On January 29, 2015, the Ontario Securities Commission (the “OSC”) released OSC Staff Notice 51–723, which is a report on its review of related party transaction disclosure filed by 100 randomly selected, Ontario-based issuers. Nearly half of the issuers reviewed received comments from the OSC requesting changes to their management discussion and analysis (“MD&A”) filings. The OSC noted that, while many issuers rely extensively on related party transactions to advance their business on a cost-effective basis by leveraging existing relationships, such transactions have the potential to be unfair to shareholders due to inherent conflicts of interest. Accordingly, it is critical that issuers provide full and adequate disclosure about these transactions so that shareholders can better understand their business purpose and value.

Many issuers prepare their own MD&A, and simply use the same language for related party transaction disclosure as is included in the notes to their financial statements. However, the disclosure used for accounting purposes, which typically complies with IFRS requirements, does not provide the level of detail required under securities laws.

This is often raised as a comment by securities commissions in the context of continuous disclosure reviews, and, particularly, can become an issue if you are incorporating past filings into a short form prospectus or other offering document. In such circumstances, securities commissions may refuse to allow you to proceed with the offering until past filings are amended and re-filed. If you are in a time sensitive financing situation, this can cause significant delays. As such, you should ensure you properly comply with disclosure requirements on an ongoing basis.

The related party transaction disclosure requirements for MD&A set out in Form 51-102F1 require disclosure of:

• the name of the related party and their relationship to the issuer;
• the business purpose of the transaction;
• the recorded amount of the transactions the measurement basis used; and
• any ongoing contractual or other commitments resulting from the transaction.

Multilateral Instrument 61-101, Protection of Minority Security Holders in Special Transactions, goes further, requiring discussion of the effect of the transaction on the issuer, the review and approval process undertaken by the issuer, a description of every related party as well as any interested party, and, if applicable, exemptions from the formal valuation and minority approval requirements of MI 61-101 the issuer is relying upon.

Although the report noted above was issued by the Ontario Securities Commission, securities regulators in other provinces of Canada, as well as in other countries, impose the same or very similar requirements. As such, we encourage you to review your disclosure to ensure it properly complies with applicable requirements.

The OSC’s complete report can be found here.

If you have any questions about these requirements, contact any member of Clark Wilson’s Corporate Finance & Securities Group.