A Canadian Securities Law Primer on the Filing of Material Contracts

Commentary from the Canadian Securities Administrators (the CSA) regarding deficiencies concerning material contracts was included in the recently issued CSA Staff Notice 51-365 Continuous Disclosure Review Program Activities for the Fiscal Years Ended March 31, 2024 and March 31, 2023 (Notice). This bulletin outlines the requirements and associated regulatory guidance, which have been in-place since 2008.

1. Why Think About Material Contracts? 

Under Canadian securities laws, a reporting issuer is generally required (subject to certain exceptions discussed below) to file on SEDAR+ a copy of any material contract that it has not previously filed, in connection with the filing of a prospectus or an annual information form (AIF). An issuer may also be required to more promptly file a material contract in connection with the filing of a material change report or otherwise pursuant to an undertaking given by the issuer to the CSA – see “When Must a Material Contract be Filed?” below.

2. Is the Contract Material? 

A material contract is defined as a contract that a reporting issuer or any of its subsidiaries is a party to, that is material to the issuer — though the CSA have not provided any additional guidance as to what will be considered material to an issuer. Additionally, further to CSA requirements, a material contract generally includes a schedule, side letter or exhibit referred to in such a contract and any amendment to such a contract.

3. Is the Material Contract Current? 

A material contract must be filed in connection with the filing of an AIF or a prospectus only if the material contract was entered into either (1) before the issuer’s last financial year, but after January 1, 2002, if the contract is still in effect or (2) within the issuer’s last financial year. Material contracts filed with a material change report or pursuant to an undertaking will necessarily be current — see “When Must a Material Contract be Filed?” below.

4. Is the Material Contract in the Ordinary Course of Business? 

If the issuer determines that a contract is material and current, the issuer must then determine if the contract was entered into in the ordinary course of business and is, therefore, potentially excepted from the filing requirements. The CSA have stated that this is a question of fact that the issuer should consider in the context of its business and industry.

The following categories of material contracts are deemed not to have been entered into in the ordinary course of business, requiring such a contract to be filed:

(a) A contract to which directors, officers or promoters are parties other than a contract of employment

(b) A continuing contract to sell the majority of the issuer’s products or services or to purchase the majority of the issuer’s requirements of goods, services, or raw materials

(c) A franchise or licence or other agreement to use a patent, formula, trade secret, process or trade name

(d) A financing or credit agreement with terms that have a direct correlation with anticipated cash distributions

(e) An external management or external administration agreement

(f) A contract on which the issuer’s business is substantially dependent

The CSA have provided guidance, including the following, relating to these categories of deemed non-ordinary course contracts:

A. What is a Contract of Employment? 

One way for a reporting issuer to determine whether a contract is a contract of employment is to consider whether it contains payment or other provisions that are required to be disclosed as executive compensation in a management information circular.

B. What is an External Management or Administration Agreement?

CSA guidance provides that external management and external administration agreements include agreements between the issuer and a third party, the issuer’s parent entity or an affiliate of the issuer, under which the latter provides management or other administrative services to the issuer.

C. What is a Contract on Which the Issuer’s Business is Substantially Dependent?

Generally, a contract on which the issuer’s business is substantially dependent is a contract so significant that the issuer’s business depends on the continuance of the contract. Examples provided by the CSA of such contracts include:

(a) A financing or credit agreement providing a majority of the issuer’s capital requirements for which alternative financing is not readily available at comparable terms

(b) A contract calling for the acquisition or sale of substantially all of the issuer’s property, plant and equipment, long-lived assets, or total assets

(c) An option, joint venture, purchase or other agreement relating to a mining or oil and gas property that represents a majority of the issuer’s business

5. When Must a Material Contract be Filed? 

A material contract that is current and for which the ordinary course of business filing exception is unavailable must be filed on SEDAR+ in connection with the filing of a material change report, an AIF, a prospectus or pursuant to an undertaking delivered by the issuer to the CSA.

A. Is the Issuer Filing a Material Change Report?

If the making of an applicable material contract constitutes a material change for a reporting issuer, such contract must be filed at the time of filing of the applicable material change report.

