......................................................................................................................... 22

McMillan LLP mcmillan.ca

A. NOTABLE AMENDMENTS IN 2016

In 2016 there were several notable regulatory and legislative amendments ranging from amendments to the take-over bid regime to the introduction of new prospectus exemptions and important changes to reporting and disclosure requirements. All of these are discussed below.

I. Reforms to the Take-Over Bid Regime

In May 2016, the Canadian Securities Administrators (CSA) adopted amendments to Canada's take-over bid regime. Fundamental changes for non-exempt take-over bids included:

50% Minimum tender condition. The bidder must receive tenders of at least 50% of the outstanding securities subject to the bid prior to taking up any securities.

Mandatory 10-day extension. The bidder must extend the deposit period for a minimum of 10 days once the 50% minimum tender condition has been met.

105-day minimum deposit period, subject to certain exceptions. All take-over bids are required to remain open for a minimum of 105 days unless the target board agrees to a shorter deposit period of not less than 35 days or the target company intends to effect a specified alternative transaction, reducing the initial tender period to 35 days for all contemporaneous take-over bids.

The purpose of the 2016 changes to the take-over bid regime is to provide boards of directors of target companies with more time and more leverage to respond to unsolicited bids and establish a majority acceptance standard for bids. The changes are also intended to prevent target shareholders from being pressured into tendering to a bid out of a fear of being left holding securities in a closely held company that are not as liquid. Unfortunately for bidders, the changes are likely to increase the risk of an interloping bid being made. However, this also means that the occurrence of hostile bids will likely decrease and the level of engagement between potential bidders and target companies will increase. For further information on the reforms to the take-over bid regime, please see our bulletin: For The Times They Are A-Changin: Canadian Regulators Adopt Fundamental Changes to the Take-over Bid Regime.

II. New Prospectus Exemptions

2016 saw the adoption of a number of new prospectus exemptions. While some were introduced in several jurisdictions, others were limited to specific jurisdictions as those jurisdictions finally implemented an exemption that others had previously adopted or introduced a new one.

Investment Dealer Exemption

In February 2016, the securities regulatory authorities of British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick adopted the investment dealer exemption to facilitate capital raising for listed issuers and foster participation of retail investors in private placements while maintaining appropriate investor protection. The exemption is subject to a number of conditions.

The issuer is required to be a reporting issuer in at least one Canadian jurisdiction and have a class of equity securities listed on the Toronto Stock Exchange (TSX), the TSX Venture Exchange (TSXV), the Canadian Securities Exchange (CSE) or Aequitas Neo Exchange Inc. The issuer’s public disclosure must also be up to date. The offering is limited to a listed security, a unit consisting of a listed security and a warrant to acquire another listed security, or another security convertible into a listed security at the security holder’s discretion. The news release announcing the offering must disclose all required information regarding the distribution

McMillan LLP mcmillan.ca

- 2 -

and any material fact that has not generally been disclosed. Furthermore, the investor is required to obtain advice regarding the suitability of the investment from an investment dealer.

It is also important to note that in all jurisdictions mentioned above other than Alberta, the investor must be provided with a contractual right of action in the event of a misrepresentation in the issuer’s continuous disclosure record. Issuers should be cautious when providing a voluntary offering document as an investor will have certain rights of action in the event of a misrepresentation in the offering document.

For further information on the investment dealer exemption, please see our bulletin: New Investment Dealer Prospectus Exemption Adopted.

Start-Up Business Exemption

In July 2016, the Alberta Securities Commission (ASC) implemented ASC Rule 45-517 Prospectus Exemption for Start-up Businesses to facilitate small, local financings. It allows issuers to raise funds through their own contacts, a traditional registered dealer, crowdfunding and an online funding portal as long as the funding portal is registered as a dealer.

This exemption is only available to issuers which have a head office in Alberta (or a jurisdiction which has adopted a corresponding exemption) and which are seeking funds from investors in Alberta. Under the exemption, the issuer can only distribute specific types of securities and is also required to prepare an offering document in the required form. Additionally, there are capital raising limits. Specifically, the issuer (including other members of its issuer group1) cannot raise in aggregate more than $250,000 per distribution and the issuer group is limited to two start-up business distributions in a calendar year and an aggregate lifetime amount of $1,000,000. An issuer can only accept $1,500 from an investor unless a registered dealer provides advice to the investor, in which case an issuer can accept $5,000 from the investor.

An offering under this exemption is required to close within 90 days following which the issuer must file the offering document and a report of exempt distribution. This exemption prohibits payment of a commission, fee or similar payment to the issuer group or any of their promoters, directors, officers, control persons or founders in connection with a distribution under the exemption.

For further information on the start-up business exemption and the full list of securities that can be distributed under the exemption, see our bulletin: Prospectus Exemption for Start-Up Businesses.

Offering Memorandum Exemption

In January 2016, the offering memorandum exemption was finally introduced in Ontario, allowing issuers to obtain capital from a wider range of investors than under existing exemptions. In an effort to harmonize the exemption, securities administrators in Alberta, New Brunswick, Nova Scotia, Quebec and Saskatchewan implemented amendments to their existing offering memorandum exemption. Under this exemption, issuers are required to prepare and deliver an offering memorandum in the prescribed form to issuers.

The main features of the offering memorandum exemption are as follows:

non-eligible investors may invest up to $10,000 in any 12 month period while eligible investors may invest up to $30,000 in any 12 month period (or $100,000 if they obtain advice from a investment or exempt market dealer or portfolio manager);

1 The term “issuer group” includes the issuer, each affiliate of the issuer and any other issuer that is engaged in a common enterprise with the issuer or who has a founder that is also a founder of the issuer.

McMillan LLP mcmillan.ca

- 3 -

investors must complete and sign the risk acknowledgment form and schedules;

a continuous disclosure requirement to provide audited annual financial statements and a notice outlining how the money raised has been used within 120 days of the financial year end;

in New Brunswick, Nova Scotia and Ontario, non-reporting issuers must file an additional notice within 10 days of the occurrence of a discontinuance of the issuer’s business, a change in the issuer’s industry, or a change of control of the issuer;

marketing materials used in connection with distributions under this exemption are required to be incorporated by reference into the offering memorandum and are subject to liability for misrepresentation;

both the offering memorandum and marketing materials must be filed with the securities regulatory authority;

non-reporting issuers using this exemption in Ontario or New Brunswick are designated as market participants and therefore must meet legislative record-keeping requirements and compliance reviews;

issuers cannot use this exemption to distribute specified derivatives or structured finance products; and

this exemption is not available to investment funds in New Brunswick, Ontario and Quebec.

Issuers relying on this exemption may still use other prospectus exemptions.

For further information on the offering memorandum exemption and other common prospectus exemptions, see our bulletin: Do Securities Laws Apply to Private Ontario Companies?

