Cross-Border Counselor

We have written about this in the past [here], but the message bears repeating each year. It is easy to overlook that employment agreements, change-in-control agreements, and severance agreements with U.S. taxpayers frequently contain provisions that subject them to U.S. Internal Revenue Code Section 409A ("Section 409A"), and failure to comply can result in onerous tax penalties. However, to the extent that rights under such agreements are not yet vested, it may be possible to correct them before year-end without penalty. Even if rights under an agreement are vested, in some cases correction is available with payment of reduced penalties under IRS correction programs. It is important to remember that U.S. residents, and U.S. citizens regardless of country of residence, are taxed on worldwide income. This means that compensatory arrangements for employees and directors who are U.S. citizens working outside the U.S. will be subject to U.S. federal income tax. If compensation arrangements have not been reviewed for Section 409A compliance, we recommend doing so now, especially with respect to arrangements that will or may become vested during 2019. For a more detailed explanation, see our Dorsey publication from October 6, 2015 here.

On October 31, 2018, the United States Securities and Exchange Commission (the “SEC”) announced that it adopted rules to modernize mining property disclosure in order to harmonize SEC disclosure requirements with international standards. The SEC had proposed rules in June 2016 which received numerous comments and as a result a number of changes were made to the original proposed rules. A high level summary of the final rules and changes compared to the proposed rules can be found here: www.sec.gov/news/press-release/2018-248 The final rules provide for a two-year transition period so that a registrant will not be required to begin to comply with the new rules until its first fiscal year beginning on or after January 1, 2021. The new rules permit Canadian issuers who file reports with the SEC in accordance with the multijurisdictional disclosure system (“MJDS”) to continue to comply with the standards set forth in National Instrument 43-101 (“NI 43-101”). This includes issuers who file annual reports on Form 40-F or registration statements on Form F-10, Form 40-F or Form F-7. However, Canadian issuers who are not MJDS eligible (i.e. those who file annual reports on Form 20-F or who file registration statements on Form F-1, F-3 or F-4 that refer to the annual report on Form 20-F), or issuers who file using U.S. domestic issuer forms, will need to comply with the new rules and will not be able to include disclosure solely compliant with NI 43-101. Dorsey will provide a more comprehensive analysis on the new rules in the coming weeks and will be conducting a webinar to discuss the new rules in early 2019. The full rules are available here: www.sec.gov/rules/final/2018/33-10570.pdf

With the legalization of marijuana going into effect in Canada tomorrow, October 17, we encourage our Canadian contacts to be careful when crossing the U.S. Border. For more information, see the recent article authored by Dorsey’s Immigration Practice Group posted on our Cannabis Blog here: dorseycann.com/at-the-intersection-of-cannabis-and-u-s-immigration-law-issues-that-canadians-and-other-non-citizens-should-be-aware-of/.

The SEC’s settlement with Tesla and Elon Musk teaches us some important corporate governance lessons on monitoring and vetting executive use of social media. As background, on August 7, 2018, the markets were surprised by a series of tweets initiated by Elon Musk, the CEO of Tesla, Inc., in which Musk mused about taking Tesla private at $420 per share (a significant premium to the then-market price), with funding secured. The stock price jumped, trading in Tesla stock was halted, and Tesla rushed to catch up with official announcements. The deal didn’t happen, and it was questioned whether Musk was really serious, and whether funding was really “secured.” The SEC commenced an investigation. On September 27, 2018, the SEC announced charges against Musk for securities fraud in connection with his tweets, which it said were inaccurate and misleading. Among the remedies sought was a permanent ban on Musk being eligible to serve as a director or officer of any public company, effectively seeking to sever him from Tesla, a company of which he is the heart and soul. Tesla’s stock dropped 14%. If this remedy was included by the SEC as leverage, that leverage worked, and on September 29, 2018, the SEC announced a settlement with Musk, as well as charges against and a settlement with Tesla. Tesla’s stock increased 17%. As part of the settlement, Musk will remain Tesla’s CEO and a director, but Musk and Tesla agreed that: Musk will step down as Tesla’s Chairman for at least three years and be replaced as Chairman by an independent director; Tesla will appoint two additional independent directors; Tesla will establish a committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications; and Musk and Tesla will each pay $20 million to harmed investors under a court-approved process. The SEC alleges that Tesla failed to implement adequate disclosure controls and procedures over Musk’s use of Twitter. Tesla had publicly announced in 2013 that Musk’s Twitter account would be among the means by which Tesla intended to release material information, Musk had amassed 22 million Twitter followers, and important information about Tesla had been released through this account, but the SEC says that Tesla had not adopted any specific policies regarding Musk’s use of Twitter, such as procedures to determine whether proposed tweets were accurate and complete, and whether they contained information requiring disclosure in Exchange Act reports. In effect, the SEC says Tesla had given Musk carte blanche to release material information about Tesla, without subjecting it to the normal controls to which other, more formal, types of disclosures would be subject, and as a result, the market was misled. Investors harmed included short sellers and those who purchased shares after Musk’s announcement temporarily drove up stock prices, only to see those prices drop afterwards. The SEC’s settlement with Tesla and Musk teaches us some important corporate governance lessons: If a public company allows its executives to use Twitter or other social media accounts to disclose material information about the company, it is not enough to notify the public that material disclosures may be made by these means. Companies must ensure that their disclosure controls and procedures adequately cover executives’ use of social media. In deciding what disclosure controls and procedures to implement, consideration should be given to such matters as: what topics are permitted or prohibited; procedures for review and approval of disclosures before they are made; the inclusion of risk factors or other cautionary or explanatory language to help prevent disclosures from being potentially misleading; coordination of social media disclosures with other company disclosures as needed to satisfy public reporting requirements; and monitoring actual disclosures and resulting market and media reactions for any surprises. Companies that do not allow executives to use social media accounts to disclose material information should adopt policies clearly prohibiting such use, and monitor executives’ use of social media for any inadvertent violations of policy.  

On Sunday, September 30, 2018, the U.S. and Canadian governments announced that they had reached agreement on a new trilateral trade agreement with Mexico, which will replace the North American Free Trade Agreement (NAFTA). This long-awaited text, released late in the day as the “United States-Mexico-Canada Agreement (USMCA),” is now available for public inspection.[1] The two governments announced this agreement just before a key deadline was set to expire at midnight. As reported in May 2017,[2] the Trump Administration commenced a process to renegotiate NAFTA, citing the need to update the cornerstone trilateral agreement that has governed trade among the three countries since 1994. At that time, U.S. Trade Representative Robert Lighthizer informed Congress that the renegotiation would include the key trade negotiation objectives that underpin the Trade Promotion Authority (TPA) that Congress granted in 2015, and extended in mid-2018.[3] Adherence to that TPA framework is key, because it would allow for a simplified legislative process that avoids proposals for significant amendments. TPA requires the Trump Administration to publish the proposed agreement 60 days before the President enters into the agreement. Because of the Trump Administration’s negotiation tactics, that deadline fell on September 30.[4] The Trump Administration reached tentative agreement with Mexico at the end of August. Because Mr. Lighthizer initially announced his intention to renegotiate NAFTA with both Canada and Mexico, it appeared that TPA required all three countries to reach agreement. The public was kept in suspense, as Canada did not indicate its intention to join until just a few days before the deadline. The USMCA text released late Sunday appears to cover the objectives announced in May 2017.[5] In addition to sections that appear in the current NAFTA, there are new provisions relating to digital trade, regulatory practices, labor, environment, and small and medium enterprises. There are also enhanced provisions relating to state-owned enterprises that contains express prohibitions, and enhanced protection of intellectual property. According to Mr. Lighthizer, these were the areas that required updating because of significant advancements since 1994. (It is interesting to note that these objectives also appeared in the Trans Pacific Partnership of Pacific Rim nations that the Obama Administration negotiated, and from which President Trump withdrew in early 2017.) A notable difference from the current NAFTA is that the USMCA, unlike NAFTA, would automatically terminate if not renewed. During the sixth year, each country must give notice of its desire for the agreement to continue for another 16 years. If such consent is given, the process would repeat 6 years later. Although the United States had indicated a desire to abolish NAFTA dispute settlement panels, it appears Canada succeeded in pressuring the Trump Administration to preserve a key aspect of the panels. Currently, NAFTA provides for a panel to review of any tariff-related measures imposed under a country’s domestic laws as “trade remedies.” In a major concession to Canada, the USMCA preserves the panels to review trade remedies. At the same time, the USMCA curtails a separate provision regarding disputes relating to private investments; that mechanism will be limited to certain disputes between Mexico and the United States. Although the text has been released, the USMCA still must overcome Congressional scrutiny (as well as any obstacles to ratification in Canada and Mexico) before it can enter into force. For instance, Congress must be satisfied that the USMCA satisfies the TPA parameters to avoid a drawn-out legislative process. Because that process may not occur until 2019, the mid-term elections in November 2018 may determine whether the Republicans retain control of Congress to push through the Trump Administration’s USMCA text. All eyes will be on Congress to see whether USMCA will replace NAFTA and become law. [1] https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico [2] https://www.crossbordercounselor.com/trump-administration-announces-nafta-renegotiation/ [3] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/june/ustr-lighthizer-welcomes-extension [4] https://www.politico.com/story/2018/09/30/nafta-trade-canada-819081 [5] https://ustr.gov/sites/default/files/files/Press/Releases/NAFTA%20Notification.pdf

