New Requirements Proposed by TMX for Issuers Operating in Emerging Markets and Listing in Canada
The TMX has released for comment a Consultation Paper on Emerging Market Issuers which proposes new requirements for issuers operating in emerging markets and intending to list on either the Toronto Stock Exchange (TSX) or the TSX Venture Exchange (TSX V). Comments on the proposals are due February 28, 2013.
The requirements are intended to address what are perceived to be the incremental risks associated with emerging market issuers. Certain of the proposed requirements will be only applicable at the time of the listing application; whereas, others will have on-going effect on a permanent or limited basis (e.g. interim reviews, internal control). This article summarizes the key areas in which changes are being considered.
Who is an Emerging Market Issuer?
An emerging market jurisdiction is proposed to be one which is outside of Canada, the United States, the United Kingdom, Western Europe, Australia and New Zealand. The determination of whether an issuer that operates in an emerging market jurisdiction will be considered an emerging market issuer will be facts and circumstances based. Under the current proposals, an issuer could be an emerging market issuer for the TSX and not the TSX V or vice versa since the criteria are not identical.
The TSX has indicated that in making this determination it will consider:
- Residency of “mind and management”
- Jurisdiction of the principal business operations and assets
- Jurisdiction of incorporation
- Nature of the business, and
- Corporate structure.
The TSX V has indicated that it if the principal jurisdiction in which the issuer operates has substantially comparable business practices, business culture, corporate law requirements, securities law requirements and rule of law as Canada then it may not be considered an emerging market issuer. Neither the TSX nor TSX V have defined “principal” to be any particular threshold of operations.
The TSX is considering exempting certain issuers such as a resource issuer that has produced independent technical reports.
The TSX V has proposed exempting an issuer that is either a Mining issuer or and Oil and Gas issuer and for which certain defined officers and directors have not been resident in an emerging market jurisdiction for a majority of the 10 years preceding the issuer’s listing application.
Management and Corporate Governance
With respect to the board of directors, the TSX has asked for comment on:
- Whether any specific attribute and experience should be required of independent directors in order to properly oversee management of an emerging market issuer
- What percentage of the board of directors should be independent directors with public company and emerging market business experience
- Whether an independent chair of the board of directors should be required.
The TSX V is considering requiring that:
- Each of the CEO and CFO and, when taken as a whole, the board of directors must have adequate knowledge and experience with Canadian public company requirements (i.e. Canadian securities law requirements and the policies of the TSX V)
- The senior officers and board of directors, when taken as a whole, have adequate industry and, as applicable, technical experience in the applicable emerging market jurisdiction
- With respect to audit committee members that:
- Each must be financially literate and independent, and
- At least one member must have Canadian financial reporting skills and experience with audit engagement for public companies.
The TSX V is also proposing additional qualification requirements to act as CFO of an emerging market issuer which includes that the CFO have a strong understanding of the business environment in the jurisdiction in which most of the issuer’s transactions will be conducted.
The TSX has specifically asked for comment regarding whether demonstrated local business knowledge and experience is an important requirement for the CFO and audit committee members.
The TSX and TSX V indicate that they consider the experience and expertise of the auditors in the jurisdiction where the principal operations of the issuer are carried out, the size and general resources of the firm, whether the firm is in good standing with the Canadian Public Accountability Board, an ability to communicate effectively with management and the board, and an ability to directly execute the audit field work. The TSX and TSX V have specifically asked for comment regarding whether demonstrated local business knowledge and experience is an important requirement for the auditor.
The TSX is considering requiring management certification of internal control over financial reporting (ICFR) at the time of listing and is further considering whether an audit of ICFR should be completed at that time and on an on-going basis by the issuer’s auditor.
The TSX V has proposed that management provide a confirmation on ICFR at the time of listing and for a subsequent two fiscal years these issuers must certify on the design an operating effectiveness of ICFR consistent with NI 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, despite the fact that NI 52-109 would exempt venture issuers from filing certificates addressing ICFR matters.
The TSX V has also proposed that the issuer’s auditor review and evaluate ICFR and report the results of their review to the CEO, CFO and Audit Committee prior to management completing their confirmation at the time of listing application. The TSX V has proposed that non-revenue generating issuers may be exempted from all the ICFR requirements.
The TSX has asked for comment on whether a review of interim financial statements for emerging market issuers should be mandated on an on-going basis. The TSX V has proposed that emerging market issuers, other than non-revenue generating issuers, be required to engage their auditors to perform interim reviews of the interim period financial statements for each interim period in the two years following the listing of the issuer.
Related Party Transactions
The TMX observed that certain transactions for emerging market issuers that have a controlling security holder may have the appearance of related party transactions (RPTs) but may not meet the strict definition of an RPT.
The TSX has asked for comment on whether it should take an expanded view of RPTs and how to define the scope of RPTs.
The TSX V has proposed that emerging market issuers will be required to adopt specific internal written policies in respect of RPTs and transactions with non-arm’s length parties which would address independent director oversight and approval, adequate timely disclosure and compliance with all applicable regulatory requirements.
Non-Traditional Corporate or Capital Structure
The TSX and TSX V have asked for comment regarding whether certain non-traditional corporate or capital structures should be refused or whether support for non-traditional structures should be obtained. The TSX V has proposed that when a non-traditional structure has been employed that the issuer be required to:
- Provide an explanation to the exchange of why the non-traditional structure is necessary
- Provide a legal opinion addressing the noted concerns, when requested
- Provide disclosure of the nature, material characteristics and associated risks of the structure in the listing application and subsequently its MD&A or AIF.
A sponsor provides independent due diligence and review of the listing merits of an issuer.
A number of questions have been asked by the TSX and TSX V, including:
- Whether an investor be informed if an applicant was sponsored, exempt from sponsorship or received a waiver from sponsorship?
- Whether sponsorship of all emerging market issuers should be required?
- Should the name of the sponsor be published?
- Should the sponsorship reports be made public?
- Should there be explicit standards for sponsorship work?
- Should the sponsors’ work be audited or otherwise subject to review?
- Should there be an annual update to sponsorship?
The TMX proposals may have a significant impact on whether a potential issuer chooses to list on the TSX or TSX V as the requirements above are extensive. We encourage you to provide comments on these significant proposals before they are finalized.