OSC Policy 2.6: OSCP - 52-601 - Application for Exemption of Interim Financial Statements

O.S.C. POLICY 2.6 - APPLICATIONS FOR EXEMPTION FROM
PREPARATION AND MAILING OF INTERIM FINANCIAL STATEMENTS,
ANNUAL FINANCIAL STATEMENTS AND PROXY SOLICITATION MATERIAL

TABLE OF CONTENTS

I. Application for Exemption from Filing and Distribution of Interim Financial Statements

A. Full Exemption

B. Partial Exemption

C. Termination of Exemption---Material Change

D. Securityholder Approval of Exemption

E. Application to Allow Alternate Distribution Method

II. ANNUAL MATERIAL

I. Application for Exemption from Filing and Distribution of Interim Financial Statements

A. Full Exemption

1. Where an issuer makes an application under section 79(b)(iii) [80(b)(iii)] of the Securities Act (Ontario) (the "Act") for an order exempting the issuer from filing interim financial statements with the Ontario Securities Commission and from distributing such statements to its security holders, the Commission will be inclined to grant such orders where the issuer demonstrates that the preparation and distribution of such statements would not be of significant benefit to investors and would represent a material financial burden to the issuer. However, this general statement is subject to the following caveats:

(a) Where an issuer is required by its statute of incorporation or other applicable requirements to prepare and distribute semi-annual financial statements, the relief granted may be restricted to exemption from filing and distributing interim statements for the first and third quarters of each financial year.

(b) It is anticipated that an issuer will have great difficulty demonstrating that it falls within the above criterion unless it has a relatively low level of business activity. However, where such is not the case, a full exemption or a partial exemption (discussed separately below) may still be in order if the making of such an order can be justified on a cost-benefit basis.

(c) The Commission wishes to make it clear that an issuer who has the means to do so will ordinarily be expected to fully comply with these requirements notwithstanding the inconvenience or cost of so doing (subject to the comments below regarding applications to allow an alternate distribution method).

2. With respect to clause (b) above, the Commission recognizes that it is unlikely that an issuer with little working capital will have sufficient level of business activity for interim financial statements to provide useful information to investors. Therefore, the Commission is prepared to grant on a routine basis a full exemption from filing and distributing interim financial statements (subject to clause (a) above), where the issuer has working capital of $50,000 or less, unless it appears that some factor other than a relatively low level of business activity accounts for the issuer having little working capital. All other applications relying on the general principle outlined previously will be considered on a case by case basis.

3. An application for a "routine" exemption order should include the following material:

(a) A statutory declaration which

(i) discloses that the issuer's working capital is $50,000 or less;

(ii) describes briefly the nature, extent and value of its assets, and the nature and extent of its current business activities;

(iii) states that its working capital level is not attributable to temporary financial difficulties or some other extraordinary factor;

(iv) states that there are no other material facts concerning the issuer which have not been furnished to its security holders and to the Commission;

(b) An undertaking to keep the above facts under review and to promptly advise the Commission of any relevant change therein.

B. Partial Exemption

1. As previously indicated, where a full exemption from the interim financial requirements of the Act is not justified, a partial exemption may be in order. Such an order may take one of the following forms:

(a) an order exempting the issuer from filing and distributing interim financial statements for the first and third quarter only, while continuing to require filing and distribution of semi-annual statements;

(b) an order exempting the issuer from filing and distributing quarterly financial statements, provided that the issuer prepare and deliver such statements to the Commission and to the appropriate stock exchanges.

2. With respect to an exempting order in the form contemplated by clause (b) of paragraph 1 above, reference to the interaction of section 79 [80] of the Act and section 176 [177] of the Business Corporations Act (Ontario) (the "OBCA") is in order. Section 176(1) [177(1)] requires that OBCA corporations which are offering their securities to the public send to each shareholder interim financial statements required to be filed under the Act. Where relief from filing interim financial statements is granted to an OBCA corporation under section 79 [80] of the Act the Commission takes the view that the corporation is thereby relieved from distributing such statements to shareholders pursuant to section 176(1) [177(1)] of the OBCA. The same view holds where, as a condition of the exemption from filing, the corporation is required to prepare and deliver such statements to the Commission.

C. Termination of Exemption---Material Change

Where an exemption order has been granted to an issuer upon the grounds indicated above (whether or not the application is "routine" in nature), it may be appropriate for such an exemption to terminate upon the occurrence of certain material changes in its affairs, for example, where the issuer undertakes a significant new financing or significantly increases the level of its business activity. In other cases, however, the nature of a material change may be such that termination of the exemption would not be appropriate (although disclosure under section 74 [75] of the Act would still be required), for example, where an issuer's financial condition deteriorates significantly or it ceases operations altogether. Consequently, the Commission will ordinarily condition exemption orders granted upon the grounds indicated above such that the exemption will terminate thirty days after the occurrence of a material change in the issuer's affairs unless the issuer satisfies the Commission that such exemption should continue. In the ordinary course, upon the occurrence of a material change, an issuer wishing to have such an exemption continued should file with the Commission, along with its section 74(2) [75(2)] material change report, a letter justifying continuation of the exemption. No attendance before the Commission by the issuer of its representative would be required except where the Commission is not satisfied upon the written material alone that the exemption should continue.

