Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.
Transportation infrastructure: A pillar of economic recovery
Like many other governments, the Government of Quebec decided to invest in infrastructure to help mitigate the impact of the COVID-19 pandemic and stimulate Quebec’s economy. A significant number of investments will be made in the transportation sector, and the government wants to accelerate the realisation of several previously announced transportation infrastructure projects in the greater Montréal area. This focus on construction as a way of speeding up the recovery from the crisis arises in a context where construction contractors’ and professionals’ interest in public contracts has fallen sharply. According to a recent study conducted by three Raymond Chabot Grant Thornton professionals1, mandated by six major players in the Quebec construction industry, this lack of interest in public contracts can be explained by a number of factors: poorly structured payment terms, unappealing contract clauses, issues related to the tender process, cumbersome contract management, and, as far as construction professionals are concerned, hourly rate ceilings set out in existing government regulations. The Quebec government is acutely aware of this decline in interest for public contracts and tabled an action plan for the construction industry in late March 2021 to address it. Four categories of measures are included in this action plan. First, the government has reiterated its desire to accelerate the realisation of a number of projects already included in the Québec Infrastructure Plan and to implement this plan more effectively. The Act respecting the acceleration of certain infrastructure projects introduced in June 2020 and adopted in December 2020, even before the action plan was tabled was a concrete example of the government’s intent. The other two categories of measures in the action plan aim to implement solutions to reduce the current labour shortages and to increase productivity in the construction industry. The Act respecting the acceleration of certain infrastructure projects covers approximately 180 projects, most of which are in the transportation, education and health and social services sectors. It focuses, in particular, on a number of transportation infrastructure projects in the greater Montréal area, such as the projects that will link the east, northeast and southwest of Montréal to the city’s downtown area by way of an electric public transit system (including the REM de l’Est and the first phase of the pink metro line), to improve access to the Port of Montréal, to rebuild the Île aux Tourtes Bridge, to build the Longueuil tramway, to extend the REM to Laval and to implement an express bus service in Laval. The Act focuses onfour main areas. First, if expropriation required to carry out a particular project, its procedure has been simplified. Second, in connection with compliance with environmental legislation provisions, the requirement of a certificate of authorization will waived for certain projects; for others, the BAPE project assessment procedure has been simplified. An expedited process to authorize the use of governmental property is provided for projects where such use is necessary. Lastly, city or municipal authorizations have been simplified for projects that require such an authorization. Extraordinary measures were required to deal with the unique situation caused by the COVID-19 pandemic. We applaud the Quebec government’s efforts to address the impacts of this pandemic. The chosen approach, however, is not without risks. Some critics have warned the government about the risks of possible collusion between tenderers, as collusion is thought to be more likely to occur in a context where projects are being accelerated. To mitigate this risk, the Actconfers on the Autorité des marchés publics more oversight functions, and in clear cases of collusion, the power to suspend the performance of contracts. Concerns have also been raised as to the quality of the constructed works, thereby underscoring the importance of maintaining and not ditching adequate public consultations. Finally, the Act addresses the issue of delays in payments by the government that was not only raised in the Raymond Chabot Grant Thornton report, but also during public consultations preceding the adoption of the Act. The Act extends the existing pilot project to facilitate payment to enterprises applicable to all projects covered by the Act. Hopefully, the Act respecting the acceleration of certain infrastructure projects, paired with the other measures announced in the government’s action plan for the construction industry, will make infrastructure a key component of Quebec’s economic recovery, as we finally start to see the end of the COVID-19 pandemic. A short version of this publication was published as an open letter in La Presse. Click here to read it. Plante, Nicolas, Jean-Philippe Brosseau and Marie-Pier Bernard, Consultation visant à évaluer le niveau d'intérêt des entrepreneurs et des professionnels envers les marchés publics [French Only], Montréal, Raymond Chabot Grant Thornton, April 2021, 85 p. (see in particular pages 17 to 34).
E-commerce: Some Laws and Rules You Should Be Aware of
Various ways of doing e-commerce E-commerce can take different forms. For the purposes of this article, we will refer to e-commerce where the contract of sale or of supply of services is concluded by electronic means, E-commerce will be said to be “direct” when the product or service is delivered electronically, such as in the online conclusion of a contract for a subscription to an online-only publication, and “indirect” when the item sold is tangible or the service is rendered otherwise than online. E-commerce can be conducted entirely online or in a hybrid manner, where the vendor operates both online and through brick-and-mortar stores. It is considered “closed” when it is between a relatively small number of participants who already have a contractual or professional relationship with each other. It can be conducted between a business and a consumer, in which case it is called “B2C,” or between a business and another business and is then known as “B2B.” E-commerce poses particular challenges for businesses and if these challenges are not properly addressed, they are likely to expose the business to additional liability. This means that e-commerce can be particularly risky for novice businesses that start to do carry out business electronically, without adequate preparation. For example, a merchant who transacts electronically will necessarily have to take direct possession of some of its customers’ personal data, such as their names, addresses and credit card numbers, or have an e-commerce service provider take indirect possession of it. The use of such personal data is subject to the provisions of privacy laws, and, given that the data is of great value to potential thieves or fraudsters, it must be protected. A merchant may also be the victim of fraudulent orders or payments made with stolen credit cards numbers. To better control its risks, a novice in e-commerce may be better off doing business with established e-commerce service providers such as Shopify, BigCommerce, Squarespace or GoDaddy, which have set up robust infrastructures for their customers. A corporation should nonetheless do its homework before choosing an e-commerce service provider. It should, for example, inquire about the terms and conditions of the service agreement to be entered into with the chosen provider, and, in particular, about the services offered (including how returns and chargebacks are handled), how the service provider protects its customers in the event of data theft or fraud, what fees are charged, and so forth. In all cases, whether or not a corporation does business with an e-commerce service provider, it should ensure that the information kept on its own servers and computers is limited to what is absolutely necessary. Likewise, once a transaction is completed, it should avoid, as far as possible, keeping personal data belonging to its customers, such as their names, addresses and credit card numbers. Moreover, a corporation that decides to engage in e-commerce must be aware of certain specific legal aspects relating first, to the particularities of e-commerce itself and second, to the fact that its customers may be located anywhere in the world. For the purposes of this article, we will focus on the rules generally applicable to all types of e-commerce. A future article will deal with the specific rules provided in the Consumer Protection Act (Quebec). Consumption tax The majority of governments impose a consumption tax on goods (and sometimes services) sold within their jurisdiction. Applicable consumption tax laws generally provide that businesses with a presence in a jurisdiction must collect applicable taxes and remit them to the competent tax authorities. For a corporation that is otherwise not present in a jurisdiction, the mere fact of selling goods in that jurisdiction is generally not sufficient to require registering with its tax authorities and collecting and remitting applicable taxes. However, the definition of what constitutes a sufficient presence to require business registration and the collection and remittance of consumption taxes varies from one jurisdiction to another. A corporation wanting to sell its goods and services electronically must therefore ensure that it is aware of the applicable consumption tax rules in the main jurisdictions where it will sell these goods or provide these services. Licences and permits Although it is generally not necessary for a manufacturer or seller to obtain a license, permit or other governmental authorization for the vast majority of goods typically sold online, they may be required before certain products, in particular medical or pharmaceutical products, can be sold online or otherwise, domestically or internationally. It is also important to note that a licence, permit or other authorization may not be required to sell goods in a jurisdiction while the sale of the same goods in another may require such license, permit or other authorization. Thus, if a merchant wants to sell its product in a jurisdiction where a permit, licence or other authorization is required, it will be required to obtain it before proceeding with any sales. In addition, in some territories, the sale of certain goods must necessarily be done through a State monopoly. For instance, such restrictions are still the norm in Canada for the sale of alcoholic beverages. For example, a resident of Ontario may not order alcoholic beverages directly online from a producer in another province and have them delivered to Ontario, which prevents a