Policy on making a determination that a corporation is not a distributing corporation – Canada Business Corporations Act, subsection 2(6)

Table of contents

  1. Statement of general principles
  2. Legislative framework
  3. Where an application to the Director is not necessary
  4. Guidelines for making an application
  5. Other information
  6. Making the application
  7. Annex A - Schedule 1 of the CBCR
  8. Annex B - Sample of documents to submit when making an application under subsection 2(6) of the CBCA

1. Statement of general principles

  • 1.01 The September 22, 2004 exemption policy is repealed and replaced with this policy.
  • 1.02 This policy sets out information to facilitate an application to the Director appointed under the CBCA for a determination that the corporation is not or was not a distributing corporation.
  • 1.03 The rules governing distributing corporations in the Act and Regulations are designed to provide safeguards and promote a higher standard of corporate diligence given that securities are distributed to the public on an open market. The Director will only exempt a corporation if satisfied that the determination would not be prejudicial to the public interest.
  • 1.04 Nothing in this policy is intended to constitute a binding statement of what position the Director will take with respect to a particular application. This policy is intended to reflect the Director's understanding of the Director's role in processing an application under subsection 2(6) of the CBCA. This policy does not address subsection 2(7) and the exemption of classes of corporations.

2. Legislative framework

  • 2.01 The term "distributing corporation" is defined in section 2 of the CBCR. According to subsection 2(1) of the CBCR, the term means:
    1. a corporation that is a "reporting issuer" under any legislation that is set out in column 2 of an item of Schedule 1; or
    2. in the case of a corporation that is not a "reporting issuer" referred to in paragraph (a), a corporation
      1. that has filed a prospectus or registration statement under provincial legislation or under the laws of a jurisdiction outside Canada,
      2. any of the securities of which are listed and posted for trading on a stock exchange in or outside Canada, or
      3. that is involved in, formed for, resulting from or continued after an amalgamation, a reorganization, an arrangement or a statutory procedure, if one of the participating bodies corporate is a corporation to which subparagraph (i) or (ii) applies.
  • 2.02 The definition seeks to largely harmonize the CBCA with provincial securities legislation. Where a corporation is governed by any securities legislation set out in Schedule 1 of the Regulations and is caught by the definition of "reporting issuer" in that legislation, it then becomes a distributing corporation under the CBCA (see Annex A fora copy of Schedule 1). Alternatively, where a corporation is governed by securities legislation not enumerated in Schedule 1, or where there is no securities legislation in the jurisdiction the corporation operates, paragraph 2(1)(b) then applies. Note that where a corporation is subject to an exemption under provincial securities legislation or to an order of the relevant provincial regulator to the effect that the corporation is not a "reporting issuer", that corporation is not a distributing corporation for the purpose of the definition of the term in section 2 and would not have to argue that it is not caught by paragraph 2(1)(b), see 3.02 below.
  • 2.03 The Act and Regulations contain a number of provisions which impose specific requirements for distributing corporations, which include:
    • access to securities register under s. 21(1.1);
    • access to shareholder lists, ss. 21(3) of the CBCA;
    • the definition of open-end mutual fund in ss. 26(12);
    • the lack of restrictions on the ownership or transfer of shares under ss. 49(9);
    • the number of directors a corporation is required to have, ss. 102(2) of the CBCA;
    • the prohibition of short sale for insiders, ss. 130(1) of the CBCA;
    • the notice of the time and place of a meeting of shareholders, s. 135 of the CBCA;
    • the managment proxy solicitation requirements imposed by s.149(1) and s. 150(1);
    • the obligation to file financial statements with the Director (subject to single filing), s.160 of the CBCA
    • the requirement to have an auditor and audit committee, s.163 and s.171 of the CBCA;
    • going-private transactions in s. 193; and
    • the compulsory and compelled acquisition of shares, s. 206.1 of the CBCA.
    The foregoing is a not an exhaustive list.
  • 2.04 Subsection 2(6) of the CBCA provides, however, that on the application of a corporation, the Director may determine that the corporation is not or was not a distributing corporation if the Director is satisfied that the determination would not be prejudicial to the public interest.
  • 2.05 The Director does not have the power to determine that a corporation is:
    1. Simultaneously both a distributing corporation and a non-distributing corporation; or
    2. a distributing corporation for some purposes under the Act but a non-distributing corporation for other purposes.
  • 2.06 The applicant should determine those provisions of the Act that should no longer apply to the corporation if it ceases to be a distributing corporation and those provisions that should continue to apply notwithstanding that the corporation is no longer a distributing corporation. If the applicant only wants relief from specific obligations imposed on a distributing corporation under the Act and a specific exemption applies (i.e. an exemption under ss. 151(1) from the management proxy solicitation requirements or an exemption under ss. 171(2) from the audit committee requirements), the application should be made under those specific exemptions. In other cases, applicants may seek a determination that it is no longer a distributing corporation. In an application under ss. 2(6), the applicant should identify any provisions summarized in s. 2.03 above that should continue to apply to the corporation notwithstanding that it ceases to be a distributing corporation. The Director has the power to determine that a corporation is not a distributing corporation on terms including those whereby the corporation must continue to comply with certain provisions of the Act imposed on distributing corporations notwithstanding the change in the corporation's status.
  • 2.07 A corporation that does not comply with the provisions governing distributing corporations in the Act and Regulations and who fails to obtain an exemption from the Director is in contravention of the Act which can result in civil and/or criminal liability.