When one thinks of the law, one often thinks of hard and fast rules. Employers cannot fire employees for a discriminatory or a retaliatory reason. Employees must be paid at least minimum wage. And so on. The law governing hostile work environment claims in the United States, however, is not so easily defined and applied. At first glance, the elements of a hostile work environment sexual harassment claim seem definite enough. In order to prove a claim for hostile work environment sexual harassment, a plaintiff has to prove that he or she has been subject to behavior that is: Sexual in nature or directed at an individual solely because of his or her gender; Uninvited or unwelcome; Offensive to a reasonable person; and Severe or pervasive enough to adversely affect a person’s work environment. The first two elements are clear enough conceptually. Was the conduct sexual or about the plaintiff’s gender and was the plaintiff a willing participant in the conduct? Like anything in the law, there are tough cases. For example, what about someone who participates in the conduct at first, but stops participating later? The last two elements, however, are based entirely on the subjective feelings of the jurors in any given case. What exactly is offensive to a reasonable person? Who is this reasonable person and what is she or he like? When exactly would any particular conduct affect that person’s ability to do her or his job? When a judge instructs a jury in a hostile work environment case, she or he will tell the jury that, in order to find for the plaintiff, you must find that the conduct complained of is offensive to a reasonable person. When assessing this issue, the vast majority of jurors will ask themselves, “do I find the conduct offensive?” The reason for this is simple—most people consider themselves reasonable. If I find conduct highly offensive, then it is offensive to a reasonable person because I myself am reasonable. The difficulty with this standard is that it makes hostile work environment claims a moving target. What is offensive in a small rural town may not be offensive in a big city. What is offensive in a very socially liberal area may not be offensive in a conservative area, or vice versa. What is more, standards for what is or isn’t offensive change over time and across generations. A recent survey by The Economist/YouGov found that almost 25% of millennial men in the United States believe that asking someone out for a drink is sexual harassment. This statistic is, to say the least, surprising to many in older generations. What does this mean for companies looking to employ workers in the United States? First, it means you cannot be too careful. Even if you think that certain behavior is just harmless flirtation or joking around, you need to ask yourself, how confident are you that 12 strangers in the city where your employees live would agree with you? Sexual harassment verdicts frequently reach into the six and seven figures range when attorney fees and emotional distress damages are added to an employee’s lost wages. Are you willing to bet that kind of money on your ability to tell whether a sexually charged joke at work crossed the line? Furthermore, as a practical matter, it is not enough to have a case that will win a trial. Between document discovery, depositions, motion practice, trial preparation, and the actual trial, “winning” a sexual harassment case at trial will cost a company hundreds of thousands of dollars. To really win, your case has to be so good that a court will dismiss it as a matter of law. Recently such victories have become harder to come by. In early 2017, the Ninth Circuit Court of Appeals, which hears cases from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington, overturned a trial court’s order dismissing a harassment case where the plaintiff claimed she was hugged too much by her boss, but never complained of the hugging to her boss or human resources. Courts are increasingly unwilling to say what is or isn’t offensive to a reasonable person as a matter of law. As an employer, it is important to set policies that keep employees from coming close to what they consider to be “the line” and to address employees’ concerns regarding possible harassment quickly and thoroughly. You might think the behavior was harmless, but how much are you willing to bet that 12 strangers will agree with you? Well-crafted policies written in consultation with your employment lawyer can make it clear to your employees that your company has zero tolerance for inappropriate behavior. Wherever your employees think the line is, they shouldn’t even come close.

As a continuation of our August 9 post regarding the deadline for Canadian companies to file a Form D for a private placement in the United States, we now address the questions, “What if our company missed the deadline to file a Form D with the SEC?” And, more importantly, “Have we lost our ability to rely upon the exemption?” The good news is that the exemption provided by Regulation D is not dependent upon the filing of the Form D. So, an issuer that fails to file the Form, or files it late, need not be concerned about the liability associated with a non-exempt offering. However, the failure to file exposes the issuer to risk of administrative action and possible loss of the ability to rely upon Regulation D in the future, and a willful failure to file Form D is a potential criminal violation. Accordingly, a company that discovers it has inadvertently failed to file a Form D with the SEC by the 15th day after the date of first sale of securities in an offering is best served by making the filing late unless counsel can identify an available alternative exemption. Unless the offering is otherwise exempt from state law, a late filed Form D must also be filed with, and a filing fee paid to, any state in which purchasers are located that requires such a filing. States differ in their response to late filings. Some states welcome them, and are happy to get the filing fees. Many states, including Illinois, impose an additional late filing fee when the filing is late. A few states, including Hawaii, have claimed that an exemption from state law is not available if the Form D is filed late, and demanded that the company give investors the right to get their money back. While I believe this view misinterprets federal law, it will usually be worth checking whether the late Form D must be filed in any of the states that take this position or that impose an onerous late filing fee and, if so, whether an alternative exemption is available under state law that would allow the company not to file the Form D in that state.

Canadian companies that sell securities to U.S. investors under Regulation D must file a Form D with the SEC within 15 days after “the date of first sale.” Most people would assume that the closing of the offering is the date of sale. However, in the instructions to Form D, the SEC explains that the date of first sale is “the date on which the first investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor's subscription agreement or check.” Therefore, the deadline for the Form D will depend on the wording of the agreement and how those words are interpreted under the governing law of the agreement. Companies whose agreements say a subscription is “irrevocable” should consider what that language is intended to mean. If it is intended to mean that the subscriber is contractually obligated to purchase the securities, regardless of whether the company has accepted the subscription agreement, then the receipt of the subscription may begin the 15-day clock and the Form D may be late by the date of closing. This problem can be addressed either by rewording the subscription agreement or by filing a Form D at the start of the offering, covering the maximum amount that may be sold in the offering. If instead, the “irrevocable” language is intended to be effective only upon the company counter-signing the agreement, the company should refrain from counter-signing the agreement until it is ready to begin the 15-day clock for filing of the Form D. Next week we will address the consequences of filing a Form D late.

