Canada Cross-Border Transactions

SEC rules prohibit taking “any action” to impede an individual from communicating directly with the SEC about a possible securities law violation, including by enforcing, or threatening to enforce, a confidentiality agreement. Previously, the SEC has brought enforcement actions against, and secured large monetary settlements from, companies whose internal agreements and policies included broad confidentiality provisions that would restrict an employee from voluntarily being a whistleblower to the SEC. This month, the SEC announced a new round of settlements with seven different U.S. listed companies, who agreed to pay the SEC penalties totaling $3 million for violating these rules. What is notable about this new round of enforcement is that in each case, the SEC objected to language in internal employment agreements, separation agreements, and releases by the company that required the employee or former employee to waive their right to a monetary whistleblower award. The SEC took the position that restricting an employee’s receipt of a whistleblower award is itself an impermissible impediment on whistleblowing, even if the employee is otherwise permitted to be a whistleblower. In only three of the seven cases did the SEC also identify language that directly prohibited whistleblowing. Companies subject to U.S. jurisdiction should be aware of this SEC position, and should consider including in their agreements and policies, including employment agreements, separation agreements, and releases, language designed to ensure that personnel are both permitted to directly communicate with the SEC as a whistleblower and to receive a whistleblower award if applicable.

Earlier this summer, the District of Columbia Court of Appeals issued a decision affirming the lower court’s decision that the Mining Law of 1872 does not impose a limit on the number of mill sites that a mining claimant may use for ancillary purposes.[1] Section 42 of the Mining Law of 1872 provides that the holder of a mining claim may also locate nearby non-mineral-bearing-land for the purposes of “mining” and “milling” activities.[2] In 1997, the Department of the Interior then-Solicitor John Leshy issued a legal opinion concluding that Section 42 prohibits a claim holder from locating more than a total of five acres of mill site land with respect to any one mining claim.[3] The Solicitor’s Office issued a new opinion in 2003, rejecting the conclusion of the 1997 Opinion, and the Bureau of Land Management (“BLM”) promulgated a new rule to that effect.[4] The 2003 rule specified that while a claim holder may not exceed a total area of five acres for a mill site, there is no limit to the number of mill sites that may be located, provided that each site is “reasonably necessary” for “efficient and reasonably compact milling or mining operations.”[5] A number of environmental plaintiffs challenged the new rule in 2009, asserting that BLM’s interpretation of Section 42 of the Mining Law was unreasonable. Key mining industry participants, including National Mining Association, American Exploration and Mining Association, Alaska Miner Association intervened to defend the 2003 rule.  In 2020, the Federal District Court for the District of Columbia ruled against the plaintiffs, and they appealed. In its June decision, the majority opinion of the appellate court rejected the 1997 Opinion, finding instead that the 2003 rule was consistent with the history of the administration of the law.[6] The majority opinion also rejected claims that BLM failed to comply with the National Environmental Policy Act when adopting the 2003 mill site regulation.[7] The decision from the D.C. Circuit Court upholding the 2003 rule is an important decision for the mining industry in the United States because the prior rule had the potential to significantly reduce the ability of mining companies to develop mineral deposits on Federal lands by limiting the number of mill site claims that could be located and used for surface and process facilities. [1] Earthworks, et al. v. Dep’t of Interior, 105 F.4th 449 (D.C. Cir. 2024). [2] 30 U.S.C. §42(a). [3] U.S. Dep’t of the Interior, Office of the Solicitor, Limitations on Patenting Millsites under the Mining Law of 1872, M-36988 (Nov. 7, 1997) (1997 Opinion). [4] U.S. Dep’t of the Interior, Office of the Solicitor, Mill Site Location and Patenting under the 1872 Mining Law, M-37010 (Oct. 7, 2003); 68 Fed. Reg. 61,046, 61,054 (Oct. 24, 2003). [5] 68 Fed. Reg. 61,046, 61,070-61,071 (Oct. 24, 2003). [6] Earthworks, et al. v. Dep’t of Interior, 105 F.4th 449 at 16 (D.C. Cir. 2024). [7] Id. at 23.

As discussed in our January 10, 2024 webinar, new SEC rules require resource extraction issuers that file reports with the SEC to file a Form SD within 270 days after each fiscal year end to report their payments to the U.S. federal government and foreign governments. An issuer’s initial filing deadline in 2024 will therefore depend upon its fiscal year end, with reports from many companies already due, and others’ deadlines fast approaching. For an issuer with a December 31 fiscal year end, the Form SD will be due no later than September 26, 2024. In informal discussions, the SEC’s staff has provided our firm with welcome guidance on a number of related questions, including: If using the SEC’s standards under Rule 13q-1 and Form SD, an issuer has no reportable payments for a particular fiscal year, the issuer will not be required to file a Form SD with the SEC for that fiscal year, but may voluntarily elect to do so. If an issuer is subject to Canada’s Extractive Sector Transparency Measures Act (ESTMA) with respect to a particular fiscal year, but applying ESTMA rules is not required to file an ESTMA report in Canada for that fiscal year, the issuer will also not be required to file a Form SD with the SEC for that fiscal year, but may voluntarily elect to do so.  While this guidance was limited to ESTMA, we anticipate the staff may take a similar position with respect to the other SEC approved alternative reporting regimes. An issuer is permitted to file a Form SD with reports from more than one reporting regime. For example, if an issuer has some projects subject to ESTMA reporting and other projects that are not subject to ESTMA or any other accepted alternate reporting regime, the issuer can file a Form SD with ESTMA reports for certain of its projects and apply the SEC’s reporting standards to the remainder of its projects. If the issuer chooses to use this approach, the type of reporting for each of its projects, or entity-level payments, should be clearly identified in the Form SD. If an issuer has a 100% owned subsidiary that is subject to the United Kingdom’s Reports on Payments to Government Regulations 2024 and files thereunder a report for the issuer’s fiscal year that covers all applicable projects of the issuer, the issuer should be able to rely on Form SD’s alternative reporting regime, attaching the UK report of the subsidiary and explaining these facts in the body of the Form SD. While this guidance was limited to the UK regime, we anticipate the staff may take a similar position with respect to the other SEC approved alternative reporting regimes.

Way back in 2017, one of our earliest posts discussed the legal and financial risks to both the issuer and the finder if an issuer pays a finder’s fee in connection with a sale of securities in the United States, and the person receiving the fee is not a U.S. registered broker-dealer. In many cases, this type of fee violates U.S. securities laws. However, this continues to occur from time to time, especially in deals where U.S. counsel is not consulted prior to the closing. For a brief summary of the risks of paying this type of finder’s fee, and an example of one issuer that declared bankruptcy as a result, read on. The Securities and Exchange Commission (SEC) has taken the position that a person receiving a finder’s fee with respect to a purchase of securities by a U.S. investor will, in many cases, be treated as having acted as a “broker” within the meaning of federal securities laws.[1] In those cases, the unregistered finder has violated the federal securities laws. Similarly, the issuer may have violated the federal securities laws (under an agency theory, or otherwise) by having paid such fee. In many states, state regulators take similar positions under applicable state law. The filing of post-closing notices of sale with the SEC and the states disclosing such a fee may result in federal and state regulatory enforcement actions to seek injunctions, monetary penalties or criminal sanctions against the issuer and/or finder. Perhaps more importantly, the payment of the fee may provide the relevant investor(s) with a right to rescind their investment, and create uncertainty about whether and the extent to which such rights should be reflected in the issuer’s financial statements. Such disclosures may adversely affect the issuer’s ability to raise funds, and may further increase the risk of such a rescission claim or regulatory enforcement action. One real life example is the case of Neogenix Oncology Inc. In a series of financings, Neogenix paid finder’s fees to unregistered persons.  In Q4 2011, the SEC initiated a regulatory inquiry.  Neogenix was soon dealing both with the SEC and its auditors.  Neogenix disclosed that its auditors were unwilling to review or audit Neogenix’s financial statements because of their uncertainty as to how to reflect any possible rescission rights. Without that review and audit, Neogenix was unable to timely complete and file with the SEC its quarterly report for Q3 2011, its annual report for FY 2011, and its quarterly reports for 2012. As a result, Neogenix was also unable to raise additional funds.  Several directors and employees departed, and in July 2012 Neogenix filed for bankruptcy protection under Chapter 11. [1] This blog post does not address the exemption available under federal securities law to “M&A brokers” with respect to certain transactions involving a transfer of control of a private company.    