small-scale producer of alcoholic beverages in Quebec from selling its products online to Ontario customers, for delivery in Ontario. Shipping Not all goods can be shipped in the same way. Some must be specially packaged, and some may even not be shipped by regular means, such as Canada Post and major courier companies. For example, Canada Post requires that fish, game, meat, fruit, vegetables or other perishable products be properly prepared and meet certain other applicable requirements for mailing. Other products, such as objects classified as hazardous materials, may simply not be shipped by mail. To ship these products, it will be necessary to deal with a specialized courier service. Finally, Canadian laws prohibit the export of certain goods or require special permits for their export. In addition, merchants must ensure that the laws of the destination jurisdiction allow the goods shipped to be imported into that jurisdiction. Indeed, all countries either prohibit the import of certain goods into their jurisdiction or require the importer to obtain a permit or licence issued by their government. Age restrictions Under applicable laws and regulations, certain goods may only be sold to persons who have reached a certain age or may not be sold to children. These restrictions vary from jurisdiction to jurisdiction. For instance, in Quebec, one must be 18 years old to legally buy alcohol, while elsewhere in Canada the age is 19 and in the United States, 21. Merchants wishing to sell alcoholic beverages online must take these restrictions into account. The same applies to the sale of any other goods that are subject to age restrictions. PCI DSS compliance In 2006, the main credit card issuers, American Express, Discover Financial Services, JCB International, MasterCard and Visa formed the PCI Security Standards Council to standardize the rules and standards applicable to payments made with their credit cards. The council adopted a set of rules called “Payment Card Industry Data Security Standard,” better known by its acronym, PCI DSS. All merchants wishing to accept credit card payments, including direct online payments, must adhere to these rules. Any merchant, regardless of its size, wishing to process credit card payments on its website must also be PCI DSS compliant, unless it is doing business through a compliant payment service provider. The PCI DSS include the following 12 compliance requirements, which are grouped into six categories called “control objectives.” The following table, taken from the document entitled “Payment Card Industry (PCI) — Data Security Standard — Requirements and Security Assessment Procedures”1, provides a summary of these requirements. Control objectives PCI DSS conditions Build and Maintain a Secure Network and Systems 1. Install and maintain a firewall configuration to protect cardholder data 2. Do not use vendor-supplied defaults for system passwords and other security parameters Protect Cardholder Data 3. Protect stored cardholder data 4. Encrypt transmission of cardholder data over open, public networks Maintain a Vulnerability Management Program 5. Protect all systems against malware and regularly update anti-virus software or programs 6. Develop and maintain secure systems and applications Implement Strong Access Control Measures 7. Restrict access to cardholder data by business need to know 8. Identify and authenticate access to system components 9. Restrict physical access to cardholder data Regularly Monitor and Test Networks 10. Track and monitor all access to network resources and cardholder data 11. Regularly test security systems and processes Maintain an Information Security Policy 12. Maintain a policy that addresses information security for all personnel Although the PCI DSS are mandatory, only Visa and MasterCard require merchants and service providers that accept their cards to comply with these standards. However, a non-compliant corporation will nevertheless be held fully liable if fraud associated with theft of cardholder data occurs. In addition, should a security breach occur, all exposed merchants that are not PCI DSS compliant will be fined. It is up to merchants and service providers to achieve, demonstrate and maintain compliance through annual validations. Merchants may use the services of specialized service providers to help them comply with PCI DSS standards. Useful tools to ensure compliance are also available online for these purposes2. Should a merchant not wish to go through the PCI DSS compliance process, it may always use the services of a PCI DSS compliant payment service provider3. PCI Security Standards Council, Payment Card Industry (PCI) Data Security Standard Requirements and Security Assessment Procedures (Version 3.2.1, May 2018), online (PDF): Official website of the PCI Security Standards Council These can be found through a search using the keywords “PCI DSS compliance” or “PCI DSS conformity.” These can be found through a search using the keywords “PCI DSS Payment Gateway.”
What are the Duties and Responsibilities of Corporate Directors during the COVID-19 Crisis?
This publication was written in collaboration with André Laurin. By all accounts, the coronavirus pandemic and the measures implemented by the government have created a particularly difficult and delicate situation for almost all organizations. Despite this extraordinary situation, the general duties of directors (duty to comply with the law, duty of care and duty of loyalty or fiduciary duty) as required by the relevant laws of incorporation and by the Civil Code of Québec remain the same. However, in the current context, the directors of a legal person must greatly improve and intensify their thinking process and their actions, in order to ensure that they respect these duties and, in particular, to ensure that they act in the best interests of the legal person in question. According to the incorporation laws and the Civil Code of Québec, the board of directors is responsible for the management of the legal person or, as the case may be, for the supervision of the management performed by the persons to whom they have delegated their powers, namely the legal person’s management team. Duty of care For directors of legal persons, respecting their duty of care involves, now more than ever: an understanding of the challenges and risks associated with the impact of COVID-19 on the legal person’s business, clients, employees, suppliers, etc.; identifying the best management measures available, relying upon what they reasonably consider as being the best practices under the circumstances; attentively monitoring the implementation of the decisions made and making the appropriate adjustments as things evolve. On this subject, please note that the business corporations acts specify that directors are considered to have complied with their duty of care if their decisions rely in good faith on the reports of a person whose profession lends credibility to his statements. Duty of loyalty As well as a duty of care, the law also imposes a duty of loyalty, also referred to as a fiduciary duty, on directors of legal persons, which, among other things, requires them to act in the best interests of the legal person. The Supreme Court of Canada provided interpretations of the duty of loyalty in its 2008 BCE decision1 (many of these interpretations have been explicitly integrated into recent modifications to the Canada Business Corporations Act2): characterizing the interests of the legal person as being those of a responsible corporate citizen (or “good corporate citizen”); highlighting that directors pursuant to this duty of loyalty may consider the interests of the stakeholders, such as shareholders, employees, retired persons, creditors, consumers, governments and the environment, who may be affected by their decisions; specifying, however, that if the interests of the various stakeholders cannot be reconciled with the best interests of the legal person, the long-term best interests of such legal person viewed as an ongoing concern must prevail. In practice, in order to respect this duty, directors cannot disobey the law. They must also, in particular: ensure that the legal person takes necessary measures to respect the directives of public authorities; ensure that the legal person takes appropriate measures to protect the health of its employees, clients and suppliers; not tolerate practices that are generally detrimental to the legal person or that aim to fraudulently profit from the current crisis; prioritize measures that have the best chance of enabling a substantial part of the legal person’s business to survive and restart the majority of its operations once the situation returns to normal3. We believe that in the current circumstances, it would be consistent with best practices for directors to consider the interests of stakeholders. This involves identifying those interests and evaluating them reasonably and fairly, as well as evaluating whether they can be reconciled with the legal person’s best interests. It is clear that the current situation does not easily allow for reconciling, at least in the short term, the interests of all of stakeholders with the interests the legal person, which must prevail. Maintaining the conditions and relationships that existed before the crisis will be, in most cases, difficult to reconcile with the long-term best interests of the legal person, as defined and interpreted by the law and the courts. Directors therefore must arbitrate between these interests in a reasonable way, prioritizing the interests of the legal person, even if it is difficult to do so. This crisis, the government directives and their effects require leadership and creativity on the part of directors. As has been written by several observers, the current crisis will necessitate new approaches when the pandemic is over. In this endeavour, directors must be proactive and must help management find solutions to limit the negative effects of the crisis and plan on potential new ways for the carrying out of the legal person’s operations in the coming years. BCE Inc. v. 1976 Debentureholders,  3 S.C.R. 560, 2008 SCC 69. See subsection 122 (1.1) of the Canada Business Corporations Act, RSC 1985, c C-44. A very apropos article on the way directors can fulfill their duties of diligence and loyalty was posted on the Harvard Law School Forum on Corporate Governance on March 29, 2020: GREGORY, Holly J., GRAPSAS, Rebecca and HOLLAND, Claire, Ten Considerations for Boards of Directors, Cambridge, Harvard Law School Forum on Corporate Governance, online: https://corpgov.law.harvard.edu/2020/03/29/ten-considerations-for-boards-of-directors/.
Infrastructure Insider: What essential news and transactions occurred in the infrastructure market?