D. Securityholder Approval of Exemption

1. The Commission is of the opinion that, as financial statements are for the benefit of the securityholders of a reporting issuer, such persons should be given an opportunity to approve or disapprove of an exemption granted by the Commission pertaining to distribution of those statements. Therefore, in appropriate cases, the Commission will condition an order exempting the reporting issuer from the requirement to distribute interim statements on the approval thereof at the issuer's next annual meeting by a majority of the voting securities that are represented and voted at such meeting. The Commission is to be informed of the result, in writing, within three business days of taking the vote on this matter.

2. The Commission will take into consideration the fact that there is a controlling securityholder or group of securityholders of the reporting issuer and, therefore, the exempting order may be further conditioned by requiring approval by a "majority of the minority" of securityholders. The excluded majority may include, among others, insiders, associates or affiliates.

E. Application to Allow Alternate Distribution Method

1. In cases where the statute under which an issuer is organized does not require the preparation of material that is required under the Act or requires that the material be prepared but not that it be distributed, the Commission is prepared to entertain applications under section 79 [80] to allow dissemination of information through the news media rather than through a general distribution to all shareholders. This approach recognizes the increasing costs involved in individual distribution of material, particularly when distribution is effected through the mails. Such orders may be granted subject to a number of conditions, for example, if an issuer elects not to distribute material through the mails, it may be obligated to maintain a list of shareholders who request such distribution and to send the material to such shareholders.

2. This section E deals with applications relating to distribution of interim financial statements only. Similar applications with respect to dissemination of annual financial statements and proxy solicitation material are referred to later.

3. The interaction referred to previously between a section 79 [80] exempting order and section 176 [177] of the OBCA is also relevant in this context. The Commission takes the view that it has the jurisdiction to grant an order under section 79 [80] of the Act permitting offering OBCA corporations to use an alternative method of distribution of interim financial statements. Such an order would exempt the corporation from filing interim financial statements, upon the condition that it distribute such statements by alternative means and deliver copies of same to the Commission and the appropriate stock exchanges.

4. Where an applicant satisfies the Commission that its statute of incorporation or other statute under which it is organized does not require that interim reports be sent to all shareholders, and that an alternative distribution technique is available whereby the information will be brought to the attention of most Ontario shareholders or their advisers, then the Commission will be inclined to favour an application under section 79 [80] for an exemption from the requirements of section 78 [79]. The Commission anticipates that most such applications will be premised on newspaper advertising as the alternative distribution medium, but the Commission would be prepared to consider other alternatives thought to be appropriate by the particular applicant.

5. If satisfied with the quality and likely effectiveness of the alternative distribution medium, the Commission will not ordinarily insist that the applicant maintain a mailing list such as that described in the example in paragraph 1 of this Section E. However, where the quality and effectiveness of the alternative medium are in doubt, or other special circumstances are present, the maintenance of such a list might be required at least for an interim experimental period.

6. Where an order allowing an alternative distribution method is granted, no automatic termination provision will ordinarily be included, but the Commission, after affording the issuer an opportunity to be heard, may rescind the order where it concludes that the means of dissemination provided for is not adequately meeting the needs of investors.

II. ANNUAL MATERIAL

1. The Commission has considered the feasibility of encouraging relief with respect to the preparation, filing and distribution of annual financial statements, information circulars and proxy solicitation material. It continues to be of the view that these are the cornerstones of continuing shareholder and investor protection. The public distribution and trading of an issuer's securities carries with it a continuing obligation to provide to investors the information contained in the annual information circular and audited financial statements. Accordingly, full relief from preparation, filing and mailing of such material will not ordinarily be granted.

2. With respect to applications to allow use of an alternative method of dissemination of annual material, the Commission anticipates that applications of this nature will be much less frequent than those as to interim financial statements. Almost all incorporating statutes require the mailing of such material. Further, most issuers find it desirable to establish direct contact with the shareholders at least annually. If any applications are brought for orders authorizing dissemination of annual financial statements, proxy material and information circular by advertisements or other techniques rather than direct distribution, the Commission will wish to verify that the alternative arrangements proposed are justified on a cost-effectiveness basis and that they will fully preserve the information flow, the shareholder-company contact and the access to annual meetings that are important benefits of the annual financial statements and related material.

3. Where it does grant an exemption order as to sending of annual material, the Commission will, absent special circumstances, make that order subject to terms and conditions such as those referred to in paragraph 1 of Section E above. As well, the provisions of paragraph 6 of Section E will apply with respect to the rescinding of orders where the means of dissemination provided for proves to be inappropriate.

(Former Policy 3-36: First published (1977) O.S.C.B. 182; addenda (1979) O.S.C.B. 228, (1980) O.S.C.B. 458; published as 2.6 (1982) 4 O.S.C.B. 385E; amended (1987) O.S.C.B. 5057.)