III. Amendments to Existing Exemptions

Rights Offering Amendments

In 2016 both the TSX and TSXV formalized changes to their rights offering rules made in response to the new rights offering regime published by the CSA in late 2015. In May 2016, the TSX formally amended Section 614 – Rights Offerings of the TSX Company Manual and on August 11, 2016, the TSXV announced that amendments to TSXV Policy 4.5 Rights Offerings are in effect.

While the CSA amendments eliminated the regulatory review of a rights offering circular by the CSA, the TSX and TSXV have mandated that issuers undertaking a rights offering must file the following rights offering documents in draft form with the TSX or TSXV, as applicable, at least five trading days prior to finalization:

the Rights Offering Notice (Form 45-106F14); and

the Rights Offering Circular (Form 45-106F15).

The advance notification period to set the record date for all rights offerings has been reduced from seven trading days to five trading days for both the TSX and TSXV. Consequently, all deficiencies raised by the TSX or TSXV must be resolved at least five trading days in advance of the record date for the rights offering.

Other notable amendments to TSXV Policy 4.5 Rights Offerings include the following:

McMillan LLP mcmillan.ca

- 4 -

The minimum subscription price for securities acquired on the exercise of rights was reduced to

$0.01 from $0.05.

Rights are no longer required to be listed on the TSXV, but could be at the option of the issuer and are also required to be transferrable.

If rights are listed on the TSXV and the subscription price for a right is significantly lower than the market price, then shareholder approval is not mandatory for any new control person resulting from a stand-by commitment for a rights offering.

Although fractional rights can be issued, the number of rights required to purchase a security is required to be a whole number.

If security holder will own securities representing more than 10 percent of the voting rights attached to all outstanding voting securities of the issuer on the completion of a rights offering, such individual (or director, officer or insider of such security holder) is required to submit a complete Personal Information Form (Form 2A) or, if applicable, a Declaration (Form 2C1).

Amendments to the Crowdfunding Exemptions

In 2015, securities regulators in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia adopted substantially harmonized registration and prospectus exemptions for start-ups by way of local exemption orders. In June 2016, the above mentioned jurisdictions, except British Columbia, amended the exemption orders and corresponding start-up forms and guides.

The amendments reflect the new filing requirements related to exempt market filings that came into force in May 2016, specifically the new requirement that issuers with exempt market filings electronically file their offering document and report of exempt distribution through the System for Electronic Document Analysis and Retrieval (SEDAR). Issuers in British Columbia will continue to file through BCSC eServices but are now required to file a new Form 45-106F1 Report of Exempt Distribution.

For further information on the amendments to the crowdfunding exemptions, see our bulletin: Adoption of Amendments to Start-up Crowdfunding Blanket Orders.

IV. Changes to Reporting and Disclosure Requirements

Exempt Market Filings to be made on SEDAR

As of May 2016, the CSA requires that certain exempt marketing filings be made on SEDAR. The exempt market filings that must be made on SEDAR include:

Form 45-106F1 Report of Exempt Distribution and the corresponding schedules;

required materials in connection with the offering memorandum, start-up crowdfunding and crowdfunding prospectus exemptions;

disclosure documents delivered to subscribers pursuant to section 37.2 of the Securities Regulation (Quebec); and

McMillan LLP mcmillan.ca

- 5 -

financial statements of “mutual funds in the jurisdiction”2.

There are different access levels for the various filings as indicated in Multilateral CSA Staff Notice 13-323 Frequently Asked Questions About Making Exempt Market Offering and Disclosure Filings on SEDAR. In particular, there are three access levels: auto-public (displayed on SEDAR.com within 15 minutes of filing), private (initially private, but regulators can mark as public and display on SEDAR.com within 15 minutes of it being marked) and private non-public (is never displayed on SEDAR.com).

It is not mandatory for foreign issuers who meet the definition of “foreign issuer (SEDAR)” in National Instrument 13-101 System for Electronic Document Analysis and Retrieval to make electronic filings but they can chose to do so.

Report of Exempt Distribution

Effective June 30 2016, the CSA introduced a new nationally harmonized form of exempt distribution (Form 45-106F1 Report of Exempt Distribution) to be used in all Canadian provinces and territories.

The new form is anticipated to reduce the compliance burden for issuers and underwriters. As a result, there are enhanced disclosure requirements. Issuers must disclose the type of securities being distributed using a 3 letter code and details about the prospectus exemption relied on (how each purchaser qualifies for specific exemptions). Issuers who are not investment funds have additional disclosure requirements. Non-reporting issuers who are distributing securities into Canada except for “eligible foreign securities” will be required to disclose information concerning directors, executive officers, promoters and control persons of the issuer.

The form also requires issuers and underwriters to complete a confidential schedule that discloses whether or not purchasers in Canada are registrants and/or insiders of the issuer.

In an effort to address concerns raised by non-Canadian market participants, the CSA granted relief for specific foreign issuers. Foreign issuers do not have to report whether a purchaser under an exempt distribution in Canada is a “registrant” and/or an “insider” of the issuer. It should be noted that this relief only applies where the issuer is a “foreign public issuer”, a wholly owned subsidiary of a “foreign public issuer” or the issuer is distributing “eligible foreign securities” to “permitted clients”.

Early Warning Amendments

In May 2016, the CSA made amendments to the early warning requirements in National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids (MI 62-104) and National Policy 62-203 Take-Over Bids and Issuer Bids. The most notable changes were:

the requirement of enhanced disclosure for the intention of the acquirer and the purpose of the acquisition (includes disclosure of any intention to change the board or management, sell or transfer material assets, effect a corporate transaction involving the reporting issuer, change the capitalization or dividend policy, change the reporting issuer’s charter or by-laws in a way that might impede the acquisition of control or solicit proxies);

the requirement of enhanced disclosure for material terms of any related financial instruments, securities lending arrangements and other arrangements in respect of a reporting issuer’s securities;

2 As defined in National Instrument 81-106 Investment Funds Continuous Disclosure.

McMillan LLP mcmillan.ca

- 6 -

clarification that early warning news releases must be issued by the opening of trading on the next

business day;

requiring disclosure for decreases in ownership of a reporting issuer of 2% or more and for ownership falling below the 10% reporting threshold;

the exemption for securities transferred or lent pursuant to “specified securities lending arrangement”;

guidance regarding circumstances where an investor may have to include an equity swap or similar derivative arrangement in the calculation or reporting threshold; and

the restriction that eligible institutional investors will be prevented from using the Alternative Monthly Reporting System if they solicit proxies to support the election of a director or a reporting issuer other than the persons proposed by management (or support an M&A transaction that is not supported by management or oppose an M&A transaction that is recommend by management).

For further information on the early warning amendments, see our bulletin: Early Warning Enhancements.

