blq vol3 issue2 e...national instrument 41-101 general prospectus requirements a new national...

Co-Counsel

McCarthy Tétrault Co-Counsel:

Business Law Quarterly Volume 3, Issue 2

March — May 2008

In this edition, we report on the latest continuous disclosure obligations for public companies, such as the new filing requirements for material contracts entered into in the ordinary course of business and disclosure of information regarding environmental matters. We also discuss proposals to revamp the registration requirements for participants in the Canadian capital markets, to expand the CEO and CFO certification, and to repeal and replace the requirements for disclosure of executive compensation. As well, we provide an introduction to new International Financial Reporting Standards.

You will also find a report on the latest foray by the federal government into the area of securities regulation, an examination of the scope of judicial review of decisions of securities regulators.

We also provide an extended analysis of the CRTC review and approval of the BCE sales transaction expected to be completed in June of this year.

And we include an update on mining law issues, featuring an article that discusses how to obtain a social licence to mine in the face of Aboriginal and treaty rights. A second article considers a recent judgment by the Ontario Superior Court that confirms that Aboriginal communities are subject to the rule of law in the face of defying a court order granted to a corporation to proceed with exploratory drilling.

We are pleased to advise those of our readers who are interested in mining law issues of the launch of McCarthy Tétrault: Mining Prospects, a periodical from our firm’s Global Mining Group. Mining Prospects provides practical information of interest to mining companies and their capital markets advisors.

These are just some of the topics you will find in this issue of our quarterly. As always, we welcome your questions and comments. If you are not a subscriber to McCarthy Tétrault Co-Counsel: Business Law Quarterly, simply contact us to have your name added to our list.

Yours truly,

Robert D. Chapman and Edward P. Kerwin Managing Editors, McCarthy Tétrault Co-Counsel: Business Law Quarterly

Michael Bazzi and Duncan Quarrington Business Law Group Knowledge Management Lawyers May 2008

Co-Counsel: Business Law Quarterly Volume 3, Issue 2

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Co-Counsel: Business Law Quarterly Volume 3 Issue 2

Table of Contents

Securities ........................................................................................... 1

PUBLIC OFFERINGS........................................................................................ 1 The Recent Introduction of National Instrument 41-101 General Prospectus Requirements..........1

REGULATION ............................................................................................... 3

Another Federal Attempt at Securities Regulation...........................................................3 DEALER REGISTRATION................................................................................... 4

The Next Step: Revised Draft of Proposed National Instrument 31-103 — Registration Requirements ......................................................................................4

Public Company Disclosure & Corporate Governance ..................................... 7

CONTINUOUS DISCLOSURE ............................................................................... 7 Canadian Securities Administrators Propose Revised Certification Requirements — Proposed National Instrument 52-109 ..........................................................................7 New Filing Requirement for “Material Contacts” Entered into in the Ordinary Course of Business .....................................................................................9 Continuous Disclosure and the Environment — OSC Staff Notice 51-716 Environmental Reporting ....................................................................................... 11 International Financial Reporting Standards for Canada by 2011........................................ 14

EXECUTIVE COMPENSATION ............................................................................ 16

Wait and See Time — CSA Considering Comments on New Executive Compensation Disclosure Proposal: Form 51-102F6 .......................................................................... 16

Private Equity & Venture Capital .............................................................19

Proposed Canadian Tax Changes Expected to Impact Cross-Border Private Equity and Venture Capital Investors ...................................................................................... 19

Mergers & Acquisitions ..........................................................................21

The Right to Be Wrong … Why Should Anyone Be Wrong? ................................................. 21 Clear Channel from Courts to Closing: Accommodations to Complete a Deal ......................... 22

Updates.............................................................................................25

COMPETITION LAW UPDATE ............................................................................ 25 Warm Beer from the Federal Court of Appeal: The Labatt/Lakeport Section 100 Decision......... 25

MINING LAW UPDATE .................................................................................... 27

Social Licence Concepts and Canadian Mine Development ............................................... 27 Aboriginal Protest against Mining Exploration: The Paramountcy of the Rule of Law................ 29

PENSION LAW UPDATE................................................................................... 31

Equity-Based Compensation Plans — Tax Considerations.................................................. 31 PRIVACY LAW UPDATE................................................................................... 34

Video Surveillance Guidelines Issued by Privacy Commissioners......................................... 34 REAL PROPERTY UPDATE................................................................................ 35

New Anti-Money-Laundering Regulations Regarding Real Estate Developers .......................... 35 TELECOMMUNICATIONS LAW UPDATE................................................................. 37

CRTC Approves Sale of BCE .................................................................................... 37 TRADE LAW UPDATE ..................................................................................... 43

First Arbitration Judgement Issued under Canada-United States Softwood Lumber Agreement, 2006 .......................................................................... 43


Securities

PUBLIC OFFERINGS

The Recent Introduction of National Instrument 41-101 General Prospectus Requirements

A new national instrument governing the requirements for prospectuses came into force on March 17, 2008. National Instrument 41-101 General Prospectus Requirements (New Instrument) is based on Ontario Securities Commission Instrument 41-501 General Prospectus Requirements (Old Instrument). The New Instrument is intended to create a comprehensive, seamless and transparent set of national prospectus requirements for all issuers including investment funds, other than mutual funds filing a prospectus under National Instrument 81-101 Mutual Fund Prospectus Disclosure.

Along with the introduction of the New Instrument, a number of other national instruments were changed. These include National Instrument 44-101 Short Form Prospectus Distributions (Short Form Instrument) and National Instrument 51-102 Continuous Disclosure Obligations. This article will focus on some of the more substantial changes made in the New Instrument.

Definitions

The concept of an initial public offering (IPO) venture issuer has been added to the New Instrument. The difference between a venture

issuer and an IPO venture issuer is that the former is already a reporting issuer when the prospectus is filed with the regulator, while the latter is not.

Form of Prospectus

Generally, an issuer must file a prospectus with the disclosure required by Form 41-101F1, and an issuer that is an investment fund must file a prospectus with the disclosure required by Form 41-101F2. A qualified issuer may file a short form prospectus. The disclosure requirements for a short form prospectus are still found in the Short Form Instrument, to which certain amendments have also been made.

Certificates

In the New Instrument, the number of persons required to sign certificates that the prospectus constitutes full, true and plain disclosure has increased. The new certificate requirements apply in all jurisdictions except Ontario, which did not adopt them. Instead, prospectuses filed in Ontario will still conform to the requirements in the Securities Act (Ontario) regarding certificates. Many of these requirements are similar to those in the New Instrument.

Best Efforts Distributions

The New Instrument caps the distribution time for securities being distributed on a best efforts basis. The distribution must cease within 90 days after the date of the receipt for the


final prospectus. However, distribution can be extended by 90 days beginning on the date an amendment is filed, to a maximum of 180 days.

Filing Requirements

The filing requirements for long form prospectuses are found in the New Instrument, and the filing requirements for short form prospectuses are found in the Short Form Instrument. Two substantial changes to the filing requirements for both instruments concern material contracts and the provision of personal information in respect of directors, executive officers and promoters.

Material contracts

Under the Old Instrument, material contracts entered into “in the ordinary course of business” did not have to be filed with the prospectus. The New Instrument and the Short Form Instrument require that certain types of material contracts always be filed, whether in the ordinary course of business or not.

The New Instrument and the Short Form Instrument also provide guidance on which provisions of a filed material contract may be omitted or marked unreadable. However, if a provision is omitted or marked unreadable, a description of the types of information omitted or marked unreadable must be included.

Personal information form

Under the Old Instrument and the Short Form Instrument, certain personal information of each director, executive officer and promoter of the issuer had to be filed with the regulator. The New Instrument includes a personal information form as an appendix that each director, executive officer and promoter of the issuer is required to complete.

Further details can be found in the McCarthy Tétrault E-Alert written by Matthew Hall on the McCarthy Tétrault website.

Contact: Matthew J. Hall in Calgary at [email protected] or Brian E. Vick in Vancouver at [email protected] or Edward P. Kerwin in Toronto at [email protected] or Virginia K. Schweitzer in Ottawa at [email protected] or Karl Tabbakh in Montréal at [email protected]

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REGULATION

Another Federal Attempt at Securities Regulation

In an earlier article, we discussed the report of the Crawford Panel, Blueprint for a Canadian Securities Commission. Published in June 2006, this report was a response to the federal government’s December 2003 Wise Persons’ Committee report, which had proposed a federal securities commission with federal legislation. The Crawford Panel report recommended a single Canadian securities regulator with a single Canadian securities act that would apply in all jurisdictions and suggested the methodology of having the legislation passed by one province and adopted by all other provinces and territories. The Crawford Panel was funded by Ontario.

The federal government has again weighed in on the topic of securities regulation with the appointment of the Expert Panel on Securities Regulation in Canada (Expert Panel) by the federal Minister of Finance in February 2008. The Expert Panel has been charged with providing advice and recommendations to the Minister of Finance and the provincial and territorial ministers responsible for securities regulation on the best way to improve securities regulation in Canada. Although the Expert Panel has been instructed to report to the federal, provincial and territorial ministers, all funding will be provided by the federal government.

As a first step, the Expert Panel published a public consultation paper in April 2008

identifying five items on which it seeks input. These closely, but not uniformly, parallel the five-point mandate assigned to the Expert Panel by the Minister of Finance in its Terms of Reference, namely:

• What should be the objectives, outcome indicators and performance measures for securities regulation in Canada?

• Should a more principles-based approach to securities regulation replace the current rules-based approach?

• Should securities regulation be tailored to be proportionate to certain economic characteristics of the companies being regulated, notably size and business risk?

• Could a more principles-based approach improve enforcement — and should the adjudicative function, which determines the application of administrative solutions, be made independent of the regulator?

• What is the best structural model for securities regulation in Canada is — a single securities regulator or the passport system?

The last two items naturally draw the most reaction.

Canadians securities regulators have not received high praise in connection with their enforcement activities. One criticism is that securities regulators should not be both prosecutors and adjudicators. In Québec, these functions have recently been separated.