Early last year, the U.S. Federal Trade Commission (“FTC”) proposed a rule banning non-compete agreements nationwide. Yesterday, the FTC voted 3 to 2 in favor of adopting this rule. The FTC’s newly adopted rule bars for-profit employers from entering into new non-compete agreements with employees, including highly compensated and executive employees. Existing non-compete agreements with senior executives are still enforceable under the new rule, but employers must, by the rule’s effective date, notify all other employees with non-compete agreements that those agreements are unenforceable. The rule defines a “senior executive” as a worker who was in a policy-making position and earns at least $151,164 per year. The rule does not apply to agreements between franchisees and franchisors, nor does it apply to non-profit entities. The rule also includes an exception for non-compete agreements entered into in the context of the sale of a business. The FTC’s rule requires employers to provide workers who are subject to covered non-compete clauses “with clear and conspicuous notice … that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” The FTC’s rule also includes a form of notice that satisfies this requirement. FTC’s final rule defines “non-compete clause” broadly to include “a term or condition of employment that … functions to prevent a worker” from seeking or accepting work from a different entity after the conclusion of employment. Thus, a provision that would function to keep an employee from finding a new job, such as a very broad non-solicitation clause, might run afoul of the new FTC rule. For example, a non-solicitation clause that prohibits a former employee from contacting any customer or potential customer may encompass practically every consumer in the industry and thus effectively bar the employee from obtaining a new job in the industry. The FTC’s final rule does not specifically address terms such as stay bonuses or retention agreements. However, in its comments to its final rule, the FTC did state that agreements for deferred compensation and other structured payments may be permissible as long as they do not fall within the definition of a non-compete clause—that is, so long as they do not function to prevent employees from seeking or accepting a new job. A substantial signing bonus that an employee would have to pay back if they were to accept work with a competitor might function like a non-compete clause if it were so large that it would effectively be impossible for the employee to repay. While the FTC’s rule might sound like the death knell for most non-compete agreements in the U.S., there is a long road ahead for the FTC’s rule. While the FTC’s rule is set to become effective 120 days after it is published in the U.S. Federal Register, at least two lawsuits have already been filed to block the rule, including one filed by the U.S. Chamber of Commerce. The U.S. Chamber of Commerce’s suit seeks to block the implementation of the rule while an ultimate decision on the rule’s merits is pending. Among other arguments, the U.S. Chamber of Commerce’s asserts that the FTC rule violates the “major questions doctrine” under which the U.S. Supreme Court has asserted that an administrative agency, such as the FTC, must have “clear congressional authorization” before adopting a rule that implicates a matter of major political or economic significance. During the COVID-19 pandemic, the U.S. Supreme Court relied upon the major questions doctrine to strike down the U.S. Occupational Safety and Health Administration’s emergency temporary standard requiring large employers to vaccinate their employees or require them to wear masks and test for COVID-19. Even if the FTC’s ban is ultimately struck down, many U.S. states have been separately restricting or outlawing non-compete agreements altogether. California has long outlawed non-compete agreements and has more recently passed laws declaring non-compete agreements void in California, even if they were entered into outside of California and the employee performed services for the enforcing employer entirely outside California. In addition to California, Minnesota, North Dakota, and Oklahoma have banned non-compete agreements entirely. New York’s legislature recently passed a bill that would outlaw non-compete agreements, which New York’s governor vetoed but with a suggestion that she would sign a bill focused on low wage workers. Colorado has passed a law limiting non-compete agreements to employees deemed “highly compensated” and now requires that employers provide notice to candidates for employment before they accept a job offer and to current employees at least 14 days before the effective date of any additional consideration for the non-compete provision. The District of Columbia recently passed law creating a similar pay threshold that non-compete must meet and Washington State has had such income requirements in place for over three years. Several states have also included wage thresholds below which non-compete agreements are not enforceable. These states include Colorado, Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, Washington, and Washington D.C. Such thresholds are often tied to a cost of living index such that the threshold will increase each year. Many of the states that have restricted the use of non-compete agreements, but still allow them under certain circumstances, have created penalties for employers who unsuccessfully attempt to enforce non-compete agreements. Washington, for example, has passed a law requiring the employer to pay the employee’s attorney fees if the non-compete agreement is deemed partially or entirely invalid by the court. Other states have even passed laws creating criminal sanctions for employers who try to enforce unenforceable non-compete agreements. Even in states that have not passed laws restricting non-compete agreements, courts have grown increasingly skeptical of employers’ need for such protections. The general rule in states without non-compete legislation is that non-compete agreements are only enforceable if the employer can show a compelling need for them. Such need usually involves a need to protect sensitive confidential information and trade secrets, or a need to protect customer goodwill in situations where employees develop close relationships with customers. U.S. courts are, on average, becoming more skeptical of employers arguments that they need such protections except in cases where employees have access to truly sensitive information, or could do real damage by going to a competitor and taking substantial business with them. While the fate of the FTC’s rule remains uncertain, employers should be prepared to come into compliance by the rule’s effective date (120 days after the rule is published in the federal register, barring any judicial injunction). For example, companies should be prepared to issue the required notices to workers that their non-compete agreements will not be enforced and are unenforceable by the rule’s effective date. Companies should also consider that their workers may not understand the status of their non-compete agreements or the unfolding process by which the enforceability of those agreements is being determined. Workers may believe that their non-compete agreements are already unenforceable, and begin to act accordingly. Companies with existing non-compete agreements should have plans in place for handling such situations, including how they communicate their intent to enforce or not enforce their existing non-compete agreements while the fate of the FTC rule is up in the air. There are no one size fits all solutions to such tough questions, and companies should consult with counsel experienced with navigating non-compete agreements to come up with a plan that fits the company’s particular needs and goals.

In wrongful termination cases in the U.S., the primary source of liability for employers is an employee’s alleged lost wages. Under U.S. law, an employee who is terminated for a discriminatory or a retaliatory reason is entitled to recover the amount of wages the employee would have earned had the employee not been wrongfully terminated. In a normal labor market, an employee might be able to argue that it will take him or her six months or even a year to find a new job, and the employer, therefore, should pay the employee six months' to a year's worth of lost wages. In a tight labor market, however, it is much harder for employees to argue that they are entitled to lost wages when they can easily go across the street and get a new job—perhaps even a higher paying job. Plaintiffs in wrongful termination cases have a duty to mitigate their damages by trying to find a new job that pays as well as the one they lost. As a result, we have seen a significant decrease in the number of wrongful termination cases being brought during the recent tight labor market. Instead, many of the new cases being filed against employers are wage and hour class actions, such as cases involving failure to pay minimum wage or overtime, where the plaintiff does not have a duty to mitigate their lost wages. Given the increased difficulty plaintiffs are facing in bringing wrongful termination cases, employers may be tempted to let their guard down on their performance management practices or employment documentation. While employers might get away with doing so in the very near term, the events of last several years suggest that employers that do so may find themselves facing a wave of wrongful termination litigation. Most employers’ performance management systems were highly disrupted during COVID when employers were forced on a moment’s notice to start managing their employees remotely. The regular channels and methods for providing formal documented performance feedback stopped. Further into the pandemic, the U.S. government began issuing so called Paycheck Protection Program loans, which were forgivable if the employer maintained its headcount. Essentially, the U.S. government began paying companies to not fire anyone. This created a huge incentive for employers to not fire poorly performing employees. As the economy began to open up, employers began to find it very difficult to find employees to fill open positions. This extremely tight labor market made employers desperate for headcount and very fearful of losing employees. Many employers adopted the calculus that it was better to have a poorly performing employee rather than none at all. As a result, many poorly performing employees were given passing grades on evaluations. These events have led to evaluation grade inflation and a population of employees whose performance may be far lower than their evaluations would suggest. Such employees are apt to see a lawyer when they are terminated for performance reasons, despite having had at least decent reviews. This flood of wrongful termination litigation has been held at bay by a continued strong labor market. But as soon as that labor market softens and employees cannot simply go across the street to find a new job, those employees will be able and motivated to sue for substantial lost wages. Now is the time for employers to re-evaluate their performance management and documentation practices to make sure that they can justify any performance based terminations they may need to make. Reigning in evaluation grade inflation and reinstituting performance management best practices is difficult and requires careful planning. Employers with U.S. based employees should reach out to their employment counsel now, before a flood of wrongful termination cases begins.

Dorsey’s Mining & Metals practice area and three mining partners, the most lawyers of any U.S. law firm, received a Band 1 recognition by Chambers and Partners in its Chambers Global 2024. The recognized attorneys from Dorsey’s Canada Cross-Border practice group include Kimberley Anderson, Chris Doerksen and Wells Parker – just in time for the Prospectors & Developers Association of Canada (PDAC) Convention! The Chambers Global Guide ranks the top lawyers and law firms in over 200 jurisdictions across the world. Each ranking is based on Chambers’ in-depth research conducted by its dedicated and experienced team of researchers. It annually collects hundreds of thousands of responses from clients. Learn more about Dorsey’s Mining practice group.