V. Other Notable Amendments

Insider Trading Restrictions Extended

In July 2016, amendments to the Ontario Securities Act (OSA) broadened and aligned its insider trading provisions with the securities legislation in other Canadian jurisdictions. The amendments introduce the new offence of “recommending”, which is defined as recommending or encouraging the purchase or sale of securities of an issuer where the person of company making the recommendation is in a “special relationship” with the issuer and also has knowledge of a material fact or material change that has not been generally disclosed.

Dividend Reinvestment Plan Rules

As of September 2016, TSX amendments to dividend reinvestment plans (DRIPs) require that a DRIP and any amendments to it be pre-cleared with the TSX at least five days before the effective date. An exception to this is when the DRIP allows for the payment of dividends or distributions exclusively with securities purchased on the secondary market.

The TSX has certain requirements with respect to the listed price of securities issued pursuant to the DRIP. Moreover, fractional security interests must be dealt with under the provisions and additional securities can be listed under an existing DRIP through the filing of a DRIP additional listing application. The DRIP also has to allow all security holders to participate in the DRIP unless they reside outside of Canada.

Previously, the DRIPs that allowed for securities from treasury to be issued were treated as additional listings of securities by the TSX. Issuers with DRIPs implemented before September 1, 2016 will be grandfathered and do not have to comply with the new rules until the pre-existing DRIP is amended. Listing additional securities under a pre-existing DRIP without requiring an amendment to the DRIP will not amount to an amendment requiring TSX approval, hence the issuer will not need to comply with the new DRIP rules to list additional securities.

For further information on DRIPs, see our bulletin: TSX Seeks Public Comment on Proposed Amendments to DRIP Rules.

McMillan LLP mcmillan.ca

- 7 -

B. JUDICIAL DECISIONS

In 2016, Securities Commissions and Canadian Courts visited and re-affirmed issues such as the appropriate circumstances for the British Columbia Securities Commission to use its public interest power, the scope of shareholders’ rights and shareholder approval significance in plans of arrangement and remedies available for secondary market misrepresentations.

I. Re Hecla Mining3

This decision addresses the scope of the public interest authority of securities regulators.

A recent decision by the British Columbia Securities Commission (the Panel) involved determining how the public interest power should be applied when there is no breach of securities laws. This was the first hostile bid since Canada’s recently amended take-over bid rules came into force in May 2016. Hecla Mining Company (Hecla) publicized its intention to acquire Dolly Varden Silver Corporation (Dolly Varden) via an insider bid. Dolly Varden then publicized its intent to undertake a private financing. Both companies subsequently filed for cease trade orders, Hecla arguing Dolly Varden’s private placement was an improper defense tactic and Dolly Varden arguing that Hecla failed to comply with Multilateral Instrument 61-101 Take-Over Bids – Defensive Tactics. The panel’s analysis of the issue involved a determination of whether Hecla’s failure to include a formal valuation in the circular was contrary to the public interest, thereby authorizing the panel to invoke its public interest jurisdiction to cease trade the offer.

The Panel deferred to its earlier decision in Re Carnes4 where it held that the public interest power should only be used in very rare circumstances to sanction the type of conduct that is abusive of capital markets. In this case, the Panel decided that the public interest power should be narrowly applied given its potentially significant impact on the transaction and on the shareholders of Dolly Varden.

Ultimately, the Panel held that requiring a formal valuation was not a matter of public interest. The Panel’s reasoning was that the private placement would result in a 40% dilution and was negotiated at arm’s length at an issue price lower than that offered by Hecla and that Hecla did not appear to have material undisclosed information that would make its offer abusive absent a valuation. In rendering its decision, the panel did not clearly articulate exactly what constitutes abuse under this standard.

This matter was simultaneously heard by the Ontario Securities Commission (OSC), where the private placement was also upheld. However, the OSC responded differently with respect to the issue of Hecla not providing a valuation by ordering Hecla to provide a formal valuation and to comply with the requirements of MI 61-101.

For more information on this decision, see our bulletin: Hecla Decision – The British Columbia Securities Commission Continues to Narrow the Use of the Public Interest Power.

II. InterOil Corporation v. Mulacek5

This case examines the fairness of a plan of arrangement by applying the three part plan of arrangement approval test.

3 2016 BCSECCIN 359; 2016 39 OSCB 8927. 4 2015 BCSECCOM 187. 5 2016 YKCA 14.

McMillan LLP mcmillan.ca

- 8 -

In late 2016, the Court of Appeal of Yukon (YKCA) overturned a lower court decision that had approved the proposed acquisition of InterOil Corporation (InterOil) by ExxonMobil Corporation (Exxon) by way of a plan of arrangement. Despite a majority of shareholders voting in favour of the plan of arrangement, it was opposed by the founder and former Chairman and CEO of InterOil on the basis that it was not fair and reasonable, that InterOil’s corporate governance process was deficient and that the disclosure to shareholders was inadequate.

The YKCA, in applying the three part plan of arrangement approval test, found that the plan of arrangement complied with all statutory and court-mandated requirements and was brought in good faith. However, it did not meet the test because it was not fair and reasonable. The YKCA held that: (i) InterOil did not provide sufficient disclosure to its shareholders “both as to the value they would be giving up and the value they would be receiving”; (ii) the Board should have obtained independent advice as to the financial fairness of the plan of arrangement; and (iii) the fairness opinion was limited in scope, did not contain any analysis to support the conclusion that the plan of arrangement was financially fair to shareholders and the fee for the fairness opinion was contingent on the plan of arrangement taking place.

This case highlights the importance of having procedures in place to address actual or perceived conflicts of interest and to ensure that a proposed transaction is subject to independent review (and independent advice, where necessary). Notwithstanding a shareholder vote in support of an arrangement, if a court believes that a company’s corporate governance practices are flawed or that shareholders have not been provided with full and complete disclosure so that they can make a fully informed decision, it may lead to a finding that the arrangement is not fair and reasonable.

For more information on this decision, see our bulletin: Court of Appeal Overturns Approval of US$2.3 Billion Merger Between InterOil and ExxonMobil.

III. Smoothwater Capital Corporation v. Marquee Energy Ltd.6

This case discusses shareholder voting rights in a plan of arrangement and the discretionary powers of the board in how to structure a transaction.

In this decision, the Alberta Court of Appeal overturned the lower court’s decision granting shareholders of an acquiring company a vote in a plan of arrangement and held that a company’s board of directors have the discretion to structure a transaction how they see fit. Alberta Oilsands (AOS) entered into a transaction where it would acquire all of the shares of Marquee Energy (Marquee) in exchange for shares of AOS, resulting in Marquee becoming a wholly owned subsidiary of AOS. Then AOS planned to vertically amalgamate with Marquee. The structure of the transaction required shareholder approval from Marquee’s shareholders and provided them with dissent rights upon approval, but no approval was required from AOS’ shareholders. Smoothwater Capital Corporation (Smoothwater), a shareholder of AOS, opposed the transaction and asked the court to provide voting and dissent rights to AOS shareholders.