Finally, the thorny issue of a single securities regulator is necessarily on the list of issues. The federal Minister of Finance has previously signalled his preference for a single regulator rather than the current passport system in which 12 of the provinces and territories are full participants and Ontario is a co-operating party.

The Expert Panel is scheduled to deliver a final report and draft model securities act by the end of 2008.

Contact: Robert D. Chapman in Ottawa at [email protected] or Edward P. Kerwin in Toronto at [email protected]

DEALER REGISTRATION

The Next Step: Revised Draft of Proposed National Instrument 31-103 — Registration Requirements

On February 29, 2008, the Canadian Securities Administrators (CSA) published revised drafts of National Instrument 31-103 Registration Requirements (Proposed Rule) and Companion Policy 31-103CP Registration Requirements (Proposed Companion Policy) for comment. Previous drafts were published for comment on February 20, 2007 (Previous Proposal). As with the Previous Proposal, the primary objective of the Proposed Rule is to simplify and harmonize the dealer, underwriter and advisor registration requirements of all Canadian provinces and territories, and to introduce the investment fund manager category of registration.

The Previous Proposal received more than 260 comment letters. As a result, a number of amendments have been made to the Previous Proposal by the Proposed Rule. The most significant changes to the Previous Proposal contemplated by the Proposed Rule comprise the following:

• the “business trigger” for dealer registration that was proposed by the Previous Proposal has been changed to refer to “carrying on the business of trading in securities” rather than “carrying on the business of dealing in securities”;

• the Proposed Companion Policy clarifies the fact that an investment fund manager will be required to register only in the




jurisdiction where the person or company that directs the management of the relevant fund(s) is located;

• exempt market dealers that do not handle, hold or have access to client cash or assets, including cheques and other similar instruments, will be exempt from (i) capital and insurance requirements, and (ii) annual audited financial statement delivery requirements — provided they deliver certified quarterly unaudited financial statements to the CSA;

• exempt market dealers will also be exempt from the following requirements when dealing with so-called “permitted clients”:

the know-your-client requirement with the exception of the basic information required to establish a client’s identity;

the suitability obligation;

account-opening information requirements; and

complaint-handling requirements.

• the relationship disclosure document contemplated by the Previous Proposal has been replaced by a principle-based provision requiring registrants to provide information that a reasonable client would consider important respecting the client’s relationship with the registrant;

• every registrant will be exempt from the suitability obligation when dealing with a

permitted client that has agreed in writing to waive the suitability obligation; and

• the solicitation prohibition that would have been imposed upon international advisors by the Previous Proposal has been eliminated.

Unlike the Previous Proposal, the Proposed Rule also contains detailed transition rules that provide certain registrants with a grace period of six months to a year to become compliant with the Proposed Rule. Individuals designated as ultimate designated persons or chief compliance officers must apply for registration within one month of the effective date of the Proposed Rule.

Several instruments in relation to the Proposed Rule have also been published for comment by the CSA and the Ontario Securities Commission (OSC). On February 29, 2008, the CSA published for comment proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions to delete those dealer and advisor registration exemptions that will no longer be required once the Proposed Rule becomes effective, due primarily to the adoption of the “business trigger.” On the same date, the OSC also published for comment comparable amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions. More recently, on April 25, 2008, the OSC requested comments on draft amendments to the Securities Act (Ontario) and consequential amendments to the Proposed Rule that are intended to implement in this Act a number of the more significant provisions of the Proposed Rule.


Contact: Michael C. Nicholas in Toronto at [email protected]



Public Company Disclosure & Corporate Governance

CONTINUOUS DISCLOSURE

Canadian Securities Administrators Propose Revised Certification Requirements — Proposed National Instrument 52-109

On April 18, 2008, the Canadian Securities Administrators (CSA) issued a notice and request for comments regarding the revised proposal for the repeal of Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings and its replacement with proposed National Instrument 52-109 (Proposed Instrument). The Proposed Instrument and related forms and companion policy reflect revisions made as a result of extensive comments received in response to previously proposed materials published for comment in March 2007.

The principal substantive certification additions of the March 2007 proposal have been retained. Namely, the chief executive officer (CEO) and chief financial officer (CFO) of a reporting issuer, subject to certain exceptions discussed below, will be required to certify in their annual certificates that:

• they have evaluated, or caused to be evaluated under their supervision, the effectiveness of the issuer’s internal

control over financial reporting (ICFR) as at the end of the financial year; and

• they have caused the issuer to disclose in its annual Management’s Discussion and Analysis (MD&A) their conclusions about the effectiveness of the issuer’s ICFR based on such evaluation.

These certification requirements will be in addition to the current requirements that an issuer’s CEO and CFO certify that, among other items:

• they have designed disclosure controls and procedures (DC&P) and ICFR, or caused them to be designed under their supervision;

• they have evaluated the effectiveness of the issuer’s DC&P and caused the issuer to disclose their conclusions about their evaluation in the issuer’s MD&A; and

• they have caused the issuer to disclose certain changes in ICFR in the issuer’s MD&A.

Key Changes Applicable to Non-Venture Issuers

Control framework

The Proposed Instrument requires that a non-venture issuer use a suitable control framework to design the issuer’s ICFR, and includes examples of commonly used control


frameworks. Venture issuers should note that for any financial period that a venture issuer chooses to file a full certificate rather than the venture issuer basic certificate (described below), it must use a control framework to design its ICFR.

Material weakness

The previously proposed concept of “reportable deficiency” has been replaced with the concept of “material weakness,” which is defined as a deficiency or a combination of deficiencies in ICFR leading to a reasonable possibility that a material misstatement of the reporting issuer’s annual or interim financial statements will not be prevented or detected on a timely basis. Readers will note that this definition matches the one adopted by the US Securities and Exchange Commission in respect of the corresponding certification requirements under the Sarbanes-Oxley Act of 2002. For each material weakness identified, the Proposed Instrument requires a non-venture issuer to disclose in its MD&A a description of the material weakness, the impact on the issuer’s financial reporting and ICFR, and the issuer’s current plans or actions already undertaken for remediation, if any.

Scope limitations

A non-venture issuer may now limit its design of DC&P and ICFR to exclude controls, policies and procedures of a business the issuer has acquired not more than 365 days before the end of the financial period to which the certificate relates. This limitation is only applicable to an annual certificate relating to the financial year in which

the issuer acquired the business and an interim certificate relating to the first, second and/or third interim period ending on or after the date the issuer acquired the business.

Venture issuer basic certificate

The Proposed Instrument includes a new form of certificate for venture issuers (venture issuer basic certificate) that does not require the CEO and CFO to certify that they have designed and evaluated the effectiveness of DC&P and ICFR. This change is consistent with existing blanket orders and similar exemptive relief and guidance issued by each CSA jurisdiction for financial years and interim periods ending on or after December 31, 2007. We described the form and content of the venture issuer basic certificate in an earlier issue.

Alternative forms of certificates

Pursuant to the Proposed Instrument, alternative forms of certificates may be used for the first financial period following an initial public offering or certain reverse takeovers, or after becoming a non-venture issuer. The proposed alternative certificates are similar in form to venture issuer basic certificates.

Expanded guidance

The proposed companion policy also has been significantly amended and contains enhanced guidance on various topics, including self-assessments, compensating controls and mitigating procedures, use of a service organization or specialist for an issuer’s ICFR,



weakness in DC&P and disclosure of an external auditor report on ICFR.

McCarthy Tétrault Notes:

The Proposed Instrument is scheduled to come into force on December 15, 2008 and will apply to all reporting issuers, other than investment funds, in all Canadian jurisdictions for financial periods ending on and after the effective date.

The notice and request for comments issued by the CSA on April 18, 2008 invites written comments on the Proposed Instrument no later than June 17, 2008.

Further details can be found in the legal update on the McCarthy Tétrault website.

Contact: Roger J. Chouinard in Toronto at [email protected] or Robert O. Hansen in Toronto at [email protected] or Jo-Anna Brimmer in Toronto at [email protected]

New Filing Requirement for “Material Contacts” Entered into in the Ordinary Course of Business

Privately held companies that enter into contracts with Canadian reporting issuers may be surprised to learn that those contracts may become publicly available through the Internet. Recent changes to National Instrument 51-102 Continuous Disclosure Obligations now require reporting issuers to publicly file certain “material contracts” entered into “in the ordinary course of business” on SEDAR. Material contracts entered into on or after January 1, 2002 and still in effect will also be subject to this new filing requirement if they were not previously filed.

Before these changes came into effect on March 17, 2008, reporting issuers were not required to file on SEDAR material contracts entered into “in the ordinary course of business.” A material contract is a contract to which a reporting issuer or any of its subsidiaries is a party that is material to the reporting issuer. It generally includes a schedule, side letter or exhibit referred to in the contract, as well as any amendment to the material contract.

Now, reporting issuers must file certain types of material contracts which are entered into in the ordinary course of business. These contracts include franchise, licence or other agreements to use a patent, formula, trade secret, process or trade name. In addition, material contracts on which the reporting issuer’s business is substantially dependent are also subject to the new filing requirement.






Thus, material technology licensing agreements and outsourcing agreements may need to be filed and could therefore become publicly available.

The National Instrument permits redacting or omitting certain contractual provisions if an executive officer of the reporting issuer reasonably believes the disclosure of that provision would be seriously prejudicial to the interests of the reporting issuer or would violate confidentiality provisions. A one-sentence description of the type of information omitted or redacted must be included.

It should be noted, however, that no omission or redaction is possible if a provision relates to:

• debt covenants and ratios in financing or credit agreements;

• events of default or other terms relating to the termination of the material contract; or

• other terms necessary for understanding the impact of the material contract on the business of the reporting issuer.

For material contracts entered into prior to March 17, 2008, regulators may consider granting an exemption to redact certain provisions if the disclosure of that provision would violate a confidentiality provision. In considering whether to grant an exemption, regulators will take into consideration a number of factors, including:

• whether an executive officer of the reporting issuer reasonably believes the disclosure of the provisions would be

prejudicial to the interests of the reporting issuer; and

• whether the reporting issuer is unable to obtain a waiver of the confidentiality provision from the other party.