For an employee who is a U.S. taxpayer, both the employer and the employee are liable for a portion of Social Security taxes and Medicare taxes (collectively referred to as “FICA” taxes) on the employee’s compensation. Employers are liable for withholding and remitting both the employer and the employee portions of FICA taxes, which typically occurs at the time the compensation is received by the employee, which his known as the “General Timing Rule.” However, when dealing with awards of nonqualified deferred compensation (“NQDC”) to U.S. taxpayers, a Special Timing Rule (outlined in Treas. Reg. §31.3121(v)(2)-1) may apply.  Under the Special Timing Rule, FICA taxes are owed when the employee becomes vested in the NQDC, whether or not the NQDC is actually paid at that time. If a Canadian company is unaware of this Special Timing Rule, it could result in the employer withholding and reporting incorrect FICA amounts as well as the employee overpaying FICA taxes. What is Nonqualified Deferred Compensation? A NQDC arrangement is really any kind of compensation that has been earned by an employee in one tax year, but that the employee will not receive until a later tax year. This could be as simple as a bonus earned in one year and payable in a later year, or as complex as equity-based awards, such as Restricted Stock Units, phantom stock, or a supplemental executive retirement plan (to name a few). However, this Special Timing Rule generally does not apply to stock options. What is the Special Timing Rule for FICA? As mentioned above, under the Special Timing Rule, FICA taxes are due on NQDC on the later of: (1) when the employee provides the related services, or (2) when the compensation is no longer subject to a substantial risk of forfeiture (i.e., when the amounts vest). In other words, FICA taxes could be due before the NQDC is actually paid to the employee. For a typical employer contribution-based cash plan or phantom stock plan, this rule means that FICA taxes will be due in the year when any deferred compensation (and any earnings) vest. This can become complex to track when there is an extended vesting schedule to ensure that the appropriate amount of FICA taxes are paid by the employer and employee when each tranche of the compensation (and earnings) vest. For a plan where employees are deferring salary or bonus, FICA taxes will be due in the year when the employee makes the deferral. To help ease some of the administrative complexity, there is a “rule of administrative convenience.”  The rule allows FICA taxes to be withheld and remitted as late as December 31 of the same tax year, with the amount of wages subject to FICA adjusted to reflect the value on December 31 (or an earlier date if payment is made earlier) after interest or earnings on the benefit are applied. This rule can be helpful if amounts under a plan vest at numerous times during a year. There are additional rules that can be utilized to help manage this complex issue. What are the Consequences of not Complying with the Special Timing Rule? The Special Timing Rule, although a bit administratively complex, is typically advantageous to the recipient of the NQDC. If FICA taxes are paid when the NQDC vests (but is not paid out), then FICA taxes will not be owed when the NQDC is paid (to avoid double taxation). This generally means that any interest or accruals on the amounts that have already been subject to FICA taxes, will not be subject to FICA taxes at all. On the flip side, the Special Timing Rule can occasionally be disadvantageous if NQDC is never paid, as regulations do not allow employees to recover FICA taxes paid on NQDC amounts that are never received. Unfortunately, many employers forget, or are not aware of the requirement, to include NQDC in income for FICA tax purposes at the time of contribution or vesting. If FICA taxes are not paid in accordance with the Special Timing Rule, the issue may be corrected if caught in time to amend withholding returns; otherwise, FICA taxes are due when payments are actually (or constructively) received and become taxable for income tax purposes (likely resulting in more FICA taxes due overall). The correction process is complex, as it involves determining open tax years for which correction is available, amending prior returns and issuing corrected W-2s. Therefore, employers should be careful to understand their nonqualified deferred compensation plans, and how tax withholding works under those plans.

As discussed in our eUpdate published today, the SEC on January 24, 2024 adopted final rules amending the disclosure and registration requirements applicable to special purpose acquisition companies (SPACs) and shell companies that register or file reports with the SEC. These amendments impose significant new requirements on SPAC IPOs, as well as de-SPAC and similar transactions for SEC reporting shell companies. The new SEC rules do not apply to Canadian capital pool companies, SPACs, or shell companies unless they register or file reports with the SEC. As part of the final rule package, the SEC also amended its guidance for all SEC reporting companies on how to make economic projections in SEC filings, as well as issuing guidance on when a SPAC may be considered an investment company. We will address this Investment Company Act guidance in a further post.

On January 24, 2024, the SEC issued new guidance on when a special purpose acquisition company (SPAC) may run afoul of the U.S. Investment Company Act (the Act).  While this guidance was directed at SPACs that register or file reports with the SEC, it is also instructive for other types of shell companies, including Canadian capital pool companies, SPACs, and similar shell companies that do not file reports with the SEC. Why Care About the U.S. Investment Company Act? If a Canadian issuer is deemed to be an investment company that has failed to register under the Act, it is prohibited from engaging in any business in the U.S. or offering or selling any securities in the U.S., its contracts may be voidable to the extent they are subject to U.S. jurisdiction, commonly used securities exemptions such as Regulation S are unavailable to it, and if it violates the Act, persons associated with it may be held criminally liable. Registration is also not generally an option for Canadian issuers. The Act prohibits a non-U.S. entity from registering as an investment company absent special SEC action. Registration is also impractical for an operating company or a company that intends to become an operating company upon completing an acquisition. Accordingly, avoiding investment company status is important for any Canadian issuer that intends to have any connection with the United States. What is an Investment Company? Subject to certain exceptions, the Investment Company Act defines an investment company to include any issuer which: is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities; is engaged or proposes to engage in the business of issuing face-amount certificates of the installment type, or has been engaged in such business and has any such certificate outstanding; or is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. federal government securities and cash items) on an unconsolidated basis. Operating companies typically avoid investment company status by having a different core business purpose – such as mining, drug development, or making widgets – and by having significant non-cash, non-investment assets. Shell companies that do not have significant non-cash, non-investment assets, and that do not have an operational business, are at greater risk of being deemed an investment company. What to Do? To avoid investment company status, capital pool companies, SPACs, and similar shell companies that have, or intend to have, any connection with the United States should review the SEC’s new guidance* and structure their assets and operations accordingly.  Assuming that the company has the intention to become an operating company as soon as possible through an acquisition of an operating company whose business would become the company’s primary business, it would be prudent for the company to: Describe itself and its intentions in a manner consistent with this purpose. Ensure that the company’s directors, officers, and employees are actively engaged and focused on seeking and completing the transaction that would result in the company being an operating company. Complete its acquisition as quickly as possible. In its new guidance, the SEC stated that “while the duration of a SPAC is not the sole determinant of its status under the Investment Company Act, a SPAC’s activities may become more difficult to distinguish from those of an investment company the longer the SPAC takes to achieve its stated business purpose.” The SEC noted that an exemption under the Act for a transient investment company can be available for up to 12 months, and that escrow accounts of certain blank check companies with a term limited to 18 months were not regulated under the Act, before saying that a “SPAC that operates beyond these timelines raises concerns that the SPAC may be an investment company, and these concerns increase as the departure from these timelines lengthen.” The SEC acknowledged that exchange listing rules contemplate potentially longer SPAC lifespans but said that those rules were adopted for a different regulatory purpose and do not address investment company status concerns. Pending the completion of its acquisition, avoid holding or investing in any assets that would be deemed “investment securities” under the Investment Company Act. This term is quite broad, and includes equity and debt securities, most government bonds, and several common types of term deposits.  For this reason, shell companies should pay very close attention to the types of accounts they create with their banks, and the types of investments they hold pending their transformative acquisition. Cash and U.S. federal government securities are not “investment securities”. Pending the completion of the acquisition, minimize the amount of time spent on managing investments, and do not emphasize to investors the quality or return on such investments. Ensure that its acquisition target is not an investment company, and that it will be an operating company and not an investment company upon completion of the acquisition. The analysis of whether a company is an investment company can be quite complex. The above is only an overview of factors that could be relevant for determining whether a capital pool company, SPAC, or similar shell company is an investment company. Companies should seek legal advice to determine their own status. *The SEC’s new guidance was included in the SEC’s final release adopting new rules for SPACs, beginning on page 360. See Final rule: Special Purpose Acquisition Companies, Shell Companies, and Projections (sec.gov)

