On January 22, 2010 the Canadian Securities Administrators (“CSA”)¹ approved National Instrument 55-104 - Insider Reporting Requirements and Exemptions (the “Instrument”), which is expected to come into force on April 30, 2010. The Instrument consolidates the principal insider reporting requirements and most exemptions from these requirements in a single national instrument. The CSA expects the Instrument to make it easier for issuers and insiders to locate and understand their obligations and help promote timely and effective compliance with insider reporting requirements.

"Reporting Insiders"

A key change to the existing insider reporting requirements is the concept of a “reporting insider”. The Instrument defines a reporting insider to mean, in part and in general terms, an insider of a reporting issuer who is:

• (i) the chief executive officer, chief financial officer or chief operating officer (or an individual acting in a similar capacity in each such case) of the reporting issuer, of a significant shareholder (discussed below) of the reporting issuer or of a major subsidiary (discussed below) of the reporting issuer;
• (ii) a director of the reporting issuer, of a significant shareholder of the reporting issuer or of a major subsidiary of the reporting issuer;
• (iii) a person or company responsible for a principal business unit, division or function of the reporting issuer;
• (iv) a significant shareholder of the reporting issuer;
• (v) a management company that provides significant management or administrative services to the reporting issuer or a major subsidiary of the reporting issuer, every director of the management company, every CEO, CFO and COO of the management company, and every significant shareholder of the management company; or
• (vi) an individual performing functions similar to the functions performed by any of the insiders described above.

In addition to the above enumerated list (the “Enumerated Positions”), the definition of “reporting insider” contains a “basket provision” which defines as a reporting insider any insider that:

• (i) in the ordinary course receives or has access to information as to material facts or material changes concerning the reporting issuer before the material facts or material changes are generally disclosed; and
• (ii) directly or indirectly, exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer.

The Instrument defines a “significant shareholder” to mean, generally, a person or company that has beneficial ownership of, or control or direction over, or a combination of such ownership or control, the securities of an issuer carrying more than 10% of the voting rights attached to all the issuers outstanding voting securities.

A “major subsidiary” is defined in the Instrument to mean, generally, a subsidiary of an issuer whose assets are 30% or more of the consolidated assets of the issuer or whose revenue is 30% or more of the consolidated revenue of the issuer as reported on the issuer’s most recent financial statements.

The CSA’s Companion Policy to the Instrument provides general guidance regarding the determination of whether an insider satisfies the “significant influence” criteria referred to in the “basket provision” described above. In this regard, the Companion Policy provides that the insider should consider whether the insider exercises, or has the ability to exercise, significant influence over the business, operations, capital or development of the issuer that is reasonably comparable to that exercised by one or more of the Enumerated Positions. The Companion Policy further explains that certain positions or relationships with the issuer may give rise to reporting insider status in the case of certain issuers but not others and that the importance of a position or relationship to an issuer may change over time. In addition, the determination of whether an insider is a reporting insider based on the “basket provision” will generally be a question of reasonable judgment. The CSA recommends that insiders consult with their issuers when making this determination and that a determination that is consistent with the issuer’s view may help establish that a determination was reasonable.

Filing Requirements

Under the Instrument, a reporting insider must file an insider report in respect of a reporting issuer within 10 days of becoming a reporting insider, disclosing the reporting insider’s:

• (i) beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer; and
• (ii) interest in, or right or obligation associated with, a related financial instrument² involving a security of the reporting issuer.

After the filing of the initial insider report described above, reporting insiders are required to file insider reports (“Subsequent Reports”) indicating any changes in their (i) beneficial ownership of, or control or direction over, whether direct or indirect, securities of a reporting issuer; or (ii) interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer. The Subsequent Reports are required to be filed within five days of the occurrence of any such change. However, this five day reporting period is extended to 10 days until October 31, 2010 as a transitional measure under the Instrument.

In addition to the above, the Instrument also requires reporting insiders to file insider reports if they enter into, materially amend or terminate any agreement, arrangement or understanding that:

• (i) has the effect of altering, directly or indirectly, the reporting insider’s economic exposure to a reporting issuer;
• (ii) involves, directly or indirectly, a security of the reporting issuer or a related financial instrument involving a security of the reporting issuer; and
• (iii) in respect of which the reporting insider is not otherwise required to file an insider report.

An insider report in respect of such agreement, arrangement or understanding must disclose the existence and material terms of the agreement, arrangement or understanding.

Exemptions

Subject to certain qualifications, the Instrument provides numerous exemptions from the insider reporting requirements, including those in connection with the acquisition or disposition by a director or officer of securities under an automatic securities purchase plan or a compensation arrangement. In addition and subject to certain qualifications, the insider reporting requirements do not apply to a reporting insider if the reporting insider’s ownership, control or direction over a security of the reporting issuer changes as a result of “issuer events” such as stock dividends, stock splits, consolidations, amalgamations, reorganizations, mergers or other similar events.

Failure to File

The failure to file an insider report in accordance with the filing deadlines prescribed by the Instrument or to submit information in an insider report that in a material respect is misleading or untrue is an offence under securities legislation. Such an offence may result in, among other things, the imposition of late filing fees, the issuance of a cease trade order that prohibits the reporting insider from trading in or acquiring securities of any reporting issuer or enforcement proceedings by the securities regulatory authorities.

If you have any questions relating to any of the above, please do not hesitate to contact Jim Sahdra at jsahdra@kmblaw.com or (905) 276-0423.

The comments in this newsletter are of a general nature and are not designed to replace professional advice in specific situations. If you would like extra copies of this newsletter, or you know of anyone who would be interested in joining our mailing list, please contact Cheryl Woolcott at (905) 276-9111.

1. The CSA is a voluntary umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, co-ordinate and harmonize regulation of the Canadian capital markets.
2. In general terms, an agreement, arrangement or understanding to which an insider is a party and which alters the insider’s economic interest in a security of a reporting issuer or economic exposure to a reporting issuer.