Privately held companies may want to include confidentiality provisions in their contracts that include a right to approve any redaction of the contract. While any approval right will always be subject to the requirements of applicable law (including those of the National Instrument), such a provision would give privately held companies some ability to review what sensitive contractual provisions are to be made publicly available.

Reporting issuers will need to carefully review material contracts still in effect that were entered into on or after January 1, 2002 and that have not been previously filed. As part of this review, close attention should be paid to any existing confidentiality obligations in the agreements. Before posting the contracts on SEDAR, confidential or prejudicial information in the contracts and the schedules should be redacted or omitted (if permitted by the National Instrument) and a one-sentence description added. In addition, reporting issuers must be careful not to disclose personal information in contravention of privacy legislation.


Reporting issuers should also be mindful of the new filing requirements when negotiating material contracts. In particular, they should ensure that the confidentiality provisions permit filing the contract on SEDAR. In adapting to the new requirement, reporting issuers should also identify standard form material contracts and establish a systematic review process for those contracts.

This article previously appeared in McCarthy Tétrault Co-Counsel: Technology Law Quarterly.

Contact: Patrick Boucher in Montréal at [email protected] or Frédéric Cotnoir in Montréal at [email protected] or Vanessa Grant in Toronto at [email protected]

Continuous Disclosure and the Environment — OSC Staff Notice 51-716 Environmental Reporting

The staff of the Ontario Securities Commission (OSC) have reminded reporting issuers that they are required to disclose material information about environmental matters in their continuous disclosure documents pursuant to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), including their financial statements, management’s discussion and analysis (MD&A) and annual information form (AIF).

Materiality is the determining factor for including information in continuous disclosure documents. Information relating to environmental matters is likely material if a reasonable investor’s decision whether to buy, sell or hold securities of the issuer would likely be influenced or changed if the information was omitted or misstated. This concept of materiality is consistent with the financial reporting notion of materiality included in the Canadian Institute of Chartered Accountants Handbook.

The OSC staff holds the view that issuers should consider both quantitative and qualitative factors in determining materiality generally, and particularly for disclosure relating to environmental matters.

The staff of the OSC conducted a targeted review of compliance with the disclosure requirements for environmental information and recently issued OSC Staff Notice 51-716 Environmental Reporting (Notice), which





outlined the results of that review and set forth the staff’s views of aspects of such compliance.

In the course of its review, the OSC staff examined five aspects of disclosure and stated its views as described below, with a caution against boilerplate disclosure that lacks an analysis of the issuer’s specific circumstances:

1. Financial Liabilities Related to the Environment (Environmental Liabilities)

Where the environmental liability involves a critical accounting estimate, management of TSX-listed issuers are required to include an analysis of said critical accounting estimate in their MD&A. In order to meet this requirement, such issuers should quantify the accounting estimate where quantitative information is readily available and would provide material information to investors. Issuers should also identify and explain that the estimate was highly uncertain at the time it was made and provide a detailed discussion of the estimate, which may include a sensitivity analysis or disclosure of the upper and lower ends of the range of estimates from which the recorded estimate was selected. The OSC staff also indicated that a discussion of material contingent environmental liabilities should be included in an issuer’s MD&A and/or AIF whether or not the liability has been accrued in the financial statements or disclosed in the notes to the financial statements.

2. Asset Retirement Obligations (AROs)

A liability for an ARO should be recognized by issuers in the period when a reasonable estimate of fair value can be made, and generally accepted accounting principles (GAAP) require this estimate to be included in the issuer’s statements.

If an ARO is material to an issuer, in addition to providing the required financial statement disclosure, the issuer should include in its MD&A a comprehensive discussion of material commitments, events or uncertainties, including AROs, that are reasonably likely to affect the issuer’s business. The issuer should also evaluate whether AROs are material long-term obligations. If so, the OSC staff’s view is that TSX-listed issuers should include these AROs in the summary contractual obligations table in their MD&A.

3. Financial and Operational Effects of Environmental Protection Requirements

Issuers are required to disclose the financial and operational effects of environmental protection requirements on their capital expenditures, earnings and competitive position in the current financial year, and the expected effect in future years. The AIF should include, where reasonably available, a quantification of the costs associated with environmental protection requirements, and the impact or potential impact of these costs on financial and operational results.


4. Environmental Policies Fundamental to Operations

If an issuer has implemented environmental policies that are fundamental to its operations (such as policies on the issuer’s relationship with the environment), the issuer is required to describe these policies in its AIF as well as the steps taken to implement them.

When discussing environmental policies fundamental to its operations, an issuer should evaluate and describe the impact or potential impact of these policies on its operations, including, if it so chooses, a quantification of the costs associated with these environmental policies, where quantitative information is reasonably available and would provide meaningful information to investors.

5. Environmental Risks

An issuer is required to disclose in its AIF risk factors relating to the issuer and its business, including environmental risks and any other matter that would be most likely to influence an investor’s decision to buy the issuer’s securities. The AIF should provide insight into what the issuer believes are the risks relating to the issuer and its business so that investors can assess the effect of these risks on the issuer’s operations and/or financial performance.

If any risks relating to environmental laws are material to an issuer’s operations, whether national or international, the issuer

should include a detailed discussion of these laws that provides meaningful information to investors, such as whether the issuer meets compliance with these laws and any costs of compliance.


The Notice provides helpful guidance to issuers about the disclosure of environmental matters that should be set forth in their financial statements, MD&A and AIFs to ensure compliance with securities legislation. The guidance is instructive to officers required to certify the disclosure of matters related to the issuer’s financial condition and to committees of the board that oversee financial reporting and disclosure.

Contact: Edward P. Kerwin in Toronto at [email protected] or Philip C. Moore in Toronto at [email protected]




International Financial Reporting Standards for Canada by 2011

The Canadian Securities Administrators (CSA) recently published CSA Concept Paper 52-402, which discusses issues and invites comment about the impending transition from the use of generally accepted accounting principles (GAAP) to the use of International Financial Reporting Standards (IFRS) by reporting issuers in Canada by January 1, 2011. GAAP are established by the Canadian Accounting Standards Board (AcSB) and published in the Canadian Institute of Chartered Accountants’ Handbook, while IFRS are issued by the International Accounting Standards Board (IASB). This paper is the CSA’s first step in addressing the changeover.

The CSA noted that the adoption by the AcSB of the 2011 implementation date for IFRS, as well as recent developments in the United States relating to acceptance of certain financial statements prepared in accordance with IFRS, have led to the need to address the implications from a securities law perspective.

Shortly after the CSA published its Concept Paper, the AcSB released its Exposure Draft of IFRS for Canada. This document will apply to “publicly accountable enterprises,” including publicly listed companies, certain government corporations and enterprises with fiduciary responsibilities such as banks, insurance companies, credit unions and securities firms. The AcSB is also studying appropriate standards for private companies in Canada.

The move to IFRS will place Canada on the same reporting basis as more than 100 other

countries, including the United Kingdom and other European Union (EU) countries, Australia and New Zealand. IFRS are described as principles-based and are similar to current Canadian GAAP in terms of conceptual frameworks and topics covered, in contrast with US GAAP, which is characterized as a more detailed, rules-based system.

Under National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107), domestic issuers (those reporting issuers incorporated in Canada) must use Canadian GAAP. Two exceptions apply: (i) domestic issuers who are US Securities and Exchange Commission (SEC) registrants have the option to use US GAAP, and (ii) only foreign issuers who are not also SEC registrants may use IFRS.

The SEC has recently authorized foreign private issuers that file annual reports on Form 20-F to use IFRS without reconciliation to US GAAP in preparing their financial disclosures for the US market for years ended on or after November 15, 2007. As a result, under NI 52-107, foreign issuers who are SEC foreign private issuers may now also use IFRS without reconciliation to US GAAP for their Canadian filings.

In a similar vein, the European Commission recently announced that United States and Japanese companies with a stock market listing in the EU may continue to use their versions of GAAP, while Canadian and Korean companies may use their respective GAAP until 2011.

The CSA invited comments on three principal questions:


• Should domestic issuers be permitted to adopt IFRS before January 1, 2011 if they choose to do so?

• Should the CSA eliminate the use of US GAAP by domestic issuers who are also SEC registrants?

• Should the term “Canadian GAAP” be replaced by, and not simply redefined as, “IFRS as issued by the International Accounting Standards Board”(IFRS-IASB)?

The comment period for the CSA Concept Paper closed on April 13, 2008. Comment letters submitted to the CSA by leading participants in the Canadian capital markets have supported permitting domestic issuers to adopt IFRS before January 1, 2011 and replacing the term “Canadian GAAP” with “IFRS-IASB” in laws, regulatory rules and other requirements, but have opposed eliminating the use of United States GAAP by domestic issuers who are also SEC registrants until the US adopts IFRS.

On May 9, 2008, the CSA published CSA Staff Notice 52-320, which provides guidance to an issuer on disclosure of expected changes in accounting policies relating to an issuer’s changeover to IFRS as the basis for preparing its financial statements for each financial reporting period in the three years before the first year in which the issuer uses IFRS. The notice focuses on MD&A and recognizes that the disclosure will be incremental and provide more detail as the issuer approaches its changeover date.

In future issues of this publication, we will provide reports and commentary on the transition to IFRS in Canada.

Contact: Robert D. Chapman in Ottawa at [email protected] or Edward P. Kerwin in Toronto at [email protected]




EXECUTIVE COMPENSATION

Wait and See Time — CSA Considering Comments on New Executive Compensation Disclosure Proposal: Form 51-102F6

On April 22, 2008, the Canadian Securities Administrators (CSA) picked up the last mailbag of comments on its latest proposal (Proposal) for overhauling executive compensation disclosure in Canada. Interested observers now can only wait and see whether the Proposal, which was released in February 2008, will be amended further before becoming effective. When the final new requirements are released, reporting issuers are expected to face new disclosure requirements for financial years ending on and after December 31, 2008.