On January 1, 2024, new direct reporting requirements to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Department of the Treasury, became effective – known as the Corporate Transparency Act (the “CTA”). Who must file? The CTA, and the regulations promulgated thereunder, apply to corporations, limited liability companies, limited partnerships and similar legal entities either formed in the United States (a “Domestic Reporting Company”) or formed outside the United States but registered to do business in the United States (a “Foreign Reporting Company”). Such entities must identify their natural person beneficial owners and “company applicants” (i.e. the person(s) responsible for the formation or registration of the entity), and disclose certain personal information with respect to each of them. Persons and businesses covered under these new compliance obligations will be confronted with potentially difficult initial reporting and subsequent reporting requirements. Beneficial ownership information (“BOI”) will be reported directly to the federal government. Civil and criminal penalties may apply for non-compliance. Required BOI for each beneficial owner will include, amongst other things, full name, residential address, date of birth, and a photo page of a non-expired U.S. government ID (or, in absence, a foreign passport photo page). When will filing obligations start? For non-exempt Domestic Reporting Companies and Foreign Reporting Companies formed on and after January 1, 2024, an initial report must be filed within 90 days following corporate formation or registration. For non-exempt entities formed or registered prior to January 1, 2024, entities must file an initial report by January 1, 2025. After making an initial report, all entities will be required to file amended reports within 30 days after becoming aware that a previous filing was inaccurate or requires updating (for example, in connection with a change in beneficial ownership). Information disclosed to FinCEN will not be publicly available, but may be obtained by federal agencies engaged in national security, intelligence, or law enforcement activity, certain federal regulators, and certain state, local and tribal law enforcement agencies. Further, certain foreign officials, and certain financial institutions and banks subject to customer due diligence requirements, may also be granted access via submission of a request through a U.S. federal government agency. Who is exempt from the new rules? The intent of the CTA is to collect and compile BOI for legal entities whose ownership and management is not otherwise available. While the CTA provides 23 exemptions to the reporting requirements, most of the available exemptions are limited to regulated entities (e.g., banks and healthcare companies) or large companies with a substantial employee, revenue and operating presence in the United States. Note that most Canadian issuers that conduct business in the U.S. typically do so through a structure that utilizes one or more U.S. subsidiaries. Under this structure, the parent itself typically does not conduct business in the United States and is not qualified to do business in the United States. Accordingly, under this most common structure, the parent would not be a Foreign Reporting Person and therefore would not be subject to the CTA directly. However, its U.S. subsidiaries would need to file if they are not themselves exempt. For most Canadian issuers, the three key exemptions most likely to be relevant are (1) “securities reporting issuers,” (2) “large operating company” and (3) “subsidiary of certain exempt entities.” Securities Reporting Issuer A “Securities Reporting Issuer” is an entity that (i) has a class of securities registered under the U.S. Securities Exchange Act of 1934, as amended (the “34 Act”), and (ii) has a current reporting obligation under the 34 Act. All Canadian issuers that file annual reports on forms 40-F, 20-F and 10-K, including all issuers cross-listed on Nasdaq, NYSE or NYSE American, will qualify as Securities Reporting Issuers. Issuers that are traded on the over-the-counter market in the U.S. (i.e. the OTCQX, OTCQB or OTC Pink) and rely upon an exemption from registration under the 34 Act will not qualify as a Securities Reporting Issuer.           Large Operating Company A “Large Operating Company” is an entity that, in simplified form, has more than 20 full-time employees in the U.S., has gross revenues in excess of $5 million in the U.S. and has a physical operating presence in the U.S. In the typical cross-border structure described above, the Canadian parent would not have a physical presence in the U.S., so the top-tier U.S. subsidiary (if there are multiple entities) would likely be the entity for which the analysis would be applicable. Note that each portion of this test, other than revenue (which may be computed on a consolidated basis), is determined on a separate entity-by-entity basis. Accordingly, some U.S. subsidiaries of Canadian parent companies may be exempt under this test, while others may not be. For some companies, we anticipate that a reevaluation of their subsidiary structure might provide an opportunity to qualify for an exemption from the CTA. Subsidiary of Certain Exempt Entities A Subsidiary of Certain Exempt Entities is any entity that is “controlled or wholly owned, directly or indirectly, by one or more entities” that meet one of the other categories of exemptions under the CTA (although not the exemptions for money services businesses and certain pooled investment vehicles). Notable, however, that FinCEN declined to define “control” in determining the applicability of the subsidiary exemption (although appeared to suggest in its Final Rule that control through majority ownership may not be sufficient for this exemption to apply). All Canadian issuers that are cross-listed in the U.S. will  themselves be eligible for an exemption from the CTA reporting requirements. In addition, their direct and indirect wholly-owned subsidiaries will also be exempt. Less than majority-owned subsidiaries may also be exempt, depending on the circumstances. Other issuers with operations in the U.S. may also be eligible for an exemption, though careful analysis will likely be necessary. Please refer to our long-form update on the CTA HERE. Our attorneys are ready to assist with any questions you may have.

In the Fall of 2023, the Interagency Working Group on Mining Laws, Regulations, and Permitting (“IWG”) released its final report containing recommendations to reform how mining is conducted on public lands (the “Final Report”). The IWG was formed to convene experts across various agencies and receive input from the public in order to assess the adequacy of the existing regulatory scheme governing domestic hardrock mining, and to determine whether changes to that scheme were necessary to satisfy the goals set forth in the E.O. 14017 100-Day reviews. 87 Fed. Reg. 18811 (Mar. 31, 2022). The Final Report included a range of recommendations, including those which would require legislative action by Congress, those which would require Federal agencies to promulgate or amend existing regulations, and other recommendations that may be achieved by updating Federal or agency policies. Some of the key recommendations which substantially differ from current mining regulation include the following: Leasing System - The Final Report recommends replacing the current mine claim location system with a leasing system by amending the General Mining Law of 1872 to permanently end patenting of Federal lands, and developing for use a leasing system that would provide access to hardrock minerals on public lands. Id. at 99. Additionally, the IWG recommended that once a leasing system is established, a programmatic Environmental Impact Statement to incorporate mining into land use planning processes be prepared and adopted for the eleven contiguous Western states and Alaska. Id. at 97. Royalties - The Final Report recommends that Congress enact a royalty for hardrock mineral production from Federal lands, with a minimum of four percent and a maximum of eight percent. Id. at 104. The IWG is not taking a stance on whether such a royalty would apply only to new mines, expansions on existing mines, or on all new and existing mines and operations. Dirt Tax - In addition to the federal royalty approach to obtain fair compensation for taxpayers for those minerals extracted from Federal lands, the Final Report also includes a recommendation for Congress to adopt a 7-cent per ton fee on “material displaced by hardrock mining.” Id. at 105. The IWG notes that this fee could be applied in conjunction with other means of funding reclamation for abandoned mine lands. Permitting Reform - The Final Report recommends the project management process used by the Bureau of Land Management (“BLM”) Nevada state office be updated to reflect the additional recommendations made in the Final Report, and be made standard procedure nationwide for both BLM and the United States Forest Service (“USFS”). Id. at 107. The project management process as currently implemented is designed to provide consistency and coordination between the project proponent and State and Federal agencies and Tribes, and includes a number of Memorandums of Understanding between BLM and EPA, and BLM and USFS to coordinate the development of NEPA documents for proposed mining operations. Id. at 58. The Final Report also recommends the development of project schedules to be made public, and standardizing the information by BLM and USFS which is necessary for exploration plans, mine plans, and relevant permit applications and NEPA submissions. Id. at 108. Of note, the IWG does not address the additional directives for permitting reform as stated in the Infrastructure Investment and Jobs Act or in the Fiscal Responsibility Act. We will be monitoring Congressional action and regulatory proposals on the IWG recommendations and will report on further material developments.   If you have any questions or would like to learn more about the Final Report, please contact us.

As noted in our post of December 18, Canadian companies with U.S. subsidiaries have been gearing up all year to file beneficial ownership reports with FinCEN pursuant to the Corporate Transparency Act, in advance of a January 1, 2025 deadline for entities that were formed prior to 2024. Many have already completed their analysis and either determined that they qualify for an exemption or filed their initial beneficial ownership reports. On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against enforcement of the January 1, 2025 deadline. On December 23, 2024, the motions panel of the United States Court of Appeals for the Fifth Circuit granted the government’s emergency motion and stayed the temporary nationwide injunction. Shortly thereafter, FinCEN issued a notice confirming that compliance with the CTA and the FinCEN Regulations was once again effective—but issued new and slightly extended compliance deadlines (for most reporting companies – to January 13, 2025). On December 26, 2024, in order to “preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments”, the merits panel of the United States Court of Appeals for the Fifth Circuit vacated that decision and reinstated the temporary preliminary injunction. On December 27, 2024, FinCEN swiftly confirmed that beneficial ownership information reports were, once again, not currently required, but that reporting companies may continue to submit reports on a voluntary basis. The continued back and forth between the courts (and even within the same court) demonstrates the legal and political tensions (and accompanying confusion) that reporting companies are facing as they continue to grapple with their obligations under the CTA. While this latest development may be welcome relief for many, reporting companies should continue to be prepared to file their BOI Reports on short notice - particularly as the case in issue, Texas Top Cop Shop v Garland et al., is on expedited appeal.

Imagine a Canadian company adopts a deferred share unit plan (DSU Plan) for its directors.  At the time the plan is adopted, the company does not have the plan reviewed by U.S. counsel, because none of their directors reside in the U.S.  It is not until several years later that the company learns that one of its directors, despite living in Canada, has dual citizenship with the U.S.  Because the typical form of Canadian DSU Plan will not comply with U.S. tax laws governing deferred compensation, particularly U.S. Internal Revenue Code Section 409A (Section 409A), the company has quite a mess on its hands.  You can read our prior articles on common payment timing issues with DSUs here and common election deferral issues with DSUs here. It is because of scenarios like the above that it is crucial to consider whether any of your employees or non-employee directors are U.S. taxpayers.  Unlike most other countries, U.S. taxpayers are taxed on worldwide income, regardless of where they reside.  U.S. taxpayers include: (i) U.S. citizens regardless of residency; (ii) legal permanent residents (“green card” holders); and (iii) non-citizen, non-green card holders who have a “substantial presence” in the United States under the U.S. income tax laws (but exceptions to this category apply – careful analysis of the facts and applicable tax treaties is required). Section 409A is so broad that it covers most nonqualified deferred compensation arrangements, unless a specific exception applies, and it imposes specific timing, election and distribution requirements on covered arrangements.  If a nonqualified deferred compensation arrangement fails to comply with the requirements of Section 409A, deferrals are includible in income at vesting (even if they are not paid out) and subject to a 20% additional tax.  In some circumstances, an underpayment interest penalty will also apply. Because of the broad definition of Section 409A, it is easy to overlook that employment agreements, change-in-control agreements, and severance agreements with U.S. taxpayers frequently contain provisions that subject them to Section 409A.  Because the failure to comply with Section 409A can result in such onerous tax penalties, if a Canadian company has U.S. taxpayers participating in its equity plans or if the company is entering into any type of compensation arrangement with a U.S. taxpayer where such arrangement promises to pay compensation in a future taxable year, the company should consider having the terms of any such plan or arrangement reviewed by U.S. counsel.