To download the Infrastructure Insider To download the Infrastructure Insider 1. Setting up the Autorité des marchés publics — Practical consequences on the call for tenders process in Quebec The Autorité des marchés financiers is now replaced by the AMP for the authorization to contract with a public body. This new body, which is responsible for overseeing all public contracts, also has the power to audit, investigate, order and recommend. 2. The latest news in the infrastructure market Among the highlights from the last few months: The production of more than 2.305 GW of renewable energy, confirmed in new contracts 3 major transportation projects are progressing rapidly in North America The Olympic Stadium Roof Rehabilitation Project is moving forward The PPP model is considered for the implementation of 2 new transportation projects A major bank ceases to finance coal, oil and gas energy projects To download the Infrastructure Insider
Positive advice of the European Securities and Markets Authority to the extension of the European passport to the managers of alternative investment funds in Canada
Martine Samuelian and Virginia Barat, JEANTET On July 18, 2016, the European Securities and Markets Authority (ESMA) issued a favourable advice for a future extension of the European passport concerning Alternative Investment Fund Managers (AIFMs)1 in Canada. This advice, which is based on objective criteria of cooperation and guarantee of overall protection level equal to that in force in European State members, constitutes the last stage prior to the effective extension of the European regime to Canada. 1. Assessment criteria The ESMA reviewed the individual situation of twelve non-European countries2, including Canada, to assess the guarantees offered by their respective local legislation against the requirements of the AIFM Directive (AIFMD). With respect to cooperation, the assessment criteria relate to: the possibilities for the exchange of information, on site visits, between the competent monitoring authorities respectively in Canada and those of the European State member; the fact that the non-European third country in which the Alternative Investment Fund (AIF) is established is not listed as a Non-Cooperative Country and Territory of the Financial Action Task Force (FATF); the existence of agreements for exchange of information in tax matters. Furthermore, sufficient guarantees (as defined by the AIFMD) must exist in respect of: investor protection, particularly in relation to complaint management, the safeguarding of assets, the prudential soundness of the depositary, the separation and management of conflicts of interests between the depositary function and that of alternative investment fund manager, the scope of monitoring by local regulatory authorities, compliance with the requirements of the AIFM Directive; market disruption as a result of a potential extension of the AIFM passport to a non-European country; competition, by the assessment of the level of reciprocity in respect of the marketing of European AIFs in a non-European third country; systemic risk management, particularly the mechanism for monitoring existing markets. 2. Final result of the assessment of Canada by ESMA The ESMA notes that the Canadian financial system had been assessed by the International Monetary Fund (IMF) in 2014, the IMF concluding that the international principles on securities regulations were “fully implemented” in Canada. In its advice dated July 18, 2016 respecting a possible extension of the AIFM passport to Canada, the ESMA thus confirms that there is no significant obstacle which may hinder the application of the passport to Canada with respect to the systemic risk, market disruption and obstacles to competition. Nevertheless, it notes differences between the Canadian regulations and the AIFMD. These differences particularly relate to the supervisory function that are imposed on the European AIF depositary (contrarily to the Canadian custodian which, pursuant to National Instrument 81-102 – Investment Funds (Regulation 81-102 respecting Investment Funds in the province of Quebec) (“NI 81-102”), is not subject to supervisory functions but rather only subject to obligations of custodianship of the portfolio assets). The ESMA also mentions the rules pertaining to the compensation of the manager (notably to align the interests of the manager and of the investors). There are various rules regarding compensation in Europe while NI 81-102 provides for very few rules in that regard (further, many investment funds in Canada are not subject to NI 81-102). However, the ESMA concludes that these differences between the Canadian regulatory framework and that of the AIFMD do not constitute a significant obstacle to the application of the European passport to Canada. Conclusion Where ESMA3 considers that “there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk, impeding the application of the passport to the marketing of non-EU AIFs by EU AIFMs in the Member States and the management and/or marketing of AIFs by non-EU AIFMs in the Member States in accordance with the rules set out in Article 35 and Articles 37 to 41, it shall issue positive advice in this regard.” It is this positive recommendation that the ESMA sent on July 18, 2016 to the European Commission (EC), to the European Parliament and Council, which should allow the EC, within three months, to define by delegated act the date of coming into force and the terms for the extension of the European passport to Canadian Alternative Investment Fund Managers to market these funds in EU countries. Includes notably private equity funds, venture capital funds and hedge funds. See our article entitled “Impact of the possible extension of the European passport regime on Canadian fund managers” published in the Lavery Capital newsletter, May 25, 2016. Australia, Bermuda, Canada, United States, Guernsey, Hong Kong, Cayman Islands, Isle of Man, Japan, Jersey, Singapore, Switzerland. See article 67(4) of the Directive 2011/61/UE on Alternative Investment Fund Managers.
Options available to Canadian managers under the European AIF marketing rules
Martine Samuelian and Virginia Barat, JEANTET This article is supplementing the May 2016 issue of the Lavery Capital newsletter, number 9, which discusses the potential extension of the European passport regime (the “Passport”) – established under EU Directive no. 2011/61/EU (the “Directive”) – to Canadian investment fund managers (“Canadian managers”). In that article, we described the conditions for the possible extension of the Passport regime to Canadian managers and, once so extended, the obligations such managers will have to meet to benefit from this regime. As we indicated in the previous article, the Directive gives every manager established in a third country, i.e. any country not a member of the European Union (the “EU”), the opportunity to market, in a country of the EU, units or shares of alternative investment funds (“AIFs”) established in the EU or in a third country, either under the Passport regime, or under article 42 of the Directive. Article 42 of the Directive already allows Canadian managers to market the AIFs that they manage, provided they comply with the so-called “private placement” mechanisms applicable in each country of the EU where they wish to market their AIFs. In this second article, our analysis will therefore focus more closely on the options currently available to Canadian managers under those private placement regimes. We will also consider the regime known as reverse solicitation. Firstly, we refer the reader to our discussion in the previous article on what constitutes an AIF for purposes of the Directive. 1. The European private placement mechanisms Until the Passport regime is extended to Canadian AIF managers, the only mechanism available to them is the national private placement regime of each EU country. These regimes in fact vary widely between the different EU countries. The conditions applicable to marketing, without a Passport, in EU-member countries, of AIF units or shares managed by managers established in third countries, are set out in article 42 of the Directive. Under this article, member countries “may allow non-EU AIF managers (AIFMs) to market to professional investors, in their territory only, units or shares of AIFs they manage.” However, the Directive lays down certain conditions for such marketing for the protection of European investors. Thus, managers from third countries must comply with two sets of conditions: the obligations provided for in the Directive, and the obligations specific to each member country having authorized such marketing. 1.1. Requirements under the Directive Under article 42 of the Directive, national private placements are open to managers in third countries if they meet the minimum requirements, as follows: compliance with the transparency requirements provided in articles 22, 23 and 24 of the Directive: obligation to draft an annual report for each AIF marketed in the EU (art. 22), obligation to provide adequate and periodic disclosure to the investors in the AIF (art. 23), and various reporting obligations to the competent authorities (art. 24); the existence of appropriate cooperation arrangements between the regulatory authorities of each member country of the EU where the marketing will take place and the authorities of the third country concerned (i.e. where the manager is established), but also the third country where the domicile of the AIF is located, if the AIF is domiciled in a country other than the domicile of its manager;1 also, the third country in which the manager is established must not be listed as a non-cooperative country or territory by the Financial Action Task Force on anti-money laundering and terrorist financing (FATF). 1.2. Requirements imposed by member countries The foregoing requirements are characterized as “minimum” by the Directive, with each member country being free to impose stricter rules. Thus, managers from third countries must also comply with the specific conditions regulating the private placement mechanisms of each of the member countries of the EU in which marketing of the AIF is being considered. 