B. Is the Issuer Required to File an AIF?

If a reporting issuer is required to file an AIF, then each applicable material contract must be filed by the time of filing of the AIF, if the document was made or adopted before the date of the AIF.

If a reporting issuer is not required to file an AIF, then each applicable material contract must be filed within 120 days after the end of the issuer’s most recently completed financial year, if the document was made or adopted before the end of the issuer’s most recently completed financial year.

C. Is the Issuer Filing a Prospectus?

If not previously filed, then at the time of filing of any preliminary prospectus, final prospectus or any amendment to either of the foregoing, an issuer will be required to file a copy of each applicable material contract. If such a material contract is described in a final prospectus (or amendment thereto) and has not been executed before the filing of such prospectus but will be executed on or before the completion of the distribution under such prospectus, the issuer will be required to file an undertaking with the CSA, pursuant to which the issuer will agree to file the material contract promptly and in any event no later than seven days after its execution.

D. Has the Issuer Given an Undertaking to the CSA Regarding Material Contracts?

Similarly, the CSA will typically require an issuer to enter into an undertaking regarding material contracts in connection with the filing of a final base shelf prospectus, which undertaking will apply throughout the duration of the shelf prospectus. Accordingly, any issuer subject to such an undertaking will need to promptly file (typically within seven days) an applicable material contract, even in the absence of an associated material change report, prospectus or AIF filing.

6. What Portions of the Material Contract Can be Redacted or Omitted? 

Once an issuer has determined that a contract is material and current, that the filing exceptions are unavailable and that a requirement to file the contract has been triggered, the issuer may be permitted to redact or omit certain provisions of the contract if an executive officer of the issuer reasonably believes that disclosure of such provisions would be seriously prejudicial to the interests of the issuer or would violate confidentiality provisions.

It is noteworthy that the serious prejudice that matters is the interests of the issuer, not the interests of any counterparty to the contract. However, it is worth considering if something seriously prejudicial to the interests of any counterparty (e.g., a lending institution) is actually also, indirectly, seriously prejudicial to the interests of the issuer.

The CSA have provided the following guidance on permitted redactions or omissions:

A. What Constitutes Disclosure Seriously Prejudicial to the Interests of the Issuer?

The CSA cite the disclosure of information contrary to applicable Canadian privacy laws as an example of disclosure that may be seriously prejudicial to the interests of an issuer. However, in situations where securities legislation requires disclosure of particular information, applicable privacy legislation generally provides an exemption for such disclosure. The CSA have stated that, generally, disclosure of information that has already been publicly disclosed should not be considered as seriously prejudicial to the interests of the issuer.

B. What Disclosure Cannot be Redacted or Omitted From a Filed Contract?

The CSA have stated that a blanket confidentiality provision covering the entire document will not suffice to permit redaction of the agreement. The amended rules and policies provide that the following provisions in a material contract cannot be redacted or omitted:

(a) Debt covenants and ratios in financing or credit agreements

(b) Events of default or other terms relating to the termination of the material contract

(c) Other terms necessary for understanding the impact of the material contract on the business of the issuer, which may include the following:

(i) The duration and nature of a patent, trademark, license, franchise, concession or similar agreement

(ii) Disclosure of related party transactions

(iii) Contingency, indemnification, anti-assignability, take-or-pay clauses or change-of-control clauses

C. Are Discretionary Disclosure Exemptions Available?

The CSA have stated that, in certain limited circumstances, a securities regulatory authority may consider granting an exemption to permit a provision of the type listed in section 6(B) above to be redacted.

If provisions of a material contract are redacted or omitted from the filed copy, the issuer is required to describe the type of omitted information in the filed copy. The CSA have stated that a brief one-sentence description immediately following the omitted or redacted information is generally sufficient for this purpose.

As cautioned in the Notice, when negotiating material contracts with third parties, issuers should consider their disclosure obligations under securities legislation. It should come as no surprise to an issuer or to the counterparties of any material contract that a public filing of the contract may be required and that the permitted redactions may be more restricted than desired.

For further information, please contact the author of this bulletin or any other member of our Capital Markets group.