On October 10, 2023, the Securities and Exchange Commission approved amendments to the Regulation 13D-G reporting regime for persons who beneficially own more than 5% of a class of securities (“5% Owners”) that is registered under Section 12 of the Securities and Exchange Act of 1934, as amended.  The amendments accelerate the deadlines by which 5% Owners must file initial reports and amendments on Schedule 13D or 13G, mandate the use of machine-readable language in those reports, and provide for additional amendments and guidance.  The amendments apply to 5% Owners of all Section 12 registered securities, including 5% Owners of Canadian foreign private issuers and MJDS filers listed on Nasdaq, the New York Stock Exchange and the NYSE American. For more information, see our eUpdate.

Canadian issuers that are reporting issuers with the Securities and Exchange Commission should be aware of new rules that impose disclosure requirements regarding cybersecurity risk management, strategy, governance and incidents. The new rules have two basic components.   First, certain issuers will have new disclosure requirements regarding the registrant’s processes and policies for cybersecurity risk management, strategy and governance.  These disclosures (which we refer to as “risk management disclosures”) will be required in the registrant’s annual report. The new risk management disclosures apply to nearly all domestic SEC reporting issuers (including Canadian issuers that report on domestic forms) and those foreign private issuers that report on Form 20-F. Second, in the event of a material unauthorized occurrence on or conducted through a company’s information systems (which we refer to as a “cybersecurity incident”) all reporting issuers will need to provide current disclosure regarding that incident on the appropriate form (either 6-K or 8-K).    The cybersecurity incident disclosure requirements apply to all SEC reporting issuers, including those Canadian issuers that report on Form 40-F. For Canadian issuers that report on either Form 20-F or 40-F, in the event of a material cybersecurity incident, the issuer must furnish on Form 6-K that information that the issuer (i) makes or is required to make public pursuant to the law of the jurisdiction of its domicile or in which it is incorporated or organized, or (ii) files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange, or (iii) distributes or is required to distribute to its security holders. For Canadian issuers that report on Form 20-F, the risk management disclosures will be required in the annual report for fiscal years beginning on or after December 15, 2023.  The applicable risk management disclosure requirements for 20-F filers are contained in Item 16K of Form 20-F. For Canadian issuers that file on either 40-F, 20-F or 10-K (other than smaller reporting companies), the disclosures required in connection with a cybersecurity incident will be required after December 18, 2023.  Issuers that file on Form 10-K (including Canadian issuers) that qualify as “smaller reporting issuers” will have an additional 180 days before they are required to comply with the cybersecurity incident reporting requirements, so after June 15, 2024. Issuers must tag the new disclosures in Inline XBRL, including by block text tagging narrative disclosures and detail tagging quantitative amounts, beginning one year after the initial compliance date for the issuer for the related disclosure requirement. A summary of the new rules can be found here and the adopting release for the new rules can be found here.

Companies utilizing noncompete agreements in the U.S. in the employment context should reevaluate their practices in light of recent changes to law and a rapidly changing legal landscape that is growing increasingly hostile to noncompete agreements. Early this year, the Federal Trade Commission (“FTC”) proposed a rule that would ban noncompete clauses nation-wide in the U.S. However, there is a long road ahead for the FTC’s proposed noncompete ban, and the proposed ban may very well be struck down by U.S. courts even if it is ultimately adopted. The FTC will not vote on the proposed ban until next April, and while 18 states’ attorneys general submitted a joint public comment letter in favor of the ban, numerous small business groups and the U.S. Chamber of Commerce submitted letters in opposition. Even if adopted, the rule would not go into effect until 180 days after its publication and it is likely that there would then be numerous challenges to the rule, which may ultimately need to be decided by the U.S. Supreme Court. While the future of the FTC’s noncompete ban is uncertain, states are, in the meantime, making noncompete agreements harder and harder to enforce across the country, and in many cases, banning noncompete agreements altogether. California, for example, has long outlawed noncompete agreements and has more recently passed laws declaring noncompetes void in California, even if they were entered into outside of California and the employee performed services for the enforcing employer entirely outside California. In addition to California, Minnesota, North Dakota, and Oklahoma have banned noncompete agreements entirely. New York’s legislature recently passed a bill that would outlaw noncompetes, which is now awaiting New York’s governor’s decision on whether to sign it. Colorado recently passed a law limiting noncompete agreements to employees deemed “highly compensated” and now requires that employers provide notice to candidates for employment before they accept a job offer and to current employees at least 14 days before the effective date of any additional consideration for the noncompete provision. The District of Columbia recently passed law creating a similar pay threshold that noncompetes must meet and Washington State has had such income requirements in place for over three years. Even in states that have not passed laws restricting noncompete agreements, courts have grown increasingly skeptical of employers’ need for such protections. The general rule in states without noncompete legislation is that noncompete agreements are only enforceable if the employer can show a compelling need for them. Such need usually involves a need to protect sensitive confidential information and trade secrets, or a need to protect customer goodwill in situations where employees develop close relationships with customers. U.S. courts are, on average, becoming more skeptical of employers' arguments that they need such protections except in cases where employees have access to truly sensitive information, or could do real damage by going to a competitor and taking substantial business with them. Many of the states that have restricted the use of noncompete agreements, but still allow them under certain circumstances, have created penalties for employers who unsuccessfully attempt to enforce noncompete agreements. Washington, for example, has passed law requiring the employer to pay the employee’s attorney fees if the noncompete agreement is deemed partially or entirely invalid by the court. Other states have even passed laws creating criminal sanctions for employers who try to enforce unenforceable noncompete agreements. Companies with employees in the U.S. must be sure to stay up to date on the rapidly changing legal landscape governing noncompete agreements. Not only is noncompete litigation extremely expensive, but there is a growing additional risk to employers in the use of noncompete agreements in circumstances where no compelling need can be established. Accordingly, employers should reevaluate their employment practices and considering limiting such agreements to employees that have access to truly sensitive confidential and trade secret information, and/or employees with responsibility for key client relationships that could easily be transferred to a competitor.

The U.S. Equal Employment Opportunity Commission (“EEOC”) has released guidance confirming that employers face potential liability if they use AI tools to screen applicants in a way that disproportionately impacts employees on the basis of a protected class such as race, color, religion, sex, or national origin. While ChatGPT and its competitors are new, the legal framework used to assess other applicant screening tools has been around for quite some time.  Employers and the legal system have struggled for years over whether and to what extent employers should be allowed to take a person’s credit scores or even their criminal record into account when making hiring decisions. Indeed, the system by which a person’s credit score is calculated is via an algorithm which is applied to large body of data to make predictions about a person’s future behavior. There is a well-developed body of case law addressing situations where facially neutral hiring criteria end up having a disparate negative impact upon particular group of historically marginalized people. This so called “disparate impact” analysis requires that employers show that their facially neutral hiring criteria are job related and consistent with business necessity if those hiring criteria disproportionally disadvantage individuals of a particular race, sex, national origin, or other legally protected class. As the EEOC has confirmed, this disparate impact analysis definitively applies to employers’ use of AI in the hiring process. Employers may not use AI to select applicants in way that adversely impacts individuals on the basis of race, sex, national origin, or other legally protected classes unless the selection criteria are “job related for the position in question and consistent with business necessity.” For example, screening on the basis of physical strength would not be allowed for an office job where physical strength is not necessary because such a requirement would disproportionately exclude female applicants and not be job related. Similarly, Employers cannot use AI in a way that adversely impacts a protected class, without also showing that they are selecting for job related criteria. The conventional wisdom is that it would be hard to sue an employer for using AI, which was not explicitly programmed to exclude members of a protected class, when making hiring decisions. While a plaintiff might be able to show that an algorithm is disproportionately disadvantaging people of a certain race, gender, or other protected class, the employer has a legal defense if the employer can show that the selection criteria are job related and consistent with business necessity. In other words, even if the algorithm is disproportionately screening out people in a certain protected class, if the algorithm is selecting for goals such as decreased turnover or high sales potential, the law favors the employer. Since any selection algorithm anyone would use would almost always be programmed to select for traits or capabilities that are job related and consistent with business necessity, such as skill at sales, low likelihood of turnover, etc., the employer will prevail. There is a further step in the legal analysis, however, that is going to increasingly come into play as the potential for bias with such algorithms becomes better understood. Even if a defendant can show that their selection criteria are job related and consistent with business necessity, a plaintiff can still prevail by showing that the employer could have used different selection criteria that creates less of a disadvantage for minority applicants, but still achieves the employer’s job-related selection goals.  Indeed, the EEOC addresses this very point in its most recent guidance, explaining that failure to adopt a less discriminatory algorithm may give rise to liability. As tools that have been vetted for bias on the basis of race, gender, and national origin become available, and as those tools are proven to be at least as effective as other tools that have not been vetted for bias, employers will be obligated to select the vetted tools, or face potential liability. In the meantime, employers should avoid using unvetted AI tools to make important screening or hiring decisions that could improperly impact applicants on the basis of protected classes such as race or sex. Regulatory bodies such as the Equal Employment Opportunity Commission have already begun the process of regulating AI hiring tools. Just as several states have banned or limited the use of credit scores when making hiring decisions, agencies and legislatures will likely begin to pass legislation and adopt rules for how and when AI tools may be used how they ought to be vetted. Until the legal dust settles, employers would be wise to exercise caution.