3. Where an application to the Director is not necessary

  • 3.01 Prior to the 2001 amendments to the Act and Regulations, most applications were made to the Director and exemptions granted on grounds that the applicant did not have or no longer had any securities held by the public (through a going-private transaction or other means).
  • 3.02 Subsection 2(2) of the CBCR now stipulates that a corporation that is subject to an exemption under provincial securities legislation, or to an order of the relevant provincial regulator that provides that the corporation is not a "reporting issuer" for the purposes of the applicable legislation, is not a "distributing corporation" for the purpose of the definition of that expression in subsection (1).
  • 3.03 Since the Director cannot grant an exemption under provincial securities legislation, applicants that need both CBCA and provincial exemptions should first obtain the provincial exemption. The provincial exemption will automatically invoke the CBCA exemption. However, the CBCA exemption will not automatically invoke any provincial exemption.

4. Guidelines for making an application

  1. General considerations
    • 4.01 The general test used by the Director consists of determining whether the public interest would be prejudiced by such a determination, if an exemption were granted.
  2. The terms "Prejudice" and "Public Interest"
    • 4.02 There is no definition of the term "prejudice" or "public interest" in the Act or Regulations.
    • 4.03 In reviewing an application under subsection 2(6) of the CBCA, the Director will generally assess the potential for prejudice if the provisions governing distributing corporations in the Act (see 2.03) and Regulations were to no longer apply to the applicant. The Director will consider the interest of the stakeholders who would ordinarily benefit from those provisions from which the applicant would be exempt. Essentially, the question to be asked is "would the exemption cause prejudice to those persons or groups who ordinarily benefit from the provisions for which the applicant would be exempt?"
    • 4.04 Nothing in section 4.03, however, is intended to limit the discretion afforded to the Director under subsection 2(6) of the CBCA especially where the exemption would be incompatible with the interest of the public generally (e.g. investor confidence in capital markets).
  3. Factors considered in reviewing an application
    • 4.05 Based on the statement of facts provided by the applicant (see Annex B, Schedule B for a non-exhaustive list) - e.g. the capital structure of the applicant, the nature of the securities issued or to be issued - the Director attempts to determine if the test is met and, in turn, whether or not to grant the exemption sought.
    • 4.06 An exemption may be granted where particular circumstances, set out in the statement of facts, are argued:
      1. the applicant exists solely and for a limited duration to facilitate an exchange of shares (i.e. exchangeco) between two reporting issuers and as a result is deemed a reporting issuer;
      2. the applicant is a reporting issuer only due to debt securities that, while held by the public, are governed by an indenture or other agreements that adequately protects the interest of those security holders;
      3. the applicant is a wholly-owned subsidiary and is seeking to be exempt from certain provisions;
      4. the applicant is a reporting issuer only due to securities held by investors which cannot be found or located but where moneys are held in trust for the repurchase of these securities;
      5. the consent of all affected security holders for the exemption has been obtained.
  4. Conditions for issuing an exemption
    • 4.07 In granting an exemption to a corporation, the Director may find it appropriate to include one or more conditions in the decision.
    • 4.08 Where the public interest is served, the Director may grant an exemption upon the condition that one or more provisions governing distributing corporations remain in effect, and may find it appropriate to set them out in the decision.
    • 4.09 The Director may require the applicant to forward a copy of the exemption to those security holders affected by the exemption and any securities regulators concerned.