The CSA has been working on new executive compensation disclosure requirements for well over a year. Its first proposals were released in March 2007, with the hope that a new rule would be effective for financial years ending on and after December 31, 2007. The initial proposal came after the SEC’s implementation of new rules for US public companies for years ending on and after December 31, 2006. Modelled on the US rules, the initial CSA proposals were heavily commented upon. The CSA announced in September 2007 that it would not be finalizing new rules for the 2007 year, thus giving Canadian reporting issuers another year under the existing rules, which have been in place since 1994. Issuers should anticipate that the CSA will finalize its new rules over the next few months, to be effective for years ending on and after December 31 of this

year. Given the time that has passed since the CSA’s first proposal and the previous opportunities that have been provided for comments, issuers should also expect that something very close to the latest Proposal will emerge as the final new requirement.

The CSA’s Proposal is the latest step in the ongoing efforts on the part of Canadian securities regulators, institutional shareholders and governance commentators to improve the quality and transparency of executive compensation disclosure. The primary thrust of the Proposal, in common with the US requirements, has been to require reporting issuers to disclose more clearly not just what executive officers have been paid, but how their compensation was calculated and why the compensation was paid. The existing requirements contain significant disclosure on what was paid, but the revised requirements will be intended to disclose more clearly the link between pay and performance.

This link will need to be discussed by reporting issuers in one of the most significant new elements of executive compensation disclosure, the compensation discussion and analysis (CD&A). The CD&A will require a narrative discussion of the compensation philosophy of the issuer for the prior year, including:

• the objectives of the compensation program;

• what the program is intended to reward;

• each element of compensation;

• why the issuer chose to pay each element;


• how each amount paid was determined; and

• how each element fits into the overall compensation objectives.

This disclosure will be new to most Canadian reporting issuers, as it is more detailed and focused on the reasons for paying particular amounts than are the current requirements.

The CD&A will also require far more detailed disclosure of any performance targets that determined the amount of compensation paid. This disclosure is also required in the United States and has occasioned significant discussion. Many issuers have not disclosed as much detail on the performance targets that determined the compensation amount as the Securities and Exchange Commission (SEC) or observers would have liked. Many issuers have cited concerns about the release of competitively sensitive information through this disclosure as a reason for less explicit descriptions of their incentive pay performance targets. For example, if one target was whether a particular business unit’s gross margin exceeded some predetermined level, that information could be of great interest to customers and competitors alike.

This issue was frequently commented upon in the response to the initial CSA proposal. In its revised Proposal, the CSA set the threshold that reporting issuers must meet in order not to disclose performance targets, as a test of whether the disclosure “would seriously prejudice the company’s interests.” Issuers should consider whether explicit disclosure of their compensation performance targets would be seriously prejudicial to their interests,

as it should be expected that more, rather than less, disclosure will be required on performance targets.

The Proposal carries through with the direction of the earlier CSA attempt, and the SEC requirements, to have all compensation included in the summary compensation table, leading to a single number in the far right column of that table. One significant area of discussion, and one area where the Proposal differs from the SEC requirements, is in valuing equity grants included in annual compensation. The SEC requires that issuers disclose in the summary compensation table the financial statement values of any equity grants made in the year; that is, the values used in the year-end financial statements are used as the amount of compensation shown. The Proposal, in contrast, requires disclosure of the value of equity grants as at the date of grant. If this value differs from the year-end values shown in the financial statements, the Proposal requires that an explanation of the difference be given. The CSA approach responded to comments made on its earlier proposal to the effect that the grant date values were those that compensation committees and boards considered in determining compensation, and thus those values should be used in the compensation disclosure.

The Proposal contains numerous other, more technical, changes to the current Canadian requirements. With the effective date having been delayed by a full year from its original objective, issuers should expect that the CSA will do all it can to finalize its new requirements


for next year’s proxy circulars. The new requirements, it is hoped, will be released early enough for issuers to have plenty of time to adapt. Regardless of how much time they are given, issuers should expect that more, not less, disclosure of their executive compensation programs will be required for years ending on and after December 31, 2008.

Contact: Philip C. Moore in Toronto at [email protected]



Private Equity & Venture Capital

Proposed Canadian Tax Changes Expected to Impact Cross-Border Private Equity and Venture Capital Investors

Current Canadian tax law creates barriers to efficient cross-border investment. In particular, many international private equity investors, particularly US-based venture funds, have complained about the additional time and expense associated with exiting Canadian-based investments. Proposed changes to the Section 116 withholding and clearance certificate obligations, announced in the federal budget on February 26, 2008, should come as good news to US venture capital investors active in Canada.

Under current Canadian tax law, a US-based fund investing directly in a Canadian operating company, on a disposition, will generally be required to obtain a certificate from the Canada Revenue Agency (typically referred to as a “Section 116 Certificate” after the relevant section in the Income Tax Act (Canada)), file a Canadian tax return and provide certain details regarding each of its limited partners. Private equity sponsors are often precluded from doing this under the terms of their limited partnership agreements. Even if they are permitted to do so, compliance with the requirements can be an organizational headache.

To avoid these administrative burdens, many US venture funds have resorted to structuring their investments in Canada through an exchangeable

share transaction. These funds invest directly in a newly established Delaware company into which all of the shares of the existing Canadian operating company are exchangeable upon the occurrence of certain events.

Other US funds have been known to structure their Canadian investments through a corporate vehicle resident in a third jurisdiction (e.g., Barbados or Luxembourg) that mitigates the administrative burden and may otherwise be more favourable from a tax-planning standpoint.

In many cases, these complexities have resulted in significantly higher transaction costs or have chased away investors that might otherwise have considered investing in Canada. In fact, some commentators have blamed the lack of venture funds available to Canadian entrepreneurs on these tax restrictions.

In the 2008 federal budget, the Canadian government proposed revisions to the Section 116 withholding and clearance certificate obligations, and the hope is that these revisions will alleviate some of the cost and inconvenience associated with certain cross-border transactions. The effect of the proposals may be to ease the compliance burden imposed on certain non-resident sellers and to allow such sellers to avoid the related purchase price withholding on closing.

To qualify for the proposed relief, several requirements must be satisfied. Given the


potentially significant exposure to buyers seeking to hold-back, buyers will need to diligently assess whether the relevant criteria can be adequately satisfied. In certain instances, opinions, representations and certificates may be inadequate to provide buyers with the required level of assurance.

On a separate note, but relevant to venture funds, the budget also proposed enhancements to Canada’s scientific research and experimental development incentives, in particular for R&D undertaken by Canadian-controlled private corporations and for certain eligible R&D to be undertaken outside of Canada.

For a more detailed discussion of the revisions to the Section 116 withholding and clearance certificate obligations, please read our firm’s federal budget commentary.


Contact: W. Ian Palm in Toronto at [email protected] or Patrick McCay in Toronto at [email protected]





Mergers & Acquisitions

The Right to Be Wrong … Why Should Anyone Be Wrong?

Canada’s securities regulation mosaic, with 13 provincial and territorial regulators and no national regulator, is facing increasing scrutiny. Any serious dialogue on reform must carefully study the relationship between securities commissions and the courts. One area where this merits examination is that of contested takeovers, an area of significant regulatory intervention often overlooked in public discussion.

The prevailing wisdom, according to existing case law, is that securities commissions have expertise in resolving disputes arising from mergers and acquisitions, and therefore an appellate court must give a high degree of deference to a decision of a securities commission in this area.

In Sears Holdings, in August 2006, the Ontario Securities Commission (OSC) thwarted a takeover of Sears Canada by its majority shareholder, Sears Holdings, ostensibly in order to protect minority rights. On appeal in September 2006, the Divisional Court applied well-established law holding that the OSC is entitled to strong curial deference when interpreting the Securities Act and when fashioning a remedy. This approach, which holds that the standard of review is one of reasonableness in the event of the exercise of a statutory right of appeal from a decision

of the OSC to the courts, leaves no room for rigorous review on appeal. In dismissing the appeal from the OSC regarding the contested takeover of Sears Canada, the Divisional Court held that the standard of review of reasonableness encompasses “the right to be wrong.” The court could not revisit the correctness of the result, which allowed sophisticated hedge funds to manoeuvre in to a blocking position and kill the only offer for the company’s largely illiquid stock.

Cases like Sears Holdings bring into focus the following questions:

• Does the deferential standard of appellate review adequately account for the will of the legislature in granting a right of appeal?

• Are securities commissions better qualified than specialized courts, such as Toronto’s Commercial List, in resolving disputes arising from mergers and acquisitions? If not, why does a judge’s decision face greater scrutiny on appeal than a securities commission’s decision?

• Is it justice for a tribunal’s “wrong” decision to be given deference and allowed to stand?

The answers to these question point towards a radical rethinking. Perhaps a securities commission should only be entitled to deference when it exercises expertise that would satisfy the test for admission of expert evidence.


Change is unlikely to come through judicial precedent because the principle of deference to securities commissions is well-entrenched in decisions up to the Supreme Court of Canada.

However, creative legislative solutions could be made available. In October 2006, the Task Force to Modernize Securities Legislation in Canada, chaired by Tom Allen and established by the Investment Dealers Association of Canada, recommended a Capital Markets Court. Such a court would be a natural candidate for jurisdiction over contested mergers and acquisitions, as well as quasi-criminal prosecutions regarding capital markets offences.

Ideally, a Capital Markets Court would comprise specially selected judges trained in, and with direct experience in, capital markets issues, such as the judges of the Commercial List in Ontario and their equivalents in certain other provinces, who have both commercial and criminal experience. Alternatively, a Capital Markets Court could be part of the Provincial Court, but several suitable Superior Court judges could be cross-appointed to the Provincial Court to sit on the Capital Markets Court. Another option would be to allow a judge to be appointed part-time to the OSC or other applicable securities regulator for hearing purposes on either a permanent or ad hoc basis, with the judge being the chair of the panel. Yet a further possibility to explore would be a version of the French commercial courts, which have both a commercially oriented judge and a lay expert on the hearing panel.

Contact: The Honourable James Farley, Q.C. in Toronto at [email protected] or Andrew Matheson in Toronto at [email protected]

Clear Channel from Courts to Closing: Accommodations to Complete a Deal

In March 2008, the private equity buyers who had agreed to purchase Clear Channel Communications, Inc. commenced a lawsuit in New York against the consortium of six banks who had committed to provide the debt financing in the transaction, accusing them of trying to undermine the deal by changing the terms of the financing. In a separate lawsuit launched in Texas by Clear Channel itself, together with the private equity firms, the lenders were accused of interfering with the purchase agreement.