1.3. Specific requirements governing the French private placement regime The French legislation does not use the term “private placement” for the purposes contemplated by the Directive. Indeed, the concept of private placement already exists in French law, but refers to another type of transaction (the raising of capital from a small number of professional investors as opposed to a public offering). Nevertheless, a regime has in fact been adopted to allow managers from third countries to market AIFs in France. Article 42 of the Directive was transposed into French law by articles L. 214-24-1 and D. 214-32 of the French Code monétaire et financier, which set out the conditions for such marketing by managers from third countries both to professional and non-professional clients on French territory. a) Conditions applicable to professional clients:2 : The conditions for marketing derived from the Directive and transposed to and set out in article D. 214-32 of the French Code monétaire et financier are as follows: The manager must comply with the legislative and regulatory provisions applicable to management companies subject to the Directive, including: - it must have designated one or several entities to perform the functions of the depositary (set out in article L. 214-24-8 of the French Code monétaire et financier);- it must be in compliance with the other requirements laid down in the Directive for the management of the AIF. Appropriate cooperation arrangements for the purpose of systemic risk oversight and in line with international standards should exist between the French regulatory authority, namely the Autorité des marchés financiers (France) (the “AMF”), and the competent authorities of the EU-member country concerned, or of the third country where the AIF or its manager is established, to ensure the exchange of information allowing the AMF to fulfill its functions. The third country in which the manager or the AIF is established must not be on the list of non-cooperative countries or territories published by the FATF. In addition to these requirements, article L. 214-24-1 of the French Code monétaire et financier provides that managers from third countries may market AIFs established in an EU-member country, or in a third country, to professional clients provided they comply with a procedure for giving notice to the AMF, the terms and conditions of which are set out in article 421-13-1 of the Règlement général (General Regulation) of the AMF (the “AMFGR”). Thus, under that article, managers must submit an application to the AMF for prior authorization, whose conditions are provided for in an instruction from the AMF. Under this same article, the AMF has published an instruction entitled [translation] “Procedure for Marketing Units or Shares of AIFs”, setting out the process to be followed by managers from third countries.3 b) Conditions applicable to non-professional clients (“retail investors”): In addition to the requirements under article D. 214-32 of the French Code monétaire et financier, managers must also show that they are in compliance with the specific conditions provided in article 421-13 of the AMFGR. Firstly, this article states that managers from third countries may market AIFs, established in an EU-member country or in a third country, to non-professional clients provided they submit a prior application for authorization to the AMF, whose conditions are set out in an instruction from the AMF. Secondly, article 421-13 of the AMFGR provides that this authorization is subject to compliance with the following three additional conditions, which apply depending on whether the AIF is French or not: a system for the exchange of information and mutual assistance in the field of asset management on behalf of third parties has been set up between the AMF and the supervisory authority of the manager, on the one hand, as well as the supervisory authority of the AIF, on the other hand, where the AIF is not established in France; the AIF meets the conditions laid down in a mutual recognition agreement dealing with AIFs that can be marketed to retail investors, signed between the AMF and the supervisory authority of the AIF, where the AIF is not established in France; the manager meets the conditions provided for in a mutual recognition agreement establishing the specific requirements applicable to the authorization of managers of AIFs that can be marketed to retail investors, signed between the AMF and the supervisory authority of the manager. It should also be noted that in order to apply for authorization to engage in marketing to retail investors, one must either first have complied with the procedure for marketing to professional investors, or submit both applications jointly. 2. Reverse solicitation Since July 22, 2014, non-European fund managers who are active in the European market are no longer authorized to engage in solicitation of investors located in EU-member countries, unless they comply with the private placement regimes of each of the member countries where their investors reside. The only possible form of solicitation for a manager who does not comply with such a private placement regime or regimes is that commonly known as “reverse solicitation”, i.e., where the initial contact for investment purposes is made by the investor himself. In other words, the investment is made solely upon the investor’s initiative with no prior “marketing” by the manager. Indeed, the Directive defines “marketing” as “a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union.” Thus, in the case of “reverse solicitation”, since it is the investor who initiates discussions with the manager and not the converse, in fact, no marketing takes place within the meaning of the Directive. The difficulty nonetheless of resorting to reverse solicitation is in determining which, in fact, of the manager or the investor actually initiated the investment process. The regulatory authorities define the concept of reverse solicitation differently from country to country, but the definition is generally a narrow one. In France, the concept remains vague but, very recently,4 the AMF issued a warning against this practice. Reverse solicitation could therefore remain a possible option for Canadian managers (although its application would, in such case, be limited), even if the Autorité européenne des marchés financiers does decide to extend the Passport regime to them, as described in our article published in May 2016. Conclusion Given the delays before any potential extension of the European passport regime to Canadian managers, the national private placement regimes of each of the countries of the EU and the reverse solicitation regime may still be viable options, in the meantime, for Canadian managers seeking to market units or shares of AIFs in a country of the EU. In France, the list of non-European authorities with whom the Autorité des marchés financiers (France) has signed bilateral cooperation agreements, in Canada, includes: the Alberta Securities Commission, the Autorité des marchés financiers (Quebec), the British Columbia Securities Commission, the Ontario Securities Commission, and the Office of the Superintendent of Financial Institutions. Professional investors are defined as investors who, because of their nature or size, are considered by the French legislation to have the experience, knowledge and skills necessary to make their own investment decisions. See, in particular, articles 16 to 20 and schedule 3 of the aforesaid instruction. Guide de bonnes pratiques à destination des associations, fondations, fonds de dotation et autres petites institutions (Guide to Good Practices for Associations, Foundations, Endowment Funds and Other Small Institutions) (December 2015).
Impact of the possible extension of the European passport regime on Canadian fund managers
Martine Samuelian and Virginia Barat, JEANTET Since July 22, 2013, investment fund managers (“managers”) in Canada who wish to raise funds from investors located in member states of the European Union (the “EU”) have had to consider Directive 2011/61/EU1 (the “Directive”), dealing with managers of alternative investment funds (“AIFs”). This Directive was adopted following the G20 summits held in London in 2009 and Toronto in 2010, during which the G20 leaders agreed that hedge funds managers should be subject to oversight to ensure that they have properly implemented adequate risk management procedures. The primary aim of the Directive is to protect investors through the harmonization of the rules applicable to fund managers, thereby strengthening the appeal of the European financial centres. To streamline the market, the Directive also provides for the implementation of a European passport regime which enables European managers to market AIFs throughout the EU, provided they obtain authorization from an EU member state and comply with certain requirements set out in the Directive. Finally, the Directive also regulates the regime applicable to managers established in non-EU countries (“third countries”) in order to “ensure a level playing field between EU and non-EU AIFMs”.2 Indeed, to date, non-EU managers have been hampered by the complexity of marketing without the benefit of a passport, under a regime which is left to the discretion of each EU member state in which they wish to market their AIFs. This situation is set to change in the near future by eventually enabling non-EU managers to benefit from a similar regime to that applying to EU managers who are able to use the European passport regime. 1. Criteria for the qualification of AIFs Firstly, it is appropriate to explain the concept of AIF in order to define the scope of the Directive. It seems that the majority of venture capital funds, private equity funds and hedge funds created in Canada should qualify as AIFs under the Directive. Indeed, under article 4 of the Directive, an AIF3 consists of any entity which meets all of the following characteristics: the entity raises capital from a number of investors with a view to investing it for the benefit of those investors in accordance with an investment policy which is defined by the AIF or its management company; the entity is not an undertaking for collective investment in transferable securities (UCITS), that is, neither an investment company with variable capital (société d’investissement à capital variable (SICAV)) (i.e. a société anonyme (limited liability company) or société par actions simplifiée (simplified joint-stock company)) whose sole purpose is to manage a portfolio of financial instruments and deposits) nor a mutual fund (co-ownership of financial instruments and deposits, with no legal personality). In addition, an entity which has an investment policy governing the terms and conditions for managing pooled capital with a view to generating a collective return for the investors is equated with an AIF. Thus, based on the foregoing, even traditional private equity funds, which do not normally qualify as investment funds under the Québec Securities Act, will be considered to be AIFs under the Directive. The Directive provides for the eventual ability of any manager established in a third country, i.e. in a non-EU member state such as Canada, to market, in a country of the EU, units or shares of an AIF established in the EU or a third country, in accordance with two separate regimes: as of this date, managers from third countries cannot obtain authorization (registration) as an AIFM and cannot therefore invoke the application of the European passport regime. They are therefore subject to the terms of article 42 of the Directive which permits them to market the AIFs that they manage under the so-called “private placement” mechanisms applicable in each of the countries of the EU in which they wish to market their AIFs (we will review these mechanisms in greater detail in a subsequent newsletter); under article 67 of the Directive, the European Securities and Markets Authority (the “ESMA”) was supposed to decide, by July 22, 2015 at the latest, on the possible extension of the European passport regime to managers established in certain third countries (including Canada), in accordance with the terms of articles 37 to 41 of the Directive. However, as regards Canada, this opinion was postponed until June 30, 2016. This possible extension of the passport regime to managers established in non-EU countries will facilitate the marketing, within the EU, of the AIFs of both EU and third countries by managers from third countries. Therefore, it is appropriate to outline the solutions that will be offered to Canadian managers on the assumption that the European passport regime provided for in the Directive will be extended to them. 2. The future Passport regime 2.1. Possible extension of the European Passport regime to Canadian managers The European Passport regime (the “Passport”) now enables investment fund managers authorized by the regulatory authority of an EU-member state (i.e., managers established in a country of the EU) to create, manage and market funds throughout the EU either through the principle of freedom to provide services (FPS) or