The United States isn’t the only country addressing its history of gender inequality, sexual abuse, and sexual harassment. However, the United States is having its own unique experience in doing so. For U.S. employers, the current focus on these issues poses challenges, but also opportunities to address problems of diversity and harassment in the workplace. Non-U.S. companies looking to hire employees in the United States should be aware of the issues facing U.S. employers and be prepared to address them. One major change in the U.S. workplace resulting from the #MeToo movement is that employees who allege sexual harassment are far more likely to be believed. According to a November 2017 Quinnipiac University poll, 60% of U.S. women report that they have been sexually harassed, but according to the Equal Employment Opportunity Commission (the U.S. Federal Agency charged with investigating claims of sexual harassment in the workplace), 90% of women who have been sexually harassed never formally report it. That second statistic is changing rapidly. The deluge of credible allegations of sexual harassment against previously well-regarded public figures such as Bill Cosby, Matt Lauer, and Charlie Rose has eroded the view that “nice guys” aren’t capable of such behavior and that sexual harassment is relatively rare. In the post #MeToo era, the presumption favors the accuser, and the burden is on the accused to prove that the harassment didn’t occur. Since the #MeToo movement began, the standard for what constitutes sexual harassment has changed as well. Sexually harassing behavior is legally defined, in part, as behavior that is “offensive to a reasonable person.” This definition is fluid and depends upon prevailing social norms. In the post #MeToo era, behavior that used to be considered merely crude or boorish can now qualify as sexual harassment. In early 2017, the Ninth Circuit Court of Appeals, which hears cases from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington, held that excessive hugging in the workplace could constitute sexual harassment. Companies with U.S. customers also face public relations challenges over and above any legal liability resulting from sexual harassment allegations. U.S. customers are voting with their dollars, and if a company is perceived as turning a blind eye to sexual harassment in the workplace—or, worse, actively concealing it—many U.S. consumers and advertisers will cease doing business with the company. After numerous sexual harassment claims surfaced against then Fox News host Bill O’Reilly, more than a dozen marketers withdrew their ads from Mr. O’Reilly’s show, The O’Reilly Factor. Fox News had paid roughly $13 million to settle harassment claims against Mr. O’Reilly over the years, but it was the withdrawal of ad revenue that eventually led the company to fire Mr. O’Reilly. How can companies with U.S. employees adapt to this new reality? First, the bad news. As discussed above, what constitutes sexual harassment depends on prevailing social norms and those norms are rapidly changing in the United States. Employers cannot simply give employees a list of behaviors to avoid. Traditional anti-harassment training, which often focuses on such lists of bad behaviors, is not enough. Instead, employers must train their employees to be mindful of their impact on others and to be alert to signs that their behavior is unwanted or unwelcome. Employers should also establish strong anti-harassment policies and procedures for reporting workplace harassment. U.S. law provides employers with a defense to certain types of harassment claims where the employer has established an anti-harassment policy and procedure for employees to report harassment in the workplace, but the employee fails to do so. When employees do report harassment, employers should thoroughly investigate and make sure that the reporting employee is not subject to any retaliation—even if the employer determines that the harassment complaint is meritless. Finally, the revelations of the #MeToo movement—that sexual harassment and assault is pervasive and often goes unreported—have been deeply upsetting to many employees. Consider creating forums for discussion, such as pre-scheduled and moderated company meetings, where employees can express their concerns regarding these revelations without distracting co-workers from their jobs. The #MeToo movement has raised important issues regarding pervasive sexual harassment in the workplace. Companies that do not take this opportunity to assess their own practices are likely to face increased scrutiny and liability.

One of the principal sources of uncertainty, expense, and delay in the permitting process for many mining and infrastructure projects in the United States, especially those generating public controversy, is compliance with the environmental review process under the National Environmental Policy Act (NEPA). On June 20, 2018, the Council on Environmental Quality (CEQ) issued an advance notice of proposed rulemaking (ANPR) seeking public comment on potential revisions to its implementing regulations for the procedural provisions of NEPA. NEPA documentation is generally required for any project, public or private, that requires approvals from the federal government. The ANPR is a continuation of the Trump administration’s efforts to address inefficiencies in the federal permitting process and follows recent proposals from the Department of Interior and other agencies to streamline their NEPA review processes. The ANPR is significant because revisions to the CEQ’s NEPA regulations would apply government-wide, while the previous reform efforts have been on an agency-by-agency basis. Specifically, CEQ published a list of 20 questions for which it is seeking comments. These questions relate to ways to streamline the NEPA process, including potential revisions to the definitions of key terms, issues to be considered in NEPA documents, the range of alternatives that must be considered, the timing and preparation of NEPA documents, and interagency coordination. The ANPR presents a valuable opportunity for Canadian companies with mining or infrastructure projects in the United States and other interested parties to help shape revisions to CEQ’s NEPA regulations to ensure that the regulations serve NEPA’s purpose of informed decision making while minimizing unnecessary litigation, cost, and delay for project proponents. The deadline for submitting comments is July 20, 2018. Dorsey regularly represents companies in rulemaking processes through the submission of comments that communicate to the regulatory agencies our clients’ concerns and objectives. If you have any questions or would like to learn more about participating in this important comment process, please contact us. The Federal Register notice announcing the ANPR and requesting public comments is available at www.federalregister.gov/documents/2018/06/20/2018-13246/update-to-the-regulations-for-implementing-the-procedural-provisions-of-the-national-environmental.

Since January 1, 2016, the SEC has publicly released its correspondence relating to 60 comment letters sent to Canadian issuers with respect to annual reports filed on Form 40-F pursuant to the Canada-U.S. Multi-Jurisdictional Disclosure System (MJDS). We have analyzed the content and key takeaways from these letters, including: The SEC’s most common areas of focus; Recent trends; and Common errors to be avoided. Background The MJDS system allows Canadian issuers that satisfy certain market capitalization and other requirements to file an annual report with the SEC on Form 40-F. Except for a few items, a Form 40-F does not impose U.S. disclosure requirements upon a Canadian issuer and, instead, includes and relies upon the disclosures contained in the issuer’s annual information form, MD&A, and audited financial statements filed in Canada. The incremental requirements of Form 40-F include that the issuer’s financial statements comply with IFRS as issued by the IASB or be reconciled to U.S. GAAP, that the audit report meet certain requirements, that the auditor be independent, that certain disclosures be included with respect to the issuer’s disclosure controls and procedures and internal control over financial reporting, that certain officer certifications and third-party consents be included, and that certain additional MD&A disclosures be included. While the limited nature of Form 40-F reduces the number of areas in which the SEC may comment, Congress has directed the SEC to review the filings of SEC reporting issuers at least once every three years. For this reason, all companies that report with the SEC, even those that report under the MJDS, should expect their filings to be reviewed from time to time. If upon such review, the SEC has questions or believes that the issuer’s filing is deficient, it may provide comments to the issuer by letter. The issuer must then respond to the SEC’s comments, and may need to amend its filings to address the comments. Industry Breakdown The industry breakdown of the 60 most recent Form 40-F comment letters was: Twenty-four to companies involved in mining, mineral exploration, or the holding of mineral royalties or minerals; Five to energy companies; Five to technology and telecommunications companies; Four to life sciences companies; Four to banking and insurance companies; Three to real estate companies; and Six to companies involved in other industries, including transportation, manufacturing, entertainment, publishing, and professional services. Repeat Letters An issuer’s chance of receiving a comment letter may increase once the SEC has taken an interest in the issuer’s filings. The recipients of the comment letters included nine issuers who received a comment letter in both of the fiscal years covered by our review. Self-Inflicted Wounds Some comments could easily have been avoided. For example: Six letters noted technical problems with the audit report (missing auditor name, signature, date, or entire report; or failed to say financials comply with IFRS “as issued by the IASB”); Four noted technical problems with officer certifications or the internal control attestation report (wrong period, date, or content; or missing entirely); Four noted technical problems with the content of the controls sections of the Form 40-F; Three related to non-IFRS measures that the SEC considered misleading because terms were used inconsistently or the titles of the terms did not match the definitions (e.g., using the term EBITDA but calculating it in a manner inconsistent with market norms); Two noted technical problems with the contractual obligation table; and Two objected to an issuer’s conclusion that disclosure controls were effective when the issuer had disclosed that internal controls were ineffective. Paying Attention The SEC pays attention to an issuer’s website and earnings calls and may comment on inconsistencies between the Form 40-F and these other disclosures or raise other comments based on these disclosures. For example, several comment letters asked issuers about their business activities in sanctioned countries based on disclosures on their website. One letter questioned why management touted improvements in internal controls on the earnings call but disclosed no material change in internal controls in its Form 40-F. Another requested a different presentation of revenues based on sales information disclosed on an earnings call. Most Common Topics By far the most common topic of an SEC comment letter was the issuer’s financial disclosures. Forty-two of the 60 letters included comments relating to the issuer’s financial statements, audit report, auditor, or MD&A. These included, among others: Twenty-four with questions regarding revenue recognition policies, breakout of revenues by product (usually asking why further breakouts of revenue were not provided), methodology and disclosures around asset valuation and capitalization of expenditures, tax assets and rates, depletion/depreciation, or impairment analysis; Thirteen with questions about the accounting treatment of a specific other matter; and Nine requesting improvements to the disclosure of period-to-period changes, a particular accounting analysis, liquidity, cash flow, or other matters. Second-most common was comments relating to technical disclosure requirements for issuers involved in the mining or oil & gas industries, accounting for 13 of the 60 letters. Ten letters addressed mining company technical disclosures, including supplemental requests for copies of technical reports, studies, or other information in support of disclosures (the SEC does not require such reports to be publicly filed, unless also filed in Canada and material), and comments relating to: the issuer’s failure to comply with NI 43-101 (compliance with NI 43-101 is a pre-requisite for not complying with SEC Industry Guide 7); the issuer’s failure to update reserve calculations, for past production or more generally; and inconsistent or unclear disclosures. Three letters related to oil & gas company technical disclosures, all of which requested enhanced disclosures and alleged failures to satisfy FASB disclosure standards. The third-most common topic of the comment letters was comments relating to deficiencies in the officer certifications or disclosures relating to disclosure controls and internal controls. This topic was addressed in eight of the 60 comment letters, most of which related to failures to satisfy the form requirements. Fourth-most common was comments inquiring about the issuer’s business dealings in sanctioned countries (usually Sudan and Syria) or with companies known to operate in those countries and the adequacy of any related disclosures, usually triggered by the SEC’s realization that this may be relevant to the issuer. Seven of the 60 letters included such inquiries. Waves and Trends Comment letters have tended to come in waves. The letters from January 2016 through June 2017 dealt primarily with financial statement and MD&A issues; Two of the three letters issued to real estate companies were issued in the same week of September 2016; All of the letters issued to banks were issued in March 2017; All of the letters dealing with oil & gas technical disclosures were issued in the fourth quarter 2017; and Eight of the 10 letters dealing with mining technical disclosures were issued between June and December of 2017. It’s not yet clear if the shift toward commenting on mining technical disclosures is a trend. Lessons To reduce the likelihood of SEC comments, a Canadian issuer that files SEC annual reports on Form 40-F should attend to the technical compliance of its audit report, officer certifications, controls disclosures, and other Form 40-F mandated disclosures; include a robust and understandable MD&A; avoid the inconsistent or misleading use of non-IFRS terms; and, for resource extraction issuers, comply with the technical disclosure requirements applicable to it under Canadian and U.S. laws.  

