CHAPTER 11 SECURITIES ISSUES THAT CROSS THE BORDER—THE VIEW FROM CANADA

• Jurisdiction: United States

Gold Mine Financing
(Jan 1988)
CHAPTER 11
SECURITIES ISSUES THAT CROSS THE BORDER—THE VIEW FROM CANADA
Charles Higgins
Osler, Hoskin & Harcourt
Toronto, Ontario

INDEX

I Introduction and Overview

A. Internationalization of Equity Offerings

B. Canadian Corporate and Securities Laws

(i) Corporate Laws

(ii) Securities Laws

C. The Canadian Capital Market and Stock Exchanges

II Financing Procedure in Canada

A. Public Financing by way of Prospectus

(i) Prospectus Preparation and Filing

(ii) Prospectus Disclosure Requirements

(iii) Listing on the TSE

(iv) Timing

B. Private Placement Financing

C. Ongoing Disclosure Requirements

D. TSE Proposal for World Class Issuers

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III Acquisitions in Canada

A. Takeover Bids

B. Investment Canada

(i) Exempt Transactions

(ii) Notification

(iii) Reviewable Transactions

(iv) Net Benefit Test

(v) Free Trade Proposals

C. Competition Act

IV Tax Matters

A. Corporations

B. Partnerships

C. Joint Ventures

D. Flow-Through Shares

E. Shareholders

V Junior Resource Financing Policy

VI Conclusion

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GLOSSARY

The following abbreviations are used in this paper:

Agreement	-	Proposed Free Trade Agreement between Canada and the U.S.
CA	-	Competition Act (Canada)
CBCA	-	Canada Business Corporations Act
FIRA	-	Foreign Investment Review Act
ICA	-	Investment Canada Act
OBCA	-	Business Corporations Act, 1982, (Ontario)
OSC	-	Ontario Securities Commission
SEC	-	The Securities and Exchange Commission (U.S.)
Tax Act	-	Income Tax Act (Canada)
TSE	-	The Toronto Stock Exchange

Note: All dollar figures herein are Canadian dollars unless otherwise noted.

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I. INTRODUCTION AND OVERVIEW

This panel has been assigned the formidable task of summarizing corporate and securities laws of our respective countries as these laws affect the international resource industry. The fact is that a general summary of each of these topics would far exceed the available space and time allotted.

The discussion in this paper will thus be restricted as follows:

(a) the securities laws examined, unless otherwise noted, will be only those of Ontario;

(b) the discussion of corporate law will be restricted to the specific topics of residency and nationality restrictions, and disclosure requirements under Ontario and federal corporate statutes;

(c) a number of important topics (for example taxation matters) will only be raised as areas of significance without being in any way fully discussed.

Further, the emphasis will be on public, rather than private financing and acquisitions, and the perspective will be that of a major resource company which already operates, or is intending to operate internationally.

A. Internationalization of Equity Issues:

The growth of the number of issuers offering securities in more than one national jurisdiction has been substantial. At present, in excess of five hundred companies have equities traded on a daily basis in at least one market outside their domestic stock market. This has been paralleled by institutional presence in more than one market as a result of increased accessibility for such institutions to London, Tokyo and Canada. For instance, in Ontario, new registration rules effective June 30, 1987 permit non-residents to hold up to 50%

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of Canadian securities firms and to obtain options to acquire 100% of such firms on June 30, 1988. By June 30, 1988 all restrictions on the securities market activities of Canadian subsidiaries of non-resident securities firms will be removed, thus permitting such firms to become full service dealers.

The proposed free trade Agreement (the "Agreement") would expand the integration of the U.S. in Canadian financial markets on a national basis. Areas such as banking, and underwriting and purchasing of government debt securities will be affected if the Agreement is implemented.

There are several reasons for this increased internationalization. First, technology permitting instantaneous transfer of information and the proliferation of institutions using this technology such as NASDAQ and the Canadian equivalent, COATS, allow markets to operate in a parallel manner with little, if any, delay in trading information or disclosure.

Second, the increased requirements of corporations for capital have resulted in situations where the domestic market may be too small, or may be temporarily unavailable to satisfy financing needs.