As discussed in our Governance & Compliance Insider blog and a recent Dorsey eUpdate, all companies with securities listed on NYSE, NYSE American, or Nasdaq will be required to adopt and comply with updated clawback policies governing the recovery of erroneously awarded compensation by December 1, 2023, pursuant to rules proposed by each stock exchange and approved by the SEC under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The new clawback requirements will apply to substantially all listed companies, including foreign private issuers and Canadian MJDS filers.

Employers have frequently included confidentiality and non-disparagement terms in their separation and release agreements. Confidentiality terms help ensure that employees won’t brag to coworkers about large payouts and encourage them to seek similar payouts. Such payouts can also give the impression that a company is looking to avoid exposure for wrongdoing, and confidentiality terms can help maintain the privacy of such payouts. Non-disparagement terms can help companies deter departing employee from publically trashing their former employers on their way out the door. Employees don’t always leave on good terms and non-disparagement terms can help incent employees to keep their negative opinions to themselves. U.S. employers, however, must re-evaluate their use of confidentiality and non-disparagement terms in their separation and release agreements given a recent U.S. National Labor Relations Board (“NLRB”) decision and subsequent guidance. On February 21, 2023, the NLRB issued a ruling in the McLaren Macomb matter strictly limiting confidentiality and non-disparagement terms in separation and release agreements for most non-management private sector employees. On March 22, 2023, the NLRB General Counsel issued a memorandum answering questions that have arisen from the NLRB’s decision in McLaren. Companies with Employees in the U.S. should carefully review their separation and release agreements to make sure they comply with the NLRB’s decision in McLaren and subsequent memorandum. Confidentiality and non-disparagement have already been the subject of several laws at the state and local level designed to curb the abuses of such terms that came to light as part of the #metoo movement. Serial sexual harassers and sexual abusers would use such terms in the context of large settlements to buy the silence of victims. Many states have outlawed any terms in settlement or release agreements that restrict a victim’s right to discuss his or her underlying claims or any other conduct that they reasonably believe to be illegal harassment or assault. In McLaren, the NLRB ruled that confidentiality provisions must be narrowly tailored to restrict the dissemination of proprietary or trade secret information for a period of time based upon legitimate business justifications to be considered lawful. Confidentiality provisions that could have the effect of precluding employees from assisting others about workplace issues or from communicating with the NLRB, a union, legal forums or the media are unlawful. The NRLB further ruled that non-disparagement terms that encompass all disputes, terms and conditions and issues are unlawful. Instead, non-disparagement terms must be limited to statements that meet the definition of defamation—that is, maliciously untrue, such that they are made with knowledge of their falsity or with disregard for their truth or falsity, may be lawful. The NLRB further ruled that savings clauses (i.e. clauses that state that nothing in the agreement is intended to impede the employee’s rights under the National Labor Relations Act) will not cure overly broad provisions. The NLRB also identified several other types of clauses that could be found to be illegal, including non-compete clauses, non-solicitation clauses, no poaching clauses, broad liability releases and covenants not to sue that go beyond the employer and/or may go beyond employment claims and matters as of the effective date of the agreement, cooperation requirements involving any current or future investigation or proceeding involving the employer as that affects an employee’s right to refrain under Section 7, such as if the employee was asked to testify against co-workers that the employee assisted with filing an unfair labor practices charge. While these new restrictions may seem concerning at first blush, non-disparagement terms are frequently hard to enforce, even where legal as they often require employers to prove they were harmed by the statements in question, and the cost of litigating breaches of non-disclosure provisions is often substantial. Similarly, it is often not worth the legal expense for employers to enforce breach of confidentiality terms that don’t involve the disclosure of proprietary or trade secret information. Perhaps most importantly, employers have increasingly faced public relations backlash for including confidentiality provisions that prevent former employees from discussing the employer’s alleged wrongdoings. Conclusion Private sector employers with employees in the U.S. should carefully review their separation and release agreements with non-management employees to make sure they comply with the new requirements articulated by the NLRB. Employers can no longer rely on blanket confidentiality and non-disparagement provisions in their separation and release agreements to avoid reputational harm and information regarding severance payouts from becoming public.  

In our blog post dated August 22, 2022, we discussed the one percent (1%) excise tax on certain stock repurchase transactions by certain publicly traded corporations enacted as part of the Inflation Reduction Act of 2022 (the “Excise Tax”). The Excise Tax became effective on January 1, 2023. The Internal Revenue Services (the “IRS”) issued initial guidance describing future Treasury Regulations expected to be promulgated regarding the Excise Tax that, when finalized, are expected to be effective retroactive to the beginning of 2023. That initial guidance is contained in Notice 2023-2. (the “Notice”). Among other changes and clarifications, the Notice substantially expands the scope of Canadian corporations that may be subject to the Excise Tax. Prior to the publication of the Notice, it was anticipated that only Canadian corporations subject to the “anti-inversion” rules of Code Section 7874 or that effected stock repurchase transactions directly through “specified affiliates” (defined for these purposes as includes any U.S. corporation or partnership which is more than 50 percent owned, directly or indirectly, by the Canadian parent corporation and certain non-U.S. partnerships that have a U.S. entity as a direct or indirect partner) would be subject to the Excise Tax on such repurchase transactions. Pursuant to the Notice, if a specified affiliate funds, or is treated as funding, by any means (including through distributions, debt, or capital contributions) a share repurchase transaction of a Canadian corporation by the Canadian corporation or certain other specified affiliates, and if the “funding” is undertaken for a principal purpose of avoiding the Excise Tax, the “funding” specified affiliate will be subject to the Excise Tax with respect to the share repurchase transaction as if it had completed the repurchase transaction directly. For these purposes, the fair market value of stock treated as acquired by the “funding” specified affiliate is limited to the amount funded by the “funding” specified affiliate. And, for these purposes, a specified affiliate will be deemed to have a principal purpose of avoiding the Excise Tax if such specified affiliate funds by any means (other than a distribution) a share repurchase transaction within two years of such funding. The following is an example that illustrates this new “funding” rule. X is a publicly-traded Canadian corporation with one wholly-owned U.S. subsidiary corporation, Y. X is not subject to the anti-inversion rules of Code Section 7874. X redeems directly $20 million worth of its issued and outstanding stock. Within the two years prior to such repurchase: (i) Y paid X $10 million as repayment of principal with respect to certain intercompany debt obligations owed to X; and (ii) Y also paid X a dividend in the amount of $5 million. Y didn’t otherwise pay or distribute any other amounts to X in the two years preceding the share repurchase transaction. Pursuant to the funding rule, Y would be deemed to have had a principal purpose of avoiding the Excise Tax in connection with such share repurchase transaction completed by X insofar as the $10 million paid to X. Y would also be treated as funding an additional $5 million of the share repurchase transaction by X if it were determined that the $5 million dividend was paid with a principal purpose of avoiding the Excise Tax. Assuming that the $5 million dividend was not paid with a principal purpose of avoiding the Excise Tax, Y would be subject to an excise tax of $100,000 (1% of $10 million - the amount of X’s share repurchase transaction deemed to be funded by Y under the “funding” rule) as a result of X’s share repurchase transaction. Many Canadian companies with U.S. subsidiaries or affiliates may be inadvertently subjecting their U.S. subsidiaries or affiliates to the Excise Tax in connection with share repurchase transactions. The scope of transactions deemed to constitute a share repurchase transaction for purposes of the Excise Tax is considerably broad (including, without limitation, certain acquisitions of Canadian corporations, recapitalizations or other exchanges by shareholders of a Canadian corporation for new, different or a different number of shares of such Canadian corporation, changes to a Canadian corporation’s province of incorporation, split-offs and certain other distributions effected by Canadian corporations, and certain liquidations of Canadian corporations). The U.S. Treasury Department is accepting comments in response to the Notice until March 20, 2023. It is expected that Treasury Regulations will be proposed sometime thereafter. Subject to the promulgation of Treasury Regulations, Canadian corporations with U.S. subsidiaries or affiliates or otherwise subject to the anti-inversion rules of Code Section 7874 that directly or indirectly repurchase stock or otherwise engage in various corporate transactions (including, without limitation, those listed above) should seek advice to avoid or limit the potential application of the Excise Tax.

On December 14, 2022, the SEC adopted final rules amending Rule 10b5-1, a safe harbor from liability under the U.S. insider trading rules.  The safe harbor permits directors, executive officers and others, including issuers, to engage in securities transactions while in possession of material non-public information, by entering into a binding contract, instruction or plan adopted prior to effecting the transaction and at a time when the seller or buyer was not in possession of material non-public information about the issuer. The new rules include a number of measures intended to limit certain potentially abusive strategies permitted under the old rules and certain new disclosure requirements intended to enhance investors’ understanding of the use of Rule 10b5-1 by insiders as well as other related disclosures. The final rules will become effective February 27, 2023. Canadian issuers, particularly those that are cross-listed in the United States, should be aware that: Canadian compliant “automatic plans” may not meet the technical requirements of new Rule 10b5-1, and thus may not provide a safe harbor under the U.S. insider trading rules. The reach of the U.S. insider trading rules may extend further than anticipated; the SEC staff has demonstrated an expansive view of its jurisdictional authority, in circumstance in which it concludes there are good policy reasons to do so. The U.S. insider trading prohibitions do not apply only to U.S. listed companies or SEC registrants; transactions involving securities of issuers in the OTC markets would also be subject to the rules. Canadian issuers, as well as their directors, officers and shareholders, should review their existing insider trading policies and disclosure practices prior to the effective date, and determine what amendments or updates are appropriate in their circumstances. A summary of the new rules can be found here and a copy of the adopting release can be found here.