Earlier this week, a panel of Dorsey attorneys presented a webinar on the SEC’s recent guidance on cybersecurity disclosures and policies, which included a detailed walk-through of the SEC’s 2018 guidance, including issues related to enhanced disclosure, insider trading, and Reg FD policies. The panel also discussed the impact of the SEC’s guidance within the changing landscape of cybersecurity and current developments in shareholder litigation, SEC enforcement actions, and other regulatory and legislative initiatives such as the GDPR. The Equifax data breach is used as a case study to illustrate how the SEC’s guidance might play out in this broader context. The webinar recording and presentation materials are available on our website at www.dorsey.com/newsresources/events/videos/2018/06/seminar-playback-sec-guidance-on-cybersecurity.

With the listing on May 24th of Canopy Growth Corporation (Canopy) on the New York Stock Exchange (NYSE), both NASDAQ and the NYSE have permitted Canadian cannabis companies to trade on their respective exchanges. Canopy, the first Canadian cannabis company to list on the NYSE, follows Cronos Group Inc. (Cronos), which was the first Canadian cannabis company to list on a national stock exchange in the United States when it listed on NASDAQ in February. While neither exchange has formally adopted a policy on the listing of cannabis companies, informally they are willing, on a case-by-case basis, to accept a company with cannabis operations, so long as the company complies with all relevant laws in the jurisdictions where it operates. This is similar to the policies adopted by the Toronto Stock Exchange and TSX Venture Exchange, which prohibit the listing of cannabis companies with U.S. operations. In order to list in the United States, each of Canopy and Cronos filed listing applications with the respective exchange and registered their class of common shares with the United States Securities and Exchange Commission (SEC). A Canadian company that has been a reporting issuer in Canada for at least 12 months and has a public float of at least US$75 million is eligible to take advantage of the Multijurisdictional Disclosure System (MJDS) in order to register with the SEC. The MJDS permits such Canadian companies to file a Form 40-F registration statement, which is essentially a wrap around the company’s Canadian disclosure documents and is not subject to the typical burdensome SEC comment process. This generally permits for a quicker and less costly process for Canadian companies wishing to enter the U.S. markets. For more information on listing in the United States, contact your relationship attorney at Dorsey. For more information about Dorsey's cannabis industry practice, visit www.dorsey.com/services/cannabis.

Canadian companies with U.S. subsidiaries and investments should note upcoming deadlines for filing reports required by U.S. Department of Commerce rules. These mandatory reports are required to be filed with the Bureau of Economic Analysis (“BEA”) within the U.S. Department of Commerce by May 31, 2018, if made by hardcopy, or by June 30, 2018, if made electronically. The affected U.S. subsidiary companies are those in which a non-U.S. person owns or controls, directly or indirectly, 10 percent or more of the company’s voting securities if the U.S. subsidiary company is incorporated, or in which a non-U.S. person holds that same degree of ownership or control through other means if the U.S. subsidiary company is unincorporated. For more detailed information, see our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2018/05/foreign-owned-us-subsidiaries-federal-survey.

The NYSE has made a few recent announcements affecting the obligations of NYSE and NYSE American listed Canadian companies with respect to providing information to the exchange. An NYSE listed company that files its shareholder meeting materials (e.g., proxy, management information circular, proxy card, etc.) on EDGAR is no longer required to provide physical copies of the meeting materials to the NYSE. However, if a listed company does not file its meeting materials on EDGAR or does not include all relevant materials on EDGAR, it must provide three copies of all materials not available on EDGAR to the NYSE no later than the date on which such materials are sent or given to any securityholder. In addition, if the listed company files the materials on EDGAR on a form other than U.S. domestic Schedule 14A, it must advise the exchange via email or web portal where the materials can be found on EDGAR. Many Canadian cross-listed companies are foreign private issuers that file their shareholder meeting materials with the SEC on a Form 6-K. These issuers will now be required to provide the exchange with this electronic notice in lieu of hard copy delivery. The full rule change can be found at the following link: www.nyse.com/publicdocs/nyse/regulation/nyse/Proxy_Rule_Change_Summary.pdf In addition, the NYSE recently reminded issuers that they are not required to send the NYSE physical copies of forms related to changes in ownership of securities (i.e. Forms 3, 4, 5 and Form 144). The full notice can be found here: www.nyse.com/publicdocs/nyse/regulation/nyse/2018_Listed_Company_Regulation_Guidance_Memo.pdf Effective April 1, 2018, issuers listed on the NYSE American must notify the NYSE American at least 10 minutes in advance of notifying the public about any action relating to dividends. The notification can be made through Listing Manager. The full notice can be found here: www.nyse.com/publicdocs/nyse/regulation/nyse-american/Revised_Dividend_Notification_Policy.pdf

The recent settlement agreement between Kinross Gold Company and the Securities and Exchange Commission is a reminder to Canadian cross-listed companies that it is not enough to adopt a parent-company level anti-corruption policy designed to promote compliance with the Foreign Corrupt Practices Act (FCPA). Effective implementation and monitoring at the operating level is also needed. In Kinross’ case, the SEC charged, in effect, that Kinross had acquired two African mining operations from a third party, was aware of deficiencies in the mines’ controls at the time of acquisition, failed to timely put in place appropriate controls, and then failed to maintain them once implemented. Specifically, SEC alleged that Kinross awarded a logistics contract to a company preferred by Mauritian officials, despite concerns that the awardee exhibited poor performance at high cost without going through Kinross’ own bidding procedures, and engaged in contracts with politically connected consultants without conducting necessary, heightened due diligence. The SEC found these deficiencies constituted a violation of books and records and internal auditing controls provisions of federal securities law. In order to resolve these charges, and without admitting SEC’s findings, Kinross agreed to pay the SEC a penalty of $950,000, comply with a cease-and-desist order, and undertake to report on remedial measures. For more details, see the April 2018 edition of our Anti-Corruption Digest, which is available at  https://www.dorsey.com/newsresources/publications/newsletters/2018/04/anti-corruption-digest-april-2018.