5. Other information

  1. Additional information required
    • 5.01 The Director may require other information not provided in the application in order to decide whether the public interest will be harmed.
    • 5.02 Under section 91 of the CBCR, the Director may also seek additional information from third parties. Section 92 of the CBCR provides however that the applicant shall be given a copy of the information obtained and be given a reasonable opportunity to respond.
    • 5.03 There is no statutory obligation on the Director, however, to seek information at the request of third parties nor to allow third parties to make representations regarding an application.
  2. Access to information contained in an application
    • 5.04 Pursuant to section 266 of the CBCA, a person who has paid the required fee is entitled to examine and make copies or extracts of any document required by the CBCA to be sent to the Director. The information filed with the Director in support of an exemption application is not confidential since such information is required to be filed in order to obtain an exemption. Consequently, an application for exemption is public information.
  3. Offences
    • 5.05 Section 250 of the Act creates an offence with respect to documents required by the Act or Regulations to be sent to the Director, or any other person, that contains a false or misleading statement about a material fact or omits to state a material fact.

6. Making the application

  1. Format
    • 6.01 Along with a cover letter indicating the name of the applicant corporation, the application must provide information under three distinct headings: description and details of the exemption sought, statement of facts, and argument. These are described briefly below with further elaboration contained in the attached Annex B. We recommend the use of Annex B as a model.
  2. The documents
    • 6.02 Detailed below is a brief description of the three major documents that comprise the submission:
      1. Description and Details of the Exemption Sought: The applicant must describe the exemption sought and note that this is an application for an exemption under subsection 2(6) of the Canada Business Corporations Act (see attached Annex B, Schedule A).
      2. Statement of Facts: The applicant must include sufficient facts and all material information which might affect the Director's decision (see attached Annex B, Schedule B). The applicant should refer to 4.05 above for a non-exhaustive list of facts that the Director may consider relevant.
      3. Argument: Following the statements of facts, the applicant must provide convincing reasons that the exemption, if granted, will not be prejudicial to the public interest (see attached Annex B, Schedule C). The applicant should refer to 4.07 above for possible arguments and 4.02-4.04 which explain the Director's understanding of the terms "prejudice" and "public interest."
  3. Effective date of the exemption
    • 6.03 Pursuant to paragraph 89(1)(a) of the CBCR, an application may be made at any time. The exemption will bear the date on which it was granted.
  4. Duration
    • 6.04 The exemption generally takes effect on the date it was granted, unless otherwise indicated on the decision, and remains in effect indefinitely subject to the exemption being modified or revoked.
  5. Modification or revocation
    • 6.05 The Director may, at the Director's discretion, modify or revoke an exemption where the circumstances, for which the decision was granted, have changed (e.g. the issuance of securities to the public after the date of the exemption). The exemption will no longer apply if the corporation issues securities to the public or lists and posts any of its securities on a stock exchange after the date of the exemption.
    • 6.06 The Director will generally not revoke an exemption before providing notice to the applicant and the opportunity to respond by submitting new facts and arguments to support the exemption.
    • 6.07 A revoked exemption ceases to have effect from the date of revocation and the corporation must therefore suspend any further action in reliance of the decision.
  6. Retrospective effect
    • 6.08 Subsection 2(6) permits decisions by the Director to have retrospective effect. Requests for retrospective exemptions are reviewed on a case-by-case basis. A retrospective exemption will only be granted where the applicant establishes, beyond the general test, that no prejudice was caused to the public interest during the time prior to the application.
  7. Fees & Number of copies to file:
    • 6.09 The prescribed fee for an exemption application is $250.00.
    • 6.10 Only one set of documents is required.
  8. Time for processing an application
    • 6.11 Section 90 of the CBCR provides that the Director shall, within 30 days after receipt of an application for an exemption, grant the exemption requested or send to the applicant written notice of the Director's refusal, together with reasons for the refusal.
    • 6.12 An application duly completed and filed, with no outstanding issue or concern, will usually receive a response from the Director within 15 working days after receipt of the application.
    • 6.13 An applicant requiring that the Director review the application on an expedited basis should bring the request immediately to the attention of the Director's staff, providing reasons for the urgency.
  9. Publication
  10. Appeal of Director's decision
    • 6.15 An applicant who feels aggrieved by a decision of the Director to grant, or to refuse to grant, an exemption may apply to the court, pursuant to paragraph 246(c) of the Act, for an order requiring the Director on change the decision.