In this case, the Court affirmed the following two important principles:

Whether an arrangement is “fair and reasonable” must be determined from the perspective of the company being arranged.

Only the shareholders of the company that is the subject of arrangement have the right to vote, and there is no requirement for a shareholder vote of the company that is not being arranged..

6 2016 ABCA 360.

McMillan LLP mcmillan.ca

- 9 -

It was held that shareholders cannot rely on corporate laws for shareholder voting rights unless those rights are expressly provided to them. The court also stated that directors can choose from a variety of potential transaction structures, even if shareholders do not get approval or dissent rights that would have been available to them if a different transaction structure was chosen.

For more information concerning this decision, see our bulletin: No Changes to Arrangements: Alberta Court of Appeal Upholds Directors’ Choice of Transaction Structure in Merger of Marquee Energy Ltd. and Alberta Oilsands Inc.

IV. Rooney v. ArcelorMittal S.A.7

This decision examines remedies available to security holders for secondary market misrepresentations.

The Ontario Court of Appeal dismissed a class action appeal, holding that security holders who trade their securities in a secondary market cannot pursue an action for misrepresentation under Section 131(1) of the OSA.

Security holders of Baffinland Iron Mines Corporation (Baffinland) brought a class action against Baffinland and others involved in the unsolicited take-over bid for Baffinland. The security holders claimed that the take-over bid circular and associated documents included misrepresentations about the business and dealings of Baffinland.

In considering the policy objectives of the OSA, the court upheld that security holders cannot circumvent the stringent leave requirements, liability caps and other elements that produce legislative secondary market liability for misrepresentations. Specifically, the Court upheld the lower court’s decision that secondary market security holders cannot seek relief under Section 131(1) on the basis that it would not make sense for security holders trading in the secondary market to be given a right of rescission. Furthermore, the Court stated that Part XXIII.1 of the OSA already provides a remedy to secondary market sellers for misrepresentations in a take-over bid circular and the purpose of Section 131(1) is to help sellers make an informed decision about whether to tender an offer to a bid rather than to assist sellers in selling their shares in a secondary market.

This decision confirms that courts will not allow plaintiffs to bypass the restrictions placed on secondary market causes of action from Part XXIII.1 of the OSA by pursuing claims under a different Part of the OSA.

V. LBP Holdings v. Allied Nevada Gold Corp.8

This decision confirms the test that must be met to add new defendants to a claim and applies the test to adding underwriters.

In its April 27, 2016 decision, the Ontario Superior Court of Justice (OSCJ) refused to add the underwriters of a company as defendants to primary and secondary market misrepresentation claims under the OSA. The OSCJ confirmed the test to add new defendants: unless the defendants can establish non-compensable prejudice or that the claims advanced are untenable at law, the plaintiffs commonly are granted leave to add new defendants.

In this situation, after the plaintiff, LBP Holdings Ltd. (LBP), purchased shares of Allied Nevada Gold Corp. (Allied Nevada) the price of the shares fell due to claims of corrective disclosures. LBP then launched a

7 2016 ONCA 630. 8 2016 ONSC 1629.

McMillan LLP mcmillan.ca

- 10 -

proposed class action claiming that Allied Nevada misrepresented its operations and finances, which were incorporated by reference in the prospectus.

The OSCJ found that the underwriters were unable to demonstrate non-compensable prejudice as their claim for compensation of legal costs could still be allowed under the defendant company’s insurance policy. Furthermore, the court found that the primary market claims were untenable because they were not brought within 180 days of when the plaintiffs first had knowledge of the facts. The secondary market claims were untenable because the court held that underwriters were not “experts” for the purposes of Part XXIII.1 of the OSA. Although the OSCJ granted leave to add the underwriters as defendants to the common law claims for negligence and negligent misrepresentation, it ultimately held that s. 130 of the OSA is a complete code for underwriter liability.

C. PROPOSED AMENDMENTS

In 2016, the CSA, TSX and OSC all indicated that there would be various types of amendments coming into effect in the near future. Details of proposed amendments that are expected to be in effect soon are discussed below.

I. Proxy Voting Infrastructure and Proposed Voting Protocols

In March 2016, the CSA published Staff Notice 54-304 Final Report on Review of the Proxy Voting Infrastructure and Request for Comments on Proposed Meeting Vote Reconciliation Protocols (the Staff Notice). Issuers and investors had expressed concerns to the CSA that the proxy voting infrastructure was inaccurate, unreliable and non-transparent. The Staff Notice proposed protocols that are intended to enhance the accuracy, reliability and accountability of proxy voting by setting out clear roles and responsibilities for key participants at each stage of meeting vote reconciliations and to outline the operational processes that each key participant should implement.

The proposed protocols are aimed at satisfying the following characteristics of what the CSA believe constitute an accurate, reliable and accountable meeting vote reconciliation:

generating and sending accurate and complete vote entitlement information for each intermediary that will solicit voting instructions from beneficial owners and submit proxy votes;

setting up vote entitlement accounts in a consistent manner;

sending accurate and complete proxy vote information and tabulating and recording proxy votes in a consistent manner; and

informing beneficial owners of rejected or pro-rated votes.

The CSA believe that the protocols also lay the foundation for key entities to work collectively to eliminate paper and move to electronic transmission of vote entitlement and proxy vote information and develop end-to-end vote confirmation capability that would allow beneficial owners to receive confirmation that their voting instructions have been received and accepted by their intermediary and the tabulator.

The final protocols were published recently on January 26, 2017 in CSA Staff Notice 54-305. The CSA plans to monitor the implementation of the protocols over the next two seasons in an effort to assess the need for any enhanced regulatory measures.

For more information on the proxy voting infrastructure and proposed voting protocols, see our bulletin: CSA Publishes Final Report on Proxy Voting Infrastructure and Proposes Voting Protocols.

McMillan LLP mcmillan.ca

- 11 -

II. Amendments to TSX Company Manual relating to Disclosure Requirements for Issuer Websites and Security Based Compensation Arrangements

In May 2016, the TSX published new proposed amendments to Part IV (Maintaining a Listing – General Requirements) and Part VI (Changes in Capital Structure of Listed Issuers) of the TSX Company Manual that would (i) require listed issuers to maintain a publically accessible website providing appropriate disclosure of specified files and (ii) amend the disclosure requirements regarding security based compensation arrangements.

Part IV Amendments – Publicly Accessible Website Disclosure

The TSX proposed that a new section 473 be added to introduce a requirement for listed issuers to post copies of certain documents on a publicly accessible website, including constating documents, corporate policies that impact security holder meetings and voting, security holder rights plans; security based compensation arrangements; and certain corporate governance documents. This amendment is designed to make such documents more readily accessible to the public.