Like Canada, the United States has federal legislation protecting employees with disabilities. While Canada has the Canadian Charter of Rights and Freedoms and the Canadian Human Rights Act, the United States has the Americans with Disabilities Act (“ADA”). While both Canadian and U.S. laws protect disabled employees from discrimination, the ADA has very specific procedures and requirements for accommodating employees with disabilities that even sophisticated U.S. employers frequently get wrong. Below is a discussion of several key concepts under the ADA that employers in the United States should know about. An employer has a duty to provide an employee with a “disability” with “reasonable accommodations” that will allow the employee to perform the “essential functions” of his or her job. The definition of each of these terms is essential to complying with the ADA. While the definition of a “disability” is complex, a rule of thumb is that a disability is any condition that interferes with a person’s life, except for the most minor interference. Basically, if an employee has any sort of health condition and either asks for help or the employer is put on notice that the employee needs help, the employer’s duty to accommodate is triggered. When in doubt, it’s a disability. An “essential function” is one where the reason the position exists is to perform the function. This can be tricky to define in edge cases; however, some easy examples are a data entry specialist’s ability to enter data into a spreadsheet, a manual laborer’s ability to lift a minimum amount of weight, or a receptionist’s ability to communicate with people visiting the employer’s premises. Examples of non-essential functions include a receptionist’s ability to lift heavy objects or a secretary’s ability to do data entry. These are abilities that are nice to have, but are not central to the job. Accurate and detailed job descriptions are important for defining a job’s essential functions. If a certain ability or function is not listed in an employee’s job description, it is much harder for the employer to claim that function is essential. Just because a function is described as essential in a job description does not mean that a court will agree, however. Employers must make sure that functions described as essential are in fact essential. A “reasonable accommodation” is an accommodation that allows an employee to perform his or her essential functions, and which does not pose an undue burden on the employer. What constitutes an undue burden depends upon the size and financial resources of the employer. A small company might not be required to buy an expensive piece of speech-to-text software to allow an employee who cannot type to work on a computer, but a large company with significant resources might be required to do so. Similarly, a large employer might be required to give an employee recovering from surgery several months of unpaid leave with job projection, while a small employer might be allowed to hire a replacement sooner if the small employer cannot function without someone in the role. Employers determine what accommodations to provide through the “interactive process.” When an employer is put on notice that an employee has a disability and may require an accommodation, the employer is obligated to start a dialogue with the employee and the employee’s healthcare provider regarding what accommodations, if any, would allow the employee to perform his or her essential job functions. Much of the art of ADA compliance lies in appropriately communicating with employees and their healthcare providers through the interactive process. Employers cannot simply tell the employee what accommodations they are willing to make upfront on a “take it or leave it” basis. Rather, employers must engage in a back-and-forth dialogue with the employee and his or her healthcare provider and at least consider accommodations suggested by the healthcare provider. Employers should never reject any but the most outrageous accommodation requests out of hand. An employer’s duty to accommodate under the ADA is one of the most difficult aspects of employment law in the United States. Even sophisticated employers can run into trouble, and employer’s new to U.S. law should line up outside legal support in advance to help them navigate.

Canadian companies relying on Rule 701 under the Securities Act of 1933 to exempt their U.S. awards of stock options and other types of compensatory equity (such as RSUs and PSUs), need to track on an ongoing basis the amount of grants being made in the United States. If they anticipate that the aggregate dollar amount of the awards, calculated under Rule 701, will exceed US$5 million in any 12-month period, they must also prepare and deliver Rule 701-mandated disclosure documents. Just this month, the SEC announced a financial settlement with a privately-held fintech company, Credit Karma, Inc., relating to Credit Karma’s failure to provide stock option holders with the financial statements, risk factors, and other disclosures required by Rule 701 when its stock option awards exceeded US$5 million over 12 months. In the settlement, Credit Karma agreed that due to these disclosure failures, there was no valid securities exemption, and the company had violated the registration requirements of the Securities Act. This, notwithstanding that only a small fraction of the stock options were actually exercised. Failure to comply with Rule 701 can also subject a company to additional consequences, including state enforcement actions, rescission offers to investors, and, in extreme cases, criminal prosecution. While a company should always obtain advice from a knowledgeable securities lawyer, some key facts to know about calculating Rule 701 limits include: In the case of options, the sale is deemed to have been made at the time of the grant of the options, and the value is determined based on the exercise price of the options; In the case of other securities, the calculation is made at the time of sale, or in the case of a deferred compensation plan when the irrevocable election to defer is made, and the value is determined based on all of the consideration received or to be received by the company for the sale of the securities; and The SEC has taken the position that disclosure requirements are triggered by a company’s expectation that it will exceed US$5 million in a 12-month period, even if it has not yet exceeded US$5 million. Rule 701 imposes further restrictions on which advice should be obtained by companies making equity awards in the United States, including limits on the types of companies that can make an award, the types of persons who can receive an award, resale restrictions, and the aggregate maximum amount that can be awarded even if Rule 701 disclosures are provided.

We are frequently asked to review Canadian companies’ stock option, restricted share unit (RSU), performance share unit (PSU), deferred share unit (DSU), and other stock-based compensation plans for U.S. securities law purposes, because awards are expected to be made to U.S. residents. For companies that are cross-listed and file reports with the Securities and Exchange Commission (SEC), the intention is typically to register the underlying securities by filing a Form S-8 with the SEC. For companies that do not file SEC reports – whether publicly traded in Canada or privately held – the intention is typically to rely on the exemption provided by Rule 701 under the Securities Act of 1933 and exemptions under the securities laws of the states in which awards will be granted. Some of the most common U.S. securities issues we see in connection with Canadian stock-based compensation plans include: 1.  Defining the class of persons eligible to receive awards in a manner broader than is permitted under Form S-8 or Rule 701, especially: Allowing grants to consultants that are entities, or that are involved in investor relations or fundraising activities; Allowing grants to consultants’ employees; and In the case of Rule 701, allowing grants to employees of subsidiaries that are not majority-owned. 2.  Failing to realize when a plan is subject to U.S. securities laws and requires registration or an exemption, or the treatment of securities as restricted securities, especially: Plans that involve open market purchases or that otherwise involve the delivery of shares that were previously free trading, such as an open market employee share purchase plan (ESPP) or a trust funded with free trading securities; and Plans in which a participant elects to forego cash in exchange for a long-term investment that itself is ultimately settled in cash, such as an executive deferred compensation plan or a director DSU plan. 3.  Unqualified covenants of the company to take all steps necessary to comply with applicable law, which could be interpreted as requiring a non-reporting company to file an SEC registration statement and become an SEC reporting company if the company has inadvertently made U.S. awards that are not exempt from registration. 4.  Failing to include provisions required by U.S. state laws, when grants will be made in states that require the inclusion of specific terms in the plan. 5.  In the practical aspects of plan implementation and the making of awards, including: Making awards that do not comply with U.S. federal or state laws because such laws were not evaluated prior to the time of grant; and Using forms of award agreement that have not been tailored for U.S. residents.