Annex A

Schedule 1 of the CBCR reporting issuer
Item Column 1
Jurisdiction
Column 2
Legislation
1. Ontario the definition "reporting issuer" in subsection 1(1) of the Securities Act, R.S.O. 1990, c. S.5, as amended from time to time
2. Quebec Quebec the definition "reporting issuer" in sections 5 and 68 of the Securities Act, R.S.Q., c. V-1.1, as amended from time to time
3. Nova Scotia the definition "reporting issuer" in paragraph 2(1)(ao) of the Securities Act, R.S.N.S. 1989, c. 418, as amended from time to time
4. Manitoba the definition "reporting issuer" in subsection 80(1) of the Securities Act, R.S.M. 1988, c. S50, as amended from time to time
5. British Columbia the definition "reporting issuer" in subsection 1(1) of the Securities Act, R.S.B.C. 1996, c. 418, as amended from time to time
6. Saskatchewan the definition "reporting issuer" in paragraph 2(1)(qq) of The Securities Act, 1988, S.S. 1988-89, c. S-42.2, as amended from time to time
7. Alberta the definition "reporting issuer" in paragraph 1(t.1) and section 117 of the Securities Act, S.A. 1981, c. S-6.1, as amended from time to time
8. Newfoundland
and Labrador
the definition "reporting issuer" in paragraph 2(1)(oo) of the Securities Act, R.S.N. 1990, c. S-13, as amended from time to time

Annex B

Sample documents to submit when making an application under subsection 2(6) of the CBCA

Schedule A

In the Matter Concerning the Director apponted Under the Canada Business Corporations Act

and

The Application Of

line (Name of corporation) line

(hereinafter called the "Corporation")

Description and Details of the Exemption Sought

  1. This application is made under subsection 2(6) Canada Business Corporations Act for a determination that the Corporation ("is not" or "was not") a distributing corporation.

Or

  1. This application is made under subsection 2(6) Canada Business Corporations Act for a determination that the Corporation ("is not" or "was not") a distributing corporation, but for the application of: (indicate which provisions governing distributing corporations in the Act and Regulations that will continue to apply).

Or

  1. This application is made under subsection 2(6) Canada Business Corporations Act for a determination that the Corporation ("is not" or "was not") a distributing corporation with respect to the application of: (indicate which provisions governing distributing corporations in the Act and Regulations that will no longer apply).