The TSX also proposed an amendment to Section 461.3 such that the requirement for issuers to describe majority voting policies on an annual basis in materials sent to security holders will be replaced by the requirement to post a copy of the policy on the issuer’s website. This amendment is designed to simplify the disclosure requirement for issuers that have adopted a majority voting policy pursuant to such section.

Part VI Amendments- Security Based Compensation Arrangements

The TSX also proposed to amend Subsection 613(b) to cover a significantly broader scope of security based compensation arrangements (Arrangements) that can take the form of plans (Plans), which set out the general terms and conditions of options, a variety of stock units or other awards (collectively known as Awards), as well as individual Awards not granted pursuant to a Plan, financially assisted purchases of securities, and other compensation or incentive mechanisms involving the issuance of securities. These amendments are designed to better reflect evolving security based compensation practices.

The TSX also proposes to simplify the Arrangement related disclosure required in meeting materials by introducing a new form, Form 15. Under the proposed amendments, where security holder approval will be sought for an Arrangement, the TSX would require the disclosure of other key terms in sufficient detail as may be reasonably required by a security holder to approve the Arrangement or amendments thereto. The Part VI amendments do not affect any requirements regarding when and how security holder approval is sought in connection with Arrangements.

For further information regarding these proposed amendments, see our bulletin: Proposed Amendments to TSX Company Manual relating to Disclosure Requirements for Issuer Websites and Security Based Compensation Arrangements.

III. IOSC Proposes New Rule Regarding Distributions Outside of Canada

In June 2013, the OSC proposed a new regime for distributions outside of Canada and published OSC Rule 72-503 Distributions Outside of Canada (the Proposed Rule) that provides exemptions from prospectus and registration requirements for distributions of securities to purchasers outside of Canada. The Proposed Rule would replace OSC Interpretation Note 1 Distributions of Securities Outside Ontario and is intended to provide greater certainty by setting out specific exemptions from the prospectus requirements, and to address the registration requirements.

Under the Proposed Rule, exemptions from the prospectus requirement for distributions outside of Canada would be available in any of the following situations:

McMillan LLP mcmillan.ca

- 12 -

if the distribution is under a public offering document in the United States or a designated foreign

jurisdiction;

if a concurrent distribution of the same securities is qualified under a final prospectus in Ontario;

if the issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months prior to the distribution; or

in the case of all other distributions, including distributions by a private issuer, if the issuer has complied with the securities law requirements of the applicable jurisdiction outside of Canada, but subject to resale restrictions.

If an offering of securities to purchasers in Ontario is qualified under a prospectus, the issuer may also choose to qualify the securities sold to purchasers outside of Canada under the same prospectus. Moreover, even if there is no concurrent distribution of securities in Ontario, an issuer may still file a prospectus to qualify the securities sold to purchasers outside of Canada.

Restrictions on Resale

The Proposed Rule does not impose restrictions on securities distributed outside Canada if: (i) the securities are distributed under a prospectus or similar document filed in a foreign jurisdiction, (ii) there is a concurrent distribution under a prospectus in Ontario, or (iii) the issuer is and has been a reporting issuer in Canada for at least four months. In all other circumstances where securities are distributed outside Canada under the exemption in the Proposed Rule, the first trade of such securities must be made under a prospectus or a further exemptions unless: (i) the trade is to a purchaser outside of Canada, or (ii) the issuer of the securities is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the trade and at least four months have elapsed from the distribution date.

Registration Requirements

To assist market participants in determining whether or not the registration requirements under Ontario securities laws apply in respect of a distribution of securities outside Canada under an exemption contained in the Proposed Rule or under a prospectus filed in Ontario, the Proposed Rule provides an exemption from the dealer and underwriter registration requirement if a comprehensive list of enumerated requirements are met.

Report of Distributions Outside Canada

Except where securities are distributed outside Canada under a prospectus or similar document filed in a foreign jurisdiction, an issuer that relies on the prospectus exemptions contained in the Proposed Rule is required to file a report of exempt trade with the OSC in accordance with the proposed Form 72-503F on or before the tenth day after distribution.

The OSC believes that the Proposed Rule will provide more regulatory certainty to Ontario market participants and reduce overall costs for Ontario issuers seeking to raise capital outside of the province.

For further information on the Proposed Rule, see our bulletin: OSC Proposes New Rule Regarding Distributions Outside of Canada.

IV. Liquid Alternatives: Game Changer for Canadian Hedge Funds

In September 2016, the CSA published their proposal for a “liquid alternatives” regulatory framework in Canada (the Proposal) that primarily involves amendments to the rules contained in National Instrument 81-102 Investment Funds (NI 81-102). The new framework would create a new category of prospectus offered

McMillan LLP mcmillan.ca

- 13 -

investment funds called “alternative funds” (Alternative Funds) that would be able to use investment strategies that are not permitted to be used by conventional mutual funds. The Proposal seeks to balance the objectives of providing retail investors with access to the growing and dynamic alternative asset class, while still maintaining certain safeguards aimed at protecting investors.

Fund managers will continue to be able to offer hedge funds in the exempt market on the same terms and conditions as they always have. However, managers that seek to publicly sell hedge funds to retail investors would be required to comply with the rules applicable to Alternative Funds as outlined in the Proposal.

The Proposal modifies certain investment restrictions for both conventional mutual funds and non-redeemable investment funds or closed-end funds as these changes are interrelated with the alterative funds framework. It suggests aggregate leverage metrics for Alternative Funds, while seeking further input regarding how leverage should be calculated. No limits are set for Alternative Funds to trade in “cleared specified derivatives” registered with a regulated clearing agency in Canada, the United States, or Europe. Furthermore, there are no restrictions on the type of counterparty with which an alternative fund may trade in over-the-counter derivatives. The Proposal subjects Alternative Funds to the same restrictions on fund-on-fund investing that apply to mutual funds, including that the underlying fund(s) must comply with NI 81-102 and be a reporting issuer in the jurisdiction.

Under the Proposal, the same core investor protection requirements that apply to all publicly offered investment funds will apply to Alternative Funds. Alternative Funds will be required to file a prospectus and publish the Fund Facts point-of-sale document in the prescribed form, in addition to making publicly available audited annual financial statements and unaudited semi-annual financial statements, management reports of fund performance, annual information forms and timely disclosure of material changes. Additionally, Alternative Funds will need to provide security-holder approval rights for certain fundamental changes and comply with the related meeting and disclosure requirements, as well as the restrictions on sales communications and prohibited representations which apply to mutual funds.

If approved, the amendments regarding alternative funds would come into force approximately three months after the publication date of the final rule. For existing funds, the amendments would not apply for an additional six months after coming into force.