Several U.S. states have been adopting more complex pay transparency laws and stricter equal pay statutes that prohibit employers from paying two employees differently to perform the same role based on factors such as race or gender. While these two types of laws are different, they go hand in hand since pay transparency laws require employers to disclose the very information that tips off employees (and plaintiffs’ attorneys) to the facts necessary to bring equal pay claims. Companies looking to hire in the U.S. must become familiar with these laws or face substantial statutory penalties and civil liability. Equal Pay Laws Most U.S. states have some form of equal pay law. Many U.S. states have adopted equal pay laws that go beyond simply outlawing disparate treatment and that require employers to justify pay disparities according to a set (and sometimes quite short) list of allowable “bona fide” factors. In Washington State, for example, pay disparities must be justified by factors such as: differences in education, training or experience; seniority; merit/work performance; quantity or quality of production; regional differences in compensation; local minimum wage; or other factors that are job related and consistent with business need. While this last factor sounds like a helpful catchall that would allow any reasonable factor to apply, until a particular reason is tested in litigation, employers run a significant risk relying upon such untested reasons. In all cases, employers bear the burden of proof to justify why pay disparities exist. California, Colorado, Oregon, and several other states apply a similar list of allowable factors. In many states, employers are explicitly barred from using an applicant’s pay history to justify a pay disparity. The laws in these states recognize that historical discrimination has led to substantial pay gaps based upon sex and race and that allowing employers to use historical pay as a justification essentially enshrines historical discrimination on the bases of sex and race. Many states go a step further and prohibit employers from even asking about pay history at all. Pay Transparency Several U.S. states have adopted pay transparency laws that require employers to disclose the pay scale for a position for which an employer is advertising to all applicants and current employees. The first of these laws to make big waves was passed in Colorado and made headlines because it requires employers to disclose compensation and benefits information not just for positions open to outside candidates, but for internal promotions as well. As a consequence, an employer with a single employee in Colorado would have to provide pay scale and benefits information to current employees any time even an internal promotion could be filled by a current employee. Many U.S. employers responded to Colorado’s law by including a disclaimer in job postings stating that the position is not open to Colorado residents. Other U.S. states passing similar pay transparency laws have responded by including provisions that employers cannot avoid their pay transparency laws with such disclaimers. California, as it often does, has taken pay transparency to the next level—requiring employers with over 100 employees (including those outside of California) to file an annual report with the California Civil Rights Department that discloses pay information by race, ethnicity, and gender within each of ten job categories, such as sales workers, professionals and executives. For each of the ten categories, covered employers must disclose: the number of employees by race, ethnicity and gender; for each combination of race, ethnicity and gender, the mean and median hourly rate of pay; the number of employees by race, ethnicity and gender whose annual earning fall within each of the pay bands used by the U.S. Bureau of Labor and Statistics; the total number of hours worked by each employee in each pay band; and for covered employers with multiple establishments, there must be a separate report that covers all of the above for each separate establishment. Conclusion Employers looking to hire in the U.S. must navigate this new layer of complexity in the form of state pay transparency and equal pay laws. These laws vary significantly from state to state and not all of their requirements are intuitive. Employers face not only fines and suits by enforcement agencies for violating these laws, but private civil litigation as well. What is more, pay transparency requirements make it a lot easier for employees (and plaintiffs’ attorneys) to spot illegal pay disparities. Companies looking to hire in the U.S. should be sure to vet their job offers and pay scales with employment counsel to make sure they are compliant.

Did you know that the Canada-U.S. multijurisdictional disclosure system (MJDS) includes an SEC form that does not include any minimum market capitalization requirement, and can be used to complete a public offering of securities in the United States without triggering any ongoing SEC reporting requirements?  It’s true. Form F-7 allows certain TSX and TSXV-listed Canadian companies to extend a rights offering to its United States shareholders on a public offering basis, provided they satisfy certain form eligibility requirements.  U.S. information legends are included in the Canadian offering documents, which are filed with the SEC under cover of Form F-7, together with certain consents.  A Form F-7 is not normally reviewed by the SEC.  The shares issued to U.S. shareholders are “free trading” and are issued without any U.S. restrictive legend.  Exemptions from state registration requirements are available in most states.  A company does not need to satisfy any minimum market capitalization in order to use Form F-7, nor must it be an SEC reporting company.  Perhaps most surprisingly, filing a Form F-7 and completing the rights offering does not subject the company to ongoing SEC reporting requirements, so the form can be used by companies that wish to avoid the Sarbanes-Oxley Act and other ongoing SEC requirements. Form F-7 can be a useful tool in a Canadian company’s toolkit.

A Canadian company adopting a deferred share unit plan (DSU plan) for its directors must consider U.S. tax implications for U.S. taxpayers.  It is important to remember that U.S. citizens and U.S. residents for tax purposes (including green card holders) are taxed on worldwide income, regardless of where they reside.  As such, participation by a U.S. director, including an expat or holder of dual citizenship, could result in significant adverse tax consequences under Section 409A of the Internal Revenue Code, as a typical Canadian DSU plan often runs afoul of Section 409A.  In a prior article, DSU Plans Require Careful Review to Avoid Adverse U.S. Tax Treatment, common payment timing violations of U.S. tax laws governing deferred compensation were discussed (as well as tips for properly identifying U.S. taxpayers).  While payment timing is one common violation of Section 409A, it is also important to consider the timing of elections to defer compensation. In order to avoid a violation of U.S. deferral election timing rules, a Canadian company should consider both the general deferral election timing rules under Section 409A, as well as the exceptions permitting more lenient timing.  Generally, deferral elections must be made by the end of the taxable year before the year in which the services giving rise to the compensation that will be deferred are performed.  For instance, for any amounts earned in 2023, the election to defer should be made no later than December 31, 2022.  Once a deferral election is made, payment may not be accelerated, unless a specific exception applies, and payment may not be further deferred, unless strict second deferral election rules are obeyed. While compliance with the general deferral election timing rule is always the simplest and least risky approach, there are exceptions to this general rule that provide greater leniency in some situations.  One of the most common exceptions is for initial eligibility.  Section 409A provides that a deferral election may be made within 30 days following the date that a service provider (e.g., a director) is first eligible to participate in the plan, provided that the election may only apply to compensation earned following the date of the election (and provided the service provider does not participate in another deferred compensation plan required to be aggregated with such plan under Code Section 409A).  There are additional exceptions to the general deferral election timing rules for payments conditioned on continued service for a period of at least 12 months as well as for performance-based compensation.  However, compliance with these exceptions can be rather tricky, and the consequences for failing to comply are severe, so these exceptions should be discussed with legal counsel proficient in U.S. tax law. Where a U.S. director fails to make a timely deferral election within the meaning of Section 409A, the value of the DSUs as of December 31st of the year in which the DSUs vest (i.e. the year in which the DSUs are awarded for the majority of DSU plans) will be included in the U.S. director’s income for that year, regardless of whether actual payment of the DSUs is deferred. In addition, a 20% penalty tax will be imposed on the U.S. director. Advanced planning is crucial to ensure compliance with the above-mentioned deferral election timing rules in order to avoid the adverse tax consequences described above.  A Canadian company with U.S. directors should have any such DSU plan reviewed by counsel proficient in U.S. tax law prior to implementation.  However, even where review prior to implementation is not possible, a review after implementation would still be advantageous, as early correction may avoid or minimize certain adverse tax consequences.  We work regularly with Canadian tax counsel to ensure compliance and/or to correct violations.