On May 14, 2008, Clear Channel and its prospective private equity buyers, Thomas H. Lee Partners, L.P. and Bain Capital Partners, LLC, announced that the parties had agreed to proceed with the deal but at a reduced purchase price. The final $36 US per-share price was eight per cent below the originally agreed price of $39.20. Clear Channel struck the original deal to be acquired by the private equity buyers in November 2006.

While the litigation has now been settled, it is of interest to note the novel issues of law arising out of failed transactions where at least one of the parties to the transaction believes it will no




longer receive the value it originally contemplated. Recent litigation, such as Genesco/Finish Line and Cerberus/United Rentals, while each presenting different facts, are — arguably — fundamentally about the failure of value in light of the difficulties in the credit markets.

In Clear Channel, the New York action was, in effect, a claim that the commitment letter creates a binding obligation on the banks to fund the transaction and that the banks were in breach of that obligation. According to the court documents filed in New York, the banks “pretended to negotiate the final documentation in good faith, but in reality inserted into the final documents ‘poison provisions’” that were contrary to the terms of the commitment letter.

The definitive loan agreements were to contain the material terms as set out in the commitment letter, and other provisions consistent with loan agreements entered into by the private equity sponsors on other transactions. The plaintiffs claimed the banks had insisted on provisions that were onerous and inconsistent with the commitment letter and precedents. The lenders were also accused of delaying the transaction to run past the drop-dead date. The plaintiffs sought an order to require the banks to specifically perform the obligations under the commitment letter, and in the alternative, to pay damages.

In the settlement it appears that each of the three groups, Clear Channel, the buyout group and the lenders, compromised in order to make

the deal happen. The purchase price is lower, the cost of the debt funding is slightly higher, and the banks have provided a seven-year facility.


The difficulties in the credit markets have resulted in litigation of a number of transactions that have been the subject of articles in Volume 2, Issue 4 and Volume 3, Issue 1 of this publication. While the result of the Clear Channel litigation will never be known, the litigation raised interesting questions about the enforceability of contractual promises made in bank commitment letters.

Canada has little case law on the enforceability of bank commitment letters. The prevailing view has been that these letters are not “agreements to fund,” but an agreement to work in good faith towards documenting a loan consistent with certain agreed terms. As a result of the settlement, the Clear Channel case will not provide any judicial insight into the nature of a bank commitment.

Interestingly, as part of the settlement, Clear Channel noted that it, its partners and the six lenders had agreed to “fully negotiated and documented definitive agreements” for the financing. In addition, Clear Channel announced that the lenders would be depositing into escrow within 10 days all the cash and letters of credit that Clear Channel will need to close the transaction.




Contact: Vanessa Grant in Toronto at [email protected] or Garth M. Girvan in Toronto at [email protected] or Stephen Furlan in Toronto at [email protected]





Updates

COMPETITION LAW UPDATE

Warm Beer from the Federal Court of Appeal: The Labatt/Lakeport Section 100 Decision

On January 22, 2008, the Federal Court of Appeal (FCA) dismissed the Commissioner of Competition’s appeal of a March 2007 Competition Tribunal order that denied her an interim order to delay closing of Labatt’s acquisition of Lakeport Brewing for 30 days to permit her to complete her review. This was the Commissioner’s first Section 100 application since the Competition Act was amended in 1999 to make it easier for the Commissioner to get an interim order by removing the condition that a finding of a reasonable likelihood of substantial lessening or prevention of competition be made by the Tribunal. Section 100 now requires that the Commissioner must be of the opinion that more time is necessary to complete the inquiry, and that the Tribunal must be satisfied that, in the absence of an order, an action would be taken that would “substantially impair the ability of the Tribunal to remedy the effect of the proposed merger on competition.”

In the Labatt/Lakeport application, the Commissioner brought a Section 100 application arguing that she needed more time to review the returns made by industry participants pursuant to Section 11 of the Competition Act. Labatt and Lakeport argued that the Tribunal should not exercise its discretion to order a delay of closing of their transaction, since the Commissioner had

ample opportunity to review the beer industry in other recent investigations and since they were willing to enter into a “hold separate” agreement to preserve divestiture as an effective remedy.

The Tribunal held that although the 1999 amendments to Section 100 are intended to make applying for an interim order less onerous for the Commissioner, they had been passed at the same time as other amendments that had increased the statutory waiting period for merger review from 21 days to 42 days (for a long form filing). This has created a heightened expectation that 42 days should be enough time for the Commissioner to complete a merger review.

Further, the Tribunal held that in considering whether its ability to remedy would be substantially impaired, the focus must be on preserving “the ability to remedy, not on the availability of a particular remedy.” The Tribunal concluded that the Commissioner had not provided adequate evidence that allowing the parties to close would substantially impair the ability of the Tribunal to remedy the effect of the merger on competition.

Before the FCA, the Commissioner argued that the Tribunal’s approach would require her to demonstrate, at this early stage in the process, that the proposed transaction is reasonably likely to prevent or lessen competition substantially in a relevant market (essentially, the pre-1999 amendment condition), since to establish impairment of the Tribunal’s remedy, she would need to identify the problem to be remedied.


The FCA held that the Tribunal’s test did not require the Commissioner to demonstrate that a substantial lessening of competition is reasonably likely to result from the proposed transaction. Rather, she need only demonstrate that without an interim order, the Tribunal’s remedial powers would be substantially impaired.


Businesses should be cautious about reading too much into this decision. It does not preclude or limit a substantive merger challenge of the Labatt/Lakeport transaction by the Commissioner within three years of closing, although none has been made to date. Further, the FCA decision does not impose an unduly onerous burden on the Commission for future Section 100 applications. While the Commissioner will have to provide evidence that the Tribunal’s ability to order a remedy would be “substantially impaired” by allowing the transaction to close, the FCA has made it clear that she need not prove a likely substantial lessening of competition.

For most mergers, the Labatt decisions will have little or no impact. They may affect the limited number of cases where a proposed transaction raises serious competition issues, the acquiring party is prepared to assume the competition risk of closing, and the parties are willing to litigate with the government.

A more detailed description of this case is available as a McCarthy Tétrault E-Alert, which has also been reprinted in CCH’s Commercial List, Issue No. 490, May 2008.

Contact: Oliver J. Borgers in Toronto at [email protected] or Donald B. Houston in Toronto at [email protected] or Randal T. Hughes in Toronto at [email protected] or Jeanne L. Pratt in Toronto at [email protected]







MINING LAW UPDATE

Social Licence Concepts and Canadian Mine Development

Aboriginal and treaty rights are constitutionally protected, but are not absolute — Canadian governments’ actions that infringe upon these rights can be legally justified. Such justification requires the Crown to conduct appropriate consultation with the affected Aboriginal group, and, where appropriate, to accommodate them to minimize infringement.

The Supreme Court of Canada has held that consultation and accommodation may be effected under environmental review processes, and has provided the duty to consult as a sophisticated legal answer to part of the key issue facing worldwide mining development: obtaining the social licence to mine.

Mining companies cannot rely on mineral titles to develop mines. Unless companies demonstrate corporate social responsibility, their neighbours will not provide the appropriate level of local support that constitutes the social licence to mine. The elements of social licence are diverse, changing and international.

Sustainability is now vital to mining. The United Nation’s Brundtland Commission defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The UN Economic Commission for Europe’s Aarhus Convention mandates public transparency with respect

to environmental issues. As well, there are reconciliation movements in many countries that seek to reconcile differences between groups competing for resources.

Two 2007 decisions demonstrate that international thinking affects the defining of the social licence in Canada.

In Kemess North, a company was developing a mine in British Columbia. Its plan required tailings to be stored in a lake with cultural significance for a nearby Aboriginal community.

For two years, the plan underwent an environmental review. However, while admitting that the development would “not likely result in significant adverse environmental impacts” and that permitting would otherwise be available, the joint review panel recommended against mine development based on the thousand-year-plus horizon of environmental pollutant containment. In effect, the planned mine did not represent sustainable development.

This decision indicates the importance of considering the modern definition of sustainable development in the context of otherwise innocuous environmental impacts. It introduces into the consultation process criteria for approval that weighs environmental impacts of current technology against possibly reduced impacts obtainable from future technology.

In Tsilhqot’in Nation v. British Columbia, an Aboriginal group sought a judicial declaration of Aboriginal title over lands in British Columbia.


The trial judge set out — in a large, nonbinding statement of his views, among other items — his theory of the obligations imposed on governments by the principle of reconciliation, a little-developed legal concept. He espoused an approach to reconciliation that would “acknowledge the historical rights of Indigenous peoples to their ancestral lands … as the essential starting point for any modern settlement.”

We doubt any Supreme Court of Canada support for a general acceptance of all purported Aboriginal rights beyond the honourable approach to unproven claims adopted by the court in its 2004 decision in Haida Nation v. British Columbia (Ministry of Forests). Reconciliation, as discussed by the Supreme Court in Haida, is a process carried on by governments in and out of the courts. In the courts, it is tied to the rules of the common law and the balancing of Aboriginal and developmental interests. Out of the courts, it finds voice in such initiatives as B.C.’s “New Relationship,” which is a fundamentally important change of government policy in dealing with Aboriginal people based on reconciliation principles.


Achieving certainty in dealing with Aboriginal communities situated near mines requires proponents to go beyond asking if appropriate consultation has taken place to asking deeper questions, including:

• Is the overall impact of the mine truly transparent?

• Could the science of the mining plan be challenged as not ‘sustainable’ in that word’s modern meaning?

• Are the mine’s dealings with nearby Aboriginal communities respectful, with a view to reconciliation?

For a more detailed discussion of this topic, see the article written by Anthony Knox and Tom Isaac on the McCarthy Tétrault website.

Contact: D. Anthony Knox in Vancouver at [email protected] or Thomas F. Isaac in Vancouver at [email protected]





Aboriginal Protest against Mining Exploration: The Paramountcy of the Rule of Law

In a March 17, 2008 judgment confirming that Aboriginal communities are subject to the rule of law, the Ontario Superior Court sentenced eight Aboriginal community leaders to six months’ imprisonment after finding them in contempt of a court order for having impeded or threatened to impede mining exploration activities on their traditional land. More importantly, the court affirmed that the desire of Aboriginal communities to protect their land, cultural heritage and way of life does not supersede a court order granting the right to a corporation to proceed with economic development activities on this land. In this case, the activity was exploratory drilling.