For a fulsome summary of the principal characteristics and restrictions of the alternative funds framework under the Proposal, see our bulletin: Introducing Liquid Alternatives: Game Changer for Canadian Hedge Funds.

D. NOTEWORTHY CSA GUIDANCE

Last year the CSA provided useful guidance on a number of significant matters, including disclosure of non-GAAP financial measures, women on boards and in executive officer positions and cybersecurity. These and other notable updates are summarized below.

I. Updates to Guidance on Disclosure of Non-GAAP Financial Measures

At the beginning of 2016, the CSA updated Staff Notice 52-306: Non-GAAP Financial Measures and Additional GAAP Measures (Notice 52-306) to provide further guidance on disclosure of non-GAAP financial measures and to reflect the amendments to IAS 1 – Presentation of Financial Statements (IAS 1).

Non-GAAP financial measures assess an issuer’s historical or future financial performance, financial position or cash flow. They are not calculated in accordance with GAAP and therefore may mislead or confuse investors. However, non-GAAP financial measures have been recognized as providing investors with additional information that assists them in understanding an issuer’s financial performance.

McMillan LLP mcmillan.ca

- 14 -

The CSA provides guidelines to ensure that non-GAAP financial measures are not misleading or confusing. Issuers should:

state explicitly that the non-GAAP financial measure does not have a standardized meaning and therefore may not be comparable to similar measures presented by other issuers;

name the non-GAAP financial measure in a way that distinguishes it from disclosure items specified, defined or determined under GAAP and in a way that is not misleading;

explain why the non-GAAP financial measure provides useful information to investors and the additional purposes, if any, for which management uses the non-GAAP financial measure;

present the non-GAAP financial measure with equal or greater importance to the most directly comparable GAAP metric as presented in its financial statements;

provide a clear quantitative reconciliation from the non-GAAP financial measure to the most directly comparable GAAP metric as presented in its financial statements, referencing the reconciliation when the non-GAAP financial measure first appears in a document;

ensure that the non-GAAP financial measure does not describe adjustments as non-recurring, infrequent or unusual, when a similar loss or gain is reasonably likely to occur within the next two years or occurred during the prior two years; and

present the non-GAAP financial measure on a consistent basis from period to period or explain the reason for the change and restate any comparative period presented if an issuer changes the composition of the non-GAAP financial measure.

With respect to additional subtotals, where issuers publish additional subtotals in a press release or outside of financial statements before they are filed on SEDAR, an explanation of the composition of the subtotals should be provided to avoid any confusion. Lastly, additional subtotals in the statement of financial position and statement or profit or loss and other comprehensive income for IFRS financial statements must also comply with IAS 1 requirements.

For further information on this topic, see our bulletin: CSA Updates Guidance on Disclosure of Non-GAAP Financial Measures.

II. Women on Boards: Results of “Comply or Explain” Disclosure Requirements

In September 2016, the securities regulatory authorities in Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Quebec, Saskatchewan and Yukon published CSA Multilateral Staff Notice 58-308 Staff Review of Women on Boards and in Executive Officer Positions – Compliance with NI 58-101 Disclosure of Corporate Governance Practices (Staff Notice 58-308). This is the second review of corporate governance disclosure relating to women on boards and in executive positions, following corporate disclosure amendments. Corporate governance disclosure rules require all non-venture issuers to make certain annual disclosures with respect to women in leadership roles, including:

the number and percentage of women on the issuer’s board of directors and in executive officer positions;

director term limits or other mechanism of board renewal;

policies relating to the identification and nomination of women directors;

McMillan LLP mcmillan.ca

- 15 -

consideration of the representation of women in the director identification and nomination process

and in executive officer appointments; and

targets for women on boards and in executive officer positions.

The key findings of Staff Notice 58-308 are summarized as follows:

Board and executive officer positions. Among the issuers in the sample group, 55% have at least one woman on their board (up 6% from 2015) and 59% have at least one woman in an executive officer position (consistent with the 60% reported in 2015). Moreover, the overall board seats occupied by women in 2016 increased to 12% from the 11% in 2015. It was noted that the number of women on boards and in executive officer positions varies significantly by industry.

Term limits and board renewal mechanisms. It was found that 20% of issuers adopted director term limits, as compared to the 19% reported in 2015. Of the issuers with term limits, 48% set age limits, 23% had tenure limits and 29% had both.

Policies regarding board representation. Only 21% of sampled issuers adopted a policy relating to the identification and nomination of women directors (compared to the 15% reported in 2015). Issuers with these types of policies had higher average female board representation (18%) as compared to those with no such policies (10%).

Consideration of representation of women. It was found that 58% of issuers disclosed that they consider the representation of women when making executive officer appointments (as compared to 53% reported in 2015). While, 66% of issuers disclosed that they considered the representation of women on their boards as part of their director identification and nominating process (as compared to 58% reported in 2015). Consistent with the 2015 report, the most common reason given for not considering the representation of women in executive officer and board appointments was that the issuer’s selection is based on merit, regardless of gender.

Targets. It was found that only 9% of issuers set a target for the appointment of women to the board (as compared to 2% in 2015). Issuers with board targets had a greater proportion of women on their boards (25%) than those without a target (10%).

Overall, the Notice shows only a marginal increase in the number of women on the boards of non-venture issuers across all size categories of issuers, although there remain important variations by industry. The CSA indicated that it will continue to evaluate and report on the corporate governance disclosure of non-venture issuers to ensure that they provide meaningful disclosure regarding the representation of women on their boards and in executive officer positions.

For more information on Staff Notice 58-308, see our bulletin: Women on Boards: Regulators Release Modest Results of “Comply or Explain” Disclosure Requirements.

III. Update on Cybersecurity for Market Participants

In September 2016, the CSA published CSA Staff Notice 11-332 Cyber Security (Staff Notice 11-332) noting the increased reliance of issuers, registrants and regulated entities (collectively, Market Participants) on electronic systems and the simultaneous upswing in the frequency and complexity of cyber attacks. Staff Notice 11-332 proposes cybersecurity related policy initiatives to help Market Participants reduce their exposure to cyber risk and reminds Market Participants of the following:

Issuers. Once an cyber risk has been classified as a material risk, the issuer should provide detailed and entity-specific risk disclosure and avoid general, boilerplate disclosure. Any cyber attack remediation plan should address how the issuer would assess the materiality of a cyber attack to

McMillan LLP mcmillan.ca

- 16 -

determine what needs to be disclosed pursuant to applicable securities laws, as well as when and how.

Registrants. Registrants should remain vigilant in developing, implementing and updating their approach to cybersecurity “hygiene and management”. The CSA urges registrants to review and follow guidance issued by self-regulatory organizations such as the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.

