Seven deadly sins of joint ventures under competition law
Joint ventures in the energy and resources sectors.
The Alberta Securities Commission (ASC) has updated the rules that govern issuances of securities by Alberta issuers to purchasers outside Alberta in a way that should facilitate distributions out of Alberta. ASC Rule 72-501 – Distributions to Purchasers Outside Alberta provides exemptions from the prospectus and registration requirements for certain trades of securities to purchasers outside Alberta.
Effective August 31, 2018, it was replaced by a new rule of the same name (the New Rule). The New Rule removes some of the old rule’s regulatory impediments, reduces the regulatory burden by eliminating the need to comply with both Alberta and foreign disclosure requirements in certain circumstances, and expands on the exemptions available to an Alberta issuer.
Under the old rule, the general exemption for distributions outside Alberta was not available unless the purchaser acknowledged in a subscription agreement the risks, resale restrictions and lack of securities regulatory oversight of the offering. This was an issue for certain types of cross-border financings, such as high-yield debt financings, where there is typically no subscription agreement for a prospective purchaser to complete. The acknowledgement requirements are gone from the New Rule. Instead, the issuer must materially comply with the disclosure requirements (if any) of the jurisdiction of the purchaser. This is in line with recent changes to the comparable Ontario rules for distributions outside Ontario.
The New Rule creates new prospectus exemptions for Alberta issuers distributing securities outside Canada:
under an effective registration statement filed in the United States;
under an offering document in compliance with the regulations of the United Kingdom, the European Union, Australia or Hong Kong, among other jurisdictions; or
in material compliance with the disclosure requirements applicable to the distribution under the securities laws of the jurisdiction in which the investor is located. For non-reporting issuers, these securities would be subject to a resale hold period.
There is no investor protection rationale for the old rule’s duplicative deployment of Alberta securities laws to investors protected by their own jurisdiction’s securities laws. Absent the New Rule and its exemptions, the cross-border distribution regulations had led at their worst to the oddity of filing a prospectus in Alberta for securities offerings that had no investors in any jurisdiction of Canada.
Further facilitating cross-border offerings, the New Rule now provides a prospectus exemption for pre-marketing activities in furtherance of a distribution outside Canada under a foreign prospectus. The exemption is applicable if no solicitation or advertisement is made in Canada (except pursuant to a prospectus exemption) and the issuer has materially complied with the disclosure requirements applicable to the distribution under the securities laws of the jurisdiction in which the investor is located (or the distribution is exempt from such requirements).
The concept of materially complying with the disclosure requirements of another jurisdiction frequently arises in the New Rule. According to the ASC, an issuer complies with the disclosure requirements of another jurisdiction if it takes “reasonable steps” to comply with those requirements. The scope of what constitutes “reasonable steps” remains uncertain and issuers in Ontario have wrestled with determining a process that constitutes “reasonable steps” under a similar recently introduced provision of the comparable Ontario rules. In the absence of clarity, issuers might just treat their current compliance procedures as constituting “reasonable steps” to materially comply with the disclosure requirements of a foreign jurisdiction.
There is also a new prospectus exemption for distributions from Alberta to purchasers resident in other jurisdictions of Canada, provided the issuer has complied with the offering memorandum exemption in force in the province or territory in which the investor is resident. This facilitates distributions under the offering memorandum exemption where the province or territory where the investor is located has adopted a different version of the offering memorandum prospectus exemption.
The New Rule continues to include the prospectus exemption that applies to the first trade of a security on an exchange outside Canada or to a person outside Canada following a distribution under a prospectus exemption by a non-reporting issuer, so long as residents of Canada hold less than 10% of the securities of the same class and do not number more than 10 per cent of the total number of owners of the class of securities distributed. There is a new prospectus exemption for the resale of securities outside Canada of a non-reporting foreign issuer initially distributed pursuant to an exemption. A foreign issuer is, in general, a corporation incorporated outside Canada.
The New Rule clarifies that certain information is not required to be included in a form 45-106F1 - Report of Exempt Distribution filed for certain distributions by an issuer of securities of its own issue outside Canada, including confidential purchaser, director, executive officer, promoter and control person information. Obtaining this information had been highly problematic for many securities offerings outside Canada in the past and codifying an exemption is a welcome change for issuers.
The dealer registration requirement does not apply under the New Rule to certain securities dealers registered (or exempt) in the United States, the United Kingdom, the European Union, Australia, and Hong Kong, among other jurisdictions, who are distributing securities to investors outside of Canada under a prospectus filed in Alberta or pursuant to a prospectus exemption and who are not registered as dealers in Canada.
Joint ventures in the energy and resources sectors.