The judgment in Platinex Inc. v. Kitchenuhmaykoosib Inninuwug First Nation is the most recent episode in a judicial saga involving Platinex, a junior exploration company, and the Kitchenuhmaykoosib Inninuwug First Nation (KI), an Ojibwa/Cree First Nation occupying a reserve on Big Trout Lake in northern Ontario. KI is a signatory to the 1929 adhesion to Treaty 9, the James Bay Treaty in Ontario. The initial action was instituted in 2006, following seven years of negotiations between Platinex and KI concerning a mining exploration program to be conducted on Platinex’s unpatented mining claims located on traditional non-reserve KI land. During the negotiations, in 2001, KI adopted a moratorium on all mineral activities until proper consultations had taken place.

On July 28, 2006, an interim order was granted by the court barring Platinex from engaging in its exploration program for five months, conditional upon KI setting up a consultation committee to draft an agreement that would allow Platinex to conduct its exploration activities. This injunction was later extended by a few months, to May 1, 2007. The court then refused to renew the injunction. In so doing, the judge acknowledged KI’s perspective but observed that no concrete evidence supported KI’s position that Platinex’s exploration program could threaten KI’s culture and heritage. On the other hand, the court praised Platinex for its proposal to act cautiously, with constant consultation and attention to KI concerns. On October 25, 2007, the court issued an order permitting Platinex to proceed with the first phase of its exploration program.

On December 14, 2007, however, the court found eight KI community leaders in contempt of its previous order for having prevented Platinex’s employees from beginning the first phase of the exploration program. Evidence was specifically provided that these leaders, along with other community members, had prevented Platinex’s drilling staff from entering the village’s airport and that Ontario Provincial Police First Nation police officers had threatened them with arrest if they did not leave KI’s land.

The decision in Platinex to impose a six-month prison term on the community leaders is deeply rooted in the court’s concern to maintain the paramountcy of the rule of law in the face of conduct that openly challenged the integrity of the justice system. Having stressed that courts need to exercise their inherent power to punish


contempt of court with scrupulous care, the court noted that imposing prison terms was not uncommon in situations involving deliberate disobedience of a court order, especially if the disobedience has not been followed by apologies. Relying on existing jurisprudence, the judge set out a list of ten factors and sentencing principles that should be taken into consideration before imposing a sanction for contempt of court. These factors include the level of defiance of the court order and the repetition of the act of disobedience, its public nature, the position of the contemnors in their collectivities, their ability to pay a fine, their acknowledgment of the paramountcy of the rule of law, and the admission of the commission of the disobedient act.

Among the aggravating factors found by the court was the fact that the contemnors were community leaders who had used their position of authority to incite other community members to defy repeatedly and continuously the order. The most significant aggravating factor, according to the judge, was the fact that none of the contemnors had acknowledged the paramountcy of the rule of law. In his view, the flagrant and repeated defiance of the contemnors warranted a severe prison term. The judge also issued an order staying further procedures by KI and the contemnors.

Throughout the proceedings, Justice Smith emphasized the importance of reconciliation between Aboriginal interests and other interests. The court concluded its judgment in Platinex by offering to vary or discharge the custodial

order if the contemnors agreed to purge their contempt.

On May 27, 2008, the Ontario Court of Appeal upheld an appeal of the sentences in Platinex and in a similar case in which the Ontario Superior Court had imposed a prison term on an aboriginal leader who had been found in contempt for organizing a protest at a potential uranium mining site. The Ontario Court of Appeal immediately reduced the custodial orders to time spent but reserved its reasons for a later date.

A version of this article originally appeared in the April 18, 2008 edition of The Lawyers Weekly.

Contact: Ann Bigué in Montréal at [email protected] or Marc-Alexandre Hudon in Montréal at [email protected]




PENSION LAW UPDATE

Equity-Based Compensation Plans — Tax Considerations

Equity-based employee compensation plans are varied and sometimes confusing. They can either deliver securities or they can operate in a virtual world where the benefit is paid in cash based on the value of a reference security. They can provide benefits based only on the increase in the reference security or benefits based on the security’s original value, as well as any increase in value. Some of these plans are subject to securities law considerations, while others are not. Some are subject to vesting and performance criteria.

One thing that is common to all equity-based plans is the need to fit within the tax rules.

In designing and analyzing an equity-based plan, the most fundamental questions are whether and how the plan permits the deferral of amounts that would otherwise be brought into the employee’s income sooner. This article provides a summary of the comprehensive article written by Lorraine Allard available on our website describing various types of equity-based plans and the tax and other attributes of those plans.

Income Tax Act — Section 7 or Not

The first major determination to be made is whether the plan qualifies for income deferral treatment under Section 7 of the Income Tax Act (ITA). If it does not, then it may be caught by the salary deferral arrangement (SDA) rules,

which are designed to prevent the postponement of tax.

All that is needed for a plan to fit within Section 7 is an agreement by a corporation or mutual fund trust to sell or issue to an employee its securities or those of a corporation or mutual fund trust with which it does not deal at arm’s length. A plan under which the employer must or may pay cash will not normally be considered an agreement to sell or issue securities, and will therefore not qualify as a Section 7 plan.

Section 7 plans

A Section 7 plan is any plan that fits within Section 7, even where no options are issued. Nonetheless, the most recognizable form of a Section 7 plan is a stock option plan.

Stock option plans do not give rise to income tax at the time of an employee’s entitlement to participate in the plan, nor upon the acquisition by an employee of an option under the plan. At the time of exercise of an option or the later disposition of option shares, the ITA requires the inclusion in the employee’s income of an employment benefit amount equal to the excess of the fair market value of the securities when acquired over the price, if any, paid to acquire them.

Stock option plans may be divided between those offered by Canadian-controlled private corporations (CCPCs) and those offered by other issuers. Where the securities are not shares of a CCPC, the employment benefit amount is included in income when the securities are acquired by the employee. These securities



may be deferred for tax purposes until their subsequent sale – if certain conditions are met, including listing of the shares on a prescribed stock exchange and qualifying for the Section 110(1)(d) deduction. Where the securities are shares of a CCPC, there is an automatic deferral of the recognition of the employment benefit amount until the shares are sold.

In addition to the benefit of deferral, employees may also be entitled in the case of stock options to a partial deduction from the amount of the employment benefit, which will result in a more favourable rate of tax with respect to stock options.

An employee who acquires securities that are not shares of a CCPC will be entitled to a deduction from income, equal to one-half the employment benefit amount (which effectively equates the tax rate on the employment benefit amount to the capital gains tax rate) if certain conditions are met. These conditions include the exercise price of the options being no less than the fair market value of the securities at the time the agreement to sell or issue the securities is entered into. This is what is commonly referred to as the ‘110(1)(d) deduction,’ after the relevant provision of the ITA.

An employee who acquires securities that are shares of a CCPC will be entitled to an automatic deduction equal to one-half the employment benefit amount if he or she does not dispose of the relevant CCPC shares within two years of their acquisition. This is referred to as the ‘110(1)(d.1) deduction.’

Once the employee acquires the securities under a Section 7 plan, those securities belong to the employee. As with any other security, the employee may realize a capital gain equal to 50 per cent of the difference between the proceeds of disposition, net of reasonable costs of disposition, and the adjusted cost base in respect of the securities, and, for that purpose, the adjusted cost base increased by the full employment benefit amount.

When the employee elects to receive cash in lieu of shares, the employee will be required to include the amount of cash in the employee’s income, as income from employment, in the year received.

Under a stock option plan, a deduction is available to the employer in connection with the issuance of cash but not securities.

Non—Section 7 plans

If a plan is not a Section 7 plan, the plan will have to be designed to avoid the application of the SDA rules in order to achieve deferral of income inclusion. The SDA rules constitute an anti-avoidance measure that prevents the deferral of employment income by imposing a form of statutory “constructive receipt.” Generally, the SDA rules result in deferred amounts being added to the employee’s income in the year in which the right to receive the amount first arises. If a non-Section 7 plan is funded (in equity based plans, by means of employer equity), it will constitute an “employee benefit plan” (EBP) and be subject to its own tax regime under the EPB rules.


Like the SDA rules, the EBP rules constitute an anti-avoidance measure.

Among the types of equity-based plans not subject to the SDA rules are properly designed appreciation rights plans, performance-based plans, so-called three-year deferred bonus plans and deferred stock unit plans.

Contact: Lorraine Allard in Toronto at [email protected]



PRIVACY LAW UPDATE

Video Surveillance Guidelines Issued by Privacy Commissioners

The Federal, British Columbia and Alberta Privacy Commissioners have jointly issued new guidelines for the use of video surveillance by private sector organizations. While recognizing that private sector organizations do have certain legitimate reasons to use video surveillance techniques, the Commissioners note that (i) privacy laws impose restrictions on the collection, use and disclosure of personal information, and (ii) video surveillance involves the collection of personal information.


The guidelines are directed to organizations subject to the Personal Information Protection and Electronic Documents Act (PIPEDA), which applies to organizations carrying out commercial activities in all provinces except B.C., Alberta and Québec; to all organizations carrying out commercial activities where personal information is transmitted across an international or provincial border, no matter where the organization is located; and to the employment relationship between federally regulated organizations such as banks, airlines and railway companies and their employees.

The guidelines are also directed to organizations that are subject to the B.C. and Alberta Personal Information Protection Acts.

Under these legislative regimes, the key legal test for the collection, use or disclosure of personal information is that these should be reasonable in the circumstances and done only with the consent of the individual involved.

The guidelines list 10 factors to consider when considering using video surveillance and when implementing a video surveillance plan:

1. Determine whether a less privacy-invasive alternative to video surveillance would meet your needs.

2. Establish the business reason for conducting video surveillance and use video surveillance only for that reason.

3. Develop a policy on the use of video surveillance.

4. Limit the use and viewing range of cameras as much as possible.

5. Inform the public that video surveillance is taking place.

6. Store any recorded images in a secure location, with limited access, and destroy them when they are no longer required for business purposes.