freedom of establishment (FE). Pursuant to articles 37 to 41 of the Directive, this regime ought potentially to have already been extended to the managers in 16 non-EU countries, including Canada, following the receipt of positive opinions from ESMA on the guarantees provided by the legislation in each of these countries. These opinions were expected by July 22, 2015 at the latest,4 but this deadline was extended by the European Commission to keep pace with the progress in ESMA’s work. Indeed, to date, ESMA has still not completed its analysis of the legislation of all these third countries. However, it already issued an opinion, on July 30, 2015, in favour of extending the Passport to managers located in the islands of Guernsey and Jersey. Switzerland has also received a favourable opinion, conditional upon the removal of certain obstacles. On the other hand, ESMA has reserved its opinion on managers located in the United States, Hong Kong and Singapore. Regarding Canada, on July 30, 2015, ESMA considered that the current investment fund regulations in Canada were more favourable to the extension of the Passport to this country than those in the United States. In a letter dated December 17, 2015, the European Commission asked ESMA to submit its opinion on Canada by no later than June 30, 2016. Other countries are also expecting to receive ESMA’s position by June 30, 2016, namely, the United States, Hong Kong, Singapore, Japan, the Isle of Man, the Cayman Islands, Bermuda and Australia. It should be noted that when ESMA renders a positive opinion, the European Commission is normally supposed to issue a delegated act within three months stipulating the date as of which the Passport regime will start applying to the managers in the relevant non-EU state. However, at this time, even with respect to countries that have already been the subject of a favourable opinion, the European Commission has not yet issued such a delegated act and has instead chosen to wait until a sufficient number of third countries have been evaluated. Therefore, as of this date, Canadian managers are not able to market AIF units or shares in countries of the EU using the Passport. However, they may soon have this opportunity since an answer is expected by next June 30. It is therefore important to outline the obligations that would apply to them in the event of the extension of the Passport. It should also be noted that, pending the issuance of the opinion by ESMA, and should it refuse to extend the Passport regime to Canadian managers, they still have the option of marketing their products either by creating a portfolio management company that is authorized in an EU-member state, or by resorting to the private placement regime (which will be dealt with in a subsequent issue of Lavery Capital). 2.2. Obligations applicable to Canadian managers in the event of the extension of the European Passport regime On the assumption that the Passport regime is extended to Canadian managers, they will be required to comply with all of the requirements set out in the Directive, the main terms of which are outlined below. a) Requirement to obtain authorization from the regulatory authority of a member state of reference: To begin, Canadian managers must first apply for authorization (registration) to the competent authority of an EU-member state (the “member state of reference”).5 Paragraph 4 of article 37 of the Directive sets out the criteria for determining this member state of reference (for example, the home member state of the AIF, or the member state in which marketing of the AIF is intended). This article also states that the manager must have a legal representative established in its member state of reference. The authorization process for non-EU managers is largely similar to that for EU managers. However, certain additional requirements have been introduced pertaining to the third country in which the manager and/or the AIF is established. Thus, the manager’s application for authorization must be submitted to the competent authority of the member state of reference, which verifies that the manager has properly complied with all the provisions of the Directive. The following are the main requirements for obtaining authorization: (i) comply with the minimum capital requirements, (ii) implement compensation policies and practices, (iii) adopt internal procedures for properly evaluating the assets held by the funds, (iv) appoint a depositary distinct from the manager whose role, among others, is to hold custody of the fund’s assets, and (v) comply with the information disclosure obligations owed to the investors and regulatory authorities. In addition, there must be appropriate cooperation arrangements between the competent authorities of the non-EU state where the manager is established, the competent authorities of the member state of reference, and those of the state where the AIF is domiciled (the AIF’s state of domicile), if this is different from the former two. Also, the country where the manager or AIF is established should not be listed as a non-cooperative country or territory by the Financial Action Task Force on anti-money laundering and terrorist financing (FATF). Furthermore, article 37 of the Directive states that the third country where the manager is established must have signed an agreement with the member state of reference which complies with article 26 of the OECD Model Tax Convention on Income and on Capital, and which ensures the effective exchange of information on tax matters.6 Once a Canadian manager obtains authorization, it will then be able to manage and market its European funds throughout the EU under the Passport regime after giving simple notice to each authority in each of the EU countries concerned. b) Conditions applying to the marketing in the EU, with a Passport, of AIFs managed by non-EU managers A distinction must be made between marketing to professional and nonprofessional clients. i. Marketing to professional clients (articles 39 and 40 of the Directive) In addition to complying with the requirements laid down by the Directive for managers established in EU member countries as outlined above, non-EU managers must also meet additional conditions, where the AIF is established in a third country,7 similar to those required for the granting of authorization, namely: the existence of appropriate cooperation arrangements between the competent authorities of the member state of reference and those of the state in which the AIF has its domicile; the country in which the manager is established must not be listed as a non-cooperative country or territory by the FATF; the third country in which the AIF is established must have signed an agreement with the member state of reference which complies with article 26 of the OECD Model Tax Convention on Income and on Capital, and which ensures the effective exchange of information on tax matters. These provisions were transposed to French law in article L. 214- 24-1 of the French Code monétaire et financier which requires that prior notice must be given to the Autorité des marchés financiers (France) (the “AMF”), and which refers to the provisions of the Règlement général (General Regulation) of the AMF (the “AMFGR”) for the proper procedure. No later than 20 business days after receipt of the complete notice, the AMF will inform the manager whether it can start marketing the AIF which was the subject of the notice in France. It should be noted that the AMF can only oppose the marketing of an AIF if the management of such AIF by the manager is not or would not be in compliance with the legislative and regulatory provisions applicable to French portfolio management companies. In the event of a favourable decision, the manager can start marketing the AIF in France as soon as the AMF has given notice to this effect. The AMF will also inform ESMA and the competent authorities of the country in which the AIF is established of the fact that the manager has been authorized to start marketing units or shares of the said AIF in France. ii. Marketing to non-professional clients (article 43 of the Directive): In addition to the obligations provided for in the Directive, non-EU managers benefiting from the Passport regime must also show they are in compliance with the specific conditions contained in article 421-13 of the AMFGR. Accordingly, they must comply with the same prior authorization procedure as required for marketing outside the Passport regime to non-professional clients (which will be dealt with in a subsequent Lavery Capital newsletter). Finally, we note that it should be possible for Canadian managers to be exempted from compliance with certain provisions of the Directive relating to the Passport regime, if they are able to prove: firstly, that it is impossible for them to comply both with a provision of the Directive and a mandatory provision of the Canadian regulations; secondly, that the Canadian regulations that they are in compliance with contain an equivalent provision to the European regulations offering the same level of protection to the investors of the fund. It should be mentioned that article 68 of the Directive provides for a transitional period of three years after the extension of the Passport regime to managers in third countries, during which the Passport regime and the national private placement regimes can coexist and be chosen freely and alternatively by managers from these third countries. At the end of this transitional period and therefore, in principle, once three years have passed, at the latest, after the Passport regime has presumably been extended to Canadian managers, ESMA will have to make a decision on the possibility of allowing non-EU managers to continue opting for the private placements mechanism despite the extension of the Passport regime. In this regard, ESMA will be submitting a new recommendation to the European Commission for purposes of assessing the potential elimination of the national regimes. Conclusion Canadian managers registered with one or the other of the Canadian Securities Administrators (including the Autorité des marchés financiers (Québec)) can hope that the Passport regime will be extended to them in the near future so that they can benefit from the advantages offered by this regime. In the meantime, because of the uncertainty in the timeframe in which a decision will be rendered by ESMA regarding Canada, Canadian managers wishing to market investment funds in EU-member countries have no other choice but to rely on the national private placement regimes of each of these countries, or opt for reverse solicitation where possible. Another Lavery Capital newsletter dealing with the option for Canadian managers of benefiting from these national private placement regimes or the rules of reverse solicitation will be published in the coming months. Better known by the acronym “AIFM”, or “AIFMD”, meaning “Alternative Investment Fund Managers Directive”. Whereas # 64 of the Directive. These provisions were transposed to article L. 214-24 of the French Code monétaire et financier. In this regard, we note that there are different types of AIFs under French law meeting these distinct rules, namely: - AIFs open to professional investors, - AIFs open to non-professional investors, - employee savings funds, - securitization entities, - other AIFs (forestry groups, etc.). See article 67 of the Directive. Registration with a Canadian regulatory authority, such as the Autorité des marchés financiers (Quebec), is not sufficient. Canada has concluded a tax treaty based on the OECD model convention (OECD) with each EU-member state. Article 40, subparagraph 2 of the Directive.