On February 26, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. The SEC’s new guidance reinforces and expands on its October 2011 guidance, emphasizing the importance of adopting sound cybersecurity policies and procedures and safeguards against insider trading in the event of a potentially material cybersecurity breach. Read more about the new guidance in our recent eUpdate: www.dorsey.com/newsresources/publications/client-alerts/2018/03/sec-issues-new-cybersecurity-guidance.

While the recently enacted U.S. tax reform legislation did not overhaul executive compensation to the extent proposed in early forms of the bill, Section 162(m) of the U.S. Internal Revenue Code was dramatically revised in a way that affects Canadian companies that file reports with the SEC and that employ, or may in the future employ, executives in the United States. Previously, Section 162(m) limited the amount of compensation that an SEC reporting company that was a “domestic issuer” for securities law purposes, or its subsidiaries, could deduct with respect to its most senior executives. Important for many of our Canadian clients, we believe that under the rule changes, U.S. tax deductions for compensation paid to key executives of any SEC reporting company, including foreign private issuers, and their subsidiaries, will now be subject to the limitations of Section 162(m). In addition, the rule changes eliminate a major exception for qualifying performance-based compensation. This article identifies the important changes to Section 162(m) and addresses the limited transition and grandfathering opportunities companies should now consider. Section 162(m), as amended, limits the amount of compensation an SEC reporting company can deduct with respect to its CEO, CFO, and the next three highest earners in the company’s controlled group to US$1 million per individual per year. As mentioned above, compensation paid to key U.S. executives of foreign private issuers likely no longer escapes the reach of Section 162(m). It appears that regulations that formerly exempted key employees from public companies that were not subject to SEC proxy statement requirements (i.e., were not obligated to file a summary compensation table) have been undermined by the revised Section 162(m). Included in Section 162(m)(3) is now a statement that covered employees, aside from the CEO and CFO, are determined without regard to whether the compensation of such employees is required to be reported to shareholders. Absent any future clarifying regulations from the U.S. Treasury to the contrary, foreign private issuers should take note that certain key employees will be considered covered employees under Section 162(m) going forward. To the extent that compensation paid to a covered employee was intended to be claimed as a compensation expense deduction on a corporation’s U.S. federal income tax return, it will be important to recognize that any such compensation in excess of US$1 million annually to a covered employee will not be deductible. A major exception that exempted qualifying performance-based compensation from the reach of this limitation has been removed effective in 2018. Therefore, whereas public companies had been able to deduct large compensatory payments above the basic US$1 million limit to key executives relating to the exercise of stock options and/or the issuance of stock awards payable because of the achievement of pre-set performance objectives, this exception will no longer be available going forward. Removal of the performance-based exception will disadvantage public companies that have intentionally structured their compensation to be predominantly performance-based in order to deduct key employee compensation to the greatest extent possible. However, the overall reduction in the U.S. corporate income tax rate from 35% to 21% in the tax legislation will more than compensate for any lost deductions in most cases. Once an executive is a “covered employee” of a company for purposes of Section 162(m), the executive now will remain a covered employee forever. As a result, compensation deductions for payments made after an executive is no longer among the company’s top earners, whether received as severance, or even paid to beneficiaries after an executive’s death, will be limited under Section 162(m). While there have been reports of some companies reacting to the loss of the performance-based compensation exception under Section 162(m) by shifting executive compensation formerly payable as performance-based to base salary, the impact on employers generally remains to be seen. We encourage companies to discuss with U.S. tax counsel how the revisions to Section 162(m) may impact the ability to deduct compensation paid to key officers who are covered employees. In particular, a transition rule under the new Section 162(m) rules exempts remuneration paid pursuant to written binding contracts in effect as of November 2, 2017, from the new rules, so long as such contracts have not been materially modified or extended. The transition rule may impact whether and to what extent a company decides to modify arrangements such as employment agreements, deferred compensation plans, and bonus plans. Understanding how the transition rules impacts a company’s existing arrangements will allow for planning opportunities to maximize compensation deductions and the tracking of disallowed compensation deductions going forward.

The default rule in most U.S. states is at-will employment. This means that either the employee or the employer may terminate the employment relationship at any time, without notice, for any reason—other than a discriminatory or retaliatory reason. A reason is discriminatory if it is based upon an individual’s status as a member of a protected class, such as race, gender, national origin, or religion. A reason is retaliatory if it relates to an individual’s protected activity, such as whistleblowing or raising concerns regarding the terms and conditions of employment. Parties can opt out of the default at-will rule by entering into an employment agreement that provides the employee with severance unless the employee is terminated for “cause” or quits without “good reason.” Unlike Canada, which has a rich body of law explaining what does and does not constitute “cause,” it is completely up to the parties in the United States to decide what constitutes cause and put that definition into the employment agreement. Getting this definition right is extremely important, and Canadian companies with employees in the United States that do not pay close attention to such language might be stuck paying substantial severance to employees whom they would have a right to terminate for cause under Canadian law. Most U.S. employment agreements for high-level employees provide for severance benefits ranging from a few months to a few years of pay upon the termination of employment if the company terminates the employee without “cause” or the employee quits for “good reason” as defined in the employment agreement. The definition of “cause” can vary widely from agreement to agreement and is often the subject of intense negotiation between the company and the employee. Many agreements only allow the company to terminate for cause if the employee engages in extreme misconduct, such as a felony or an act of dishonesty that has a substantial negative impact on the company. Other agreements allow the company to terminate for cause if the employee fails to competently perform the employee’s job duties. Often times, the agreement will require that the employee be given notice and an opportunity to cure any failure that would otherwise constitute cause for termination. Some but not all agreements also allow the employee to quit and receive severance if the employee quits for “good reason” as defined in the employment agreement. “Good reason” is often defined to include a material reduction in the employee’s duties or compensation, or a requirement that the employee relocate. Good reason may also be tied to a change in control over the company, such that the employee’s right to quit for good reason and receive severance only arises if the company changes ownership. Canadian companies purchasing U.S. businesses can find themselves hamstrung by definitions of “cause” and “good reason” that make it very difficult to fire or even control wayward executives that were brought along as part of the deal. Cause definitions that require extreme misconduct by the executive tie the company’s hands in situations where the executive is merely performing poorly or not following the board’s directives. Good reason definitions that allow an executive to quit if the executive’s duties are changed or curtailed make it difficult to put new management in place where the executive and the board fail to see eye-to-eye on how the company should be run. U.S. courts tend to give the benefit of the doubt to the employee when assessing whether cause or good reason exists under an employment agreement, and companies that want to retain the right to terminate an employee for poor performance without paying severance should make sure that poor performance is explicitly included in the definition of cause. Alternatively, if a company is agreeing to a very employee-friendly definition of cause, it should be prepared to pay out the severance provided for in the employment agreement in all but the most extreme cases of employee misconduct. Business acquisitions usually start with the best of intentions and goodwill between the parties. No one goes into such a deal expecting it to go sideways. However, it is very important that Canadian companies looking to take on U.S. employees know what they are getting into in terms of severance obligations—and negotiate definitions of “cause” and “good reason” that reflect the company’s expectations.

The SEC is aiming to finalize its new mining disclosure rules within the next year, according to statements made last week by William Hinman, Director of the SEC’s Division of Corporation Finance, at the Securities Regulation Institute. For more details regarding the SEC’s original 2016 proposal to revamp the rules, and reactions by industry, see our summary of the initial proposal (here: www.dorsey.com/newsresources/publications/client-alerts/2016/07/new-mining-disclosure-rules) and our last blog post (here: crossbordercounselor.com/status-check-on-the-secs-proposed-overhaul-of-the-mining-disclosure-regime/).  

