Support for proposed securities law

The Prospectors and Developers Association of Canada (PDAC) has joined a coalition that is supporting the Canadian Securities Administrators’ (CSA’s) proposed National Instrument 54-101 (NI 54-101), also known as Communication with Beneficial Owners of Securities of a Reporting Issuer. The same coalition is urging the Ontario Securities Commission (OSC) to implement it.

The proposed instrument, intended to replace Policy 41, will allow issuers to communicate more directly with their beneficial shareholders.

Other members of the coalition are the Canadian Corporate Shareholder Services Association, the Canadian Investor Relations Institute, the Canadian Society of Corporate Secretaries and the Securities Transfer Association of Canada.

In September 2000, the CSA asked for comments on NI 54-101, which establishes a framework for publicly traded companies to communicate corporate information directly to their beneficial shareholders.

Under its terms, beneficial shareholders may choose to be known to publicly traded companies and have those companies communicate directly with them. The national instrument would also facilitate the voting of beneficial shareholders at shareholders meetings.

In addition to timely submissions to the CSA, the PDAC also wrote to the OSC in March 2001, expressing its concerns about NI 54-101.

While the OSC has yet to reply directly to the PDAC, it has indicated that it will respond to the larger CSA and association concerns.

Currently, issuers are able to communicate directly only with registered shareholders. They do not know who their beneficial shareholders are and can communicate with them only under the terms of Policy 41.

That policy, the coalition says, ensures that financial institutions keep beneficial shareholder information from publicly traded companies so that they have to deal with a monopolistic intermediary organization for purposes of shareholder communication.

The coalition points out that the current shareholders meeting process is frustrating for beneficial shareholders. They receive a voting instruction form from the intermediary, not a company proxy, and are unable to attend a shareholders meeting without taking additional steps with the intermediary to be recognized as having the right to vote.

Companies or issuers are required to provide full disclosure of their material corporate matters and to meet best practices for corporate governance. However, without solid communications links between company and shareholder, this cannot be accomplished.

While shareholders and regulators want to hold companies accountable, full accountability cannot be expected if a company is unable to communicate directly with shareholders and if it is uncertain that the shareholder has obtained complete information.

The lack of communication, or lateness of communication, from the intermediary also frustrates capital formation for small companies, particularly technology- and resource-based companies.

In addition, the coalition says, issuers want to know who their shareholders are in order to build loyalty, which leads to more investment in the company and greater economic growth.

Investors who provide capital for small companies are given the first opportunity to contribute additional capital through the use of secondary financings such as rights offerings. These investors know the company and are willing to risk additional capital to support it or at least should be allowed the right of first refusal.

Yet, says the coalition, when the company cannot communicate directly with shareholders, this form of financing is inefficient and costly.

The lack of access to beneficial shareholders also frustrates issuers, who must provide statistical data to stock exchanges and regulators. This information, which includes a geographical breakdown of the shareholder base, is costly and inefficient to obtain from the intermediary.

Another objection to Policy 41 is that issuers are required to pay to the intermediary a flat fee of $1 plus postage for each item mailed to beneficial shareholders, even though it has been proven that material can be delivered for less than that. Issuers are not allowed to communicate with beneficial shareholders electronically; nor do they have a choice as to who distributes their material.

Because the proposed NI 54-101 will go some way toward eliminating these ills, the coalition is calling for its implementation as soon as possible.

— The preceding is an excerpt from In Brief, published by the Prospectors & Developers Association of Canada.