As many of our readers will have heard, the Canadian Securities Administrators (“CSA”) has announced the adoption of a new prospectus exemption for certain reporting issuers listed on a Canadian stock exchange (the “Listed Issuer Financing Exemption”), effective November 21, 2022.  To date, little attention has been given to the potential effect of the Listed Issuer Financing Exemption on the practices of Canadian listed companies raising funds from U.S. investors.  In this post, we discuss those implications and suggest methods for relying on the Listed Issuer Financing Exemption while still preserving the ability to raise funds from U.S. investors. Overview of the Listed Issuer Financing Exemption The Listed Issuer Financing Exemption will allow certain reporting issuers listed on a Canadian stock exchange to complete a public offering of securities in Canada for cash to raise up to C$5 million (up to C$10 million for larger companies), with no investor qualifications, no legends or hold periods on the securities sold in the public offering, and no prospectus (an “Offering”).  As such, the Listed Issuer Financing Exemption may become an important fundraising tool for Canadian public companies, especially those with smaller market capitalizations. Many Canadian law firms have published summaries of the Listed Issuer Financing Exemption and its requirements.  The most important requirements for our purposes are that the issuer publish a press release describing the Offering, and file and post on the issuer’s website a completed Form 45-106F19 which outlines certain brief information about the Offering (the “Offering Document”).  The intention of the CSA appears to have been to reduce the burdens on reporting issuers when conducting a relatively small Offering, as long as the issuer is current in its continuous disclosure requirements, meets certain other requirements, and publishes certain basic information about itself and the Offering. Overview of U.S. Private Placement Exemptions The U.S. federal securities laws do not provide an equivalent exemption to the Listed Issuer Financing Exemption.  Most Canadian public companies that offer and sell securities to U.S. investors as part of an Offering (a “U.S. Offering”) conduct the U.S. Offering either: In a fully underwritten offering, as resales by the underwriter to U.S. qualified institutional buyers in reliance upon Rule 144A under the U.S. Securities Act; or In non-brokered or agency offerings, as a sale by the issuer exclusively to U.S. accredited investors, without any general solicitation or general advertising, pursuant to Rule 506(b) of Regulation D under, or Section 4(a)(2) of, the U.S. Securities Act. Therefore, outside of underwritten Rule 144A offerings, most U.S. Offerings by Canadian public companies are undertaken on the basis that no general solicitation or general advertising has been made in the U.S. Offering. General solicitation and general advertising includes, without limitation: Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and Subject to limited exceptions, any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. As the internet became more prevalent, the SEC issued an interpretation confirming that the “use of an unrestricted, publicly available website to offer or sell securities constitutes a general solicitation and is not consistent with the prohibition on general solicitation and advertising … if the website contains an offer of securities”. Notwithstanding the foregoing, the SEC has published rules governing the purpose, content and use of press releases which, if complied with, provide a safe harbor under which a press release will not be deemed to be general solicitation or general advertising for a U.S. Offering. Rule 506(c) of Regulation D under the U.S. Securities Act is an alternative exemption that allows an issuer to make sales to U.S. accredited investors in an Offering in which general solicitation or general advertising is employed, but only if the issuer takes certain steps that the SEC deems to be “reasonable” in verifying the accuracy of the investor’s claim of being an accredited investor.  The SEC has provided some non-exclusive examples of steps that may be considered reasonable, include obtaining and reviewing an individual investor’s tax returns to establish net income, or obtaining a recent certification from the investor’s U.S. broker, lawyer or accountant.  To date, this exemption has been used relatively rarely, due to the significant additional burden on issuers and investors of satisfying this due diligence requirement, and the risk that asking for this information will scare off investors who consider it an invasion of privacy. Planning a U.S. Offering Under the Listed Issuer Financing Exemption An issuer that consults with its U.S. counsel in advance should be able to ensure its ability to proceed with a U.S. Offering as a part of a broader Offering under the new Listed Issuer Financing Exemption.  Whichever U.S. exemption will be used, the issuer’s forms of offering documents will need to be updated.  More importantly, issuers that intend to continue relying on the Rule 506(b) or Section 4(a)(2) exemptions must ensure that their use of the Listed Issuer Financing Exemption for the Offering will not involve any general solicitation or general advertising for purposes of the U.S. Offering.  Of particular concern are the purpose, content and use of the mandated press release, the method of using and posting the Offering Document on the issuer’s website, and the method by which U.S. investors are brought into the U.S. Offering.  Issuers that intend to allow general solicitation and rely on the Rule 506(c) exemption must prepare new due diligence procedures. To ensure compliance under the new rules, the following matters should be discussed with U.S. counsel in advance: The issuer’s eligibility for, and selection of, the U.S. securities exemption for the U.S. Offering; The purpose, content and use of the press release announcing the Offering – in many cases, the names of underwriters or agents participating in the Offering may not be included in the press release; The approach toward posting the Offering Document on the issuer’s website, including whether the issuer should employ geofencing or geoblocking technology, mandatory questionnaires or other means to prevent users in the United States from accessing the Offering Document on the website; The description of the U.S. Offering restrictions within the Offering Document and/or in a U.S. “wrap” around the Offering Document that is used for purposes of explaining the U.S. Offering; The portions of the subscription agreement to be completed by U.S. investors, or separate U.S. subscription agreement, if applicable; The response to any prospective U.S. investor that became interested in the U.S. Offering by viewing the press release or Offering Document, and how to reduce the risk of this occurring; In a Rule 506(c) offering, the method of verifying an investor’s status as an accredited investor; Any underwriters, agents or finders, or the payment of fees or commissions to U.S. persons or for soliciting U.S. investors; and Any applicable U.S. notice filing or state securities law requirements.

In 2022, many SEC reporting companies with mineral resource assets completed their inaugural SEC annual report on Form 10-K or 20-F subject to the SEC’s mining disclosure rules in subpart 1300 of Regulation S-K (“subpart 1300”), and filed their inaugural subpart 1300 technical report summaries, if applicable. As 2023’s annual reporting season approaches, we outline for our readers some important factors to consider in preparing for Year 2 of subpart 1300 compliance.  Depending on the situation, an issuer may need to begin its preparations well in advance of its fiscal year end (“FYE”), or risk being in default of its reporting requirements. Overview Subpart 1300 requires an issuer with material mining assets that is filing a new Form 10-K or 20-F (“Annual Report”) to report mineral resources and reserves as of the end of the fiscal year, with a comparison to prior year figures. Determinations of mineral resources and reserves must be based on information provided by a qualified person (“QP). If an individual property is material to the issuer and the issuer will be disclosing any mineral resources or reserves for that property, the issuer must file with the SEC a technical report summary by a QP that complies with subpart 1300. For most issuers subject to subpart 1300, the first Annual Report for a year ended on or after December 31, 2021, filed in 2022, was the first report required to comply with subpart 1300 and to be accompanied by a subpart 1300 compliant technical report summary, where applicable. Accordingly, for most issuers subject to subpart 1300, preparing for its first Annual Report for a fiscal year ended on or after December 31, 2022, to be filed in 2023, will be the first time the issuer has needed to assess the requirements for updating subpart 1300 disclosure. An updated technical report summary is not required every year. In conversations with the Staff of the SEC, they expected most technical report summaries would be good for 3-5 years before updating was required, although material changes at a project (for example, a significant and sustained cost increase) would require that it be updated sooner. As part of subpart 1300 disclosure in Year 2 (and each year in the future), issuers will be required, among other things, to: reassess, as at the FYE, which mineral properties are material to the issuer; have a QP determine, as at the FYE, for each material property that has a previously-filed subpart 1300 technical report summary, whether all material assumptions and information set forth in the technical report summary, including assumptions relating to modifying factors, price estimates, and scientific and technical information (e.g., sampling data, estimation assumptions and methods), remain current; have a QP assess, as at the FYE, whether any changes have occurred in mineral resources or reserves, and explain the changes if any (including the comparison discussion required by Item 1304(e) of the current year’s mineral resources or reserves against the prior year’s mineral resources or reserves); determine which QP will update prior estimates of mineral resources and reserves as of the new FYE or confirm that the estimates remain current as at the FYE; if there are material changes to the information in a technical report summary, prepare the new technical report summary if required. Subpart 1300 does not require the use of the same QP who prepared the initial technical report summary; however, in some cases a consent may be required from the previous QP. Year 2 Reporting Disclosure For Annual Reports where the mineral reserves and mineral resources remain unchanged as of the FYE, the Staff of the SEC has indicated that they expect to see a statement in the Annual Report that the QP has determined that all material assumptions and information, including those related to price estimates, remain current as of the FYE. Year 2 Backup Documentation Except with respect to an updated technical report summary, there is no specified backup procedure or documentation for updating or confirming estimates in Year 2. We recommend some form of backup memo or certification from the QPs relating to the Year 2 disclosure as part of an issuer’s disclosure controls and procedures. Procedures For New Material Properties If any new material property is identified, the issuer may not disclose any mineral resources or mineral reserves for that property in the Annual Report unless the Annual Report is accompanied by a subpart 1300 compliant technical report summary. If a material property has an existing subpart 1300 technical report summary, but the QP is unable to determine that all material assumptions and information set forth in the report remain current as of the new FYE, the issuer similarly may not disclose any mineral resources or mineral reserves for that property in the Annual Report unless the Annual Report is accompanied by a new or updated subpart 1300 compliant technical report summary. We recommend that issuers begin their assessment of these matters prior to the FYE, because the preparation of any required new or updated technical report summaries may take significant time. If an issuer is unable to finalize any required new or updated subpart 1300 technical report summary by the date of the Annual Report, the Annual Report must report that the property has no mineral resources or reserves. While this approach may be permissible under the Annual Report form requirements, it may result in an adverse reaction from investors and analysts.  Depending on the circumstances, it may also require the issuer to suspend sales under certain SEC registration statements if it may constitute or result in a material misstatement or omission. Procedures For New Properties That Are Not Material Whether or not a property is material, the issuer may not disclose any mineral resources or mineral reserves for that property in the Annual Report unless those mineral resources or mineral reserves are determined in accordance with subpart 1300. For non-material properties that are discussed in the summary disclosure section, a technical report summary is not required but a QP must still conduct the required procedures to determine mineral resources or mineral reserves as of the FYE. Internal Controls Disclosure for Resource and Reserve Estimates in Year 2 We note that the language of Item 1305 relating to internal controls disclosure is open to significant interpretation by the reader.  In discussions with the Staff of the SEC, they noted the internal control disclosure was intended to be at the corporate level, not the project level.  In other words, are there board committees or members of senior management that are responsible for the oversight of mineral estimates?  What are the company’s procedures?  To see examples of this type of disclosure, keep in mind that oil and gas companies have been subject to this requirement for a number of years.