Regulated entities. Marketplaces, clearing agencies, information processors and trade repositories that operate in Canada are required to perform independent system review, which includes a specific focus on cybersecurity. Regulated entities are expected to adopt a cybersecurity framework provided by a regulatory authority or standard-setting body appropriate to their size and scale. Regulated entities should also examine and review their compliance with ongoing requirements outlined in securities legislation, which include the need to have internal controls over their systems and to report security breaches.

The CSA expects Market participants to actively protect themselves against cyber threats and has referenced documents and resources in the Notice that Market Participants may find useful. The CSA recommends that Market Participants ensure that personnel at all levels be responsible for cybersecurity, establish robust cybersecurity policies and frameworks and improve communication and collaboration with other interested parties.

For more information on the cybersecurity update, see our bulletin: CSA Publish Update on Cybersecurity for Market Participants.

IV. Results of Annual Continuous Disclosure Reviews

In July 2016, the CSA published CSA Staff Notice 51-346 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2016 (Staff Notice 51-346). Staff Notice 51-346 summarizes the results of the CSA’s annual continuous disclosure review of reporting issuers, highlights common disclosure deficiencies and suggests best practices to help reporting issuers comply with their continuous disclosure obligations.

During the fiscal year ended March 31, 2016, the CSA conducted 902 continuous disclosure reviews, of which 62% percent uncovered deficiencies that either required issuers to take action to improve and/or amend their disclosure, or resulted in the issuer being referred to enforcement, cease traded or placed on the default list. Staff Notice 51-346 highlights where common disclosure deficiencies were noted and provides guidance and considerations to help issuers better understand and comply with their continuous disclosure obligations.

MD&A Deficiencies

Liquidity and capital resources

o Deficiency: failing to provide sufficient analysis of liquidity and capital resources.

o Solution: issuers should avoid the use of boilerplate discussion of liquidity and capital resources, or merely reproducing amounts from their statements of cash flows without providing any analysis. This section should discuss an issuer’s ability to generate sufficient financial resources in the short term and the long term, to maintain its capacity, to meet its planned growth or to fund development activities.

Forward looking information

McMillan LLP mcmillan.ca

- 17 -

o Deficiency: failing to update disclosure relating to forward looking information.

o Solution: issuers should discuss the events and circumstances that occurred during the period that are reasonably likely to cause actual results to differ materially from material forward looking information that has been previously disclosed to the public and the expected difference. Additionally, if issuers decide to withdraw previously disclosed material forward looking information, they must disclose this in their MD&A.

Overall performance (discussion of operating segments)

o Deficiency: identifying segments in the MD&A that are inconsistent with those identified in financial statements.

o Solution: the discussion of operating segments should be based on the operating segments as disclosed in the issuer’s financial statements.

Investment entities

o Deficiency: not providing sufficient quantitative and qualitative information for material investments and related investment and operating activities.

o Solution: issuers should note that except in limited circumstances, an investment entity must measure its investments at fair value through profit and loss, including its investments in subsidiaries.

Other Regulatory Disclosure Deficiencies

Material contracts

o Deficiency: redacting information that is prohibited, failing to provide a description of the type of information redacted and failing to file all material contracts listed in the Annual Information Form on SEDAR.

o Solution: issuers cannot make certain redactions in material agreements, such as redactions of debt covenants and ratios in financing or credit agreements or key terms necessary for an understanding of the impact of the contract on the business. Some redactions may be permitted, but the issuer must be able to explain why disclosure would be prejudicial. Furthermore, if the issuer’s business is substantially dependent on a contract, then the issuer does not meet the ordinary course exemption and must file the material contract on SEDAR.

Audit committee composition – venture issuers

o Deficiency: some venture issuers did not meet audit committee composition requirements.

o Solution: effective for financial years beginning on or after January 1, 2016, a venture issuer’s audit committee must be composed of at least three members, each of whom must be a director. The majority of such members cannot be executive officers, employees, control persons or affiliates of the venture issuers, with some limited exceptions.

Management information circular

o Deficiency: failing to provide prospectus-level disclosure in management information circulars prepared in a situation of restructuring under which securities are to be changed, exchanged, issued or distributed.

McMillan LLP mcmillan.ca

- 18 -

o Solution: management information circulars prepared in such situations should provide disclosure

described in the form of prospectus the issuer is eligible to use (i.e. NI 41-101F1 – Information Required in a Prospectus or NI 44-101F – Short Form Prospectus Distributions)

Annual Information Form (AIF)

o Deficiency: AIF filers commonly failed to provide a sufficient description of the business or applicable risk factors in the AIF.

o Solution: the AIF should describe the issuer’s business and its operating segments that are reportable segments and disclose various aspects of the business, including production and services, specialized skills and knowledge, competitive conditions, new products, any economic dependence, and changes to contracts. The AIF should also provide a detailed discussion of risk factors that affect the issuer.

The Notice provides examples of deficient disclosure contracts against more robust entity-specific disclosure and a more in-depth explanation of the matter observed by the CSA. Issuers are encouraged to review their own disclosure practices and to use the CSA’s guidance and findings to strengthen their compliance with the continuous disclosure obligations.

For more information on the CSA results of annual continuous disclosure reviews, see our bulletin: CSA Publishes Results of Annual Continuous Disclosure Reviews.

V. CSA Update on Regulation of Fixed Income Market

In April 2016, the CSA provided an update on its fixed income regulation plan through CSA Staff Notice 21-317 Next Steps in Implementation of a Plan to Enhance Regulation of the Fixed Income Market. The purpose of the fixed income regulation plan is to enhance market integrity, increase informed decision-making among market participants and assess access to the fixed income market.

The CSA intends to make the Investment Industry Regulatory Organization of Canada (IIROC) the information processor for corporate debt securities in Canada. By the end of 2016, post-trade information for all trades in designated debt securities and for retail trades in all other corporate debt securities were reported to IIROC on a T+2 basis, subject to volume caps. This year, it is intended that post-trade information for all trades in all corporate debt securities will be reported to IIROC on a T+2 basis, subject to volume caps. For more information refer to Appendix B to CSA Staff Notice 21-317. Moreover, CSA and IIROC staff have been reviewing dealers’ practices in allocation of new debt issuers in order to determine if any regulatory action is needed.

E. OTHER SIGNIFICANT DEVELOPMENTS

I. OSC Whistleblower Program Introduced

In 2016, the OSC launched its Whistleblower Program – the first paid whistleblower program by a securities regulator in Canada. The program attempts to encourage the reporting of suspected Ontario securities laws to the OSC in an effort to prevent and limit harm to investors. The key elements of the program are as follows:

Whistleblower awards. The OSC may pay up to $5 million to eligible whistleblowers for information that is original, voluntarily submitted, of high quality, timely, credible and of meaningful assistance in leading to an enforcement outcome. Moreover, if certain conditions are met, in-house counsel, internal and external auditors, directors, officers, Chief Compliance Officers and culpable whistleblowers may be eligible for an award.