The United States Public Company Accounting Oversight Board (PCAOB) issued new standards for auditor’s reports that will effect Canadian issuers who are SEC registered. The initial changes go into effect for issuers with fiscal years ending after December 15, 2017. Our understanding is that some Canadian auditors for issuers who are MJDS eligible will try to combine the Canadian and U.S. requirements into one auditor’s report that complies with both sets of rules, while other Canadian auditors will prepare their reports solely in compliance with the new PCAOB requirements as Canadian rules permit auditors for dually registered issuers to file auditor’s reports solely in compliance with PCAOB standards. Canadian issuers who are not MJDS eligible should continue to comply with the PCAOB standards for their auditor’s reports. The new auditor’s report includes updated formatting and disclosure requirements. These changes include provisions requiring statements in the auditor’s report disclosing the auditors’ tenure and independence, and form standardizations, including new section titles to guide readers. The requirement that the auditor’s report disclose “critical audit matters,” which are matters arising from the audit of the financial statements that have been communicated or were required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involve specially challenging, subjective, or complex auditor judgment, will only take effect for audits of fiscal years ending on or after June 30, 2019, for large accelerated filers; and for fiscal years ending on or after December 15, 2020, for all other companies to which the requirements apply. The full order by the SEC with respect to the changes can be found at the following link: https://www.sec.gov/rules/pcaob/2017/34-81916.pdf Issuers should reach out to their auditors if they have any questions on the changes to the auditor’s report.

About 18 months have passed since the U.S. Securities and Exchange Commission (SEC) published its bold attempt to modernize the disclosure requirements for mining companies that are listed on U.S. stock exchanges or otherwise report to the SEC. With final rules not yet adopted, the fight for a streamlined reporting regime continues. The SEC’s proposed overhaul was spawned by industry request – specifically, a request by the Society for Mining, Metallurgy & Exploration (SME), the leading professional society of mining professionals in the United States, that the SEC bring its disclosure requirements into the modern age and adopt a new disclosure regime based on the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) standards. CRIRSCO-based standards have been adopted in most countries with advanced mining disclosure regimes, including Canada and Australia. Industry was concerned that the existing rules under SEC Industry Guide 7, nearly 35 years old, were hampering the ability of U.S. mining companies and U.S. trading markets to compete by, among other things, prohibiting the disclosure of mineral resources that have not yet been determined to be mineral reserves. As a result, in June 2016, the SEC proposed a new CRIRSCO-based disclosure system that would bring U.S. disclosure requirements more in line with Canada and other jurisdictions. One might think that such a proposal, to modernize rules at the request of industry to benefit American business, would find easy adoption following the election of Donald Trump and the appointment of a Republican Chairman and majority to the SEC, but that hasn’t been the case. Overhauling a system that has been in place for 35 years is a difficult thing to do at any time. The election of Donald Trump likely delayed the process further. The President’s party controls the chairmanship and majority of seats on the SEC, so the election resulted in the resignation of the Democratic Chairman that had overseen the initial proposal. Months of uncertainty passed before her replacement was sworn in. The new Republican Chairman was not appointed until May 2017, seven months ago, without any background on the proposed new mining rules and undoubtedly bringing his own ideas and interests to the table. President Trump also campaigned on a platform of eliminating regulation, and while the proposals were intended to benefit industry, they require passing additional regulations. Finally, but perhaps most importantly, the proposals were not as well-received by the mining industry as the SEC had undoubtedly hoped. Most industry organizations, companies, and law firms that commented on the proposals were supportive of the idea of modernization, but felt that the SEC’s proposals were too prescriptive and varied in too many ways from CRIRSCO standards, thereby imposing an administrative burden on companies, especially those reporting in more than one jurisdiction. Worst of all for many of our Canadian clients, the new rules as proposed would have eliminated the ability of Canadian companies that file SEC reports on non-MJDS forms such as Form 20-F or 10-K from including National Instrument 43-101 (NI 43-101) information in their SEC filings, even if these disclosures were mere supplements to SEC disclosure. The SEC received a lot of feedback to digest. According to the staff, they are continuing to review and consider the comments received. While it’s not a secret, few are aware that the National Mining Association (NMA), the national trade organization of the mining industry, and the SME have teamed up to present the SEC with an alternative proposal for modernizing the SEC’s mining disclosure rules. The NMA and SME have proposed that instead of working from the framework of the SEC’s 2016 proposals, the SEC merely amend the content of Industry Guide 7. The NMA and SME have recommended that Guide 7, as revised, allow companies to disclose estimates of mineral resources in addition to mineral reserves, allow reserves to be established in a pre-feasibility study, not require disclosure to be attributed to a qualified person, limit required disclosures to those that are material, and limit the information required to be disclosed by those holding passive mining interests such as royalties, all without imposing the more detailed, prescriptive requirements contained in the SEC’s 2016 proposals. Of most interest to Canadian companies, the NMA/SME proposal would allow foreign companies that are subject to and required to disclose information in compliance with another CRIRSCO-based standard, such as NI 43-101, to comply with such other standard in lieu of, and in full satisfaction of, the SEC standards, subject only to a requirement to include a reconciliation of any material differences. The NMA/SME proposal includes a specific note that for Canadian companies subject to NI 43-101, reconciliation would generally not be required (due to the lack of material differences between NI 43-101 and the NMA/SME proposed version of Guide 7). If the SEC accepts the NMA/SME proposal, most smaller Canadian companies that do not satisfy the market capitalization requirements of the Multi-Jurisdictional Disclosure System (MJDS) will find it easier and less expensive to file with the SEC than in prior years. Whether the SEC will do so, we cannot say.

California is now accepting applications for temporary cannabis licenses. For more information, see www.dorsey.com/newsresources/publications/client-alerts/2017/12/ca-opens-applications-for-temporary-cannabis.

Financial assurance and reclamation bond requirements can be a significant cost and regulatory burden for Canadian issuers with mining projects in the United States. Over the last several years, companies with U.S. mining projects have waited while the U.S. Environmental Protection Agency (EPA) has considered expanding the financial responsibility requirements applicable to the hardrock mining industry. On December 1, 2017, EPA released a pre-publication version of a final rule determining that imposing CERCLA 108(b) financial responsibility requirements on the hardrock mining industry was unwarranted.[1] The Final Rule satisfies a court-ordered timeline and rejects a proposed rule, published in January 2017,[2] which proposed regulations imposing CERCLA 108(b) financial responsibility requirements on operators of hardrock mining facilities. Based on information provided during the public comment period and EPA’s re-evaluation of the rulemaking record, EPA determined that finalizing the proposed rule and establishing financial responsibility requirements for the industry was inappropriate because: “the degree and duration of risk associated with the modern production, transportation, treatment, storage or disposal of hazardous substances by the hardrock mining industry does not present a level of risk of taxpayer funded response actions that warrant imposition of financial responsibility requirements.”[3] EPA’s decision is significant for the mining industry, as EPA had estimated that the proposed rule would cost the industry approximately $111-171 million annually to address an estimated $15 million in annual unfunded clean-up costs.[4] For more information, see Ben Machlis’ recent eUpdate on the EPA’s Decision available here:  www.dorsey.com/newsresources/publications/client-alerts/2017/12/a-win-for-the-mining-industry   [1] Final Rule: Financial Responsibility Requirements under CERCLA Section 108(b) for Classes of Facilities in the Hardrock Mining Industry, EPA-HQ-SFUND-2015-0781, Pre-Publication Copy (Dec. 1, 2017). [2] Proposed Rule: Financial Responsibility Requirements under CERCLA Section 108(b) for Classes of Facilities in the Hardrock Mining Industry, 82 Fed. Reg. 3,388 (Jan. 11, 2017). [3] Final Rule, at 47. [4] Id. at 7.