Third, the internationalization of operation and management of corporations has naturally impacted on the sources of financing which they are prepared to examine.

Fourth, the differences between securities laws have been narrowing. For instance, new prospectus disclosure requirements have permitted access to both the Canadian and U.S. markets through common prospectus documents.

It should be noted however, that significant differences still exist, and the fact of increased internationalization has resulted in a similar pressure for more relaxed or co-ordinated disclosure and reporting requirements for companies accessing the international capital market.

For instance, in the resource field, differences in accounting procedures, the treatment of income and production projections, and specific matters related to the description of resource properties still require that separate consideration be given to the Canadian market, when clearing prospectus issues.

As discussed further on, need for increased internationalization will no doubt be one of the prime motivating

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factors in facilitating the access to Canadian and other capital markets by foreign issuers.

B. Canadian Corporate & Securities Laws:

Canada is a federal state composed of:

(i) a federal government;

(ii) 10 provincial governments; and

(iii) two territorial governments.

Each level of government has its own corporate laws; and each level of government other than the federal government has general authority to regulate the securities industry in its respective jurisdiction. As a result there are some 13 corporate statutes and 12 securities statutes which could have possible application to corporate and securities aspects of a business in Canada. The confusion of this legislation has been lessened (but by no means eliminated) by the adoption of uniform legislation and policies by some provinces. Also, as noted previously, the majority of new securities issues, equity raised, and new ventures established have been in Ontario. Accordingly, the corporate and securities laws examined herein will be those applicable in Ontario. The principal statutes are the Ontario Securities Act (R.S.O. 1980 c. 446) (the "OSA"); the Ontario Business Corporations Act, 1982 (S.O. 1982 c.4) (the "OBCA"); and the Canada Business Corporations Act (S.C. 1974-5 c. 33) (the "CBCA"). Following is a discussion of some general aspects of these laws.

(1) Corporate Laws:

In acquisitions and in some circumstances for financing purposes, it is often desirable to set up a separate Canadian subsidiary to either act as a holding company for the acquisition, or to conduct a separate financing for the Canadian market. In such cases it will be necessary to select an appropriate corporate form, either an OBCA corporation or a CBCA corporation.

The OBCA and CBCA both contemplate "public" or "offering" corporations and "private" or "non-offering" corporations and are modelled after the Delaware corporate law model,

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and many of the provisions therein will be familiar to American readers. From the perspective of a foreign business wishing to establish or acquire a Canadian subsidiary, some of the important factors in the selection of either a CBCA or OBCA corporation are as follows:

OBCA	CBCA
(1) Director's Residency and Nationality	Majority must be resident Canadians, or if two, one must be a resident Canadian (other than for "non-resident corporations")	Majority must be resident Canadians (other than for "holding corporations")
(2) Location of Directors' Meetings	Unless articles or by-laws otherwise provide, a majority of meetings must be held within Canada	No restrictions, but majority present must be resident Canadians
(3) Officers	No restrictions as as to nationality or residency	No restrictions as to nationality or residency
(4) Shareholders	No general restrictions as to residency, nationality or place of meeting	No general restrictions as to residency or nationality; shareholders meetings can be held outside Canada only if all shareholders agree
(5) Public Disclosure by "private" corporations:
(a) Identity of shareholders	No	No
(b) identity of directors	Yes	Yes
(c) financial statements	No	Yes, if gross assets greater than $5 million or gross revenue greater than $10 million

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A further consideration is that a national business, if operated through an OBCA corporation, must be name-cleared and licenced in each of the provinces and territories where it carries on business. This involves significant expense and paperwork if the number of jurisdictions is large. A CBCA corporation cannot be prevented from carrying on business nationally, but may require registration.

If an inappropriate corporate form is selected, it is relatively straightforward to continue a CBCA or OBCA corporation under the other respective statute, although shareholder approval is required and the right of dissenting shareholders to be paid the fair value of their shares will arise.

(ii) Securities Laws:

The regulatory bodies governing the distribution of securities in Canada and the United States are very similar. Canada however, unlike the United States, does not have a central securities commission. Each of the ten provinces controls those securities transactions which take place under its jurisdiction, whereas in the U.S., securities regulation is primarily within federal...