7. Be ready to answer questions from the public. Individuals have the right to know who is watching them and why, as well as what information is being


captured and what is being done with recorded images.

8. Give individuals access to information about themselves. This includes video images.

9. Educate camera operators about the obligation to protect the privacy of individuals.

10. Periodically evaluate the need for video surveillance.

The guidelines also discuss a number of other issues relating to video surveillance through a series of questions and answers.

For an illustration of limits a court may place on disability insurers — and, by extension, employers — with respect to the use of information collected by video surveillance, please see the most recent issue of McCarthy Tétrault Co-Counsel: Technology Law Quarterly, which contains an article on a decision of the Québec courts.


Contact: Barbara A. McIsaac, Q.C. in Ottawa at [email protected] or Patrick Veilleux in Ottawa at [email protected]

REAL PROPERTY UPDATE

New Anti-Money-Laundering Regulations Regarding Real Estate Developers

On February 20, 2008, amendments to regulations associated with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) were finalized and published. The federal government described them as necessary steps to bring the Canadian anti-money-laundering and anti-terrorist-financing regime into line with the revised international standards of the Financial Action Task Force.

The newly amended regulations are mostly about new requirements for real estate developers, which will be effective February 20, 2009, and additional requirements for casinos, which will be effective September 28, 2009. They affect obligations including reporting, record keeping, client identification and the implementation of a compliance regime.

The new regulations also contain the latest legislative amendments in a series of changes to the regulatory regime. These changes stem from a consultation paper published by the Department of Finance in response to new money-laundering and terrorist-financing trends and techniques. Many recommendations from the consultation paper were adopted as part of Bill C-25, which received Royal Assent on December 14, 2006. When in full force, Bill C-25 will enhance the Act by expanding its coverage, strengthening its deterrence provisions and broadening the range of information that the





Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), an enforcement body created by the Act, may include in its financial intelligence disclosures to law enforcement and national security agencies.

Real Estate Developers

The Act creates record-keeping and reporting requirements for various persons or entities including financial entities (banks, loan companies, etc.), life insurance companies, securities dealers, money services businesses, real estate brokers and casinos. Reporting persons and entities must implement a compliance regime, keep certain records, undertake client-identification procedures, and report suspicious and other prescribed transactions to FINTRAC.

FINTRAC receives, analyzes, assesses and discloses financial intelligence on suspected money laundering, terrorist financing and threats to the security of Canada. It also ensures compliance by financial intermediaries and other reporting entities with their obligations under the Act and regulations.

The new regulations extend the coverage of the record-keeping and reporting requirements of the Act and associated regulations to include real estate developers. A “real estate developer” is defined generally as a person or entity who, in a calendar year, has sold to the public, other than in the capacity of a real estate broker or sales representative (i) five or more new houses or condominium units, (ii) one or more new commercial or industrial buildings, or (iii) one or more new

multi-unit residential buildings, each of which contains five or more residential units, or two or more new multi-unit residential buildings that together contain five or more residential units.

This mostly means identifying clients who provide funds in the context of a sale to the public, keeping records of such transactions, and reporting large cash transactions ($10,000 or more) and suspicious transactions to FINTRAC. Real estate developers will also have to develop a compliance program.

Reporting entities that do not comply with the Act and its regulations are subject to criminal and financial penalties.

Casinos

Another key change provided for in the new regulations is the requirement for casinos to report to FINTRAC any disbursements of $10,000 or more and to keep records in respect of these transactions.

For a more detailed discussion of these regulatory changes, see the legal update written by Barbara McIsaac and Patrick Veilleux on the McCarthy Tétrault website.

Contact: Barbara A. McIsaac, Q.C. in Ottawa at [email protected] or Patrick Veilleux in Ottawa at [email protected]





TELECOMMUNICATIONS LAW UPDATE

CRTC Approves Sale of BCE

On March 27, 2008, the Canadian Radio-television and Telecommunications Commission (CRTC) granted conditional approval of the deal to privatize Bell Canada Enterprises (BCE), Canada’s largest telecommunications company.

Under the transaction, BCE, which is also Canada’s most widely held publicly traded company, would become owned by a small group of investors that includes the Ontario Teachers’ Pension Plan (Teachers’) and three American private equity firms, Providence Equity Partners International VI L.P. and its affiliated investment funds (Providence), Madison Dearborn Capital Partners V L.P. and its affiliated investment funds (Madison) and Merrill Lynch Global Partners, Inc. (Merrill Lynch). The transaction, valued at $51.7 billion, is the largest corporate acquisition in Canadian history and reputedly the largest private equity transaction in the world to date.

The transaction was subject to approval by several Canadian regulators, including CRTC approval under the Broadcasting Act. Although BCE’s main business unit, Bell Canada, is a telecommunications carrier, it has interests in several broadcasting licensees, leading to the requirement for Broadcasting Act approval. The CRTC review was primarily aimed at ensuring that BCE will remain “Canadian owned and controlled” within the meaning of Canadian communications laws. These laws restrict the number of voting shares that can be held by

non-Canadians in regulated Canadian communications businesses and the number of board members that can be non-Canadian. More significantly, they require the regulators to ensure that non-Canadians cannot exercise “control in fact” over the business, through any shareholder agreements or other arrangements.

The CRTC’s approval and the conditions it imposed on BCE are generally consistent with recent regulatory precedents, applied to the specific circumstances of the BCE transaction.

The CRTC reiterated the legal test for control that it approved when it reviewed the sale of Alliance Atlantis Broadcasting Inc.’s broadcasting companies. According to that test, “ ‘control in fact’ generally can be viewed as the ongoing power or ability, whether exercised or not, to determine the strategic decision-making activities of an enterprise. It can also be viewed as the ability to manage and run the day-to-day operations of an enterprise.”

Applying this test to the facts of the BCE transaction, the CRTC required:

• changes to ensure that the majority of BCE’s Board of Directors would always comprise directors who are both (i) Canadian by citizenship or residency and (ii) whose appointments are not directly or indirectly controlled by non-Canadians

• increases in the thresholds for future BCE transactions that non-Canadian shareholders could veto (e.g., incurring debt, selling assets and making investments) to at least


5 per cent of the value of the broadcasting undertakings;

• changes to the proposed Independent Programming Committee to ensure broadcast programming decisions were made by Canadians; and

• other changes to the corporate governance structure, including the makeup of the executive committee and the quorums for board meetings, to satisfy itself that BCE would not be effectively controlled by non-Canadians.

The CRTC also expressed concerns about whether the structure of the transaction complied with Ontario pension legislation, but, as discussed below, deferred to an opinion from the Ontario pension regulator that the deal was compliant.

The BCE transaction remains subject to regulatory approval by Industry Canada under the Radiocommunication Act. In addition, the transaction has been the subject of litigation by certain Bell Canada bondholders. On March 7, 2008, the Québec Superior Court approved BCE’s plan of arrangement for the transaction and dismissed all claims of the bondholders. The decisions dismissing these claims are currently under appeal. The transaction is also subject to the successful completion of financing arrangements made by Teachers’ and its private equity co-investors.

Background of the Proposed Transaction

BCE Inc. is the incumbent telecom service provider in most of Ontario and much of Québec and the Maritimes. Its subsidiaries include Bell Canada, Bell Mobility Inc., Bell Aliant Regional Communications Income Fund and Bell ExpressVu Inc. The companies provide telecom services including local and long distance phone service, wireless voice and data, and wireline Internet access. They are also involved in the distribution of broadcast services by satellite and terrestrial networks, as well as pay-per-view and video-on-demand services.

The CRTC received an application by BCE and some of its affiliates (the applicant) for authority to transfer effective control of the applicant to a corporation to be incorporated (BCE Holdco). BCE Holdco would hold the shares of BCE through its subsidiary 6796508 Canada Inc. (Bidco).

BCE and Bidco entered into a definitive agreement, effective 29 June 2007, pursuant to which Bidco agreed to purchase all of BCE’s issued and outstanding common and preferred shares (BCE proposal). The BCE proposal was approved by a majority of BCE shareholders at a special shareholder meeting that took place on September 21, 2007 in Montréal.

The proposed transaction is to be effected by way of a Plan of Arrangement under Section 192 of the Canada Business Corporations Act. The estimated value of the transaction is $51.7 billion.


Following the completion of the transaction, BCE Holdco would be privately owned, with share capital consisting of Class A voting, non-participating shares (Class A shares); Class B non-voting, participating shares (Class B shares); and Class C non-voting, participating shares (Class C shares). The Class B and Class C shares would be economically equivalent and would together represent the total equity value of BCE Holdco.

Morcague Holdings Corp. (Morcague) would hold 66.7 per cent of the Class A shares of BCE Holdco, with the balance of 33.3 per cent held by non-Canadians, namely Providence, Madison and Merrill Lynch. The Class A shares would be subject to a voting agreement between Morcague and Teachers’ Private Capital, a division of Teachers’.

The majority of the Class B shares and all of the Class C shares of BCE Holdco would be held by Canadians, with Teachers’ holding the largest equity stake in the company at 51.6 per cent. Non-Canadians would hold approximately 42 per cent of the equity of BCE Holdco, with Providence (17.3 per cent), Madison (9.0 per cent) and Merrill Lynch (6.1 per cent) being the largest non-Canadian shareholders.

Bidco and BCE would have Class A and Class B shares issued and outstanding. BCE Holdco would own 100 per cent of the Class B shares and 58.1 per cent of the Class A shares of Bidco, with the balance of 41.9 per cent of the Class A shares held by Morcague. Similarly, Bidco would own 100 per cent of the Class B shares and 58.1 per cent of the Class A shares of BCE, with the balance of 41.9 per cent of the Class A

shares held by Morcague. A summary of the proposed equity structure can be found on the CRTC’s website.

Regulatory Approvals

The transaction required approvals from a number of regulatory agencies, including the CRTC, Industry Canada, Investment Canada and the Competition Bureau.