The Canada Public Sector Pension Investment Board launches a lawsuit against Saba Capital: Lessons for Fund managers when valuing illiquid securities
On September 25, 2015 the Public Sector Pension Investment Board (the “PSP Investment Board”) filed a lawsuit before the New York State Supreme Court against Saba Capital, the hedge fund managed by Boaz Weinstein (the former co-chief of the credit business at Deutsche Bank AG), for allegedly “manipulating the value” of certain of Saba Capital’s investments. The alleged manipulations occurred in the context of a request of PSP Investment Board for redemption of its entire interest in Saba Capital. This litigation highlights certain inherent risks for hedge fund and private equity fund managers when valuing certain types of illiquid securities. THE SABA CAPITAL LAWSUIT Saba Capital Offshore Fund, Ltd. (the “Saba Capital Fund”), a hedge fund created under the laws of the Cayman Islands, was formed in 2009. In February 2012 and June 2013, PSP Investment Board invested a total of US$500 million in Saba Capital Fund, making it the largest investor in the fund. Following a substantial decrease in the summer of 2014 in the net asset value (“NAV”) reported by Saba Capital Fund, in early 2015, PSP Investment Board decided to request a redemption of 100% of its interest in Saba Capital Fund as allowed by the organizational documents of Saba Capital Fund. At the time, PSP Investment Board’s interest in Saba Capital Fund represented approximately 55% of its NAV. In its complaint, PSP Investment Board alleges that in calculating the redemption price of PSP Investment Board’s interest in Saba Capital Fund, Saba Capital Management, L.P. (“Saba Capital Management”) marked-down inappropriately the value of fixed income securities issued by The McClatchy Company (NYSE:MNI) held by the Saba Capital Fund (the “MNI Bonds”). This mark-down had the effect of reducing the NAV of the fund as at March 31, 2015, resulting in a lower redemption price for PSP Investment Board’s Class A shares. According to PSP Investment Board’s complaint, the valuation method used by Saba Capital Management for the March 31, 2015 valuation differed substantially from the methods previously used. Further, according to PSP Investment Board less than one month later, Saba Capital reverted back to its previous valuation method, marking-up the value of the same MNI Bonds from their March 31, 2015 valuation. PSP Investment Board also alleges that Saba Capital Management made these abrupt changes in its valuation methods in order to artificially materially depress the value of the MNI Bonds in the calculation of the redemption price of PSP Investment Board’s interest in Saba Capital Fund. The MNI Bonds are illiquid securities. They are neither listed on a national securities exchange nor quoted on the NASDAQ, but are, however, traded over the counter (pink sheets). The lack of a liquid market for a particular type of security makes its valuation very difficult. In this situation, funds will typically rely on prices made readily available by external pricing sources, such as independent pricing services and dealer quotations from market makers or financial institutions regularly engaged in the practice of trading or pricing that security. In its proceedings before the New York State Supreme Court, PSP Investment Board states that in order to value the MNI Bonds, Saba Capital Management had always relied on the pricing provided by these external pricing sources. However, a different method was used in connection with the redemption of the Class A shares of PSP Investment Board. In this latter case, it rather initiated a bids-wanted-in-competition (“BWIC”) process, whereby the MNI Bonds held by Saba Capital Fund were listed with various securities dealers who, in turn, were allowed to makes various bids on them. This process led to depressed bids reflecting a significant liquidity discount from the values previously arrived at under the valuation methods previously used by Saba Capital Fund. The bids obtained by Saba Capital Management were used to value its MNI Bonds, although Saba Capital Fund did not accept any of these bids. As a result, according to PSP Investment Board, the MNI Bonds that were previously valued to 60 cents on the dollar at the end of the 1st quarter of 2015 were valued at 31 cents on the dollar as of March 31, 2015. As a result, the NAV of PSP Investment Board’s Class A shares was reduced (the amount of the reduction is not disclosed in the proceedings) and so was the redemption price paid to it. PSP Investment Board seeks compensatory damages from defendants for an amount to be determined at trial. LESSONS FOR PRIVATE HEDGE FUNDS AND PRIVATE EQUITY FUNDS MANAGERS TARGETING CONSISTENCY IN THE VALUATION METHODS PRIOR TO REDEMPTIONS Hedge funds’ organizational documents will generally require the manager to perform periodic, usually monthly or, in certain instances, quarterly, valuations of the fund’s assets and liabilities. Managers of open-ended private equity funds will usually also be required to produce quarterly valuations of their fund’s assets and liabilities. A fund’s manager’s compensation will typically be structured so as to foster an alignment of the manager’s interest with the interest of all other investors through the carried interest or performance fee it is entitled to receive. However, in the context of a contemplated redemption of interests in the fund, the interest of the manager and the redeeming partner may significantly differ in that while the redeeming partner’s interest is to maximize its short-term redemption price, the manager’s interest will be to maximize its long-term carried interest or performance fee. The required valuation of the fund’s assets and liabilities to determine the price payable to the redeeming partner will have a direct impact on the proceeds received by the redeeming partner, as was the case with PSP Investment Board. This conflict and, consequently, the risk of ensuing litigation is exacerbated by the fact that the valuation of the fund’s assets and liabilities is carried out as a going concern, without the fund being actually liquidated. For this reason, fund managers should try to avoid, as much as possible, using a method of valuation for the purpose of determining the price to be paid to the redeeming investors that is different from the method ordinarily used in the past. It will be difficult for a redeeming investor to assert that the manager has been manipulating the valuation of the fund’s assets for the purpose of reducing the redemption price of its interest if the valuation method used by the manager has been used consistently and reported periodically to the investors without any issue. A liquidity shock caused by the sudden request for redemption of an important investor or other particular circumstances (such as the acquisition of newly-created instruments) may, however, prevent the manager, in order for it to be fair and equitable to all investors, to continue using the valuation methods employed in the past. In cases where conditions supporting previous valuations have changed, the manager should engage with investors to ensure consensus on the fairest valuation method in the new circumstances. This may however not be possible or even desirable after receipt of a redemption request as the immediate pecuniary interest of the redeeming investors may make a consensus impossible to achieve. ADOPTING A SEPARATE VALUATION POLICY The valuation methods intended to be followed by the manager of an hedge fund or private equity fund will typically be described in organizational documents and the offering or private placement memoranda of such hedge fund or private equity fund. However, they will generally be limited to a high level overview of how the manager intends to actually proceed to value the fund’s assets and liabilities. While this level of flexibility is welcomed by managers to prevent having to amend organizational or offering documents frequently (which can involve significant costs), it can lead to conflicts such as the one between PSP Investment Board and Saba Capital Management, especially if the procedure followed by the manager varies over time with respect to a certain type of assets. Having a formal valuation policy in place (separate from the organizational and offering documents so that it can be amended without requiring significant costs for the fund and the investors) providing for a more detailed description of the valuation procedures followed by the manager would therefore be a best practice for hedge fund and open-ended private equity fund managers. This valuation policy should remain available for review by existing and potential investors. The disclosure on valuation contained in the offering documents should cross-reference the policy to ensure that all investors are aware of its existence. It should further specify that a copy can be obtained upon request. The manager should also review the valuation policy periodically to ensure that it still adequately reflects the process currently followed by the manager. The valuation policy should describe in details the valuation methods that the manager will use for each type of instrument or securities. The policy should also state the external pricing sources intended to be used by the manager, if any, the hierarchy between these pricing sources and, if possible, the accepted tolerance levels for any discrepancies between different pricing sources. It should further clarify how exceptions, if any, will be managed. Moreover, if the manager intends to use certain unusual types of valuation practices, they should be specifically provided in the organizational documents. For example, in order to prevent potential lawsuits from the fund’s investors, if the manager intends to “side-pocket” certain illiquid or hard to value securities, it should be allowed do so only if its use is specifically authorized by the fund’s organizational documents. A simple reference to “side-pocketing” in the valuation policy may not offer a sufficient protection. CONCLUSION The above recommendations are only a few of the best practices that can be put in place in connection with the valuation of illiquid securities and, in any event, do not guarantee that investors will not challenge, by litigation if necessary, the manager’s valuation of these securities. Indeed, in PSP Investment Board’s case, Saba Capital Management filed a motion to dismiss alleging that “[T]he valuation process PSP describes in its complaint is entirely consistent with the governing documents—indeed, they required it under the circumstances”. As the case was referred to mandatory mediation by the New York Supreme Court in early October 2015, Saba Capital’s motion to dismiss has not yet been decided. Nevertheless, following the above recommendations should decrease the risk of litigation relating to the valuation of certain type of securities and offer significant protection in case of litigation.
The corporate director: Questions and answers
This 52-page bulletin answers in a practical and simple manner respecting the legal framweork forty-three (43) questions administrators ask or should ask themselves. It is a very useful tool to promote good governance generating value. Click here to view the complete publication
What precautions should a proposed director take prior to accepting to act as a corporate director? / What are the duties of a member of a board of directors?