On November 16, 2017, California published the long awaited rules and regulations to implement voter approved Proposition 64, the Adult Use of Cannabis Act of 2016, which legalized adult use of cannabis in the State of California. The California Legislature passed and the Governor signed into law the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which creates the general framework for the regulation of both commercial medicinal and adult-use (recreational) cannabis. The State agencies that regulate cannabis, the Bureau of Cannabis Control (distribution, testing, retail and microbusiness), Department of Food and Agriculture (cultivation) and Department of Public Health (manufacturing), established new regulations under an “emergency” rule-making process for commercial medicinal and adult-use (recreational) cannabis industries. The “emergency” regulations will be followed by a formal rule-making process beginning next year. California’s new cannabis regulations will be of interest to the growing number of Canadian companies and investors involved in the cannabis industry. The regulations include: Temporary Permits – In December 2017, California will begin accepting on-line applications for temporary business permits. Priority application review will be provided for annual licenses applicants that were in operation under the Compassionate Use Act prior to September 1, 2016. Temporary permits will be good for four months (120 days) for cannabis businesses, which may be extended for two 90-day extensions (only if the temporary licensee has applied for an annual license). There is no fee for temporary permits. Cannabis businesses will need local approval for conducting commercial cannabis activities, which must be demonstrated to receive a temporary permit. Beginning January 1, 2018, an email notification will be issued from the State confirming that a temporary permit has been approved. Transitional Rules – Licensed cannabis companies will have a six-month grace period (until July 1, 2018) to sell products in their inventory (with specified labeling) that do not comply with regulation (testing and labeling) guidelines and may work with other licensed businesses without worrying about whether their permits are for medical and recreational activities. During the transitional period, licensees will not be required to use the State’s track-and-trace system but will need to complete manifests and other paperwork to keep track of cannabis products. Two Types of Licenses – There will be two types of licenses: A-License (adult use) and M-License (medical cannabis). It is unclear whether an A-license can be used for a medical dispensary or a business would require separate A and M licenses. Testing labs may test cannabis goods for both types of licenses. License Fees/Activities – Annual cannabis license fees are based on a sliding scale ranging from $800 to $120,000 based on activity and revenues. Activities include retail operations, cannabis events, distribution, cultivation, manufacturing and products, laboratory testing and microbusiness (multiple commercial cannabis activities are permitted under one license). Retail Operations:  Adult-use cannabis sales are limited to adults 21 years and over. Stores cannot be located within 600 feet of schools (K-12 school, day care center, or youth center), must close by 10:00 p.m., and must have 24-hour surveillance. There are limitations on purchases (adult-use customers may purchase up to one ounce and medical patients up to eight ounces or more with physician’s note). Only medical cannabis patients or their caregivers will be permitted to receive free cannabis products or samples. Products must be packaged, tested and labeled. Advertising is limited. Distribution:  Only a licensed distributor may transport cannabis. Cannabis Manufacturing and Products:  The California Department of Public Health (CDPH) is responsible for regulation of manufacturing of cannabis. Manufacturing licenses (A-License and M-Licenses) fall under four license types: Type 7: Extraction using volatile solvents; Type 6: Extraction using non-volatile solvents or mechanical method; Type N: Infusions; and Type P: Packaging and labeling only. All cannabis products must contain a State-mandated warning label and the CDPH-issued universal symbol and must be tested. Edible products may not be in shapes that may appeal to children – no human beings, animals, insects, or fruit shapes. There are limits on THC content. Licensees must have written procedures for inventory control, quality control, transportation, security and cannabis waste disposal. Good manufacturing practices must be followed. Cannabis Cultivation:  The California Department of Food and Agriculture regulates the cultivation of commercial cannabis. Cultivation of cannabis is divided into three categories: Cultivators (commercial cultivators); Nurseries (cloning and seed propagation) and Processors (trimming, drying, curing, grading, or packaging). Testing Laboratories:  All cannabis goods must meet certain health and safety standards before they can be sold to consumers. To ensure that cannabis goods meet those standards, a representative sample of the cannabis goods must be tested by a licensed testing laboratory. The regulations provide the minimum laboratory-operation requirements, which would include requirements such as sampling procedures, personnel qualifications, standard operating procedures, and recordkeeping requirements. Ownership­ – License “owners” must submit fingerprints (via the Department of Justice’s Live Scan service) and background information including any past criminal convictions. An “owner” includes the CEO, a board member, a person holding 20% or more ownership interest and any person participating in the direction, control, or management of the person applying for a license. Individuals that are employed by the State of California or district attorney’s offices and law enforcement agencies are prohibited from holding a license when the duties of their employment have to do with enforcement of cannabis regulations. Financial Interests – The license application must disclose the holders of “financial interests” (any investment, loan or any other equity interest), including the holder’s name, birth date and a government issued ID. Holders of financial interests that are not required to be listed: (a) a bank or financial institution whose interest constitutes a loan; (b) individuals whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust, or similar instrument; (c) individuals whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business; and (d) individuals who hold a share of stock that is less than 5 percent of the total shares in a publicly traded company. Labor and Employment – License applicants with more than 20 employees must attest that they have entered into a labor peace agreement (in which the employer agrees not to resist organizing attempts by its workers) and provide a copy to the Bureau of Cannabis Control. If no such agreement exists, the license applicant will have to provide a notarized statement indicating that the company will enter into a labor peace agreement. Surety Bond – License applicants must obtain a surety bond of $5,000, payable to the State as obligee, to ensure payment of cost incurred for the destruction of cannabis product necessitated by violation of the MAUCRSA or regulations. For a more complete summary of the regulations visit: www.dorsey.com/newsresources/publications/client-alerts/2017/11/ca-emergency-cannabis-regulations   Federal Law Warning: The United States federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule 1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” The United States Federal Drug Administration has not approved the sale of marijuana for any medical application. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act, which makes cannabis use and possession federally illegal.  

Tax reform efforts by Congress are ongoing, and the substance of the tax bills remains fluid. However, for foreign corporations with U.S. operations, there are some specific potential risks to consider, such as additional limitations on the deductibility of interest, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. Canadian corporations with U.S. operations may want to consider including a risk factor in their periodic reports or offering documents regarding the potential impact of U.S. tax reform. A sample risk factor (based on the current iteration of the tax bills) is below. As the tax bills are amended during the legislative process, the language of the risk factor may need to be edited prior to use. Possible U.S. federal income tax reform could adversely affect us. The new U.S. administration and certain members of the U.S. House of Representatives have stated that one of their top legislative priorities is significant reform of the Internal Revenue Code. Proposals by members of Congress have included, among other things, changes to U.S. federal tax rates, imposing significant additional limitations on the deductibility of interest, allowing for the expensing of capital expenditures, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. There is substantial uncertainty regarding both the timing and the details of any such tax reform. The impact of any potential tax reform on our business and on holders of our common shares is uncertain and could be adverse. [Prospective investors should consult their own tax advisors regarding potential changes in U.S. tax laws.]

There are a couple of recent developments that we would like to remind issuers to keep in mind for their upcoming annual reports. Foreign private issuers who prepare their financial statements in accordance with the International Financial Reporting Standards (“IFRS”) will be required to file their annual audited financial statements in XBRL format in respect of any period ending after December 15, 2017 (i.e., for a December 31 company, beginning with any Form 20-F or Form 40-F for the fiscal year ending December 31, 2017). The following is a link to a Dorsey blog posting about this topic from earlier this year: https://governancecomplianceinsider.com/compliance-with-xbrl-for-foreign-private-issuers-that-prepare-their-financial-statements-in-accordance-with-ifrs-required-beginning-with-annual-reports-for-fiscal-periods-ending-on-or-after-december-1/. Foreign private issuers who file their financial statements in accordance with IFRS should reach out to their EDGAR agents now to start the process as it takes a significant amount of time to prepare the template for an issuer’s first XBRL filing. While there is a 30-day grace period for first time filers that would permit an issuer to file the XBRL exhibit by amendment, issuers that wait until the last minute to start the process may miss the grace period deadline. In addition, foreign private issuers who file their Annual Reports on Form 20-F should also remember that they are required to include hyperlinks in the exhibit index to the underlying document. The links may be included in the exhibit list prior to the signature page. In those circumstances, issuers are no longer required to include an exhibit index after the signature page. The following is a link to a Dorsey article prepared on this topic from earlier this year: https://www.dorsey.com/newsresources/publications/client-alerts/2017/03/sec-adopts-use-of-exhibit-hyperlinks-in-filings.