The CRTC must approve the proposed transaction under the Broadcasting Act, as a result of the proposed transfer of BCE’s broadcasting assets (the subject of today’s decision). The CRTC also reviews ownership of telecommunications carriers under the Telecommunications Act on a periodic basis. Industry Canada, which acts as Canada’s spectrum regulator, must also review the proposed transaction under the Radiocommunication Act.

The tests for Canadian ownership and control are similar under all three acts, and stricter than those under the Investment Canada Act, which is therefore unlikely to pose a significant hurdle for the transaction. The fact that the investors acquiring BCE do not directly compete with it simplifies the Competition Act review.

Ownership and Control Review under the Broadcasting Act

The CRTC has authority under the Broadcasting Act to regulate the broadcasting system in Canada to implement identified policy objectives, including the requirement that

http://www.crtc.gc.ca/Broadcast/eng/HEARINGS/2007/ex2007-19.htm


the Canadian broadcasting system be effectively owned and controlled by Canadians.

The Governor in Council has issued a direction to the CRTC, pursuant to subsection 26(1) of the Act, respecting the classes of applicants to whom licences may not be issued or to whom amendments or renewals thereof may not be granted (the Direction). Pursuant to the Direction, no broadcasting licence may be issued, and no amendment or renewals thereof may be granted, to an applicant that is a “non-Canadian.” A “Canadian” is defined to include a “qualified corporation.”

The Direction defines a qualified corporation as a corporation that is incorporated or continued under the laws of Canada or a province, and that meets the following conditions:

• the CEO and 80 per cent of the directors are Canadians; and

• Canadians beneficially own and control, directly or indirectly, in the aggregate and otherwise than by way of security only, at least 80 per cent of all votes and all voting shares, both issued and outstanding.

In the case of a corporation that is a subsidiary corporation,

• the parent corporation must be incorporated or continued under the laws of Canada or a province; and

• Canadians must beneficially own and control, directly or indirectly, in the aggregate and otherwise than by way of

security only, not less than 66 2/3 per cent of all votes and all voting shares, both issued and outstanding.

Further, if a corporation does not meet the criteria set out above (i.e., the CEO or more than 20 per cent of directors are not Canadian, or Canadians do not own and control 80 per cent of all votes or of all issued or outstanding voting shares), then neither that corporation nor its directors may exercise control or influence over any programming decisions of a subsidiary that is a broadcasting licensee. Instead, an “independent programming committee” must be established, with responsibility for the programming decisions of the subsidiary corporation.

“Control” is an important aspect of the test. Under the Direction, the CRTC is to determine whether an applicant is controlled by a non-Canadian, on the basis of personal, financial, contractual or business relations, or any other considerations relevant to determining control in fact.

An important factor in determining whether non-Canadians exercise effective control over a broadcasting licensee is the degree of influence that non-Canadian investors can exercise through the board of directors and its committees. In that respect, the CRTC examines such elements as the number of board and committee members appointed by Canadian investors and by non-Canadian investors, respectively, and whether directors designated by Canadian investors are adequately represented at all board and committee meetings.


Specific Rulings on Canadian Control

After considering the issues related to Canadian control, the CRTC made its approval of the transaction conditional on specific amendments to the “Principal Investor Agreement” between the investors. The CRTC’s conditions were aimed at achieving the following objectives:

• to fix the membership of the Board of Directors at 13 including, within the total membership, six designees of Teachers’, one Independent Director and the CEO, all of whom must be Canadians;

• to provide that the Chair of the Board will have a tie-breaking vote over the appointment and dismissal of the CEO;

• to provide that a Chair will be appointed to the Board at all times, that the Chair will be a member of the Board but will not be a designee of a non-Canadian shareholder, will be a Canadian, and will not also serve as the CEO;

• to include a requirement that any vacancy on the Board or on a committee of the Board caused by Teachers’ losing the right to designate a member be filled by the designee of the Canadian investor who acquires the largest number of shares from Teachers’, and that any such designee must be a Canadian;

• to require BCE Holdco to maintain the same quorum requirements for the committees of the boards of Bidco and BCE as those that apply to BCE Holdco;

• to deem members of the Board designated by the non-Canadian principal investors to be non-Canadian for purposes of determining whether a quorum is present at any meeting of the Board;

• to add a second Teachers’ designee to the Executive Committee;

• to increase the threshold for transactions requiring investor approval to $110 million (so satisfying the 5 per cent of undertaking value adopted by the CRTC in its CanWest/Alliance Atlantis decision); and

• to incorporate specific definitions of “independent” (in the context of “independent directors”) and “ordinary course” (in the context of shareholder approval of transactions not in the ordinary course of business).

In addition to requiring BCE to file the amended Principal Investor Agreement, the CRTC directed it to file:

• an executed amended bylaw establishing the Independent Programming Committee, and providing that no member of the committee will be a director, officer or employee of any non-Canadian shareholder; and

• an executed amended Advisory Services Agreement, including amendments providing that the services rendered under that agreement by non-Canadian investors will not relate to programming and that Teachers’ will be entitled to review and provide input with respect to the services.


Subject to compliance with these conditions, and its determinations regarding the tangible benefits package (summarized below), the CRTC approved the application.

Compliance with Ontario Pension Legislation

The CRTC also considered the issue of whether the structure of the transaction complied with Ontario pension legislation. The relevant law prevents a pension plan from investing directly or indirectly in securities of a corporation to which are attached more than 30 per cent of the votes that may be cast to elect the directors of the corporation (director-voting shares).

Under the proposed transaction, Teachers’ would not own more than 30 per cent of the director voting shares; indeed it would own no voting shares at all. However, a company owned by a former Teachers’ executive, Morgan McCague, would own 66.7 per cent of the Class A voting shares in BCE Holdco. An agreement between Teachers’, Mr. McCague, Mr. McCague’s company and related companies requires the shares to be voted in accordance with Teachers’ instructions and gives Teachers’ the right to require Mr. McCague to transfer the shares.

The CRTC accepted this arrangement only after being provided with a letter from the Financial Services Commission of Ontario stating that the proposed structure complied with the 30 per cent restriction on Teachers’ holding director-voting shares.

Tangible Benefits

The broadcasting assets involved in this transaction include Bell ExpressVu, cable assets in the province of Québec and a minority stake in CTVglobemedia Inc. The CRTC generally expects applicants to commit to specific benefits to the broadcasting system representing a financial contribution of 10 per cent of the value of the broadcasting assets transferred in a transaction. However, no benefits are required for the transfer of control of broadcasting distribution undertakings (such as Bell ExpressVu or the Québec cable assets), but only broadcast programming undertakings.

BCE allocated $109.6 million of the transaction value to the applicable broadcasting assets for the purpose of calculating the associated tangible benefits.

The CRTC revised the value of BCE's applicable broadcasting assets from $109.6 million to $219.1 million, based largely on inclusion in the valuation of an identified acquisition premium, the value of BCE’s “IPTV” service (Internet Protocol pay-per-view and video-on-demand) and the value of operating lease commitments. This higher valuation increased the tangible benefits package to $21.9 million. As part of this package, the CRTC has directed that $10.5 million be placed in a fund whose annual revenues will support new media initiatives.

Conclusion

The CRTC’s decision is generally consistent with recent precedents involving other transactions reviewed by the CRTC and Industry Canada.


However, the decision provides useful guidance on issues related to the specific circumstances of the BCE transaction.


Contact: Hank Intven in Toronto at [email protected] or Stephen Rawson in Toronto at [email protected]

TRADE LAW UPDATE

First Arbitration Judgement Issued under Canada-United States Softwood Lumber Agreement, 2006

On March 8, 2008, the London Court of International Arbitration (LCIA) issued its decision regarding the interpretation and application of Canada’s obligations under the 2006 Softwood Lumber Agreement between Canada and the United States (SLA).

The LCIA held against the US claim that Canada’s calculation and adjustments regarding the Expected US Consumption (EUSC) of softwood lumber were improper.

The SLA commits Canada to apply export taxes to softwood destined for the United States if the “prevailing monthly price” of softwood falls below US$355 per thousand feet (MBF). Each Canadian exporting region must choose between two export tax schemes, listed in Article VII, to which its softwood lumber exports will be subject. Option A requires Canada to impose an export charge that varies according to the prevailing monthly price in the United States. Option B requires Canada to impose a lesser export tax but in combination with a variable cap on export volume.

Canada’s calculation of EUSC of softwood lumber, defined in paragraphs 12 to 14 of Annex 7D, constituted the main source of the dispute.

In particular, paragraph 14 states that if actual US consumption during a quarter varies by more than five per cent from EUSC during a quarter,




“the difference (in MBF) between US Consumption and Expected US Consumption for the Quarter shall be divided by three and the amount derived shall be added to (if US Consumption was more than expected) or subtracted from (if US Consumption was less than expected) the monthly Expected US Consumption calculated under paragraph 12 for each month in the next Quarter for which quotas are determined.”

The United States claimed that Canada was required to make the adjustments stipulated by paragraph 14 in the exercise of both Option A and Option B, but had made such adjustments only with regard to Option B. The LCIA ultimately held against the US claim.

In examining the context of paragraph 14, the LCIA found that the purpose of paragraph 14 was to address the adjustment of EUSC rates, while it was under paragraphs 12 and 13 that those rates were actually to be calculated. In that context, the LCIA found that the language of paragraph 14, which spoke of “quotas,” could reasonably pertain only to Option B and not to Option A, which regulated export charges but not quotas.

The LCIA was also asked to resolve the dispute between the parties as to when Canada’s obligation to make adjustment to EUSC rates was triggered. Canada’s position was that the adjustment only be made in a quarter following the first full quarter during which the SLA was in effect because the adjustment required a retrospective look at past EUSC during a full quarter when the SLA was in effect.

The LCIA panel determined against Canada and found that the adjustment had to be made in the first quarter after the SLA came into effect, namely, the January 1 to March 31, 2007 quarter.

The next step in the proceedings will be for the LCIA panel to determine the consequences of Canada’s breach of the SLA. Any award that reduces the volume cap retroactively for the first quarter of 2007 is likely to have little practical impact on shipments from Ontario and Québec, given that those provinces were already shipping well below their volume caps.

Contact: Brenda C. Swick in Ottawa at [email protected]


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