This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin). 3. WHAT PRECAUTIONS SHOULD A PROPOSED DIRECTOR TAKE PRIOR TO ACCEPTING TO ACT AS A CORPORATE DIRECTOR? A person who is invited or wishes to become a director should clearly make some prior verifications, including: his interest for the organization and its objectives; the requirements of the position as to time and efforts and his availability in that respect; the actual possibility to make a significant contribution, therefore resulting in added value for the legal person; the quality of incumbent directors, who will be his colleagues if he accepts to act as a director; the receptivity of management respecting sound governance and the help provided by management to directors to enable them to discharge their duties and play their full role; the quality of the existing corporate governance; the financial health of the legal person; the existence of actual or threatened significant proceedings against the legal person; the compliance by the organization with laws and contracts; the existence of adequate directors’ and officers’ liability insurance coverage; the availability of an indemnification undertaking by the legal person in favour of the director; the existence of recent director resignations and the reason thereof; the proportionality of compensation relative to the liability risks (mainly in the case of reporting issuers).Preliminary discussions with the chief executive officer, the chairman of the board and some current and former directors may be helpful in obtaining adequate confirmations in respect of many of these items. However, these discussions should be completed by reviewing documents such as the financial statements, court records, minutes...).A person who is an officer, director or employee of a corporation must also ensure that the new office as director is acceptable to the first corporation. The new office may in fact contravene a policy of the corporation, the contract between the individual and the corporation or the interest of the corporation.The risks to reputation related to accepting to act as director with some legal persons are not to be neglected either. We have recently seen that the reputation of high quality persons who had accepted on a pro bono basis to act as directors of not-for-profit organizations suffered as a result. The media, politicians and even auditors general sometimes draw quick, ill-founded conclusions as to the proper discharge of their duties by directors.4. WHAT ARE THE DUTIES OF A MEMBER OF A BOARD OF DIRECTORS?Incorporating statutes, particularly the Canada Business Corporations Act1 and the Business Corporations Act2 (Quebec), as well as the Civil Code of Québec3 all stipulate two general duties which directors are subject to, that is, the duty of care and the duty of loyalty. The Canada Business Corporations Act stipulates these duties as follows:“122. (1) [Duty of care of directors and officers] Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”In addition to these general duties, a director is also subject to many statutory obligations or presumptions of liability or guilt under various statutes, particularly for unpaid salaries and remittance of deductions at source and GST/QST. It is important for directors to be aware of all the statutory obligations and presumptions and know how to recognize them, ensure that the legal person takes appropriate measures in this respect and that the board supervises such measures. _________________________________________1 Canada Business Corporations Act, R.S.C. 1985, c. C-44.2 Business Corporations Act, C.Q.L.R., c. S-31.1 art. 119.3 Civil Code of Québec, L.R.Q., c. C-1991, articles 321 and following.
New Anti-Spam Law: Better Act Quickly
In December 2010, the federal Parliament passed the Act to Promote the Efficiency and Adaptability of the Canadian Economy by Regulating Certain Activities1 that Discourage Reliance on Electronic Means of Carrying out Commercial Activities, better known as the “Canada’s Anti Spam Legislation” (CASL or the “Act”). The purpose of the Act is mainly to protect Canadian consumers and businesses against unsolicited spam messages, false or misleading commercial representations, malicious software and other electronic threats. It is scheduled to come into force on July 1, 2014. The new regime is based on a opt-in mechanism rather than through exclusion. As such, after July 1st, sending a commercial electronic message will be prohibited unless the recipient has consented to receiving it. Canadian businesses using electronic mail or social networks to inform and solicit customers will therefore have to review their practices in order to comply with the law, failing which they will be liable to administrative penalties and civil suits. However, transition measures are provided to give businesses time to adjust their practices.The definition of “commercial electronic message” within the meaning of the Act is wide and covers all electronic messages, including text messages (commonly called SMS), sound, vocal or visual messages in respect of which it is reasonable to conclude that their purpose is to encourage participation in a commercial activity. For instance, an electronic message which promotes an offer to purchase, sell or rent a product or a service constitutes a commercial electronic message covered under the Act. Such is also the case for an electronic message promoting a person as a purchaser, seller or renter of a product or service or involved in the areas of business, investment or gaming.Since non commercial activities are not covered under the Act, it must be noted that political parties, charitable organizations and corporations conducting market studies or surveys are generally not covered under the Act, unless their electronic messages are related to the sale or promotion of a product.Furthermore, the Act provides for many exceptions, such as messages sent between persons having a personal or family relationship or commercial electronic messages responding to a recipient who requested information on prices or estimates for the provision or delivery of goods, products or services.For the time being, the prohibition does not cover verbal communications by phone, which are currently governed by the Telecommunications Act2, particularly through the National Do Not Call List. However, this exception may be revoked by order-in-council if the government deems it appropriate.EXPRESS OR IMPLIED CONSENT OF THE RECIPIENTThe required consent for sending a commercial electronic message may be express or implied. The situations where the sender of such a message may rely on the implied consent of the recipient are set out in the Act. For instance, the Act provides that there is implied consent where the sender and the recipient have or had an ongoing business relationship within the two years preceding the date the message is sent. The same applies where the recipient asked the sender about products, goods or services during a 6-month period preceding the date of the message.The consent of the recipient is also implied if he or she has conspicuously published his or her electronic address without adding a statement whereby the recipient does not wish to receive unsolicited commercial electronic messages, to the extent that the message is relevant to the recipient’s employment or business or functions in such business.The consent is also implied where the recipient communicated his or her electronic address to the sender without indicating that he or she does not wish to receive unsolicited commercial electronic messages, again to the extent that the message is relevant to the recipient’s employment or business or functions in such business.Lastly, the existence of private relationships between the sender and the recipient within the two-year period immediately before the day on which the message is sent also allows for inferring the implied consent of the recipient to a commercial electronic message being sent in the cases provided in the Act.In all other cases where the Act does allow for inferring an implied consent, the express consent of the recipient is required for sending a commercial electronic message. Such consent is not presumed and the burden of proof lies with the sender.To obtain this consent, the sender must set out clearly and simply the purposes for which the consent is being sought and also the information that identifies the person seeking consent (or if the person is seeking consent on behalf of another person, information that identifies that other person). The scope of information which is required to be provided to identify the person seeking consent is set out in the regulations.It is important to note that after July 1st, a request for consent will in itself constitute a commercial electronic message. It will therefore not be possible to request such consent using an electronic mean, subject to certain exceptions.MECHANISM FOR WITHDRAWING CONSENT AND FORM OF COMMERCIAL ELECTRONIC MESSAGESThe Act provides that any person sending a commercial electronic message to another person must implement an unsubscribe mechanism allowing the recipient to withdraw his or her consent to receive commercial electronic messages from that sender. The sender must allow the recipient to express his or her will by electronic means, either by electronic mail or through a website, without cost and at any time. The sender must give effect to any withdrawal within a 10-day period.The description of this withdrawal mechanism must appear in the commercial electronic message which must, in addition, include information that identifies the person who sends the message or, if the message is sent on behalf of another person, the information that identifies the person who sends the message and the person on whose behalf it is sent. The commercial electronic message must also indicate the postal address and either the phone number to reach a service agent or a voicemail service, or the electronic mail address or the address of the website of the person who sends the message or, if applicable, the address of the website of the person on whose behalf it is sent.If it is practically impossible to include this information and the withdrawal mechanism in the commercial electronic message, they may be posted on an easily accessible web page without charge to the recipient through a link indicated clearly and prominently in the message.ADMINISTRATIVE PENALTIES AND PRIVATE RIGHT OF ACTIONThe Act provides for severe penalties for persons who fail to comply with its provisions. Contraveners are liable to administrative monetary penalties of up to $1,000,000 in the case of an individual, and $10,000,000 in the case of any other person.Furthermore, the existence of a private right of action against the sender of an unsolicited commercial electronic message constitutes a crucial point of this new regime. The Act allows any person suffering a loss or harm as a result of non-compliance with the provisions of the Act by the sender of a commercial electronic message to apply to a court of competent jurisdiction for a judgment ordering the sender to pay him or her the amount of such damages, plus liquidated damages of up to $1,000,000. For instance, the recipients of a spam message who suffer damages after relying on misleading information found therein may institute a class action to pursue their common claims on the basis of this new Act.CONCLUSIONUnsolicited electronic messages are a nuisance which warrant action. Canada is the only G8 jurisdiction which had not yet taken specific measures to regulate or prohibit spam messages. However, the obligation to obtain the consent of the recipients of commercial electronic messages, who in most cases have nothing to do with the spam messages, will constitute a difficult and costly burden for many businesses.It is therefore important that businesses review their electronic mailing lists to ensure that they comply with the provisions of the Act, namely, that the persons whose names are included have given their express consent to receive commercial electronic messages from the businesses or that the businesses can rely on the implied consent of such persons, failing which the businesses will have to obtain adequate consents. Again, contravening businesses will be liable to substantial penalties and claims which may exponentially increase through class actions involving hundreds if not thousands of recipients who allege that they suffered damages._________________________________________1 S.C. 2010, c. 23.2 S.C. 1993, c. 38.