Schedule B
Statements of facts

  1. The following statement provides sufficient facts and all material information in order to enable the Director to make an informed decision about the exemption sought:
The following is a non-exhaustive list of facts that may be material:
  1. the capital structure of the applicant:
    • what securities have ever been issued by the applicant;
    • which securities are currently outstanding on the date of the application;
    • whether the applicant intends (at the date of the application) to issue securities in the future.
  2. the nature of the securities issued or to be issued:
    • whether the securities are shares or debt obligations;
    • what rights/restrictions are attached, or to be attached, to the securities;
    • whether any trust or other forms of agreements govern the securities.
  3. who are or will be the holders of each class of securities:
    • the public (in Canada or foreign);
    • related parties or insiders;
    • institutional investors.
  4. whether the corporation is controlled by other CBCA corporations or by corporations governed by foreign legislation.

Schedule C

Arguments

  1. This application is made pursuant to subsection 2(6) of the Canada Business Corporations Act which empowers the Director to determine that the Corporation is not or was not a distributing corporation, if the Director is satisfied that the determination would not be prejudicial to the public interest.
  2. The determination that the Corporation ("is not" or "was not") a distributing corporation, as described in this application, would not be prejudicial to the public interest.
  3. In particular, the exemption should be granted for the following reason(s):

    For Instance,
    1. The Corporation exists solely and for a limited duration to facilitate an exchange of shares (i.e.exchangeco) between two reporting issuers and as a result is deemed a reporting issuer.
    2. The Corporation is a reporting issuer only due to debt securities that, while held by the public, are governed by an indenture or other agreements that adequately protects the interest of those security holders.
    3. The Corporation is a wholly-owned subsidiary and is seeking to be exempt from certain provisions.
    4. The Corporation is a reporting issuer only due to securities held by investors which cannot be found or located but where moneys are held in trust for the repurchase of these securities.
    5. The consent of all affected security holders for the exemption has been obtained.

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Signature - Capacity of


Schedule D

Model of a decision

In the Matter Concerning the Director Appointed Under the Canada Business Corporations Act

and

The Application of

(Name of corporation)

(hereinafter called the "Corporation")

For an Exemption Under Subsection 2(6)of the Canada Business Corporations Act

Exemption

Upon Application By the Corporation under subsection 2(6) of the Canada Business Corporations Act (the "Act"), for a determination that the corporation ("is not" or "was not") a distributing corporation,

And Upon reading the application documents and being satisfied that the determination would not be prejudicial to the public interest,

It is Hereby Determined that (name of the corporation) ("is not" or "was not") a distributing corporation.

Dated, this space to insert day day of space to insert month, 20space to insert year.




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Examples of Standard or Typical Terms

"This Determination is made subject to the following terms:

  1. It ceases to have further effect if, after the date the exemption is granted, the corporation issues any of its securities to the public or lists and posts any of its securities on any stock exchange within or outside Canada.
  2. It ceases to have further effect if, after the date the exemption is granted, the Ontario Securities Commission revokes the order made under s. 83 of the Securities Act (Ontario) deeming the corporation to have ceased to be a reporting issuer.
  3. Notwithstanding that the corporation is not a distributing corporation, the corporation shall:
    1. provide access to its securities register and shareholders' lists in accordance with s.21(1.1) and (3);
    2. have not less than three directors;
    3. provide not less than, nor more than, the amount of time required for a notice of meeting of shareholders under ss.135(1) of the Act and s.44 of the Regulations;
    4. prepare and circulate forms of proxy and a proxy information circular in accordance with ss.149(1) and ss.150(1) of the Act and the applicable Regulations;
    5. file financial statements with the Director under s.160;
    6. have an auditor and an audit committee under s.163 and s.171; and
    7. comply with the requirements for compulsory and compelled acquisition of shares under s.206 and s.206.1.
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