McMillan LLP mcmillan.ca

- 19 -

Internal reporting not mandatory. There is no requirement for whistleblowers to have reported the

violations internally through their compliance and reporting mechanisms as a condition to receiving an award.

Documentation. Whistleblowers may be asked to provide documentation to the OSC.

Protections for whistleblowers. While launching the program, amendments were made to the OSA to prevent the retaliation of employers against whistleblowers, including but not limited to disciplining, demoting, terminating or harassing a whistleblower. While the OSC will endeavour to make all reasonable efforts to maintain confidentiality, there are two significant exceptions: (i) when the OSC is required to disclose the whistleblower’s identity in connection with an administrative proceeding to permit a respondent to make full answer and defence or (ii) when the OSC determines it is necessary to disclose the information to various enumerated regulatory authorities. These circumstances would require the whistleblower’s consent.

Under this program, regardless of whether the information results in a whistleblower award, the OSC may use the information or documents for other purposes in carrying out its mandate.

For further information on the OSC Whistleblower Program, see our bulletin: Carrying the Tune: OSC Whistleblower Program Coming Soon.

II. TSX Provides Guidance on Normal Course Issuer Bids

In early 2016, the TSX issued Staff Notice 2016-0001 to provide guidance on the application of sections 628 and 629 of the TSX Company Manual to normal course issuer bids (NCIBs) by listed issuers. The guidance from the Staff Notice is summarized below.

TSX and ATS Purchases

Issuers and their buying brokers who make purchases on alternative trading systems (ATSs) or any other market places are required to ensure that they are properly relying on and complying with an exemption from the issuer bid rules pursuant to applicable securities laws. Issuers should note that the OSA and MI 62-104 set out different exemptions and different requirements for the exemptions for purchases made through the TSX as compared to ATSs. Issuers are required to disclose where the securities are being purchased and whether or not purchases may be made on ATSs. If issuers have publicized that NCIB purchases are to be made only through the TSX then their buying brokers should be alerted to the limitation. Although ATSs and other marketplace purchases are not subject to TSX rules, they are included in calculating an issuer’s annual NCIB limit. Interlisted issuers can appoint two buying brokers provided that the buying broker appointed for purchases on ATSs or other marketplaces cannot directly place orders on the TSX.

Automatic Purchases under NCIB

NCIB purchase arrangements must fulfil the requirements in the OSC Staff Notice 55-701 Automatic Securities Disposition Plans and Automatic Securities Purchase Plans, be pre-approved by the TSX and be publicly disclosed. Automatic plans must fulfil certain requirements, such as trading parameters and other pertinent instructions being set out in a written plan document, to be considered truly automatic. Moreover, the issuer and broker are required to enter into a formal TSX pre-approved agreement that covers the NCIB and the requirement that the issuer not provide any instructions to the broker during a trading blackout period in which the automatic securities purchase plan (ASPP) is effective. If an issuer’s ASPP is amended, a press release is required where the amendment amounts to material information.

McMillan LLP mcmillan.ca

- 20 -

Calculations

Securities that are not freely tradable (i.e. subject to resale restrictions or escrow provisions) can be included in the number of issued and outstanding securities, but are not be to included in the public float when calculating daily and annual purchase limits. If an issuer is proposing an NCIB for its common shares, then only the issued and outstanding securities of the class pertaining to the NCIB should be included in the calculation. Nonetheless, issuers with two classes of listed securities that automatically interconvert will fall within a TSX exception. Even if the maximum number of securities pursuant to the NCIB have been purchased before the expiry of the bid period, issuers cannot undertake a new NCIB until the 12 month period has expired.

Staff Notice 2016-0001 also provides guidance with respect to the timing and filing requirements for documents required by the TSX for the initiation of an NCIB, a timeframe of the NCIB procedure, explains how to calculate average daily trading volume, clarifies that non-independent trustees must comply with the NCIB annual and daily purchase limits and outlines trading rules pertinent to NCIBs.

CONCLUSION

The 2016 Securities Year in Review publication provides a quick overview of the main legislative changes, key administrative and judicial decisions and notable developments that occurred in the capital markets sector. It also provides insight for proposed changes that we can expect to see in the near future.

In the past year there were numerous important developments in the capital markets sector. Moving into 2017, we will continue to regularly monitor securities laws developments. McMillan lawyers regularly publish updates on issues relating to capital markets and corporate law on our website.

McMillan LLP mcmillan.ca

- 21 -

AUTHORS

Amandeep Sandhu 604.691.7448 amandeep.sandhu@mcmillan.ca

Amandeep Sandhu is a partner in the firm’s Capital Markets and M&A Group, working out of McMillan’s Vancouver office. Amandeep advises a broad range of companies on mergers and acquisitions, initial public offerings, private placements, public equity and debt financings, as well as stock exchange listings on the Toronto Stock Exchange and the TSX Venture Exchange. Amandeep also provides detailed advice to companies with respect to securities regulatory compliance, continuous disclosure requirements and corporate governance matters.

Andjela Vukobrat 778.328.1491 andjela.vukobrat@mcmillan.ca

Andjela Vukobrat is an associate in the Capital Markets and M&A Group in McMillan’s Vancouver office. Andjela’s practice focuses primarily on transactional, regulatory and general corporate and commercial matters. Andjela also assists public and private companies with general securities compliance, corporate governance matters, and continuous disclosure requirements.

Gurleen Randhawa 604.691.7494 gurleen.randhawa@mcmillan.ca

Gurleen Randhawa is an articled student in McMillan’s Vancouver office with an interest in capital markets.

McMillan LLP mcmillan.ca

- 22 -

ABOUT MCMILLAN LLP

McMillan is a modern, ambitious business law firm committed to client service and professional excellence. With recognized expertise and leadership in major business sectors, McMillan provides definitive Canadian legal advice and solutions to businesses, financial institutions, governments and individuals in Canada, the United States and internationally. McMillan operates from offices in Vancouver, Calgary, Toronto, Ottawa, Montréal and Hong Kong.

McMillan's Capital Markets Group helps clients in Canada, the United States and around the world to navigate the capital markets and reach the destination they have set for themselves— all while remaining in compliance with applicable regulations. Our understanding of the law, and our relationships with regulatory bodies and exchanges, helps us deliver unmatched value to our capital markets clients.

We act for a variety of clients, including domestic and foreign issuers of debt and equity securities; municipal, territorial and provincial governments; multinationals; financial institutions; investment banks; investment advisers; securities dealers; and other market participants. Our legal teams are skilled at structuring and closing complex transactions in Canadian, U.S. and international capital markets, and providing innovative transactional advice and solutions

For further information, please contact:

Teresa Dufort Chief Executive Officer 416.865.7145 teresa.dufort@mcmillan.ca

McMillan LLP mcmillan.ca