Is a director required to be a shareholder or member of the legal person? / Who is eligible to become a director?
This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin).1. IS A DIRECTOR REQUIRED TO BE A SHAREHOLDER OR MEMBER OF THE LEGAL PERSON?Subject to the following, the answer to this question is no.However, the governing statute, articles of incorporation, internal or administrative by-law or unanimous shareholder agreement may stipulate specific eligibility conditions.For example, as a non-exhaustive list of examples: the incorporating statute or the by-law of a not-for-profit organization (NFPO), professional corporation or some other legal persons may stipulate requirements as to membership, residence, citizenship, etc.; the articles of incorporation of a corporation or a unanimous shareholder agreement may confer on a shareholder the authority to appoint one or several directors or provide that a director must also be a shareholder.2. WHO IS ELIGIBLE TO BECOME A DIRECTOR?The eligibility conditions are mainly found either in the Civil Code of Québec1 for legal persons governed by it or in the incorporating statute of the legal person, as completed in both cases by the internal or administrative by-law duly adopted by the legal person or a unanimous shareholder agreement.Under all relevant statutes, a director must be a natural person. A legal person cannot be a member of the board of directors of another legal person.Article 327 of the Civil Code of Québec2 stipulates that “Minors, persons of full age under tutorship or curatorship, bankrupts and persons prohibited by the court from holding such office” are disqualified for office as directors. Exclusions which are similar in whole or in part are to be found in most incorporating statutes of legal persons.Most incorporating statutes do not require directors to be shareholders or, in the case of a NFPO, a member of the legal person.Moreover, some incorporating statutes prescribe eligibility conditions, such as citizenship or residence.Some statutes other than the incorporating statutes or some regulations or decisions of regulatory authorities establish prohibitions from acting as a director generally or, in other circumstances, from acting as a director of specific legal persons.In another publication entitled “May a director be removed by the board of directors during his term of office?”3 we discussed some additional eligibility conditions which may be prescribed by the internal or administrative by-law. Some legal person may, for example, wish to impose as an eligibility condition the absence of criminal record to avoid having to file an application with the court under article 329 of the Civil Code of Québec4 to obtain the removal of a director who has been found guilty of an offence pursuant to the Criminal Code.Failure to meet the conditions of eligibility and the loss of eligibility should, in our opinion, result in most cases and for most purposes, in the automatic disqualification of a natural person as a director.Any person who is invited to become a director of a legal person and the legal person itself must therefore verify that the applicable eligibility conditions are met. _________________________________________1 Civil Code of Québec, CQLR, c. C-1991.2 Civil Code of Québec, CQLR, c. C-1991.3 Lavery website - Publications - André Laurin - “The Corporate Director’s Q & A”, “20. May a director be removed by the board during his term of office?”.4 Civil Code of Québec, CQLR, c. C-1991.
Registration Requirements of Venture Capital and Private Equity Fund Managers in Canada: A Favourable Regulatory Framework
LAVERY: A LEADER IN MONTREAL IN THE PRIVATE EQUITY, VENTURE CAPITAL AND INVESTMENT MANAGEMENT INDUSTRY Creating and setting up private equity and venture capital funds are complex initiatives requiring specialized legal resources. There are very few law firms offering such services in Quebec. Lavery has developed enviable expertise in this industry by working closely with promoters to set up such structures in Canada and, in some cases, the United States and Europe, in conjunction with local firms. Through Lavery’s strong record of achievements, the firm sets itself apart in the legal services market by actively supporting promoters, managers, investors, businesses and other partners involved in the various stages of the implementation and deployment of private equity and venture capital initiatives. The U.S. House of Representatives passed a bill in December 2013 that would exempt many private equity fund advisers in the United States from the provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that requires advisers with more than $150 million in assets under management to register with the U.S. Securities and Exchange Commission (the “SEC”). The bill’s passage into law remains, however, uncertain. As a result, most private equity fund advisers in the United States remain under the oversight of the SEC.Canada, in contrast, remains one of the very few remaining jurisdictions where most private equity fund managers do not have to register with any securities regulator. When the Canadian Securities Administrators (the “CSA”) proposed the adoption of National Instrument 31-103 – Registration Requirements in 2007, many feared that this would change. A record number of comments made on the original draft in response to such changes led the regulators to clarify, in the final version of the policy adopted along with the new instrument, that the intention of the CSA was not to subject typical private equity funds to such requirements.REGISTRATION AS A PORTFOLIO MANAGERThe CSA indicates that venture capital and private equity funds (and their general partners and managers) (collectively, the “VCs”) are not required to register as a portfolio manager if the advice provided to the fund (and indirectly to the GUILLAUME LAVOIE [email protected] ANDRÉ VAUTOUR [email protected] investors of the fund) in connection with the purchase and sale of securities is incidental to their active management of the fund’s investments (notably as a result of the VC having representatives sitting on the boards of directors of the portfolio companies in which they invest) and if the VCs do not solicit clients on the basis of their securities advice. It must be also clear that the expertise of the manager of the VC is sought in connection with the management of the portfolio companies and that its remuneration is connected to such management and not to any securities advice it might be considered to be giving to the fund and its investors.REGISTRATION AS AN INVESTMENT FUND MANAGERVCs are typically not considered to be mutual funds because of the fact that their units or shares are not redeemable on demand. VCs that have redemption provisions in their organizational documents will typically have a series of important redemption restrictions that prevent them from being considered redeemable on demand. The CSA generally takes the view that where an investment fund allows its investors to redeem the securities they own in the fund less frequently than once a year, the fund does not provide an “on demand” redemption feature.Further, VCs are generally involved in the management of the companies they invest in. Such involvement can take the form of a seat on a board of directors or a direct involvement in the material management decisions or in the appointment of managers of such companies. As a result, they will not be considered to be “non-redeemable investment funds” as defined in Canadian securities legislation.A VC that is neither a mutual fund nor a non-redeemable investment fund will not be considered to be an “investment fund” for the purposes of Canadian securities legislation. Consequently, its manager will typically not have to register as an investment fund manager.REGISTRATION AS A DEALERWith regards to the dealer registration requirement, one must determine if the manager can be considered to be “in the business” of trading in securities. “Trading in securities” includes the sale of securities of the fund but also the simple act of soliciting potential investors on behalf of the VC. Determining factors in making such assessment will be (i) whether the manager is carrying on the activity of trading securities with repetition, regularity or continuity, (ii) whether it is being, or expected to be, remunerated or compensated for such activity and (iii) whether it is directly or indirectly soliciting investors. Based on these factors, most VCs will not normally be considered to be in the business of trading in securities.VCs solicit investors to invest in the fund, but this will typically be done for a limited period of time, without repetition, regularity or continuity and will normally be incidental to the involvement of the manager in the management of the portfolio companies. Further, the manager will typically not receive any compensation for its fund raising. Its compensation will rather relate to the management of the portfolio investments themselves in the form of a management fee and of a carried interest in the profits generated by these investments. These factors will normally allow the VC to be able to consider that it is not in the business of trading in securities.VCs that have a dedicated sales/marketing team or that have formed funds with open commitment and investment periods that regularly raise capital and invest such capital in portfolio companies should, however, be careful as to whether this reality may cause them to be characterized as being in the business of trading in securities. Given the ambiguity of the law in this respect and that such determination is fact-specific, some institutional investors may require that the promoter of the fund registers as an exempt-market dealer even when an argument can be made that no registration is required.In the context of the foregoing regulatory framework and in light of the growing Canadian private equity market, Canada can be an interesting market for private equity fund managers to launch a first venture capital or private equity fund without having to immediately bear those expenses mandated by the registration process with a securities regulatory authority.